Puncture the tech bubble myth

Here is my comment from this week’s Fund Strategy.

There is an almost universal misconception that the stockmarket experienced a technology bubble in the late 1990s, ­followed by a painful bust. This is simply untrue.

Global stockmarkets did surge at that time only to slump soon after the start of the new decade. It is also true that the Nasdaq, America’s technology-heavy market, suffered particularly badly. But it is wrong to characterise this experience as the inflating and bursting of a technology bubble.

The confusion arises because of two related developments that happened at the same time. First, there was the emergence of the internet as a popular technology. Although the internet originated in the 1960s and the Worldwide Web was invented in 1991, it took a while for the technology to be popularised.

At the same time there was a huge amount of ­surplus liquidity circulating around the financial markets. Capital which was not being invested productively found its way into the financial assets.

Until 1997 a significant part of this capital was channeled into the booming East Asian markets. But with the advent of that region’s financial crisis, much of this liquidity was redirected and added upward pressure to western technology stocks.

It was at about this time that excitement about the new technology met a surge of surplus liquidity. Money surged into the Nasdaq and bolstered the sentiment that investing in technology was a one-way bet.

This is where theories of the “new paradigm” and the “new economy” came in. The idea was that new technology was substantially bolstering product­ivity growth. A combination of the internet and mobile phones meant America’s economic future had suddenly become much brighter. The preoccupation with profits in the short or medium term was, in this view, outdated.

With the benefit of hindsight, it is clear that technology investing was not a one-way bet. Nor had America entered a golden era of unbroken growth.

However, it was not, strictly speaking, a technology bubble. It would be more accurate to describe it as a financial bubble that happened to blow up in the technology sector.

The distinction is important because it is clear that surplus liquidity merely found its way into other sectors rather than disappearing. Last decade’s house price boom is the clearest example. The stockmarket boom of the past year also has many bubble qualities.

Technology stocks may have stopped booming years ago but the age of the bubble economy is far from over.