Imagine you're standing there watching a city
being built and fast forward. Okay I can picture
that. Yeah so these massive skyscrapers made
of gleaming glass are just like shooting up into
the sky and everyone around you is rushing fighting
and paying absolute top dollar to buy the penthouses
in these buildings before the paint is even dry.
Right but the catch is I mean the wild part is
that nobody is actually pouring concrete for
the foundations. Exactly. The developers are
just you know stacking the glass higher and higher
genuinely hoping the clouds will just hold it
up. And if you point out the lack of a foundation
people don't call you cautious. They call you
crazy. They tell you that gravity simply doesn't
apply anymore. That we're in an entirely new
paradigm, right? Right. And welcome to The Deep
Dive. I'm your host. And today we are opening
the Wikipedia archives to figure out how a collective
financial delusion actually built the modern
internet. I'm the resident expert here. And yeah,
we are exploring the dot com bubble today. Our
mission is to understand the mechanics of this
late 90s tech frenzy to, you know, look past
the staggering five trillion dollar crash and
uncover what this historical moment teaches you
about information overload, hype and human psychology.
So, OK, let's unpack this. Set the baseline for
the scale of this glass city. Sure. So to give
you the bird's eye view between 1995 and its
peak in March 2000, the Nasdaq Composite Index,
which was heavily weighted toward tech companies.
Right. Exactly. Heavily. That index rose by 400%.
I mean, five years of absolute parabolic growth.
400%. That's just wild. It is. But then, by October
2002, it had lost 78 % of its value. It gave
up essentially all of the gains it made during
the entire bubble. Ouch. Yeah. But if we connect
this to the bigger picture, this actually mirrors
other massive technology -inspired booms. We
saw the exact same psychological patterns with
the railroads in the 1840s or automobiles in
the 1900s. and radio in the 1920s. So a truly
revolutionary technology arrives, and the promise
of this frictionless future just sparks a speculative
frenzy. Precisely. It's not an isolated event
at all. OK, so the technological spark for the
1990s is clearly the 1993 release of the Mosaic
web browser. Because before Mosaic, the internet
was this sterile text -based terminal, mostly
used by academics or the military. Right, you
had to know command lines just to use it. Exactly.
But Mosaic made the World Wide Web visual. You
could actually navigate it. And suddenly the
adoption rate just goes exponential. It went
from a luxury to a necessity. Yeah. I mean, between
1990 and 1997, the percentage of households in
the U .S. owning computers jumped from 15 percent
to 35 percent. The PC transformed into a standard
household appliance. But here's the thing. A
technological spark isn't enough to build a five
trillion dollar bubble on its own. You need financial
fuel. The macroeconomic conditions. That's right.
Exactly. The economic backdrop of the mid to
late 1990s provided the absolute perfect conditions
for a mania. Interest rates were dropping. And
when borrowing becomes cheap. Right. When the
cost of borrowing money becomes incredibly cheap,
keeping your capital in a traditional safe savings
account doesn't yield much return. Capital gets
bored. Bored capital. I like that. Yeah. It starts
flowing outward along the risk spectrum, basically
hunting for higher returns. It sounds like pouring
gasoline on a campfire. You have this incredibly
cool new tool, the internet, but then the government
and the Federal Reserve essentially hand everyone
free matches. That's a great way to put it. Because
on top of the low interest rates, you get the
Taxpayer Relief Act of 1997, which actively lowered
the top marginal capital gains tax. So the government
is explicitly saying, you know, if you roll the
dice on these exciting new internet startups
and win, will take a smaller cut of your winnings.
Exactly. They actively incentivize the speculation.
And Alan Greenspan, the Federal Reserve chair
at the time, is noted in the sources for putting
a distinctly positive spin on these sky -high
stock valuations. His cheerleading totally validated
the market's behavior. What's fascinating here
is how the sheer velocity of the market completely
broke the traditional ways Wall Street measured
a company's worth. They just threw the old rule
book out the window. Totally. Investors typically
look at the price earnings ratio, or P -E ratio,
to determine if a stock is overvalued relative
to its actual profits. Right, comparing the stock
price to the actual money the company makes.
Yeah. And a healthy, fast -growing company might
trade at a P -E ratio of maybe 20 or 25. But
during the height of the dot -com bubble, the
Nasdaq reached an aggregate P -E ratio of 200.
Wait, 200? 200. To put that in perspective for
you listening, during the infamous Japanese asset
price bubble in 1991, which is widely considered
one of the most extreme financial distortions
in modern history. Oh yeah, a massive bubble.
