4 Reasons Why 'Going Green' Will Put Many Investors in the Red

by Louis Basenese

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.

Comments

[Paul Killinger:]

One major difference between the U.S. and every other country in the world is our view of energy.

The French derive 80% of their electricity from nuclear power. When the Brazilians, Russians, Chinese, North Sea and even African nations discover new energy resources, they have big parties.

Conversely, our government is at war with our domestic energy producers and mining companies, We use moratoria, lawsuits, taxes and regulations to keep from utilizing our own energy resources.

We do so at our peril.

Mar 04 09:58 AM

[Adam Silver...:]

If I understand correctly, the position is that we can merely "dump the trash in the backyard" b/c it's the most expedient and economically sound thing to do, as our cost/benefit projections (a) exclude long term costs and (b) exclude anything but "hard" costs, or those with easy metrics. That way, we exclude the cost of, say, my grandson having to sail to his business meeting in Copenhagen over a 34 day stretch while his kids burn old tires for heat. Don't forget, "Grandma, what's a lion?" They have no current (or future) economic value, except as tourist attractions to a bunch of skinny Kenyans who would rather have a copper mine anyway (better returns). I think some of those silly common core classes and some actual reading might help everyone with "big picture" thinking after all. Otherwise, enjoy that ash heap.

Mar 04 10:04 AM

[geranz:]

I think Mr. Basenese cannot look beyond his own nose! Sure there will be market forces that drive green energy investing. Those forces are rife with naive investors(read Louis Basenese) that monger fear of bubbles! Bubbles are a wonderful thing for children! At some point in the future we, the U.S., must realign our energy infrastructure to make it more sustainable or suffer the consequences. The investment community sometimes needs the assistance toward goals that provide for the greater good. That makes sound policy and the almighty profit does not always drive good policy. Happy dune riding Mr. Basenese.

Mar 04 10:31 AM

[ChipSeal:]

"This green must sit on a large base of reliable nuclear power."

It ought to, but it won't happen while BHO is in office.

Evidence: He just flushed the Elk Mountain depository.

Mar 04 12:01 PM

[La Marque:]

The article is basically correct: everything is in place for a bursting bubble. Governments & environmentalists along with the average person wanting a cleaner world will support being green. Cities are paying the costs of rampant consumerism by the truckload at the landfill. Until we learn to mine landfills, we need to recycle as a society. As the author says: "pick the ones with bona fide products and loads of sales." There will be profits down the road.

Mar 04 12:16 PM

[Advill:]

Mr. Boyter:

Your points of view are ....your points of view, and are far from the understanding of WHAT INVESTMENT IS, in this article the author is not talking about Kyoto, global warming, pollution, Iraq or whatever.

He is talking about investors behaviour, how the individual motivations creates conducts that are predictable, theories about this are in text books (contrary thinking, fundamental analysis etc.) same if you talk of corn, oil, gold or art,...or tulips.

So, all your points are MEANINGLESS and shows a poor capacity for reading and understanding, your comment was reported by me as abusive, and ignorant

Mar 04 12:20 PM

[AHJ:]

Fabulous article. I was a fool to have participated myself in investing a bit in this bubble via the ETFs, FAN and TAN.

Even with all the money and political support chasing alternative energy they won't make it without subsidies and they will do even worse with subsidies. They need miracle technological break throughs which will never happen as long as government is involved. Just imagine how Microsoft would have done if the Feds had been "helping" Bill Gates all those early years? We'd all be using punch cards to send our emails to protect the jobs of the key punch operator union workers.

I do still think there is a future for nuclear and natural gas if those are considered "alternative". They don't need subsidies and they don't need government help, other than having government get out of the way. But that won't happen until the Obama administration blunders us into a war or other crisis which shuts off oil and forces us to use USA Natural gas and nuclear resource over the protests of the tree huggers.

I also explored a hybrid car in 2008, but due to estimates that I would need 8 years to break even on the cost/benefit of the fuel savings (I'm retired and don't drive enough miles to make it pay for me even at $4.50 a gallon for gas), I decided to hold on to my 2000 Ford Crown Vic), so at least I didn't make that fashionable mistake in 2008.

