Week of September 14

More on financial bubbles.

For the next month or so we will curtail our weekly news coverage somewhat in order to meet outside writing and research commitments. Our relative inactivity should not be taken to indicate a similar dormancy within the alternative fuels industry.

Hotrodding the Bubble Machine

In the previous postings we have run a number of pieces alluding to financial bubbles of the past and to their impacts upon the energy business. Now with the bursting of a whole froth of financial bubbles in U.S. and world financial markets—surely the biggest accumulation of fiscal spume since time began—it is time resume our bubble gazing and see what the financial industry's now chronic bipolar condition might portend for new energy investors and promoters.

When the securitized debt business began to go south over a year ago, everybody kind of wondered what it would take to get the bubble machine revved up again. With potential losses in the trillions, where is the money for a new round of bubbles going to come from?

The answer, it appears, is from the tax payer, or, at least, the tax payer will have a kind of put position on the next round of bubble investments. Tax payer money is supposed to bail out literally hundreds of beleaguered institutions and buy off all or most of their bad debts, but of course no politician is going to vote for the higher taxes required for such a purchase, and the Asian bond markets are drying up as a source of further borrowing. So the debt will be bought with increasingly worthless dollars. But it will be bought, clearing the books of troubled financial institutions and allowing them to make further investments with the inflated dollars they have received gratis and with no obligation to repay the investor, in this case the tax payer.

So how might these depreciated dollars be spent? Surely they will not all be spent in the same way, but there is a trend that we observed earlier that bears watching.

Prior to last week's near financial collapse, financial institutions were increasingly investing in formerly public infrastructure such as public roads which would then become toll roads, which increasingly distressed local governments are now more willing to sell for badly needed operating capital. With the bailouts to come and with no strings attached to the money accorded the bankrupts (the condition imposed by the Bush Administration on the citizenry at large for the rescue of the nation's banking system) the banks could proceed to buy up large portions of the nation's highway system—highway robbery as it were. Your tax dollars would go to purchase the roads which your tax dollars formerly built and maintained and for whose use you would subsequently be charged exorbitant rates. In other words, you would be charged thrice! Once to build the roads in the first place, once again, to provide banks with the money to purchase them, and finally, on a recurrent basis for their use.

No doubt roads could be had for fire sale prices and could even be purchased with depreciated dollars. It's just such a logical next step.

Would there be a public outcry? Probably, but with Rush Limbaugh and the Fox Boys talking up the privatization of the nation's basic infrastructure, it would likely be muted.

Alternately, the banks could find some new kind of derivative in which to invest. Perhaps the derivative could be built upon privatized public infrastructure. After all there is a sort of precedent for that sort of thing.

The notorious Samuel Insull, the early twentieth century financier who built a lot of the nation's local electrical systems, created a whole host of interlocking holding companies and financial shells surrounding the nascent electrical utilities of the time. Electrical utilities almost always proved profitable endeavors, but the rates of return were low and dependable rather than spectacular, and, of course, the construction of the utilities was mightily capital intensive. One needed financial structures that were not tied to any one utility and whose valuations could float independent of the rate of return on any one of them. During the same period, the first airlines, which have to be considered a form of public infrastructure, were also subject to massive overvaluation.

But we needn't look back to the early twentieth century for examples of financial bubbles resting upon foundations of basic infrastructure. We need merely observe the great telecom boom and bust of the nineties. Telecommunications services were forced to charge lower and lower tariffs in the overheated competitive atmosphere of the time, were yet able to attract ever more investors willing to pay ever more for shares.

Of course investment could go in a different direction entirely, and ultimately it doesn't really matter. As surely as the money is made available, another bubble will occur, and, just as surely, it will burst. And, more than likely in the event of another really severe crisis, American finance will call upon the Federal Government to rescue it again, which it will—with ever yet more seriously depreciated dollars. Unless, of course, the Government releases Social Security funds into the private financial markets which will initiate a bubble of unprecedented proportions.

So where is the end to this?

I am reminded of the process by which a star dies, a process which occurs in phases, beginning with the red giant phase, proceeding to the white dwarf condition, and culminating in the neutron star or black hole final state, depending upon the initial mass of the star. The process is inexorable as the star occupies successively lower energy states.

Of two things we can be fairly certain. Widespread misery is going to follow hard upon the heels of our current financial travails. This is not some routine course correction. Altogether we are facing the biggest shock to the economy since 1932. Our current situation is reminiscent in some respects to the awful decade of the nineteen seventies in which I had the misfortune to spend my young manhood, but it is much worse because it includes a stock market crash which is already more severe than any that occurred in the seventies combined with permanently high energy prices and the prospect of sustained double digit inflation and possibly double digit unemployment. Combine that with the militarism that is likely to continue under a Palin Administration, and you have a recipe for profound financial malaise.

As for alternative energy in general and alternative fuels in particular. Those projects that will succeed will be those that can be bootstrapped and self financed. Major institution investment is simply bound to decline.

By the way, I hope I'm completely wrong about all of this.

Virent Announces a New Process

Virent Energy Systems, an industrial process company of impressive credentials, announced a process for converting sugars into synthetic hydrocarbons. This in itself is not unprecedented. I recall a process developed in Japan for converting ethanol in hydrocarbons. No word was given as to whether the Virent process involves an ethanol intermediate, however.

PetroTech Holdings Corporation Buys PetroAlgae

PetroTech Holdings, a Delaware corporation managed by Valens Capital Management, has purchased PetroAlgae, a highly publicized algae fuel startup. On a similar note, Bill Gates put $100 million into Solazyme, a Bay Area company claiming to have produced jet fuel from algae.

Frankly, I still haven't decided if algal biofuels are going to pan out. I note a decrease in startup activity in this area, but there are more big financial deals going down. There also appears to be a rise in the incidence of fraudsters. There are a number of folks out there purporting to sell bioreactors for making algal fuel at home, but there is no generally accepted proof that fuel can be made economically from algae by any known process.

I have decided not to compose an algal fuel report, but I will include a section on algae in an upcoming report on alternative fuels sui generis which will be distributed by Research and Markets.