West is forever blowing bubbles

In: Uncategorized

7 Mar 2011

This is my latest weekly comment from Fund Strategy.

For anyone who remembers the investment world of the 1990s there are clear signs suggesting a technology bubble could be inflating.

Not only is it fund managers’ favourite sector, judging by the latest Bank of America Merrill Lynch survey, but recent deals have the whiff of what came to be known as TMT (technology, media and telecoms).

Last week’s acquisition of a 10% stake in Twitter by a JPMorgan fund, reportedly valuing the information network at $4.5 billion (£2.8 billion) was the latest such deal.

It followed a similar investment by Goldman Sachs in Facebook and AOL’s takeover of Huffington Post, a news and opinion site, for $315m.

There was also the huge importance that western pundits attached to social networking sites in the recent Middle Eastern protests.

Although this excitement was not directly connected to the stockmarket it exhibited a breathlessness about the impact of information technology that was reminiscent of the 1990s.

However, there are two reasons to believe that history is not repeating itself. First, today’s hype is a long way from the crescendo levels that preceded the crash of 2000.

Back then it was common to hear that the New Economy, transformed by information technology, was set for a golden era of continuous expansion. A strongly rising stockmarket was seen as part of the story.

More fundamentally, the idea that there was a technology bubble in the 1990s is a misconception. It would be more accurate to say there was a financial bubble that happened to find its way into the technology sector.

It was preceded by an Asian bubble in the run-up to 1997 and was followed by one in the American housing market.

Bubbles are never far away in these times of economic atrophy in the developed world.