Friday, February 8, 2008

Whither The Next Bubble?

Whither The Alternative Energy Market?
Q&A With Eric Janszen On Whether An Alt-Energy Bubble Is In The Making

By Mark Pawlosky, Grist | 1 February 2008

Eric Janszen, the founder and president of, recently argued in Harper's Magazine that the alternative energy segment is a prime candidate for a massive asset bubble, potentially dwarfing both the dot-com and housing bubbles. I wrote about Janszen's prediction last week. This week, Janszen joins us for a question-and-answer follow-up.

Grist: You make a convincing argument that a financial bubble in the alternative energy industry is nearly inevitable, but the question I have is, do all bubbles have to end badly? Is it not possible for a bubble to harmlessly deflate over time?

Janszen: As I mention in the footnotes of the article, I'm not fond of the term "bubble" precisely because it suggests a thing that suddenly ends. Asset hyperinflations go through stages of growth and decline, resurgence, and so on. No two are alike, and they do not necessarily have to end badly.

Grist: What sticks in the mind about the dot-com bubble is the daily drumbeat of internet hype, frenzied day traders, and a surging stock market. That sort of activity isn't as apparent in the alternative energy sector. I'm wondering, is there such a thing as a stealth bubble, or are we just at the early stages and the hype will build?

Janszen: If tech-bubble participants knew in 1996 what we know today, they'd generally have recognized the formation stage of the tech bubble— that includes investors, management, and employees of tech companies, government policy makers, the press, in fact everyone except perhaps the investment bankers. But they did not, and in fact most did not even know a bubble had occurred until long after it ended. Similarly the housing bubble, although the participants were different, except again for the investment banks. As the Harper's article indicates, in the formation stage there are early successes, but not until all of the conditions of an asset hyperinflation are met does the part of the process that is generally observable as a "bubble" occur.

The paradox today is that awareness of asset bubbles is wide, but it is unrefined: market events that are not "bubbles" are misinterpreted as such. Recent near manic enthusiasm and hype for solar and other green energy companies has been mistaken for a bubble. In the early stages of the tech bubble in the mid-1990s, early companies that never participated in the main event many years later came and went with a lot of hype. These booms often have false starts. These companies do not represent what I believe will be the main participants. A few will, but most will not. In fact, many of the companies that will experience the most growth and success during the boom have not even been formed yet.

At this stage, the core focus of the alternative energy and infrastructure bubble has not yet formed. Now it is a morass of ad hoc deployment of various products and technologies, mostly improvements on what has been around for decades. The key drivers of the alternative energy and infrastructure boom will be:

  • Economic recession recovery

  • Dollar weakness

  • Loss of petrodollar liquidity

  • Need for energy security

  • Peak cheap oil

The headline drivers are three needs:

  • Provide employment and economic stimulus

  • Reduce U.S. dependence on imported energy

  • Reduce energy intensity of the U.S. economy

[Note: As if to underscore Janszen's points, The New York Times published a story on Feb. 1 heralding the employment and economic boom alternative energy is creating in California.]

Grist: It's not only the U.S. that's rushing to find new sources of energy and build the infrastructure to support and transport those new supplies. The race is global. Does it follow that the bubble, if it happens, will be global in scale as well?

Janszen: The U.S. is not alone with these challenges. China, because its economy is not a market economy and is still largely centrally planned, is far ahead with a new energy infrastructure that will support economic growth as access to cheap, high quality petroleum supplies becomes more limited and contested. In fact, I expect that the changes that need to occur in the U.S. to make a new energy infrastructure possible, especially entrenched business interests, will need to be politically enabled by the demands of international competition. The country that gets there first, wins [[We-e-ell; not always! : normxxx]].

Grist: How would you see the alternative energy sector maturing, absent a bubble? Would it take 25-plus years and be akin to other capital-intensive energy industries?

Janszen: The only way alternative energy infrastructure does not grow rapidly is if some other boom occurs that helps the U.S. out of a serious economic crisis, oil becomes cheap and plentiful, and oil producers become politically stable. The occurrence of all three strikes me as a very low probability coincidence.

Grist: Are you recommending investors stay away from alternative energy stocks? Do you own any yourself?

Janszen: In my opinion it's too early to identify winners. As I mentioned, the focus of the boom has not developed yet. It may be national high-speed rail takes off first, and that drives other technologies. Or maybe the new nuclear industry takes off first. At this point it's hard to say, so the winners are difficult to identify.

Grist: What are the odds you put on a bubble in the alternative energy sector?

