A lookback into 2000-2002 Dot.com Bubble & Cryptocurrency Thoughts?

The post today will be about another study on the financial crisis that had happened 17 years ago.

Not long after the 1997 Asian Financial Crisis, a historic economic bubble was formed and excessive speculation is hovering around the market. Many of which are speculating about the internet companies and the booming technology companies.

Background
Back in the 1993, when the internet world wide web was founded, information and communication is a luxury to people. The rapid growth of internet has allowed many people to readily access information with ease. Not long after, the IT had became a necessity from humans.

During that period of time, where many internet companies are formed, investors are very eager to invest in the companies, considering on how their future "prospects" would be, and how well they believe their investments will turn out.

Investors are very willing to invest in any companies at any valuations which has internet prefixes in their name. Now, a bubble is formed.

The bubble is caused by:
Over speculation/confidence: The rapid rise of stocks with association to the Internet Technology had caused investors to overlook and neglect many investments metrics.

Greed: Venture capitalist, eager to profit from the investment demands. As such, they're very aggressive in raising capital without caution.

Low interest rates: Interest rates between 1998-99 is relatively low. As such, this has provided investors with the ease in obtaining funding for their capital. With a combination of greed, over speculation, confidence without due-diligence and the ease in obtaining funds, many people back then, felt that it is really easy to make money from the stock market. In fact, it is reported that there is a great number of people that resigned from their full-time job to be "traders"!!

During that period of time, the dot com companies operated at a net loss due to their believe in rapid expansion, and the willingness to advertise (by providing discount and giving out freebies and certainly paying a big advertising fee) to further stretch their companies' public awareness.

They believe that when they've built a healthy brand-awareness, it will be profitable for them in the future with the services they're providing.

The dot com companies felt that they belong to the "new economy" and rewarded themselves and celebrate whenever a new services/product is launched called the "dot com party". Dot com party is a very lavish and expensive event.

The equity market began to surge from 1995 before crashing in 2000-2002

Aftermath - The Dot Com Crash:
The NASDAQ peaked at 5048 in 2000 and that's when top IT companies like Cisco and Dell placed a sell order on their own share which triggers a panic sell down by the public. The investment capital of the dot com companies also began to dry up from their lavish spending and advertising. Not long after, the market crashed. After the dot com crash, majority of the dot com companies that is publicly traded folded and trillion of dollars evaporated from the market.

Now, let's take a look at some chart, shall we?

First, let's take a look at some successful companies that are survived the dot com crash, and how they're affected by the dot com bubble.

Cisco, a high-tech standard bearer, driving the organic growth too experience the tremendous gain from the market back in the 90s before the dot com bubble! However, after the dot com crash, Cisco's drop to a new low at 10.51 in 2002, shredding 86% of it's value from it's peak at 79.38!!

To the peak in 2000 at 79.38, a 1302.47% gain!

Now, let's take a look at some other companies that are still around like Amazon and eBay.

Amazon, the largest online retailer in the world had it's IPO at $18/share in 1997 and subsequently, the booming dot com bubble has caused Amazon's share price to rise to $85 with 3 shares split! Impressive isn't it? Following the dot com crash, Amazon is trading below $10!

eBay, the online auction platform previously and an e-commerce platform had it's IPO at $18/share and during it's first day of trading, the price shot up to $53/share, before closing at $47. A 163% gain in a day!! Wow.

Read: eBay return of the IPO by CNN money

Time for some bad example?
Many companies did not survive the dot com crash and had declared bankrupt. I will highlight some prominent examples such as WorldCom and Pets.com

WorldCom is a leading telco back in the 90s, the operator of the world largest internet provider back in the 90s folded and was involved in some accounting scandal. The bankruptcy of WorldCom was the largest till 2008 before the bankruptcy of Washington Mutual and Lehman Brothers in the 2008 Global Financial Crisis.

