Cycles & Culture
American Beauty and the End of the Bull Market
Russell Arthur Lockhart, Ph.D.

THE MARKET IS NOT AN ISOLATED PROCESS, but is deeply embedded in the historical fabric of human events. Our focus on the minute detail of tick-by-tick price movement sometimes keeps us blind to the larger factors at work in the stories of our time, the stories that will become history. From time to time, it is useful and enlightening to step back and make an effort to see the larger picture. And quite often, doing so, helps to keep us from being blindsided by the lack of awareness of the great circularity and cyclicality to which we are all subject. In late1969, a physical network linking four sites (UCLA, Stanford Research Institute, UC Santa Barbara, and The University of Utah) became the first literal “internet,” an idea initially conceived by the MIT computer scientist, J. C. R. Licklider in 1962. This literal birth of the Internet coincided with the end of the longest economic boom in US history (106 months between 1961 and 1969).

   Thirty years later, in February 2000, this record for the “longest” period of economic expansion was broken. The month before, President Clinton declared the “State of the Union and the state of the economy were never better.” Two weeks earlier, the Dow had set an all-time record high at 11,722.98, rising more than 400% from the beginning of the expansion in March 1991 following the conclusion of the Gulf War and its accompanying recession.

   The boom was attributed largely to the advent of large-scale productivity gains made possible by computer technology and, of course, the expansion of the Internet beyond those initial four nodes to literally encompass the globe-a nearly full realization of the “galactic network,” Licklider had envisioned in his “dream” of the interconnected world. By January 2000, little AOL, an early “on line” company, had grown to gargantuan proportions, so large as to buy Time-Warner and become the third largest company in the world. By late 1999, Microsoft, the software backbone of the “information economy,” had become the world’s highest valued company, and its founder, the world’s richest individual. February also saw the largest corporate merger in history, when two telecommunication giants, Vodaphone and Mannesmann AG joined forces. The “new economy” had arrived.

   More wealth had been created during this short period than at any time in history. The rate of newly forming fortunes was increasing exponentially. The belief in the new technology of the information age and all that would follow from it was profound. Things could only get better and the “new economy” would insulate the world’s financial systems from the old plagues. The world was different now and the old economic laws and old ways of thinking and old ways of measuring economy were dead. Dead! Such was the belief sweeping the wired world as the new millennium dawned.

   The film of the year in 1999 was American Beauty, released on September 15 to great acclaim. Later, in March, it would win the Oscar for best picture. In Alan Ball’s original script, the opening scene pictures an extreme close-up of a drop of water, gathering at the tip of a faucet, a flash of light refracting through it just before it falls. Then, the camera pulls back a bit, another drop gathers, and falls, then another. This “falling” is the theme of the film announced in this opening image-which unfortunately did not make it into the final audience version. In the original script, the last thing Lester sees before he is shot, is water slowly falling from the faucet and after, we hear, “and it’s too much, my heart fills up like a balloon that’s about to burst.”

   In the heart of Internet heaven, Seattleites were flocking to see American Beauty. On November 5, 1999, the mighty rose suffered a bruise. The invulnerable Microsoft, found itself convicted of “being a monopoly,” a phrase missing from the new vocabulary. As if to defy gravity, MSFT shrugged off this affront to the new economy and before years’ end climbed its way to 119.94 an all time high as it entered the first year of the new century. The disparity between the “new way” and the “old way” was starkly drawn. One year later, MSFT found itself at 40.25, having lost more than two-thirds of its value.

   What happened?

   Shortly following the Microsoft ruling, the World Trade Organization met in Seattle. The meeting was a failure and not only because of the rioting and tear gas in the streets of Seattle, the likes of which had not been seen since the end of the last boom in 1969, in the People’s Park riots in Berkeley. Rioting over trade? More precisely, over the disparity in the “wealth effect” the new economy had driven to extraordinary extremes. In this atmosphere, the US government reported the largest trade deficit in history. The price of oil was reaching extremes not seen since the Gulf War and the beginning of this longest of economic booms. The wealth effect had created enormous budget surpluses and the alarming degree of public debt was reduced substantially. In spite of the turbulence, the President declared that things were never better.

   In February 2000, a young boy, managed to “hack” the “secure” servers of several major Internet sites (Amazon, Yahoo, Ebay). Early in March, George Bush and Al Gore locked up their presidential nominations. On March 10th, the Nasdaq and the Internet Index reached their all-time peaks. Two weeks later, after a bit of correction, the Nasdaq and Internet indexes failed to make new highs as American Beauty won the Academy Award for Best Picture. Lester says, as the film opens, “My name is Lester Burnham. I’m forty-two years old. In less than a year, I’ll be dead.”

   Of course, this means that Lester was born in 1957…the year Russia launched Sputnik. The United States government’s response was to the form the Advanced Research Projects Agency (ARPA), the agency that gave birth to the Internet. A week after the Academy celebration, Microsoft was found guilty of violating antitrust law, and fell 14%, buffeting the world’s markets. However, the bounce back was sharp and wondrous, and like that plastic bag in American Beauty, it soared again, as if still convinced the old economic rules did not apply.

   At this time as well, the country’s imagination was caught up in the drama of a young Cuban boy, whose mother had died. Debate raged over whether the child would be able to stay in the “wealthy free world” or be forced to return to the “poverty of the slave state.”

   Synchronously, the leaders of the developing countries, those largely left behind in the wake of the “new wealth” generated by the new economy, were meeting in Havana, Cuba. On Tuesday, April 11, 2000, Kofi Annan, Secretary-General of the United Nations, harshly criticized the World Bank, the International Monetary Fund, as well as the countries enjoying extreme concentrations of wealth. He warned, in the strongest possible terms, of the danger to the world of having extreme wealth and extreme poverty side by side. In the closing speech on April 14th, 2000, Fidel Castro called this disparity the “new apartheid.” That day, of all days, the Dow fell 617.78 points, the largest single day loss in its history; the Nasdaq 355.49, likewise its largest single day loss.

   By year’s end, the enormous wealth created in the prior two years was gone, a loss in value of more than five trillion dollars, the largest and fastest loss of wealth in history. The dangerous disparity had been substantially reduced and, perhaps for a time, forestalled the “dangers” Kofi Annan was pointing to.On Saturday, February 24th, Claude Shannon died. It was Claude Shannon’s work in 1948, A Mathematical Theory of Communication, which laid the theoretical foundations for computers, communications and the Internet. The week following his death would see the financial value of Internet companies reduced to less than 18% of their value at the peak of the great Internet mania.

   Lester had said: “You have no idea what I’m talking about, I’m sure…but don’t worry… you will someday.” That someday arrived sooner than anyone could imagine.

   New economies, old economies, that’s never the issue. As long as humans are “in charge” they will not escape their own foibles, their own nature. The next round may be “different.” On March 8, 2001, IBM announced its Research Division is “following a new path aimed at building more intelligence into computing by creating more autonomous computers.”