Oil has been trading over U.S. $100 for the past week.
Gold is within a whisker of $1000 per ounce
Silver! Has gone ballistic
The media is (FINALLY) rife with reports of projected food shortages in the coming years (if we do not do something NOW, “projected” will be replaced by the word “chronic”).
The banking/debt/housing crisis has barely begun, and is not even remotely understood, and in my opinion all of this PALES IN COMPARISON to the coming Credit Default Swap DISASTER coming soon to a portfolio near you.
The US$ has fallen, as measured by the Dollar Index, to 73.63 - THE LOWEST LEVEL SINCE THE INDEX’S START IN 1973. I can remember when it was believed that 80 would be the end of the world. And lest this should give you false confidence that since the world DID NOT end yet all is well… read on.
The U.S. Dollar will not survive in its present form. Yes, it is the world’s reserve currency, and yes, no other currency, not even the Euro, can replace it. That does not, not for one bloody minute, mean that the SYSTEM that uses the U.S. Dollar as its reserve currency will survive as it is presently constituted. I have no idea how or with what that SYSTEM will be replaced, so I won’t waste your time with the myriad possibilities at this moment – there will be plenty of time for that – but I will make the case as to why the U.S. Dollar’s future is ineluctable.
First, a definition of sorts:
“The global current account deficit of the United States is now larger than it has ever been—nearing $800 billion, almost 7 percent of US GDP. To finance both the current account deficit and its own sizable foreign investments, the United States must import about $1 trillion of foreign capital every year or more than $4 billion every working day. The situation is unsustainable in both international financial and domestic political (i.e., trade policy) terms. Correcting it must be the highest priority for US foreign economic policy. The most constructive remedy in the short term is a three-part package that includes credible, sizable reductions in the US budget deficit, expansion of domestic demand in major economies outside the United States, and a gradual but substantial realignment of exchange rates.” – Peterson Institute for International Economics
Unfortunately,
“Anybody who believes exponential growth can go on forever in a finite world is either a madman or an economist.” - Kenneth Boulding
In the conflict between economics and mathematics, the natural laws of mathematics win EVERY time. It ain’t even close. But, I digress…
Here is the problem:
The U.S. has NET IMPORTS of Petroleum Products of 13,000,0000 per (give or take – the U.S. imports over 14mm barrels of oil every day but also exports gasoline, diesel and other finished products to Canada and Mexico – but it is the NET volume that matters). At $100 per barrel multiplied by 13mm the U.S. trade deficit resulting from international oil purchases is $1.3 BILLION every day of the year, or $474.5 BILLION every year. Nearly 60% of the current account deficit at yesterday’s prices is for OIL ALONE. There is no chance that this issue will be mitigated by ANYTHING in U.S. policy. After all, if we do not import the 13 million barrels of oil every day, our car/transportation fuel dependant economy will spiral down and grind to a halt, markets will crash, the banking system will fail, and more importantly, my son’s little league games will be called off because no one will be able to drive their kids to the baseball diamond.
The only possible reduction in borrowing to fund oil purchases will come when our export partners REFUSE TO SELL US OIL FOR U.S. DOLLARS. And that’s coming, not right away, but as sure as G-d made little green apples, that is coming. (What do you think Al-Quida is trying to accomplish?)
IF oil prices continue higher, and IF the U.S. were able to continue to get their trading partners to take more U.S. dollars in exchange for the oil, by definition the tsunami of dollars that would need to be created/printed would wash all of the existing dollars’ value away. At $200 per barrel the U.S. would experience a $950 BILLION TRADE DEFICIT FOR OIL ALONE???!!!! WHAT ABOUT $300 PER BARRLEL OIL?? That would mean a trade deficit of 15% of U.S. GDP!! Is that even possible??
And that is before we start to import Liquified Natural Gas in earnest.
OK. So what to do. (Theoretically, that is. None of this is intended as specific financial advice for all persons in all circumstances. (For example, if you are over 65 you might be better off just playing defense.) I won't tell you to seek a qualified investment professional as there very few of those for the environment I foresee. I will tell you to educate yourself as if your life depended on it, but only because the quality of your life does. If you were smart enough to make money, you are smart enough to figure most of this out. And my favorite reason for doing this yourself? As Warren Buffet famously said: "Wall Street is the only place that people drive to in Rolls Royce's to get advice from people who came to work on the subway." If Bull S--t were good financial advice you wouldn't need deodorant.)
