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Green Energy: The Largest Speculative Bubble We’ve Ever Seen
by Louis Basenese, Advisory Panelist
Senior Analyst, The Oxford Club
Tuesday, March 3, 2009: Issue #947
A few months ago I warned you about the bubble in U.S. Treasuries. And sure enough, it’s popping.
Treasuries have already plummeted 20% from their December peak. By my estimates, they’ve still got another 20% to go.
But regardless of how far price falls, it’ll be a pittance compared to the losses from the next bubble – one that could be $21-trillion large when the air comes rushing out…
In what, you ask?
Green energy… but first let me provide you with a brief historical and psychological perspective. Otherwise, I’m afraid you’ll be too quick to dismiss my prediction. And that could lead to disastrous results.
Speculative Bubbles Dot The Free-Market Landscape
Instances of speculative bubbles dot the free-market landscape…
- The 17th century brought us the Tulip Mania bubble, which like every bubble, was fueled by the social contagion of boom thinking. Tulips were the most-coveted flowers on the planet, different from every other flower known to horticulturists. As such, the incredible demand sent prices through the roof. The madness reached its peak during the winter of 1636-37, when tulip bulbs were changing hands ten times in a day. Soon after, however, the market crashed in spectacular fashion.
- In 1720, it was the South Sea Bubble, where massive over-speculation in Britain’s South Sea Company – which was granted a monopoly to trade in Spain’s South American colonies as part of a treaty during the War of Spanish Succession – caused financial ruin for many. (Incidentally, the bursting of this bubble led to a Bubble Act – talk about a useless and ineffective piece of legislation.)
Fast-forward a couple hundred years and we endured the Japanese asset price bubble of 1990 and, of course, the infamous dot-com bubble of 2000.
Lately, we’ve stepped it up even more. Three bubbles – the housing bubble, the commodity bubble and the U.S. Treasury bubble – have been crammed into a ridiculously short time span of less than eight years.
The Green Energy Super-Bubble
And unless our pattern of behavior suddenly changes, the ominous green energy super-bubble that’s forming will burst before the prior three have ample time to deflate.
We’ve ordained a bubble economy because favorable speculative conditions constantly exist. The ever-shrinking gap between bubbles serves as all the proof we need.
- Cash is the fuel.
- Legislation is the accelerant, providing extra incentives via tax credits or subsidies.
- And popular culture is the explosive kicker.
Together, they comprise the primary ingredients for a first-rate asset bubble.
And right now, there’s only one industry that rests squarely at the intersection of public policy, investing and popular culture – alternative energy.
That’s right. I believe “going green” will lead to lots of red for unprepared investors. As much as $21 trillion, based on former venture capitalist, Eric Janszen’s estimates. And here’s why…
1. The legislation is in place. And more is on the way. Under the Bush administration we got the ridiculous ethanol mandates. And solar and wind credits were routinely extended. Now, President Obama is making the environment and green-collar jobs the cornerstones of his economic recovery plan.
2. Money is already pouring into the sector. More than $200 billion was invested in clean energy and clean technology markets in the last two years. And yet, record amounts of cash are still waiting to be deployed. According to Bloomberg, speculators are sitting on $8.85 trillion in cash, desperate for an outlet.
3. Tough credit conditions actually encourage more speculation. Wayne Woo, director of Good Energies, reports that green start-ups will now give up to 75% ownership (up from 50%) to get their projects off the ground. Getting a bigger piece of the potential profit pie, for the same perceived level of risk, is bound to encourage more speculation.
4. Green is the new black. Forget fashionable. Going green resembles a religious movement nowadays. This alone has people ignoring economics in the name of social responsibility.
Unmistakably, the ingredients are all there.
What Will Burst This Green Energy Bubble?
The only question left is, “What will burst this green energy bubble?” Plenty of scenarios exist…
- Government spending could fail to create sustainable jobs, which would, in effect, cause green investment to grind to a halt. Or, the lack of focus toward one be-all, end-all alternative-energy solution, whether it be wind, solar, biofuel, or something else, could frustrate investors and force them to bail.
- Likewise, too many so-called green innovations still reside in the laboratory. Many will never make it to market, which is another surefire way to hand investors 100% losses and sap enthusiasm and future investment.
- In the end, the economics just don’t add up. Without tax breaks and government subsidies, not a single alternative energy will be able to compete. So no matter how popular or fashionable alternative energy becomes, if it remains economically stupid, it’s destined to fail.
