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Catching the Next Bubble

by: Investing The Middle Way April 14, 2008 | about stocks: DIA / PBW / QQQQ / SPY    
Investing The Middle Way

Investing The Middle Way

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The February edition of the Harper's Magazine featured an article by Eric Janszen titled "The next bubble: Priming the markets for tomorrow's big crash." Eric Janszen, a venture capitalist, is also the proprietor of iTulip.com, a site originally devoted to chronicling the tech bubble, but has since been focusing on the one in housing. For those interested in longer term investment trends, this article is a must-read.

The gist of the article is best summed up by the chart below where Janszen plotted the (actual and predicted) trajectories of the bubbles of past, present and future, namely the tech bubble, the housing bubble and the coming bubble in alternative energy and infrastructure.

click to enlarge

A picture is worth a thousand words, and this chart contains a lot of information:

  • First of all, Janszen defines various stages within a bubble: normal, formation, hyperinflation, dissipation and overshoot. It doesn't offer any particular insight but lays a common framework for analyzing all bubbles.
  • One major prediction of this article is the course of the current housing bubble, which is forecast to reach the overshoot stage in 2011-12.
  • Janszen's next bubble - alternative energy and infrastructure is currently in the formation stage and bound to reach its hyperinflation stage in 2011-2013.

    • From a big picture perspective, how the current and any future bubbles pan out is obviously of the highest importance. In my personal situation, my wife and I don't currently own a home, and I'm looking at 2009 as a time that we might start looking for a house. This is earlier than the trough in Janszen's chart, because I expect a lot of real depreciation in housing to come from inflation rather than nominal price decline in the later years.

    I'm also a believer in the alternative energy space, which is the main reason behind my recent purchase of PowerShares Clean Energy ETF (PBW). I am however wondering why there isn't a commodity bubble prior, say peaking in 2011-2012. After all, what better justification for alternative energy than high conventional energy prices?

    In the inflation/deflation debate, Janszen is squarely in the former, so he's unlikely to argue for lower e.g. oil/gas prices based on waning global demand. The most plausible explanation is that the commodity bubble will be concurrent to the one in alternative energy. We know that Silicon Valley VCs have gone "green" in a big way. Janszen being a venture capitalist himself, is probably more conscientious of it.

    I would like to hear your reviews of this article, since I believe bubbles are of the uttermost importance. In fact, I'll go so far as to say that successful investing consists essentially of catching a bubble at its formation stage and not jumping ship too early or too late. So for now, I'm planning to do some reading on business relating to all manners of alternative energy as well as recycling.

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    This article has 11 comments:

    •  
      Apr 14 06:05 AM
      what current alternative energy technology is out there?
      nuclear (is already in the picture)? bio-fuel (will cause food prices to spiral out of control until it crash)? battery for cars (any breakthru technology?) solar & wind power (again linked to battery technology and the need for large real estate for such farms)?

      in the foreseeable future, there isn't the technology to sustain a rally in the alternative energy. it would be like the bio-tech rally, offering so much promise but delivering so little at the end of the day for investors. so becareful!

      Reply
    •  
      Apr 14 09:06 AM
      Sergeant Phil Esterhaus of Hill Street Blues,

      "Hey, let's be careful out there ! "
      Reply
    •  
      Apr 14 09:07 AM
      I think that the next Google will be the Solar Company that could make every house, apartment, car, etc in the world to use 100% solar energy paying equal or less than non renewable energy.
      Reply
    •  
      Apr 14 10:31 AM
      Has User 154263 actually priced a solar system for his house? First of all, I have, and you typically don't have enough roof space to generate 100% of your electricity needs. Covering about 3/4 of my south-side facing roof would generate maybe a third to half of my electricity usage (and that's just the electricity --- doesn't do anything for my home heating which generally costs me 2-3x what my electricity costs are). Yes, the technology will get better, but not until a viable silicon alternative is mainstream. And it won't be a "breakthrough&quo... It will be gradual increases in efficiency and output over time. Also, right now in CT for a solar system you're looking at about 15 years to the break-even point where you've paid it off and are actually profiting from it. And that's with HUGE federal and state subsidies that essentially pay for half of the hardware. Good investment, but its a long-term investment and you'd end up replacing it at the 15-year mark anyway because it would be antiquated. User 154263's vision of "100% solar energy" is a long way off. The last few years have had a glut of Chinese aluminum siding companies switch over to solar cell manufacturers. They are highly inefficient and the raw materials are expensive and their management is lousy. The bubble on those has popped already. TSL was trading as high as $70 and is now at $40 (PE 26). STP was as high as $85 and is now $44 (PE of 43). FSLR started at $60 and is currently $273, but its PE is 133 (can you say "Pop"?)!!! FSLR is 3.44% of PBW. When that one gets chopped in 1/2 or 2/3 that is at least 1-2% off the top of PBW, probably more due to shock value because it will take the others down with it. Of course, that might be a good buy-in time.

      If you read General Cable's (BGC) annual report, they are banking a lot on off-shore wind farms and running the cables out to them. Also, if you follow a company like Maxwell (MXWL), which still isn't profitable, they are pushing the envelope on super-capacitor batteries for applications like electric cars.

