The Bubble and The Triangle

 

This week I am going to try and link the bubble triangle to the dot come bubble.

Bubble Triangle - Quinn and Turner

Firstly, I will look at the marketability side. This is probably the most obvious bit, and the easiest to understand. There were more IPO’s happening which meant firms that could only be privately owned were on the stock market. Second, transaction costs fell throughout the 90’s as more technology made it less costly to execute trades. The technology also made stock trading easier and as a result, after hours trading became much more popular. Retail traders could even trade after hours in 1999. Also with advancements in technology more people were owning computers, with percentage of American households owning computers rising from 15%to 35%.

The money side of the triangle was covered by the increase in margin lending in the lead up to the bubble bursting. Individuals were buying stock on margin which meant you didn’t need the funds to participate in buying the stock. Another point to make, was the fact that Greenspan and the Fed cut interest rates in 1998 in anticipation of severe economic downturn, which would limit losses to investors, but this just caused more investors to take greater risk to maximise yield.

Margin Debt Yearly % Change

Finally, the rise in marketability and supply of money led to a rise in number speculative investors. Dhar and Goetzmann in their paper “Bubble Investors: What Were They Thinking” surveyed investors of the dot com bubble and many of them admitted to buying overvalued stocks in the hopes that the price would rise more. `

Next week I will look at the consequences of the bubble and finally look at some of the winners and losers of the bubble.