Read: WorldCom files largest bankruptcy ever

Pets.com is a online enterprise which sells pet supplies. It is short-lived and only survived 268 days in the market before filing for bankruptcy. Pets.com have their IPO price at $11 before tumbling to 0.19 and forced liquidation in 268 days.

Pets.com mascot found from the net

 

Does this situation looks familiar? 
Over speculation? Confidence? Bubbles?
Buy on news and sell on facts? How about it's fundamentals?

How about cryptocurrency?
On a side note, the cryptocurrency market today bears some resemblance towards to dot com bubble. However if we take a closer look into both the situation. The dot com bubble in the early 2000s has melted down $1.7 trillion, whereas as of today, the entire cryptocurrency market capitalization is merely touching the 300 billion mark. To reach 1.7 trillion, there still some way for the crypto market to travel.

Having that said, it's also good to remember that the world today in 2017 is much richer than it is in early 2000 when the dot com crash. As such, this might pushes the bracket up more, before the actual crash starts to kick in. 

Take note: I'm not recommending anyone to invest in Cryptocurrency.

Read:
A lookback into 1987 Black Monday
A lookback into 1986 - 1991 Japanese Asset Price Bubble
A lookback into 1997 Asian Financial Crisis
Cryptocurrency for Dummies Series

A lookback into 1997 Asian Financial Crisis

This post today is another study on the financial crisis from before.

Remember on 19 October 1987... The Black Monday strikes? Let's fast forward to 10 year later, in the summer of 1997. In the beginning of July 1997, the East Asia is battling with a rising fear of worldwide economic meltdown. This Asian Financial Crisis is a series of currency devaluations. This had it turn caused the stock market to collapsed.

The Asian Miracle is a name used to describe the economic growth of East Asia. For 30 years, the growth rate of Thailand, South Korea, Hong Kong, Singapore, Taiwan and Indonesia had maintained a very high growth rate of 8-12%. This is attained by high interest rates which is used to attract foreign investments. The foreign investment also allows rapid industrialization.

The high exposure to foreign investments also brings them a bigger risk to forex movements. As the US economy recovered from a recession and aftermath of Black Monday in early 1990s, U.S begins to increase the interest rates. This inevitably caused a problem for countries in Asia that are exposed to foreign investments and the U.S becomes a more attractive investment destination.

Bubbles are formed and fueled by hot money (money that are flowing regularly and quickly between financial markets for investors to capitalize on the gain in shortest time on the highest interest rates)

Background/Causes - Thailand
It all started in Thailand. In 1985 to 1996, Thailand's economy grew at an average of 9% per year. The highest economic growth rate of any country at the time (Japan is knocked out by the popping of their asset bubble. Inflation was however kept reasonably low between 3.4-5.7%. The Real Estate sector is also booming with speculations. However in early 1997, the exports decline. Exports is an extremely sector that contribute to a significant portion of Thailand's economy.

In May 1997, the Thai Baht was hit by massive speculative attack in view of the weaker economy. In spite, of the attack the Prime Minister of Thailand announced that they will not devalue Baht. Thailand, however, lacked in foreign reserve to support the peg between USD and Baht and the government was forced to float the Baht allowing the Baht to be set by the currency market.

The currency market failed in Thailand as a result of the government's decision to no longer peg the local currency (Baht) to the U.S dollars due to insufficient reserves. Since the U.S is now a better destination for investment, investors withdraw from their investment in Thailand and flock to the U.S. This event had caused the baht reached it's lowest point at 56 to 1 USD.

From 25 to 1USD to 56, it had made foreign loan extremely costlier for Thailand. This event had caused the biggest financial company in Thailand - Finance One to collapse. Fear has strike and investors are in a panic and started pulling money from the Thailand market.

As a result, Thailand had accumulated a heavy bag of foreign debt that effectively bankrupted the country. This event had ended Thailand's booming economy.