      There are a lot of technologies out there, and the idea that there will be one "Google" solution isn't realistic. Look at home heating. Some areas use oil, some gas, some electric. It's a mix. And you have tons of companies involved. I don't see a "bubble" per se as opposed to a gradual shift from conventional energy technology to "alternative"... energy technology as those scale up and drive the prices gradually down (and as oil and gas prices go up).

      I am long on PBW as well, but I'm also long on CHK, SLB, EEP and OKS.
      Reply
    •  
      Apr 14 11:38 AM
      You said: "In my personal situation, my wife and I don't currently own a home, and I'm looking at 2009 as a time that we might start looking for a house."

      I don't see any reason to wait until 2009 to buy a house. Last week my son, called and said that a house across the street from him has just gone on the market for 64k, a house that 3 years ago sold for 200k. The deals are out there right now, no need to wait.

      Respectfully,

      Bill W.
      Reply
    •  
      Apr 14 11:43 AM
      As a follow-up....housing is in a deflationly spiral right now, what with all the money the fed is injecting into our economy, I would'nt be surprized if housing was not in an inflationly spiral again, in 2009.
      Reply
    •  
      Apr 14 12:05 PM
      I agree with your general idea that "successful investing consists essentially of catching a bubble at its formation stage and not jumping ship too early or too late", though I would qualify that a bit to simply say that the obscene profits in investing are best made from good bubble handling; good investing simply requires a reliable bull market, not bubbles.

      I would also qualify the inevitability implied by Janszen; it's fun to look at what trends contain future bubble potential, but there's no guarantee any particular trend will reach that stage of excess. I see no evidence that alternative energy is headed that way yet, nor commodities. Based on the shortage of investable shares in US stock markets, the next stock bull market might make stock investing the next bubble, a la the roaring 20's. The trick here is to stay alert to the signs of excess, to wait for clear evidence, not to make any plans on speculation. Unreasonable valuation by common standards is the most reliable indicator of a bubble, whether it be housing prices or grocery prices or stock PE's, so buy when the trend starts to offend and sell when everyone talks about the overpricing as though it were the new normal...
      Reply
    •  
      Apr 14 12:06 PM
      There is little choice but to have our country build out the massive infrastructure for alternative energy. This includes coal liquification, biodeisel and nuclear. The government plan was to subsidize 5% of our energy using ethanol. This has occured and you can expect corn commodities to begin leveling off. The nation has plenty of agriculture to grow soybeans and of course, this will spike and become expensive over the next few years.

      The real problem we have right now people is the global warming crowd, made up of the top 3% wealth earners. This crowd sees global warming as the priority of America, not the coming crash of the U.S. and Central Banks. Heated disputes have begun occuring in State government that have coal but are being defied by Governors & Liberal courts whom are not listening to Main St.

      In turn, Main St/ whom is just beginning to learn that government + non-regulated banking = depression (1870 and 1930 come to mind)but instead of crying for changes in government Americans are demanding bailouts. Socialism may stave off a depression for a couple of years but as the responsible are taxed to pay for the irresponsible, it is likely we will see revolt of some kind.

      I have thought long and hard about this and resented the top 3%. I have come to the conclusion that we all shared the party, sure the top 3% had yachts but every American enjoyed the party to some degree as well.

      This all said, I like Alternative Energy, but will remained reserved as an investment until I see what government policy will be. I would like to see government declare an energy crisis and subsidize becoming energy independent. Much better to do this with Treasury (we the people) then continued bailouts. Pain is coming no matter what. One path leads to a better quality of life as an American by giving the global consumer what they want and that is the basics, energy and food. The other choice is fascism which leads to world wars.
      Reply
    •  
      Apr 14 02:45 PM
      We never even recovered from the tech bubble. The housing bubble is totally different from the tech bubble, in both magnitude and duration. Yet this turkey thinks he knows when the alternative energy bubble is going to peak? LOL.
      Reply
    •  
      Apr 14 11:41 PM
      Bill W: "...a house across the street from him has just gone on the market for 64k, a house that 3 years ago sold for 200k"

      Well, that's a 68% drop. That would definitely bring housing back in line with reality. In fact, I would call that a bargain buying opportunity, assuming it's the "same" house in normal value terms. I have to wonder if there isn't more to the story in this particular case.

      However, that surely isn't the normal markdown. We seem to be in the 10-25% range overall, not nearly enough to undo a 100% increase above the historical norm. It would take 50% to accomplish that, or somewhat less in combination with inflation.
      Reply
    •  
      Apr 15 04:48 PM
      awesome.... honestly, one day I gave a deep thought of what could be the next bubble that we may see in coming times, & I could think of Alternate Energy!! Its human tendency to find & create something some fizz to be busy playing with..... it happened with tech & this time globally investment /hedge funds have found Alternate Energy! The fire started with corn based bio-fuels where those silicon valley started to pour money into... and it gaining momentum with solar, wind n fuel cells!! Intrestingly, consumers will never shift between technologies that soon!! apetite for oil will geep increasing, we will keep producing more oil & world wil work to stabilize the oil prices soon! The day oil is back to $60-70 range, these alternate energy companies will die its natural death...
      I believe this bubble will never reach a majestic peak!!!
      I believe within next one or two decade, world will invent a real breakthrough alternate for oil & not search an alternate in wind or solar energy!!
      Reply
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