Blame it On Y2K : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

On Marc's Mind: Blame it On Y2K Wednesday, April 04, 2001 Marc Baum

How things have changed in a year. In March 2000, the stock market was a one-way ride; stocks were incapable of going down. This was a New Economy, analysts said, while bending over backwards to explain stocks priced to fantasy. We'd moved beyond history. The tyranny of the business cycle was overthrown; replaced by the all-benevolent bull, elected dictator-for-life by the cheering masses, suddenly safe and secure in the knowledge that unsustainable stock market gains would magically produce a very comfortable retirement for everyone. In the New Economy, productivity would always rise (so we could work less), inflation would stay low, and skies would always be blue. Well, you know what they say about forgetting the pastů.

That was just one year ago - or, more importantly, one year and about 3300 points on the Nasdaq. Now, every day brings more earnings warnings and another stock market low to accompany them. The bluest of the technology blue chips, companies like Cisco Systems (ticker: CSCO), Sun Microsystems (ticker: SUNW) and EMC (ticker: EMC), suddenly find that their triple-digit revenue growth has dried up.

Disturbing Comparisons

Many analysts that are focusing on the nature of this particular bear market are drawing disturbing comparisons between recent market performance and some bear markets and economies of the past century: the U.S. in the late 1920s and early 1970s, and Japan in the late 80s. Any strong resemblances would obviously be frightening.

The similarities among all three of these bears are easy to see in the shape of the charts. The markets started humming along, eventually reaching amazing new and inexplicable heights. Then something happened, investors realized that stocks were overvalued, and the bubbles burst as economies and their markets deteriorated in malicious cycles.

Though Alan Greenspan made his irrational exuberance speech back in 1996, we think that one of the biggest causes of both this stock market correction and economic downturn is the good old Y2K bug. In 1998 and 1999, many companies spent enormous sums of money beefing up their IT infrastructures in advance of Y2K. The increased spending boosted the financial results of many tech companies, allowing them to reach ever more stratospheric valuations. The big names in tech thought the exploding demand for their products would continue forever. Analysts and investors wearing rose-colored glasses agreed eagerly. In addition, towards the end of 1999, the Federal Reserve, fearing liquidity problems, pumped billions of extra dollars into an economy already awash in cash, which ultimately found its way back to the same over-valued stocks.

No Need to Spend

What happened next? Companies that had spent so much leading up to Y2K didn't need to spend as much afterwards. And in the PC market, older machines can still do just about everything their owners ask of them. Many users see no need to spend a large amount of money on new equipment that is only marginally more useful.

In the end, tech companies created extra capacity just when demand was leveling off. When IT sales in 2000 didn't keep pace with industry expectations, many companies ended up with growing inventories. And growing inventories are a classic cause of downturns. Twenty years ago, a correction in the tech sector might have been troublesome, but it hardly would have been an earth-shattering event as ramifications would have been limited to a small group of companies and shareholders. The problem today is that tech has grown explosively and become a much larger part of the economy. With so many of the world's investment dollars concentrated in the largest technology names, a crash in this one sector can bring the entire market to its knees.

Market Reeling, Economy Fine

For those of you concerned that we are reliving the 70s or, worse yet, Japan from the mid-80's through today, remember that, though related, the market is not the economy. In the early 1970s, there were other culprits -- stagflation and the oil crisis. And in Japan, the government propped up inefficient industries and poorly run banks that still have not come to grips with billions of dollars of bad loans.

In contrast, the United States flushed many of its bad loans in the S & L bailout in the 1980s and currently has low interest rates (though high by historical standards), an inflation rate still near zero, and an unemployment level that, even after the recent economic troubles, remains below what we considered full employment as recently as the mid 90s. Though this economy is not likely to boom anytime soon, it also doesn't seem probable that this downturn will be all that profound. It may or may not turn out that we are currently in a full-fledged recession (though we doubt it), but unless something drastic comes into the mix, there's little danger of a return to the 1970s. And when growth resumes, it will occur on a technology infrastructure completely overhauled under the cover of Y2K fears.

Justifying the P/Es

As for the stock market, the current generally favorable economic conditions when combined with the very real technology-driven productivity gains probably support P/E ratios somewhat higher than the historical average; but remember, we are not beyond history. Many of last year's valuations were too high. The fall in stock prices this year was largely well deserved, and there well could be more damage before the market finally finds a bottom. But when things look grim, remember that we're not reliving the 1970s. This too shall pass. We just won't know when until its actually happened

-- Martin Thompson (, April 07, 2001


The following statement in this article by Marc Baum does not ring true:

"...when growth resumes, it will occur on a technology infrastructure completely overhauled under the cover of Y2K fears. "

The problem with the author's statement seems to me to be this: Y2K remediation efforts involved only the partial overhaul of technology infrastructure. While parts of the technology infrastructure were "overhauled", other parts were given only temporary fixes; and still other parts were neither "overhauled" nor temporarily fixed. Those parts of the technology infrastructure that were in need of remediation but were not remediated need to be "fixed on failure".

-- Paula Gordon (, April 09, 2001.

I should have added: They need to be fixed on failure or, preferably, fixed before they fail.

-- Paula Gordon (, April 09, 2001.

I was a woe experiece in the Y2K EXPERINCE. You had to be there. Call me fool. if you choose....I Still Stick By..

-- My Story (, April 09, 2001.

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