Forecast Review: Green Energy and the Stock Market

[FRED]

February 2008, Janszen repeats Dec. 20007 "go to cash" for the CNBC audience. Start of Alternative Energy bubble is at least 18 months away. Has it begun?

[goadam1]

Re: Forecast Review: Green Energy and the Stock Market

Long oil, short dumb?

I've lost my share of money thinking I could buy alt energy and hold it for the big moment. Just tell us when and don't go dark on the site before you do.

Thanks.

[EJ]

Re: Forecast Review: Green Energy and the Stock Market

Long oil, short dumb?

I've lost my share of money thinking I could buy alt energy and hold it for the big moment. Just tell us when and don't go dark on the site before you do.

Thanks.

Our mission since March 2006: warning our readers to avoid the pain and suffering of a crashed housing and stock market. Mission accomplished, as it was in 2001 after warning about the technology stock bubble. But we are not going anywhere this time. I have no urge to go run a VC backed high tech company, even though that is tempting in a labor market over-flowing with motivated talent, and class A office space around here is now 1/2 to 1/3 of 1999 rates, and falling.

In February 2008 when I was on Dennis' show, the general CNBC line:

• No recession
• Hold stocks
• Buy Alternative Energy stocks, $147 oil proves they are a good investment

My position:

• We've been in a recession since Q4 2007
• The debt deflation bear market will take stocks down 40% in 2008
• All stocks will decline, but especially alternative energy
• Wait 18 months to see if the Fed and government can get another bubble going

This is not a normal downturn. This is debt deflation.

The Rolling Stone in Rolling Stone: The Great American Bubble Machine just discovered the bubble cycle that I wrote about in The Bubble Cycle is Replacing the Business Cycle in March 2005 and described in greater detail in The Next Bubble in February 2008.

My February 2008 appearance on CNBC coincided with the publication of that article. Note, however, that even though the article concludes that the only thing worse than getting another bubble is not getting one, I am not at all sure that we will get another one. My concern at the time: the bubble machine that the Rolling Stone describes broke in 2007 with the collapse of the securitized debt market. Subsequently we get debt deflation.

Loans Shrink As Fear Lingers
July 27, 2009 (WSJ)

Lending continues to slow as bankers and borrowers refrain from taking risks, a bearish sign for the economy. The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter.

Unfortunately for WSJ readers, the reporter does not understand the concept of debt deflation. The problem is not "fear" on the part of borrowers and lenders. This is not an emotion issue.

Debt levels are not expanding. They are shrinking. They are shrinking because debt levels created within the FIRE Economy from 1980 to 2007, as measured in aggregate debt service payments by businesses and households, grew to the upper threshold level that the Producer/Consumer Economy could pay out of income when demand and employment was high. Now that demand and employment have fallen, and the debt remains, the economy is stuck in a downward debt deflation spiral.

This is why I call the rally off March 8, 2009 panic lows a Debt Deflation Bear Market: First Bounce.

ICM63 on his thread 1ST ALERT - SELL SP500 @ 950 to 1050 offers a technical view of the phenomenon, characterized by a sharp rise on thin volume. Insider selling is reaching 2007 levels. This is not a new bull market. It is a market responding to fiscal stimulus spending.

Note my observation on sector bubbles and stock prices from February 2007--Harper's used the title for the Harper's piece a year later:

The Next Bubble: Anomalous Stock Price Increases as an Indicator?

The observation is that a bubble in its formative stages is identifiable because stocks in the sector, such as housing stocks during the 2000 to 2003 bear market, do not fall in a secular bear market along with other stocks. My argument is that if a bubble in Alternative Energy was going to occur, alternative energy stocks should not fall as much as other stocks; the market should price the bubble in.

That did not happen this time.

If you re-read The Next Bubble, my argument is that a bubble requires the assistance of government in the form of deregulation, lack of enforcement of regulations, direct subsidies, and tax credits but that the real driver is a new form of private credit virtually backed by the government, as in the case of mortgage-backed securities and CDOs during the housing bubble. Today the private credit markets remain weak and there is no magical credit creation system on the horizon. The administration's infrastructure bonds are not it.

My conclusion: there will be no bubble in Alternative Energy. In fact, there will be no bubbles in anything in the U.S. for a very long time. The bubble machine that The Rolling Stone writes about broke in 2007.

We may, however, get a boom in Alternative Energy, but nothing on a bubble scale. That means real returns but no massive windfall gains as we saw in the technology bubble in the late 1990s or the housing bubble from 2002 to 2006.

It's over. And once China's bubble collapses next year, the tenuousness of the U.S. recovery will become apparent.

