Good point and indeed indexing played a prominent role in the late 90s tech boom; it was a broad market phenomenon, in contrast to the idea that it was a micro-speculative frenzy contained to things like zero-revenue IPOs.
However, here I’ll expand on the meta-contrarian “bubble” point and offer that the dot com boom was not a case of markets gone haywire. I think we had a case for real technological prospects coupled with a market buying into the expectation that the Greenspan Fed was capable of providing nominal stability over the long-term.
It perhaps serves as a positive case study as to why some economists bang the drum so strongly for nominal GDP-level targeting. With expectations of nominal stability, the hurdle to invest in high-risk, long time-horizon projects, is greatly reduced. This can effectively yoink away much of the equity risk premium and could justify the high valuations and low expected forward returns to equity that marked the 1999-2000 period.
I’ll caveat by saying that this is currently just my working model of the late-90s, but it perhaps offers the deliciously contrarian view that managers just blindly dumping money into tech indices were actually not ‘uniformed flow’, even if they weren’t fully cognizant of the incentives they were responding to at the time
Good point and indeed indexing played a prominent role in the late 90s tech boom; it was a broad market phenomenon, in contrast to the idea that it was a micro-speculative frenzy contained to things like zero-revenue IPOs.
However, here I’ll expand on the meta-contrarian “bubble” point and offer that the dot com boom was not a case of markets gone haywire. I think we had a case for real technological prospects coupled with a market buying into the expectation that the Greenspan Fed was capable of providing nominal stability over the long-term.
It perhaps serves as a positive case study as to why some economists bang the drum so strongly for nominal GDP-level targeting. With expectations of nominal stability, the hurdle to invest in high-risk, long time-horizon projects, is greatly reduced. This can effectively yoink away much of the equity risk premium and could justify the high valuations and low expected forward returns to equity that marked the 1999-2000 period.
I’ll caveat by saying that this is currently just my working model of the late-90s, but it perhaps offers the deliciously contrarian view that managers just blindly dumping money into tech indices were actually not ‘uniformed flow’, even if they weren’t fully cognizant of the incentives they were responding to at the time