In short, using a simple diagram:

Indonesia
Indonesia, a country that has the largest economy in the Southeast Asia, is next to feel the wave. Just before the AFC, Indonesia is in good shape due to the low inflation and huge foreign reserve along with the good banking systems. Rupiah has also appreciated from the loans taken by foreign institute. However, just after Thailand floated baht, Indonesia responded by floating the rupiah too and had widened the band from 8 to 12%.

Unfortunately, rupiah is next in the severe speculative attacks which devalued Rupiah to a greater extent. Similarly, the cost of foreign debt and investments becomes costlier and Rupiah has dropped from 2600 to 1USD to 11000 to 1USD. As a result of the falling Rupiah, the Jakarta Stock Exchange is also affected and touched it's historic low.

South Korea:
The domino effect has spread from Thailand to Indonesia and South Korea is next. They've great conglomerates owned by government. However, as many of the corporations are busy with building great conglomerates to compete on world stage, the Koreans are not left out. They've been aggressively expanding their businesses, funded by loans. The conglomerates does not earn sufficiently to pay off their loan. This has resulted in non-performing loans and is burdening to the banking sector.

The shortage of foreign currency caused the value of won to devalue from 800 to a low of 1700. And due to low reserves that South Korea has, the devaluation of won and non-performing assets, South Korean market plunged and many countries bankrupted. IMF stepped in to provide US 57billion as bailout package, with conditions of the Koreans to adhere to. An example of company that has bankrupted in AFC is Daewoo Motors and they're taken over by General Motors.

Philippines:
In response to the crisis in Thailand, the country's central bank raised interest rates to defend the peso. Stock market crashed and fell from 3000 to 1000 points. Huge outflow of money


Hong Kong:
The Hong Kong dollars come under speculative pressure soon after. Due to the inflation rate in Hong Kong being significantly higher than the U.S. As Hong Kong had a huge foreign reserve, they manage to maintain the peg. To protect the currency, the interest rates increased from 8% to 23$ overnight. This in turn caused the stock market to be extremely volatile and in 3 days, Hang Seng Index dropped 23%. The rate hike had caused the market to spiral downwards and many speculators had shorted the shares on Hang Seng Index. The HKMA and Donald Tsang (Financial Secretary of HK) since declared war on speculators with government buying US 15 billion worth of stocks in many companies. 


Malaysia:
Similarly, the Ringgit Malaysia is attacked by speculators after the Thai Baht. Overnight rate jumped from 8%-40%. This has caused the massive sell down in the stock market by which it fell by 50% from 1200 to 600.

Malaysia prime minister, Mahathir had introduced strict capital control, stopping of overseas trade by making the RM invalid. Currency/investments aboard for residents is also controlled. The decision to make RM invalid in overseas trading has caused the short-sellers to buy back RM at a higher price. Hence, making it a bad investment for them. CLOB counters is also suspended, and $4.5 billion worth of shares is suspended, affecting many Singaporeans that are invested in CLOB.

The plunging of economy has caused the Malaysia to enter into their first ever recession. All sectors were hurt in the falling economy. Foreign investment in Malaysia since the AFC is mostly avoided from how they dealt with the CLOB counters. Till date, the economy has not recovered to pre-crisis level.

Singapore:
Singapore is less affected by the AFC. However, as the crisis is spread to Singapore, Singapore entered a short bout of recession. The MAS had allowed a 20% depreciation to SGD to cushion the economy for a soft landing. However, the STI is left unattended to, falling from 2,000 points in closing at a low of 848 points on October 1998.

U.S:
The U.S is also affected, but least affected. This is caused by the worries that arises about Asian economies with DJIA plunging 7.2% on October 1997.

Over-investment? Speculation? Panic-stricken? Bubbles?
Oh no.