First off, I am assuming that you are a person of means. If so (and none of this is THE perfect solution, there are none of those):
Sell your sub-urban real estate. All of it. McMansions won’t be worth spit. Rent the home you live in. In most markets you are being SUBSIDIZED to rent. Exchange the sub-urban properties for farmland you can rent, and city property that has walkable amenities. No, you don’t have to live in the city or the country (yet), but these properties, unlike sub-urban properties, are very, very rentable. Farmland will likely hold its value extremely well in a U.S. $ crash, as will properties that do not require a car to get to and from.
Be creative in the ownership of hard assets. Gold, silver, platinum, palladium, oil, natural gas, corn, wheat, soy beans, coal (notice I have left out the industrial base metals. I might be wrong, but they are not in my portfolio), Agricultural LAND, livestock, timber, mines, oil and gas wells, railroad cars… the opportunities are rampant. Be careful not to over leverage (or even leverage at all), and make sure you DIVERSIFY.
Financial assets? Of course, but they must be in industries that benefit (or are not harmed) from commodity inflation and high energy prices.
Still trying to build a business that depends on the U.S.$ or car traffic/employees that commute? Good luck. Not for my money or efforts. If already have one, strip it down and convert the cash flow of the next couple of years into those hard assets listed above and a new business that takes all of this into consideration.
Could I be wrong? Maybe, but check my math. I would not bet against it. And if I am? You would own a diversified portfolio of real estate, hard assets, financial assets, precious metals, etc… No harm, no foul.
And if I am correct? The above mind set will save your bacon.
Yours for a better world,
Mentatt (at) Yahoo (d0t) cam
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5 comments:
Its hard to feel sorry for the situation the USA has put itself into. Both Germany and Britain manage to have a higher standard of living on less than HALF per capita oil consumption. In other words, if the US stopped wasting the oil it uses so inefficiently, it could live a good life without importing ANY oil!
But we both know that nothing sensible will be done if it involves an American politician telling the Children of America anything as grown-up as The Truth. So we'll all shake our heads and watch as the US implodes, and pulls down the rest of the financial world with it. Why doesn't Obama say something?
I admit I was shocked at the recent coverage of Detroit Mo Sho; a few low-emission design concepts, then row upon row of 3 ton 4X4's. (Hybrid 4X4's? Who are you trying to kid??). Can't you guys get a grip?
Meanwhile you're right about buying some land. Before oil came along the accepted measure of wealth was the amount of productive land you owned. That has to be even more important today as the population of the world has doubled in the last 50 years. The rest of us can all dress up a serfs and peasants! (Is this going to be the new season's fashion trend?)
And the new money? Well I'd like to see a new version of the Gold Standard based on energy, perhaps the Kilowatt Hour under a catchy name. But it won't happen. So I'd guess we'll all be hoping for Yuans to be tinkling into our begging bowls.
The U.S. system was built taking into consideration that data we had at the time. Unfortunately, that data set was erroneous and that system will be dismantled,
one way or the other.
In terms of using the late 20th century industrial economies as your (mathematical) control The U.K. would have been up shit's creek long ago... the North Sea saved their bacon.
Germany? Like much of Europe they fell on serendipity in many ways. Cities were already constructed in such a way that auto use was not as practical as the U.S., Germany had decent coal reserves, actually the largest in the E.U. and access to NG in the east and oil imports from the usual suspects.
And all of Europe's industrial economies benefited from the Post War boom. Prior to that, they were what we are all going to become over the next 2 or 3 or 4 decades. Agrarian economies with small local manufacturing. The big differences will be the expectations of the people and the political response to it.
Expectations, I think, are everything. I enjoy adventure travel and a couple of years ago my son and I went on an extended hiking trip in the Andes in Peru. Besides the obvious natural beauty of the place what struck me most was the apparent satisfaction with their lot in life, the lot of the local mountain folk. No electric, running water, refridgeration, etc.. Dairy goats and chickens lived in and around their thatched roof or tin roof homes and gardens to provide them with milk and eggs. They ate what seemed an awful lot of cabbage, it seemed cabbage was served with every meal. The roads were dirt, toilets were few and far between, and the open air food markets were like something out of a medieval period piece and equally unsanitary - but the kids played soccer every afternoon, the men had tea together at the local shop after the days work was through (and they played soccer at least as often as the kids), and the women gathered together to socialize while completing other tasks... It sure seemed like they were happy. I asked our guide about much of this and he told me there was little or no divorce, violence, or drug abuse (though they seemed to like a tea made from the leaves of the plant that I think cocaine is made from) and he had never heard of a suicide in his village. As I reflected on this I noticed that the entire village had only 2 or 3 Televisions... Few outside newspapers (I don't know the literacy rate) and not single "People Magazine".
