Bulls and Bears - The Rise and Fall of the Stock Markets at the Turn of the 21st Century

Index

1. Introduction

2. The Stock Market Development since the 1990s
Illustration: Dow Jones Index
Illustration: Nasdaq Composite Index
2.2.1. Where are the profits? – Insider Business
2.2.2. After Dotcom – Fraud and the Crash of the Telecoms
2.3. Rational or Irrational Markets?
2.3.1. Arguments For Rational Stock Markets
2.3.2. Irrational Markets – Irrational Exuberance
2.3.3. The Bubble Years 1998-2000
2.4. The Development of Wealth Inequality During the Boom Years

3. Conclusion

4. Bibliography

List of Illustrations

“A couple years ago I was talking to a guy in a bar who happened to be a stockbroker. He asked me about my ‘investments.’ I told him that I don’t own a single share of stock. He was stunned.”^[1] Michael Moore

1. Introduction

Financial speculation and the people involved in it did not have any prestige when the first stocks were traded in 16th century Europe. Speculation was put on one level with gambling or carnivals and the wealthy people would have been ashamed of being seen at the stock exchange. To gain their dividends anyway, they left the trading business to professional “brokers”, a term that until 1690 was only used for procurers or pimps. “Blue chip” stocks, also known as the heavy-weights of a stock index, were named after “the most expensive chip at the Monte Carlo Casinos.”^[2] Since those days, stock trading has developed to become a highly respected business but, as Kevin Phillips puts it “[g]ambling’s psychological kinship has also remained obvious”^[3] and it is sometimes hard to determine where risk-taking stops and greed begins.

The phenomenon of so-called stock market bubbles, stocks becoming more and more expensive without fundamental data supporting these price increases and then crashing at a certain point causing enormous financial losses, also have a long history. The most famous bubbles in history are the Dutch Tulip Mania of the 1630s where the markets crashed when more effective ways of growing the so far highly expensive flowers were discovered, the railroad bubbles in Britain and the United States in the middle of the 19th century, the bubble of the 1920s that resulted in the infamous crash of 1929, and now the technology and Internet bubble at the end of the 1990s.

This paper aims to collect opinions on the development of the stock markets since the 1990s. People from varying fields and backgrounds have written about the recent situation of the economy. First, there are economists like Yale professor Robert J. Shiller, whose book Irrational Exuberance coincided with the bursting of the bubble in 2000. Then there is political analyst Kevin Phillips who reconstructs and discusses the boom and decline of the markets in a political and historical context in Wealth and Democracy: A Political History of the American Rich, or radical journalist Alexander Cockburn whose articles for publications like The New York Press and The Nation focus on the aspects of corporate fraud and the politics behind the market dilemma. Others, like financial economists Robert E. Hall and Alan Reynolds reject the idea of bubbles and argue that the recent decline of the stock markets is merely part of a normal economy cycle that may be derived from historical context as well as from mathematical equation.

2. The Stock Market Development since the 1990s

When the Dow Jones reached its peak at 11,722 points in January 2000 (ä see page 5), it had more than tripled in only eight years. Buying and selling stocks had become fashionable and the volume of stock trades was skyrocketing. In Wealth and Democracy Kevin Phillips offers impressive numbers: “Volume on the New York Stock Exchange hit 100 million shares a day in 1982, crossed the billion-share mark in 1997, and passed 2 billion in early 2001.”^[4]

Since the mid-1990s the new wide availability of the Internet to large parts of society, companies as well as private households, helped creating the new market phenomenon by killing two birds with one stone. The rapid development in technology on the one hand helped the largely technology-based index Nasdaq thrive and on the other hand, online brokers and easy access to real time charts also opened up the possibility of cheap and easy trading for everyone with money to invest. Phillips writes: “The upsurge of the 1980s and 1990s elevated the Nasdaq, and its 1999 crescendo brought online an estimated five to seven million day traders, who for a while accounted for 25-33 percent of all retail trading.”^[5] These new day traders were no longer the former small group of specialists using rapid changes in the markets to make money - more and more of them were private people from all kinds of professional backgrounds, who had discovered the opportunity of making easy money with trading stocks via the Internet. The risk of losing money seemed obsolete, the Nasdaq had grown from 374 points in 1990 to 4069 points in 1999 (ä see page 6) – until the markets started to decline in early 2000, with the Nasdaq losing more than 70 percent in only 18 months. The losses in the Dow Jones index were significantly smaller, but at its so far lowest point in 2003, the Dow Jones had lost more than 30 percent of its peak value.

Abbildung in dieser Leseprobe nicht enthalten

Dow Jones 5-year index (March 1999 to March 2004)^[6]

Abbildung in dieser Leseprobe nicht enthalten

Dow Jones 10-year index (March 1994 to March 2004)^[7]

[...]

^[1] Michael Moore, Stupid White Men and Other Sorry Excuses for the State of the Nation! (New York: Regan Books), 2001, p. xv.

^[2] Kevin Phillips, Wealth and Democracy: A Political History of the American Rich. (New York: Broadway Books), 2000, p. 347.

^[3] Ibid. p. 348.

^[4] Kevin Phillips, Wealth and Democracy. p. 144f.

^[5] Ibid. p. 146.

^[6] “On Vista - Indexanalyse - DOW JONES INDUSTRIAL AVERAGE (DJIA)-Index-Chart.“On Vista. 25 March 2004. <http://index.onvista.de/charts.html?ID_NOTATION=324977&MONTHS=60&PERIOD=7&DISPLAY=1&SCALE=1&GRID=1&SUPP_INFO=0&VOL=0#chart>.

^[7] Ibid. <http://index.onvista.de/charts.html?ID_NOTATION=324977&MONTHS=120&PERIOD=6&DISPLAY=1&SCALE=1&GRID=1&SUPP_INFO=0&VOL=0#chart#>.