Janszen: I'll answer that on a time scale. The odds that we will see what is generally observable as a boom (widespread public participation, general business press coverage, investment bank and hedge fund focus, etc.):

  • 10 percent next two years

  • 50 percent next three years

  • 70 percent next six years

  • 90 percent next nine years

Bubbling up ...
Could alternative energy companies drive the next big market bubble?

26 Jan 2008

In case you missed it, the Dow Jones Industrial Average experienced a violent and exhausting 1,000-point swing the other week in January, down 450 points on a Tuesday before trimming its losses and then tumbling another 330 points on the following Wednesday before rebounding with a 299-point gain. It's not the only financial freefall of late. The housing market / credit bubbles were punctured last fall and have been leaking like a badly torn hot-air balloon ever since. (And long before that, the economy experienced the dot-com / high tech implosions in the spring of 2000.)

All of which is to say, it's probably safe to assume most Americans are familiar with what a financial bubble looks like when it bursts. But how many of us could spot a bubble in the making? Eric Janszen believes he can. In fact, the president of predicts the next bubble is going to be green— not as in the color of money, but as in alternative energy companies, suppliers, and technologies. If Janszen's right (and he's got a pretty good pedigree in all things bubble, having had a front-row seat at the dot-com debacle and now as founder of a website that's tracking the current housing / credit debacle), it could be the mother of all bubbles.

Bubbles are "a market aberration manufactured by government, finance, and industry," Janszen postulates in the February issue of Harper's Magazine (here's the first page of the article; the rest isn't online). Once one bubble has been formed and punctured, the co-conspirators are motivated to create new bubbles to maintain the illusion of real financial prosperity— fresh capital is the mother's milk that sustains the illusion. Without a follow-on bubble, the economy would, according to Janszen, crater like a cheap pyramid scheme.

Whether it's technology, housing, or clean tech, what all bubbles have in common is that they create vast phantom values that can evaporate instantaneously. Values are not driven by any actual worth of the underlying asset— e.g., a share of stock— but by wholly hyperinflated estimates that are unrealistic and thus unsustainable (and, indeed, the less real data the better). Janszen projects the alternative-energy bubble could outstrip both the dot-com and housing bubbles combined, generating in excess of $20 trillion in speculative wealth— "money that will be employed simply to increase share prices rather than to deliver anything along the lines of actual 'energy security.'" At their peaks, the tech bubble had a speculative value of $7 trillion and the housing bubble $12 trillion.

Financial bubbles were once rare and thoroughly feared. And for good reason. The 1929 stock market crash was so devastating that no one in their right mind dared tempt that fate again, and many regulatory safeguards [[since removed: normxxx]] were put in place to make sure it wasn't repeated. That was pretty much the status quo until the late 1980s and early 1990s, when a new wind blew through the financial world: banking and financial industries were deregulated— and deficit financing, once the bane of governments and institutions, was celebrated instead. Add in a dash of liberal interest-rate policies, and a gullible "new generation" of cheering politicians, financial journalists, economists, and 'would-be' millionaires, and presto: you have tinder for a wild fire.

But you need a spark, or as Janszen contends, a new invention or discovery that's both plausible and in vogue and tends to open up seemingly untapped 'possibilities'. In the '90s, that invention was the web browser, which ushered in for 'everybody', the vast, user-friendly internet— and a revolution in seemingly 'new ways' of marketing and keeping score (e.g., 'eyeballs' and 'clicks'). Later, in the middle of the first decade of this millenium, it would be the invention of financial derivatives and, more especially, 'securitized debt financing', especially as applied to housing. Now, at the end of the first decade of this millenium, that spark is likely alternative energy, which promises to reduce our greenhouse-gas emissions and increase our national security by limiting our reliance on foreign oil and natgas.

You can already see the early froth in the stocks of some of these companies.

First Solar, which designs and manufactures solar modules using thin film semiconductor technology, is one such Wall Street darling [[at least until its technology is overtaken by the next breakthrough: normxxx]]. Its stock climbed to $268-a-share from its already inflated $50-a-share in the span of 12 months, before dropping back to its current, still-lofty $170-a-share range. First Solar, which actually has real revenues and a widely praised product line, is by no means the only stock that's gone hyperbolic. It doesn't take much poking around on Yahoo Finance message boards to find other high fliers. As kids we used to cram handfuls of Bazooka gum into our mouths and have bubble-blowing contests. My cousin Pete was the champ, blowing pink orbs twice the size of his head. Inevitably, the bubble would burst and he'd be left with a thin film over his face. It was harmless fun. Not so financial bubbles.



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