No doubt, the run-up and profits will be historic. Just be forewarned that the green euphoria will ultimately be replaced with despair and massive losses.
It’s hard to gauge exactly when it will occur, however. I estimate we’ve got another two to three years before we hit the peak. That’s why, given the capital still rushing in, I don’t recommend avoiding the sector altogether
Just be smart and buy proven (not probable) green energy companies. You don’t want to own companies that are stuck in the lab with loads of potential. Instead, pick the ones with bona fide products and loads of sales. And religiously use trailing stops. It’s the only way to make sure you don’t bail too early… or worse, too late.
Good investing,
Lou Basenese
Today’s Investment U Crib Sheet
On Saturday, Warren Buffett released his Annual Letter from Berkshire Hathaway for 2008. For investors of any age and experience level, they represent some of the best financial reading for the entire year.
We’ll be touching on some of the key points from his letter over the next few weeks, but there was a passage on bubbles that stuck out to us. We’ve excerpted it below…
“A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.
Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.
Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
Warren Buffett’s Annual Letter to shareholders.
- Alternative Energy: Why You Can’t Ignore “Green” Investing
- A Green Energy Investing Guideline
- Two Investments to Add to Your “Green” Portfolio
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20 Responses to “Green Energy: The Largest Speculative Bubble We’ve Ever Seen”
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A former Wall Street consultant and analyst, Louis helped direct over $1 billion in institutional capital before joining forces with The Oxford Club.
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March 3rd, 2009 at 12:00 pm
Excellent article and seemingly solid advice. I have many ‘green’ friends who swear their first million will be from green technologies. Philosophically, these same people were betting on Tulips, the South Sea’s growth and internet start ups. Thanks!
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March 3rd, 2009 at 12:17 pm
Excellent, excellent comments regarding the green revolution. An awful lot of this green stuff is pipe-dream material foisted on us by a government destined to try to run (ruin?) our everyday lives. At least you have told it like it looks to be, not what the average green reviewer wants it to be. I would dearly love to see us be independent of foreign influence on our energy needs, but I’m not quite sure all this green talk is the answer to our problems.
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March 3rd, 2009 at 12:22 pm
Ok, I’ve been reading Investment U for sometime and generally enjoy the articles and opinions. Even though IU basically exists to spam readers with offers, there are valuable articles from Mr. Green and Mr. Fessler.
However, I must say I am terribly disappointed in Mr. Basenese’s views. I believe you could do the *opposite* of what he said every time and be profitable. Just check the history of his views – he’s almost always wrong and then comes back to “eat crow”. I’ve been reading his articles for over the past year.
I feel bad for any new readers that actually try and follow his advice – they WILL get burned.
This is just my candid feedback – and I have read and subscribed to many newsletters. While Mr. Basenese may have good credentials, his track record at IU is spotty at best. If your intent is to just generate traffic and spur conflict online, then by all means keep him on staff. But if this was truly run like a real business, there is no way his performance is at expectations.
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Alexander Wissel Reply:
March 4th, 2009 at 10:27 am
With all due respect, Lou takes his lumps when deserved. But the facts don’t line up with your recollection…
His subs booked a 266% gain on his long dollar recommendation (put options on FXE), a 19% gain on his short oil call (via DUG). And 18% and counting on his short Treasuries call (via TBT).
As for his latest prediction to short gold – prices are trending in his favor too. Gold stands at $913.50 this morning compared to $938 the day he recommended the move.
So doing “the opposite of what he said every time” clearly would not be profitable.
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March 3rd, 2009 at 12:30 pm
I concur that an “Alternative Energy” bubble is forming big time. I also believe that “Going Green” offers much more sustainable growth opportunities. Going green is at the end of the energy pipe line so it does not matter where the energy comes from, it is about how efficiently it is used. Take Vu 1 for example. A start up company that has produced a new light build using LED technology that has no mercury, last longer than a floresent bulb,is dimable, provides full spectrum light and will cost about the same as a floresent. It will be on the market within a few months.
It is often productive to fish downstreem.
Paul
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rca Reply:
March 3rd, 2009 at 10:07 pm
I have already seen LED 15Watt to 40Watt (equivalent) lightbulbs at my local Ace Hardware store. LED’s are taking over the flashlight market too. I am waiting for the LED 60Watt to 100Watt equivalents.
