As long as there have been markets, there have been bubbles. In the decades following the Great Depression, some believed sound monetary policy would put an end to the boom/bust cycle for good. However, the 1980s housing bubble, the 1990s dot-com bubble, and the revived housing mania in the 2000s exposed this as wishful thinking.

Although it’s hard to say exactly how or why a bubble forms, it certainly helps to have a few conditions in place. An element of innovation or discovery is often part of the story. Compliant regulatory, monetary, and tax policies help. And, naturally, there must be a significant source of capital available.

In trying to predict the next bubble, one sector that’s frequently mentioned is alternative energy. This refers to just about any energy-producing technology other than fossil fuels or nuclear energy. It’s a fast-growing field, and one that seems to have the right ingredients for the next bubble:

Innovation
With so much at stake for national security and the health of our planet, you can be certain that some of the world’s best minds are already hard at work developing clean, safe, and economical alternative energy sources. This creates an environment where R&D firms have the potential to make breakthrough discoveries—and big profits for investors.

Legislation
Industries such as coal, ethanol and wind energy already benefit from government grants, tax credits, and loan guarantees. Considering that President Obama’s inauguration speech promised the country would “harness the sun and the winds and the soil to fuel our cars and run our factories,” it’s a safe bet that the legislative environment will increasingly support alternative energy in the years to come.

Financing
Most alternative energy solutions will involve massive public works projects. For example, a viable electric car could require a national network of charging stations. With these new demands coming down the road and an acute need for fiscal stimulus currently at hand, governments are now committing billions to new infrastructure. Meanwhile, opportunities for investors will abound, both through partnerships with government and via private enterprise. Bill Gates’ venture fund has reportedly invested $50 million in a San Diego start-up that’s working on turning common pond scum into a viable energy source. How long before alternative energy investments go mainstream?

Our view
Alternative energy appeals to virtually every constituent of society—from environmentalists to national security types to policymakers. It seems inevitable that as new ideas are generated, new investment capital will flow into the sector. And if enough people become sufficiently excited about the prospects, we may even see the next bubble. //