Financially speaking, 2017 has been a very profitable year for many, especially those individuals who have a stake in the stock market and those businesses that have made huge gains as well. Just ask our leaders about that and you’ll probably hear over and over how great our economy is performing, “record levels like no one has ever seen before” to coin a phrase.
But, 2017 has been a year also marked and marred by unexpected events, from natural disasters to terrorist attacks and all kinds of political and social upheaval. It seems 2018 will likely prove to be no different, but the least we can do is examine our own expectations for the year to come, so we know where we may be in for some really unpleasant surprises. One such surprise might just be a burst in the stock market bubble and the carbon bubble that might spell double trouble.
It’s now been almost a decade since the last large correction in the financial markets, and with a steady record breaking bull market (steadily upward trending market) since then, indicators are starting to appear and to be anticipated for a potential pending correction.
One of those significant indicators is that the P/E ratios have risen to levels only matched before the 1929, 2000, and 2007 dramatic stock market bubble bursts. The P/E ratio compares stock prices to company earnings, and so they can be interpreted as a mismatch between the stock valuation and the actual real-world value of any given company.
In other words, we’re seeing a general overvaluation in the financial markets which matches previous large bubbles and the timing of their bursts.
Why This “Bull Bubble”?
Part of the reason for the current “bull bubble” can be attributed to the efforts to ease the financial market strains after the 2008 bubble burst. While the first stimulants and changes were arguably necessary to prevent the ongoing credit freeze, subsequent changes can be more likened to the treatment of symptoms of an illness. This is done instead of taking the tough necessary steps towards actual recovery. Few of the real problems with the financial markets or the general economy were addressed with the countermeasures applied by politicians and central banks in past years and the symptoms were successfully suppressed. That has only seemed to worsen the real underlying issues.
One thing that seems to be hanging out there for all to see is a potential 10-20% market correction looming if and when the bull bubble actually bursts.
In the meanwhile, here in the U.S., we are talking about major imminent changes to our tax laws, all of which may be a simple misguided view that addresses none of the potential underlying problems that are lingering in the wings. Whether more of these approaches to stimulate economic growth are the right course now or not, if the “bull bubble” breaks, it will definitely spell a couple of tough years in our national and global economies.
Eventually, the good news is that we can recover from a burst and that would likely mean we’d emerge healthy on the other side.
However, there’s a larger and more dangerous bubble looming, one created by a mixture of technological progress, geopolitical necessity, digital disruption, and human ignorance and arrogance.
The “Carbon Bubble” and Its Repercussions
One major driver of all of our economic sectors are fossil fuels and the current standard for worldwide fuel companies is that all of those reserves will be harvested, sold, and consumed.
That standard and practice is currently being disrupted by the drop in renewable assets and prices. Solar energy is now being estimated to provide 1¢/KWH cost points in a time frame of the next seven years. That means we can see a potential future on the horizon where energy is quasi-free! Combine this with the undeniable necessity of pricing in the “climate cost”, the damage to terra firma (planet earth) from the fossil fuels process and a 10 year or less horizon for self-driving electric cars meeting most of the transportation needs and we’re facing a future where fossil fuel based industries and their valuations are fast becoming obsolete.
What Happens in Financial Markets Doesn’t Stay in the Financial Markets
The key point to understanding the danger of the carbon bubble is that the bubble will not stay inflated and just affect the fossil fuel companies. Even when fossil fuel companies start to lose real-world earnings from the supply disruptions, it will not change the underlying thinking about the industry.
That change won’t begin as soon as earnings are no longer seen as being reliable as they have been for over a century. Current valuations are not based on actual potential for future earnings, but on the expectation that fossil fuels are not disruptable permanently and unfortunately one way or another that fact is an inevitability.
So what that means is that the lack of recognition of the demise of fossil fuels will spill over into further damage to our climate and environment.
It’s More Than Just Fossil Fuels
A recent analysis estimates that there is a difference of as much as a $100 trillion in worldwide “bloated values” in the fuel companies bubble.
“Renewable energy—great fun, our whole economy collapsing when trillions of dollars of our assets quickly turn into useless pieces of junk and liabilities—uh oh!”, a quote from Andrew Winston, author of “The Big Pivot” who expertly writes about how business can profit and deal with such dangerous challenges.
But take note please on this: the carbon bubble and its impending collapse are not confined to the fossil fuel industries alone, but instead include all business areas affected in some way by global climate changes too. That means the auto/transportation industries, coastal property values, travel/vacation, agriculture, and numerous other areas will be drastically impacted with the carbon bubble bursting.
If both the bull and carbon bubbles burst simultaneously, one triggered by the other, we will surely come to regret not dealing with the bull bubble root causes properly when we failed to do so in the 2008 aftermath of that most recent bubble burst.
As with the 2008 crash, efforts to keep this bubble going are leading to staggering levels of corruption and lobbying designed to undermine any effort to bring the markets back under control. The failure to acknowledge the long-term environmental and legislative risks faced by high carbon firms continues to fuel the carbon bubble.
The Frightening Course We Are Now On
Green policy efforts are being undermined by market analysts and investors who control the market. They do not believe building a low-carbon economy provides high carbon companies and investors with further financial incentives. This ignores the risks they face and the dangers it creates. In reality, it is ignoring the new business opportunities that would benefit us all. Those are the challenges facing us in 2018.
So what does this mean to you, the investor? If you have a long time horizon before you’ll need your money, then staying put for the long haul makes good sense. However, if you have a short time horizon, say you’re ten years or less from retirement, then you might need to think about taking action. Consider your asset allocation and whether a higher proportion of bonds to stocks will benefit you in a bubble laden future.
Are you an investor currently reaping the benefits of the bull market? Are you excited that the tax cuts and reform may stimulate the economy to even greater record levels? Or, are you one who is more concerned about what might happen if the underlying assumption about fossil fuels isn’t addressed and our opportunities to combat climate change and prevent economic disaster continue to be ignored?