Green Energy: The Largest Speculative Bubble We've Ever Seen

by Louis Basenese

Green Energy: The Largest Speculative Bubble We've Ever Seen

by Louis Basenese, Advisory Panelist

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.

comments powered by Disqus