We do need a non traditional energy solution. But it will come from some place we most likely aren't looking and it most likely will succeed bet if government does not give it a subsidy. The subsidies will doom or slow down the currently favored alternatives. How about geothermal? Or is there any way to harness the wind from the windbags in Congress? We could sell the excess and cover the energy needs of the Saudis for centuries.

Mar 04 12:26 PM

[ArtfulDodger:]

Thanks for this article and the details to prove your point, but you don't really need them. For when you see everyone jumping into an area, you have to know the blow out is soon coming.

Moreover, you're going to continue to get heat on this site from this article, because there are gobs of Susan Sarandon eco-maniac kooks bashing and banging around here.

They think, like Al Snore, that the earth is teetering on heating itself to death.

Is it not ironic that when they hold a kook out it snows on them?

Mar 04 12:31 PM

[Buckoux:]

There will be no "Green" or alternative energy without nuclear. As one who has had intimate experience around both nuclear weapons and power plants while in military service, I fear the publics ignorance and irrational fear of things nuclear more than the inflated boogie-man of radioactive waste or accident. Wind and solar installations will ultimately prove more suitable to be recycled into materials to build nuclear power plants. Too bad we are going to have to learn the hard way. And the lesson is going to be cold, dark and will hurt.

Mar 04 12:49 PM

[Marianthi:]

Investing in anything at all requires caution, but we need a renewable source of energy because oil is a finite resource and it is better to prepare early than wait until we have to fight off China for the last nonrenewable resources.

As for those bashing government involvement or subsidies, remember the Manhatten Project. Sometimes government actually gets things done because they don't care about immediate profitability.

This is an area I am looking at, considering FSLR as they are a good company that has gotten whacked recently...

Mar 04 03:17 PM

[quick:]

Sounds like you're just pushing a political viewpoint that you have and haven't done much research.

First of all, the cost of producing electricity generated by wind or solar is getting very close to being on par with fossil fuels. And if you add in the TRUE cost of fossil fuel generation, such as the added cost of health care from all the pollution burning these fuels produce, then alternative energy is already cheaper.

Also, most alternative energy funds and ETFs are down 60% or more from their highs.....I don't know what bubble you are talking about. While many of those companies may have been over valued a year or two ago, they are certainly not in bull market mode right now.

Finally, there is only so much oil or coal or whatever stored in the ground that we can extract. It's going to run out eventually, then what are we going to use for energy sources? Clean, renewable energy is the future, whether you like to admit it or not!

Mar 04 03:19 PM

[quick:]

So what company do you work for anyway, I'm curious? They sound like a real progressive bunch, banning employees from recycling!


On Mar 04 07:33 AM Online Backups Review wrote:

