The NASDAQ Composite Stock Index this week broke out to 14-year highs, reaching levels not seen since March 2000, within 10% of its all-time closing peak of 5,048.62 on March 10 of that year (by the end of that month it was already below current levels.) At that time I thought, along with many commentators, that absent major inflation we would not see that NASDAQ level again in our lifetimes – unlike the Dow Jones and S&P 500 indices, which were less egregiously overpriced. It is thus worth pondering why the index had reached such nosebleed levels again, and what about today’s environment might justify higher valuations than in 2000.

The NASDAQ composite index’s rise in the years before 2000 wasn’t exactly healthy. The index, whose base was 100 at its foundation in 1971, hit 1,000 only in July 1995, at a time when the market as a whole was already well into bubble mode and Fed chairman Alan Greenspan had already (five months earlier) taken the brakes off money supply creation. It rose moderately quickly to 2,000 in 1998 then accelerated as the dot-com bubble reached its apogee, with much of the hype surrounding an expected increase in tech spending by companies seeking to avoid the “Y2K” disaster in which supposedly all legacy computer systems would fail to account for the advent of the new millennium.

Needless to say, the predicted disaster didn’t happen, and one’s sympathy remains with the Italian trade minister who in January 2000 congratulated himself on having done nothing whatever to prepare for the supposed tech apocalypse. Nevertheless, even the passing without incident of the magic date did nothing to halt the rise in the NASDAQ index, which having passed 4,000 only in late December 1999 peaked at over 5,000 in March 2000.

The stock market’s rise in 1999-2000 was accompanied by frenzied day trading, mostly by amateurs who took advantage of the new connectivity of the Internet to lose their shirts. (Just because you’re using the latest technology to access something, that doesn’t mean it’s not a scam. Indeed, given the get-rich-quick mentality in the tech sector, it’s more likely to be.)

Those with market experience were cynical of the NASDAQ index’s rapid rise; in May 2000 Jim Cramer was already referring to its five leading companies as “Nazzdogs.” Interestingly, the Nazzdogs weren’t completely horrible investments; if you’d bought equal amounts of them at their peak you would by today have lost about half your money, which is a pretty good outcome for buying fashionable stocks at the top of the market and holding for 14 years.

Indeed, in Oracle you’d have broken even, and Intel, Applied Materials and Cisco haven’t been complete disasters, down between 30% and 70% from the peak. Only in Sun Microsystems would you have lost the great bulk of your money; it was taken over by Oracle in 2009 for about one twentieth of the peak stock price. That’s excluding dividends, too, which all four of the surviving companies now pay, and which over 14 years mount up.

Those statistics would suggest that the NASDAQ Composite index was almost reasonably valued in March 2000, yet few contemporaries thought so. Its P/E ratio at that time was around 200, as pointed out by the level-headed Robert Samuelson in January of that year, which for an index is extraordinary – and indeed entirely different from its current P/E ratio of a mere 25.4, above the 19.7 of the Standard and Poor’s 500 index but not impossibly so. The four surviving Nazzdogs also are not obviously overvalued, holding average P/E ratio of 21 times – although those greying enterprises are no longer considered the most attractive growth stocks.

The collapse in NASDAQ’s value after March 2000 was not therefore due to its most celebrated “blue chip” names, which have mostly survived and even prospered, but to the many smaller companies like the celebrated Pets.com which had neither a sensible business plan nor adequate sources of revenue. This is an important factor to remember when judging the present market; while Apple and Google, the largest and most fashionable names, may be viable if overpriced businesses, there are many others, mostly smaller, which are not. Those smaller companies include a couple of analogues of Pets.com; yet again the world is full of people hoping to make their fortunes by shipping cat food around the country.

There appear to be two genuine factors which have driven the NASDAQ composite index up towards its 2000 level and which give the current market an air of respectability, since its P/E ratio is so much more reasonable than that sported in 2000.

First, the tech sector, the source of so much excitement in 2000, has genuinely grown enormously and today represents a much larger proportion of the overall economy. In 2000 there were no smartphones, no tablets, only primitive search engines, only the beginnings of GPS and only the most primitive social networks. Peter Thiel made a valid point when he said “We wanted flying cars, instead we got 140 characters” but in practice the innovations that have appeared since 2000 have significantly changed and improved our lives.

However it is by no means clear that they have changed our lives more than the innovations of the preceding 14 years, which after all included the Internet itself as well as widespread cellphone technology. The “productivity miracle” of which Fed chairman Alan Greenspan was so proud in 1997 shrinks almost to invisibility when examined closely with the benefit of revised data, but in any case it extended only a few years, roughly from 1995 to 2004. Since 2004 productivity growth has been distinctly anemic, and it may even have turned negative in the last few quarters.

Second, corporate earnings have increased to record levels as a percentage of GDP. For those who hold the conventional belief that stocks should be valued on the basis of their earnings, it is thus not surprising that stock prices are also at record levels. However, when you look at corporate capital investment, running at below normal levels, you begin to suspect that something is amiss. After all, if business is so profitable, why aren’t businesses expanding as rapidly as possible, rather than conserving cash and buying back their shares?

The explanation of course lies in monetary policy, which by expansion of money supply has been too loose since 1995 and by interest rate considerations has been too loose since 2003 and far too loose since 2009 (if it was too tight in 2008, as Chamber of Commerce types claim, it was for no more than a week or so in mid-September.)

The money tide after 1995 initially inflated the bubble in tech stocks, which being early in their life and in a new sector were less held down than other stocks by sober considerations of earnings and valuation. After that bubble burst the excess money flowed into real estate and commodities, producing the housing bubble – or, more properly, the mortgage lending bubble.

Then after the larger crash in 2008 it flowed into all kinds of assets, distorting values wherever you look. Farmland is rising in price at 14% per annum. Junk bond issues, for both corporations and the dodgier emerging markets, are running at record levels with risk premia far below any rational level. That too will be damaging – when Senegal is able to borrow 10-year money at 6% and watch it flow into a balance of payments deficit as large as the bond issue, you know that at some point a credit crunch will occur, exposing the thefts of various Senegalese high officials and plunging the country’s unfortunate citizens into even worse poverty.

The funny money bubble also explains the earnings glut. Part of it is caused by the simple arithmetic fact that if companies are leveraged and debt costs almost nothing, then returns on the equity portion of capital are correspondingly increased. However more of it is caused by the spiral of leverage in the economy as a whole throughout the world, increasing expenditures beyond incomes and reducing the normal price pressures of competitive markets.

Just as in the very tight money period of the early 1980s in the U.S. and Britain, companies found themselves being squeezed ever harder, with profitability declining to business-threatening levels, so today in the very loose money environment profitability increases ad infinitum, only to be scooped away by greedy management, producing businesses that are both sluggish and un-innovative.

The NASDAQ Composite index is thus in a bubble as egregious as that of 2000, but its bubbliness is better hidden, because the entire global economy around it is so frothy that conventional methods of valuation make it look sober. The bubble will eventually burst, as it has done twice before, but this time the bursting will be incomparably more painful because of the bubble’s universality.

And Tesla and Facebook are not a buy, any more than were the Nazzdogs in 2000.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)