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March 3rd, 2009 at 12:31 pm
Relative to the green bubble comment: “Just be smart and buy proven (not probable) green energy companies. You don’t want to own companies that are stuck in the lab with loads of potential. Instead, pick the ones with bona fide products and loads of sales.” Who are the “proven” companies to consider investing in?
John Sweatt
Life Member
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March 3rd, 2009 at 12:47 pm
Re the Green Energy super bubble
Still think conservation and avoidance of energy use is more profitable than trying to find the magic bullet.
On top of that energy management via smart grid is required.
We could at least start by putting on smart meters with different prices for different times of day so that individuals could manage their consumption better.
Myself I only use the electric clothes dryer now to soften towels and jeans and de-lint dark clothes for a few minutes instead of the full cycle, saving 90% or more of the electricity used for that function. So the machine should last 10 times longer too!
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March 3rd, 2009 at 12:48 pm
Your forward looking thoughts on where the next bubble is forming are very thought provoking. I thought you were going to say cash. With $8.5 trillion in US money market funds and $70 billion in Canadian funds, and untold zillions around the world all rushing into cash last year – doesn’t cash rank as the number one bubble of all times?
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March 3rd, 2009 at 2:53 pm
I do not disagree with your premise that [many] alternative energy solutions won’t be economical – but it is also true that successful ones do and will exist, though tough to surface against power and politics. This time around in history, maybe the internet will shed light on the delayers, or they will find ways of transition to participate [but that requires innovative CEOs, not just ones collecting 200+ times their workers' paychecks]. Our nation is running out of time for excuses. Here are four seemingly unrelated tidbits to think about – but with a common theme [at some point we all become walking verbal history]:
1. in 1955, an engineer friend of my Dad bought and drove a new, feature-loaded Buick from the factory in DeTroit to LA. It got 33 mpg instead of expected 12. The company then took back the “experimental” carbruator [he photographed it]as “not ready for the public” and gave the car free to Dad’s friend. For decades until about 1973, the US oil industry expanded production at a fixed 9.3% a year, telling the auto companies along the way and since what fleet mpg average it wanted. Why did diesel price recently go way [artificially] up – and now back down? Why would Ford not build a 65 mpg diesel sedan here but build one in europe? How did GM go from nowhere to announcing a 400 mpg car?
2. In the 1094s and 50s there were two nuclear reactor approaches considered, the second one – a pebble reactor – was much more secure to use, free of meltdown potential, but the US could not put that system in Navy warships so it was completely dropped. It could have been the sound base of electricty geneation; China is focusing on building pebble reactors now.
3. I know a company that has cracked the nut on very economically making biocrude for diesel fuel from algae oil, no subsidy needed – you get 20,000 to 100,000 gallons per acre per year compared to 50 gallons for corn ethanol, algae oil that lubricates engines [drops emissions too] versus ethanol destroying engine parts & accelearting wear, algae using 25% of water needed for corn, algae using polluted & farm runoff nuitrient water and CLEANING that water, algae having a quality animal feed byproduct verses a toxic chemical laden feed from the corn ethanol process, and with no need to use good farm land for algae growing – nor creating fuel competition with human food crop that corn does.
4. I read recently where a smart scientific teen from Oregon received a $25,000 scholarship in Wash DC for proving he could get 500 TIMES the electricity of current flat photovoltaic silicon cells, using a three dimentional cube arrangement that focused sun energy. But that would give energy independence to the individual, and make the utility companies have to think outside the box to integrate their equipment. How many decades will that working device be shelved by the powers that be?
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Larry DeVries Reply:
March 7th, 2009 at 6:57 pm
In reply to the figures given in regards to gallons of ethanol produced per acre, I believe the gentleman needs to recheck his sources of information. In our part of the USA the average corn yield is 185 bushel per acre, and the ethanol produced from a bushel is 2.9 gallon. So, in my figures that amounts to 536.5 gal. per acre of ethanol.
Kind of makes me wonder about some of his other statements also.
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charlie Reply:
April 4th, 2009 at 8:32 am
Where is this place that gets 185 bushels of corn per acre? I grew up on a farm and there we were lucky if we got 35-40 bushels per acre.I also went on the custom harvest run from Texas to Cananda then back to Kansas for 5 years and I never harvested a corn crop of 185 bushels per acre.