The Niki index hit a peak P -E ratio of 80. So
dot -com bubble made the greatest historical
asset bubbles look like conservative. Wall Street
essentially had to invent a new financial gravity
to justify the math. And that new gravity was
built entirely around buzzwords like network
effects and capturing mindshare. Mindshare. That
is such a 90s corporate buzzword. It really is.
But the core logic, which actually proved true
for later monopolies like Google on Facebook,
was that on the internet, The company with the
biggest audience wins everything. So scale was
the only moat. Exactly. So these early dot -com
companies would operate at massive planned net
operating losses. They would offer their services
or physical products for free or at a deep discount.
Just to get you in the door. Right. Operating
under the assumption that if they captured enough
brand awareness, they could just flip a switch
and charge profitable rates once they own the
market. Get big fast and get large or get lost.
Those were the actual mantras. I love this detail
from the source material. A Wall Street Journal
article actually suggested that investors should
rethink the, quote, quaint idea of profits. The
quaint idea of profits. Unbelievable. Right.
If you aren't burdened by the quaint idea of
making money, your only job is marketing. This
is the era of the Pets .com sock puppet. Oh,
the sock puppet. Iconic. Companies with zero
revenue were throwing multi -million dollar dot
com parties just to launch a splash page on the
web. And the cultural shift was just profound.
It wasn't just Wall Street anymore. No, CNBC
began broadcasting daily stock movements with
the same graphics, hype and suspense as a live
sports event. everyday people were quitting their
stable careers to become day traders, the feedback
loop was just intoxicating. And looking at the
raw data from 1999 totally explains that intoxication.
In a single 12 month period, shares of the telecom
company Qualcomm rose in value by 2619 percent.
Over 2600 percent in one year. Yes. And 12 other
large cap stocks, meaning massive established
companies, not just tiny penny stocks, each rose
over a thousand percent in value. The Nasdaq
as a whole rose over 85 percent in 1999 alone.
But with numbers that detached from reality the
smart money had to know this was a house of cards.
I mean someone looks at a company with zero revenue
throwing million dollar parties and realizes
the math ends in a brick wall. Oh absolutely.
The smart money saw it coming. Mark Cuban is
a prime example. Right. He was a hugely successful
entrepreneur who sold his company broadcast dot
com to Yahoo at the absolute peak. But the brilliant
part is that he immediately hedged his massive
Yahoo stock gains using complex financial instruments
to protect his wealth before the inevitable crash.
He locked in the upside but protected the downside.
Exactly. And Sir John Templeton is another fascinating
example of the smart money exploiting the delusion.
He looked at the market, publicly called it temporary
insanity and orchestrated a massive, highly specific
short selling campaign. Templeton's strategy
is brilliant because he didn't just blindly short
the market, he targeted the expiration of lockup
periods. Which is such a specific mechanism.
It is. For you listening, a lockup period is
a legal rule, stating that when a company goes
public, the executives and early employees cannot
sell their personal shares for a set amount of
time. Usually six months. Usually six months,
yeah. And Templeton realized that these insiders
knew their companies were essentially worthless.
They were just waiting for the clock to run out.
Exactly. It's like knowing exactly what time
the doors unlock. on Black Friday, and betting
millions of dollars that the ensuing stampede
of insiders rushing to cash out will break the
store windows. That's a perfect analogy. He shorted
the stocks right before those six -month windows
expired, knowing the market would instantly flood
with sell orders. Here's where it gets really
interesting, though. It wasn't just predicting
the market. It was predicting human nature. But
what about the physical infrastructure? Was that
all just vaporware, too? That's the crucial pivot
here. Templeton was betting against the software
and the consumer -facing websites. But the unseen
foundation of this entire era, the physical infrastructure
of the internet, was experiencing its own parallel
bubble. The telecom bubble. Right. The telecommunications
sector was arguably a more capital -intensive
mania than the dotcoms. Prompted by the 1996
Telecommunications Act, which deregulated the
industry, telecom companies kicked off a global
race to lay fiber optic cable. This is a massive
piece of the puzzle because Pets .com is just
code, but someone had to actually build the physical
pipes that the internet flows through. Exactly.
And these telecom equipment companies took on
more than $500 billion in debt. They weren't
just hiring programmers. They were buying fleets
of trucks, tearing up sidewalks across the globe
and laying millions of miles of dark fiber. $500
billion in debt. That is staggering. And the
speculation in the physical layer went even further.
European governments realized they controlled
a vital invisible resource, the 3G wireless spectrums
required for mobile data. Oh, the spectrum auctions.