Read: A lookback into 1987 Black Monday, A lookback into 1986-1991 Japanese Asset Price Bubble

A lookback into 1986 - 1991 Japanese Asset Price Bubble

Japan is a wonderful country that I'll be visiting in 1.5 weeks time, and also I'd be staying there for 3 months for my attachment program. Today, I will be looking back into the history of Japan's economy as well as a lookback into the Japanese Asset Price Bubble and the Lost Decade.

Japan's economy is the 3rd largest in the world by nominal GDP (a monetary measure of the market value of all final goods and services produced in a period of time) and the 4th largest by purchasing power parity (an economic theory that states the exchange rate between two currencies is equal to the ratio of the currencies' respective purchasing power). 

Tokyo Stock Exchange is also the 4th largest stock exchanges in the world by market capitalization as well as the 2nd largest stock index in Asia.

So what happened to Japan during 1986-1991??

Background
The Japanese asset price bubble, was an economic bubble in Japan from 1986-1991 in which real estate and stock market prices were greatly inflated. The Nikkei Stock Average finished at 38,916, an all-time high, which is almost double of it's price today.

Japan's economy grew largely. 
At an average annual rate of 10% in the 1960s.
At an average annual rate of 5% in the 1970s.
At an average annual rate of 4% in the 1980s.

This is way higher than the annual growth of US which is at 3.07% back then. 

This is done by inflation, and the average inflation in Japan in the 1980s was 7.81% per year with the aim to curb the appreciation Japanese Yen. 

Curbing the appreciation of Japanese Yen is done as the economy of Japan was led by exports and capital investment for export purposes. When the yen becomes too expensive, there will be lesser trades which will directly impact on their economy. 


In the fall of 1989, Japan's equities and real estate bubbly began to burst with equity plunged 60% from late 1989 to August 1992, while land values dropped throughout the 1990s by 70% towards the end of 2001.  

Nikkei Stock Average 1989-1992

The bubble is caused by:
Credit Expansion: Excessive loan growth quota by the BOJ, lending to anyone regardless of the quality of borrower. BOJ in the late 1989, sharply raised the inter-bank lending rates. Overly leveraged companies has filled it selves with a book full of bad debts and has led to the bursting of bubble and stock market crash.

Uncontrolled Money Supply: In the attempt to prevent the strengthening the Japanese Yen, the BOJ has kept inflation high and printed more money The reluctance to tighten monetary policy, due to economic uncertainty related to Black Monday, it has indirectly caused the impact of the bubble to be more significant.

Over-confidence & Speculation regarding asset and stock prices: With the ability to easily loan money and the excessive monetary easing policy from BOJ, and the speculations of asset & stock prices due to the super-charged bull, investors are over-confident. This has caused the asset prices and stock prices to accelerate rapidly. 

In August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the BOJ. By late 1991, asset prices began to fall. Even though asset prices had visibly collapsed by early 1992, the economy's declines continued for more than a decade, also known as the Lost Decade.


Over-confidence & speculations???

Aftermath
Lost decade, a period of time in Japan where the economy in Japan is stagnant 
In response to the bubble that burst, companies seek to cut debt and shift manufacturing overseas. This will results in a recession and wages stagnated. This crisis has affected the consumption and investments within Japan. As a result, there was a sharp decline in consumption, which led to long term deflation in Japan.

Deflation happens when interest rates fall below 0% and it increases the real value of money over time. It happens to Japan in the early 1990s to 2006 when the zero-rate policy ended. Japan return to deflation in late 2009 and has been battling with deflation till today for 20 years. This event also triggers liquidity trap whereby many people are holding onto cash instead of placing them into the bank as the interest rates is 0%, and when it is negative, it "eats" into your dollars inside.

It may sounds good that with deflation, my dollars on hand is worth more and that I will be having a greater purchasing power with the same dollar. However, it's good to note that with deflation, it will erode away all our bank accounts and investments, which will pushes many of us into liquidity trap.