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March 3rd, 2009 at 2:54 pm
Yes, I think we will see a green bubble, however if oil prices go back above 50 dollars a barrel in relative terms, then green energy may compete.
It is a question of were peak oil is, and markets don’t really predict this.
If the world believes that increasing co2 is a problem, then this bubble might be a long time in the making. There are a lot of so-called green energy schemes that are not green. Hydrogen and alcohol fuel are two of them.
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March 3rd, 2009 at 3:53 pm
Ethanol-bashing fails to acknowledge that ethanol replaced the poisonous chemical MTBE as the additive of choice in gasoline. MTBE is suspected of poisoning aquifiers across the USA, most notably, the water table of Santa Monica CA, which first voiced this finding and led to the ban of MTBE. That alone makes ethanol worthwhile.
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March 3rd, 2009 at 5:23 pm
With all the excitement concerning using wind for energy production, I have found Vestas and Suzlon to be major players in this field but I have yet to find a way to conveniently acquire their stock. Also, there is a company in Spain working in this field but to date I can’t find their name. Perhaps they are not a public entity.
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March 3rd, 2009 at 10:56 pm
Everybody knows that in the long run, green is the most economical. But the up front capital cost for most green installations is a major barrier.
One solution, requiring no government subsidies, is to pay for these installations with property tax liens. Spend $25,000 on solar panels for your home, say, or $10,000 on insulation, and pay that off with your annual property taxes over 20 years, say.
Unlike a lot of government programs, there are real incentives to keep the cost down. The customer still wants to save money on the installation – after all, she still has to pay taxes on it. The installer wants to reduce costs – after all, she wants more customers. The government doesn’t get any extra taxes – they only have to collect what they paid the installer.
Who wins? The homeowner has a lower electric bill. The power company can postpone building power plants at today’s historically expensive construction costs. The country wins with a) increased energy efficiency, and b) reduced dependency on foreign energy. The world wins through reduced global warming and increased economic efficiency.
Think it can’t be done? Well, Berkeley, California is doing it, and lots of cities around the world are watching. If the installers were public, I would be buying stock in them now. This idea is way better than T. Boone Picken’s supposedly green natural gas boondoggle.
There are other obvious winners too. Build well insulated new homes. Paint your roof white to keep your air conditioning costs down. Why pay $20,000 for a gas guzzler car when you can pay $20,000 for a gas sipper?
Louis Basenese is right about the bubble. But wrong that none of the green solutions make sense economically.
Finally, our dependence on foreign oil is a major problem. “Drill, baby, drill” is no solution at all. The sooner we start using greener replacements, the more secure our country will be.
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March 4th, 2009 at 1:01 am
Louis Basenese – you say “In the end, the economics just don’t add up.” If that is true, how do you explain Warren Buffet’s annual letter to his shareholders from Saturday? It talks about two utilities owned by BRK:
“Since our purchase, MidAmerican’s
wind-based facilities have grown from zero to almost 20% of total capacity.
Similarly, when we purchased PacifiCorp in 2006, we moved aggressively to expand wind generation.
Wind capacity was then 33 megawatts. It’s now 794, with more coming. [... We] have been allowed to earn a fair return on the huge sums we have invested. It’s a great partnership
for all concerned.”
Don’t get me wrong – I agree there is a green bubble. But in some cases, it makes sense from an economic and especially a national security standpoint. Warren Buffet seems to think so too.
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March 4th, 2009 at 4:56 pm
It’s an attention grabbing article no question, but would have been a bit more timely about a year ago! True, alternative energies such as wind and solar don’t compete well in an environment of $40 oil without subsidies, but do you really believe that oil remains at these levels? There’s your pipe dream. This isn’t the Jimmy Carter era.. China, India, Brazil and a host of other economies are now big time consumers and that will not change. Ethanol was ALWAYS a bad idea but wind and solar are here to stay. Sure, many of these companies will go under as the industry undergoes consolidation, but for the few players who emerge as leaders such as First Solar, Vestas.. the profit potential will be enormous. The bubble in green energy has come and gone and now it’s time for a round of survival of the fittest.
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March 26th, 2009 at 12:57 am
You are the best writter
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July 18th, 2009 at 10:07 am
Excellent article and very good, solid advice. Many people who talk about ‘green’ says that it will earn them their first million and that too soon. After going through the articles I think I will think about it twice before jumping into the wagon. Why investing is so tough always!
why invest
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