[jpatter666]

Re: Forecast Review: Green Energy and the Stock Market

It's over. And once China's bubble collapses next year, the tenuousness of the U.S. recovery will become apparent.

Every now and again EJ throws out a hidden gem like this -- much like the call for Russia's currency collapse (which as stated, I heard on iTulip first).

So, what are the implications of a China bubble collapse and how might we best prepare (and profit) from it?

"What most people don't seem to realize is that there is just as much money to be made out of the wreckage of a civilization as from the upbuilding of one."

[jtabeb]

Re: Forecast Review: Green Energy and the Stock Market

Today the private credit markets remain weak and there is no magical credit creation system on the horizon. The administration's infrastructure bonds are not it.

My conclusion: there will be no bubble in Alternative Energy. In fact, there will be no bubbles in anything in the U.S. for a very long time.
[/LEFT]
[/CENTER]

Okay, what about "Carbon Cap and Trade"?!?!

Does that not explicitly provide the securitization process you claim is necessary for bubble formation?

From my humble perspective, it does (and in the worst way of course, as a "Carbon Tax" would have been much preferable from an efficacy perspective).

So, correct me if I am wrong, but legislation allowing the securitization process of ENERGY has been passed.

Isn't that EXACTLY what you need as a bubble precursor?

Sorry EJ, I'm just not understanding. Could you please clarify how the carbon cap and trade system doesn't form the basis of an Alt-E bubble securitization model?

Thanks.

JT

[EJ]

Re: Forecast Review: Green Energy and the Stock Market

Okay, what about "Carbon Cap and Trade"?!?!

Does that not explicitly provide the securitization process you claim is necessary for bubble formation?

From my humble perspective, it does (and in the worst way of course, as a "Carbon Tax" would have been much preferable from an efficacy perspective).

So, correct me if I am wrong, but legislation allowing the securitization process of ENERGY has been passed.

Isn't that EXACTLY what you need as a bubble precursor?

Sorry EJ, I'm just not understanding. Could you please clarify how the carbon cap and trade system doesn't form the basis of an Alt-E bubble securitization model?

Thanks.

JT

It's not going to work. Europe and Asia will not buy energy securities. No one outside the U.S. will buy them, and we can't create a bubble using our own now vastly diminished domestic credit resources.

Everyone understands the game now. The game doesn't work if everyone understand it. That is why Harper's made The Next Bubble a cover article. Managing editor Roger D. Hodge understood the implications of explaining the system to the world. You'd be surprised who outside the U.S. reads that magazine, the oldest magazine in continuous publication in the U.S.

Not only is the bubble machine broken, but according to my contacts in China, Japan, Korea, and across Europe and the UK, I helped break it. I'm proud of that.

[jpatter666]

Re: Forecast Review: Green Energy and the Stock Market

EJ,
Are you saying the bubble machine is broken *everywhere* or just the US? After all, as you state, China is blowing a bubble right now.

[jtabeb]

Re: Forecast Review: Green Energy and the Stock Market

It's not going to work. Europe and Asia will not buy energy securities. No one outside the U.S. will buy them, and we can't create a bubble using our own now vastly diminished domestic credit resources.

Everyone understands the game now. The game doesn't work if everyone understand it. That is why Harper's made The Next Bubble a cover article. Managing editor Roger D. Hodge understood the implications of explaining the system to the world. You'd be surprised who outside the U.S. reads that magazine, the oldest magazine in continuous publication in the U.S.

Not only is the bubble machine broken, but according to my contacts in China, Japan, Korea, and across Europe and the UK, I helped break it. I'm proud of that.

Well good job with that, breaking the bubble machine, I mean.

I am not in a position to doubt or question the veracity of you claims. I can merely point out that the players that dominate the traditional energy market are the same ones that would benefit the most from a globalized carbon cap and trade system.

How?

It's the way that the carbon credits were dolled out, you see. Big Energy got something for nothing. A large allocation of carbon credits assigned to them based on their "footprint". There is a great PBS frontline documentary on the the oilmen and this topic was addressed at the end. Seems that the "winners" in the energy market are trying to ensure that they win again on the next go-around.

[bill]

Re: Forecast Review: Green Energy and the Stock Market

I can merely point out that the players that dominate the traditional energy market are the same ones that would benefit the most from a globalized carbon cap and trade system.

How?

It's the way that the carbon credits were dolled out, you see. Big Energy got something for nothing. A large allocation of carbon credits assigned to them based on their "footprint". There is a great PBS frontline documentary on the the oilmen and this topic was addressed at the end. Seems that the "winners" in the energy market are trying to ensure that they win again on the next go-around.