Now is deflation a good thing?
Read: My S$1M 23 years before and 23 years later

A lookback into 1987 Black Monday

Dow Jones Industrail Average - Closing Price 22,268.34 points on 14/09/17. This is 3 times the price to pay for since Global Financial Crisis in 2008.

Dow Jones Industrail Average (DJIA) is a stock market index just like our local STI which consists of 30 major companies which includes: 3M, Amex, Boeing, Coca-Cola, ExxonMobil, General Electric, Goldman Sachs, Apple, Microsoft, United Technologies, Walmart and more.

I've never participated in any market crashes before. Throughout my life on earth, I've only been through GFC in 2008. However as DJIA is breaking its all time record high and closing at 22,203.48 yesterday. As such, I've decided to look-back into market crashes, economic crises and reading more about them. I'll look back into 30 years ago, starting with the Black Monday in 1987. 

On 19 October 1987, the stock market around the world crashes. DJIA fell by 508 points (22.61%) to 1,738.74. The largest one-day percentage drop in history. $500 billion in market capitalization was evaporated from DJIA. 

Impacts on Straits Time Index (STI)
STI shredded 12% or 170 points to 1,223.28
This is also the biggest one day tumble in local stock market history. The drop also translates to S$15 billion loss from the market in a day. 

 

What causes the Black Monday?
In 1985 and 1986, US economies began shifting from a rapidly growing recovery for the early 1980s recession. The 1980s recession is an event of severe global economic recession. One of the cause was the Federal Reserve's contractionary monetary policy which was sought to deal with the for high inflation.

The stock market then go on a super-bull run in the 1986-1987. The bull market had been fueled by the low interest rates, hostile takeovers, leveraged buyouts and merger mania. Many companies raises capital to buy each other out - the companies believe that they will be able to grow exponentially by constantly acquiring other companies. Back then, investors rushed to buy their stocks hoping to benefit from the super-charged bull market.

In early 1982, Dow closed at 776.92. Dow has peaked in August 1987 at 2722 points, a 44% increase over 1986's closing price of 1895 points.

Causes of market crash includes includes program trading, overvaluation, illiquidity and market psychology.

The crash was done by program traders. In program trading, computers perform rapid stock executions based on external inputs such as the price of related securities. Mass panic selling caused by the crowd has elevated the crash.  Panic selling causes a sharp decline in price as the investors just want to get out of the investment with little regard for the price at which they sell. Investors rush to calling their brokers to sell off their stocks with the fear of losing everything. This is caused by pure emotion and fear, rather than evaluating their fundamental. Almost every market crash is a result of panic selling.

Majority of the investors are selling did not know why they're selling for. The only thing they know is that everyone is selling. This emotionally-charged behavior has caused the stock market to crash.

Circuit breakers were introduced after the Black Monday to halt stocks from trading if they plummet too quickly.

I've done a deeper research on the behavioral economics to understand more about "emotions" in investing from the net.


Behavioral economics is the studies of effects in psychological, social, cognitive and emotional factor on the economic decisions.

There are 3 prevalent themes in behavioral finances:
1. Heuristics - Humans make 95% of their decisions using mental shortcuts or rule of thumb

2. Framing - The collection of anecdotes and stereotypes that make up the mental emotional filters individuals rely on to understand and respond to events.

3. Market inefficiencies - These include mis-pricing and non-rational decision making.

Now all these is done without consideration to it's fundamental of the business they're buying into. It seems that the many investors back then has been affected by the noises from the market to buy and sell. "Buying in bull, selling in bear"


Fun Fact: Buffett however, took the advantage of the lower price in Black Monday and began building his position in Coca-Cola. One of his most successful investment ever. No doubt his favorite stock. Buffett had cashed-in more than $1 billion of Coca-Cola stock in 1988 which is equivalent to 6.2% of Coca-Cola. Today, his stakes in Coca-Cola is worth $16.7 billion and it pays Buffett $560 million in dividends every year. Now, this is almost half of what he paid in 1987.