By Randall W. Forsyth

Silver anniversaries are typically happy occasions -- but this one is bittersweet for veteran investors. A quarter-century ago, the great, giddy internet bull market peaked and entered a wrenching bear market that would drag the economy into recession after a decade-plus expansion, the longest in U.S. history.

While the Dow Jones Industrial Average topped out in January 2000, the S&P 500 index and the Nasdaq Composite would set their peaks two months later. Sandwiched between those last two high-water marks was Barron's historic cover story of March 20, 2000, on the frightening rate at which dot-com wunderkinders were burning cash thrust at them by irrationally exuberant investors, or more accurately, speculators.

And for all the snarky comments about magazine covers serving as redoubtable contrary market indicators, we nailed this one. Billions were sunk into online ventures that went down in flames, along with their cash, as our prescient article indicated.

All of which provokes distinct feelings of déjà vu. "Readers of a certain age will soon recall the millennium fiberoptic and telecom bust. Today, as in 1998-2002, technology businesses are unusually susceptible to overexcitement, overordering, and overbuilding," Barron's alum James Grant wrote in a recent Grant's Interest Rate Observer.

The Magnificent Seven megacap tech stocks, which have been throwing off prodigious amounts of free cash flow, now are plowing billions into investments in artificial intelligence. As colleague Andrew Bary wrote in this space last week, Meta Platforms, Microsoft, and Alphabet are estimated to spend $200 billion on AI this year, equal to about one-quarter of their revenue. Given China-based DeepSeek's reported ability to produce an AI model for a fraction of the cost of U.S. AI companies, this raises questions about American exceptionalism, or at least the payoff from the billions U.S. tech giants are sinking into AI investments.

That the government is all in on AI, especially on big-bucks data centers, is another warning sign, Grant adds. The outgoing Biden administration directed the departments of Defense and Energy to lease federal land and expedite permitting for new data centers. The Trump administration promptly followed up with the Stargate Project, along with SoftBank Group, OpenAI, and Oracle, which are supposed kick in between $100 billion and $500 billion to the effort. That's on top of new data-center projects announced since the beginning of 2023 that would require the electricity output of all 94 U.S. nuclear reactors combined. The bust that Grant sees following this boom will not only take down data-center companies but reverberate throughout the tech sector and the credit markets.

Last month also marked the 25th anniversary of the announcement of the $350 billion hookup of America Online and Time Warner, often seen as the culmination of the dot-com bubble and as the greatest destruction of shareholder value in business history.

Jim's colleague Evan Lorenz sees a parallel to the AOL-Time Warner deal in Elon Musk's $97.4 billion unsolicited offer this past week to buy OpenAI. He writes in the current issue of Grant's that Musk may need to triple the bid since SoftBank's proposed $40 billion investment would give OpenAI a putative $300 billion valuation. "Megadeals in the hottest sectors of the economy, as it almost goes without saying, do not occur at cyclical troughs," Lorenz added dryly.

The early internet bubble and bust isn't the only tech antecedent to today's tech industry. Radio Corp. of America was the pre-eminent tech stock of the first Roaring 20s. "All you had to do was include 'radio' in the name of your company and the price of your stock would shoot up, even if there was very little behind the company," Bryan Taylor, chief economist at data provider Finaeon, wrote in a 2023 essay. RCA stock rose 200-fold during the 1920s, only to plunge 98% from its 1929 peak to 1932.

In 1986, General Electric would acquire RCA for 72% over its 1929 price. But during that span, consumer prices rose by over 500%. So "Radio," as the stock was popularly called in the 1920s, was a loser in real terms over subsequent decades, even as radio (with a small r) and especially television, which RCA also developed, vastly surpassed the wildest expectations of the Roaring 20s bulls.

Granted, the macroeconomic backdrop a quarter-century ago was vastly different from today. The world then worried that it would run out of U.S. Treasury bonds, Grant said, with the federal budget in surplus. That's no longer the case. Spending on two Middle East wars, the 2007-09 financial crisis, and the Covid-19 pandemic, plus the expansion of domestic programs such as Obamacare, has Washington running deficits unprecedented except in wartime.

Now the bond market can look forward to a surfeit of securities to fund deficits averaging about $2 trillion for the next decade, according to projections from the Congressional Budget Office, equal to 6.2% of gross domestic product this year.

That means AI will be competing with Uncle Sam for capital in the years ahead. The main driver of deficits will be interest expense, which will total 3.2% of GDP, more than the so-called primary deficit (consisting of everything else) equaling 3% of GDP, according to CBO estimates, and are immune to any of DOGE's efforts.

While circumstances change, Grant said in an interview, the outcome bears an uncanny resemblance from one cycle to the next. So, happy anniversary.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

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February 14, 2025 21:30 ET (02:30 GMT)

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