> Great article! Not too long ago, I shared in this "green" belief.
> I would like to offer another perspective, particularly from the
> financial side of the discussion…
>
> After years of wasting valuable time, money, facility space and other
> resources, our company initiated a ZERO-RECYCLING policy last year.
> In each of our six of our plant locations, we eliminated all indoor
> recycling receptacles in our offices and on our manufacturing lines.
> All outdoor industrial recycling bins were returned to our disposal
> company. All steps of the manufacturing process which directly involved
> recycling to any degree were put to a stop. We completely eliminated
> the company position of “material handler” and re-hired that individual
> to work in an open manufacturing position. All employees are forbidden
> to recycle at work and we encourage them to follow this same policy
> at home. We conducted workshops on this initiative for existing employees
> and all new employees also receive it as part of their orientation.
> Starting this year, we reward each employee who signs an agreement
> not to recycle at home one extra paid vacation day.
>
> Why did we do this, especially given the current popularity of acting
> “green”? Because, after doing months of research and investigations
> (conducted both in-house and by two outside, independent agencies),
> we realized that recycling is just a “make-work” initiative, one
> that does NOTHING to benefit business or the environment, and recycling’s
> primary goal is to make uneducated, “green” people feel good about
> themselves. As a “make-work” initiative, the main goal of recycling,
> and the companies that do it, is to create fancy-sounding jobs for
> people who are otherwise unemployable. We would rather create and
> contribute to a real, necessary, productive workforce economy, vs.
> standing standing behind a “green” facade. Most importantly, recycling
> and the companies that do it, have been proven, time after time,
> to actually do more HARM to the environment than good.
>
> Bottom line: Recycling has been proven–without a doubt–to be nothing
> more than an expensive economic and environmental fallacy. Here is
> more information we used in our research:
>
> www.heartland.org/poli...
> www.ehponline.org/docs...
> www.milkandcookies.com.../
>
> By completely eliminating recycling and initiating a ZERO-RECYCLING
> policy, our company will save, on average, close to $40k/year, not
> including the salary of the “material handler” position which were
> able to completely eliminate. Even better yet, we have seen a huge
> increase in worker productivity, now that our employees–particularly
> in manufacturing–are able to focus on their WORK and not be burdened
> by recycling getting in the way.
>
> The success of our trend-breaking initiative has drawn the attention
> of other companies in our industry and beyond. Almost every other
> day, another company calls us, asking for information on how they
> can eliminate recycling. We have hosted seven walk-through tours
> last year alone, including a company from Finland and one from the
> UK, and our VP of Operations has spoken at two business conferences
> so far this year, with another two scheduled this month and next.
> Although it is obviously somewhat controversial, we are very proud
> of our initiative and why we are doing it.
>
> Clearly, in today’s business environment, companies large and small
> are finally realizing how damaging the scam of recycling truly is–to
> their bottom line and to the environment. If you, or your company,
> thinks it’s good to recycle, good to pretend to act “green”, and
> good to let the fallacy of recycling get in the way of real work,
> please get educated and start doing the right thing TODAY. We did,
> and we, and our shareholders, could not be happier.

Mar 04 03:24 PM

[Jonathan Ch...:]

This is just a "Hot Air" posting. - caused by my intolerance for these terms:

It's pretty clear that government programs associated with recycling, alternative energy and global warming are misguided and do not pass the economic smell test.

These terms "Recycling", "Alternative Energy", "Global Warming" all belong in the dustbin of economics. They take an idea out of context and attempt to make it a separate entity, when in fact they are all just part of the process.

We don't talk much about "recycling" steel because the process of returning scrap steel to the electric furnace is simply part of the process. The amount of steel recycled depends on many factors - all economic. And it works when the price is right.

A hundred years ago Natural Gas would have been an "Alternative Energy" except that not too much was used due to the need to develop pipelines, compression facilities and other technologies. As natural gas became competitive, it took it's place in the scheme of things.

Three hundred years ago Coal was an "alternative energy" while the oak forests of Great Britten were converted to Charcoal and Coal was not in the picture - until the trees were mostly gone.

"Global Warming" if you haven't figured it out, has been going on for over 10,000 years, and as a result the oceans have risen over 500 feet. "Global Warming is why the ice sheets that covered most of the northern hemisphere are now gone. People really think that burning the carbon compounds that we use caused "Global Warming" Not likely.

Mar 04 03:44 PM

[vpratt:]

It's deeply disturbing to see the continued notion that we can ignore, for the sake of short term expedience, doing the RIGHT thing. The costs of of NOT recycling are long term and hidden. Here in Tucson, there is ongoing agony over land fill sites. This is a cost that has to be viewed over a period of centuries. The cost and effort of recycling, in my opinion, is the same as that of piping my sewage to a treatment plant. I don't want the "stuff" produced by my bodily functions, and I happily pay the county and city to receive it.

"Green" is not a religion. Perhaps some of us must treat it as such to get our lazy butts in gear. It is a way of dealing with problems of the modern era. In this, it is no different than the costly deployment of millions of traffic lights and street signs. It simply must be done.

Mar 04 04:11 PM

[Tim Hannon:]

Can anyone tell me why the 'Artful Dodger' and 'Paul Killinger' think there is some sort of a green hoax? Love to gain an idea of the research and thinking behind it.