Yes. They set up auctions for these radio frequencies.
And the game theory here was brutal. If a major
telecom company didn't win the spectrum, they
would be totally obsolete in the mobile future.
It was an existential threat for them. So they
bid astronomical amounts of borrowed money. The
UK auction raised 22 .5 billion pounds. The German
auction raised 30 billion pounds. Just for the
invisible airspace to broadcast signals. Exactly.
But the underlying mechanism of this debt bomb
was a total miscalculation of consumer demand.
The telecom giants were building a 10 -lane physical
superhighway of fiber optics. But in 1999, most
consumers were still using slow dial -up modems.
Right. There were only a few hundred cars on
the road, so to speak. Exactly. When the financing
eventually dried up, the high debt obligations
couldn't be serviced by the non -existent customer
base. Bond investors who financed this telecom
infrastructure ultimately recovered just over
20 % of their investments. The immense debt in
telecom combined with the total lack of profits
in the dot -coms created a highly combustible
environment. A powder keg. A total powder keg.
And the peak of the cultural hubris was arguably
January 2000. Super Bowl 34 is historically remembered
as the dot -com Super Bowl. Oh wow, yes. Between
12 and 19 dot -com companies bought ad spots
paying around two million dollars for just 30
seconds of airtime. With no revenue to justify
it. None at all. And simultaneously America Online
announces its mammoth merger with Time Warner.
which really represented the ultimate triumph
of the, quote, new economy over the old economy.
But the architecture of a crash is rarely a single
catastrophic explosion. It's usually a series
of cascading failures. And March 2000 is when
the dominoes really begin to fall. OK, walk us
through the timeline. So on Friday, March 10th,
the NASDAQ reaches its peak of 5048. The very
next Monday, March 13th, news breaks that Japan
has entered a recession. Which might sound disconnected
to a tech bubble in California. Right. But in
a globalized financial system, a recession in
Japan changes the mechanics of risk. Japanese
banks pull back lending. Which means global hedge
funds suddenly need liquidity and when hedge
funds need to raise cash quickly They don't sell
their safe slow -moving assets. They sell their
most liquid highly speculative assets first exactly
tech socks that macroeconomic fear in Asia Fundamentally
shrinks the risk appetite in Silicon Valley and
then exactly one week later on March 20th The
financial magazine Barron's publishes a cover
article titled Burning Up. A very literal title.
Very literal. And this wasn't a philosophical
critique. It was a forensic accounting exposure.
The article bluntly warned that dozens of high
flying Internet companies were going to run out
of cash within months. And the timing was brutal
because on that exact same day, a prominent tech
company called MicroStrategy announces a revenue
restatement. A restatement is never good news.
Never. They basically admit their aggressive
accounting practices had fabricated their previous
profitability. Their stock price dropped 62 %
in a single trading session. 62 % in one day.
That restatement shatters the collective illusion.
The market was operating entirely on faith. If
one darling tech company is caught cooking the
books to hide their lack of revenue, institutional
investors immediately assume every other company
is lying about their numbers, too. The faith
just evaporates overnight. Then the Federal Reserve,
the entity that handed out the matches earlier,
decides to stomp on the fire. They raise interest
rates. This is a crucial mechanical shift. It
really is because it leads to an inverted yield
curve. For you listening, an inverted yield curve
happens when short term borrowing becomes more
expensive than long term government bonds. It's
a classic flashing red warning sign of an economic
slowdown. And if you are a dot -com company with
no revenue, you rely on constant cheap short
-term borrowing just to make your payroll and
pay your server bills. Right. An inverted yield
curve means the cost of rolling over your short
term debt just skyrocketed. Your financial oxygen
line is completely clamped. And adding to the
sheer panic in the tech sector, a federal judge
rules in early April that Microsoft is guilty
of monopolization in their landmark antitrust
case. So the legal foundation of the most successful
tech company in the world is suddenly under existential
threat. The market loses its anchor. Right. And
this cascading timeline brings up a really fierce
debate in the sources regarding Alan Greenspan's
legacy. Yeah, let's talk about Greenspan. Some
economists blame his specific aggressive rate
hikes in the spring of 2000 for actively puncturing
the bubble. But others offer a sharper critique,
like the economist Paul Trugman, who argued that
Greenspan's failure wasn't popping the bubble.
It was his refusal to regulate the leverage that
built it in the first place. Specifically, that
Greenspan didn't impose margin requirements.
Exactly. Margin requirements dictate how much
actual cash an investor must put down when borrowing
money from a broker to buy stock. In the late
90s, day traders were highly leveraged, using
borrowed money to amplify their bets on dot coms.
