Evidence of Fueling of the 2000 New Economy Bubble by Foreign Capital Inflow: Implications for the Future of the US Economy and its Stock Market

TL;DR

This paper analyzes the 2000 US stock market bubble, identifying LPPL signatures in foreign capital inflows and market behavior, and discusses implications for future economic scenarios and currency dynamics.

Contribution

It provides evidence that foreign capital inflows followed rather than caused the 2000 bubble and combines macroeconomic and technical analyses for future market predictions.

Findings

LPPL signature detected in foreign capital inflow during 2000 bubble

Weak synchronization between foreign inflows and NASDAQ LPPL pattern

Identification of LPPL accelerating bubble in Euro against USD and Yen

Abstract

Previous analyses of a large ensemble of stock markets have demonstrated that a log-periodic power law (LPPL) behavior of the prices constitutes a qualifying signature of speculative bubbles that often land with a crash. We detect such a LPPL signature in the foreign capital inflow during the bubble on the US markets culminating in March 2000. We detect a weak synchronization and lag with the NASDAQ 100 LPPL pattern. We propose to rationalize these observations by the existence of positive feedback loops between market-appreciation / increased-spending / increased-deficit-of-balance-of-payment / larger-foreign-surplus / increased-foreign-capital-inflows and so on. Our analysis suggests that foreign capital inflow have been following rather than causing the bubble. We then combine a macroeconomic analysis of feedback processes occurring between the economy and the stock market with a technical analysis of more than two hundred years of the DJIA to investigate possible scenarios for the future, three years after the end of the bubble and deep into a bearish regime. We also detect a LPPL accelerating bubble on the EURO against the US dollar and the Japanese Yen. In sum, our analyses is in line with our previous work on the LPPL ``anti-bubble'' representing the bearish market that started in 2000.