Mar 04 04:35 PM

[BenInEden:]

Hehehe ... this article makes me laugh! Sure there is a green bubble ... and it's a lot like the dot-com bubble. But what happened after the dot com bubble's smoke cleared? We had the MEGA industry of IT emerge that has changed EVERYTHING!!! Literally the world is a different place because of the companies that emerged during the dot-com boom. Everyone's job is different. Millions and millions and millions of jobs were created and destroyed due to the emerging of IT.

The green bubble will be no different. Sure the hype will drive stock prices into unrealistic P/Es. Sure a lot of people will get swept by various currents up and down.

But you'd be a fool to not realize that the green tsunami will shake the foundations of as many industries and we will have HUGE new companies born out of it. You'd be a fool to discount it and think it's a fad. The dot-com bubble was no fad. It was rapid rapid evolution of our economy due to technological innovation.

Hopefully with our prowess we can pick the winners of the green revolution and enter at appropriate P/E ratios and get some really big winners. There will be a Microsoft, Apple, Google, CISCO of green born. And there will be hundreds of flashes in the pan.

Mar 04 04:55 PM

[aquaculture:]

<in the end, the economics just don't add up.

Geothermally produced electricity is now CHEAPER then coal-fired generation in the U.S, but gets no credit for it. Credit Suisse says so.


sciam.com/article.cfm?...

(long RZ, ORA)

Overall poor analysis. You can not have it both ways; on the one hand you speak of government incentives for renewables, yet you do not include subsidies/tax incentives for the carbon based economy such as securing the shipping lanes in the Middle East, tax incentives for exploration etc.

Mar 04 05:36 PM

[User 285593:]

BenInEden - Thank you - your post was one of the first on this article that contained any semblance of common sense.

Will every single alt energy stock be a ten-bagger? Absolutely not. Many will go bust or be consolidated by the BPs and Shells of the world if the technologies prove to be real. However, some will produce disruptive technologies that will change the world as we know it, just like we've seen many times in many industries, including recently in the IT, Communications and Biotech sectors.

I would argue that investment bubbles are a natural and necessary step in the cycle of innovation. As an investor, if you play it smart, stick to fundamentals and avoid following the lemmings, you may miss a few of the 400% gains but you are likely to miss all of the 95% losses as well. I think that's what the author meant in his last paragraph.

As for the economic argument, I think if we were ever to factor in anything close to the full cost of using or polluting the world's "free" natural resources, we would see that many existing technologies, goods and services are not that economical after all. For more on this subject check out Amory Lovins' work at the Rocky Mountain Institute, specifically his book Natural Capitalism (www.natcap.org/).

Mar 04 08:42 PM

[John Petersen:]

The prediction of bubble conditions in alternative energy is about 30 years premature. The sector is in its infancy and the current recession has brought on baby's first cold. But it's far too early to be writing obituaries. Industrial revolutions take decades to unfold, not years.

Today many AE investments are marginal, particularly with recessionary pressure on oil and gas prices, but we have already passed the point of peak cheap oil and when the global economy recovers, so will prices. Over the longer term, there are about 5 billion people in the world that want the lifestyle 500 million of us presently enjoy. They already know the score and are working far harder than most westerners to earn their slice of the economic pie. The baby boom was the most disruptive force in American economic history, but pales in comparison to the force the 5 billion will bring to bear over the next 30 years.

We need every source of energy we can lay our hands on and as the cost of waste soars, it will become a self-correcting problem. Like many I don't think people change behavior because it's "the right thing to do," but I know they change behavior when it saves them money. AE is not going away and AE investors need to pay a lot of attention to cost-benefit analysis, but the decline we've seen over the last year is merely the receding tide in advance of the Tsunami.

Mar 05 11:58 PM

[La Marque:]

They are thinking in pure static economic terms. In the future, energy is going up in price and 'green' will be competitive or better.


On Mar 04 04:35 PM Tim Hannon wrote:

> Can anyone tell me why the 'Artful Dodger' and 'Paul Killinger' think
> there is some sort of a green hoax? Love to gain an idea of the
> research and thinking behind it.

Mar 07 01:35 PM