Floyd Norris: Watching the bubbles bounce

The International Herald Tribune: "Five years later, the great bubble of 2000 does not look nearly so bad as it did in 2002. The conventional wisdom now is that it was not all that important, certainly nothing like the great bubbles of 20th-century stock market history, those of the United States in 1929 and Japan in 1989.

But there are similarities to those bubbles, and those resemblances could indicate it will be a very long time before technology stocks as a group become good long-term investments again.

First, look at the differences. In 1929, the world economy entered the Great Depression. In 1990, Japan began a long period of poor economic performance. It was not a depression, but there has yet to be a period of sustained growth in that country since the end of the bubble.

The U.S. bubble in 2000 was different both in its breadth and in its economic impact. That bubble did not infect the entire stock market, but instead was concentrated in technology stocks, with a lesser bubble in the largest stocks in the country, the ones that dominated the Standard & Poor's 500-stock index. The economic aftermath included only a relatively mild recession and a recovery that took a long time to build up steam.

When the bubble was at its peak, Alan Greenspan, the Federal Reserve chairman, turned aside advice, some of it from this column, that he should do something to restrain the speculation. He offered a confident forecast that if and when the bubble did burst, he would know what to do to minimize the damage. And he seems to have been right.

The story is not yet over, of course. Some argue that the decisions of central bankers in both the United States and Europe to pursue super-low interest rates helped to prevent disaster but created imbalances that may yet explode. Stephen Roach, the Morgan Stanley economist, calls Alan Greenspan a "serial bubble blower" and points to housing prices as the bubble du jour. But economic disaster has been averted so far.

While many American stocks are higher than they were in 2000, the area where the frenzy was greatest remains low. Adjusted for inflation, the Nasdaq 100 is down about 70 percent. That performance is quite similar to the one turned in by the Dow industrials in the first five years after 1929, and worse than the performance of the Nikkei 225 after 1989.

But while the Dow hit bottom in its first five years after the crash, even if there would be a long period before the lost ground was regained, the Nikkei had not. Now, 15 years after its peak, it is worth about half what it was a decade ago, after adjusting for inflation.

When the stock market fell to its post-bubble low in late 2002, there was much talk that the lesson was that even if a technology is revolutionizing the world, the profits are more likely to go to those who use the technology than to those who develop it. Now investors are back buying hot technology stocks, and that lesson is forgotten.

That is perfectly consistent with the history of previous bubbles. The second five years after a historic high can produce some big gains, but they also can produce losses that wipe out most if not all of those gains. Technology investing in the next five years may be more exciting than profitable."