Sunday, January 27, 2008


Don't get burned by alternative energy schemes

by Larry Geller

I posted a comment yesterday to Ian Lind's article, Check this! Huge energy plan to be announced? that I'd like to elaborate here.

Ian posted links to two articles on the Lingle administration's proposed alternative energy plans in cooperation with the federal government. I wrote:

It’s about time.

But it has been predicted that alternative energy is the upcoming bubble, so investors should be cautious. I don’t have the source with me right now, but the theory is that a new bubble forms as the old one collapses. The housing bubble is collapsing, so I guess the gods of the economy would welcome this new one.

Not that dot coms, housing or alternative energy are bad things. It’s just that to have winners in the investment world you need losers. Bubbles generate large numbers of losers among foolish investors so that others may prosper. Especially, for example, Wall Street folks who reaped huge year-end bonuses even as housing and mortgage bubbles burst around the less elite.

Of course, Hawaii could gain in the process. On the personal level, though, “Don’t take any wooden nickels” or invest in any wooden windfarms.

I have that source for you. Check out Alternative Energy, Alternative Media, & Asset Bubbles, and the article that it, in turn, references: The next bubble: Priming the markets for tomorrow's big crash.

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.

Perhaps, before this bubble's time is up, we might derive some lasting benefit from it. But watch out, and don't get burned by alternative energy schemes.

See also this article for a discussion of rational and irrational bubbles. A snippet:

"A rational bubble," explains Richard Dale in his excellent history of 1720's South Sea Bubble - The First Crash - "is characterised by the continuing rise in the price of an asset, generated by the belief that this price rise will persist...Investors understand that the bubble will eventually burst...[but] they expect to be compensated for the risk of a price collapse."

And an irrational bubble? It arises, says Professor Dale, "where the relationship between asset prices and fundamental values breaks down...Investors have totally unrealistic expectations about a company's future profitability and therefore dividend-paying capacity."

In other words, irrational bubbles display the most rational behaviour according to the academics. Investors keep buying because they believe - wrongly, as it turns out - that they're making a rational investment in rock-solid investments. Rational bubbles, on the other hand, mean everyone knows that things have got out of hand. But they keep holding anyway, hoping to exit before the last fool catches on.

Conservation counts too, maybe as much, maybe more. Cut down your consumption and save! It's a no-brainer on a personal level and it should be embraced also by our government at all levels.


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