In case you missed it, the Dow Jones Industrial Average experienced a violent and exhausting 1,000-point swing the past week, down 450 points on Tuesday before trimming its losses and then tumbling 330 points on Wednesday before rebounding with a 299-point gain.
It’s not the only financial freefall of late. The housing market bubble was punctured last fall and has been leaking like the Hindenburg ever since. (And long before that, the economy experienced the dual dot-com and technology 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 iTulip.com 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 bubbles, having had a front-row seat at the dot-com debacle and now as founder of a website that tracks financial dislocations), 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 is formed and punctured, the co-conspirators are motivated to create new bubbles to maintain a financial illusion of prosperity, and 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 fathom values that can evaporate instantaneously. Values are not driven by the underlying worth of the asset — a share of stock — but by hyperinflated estimates that are unrealistic and thus unsustainable.
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 to increase share prices rather than to deliver ‘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 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 regulatory safeguards 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 deficits, once the bane of governments and institutions, were celebrated. Add in a dash of liberal interest-rate policies, and a “new generation” of cheering politicians, financial journalists, and economists, 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. In the ’90s, that invention was the web browser, which ushered in a user-friendly internet and a revolution in digital programming. In ’00s, that spark is alternative energy, which promises to reduce our greenhouse-gas emissions and increase our national security by limiting our reliance on foreign oil.
You can already see a 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. Its stock climbed to $268-a-share from $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.