Saturday, October 6, 2007

My wife just returned home from her native Japan with 2 data points I thought I would share with you:

1. Plastic grocery bags are no longer free
2. Garbage service in the Tokyo to Osaka megalopolis is no longer one size fits all. You pay by volume and weight.

Japan has little to no oil, natural gas, or coal. Plastic bags are derived from crude oil, and landfill space is at a premium making the garbage fee a no-brainer.

For those American’s who have never been to Japan (not talking about visiting a western style hotel), the first time is always an eye opener.

Upper middle-class Japanese typically have just one bathroom in their home. The home is perhaps 1000 square feet, frequently with 3 floors, and because space is at such a premium many homes have a compact circular staircase. The Japanese are tidy folks, never wearing their shoes in their homes, and are big on solar power – as a disinfectant. They would prefer, if possible, to place their bedding and sheet, pillows, clothes, etc… out in direct sunlight as a means of keeping pathogens at bay. Clothes dryers are not the universal item that they are in America.

The most striking anecdote I can share has to do with their husbanding of energy resources. At the end of the day many Japanese will retire to their “Ofuro”, combination shower, steam, bath (but no toilet, that is in a separate room/closet) room. After a good wash and spritz, it is customary to soak in a large tub of hot water; however, when they are finished they do not waste the energy in the tub of hot water – they use it to wash clothes, for hot water bottles, etc… the Japanese would no more waste this energy source than tramp through their mother-in-law’s house with muddy boots on.

And, of course, many middle class Japanese do not have cars. Manhattanites (and former Manhattanites like yours truly) can relate to this, but not so the rest of America.

America can look toward its trading partners and see the waves coming in. It won’t be many years before Americans are billed for their garbage by the pound, their auto insurance by the mile, and their carbon emissions by volume, and this will have a profound impact on our way of life

Even the Wall Street Journal, who just last year was snickering at us “Peak Oil types”, has had the temerity to run an article this past week on the impacts of $100 oil:

“How well could the world economy survive $100 a barrel?”
 According to the Journal, “The answer is quite well — so long as several conditions still hold true. The price rise would probably have to be gradual. Inflation couldn't get so bad as to force big interest-rate hikes. Oil-rich nations would need to pump their profits back into U.S. and European economies.” WSJ

Just over 3 years ago, when oil was in the $40’s, I wrote a letter to Larry Kudlow at CNBC that he and Steve Forbes, Michael Lynch, et al., were all wet and that they were completely uninformed as to our energy prospects; my comments were met with derision and mockery. A little crow can be good for the digestive system. Larry, eat hearty.

Look, as the WSJ tacitly admits, $100 per barrel oil is a foregone conclusion - and I believe that the world economy could handle $100 per barrel oil with barely a sniff. But it is not the PRICE of oil that will derail the economy (although given enough time it would, it just isn’t going to get that much time) it is the amount of oil AVAILABLE to the world economy that is the problem.

So, here you are, a middle-aged, self-made man of means - what do you do?

There are 2 key issues as I see it: your personal balance sheet and your income.

What is the source of your wealth? Do you build solar self-sufficient dwellings or do you sell cars? Is your business located at the proverbial beach right in front of the Tsunami? If it is, and that would be most of us (me, too), how can you best transition your future business prospects? If you were looking for pat answers, sorry, I don’t have them. You will have to figure that out for yourself. If you don’t address these issues now, you risk joining the wreckage of the homebuilders, real estate brokers, and mortgage loan officers (and if you think these businesses are just in a cyclical downturn, then by all means, now is the time to enter these industries. Please let me know, I would like to use you as a control group). It is a wonderful thing being in a business with large barriers to entry in a growing industry within an expanding economy… it is quite something else to be in a business in an industry suffering from overcapacity within a contracting economy. To get a handle on the difference you would need to find some greybeard who was in business from 1974 to 1983 or hit the history books…

What is your store of value? You know, like savings, stocks and bonds, real estate, etc… where do you store your unconsumed production? A continual/perpetual oil supply decline will wreak havoc on the purchasing power of the U.S.$, versus not only other currencies (imports) but domestically produced goods and services as well. Will your income/business be there to service the debt on your balance sheet? If not, whatever equity is there won’t be there for long.

It is my firm belief that you must have a strategy other than hoping or “wishing on a star” because we are running out of time. The energy crisis is here, and it couldn’t care less if you believe it or not, and once you are FORCED to believe, it will be too late.
This is sort of a repeat of the housing market in South Florida. In late 2004 and early 2005 we were advising clients that this was going to end badly, and that one was better off being too early than too late. Then along comes July 4, 2005 (or so), and like someone hit the switch, we went from seller’s market, to buyer’s market, to no market. You couldn’t get out at ANY price that was better than foreclosure. It is now over 2 years later and only NOW do market participants get the picture, but only as they stare foreclosure and bankruptcy in the face.

This is not a forum for advice, as I am precluded from making specific recommendations in this blog. Please feel free to email me.

Yours for a better world,

Mentatt (at) yahoo (dot) com

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