Eric Janszen, the founder and president of iTulip.com, 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" 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 recognize 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
- 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
[Editor’s 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 the 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 be enabled politically by the demands of international competition. The country that gets there first, wins.
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 low probability.
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 participation, etc.):
10 percent next two years
50 percent next three years
70 percent next six years
90 percent next nine years