It’s a process for a long trend.
http://www.itulip.com/forums/showthr...916#post107916

[EJ]

Re: Forecast Review: Green Energy and the Stock Market

EJ,
Are you saying the bubble machine is broken *everywhere* or just the US? After all, as you state, China is blowing a bubble right now.

Apples and oranges. Different culture, different history, different institutions, different power relationships between government and financial institutions, and so on.

The American system was completely unique. It leveraged U.S. global economic and military hegemony and the trust of European and Asian investors in U.S. institutions built up over generations.

To finance the technology bubble we sold them technology stocks of companies like Enron whose accounts were certified by U.S. accounting firms.

Then to finance the housing bubble we sold the Europeans securitized debt products rated as safe by U.S. ratings agencies. The Asians had wised up and didn't play.

The trust is gone and must be rebuilt. That will take time. Now private foreign investors are reluctant even to buy Treasury bonds.

We cannot make a bubble out of Treasury bonds.

[Slimprofits]

Re: Forecast Review: Green Energy and the Stock Market

EJ,
Are you saying the bubble machine is broken *everywhere* or just the US? After all, as you state, China is blowing a bubble right now.

Securitization is dead outside of the piddling TALF program.

http://www.housingwire.com/2009/07/2...cra-framework/

The Council of the European Union on Monday adopted new regulations imposing a legal framework on credit-rating agencies and introducing the requirement of 5% risk retention by originators.

A major directive within the new regulations tightens capital requirements for European banks. In an effort to improve the framework for securitization practices, the regulation requires originators to retain 5% of risk transferred or sold to investors. Trade groups Stateside remain categorically opposed to a 5% risk retention.

[..]

The news comes as spreads on UK residential mortgage-backed securities (RMBS) deals have tightened below 200 bps. Deals that already exist in Europe are trading at non-distressed levels, but the European secondary market hasn’t seen new RMBS issuance for some time.

Sources HousingWire spoke to said third-party investor interest may be rising to a point where the issuance of a new RMBS in Europe is becoming more likely. Such regulation, however, is likely to dampen that mood. Nonetheless, spread levels — a barometer of the economics of structured finance — are tightening across most markets. In the securitization market, for example, non-syndicate trades is growing more bullish, with spreads dipping below the 200 basis point level regularly for specific deal.

[idianov]

Re: Forecast Review: Green Energy and the Stock Market

EJ,

Thank you for the timely update. iTulip has been instrumental to my family's capital preservation and making investment decisions since March 2006.

The observation is that a bubble in its formative stages is identifiable because stocks in the sector, such as housing stocks during the 2000 to 2003 bear market, do not fall in a secular bear market along with other stocks. My argument is that if a bubble in Alternative Energy was going to occur, alternative energy stocks should not fall as much as other stocks; the market should price the bubble in.

It seems the only asset class holding up similar to housing stocks in 2000-2003 recession is Gold.

It's over. And once China's bubble collapses next year, the tenuousness of the U.S. recovery will become apparent.

Do you plan to cover timing of bursting China's bubble in detail in the near future? Your Argentina 2001 article was very good to understand the implications of bursting China's bubble on the US.

Igor

[marvenger]

Re: Forecast Review: Green Energy and the Stock Market

Apples and oranges. Different culture, different history, different institutions, different power relationships between government and financial institutions, and so on.

is china going to be productive with the proceeds of their bubble? their bubble is internally generated, they don't need it to finance consumption they need it as an outlet for excess saving, therefore if it bursts its not as big a deal to real economy isn't it? if they put bubble to slightly good use they should overcome the effect of reduction in exports to debtor countries?

[FRED]

Re: Forecast Review: Green Energy and the Stock Market

is china going to be productive with the proceeds of their bubble? their bubble is internally generated, they don't need it to finance consumption they need it as an outlet for excess saving, therefore if it bursts its not as big a deal to real economy isn't it? if they put bubble to slightly good use they should overcome the effect of reduction in exports to debtor countries?

EJ writes in:

The best historical analogy we can think of is the relationship between Germany and the U.S. in the late 1920s. After the Dawes Act was passed in 1924, the German economy became dependent on US and UK capital inflows. When the US bubble collapsed it took down the UK as well. Both countries stopped exporting capital to Germany. The German economy collapsed.

[marvenger]

Re: Forecast Review: Green Energy and the Stock Market

I guess I'm assuming that the level of consumer spending increase in China as a result of bubble would be less that US due to cultural differences. So the bubblr would be more of a pure asset price rise and burst without the drastic effect on the real economy as in the US. And if China spent some of bubble money well in infrastructure etc it might not be too bad for the real economy. Not sure how influencial this cultural difference would be, just an idea.