The article in the url below draws a fascinating distinction between investment bubbles that are "hugely destructive" and those that are "socially useful." While the housing bubble that led to the financial crisis a decade ago falls into the former category, the current inflated stock price of Tesla and associated bubble around green energy are (according to the author) examples of the latter category:
"Whether investors one day regret paying so much for Tesla Inc. stock, they have done the planet a favor. Their enthusiasm enabled the company to raise enough money to stay afloat until it could profitably mass produce electric cars while accelerating other manufacturers' rollouts."
The bubble these investments have created is partly due to fascination with individual personalities, such as Elon Musk (Tesla is currently "trading at more than 1,000 times trailing earnings"), but is also partly due to the increased interest with ESG funds (and the younger retail investors driving their growth). And this fascination seems to be growing, irrespective of whether the firms themselves are profitable:
"From the end of 2019 through Tuesday, a fund that tracks a Nasdaq clean energy index had risen 191% compared with the broad market's 15%. It trades at 52 times trailing earnings, nearly double the overall market's already-historically high multiple. More than a third of its 44 constituents are losing money. On Wednesday afternoon it was up 7% on expectations Democratic control of the Senate would lead to more support for renewable energy."
The rapid growth in investments flowing into these funds is apparent from the chart accompanying the article:
Although elements of these investments may be irrational, as the article notes, that does not mean the resulting bubble does not have any redeeming features:
"Stupid, however, isn't the same as useless. Some bubbles can be hugely destructive, as we saw with housing 13 years ago. Others are socially useful. Private markets generally provide too little incentive for risky innovation because shareholders only capture a small part of an innovation's benefit; most goes to consumers (think of a life-saving drug). A bubble can overcome that market failure as investors shower capital on countless new ventures they hope will be the next Microsoft Corp. or Amgen Inc. Even as most of those ventures fail, they extend the technological frontier."
This is true of elements of the dotcom bubble around the turn of the century. Similarly, it is true of a number of unicorns in recent years, and the green energy bubble today. The competition that leads to the failure of (most) companies will also produce the (much fewer) success stories that define the future:
"In the late 1990s and early 2000s, investors snapped up the stocks and bonds of money-losing technology, media and telecom companies. The mania financed a glut of fiber optic that drove the price of bandwidth down enough to bankrupt many telecom companies while allowing countless new businesses to emerge. It also enabled Amazon.com Inc. to raise enough money to keep growing until it had proven its business model could work. Green energy faces obstacles the dot-com boom didn't. It mostly does what fossil fuels already do—just with less carbon dioxide emissions, a benefit that accrues to the entire world rather than producers or consumers."
Take care
David
David Chandler
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Market Euphoria Helps Fuel Green Energy
By Greg Ip
January 7, 2021
The Wall Street Journal
Late Edition – Final
A8
https://www.wsj.com/articles/green-euphoria-may-cost-investors-but-planet-says-thank-you-11609949560