Right. And the Federal Reserve had the power
to step in and say, you must put down 80 % of
your own cash instead of 50%, which would have
choked off the speculative leverage safely. But
he chose not to touch the margin rules. He let
the leverage run hot. waited until the entire
structure collapsed under its own weight and
then attempted to clean up the multi -trillion
dollar wreckage afterward. And when the dust
finally settled, five trillion dollars in market
capitalization had been wiped from the board.
Five trillion. The buzzwords changed literally
overnight. Mindshare was out. Burn rate was in.
Burn rate. The exact terrifying speed at which
a company was bleeding through its remaining
capital before it would inevitably declare bankruptcy.
And the casualties of that burn rate were spectacular.
You had Webvan, which attempted to build an immense
nationwide online grocery delivery infrastructure
a full decade before consumer habits were ready
for it. Too early. Way too early. Then Boo .com.
a European fashion retailer that burned through
$135 million in 18 months trying to force heavy
interactive graphics onto consumers using slow
dialogue modems. Also, just horrible timing and
execution. And of course, Pets .com, the company
with the Super Bowl ad, went completely out of
business and liquidated its assets just nine
months after its IPO. Just nine months. But,
you know, it wasn't a total extinction event.
The sources note that 48 % of dot com companies
actually survived through 2004. have survived.
Yeah, albeit at drastically lower, humbled valuations.
Companies like Amazon and eBay ruthlessly manage
their burn rates, weather the brutal winter,
and eventually leverage their surviving infrastructure
to become the titans of the modern web. So they
made it through. But the cultural fallout from
the wreckage extended far beyond Wall Street.
You had a sudden massive glut of software engineers
and programmers flooding the job market as thousands
of startups just evaporated. Yeah. University
enrollment for computer science degrees plummeted
because the industry suddenly looked wildly unstable
and toxic. And those high end $1 ,100 Aaron office
chairs became this dark punchline. They were
liquidated en masse by the thousands as FANF
startup offices in San Francisco were repossessed.
The physical artifacts of the bubble. Exactly.
And perhaps most damaging retail investor confidence
was deeply structurally eroded. Not just by the
tech failures, but by the massive systemic accounting
frauds that were exposed as the tide went out.
When the cheap money disappeared, the devastating
criminal frauds that companies like Enron and
Worldcom were laid bare for the public to see.
So what does this all mean for you, the listener,
navigating today's tech news? Well, if we look
at the macro perspective, it's incredibly easy
to dismiss the dot -com bubble as merely a cautionary
tale of greed, hubris, and foolishness. Sure,
that's the standard narrative. It is. But the
venture capitalist Fred Wilson, who actually
lived through it and lost 90 % of his net worth
in the crash, offered a profound defense of the
era in our source material. He quoted a friend
pointing out that nothing important has ever
been built without irrational exuberance. Wow,
that reframes the entire catastrophe. It really
does. Wilson's point is that human nature requires
collective mania to finance massive leaps forward,
to convince rational investors to open their
wallets and finance absurdly risky, world -changing
infrastructure. Whether it's the transcontinental
railroads, or the early aerospace industry, or
a global network of computers, the intoxicating
promise of infinite wealth. So it's a necessary
evil. In a way, yes. Trillions of dollars of
speculative capital were destroyed. But that
money didn't just vanish into the ether. It paid
the salaries of the engineers who wrote the foundational
code. It paid for the high -throughput databases.
Exactly. It funded the fleets of trucks that
lead millions of miles of fiber optic cables
under our oceans and cities. That underlying
physical architecture survived the financial
crash. The telecom companies went bankrupt, but
the dark fiber remained in the ground. Precisely.
The speculative mania accidentally subsidized
the creation of the modern Internet, transforming
it into the cheap, accessible utility that changed
all of our lives. The glass penthouses may have
shattered and the day traders may have lost their
life savings. But that chaotic, rushed, seemingly
foolish construction project left behind a foundation
of incredibly deep, complex plumbing that our
entire modern society rests on today. It built
the future, just not the way anyone planned.
Right. So I will leave you with this final thought
to ponder as you navigate today's tech news.
If irrational exuberance and massive financial
loss were the required societal price to build
the internet backbone we rely on today, what
future indispensable infrastructure is being
quietly accidentally funded by the confusing
financial hype cycles you are seeing in the news
right now? That is a great question to end on.
Thank you for joining us on this deep dive. Keep
questioning the sources you read and we'll see
you next time.