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Dillian: Despite S&P 2000, This Is No Bubble

Editor's Note: This article was originally published at 9 a.m. on Real Money on Aug. 26. Sign up for a free trial of Real Money.

As everyone knows by now, the S&P 500 breached 2000 yesterday. Round numbers are pretty arbitrary, but they do have significance. Let's discuss.

I had a little extra time yesterday afternoon, so I set down to reading a set of lecture notes from Peter Thiel's class at Stanford. Quick story: I heard through the grapevine that the faculty at Stanford was very unhappy at the prospect of Peter Thiel teaching a class. After all, he was this unwashed practitioner without a PhD. After a bit of wrangling, the university listed his class. It filled up in the span of a minute.

Peter Thiel was talking at length about his experience in the 1990s. We tend to think that the 1990s was all a stock-market bubble, but nothing could be further from the truth. It started as a really bad, awful recession, and the recovery from it was very weak. If you were an investor at the time, you looked around and saw that emerging markets were a basket case, uninvestable. Europe was stagnant. Then you had the Asian financial crisis and the Russian debt default. In a lot of ways, tech was the only asset class that wasn't unattractive for some reason.

So throughout the 90s, even though stocks went up a lot, the market kind of limped along from crisis to crisis and there was a lot of lingering pessimism throughout the decade on account of the recession and the subsequent "jobless recovery." It was a long bull market, but it didn't feel like one. People were pretty much miserable up until 1998.

Thiel points out that the bubble really only lasted 18 months, the period of time following September 1998, and he talks a lot about how there was a lot of shady stuff going on. I kind of forget this. When people are just throwing money around, some less-than-scrupulous characters will show up to grab some of it. He had a story of South Korean investors trying to invest in PayPal (now owned by eBay (EBAY) ). They wired $5 million without any documents or instructions, and when PayPal tried to send the money back, the South Koreans wouldn't give them wire instructions.

So I spend a lot of time talking about how tech is way overpriced and could potentially be a bubble, but after reading some of Peter Thiel, I got a little perspective about what a bubble is. Of course he talked about VA Linux and the 1,000% initial public offering, and a bunch of other stuff. The reality is that, yes, there are a lot of things about tech right now that are goofy -- Bay Area real estate valuations, the Facebook (FB - Get Report) -WhatsApp deal, venture capitalists ending up on the cover of magazines. But it's not yet a bubble -- and it's hard to imagine what would cause a protracted downturn.

So, in thinking about this, I have to admit that the circumstances are pretty similar. As we know from years of experience, pessimism is rocket fuel for bull markets. Certainly there would be no optimism anywhere in sight for years, maybe decades, after almost blowing up the planet. There are a lot of great things happening, and not just in tech -- and yet we always seem to find a reason to be worried about something.

So this is what I have to say as the S&P crosses 2000. As much as I think the market is overextended and technically unhealthy, as much as I think credit is overpriced, as much as I think companies are releveraging and abusing bondholders and as much as I think the Federal Reserve has created a situation where losses are asymmetrical to gains, it's hard to see the catalyst for a selloff here, as much as it pains me to say it. It will happen when it happens.

Thiel started his class off by talking about how it is difficult to understand what's going on today if you hadn't lived through the 1990s. He's absolutely right.

At the time of publication, Dillian had no positions in the stocks mentioned.

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