It seemed that without much outside influence these people had come to an acceptable way of life with very little in the way of energy inputs, and since they were not bombarded with commercials and advertisements telling them that they could not possibly be happy unless they drove this, wore that, vacationed here, etc... they were not unhappy about their lack of these things.
As an American it was very surreal.
The point I am trying to make is that over time we are ALL going back to a low energy input life but I try not to worry about it as a MACRO ISSUE. I am not running for President or Prime Minister. i want to share my thoughts and research with friends, family and even like minded strangers so that they are not taken by the misinformation and propaganda posturing as news. There will always be winners and losers, life is like that. I wish the best for "Me and Mine", and hope they can gain some commercial advantage in their own lives.
Either that or I just like shouting into the wind...
Agrarian societies? Germany and Britain both had coal (I grew up in Cardiff, the largest coal-exporting port in the world, the infamous 'Tiger Bay'), and both countries built industrial empires from the 1700's on that and their colonial ambitions, and with France nipping their heels, scrapped over the rest of the world for 200 years and two World Wars. It was Germany that invented the car (1890's) and the autobahn network (1930's), Britain the iron ship, and the competition between them created most of the machinery of modern war and society. The fact that America, Australia, India, 2/3rds of Africa, Canada, and many Chinese, all speak English testifies to Britain's success.
I agree North Sea oil saved Britain in the 1970's, and there is a sad comparison between what Britain did with it's oil bonanza, and Norway's sensible investments. But if Britain had not found oil, its fate would have continued down the same path that America is on now; a balance of payments crisis, devaluation of its currency, very high unemployment, labour strikes, loss of world power and a radically diminished armed forces. I started my working life in this environment and remember it very well.
We've just ended up saying the same thing; efficient energy usage is the key to modern life, and it is the get-rich-quick, something-for-nothing mentality that has diverted the American dream from the opportunity for success by hard work, into this bankrupt society of flim-flam and greed (some of which we sadly share in Britain).
I understand your interests are in protecting wealth. Mine to but not, I suspect, on your scale. For those friends of mine who don't think I'm crazy, I've suggested buying farmland; close but not too close to medium-sized populations who'll need food (but not near big cities). Anything which relies on someone else holding your wealth (banks, pension funds, investment houses), or which involves currency, is likely to be vulnerable, so treat it as risk money. Choose to live in benign environments where fuel isn't needed to stay warm or cool most of the year (not desert, mountain top or far north) and with water and relatively low population density. If you need a job, work at something useful like teaching, healthcare, local government, or a shop selling basic needs; greengrocer, butcher, tools & hardware, etc. These jobs continue longest in recession - its better to be earning something rather than nothing.
My owned properties are in southern France (Euro zone), I rent in England. I'm buying more farmland in France (to rent out) and the south west UK. Already the returns are worthwhile.
I hope at least some people are listening to both of us. At least we can all eat cabbage!
The Industrial Economies of pre WWI Europe might have seemed consequential at the time, but in comparison to industrial economies today I would define them as Agrarian. Industrial farming had not come into existence and a significant percentage of the population still worked in food production.
I think it semantics. If you define Agrarian as pre Watts and his improved steam engine, which is probably the correct definition, you might not call pre WWI europe Agrarian. But the UK notwithstanding, most of Europe was, and much still is, quite Agrarian (again, by my definition).
I meant not to cast any aspersions at the industrial capacities of any region, only that the industrial world will likely be back there by the end of my life time (if I live to a ripe old age, that is). I think It will prove to be an interesting time to be alive.
That sounds like the Chinese curse, "May you live in interesting times"!
By the way, did you see the news about Saudi deciding to stop growing wheat because of a shortage of fossil water. From now on they'll just import - potentially up to 3.5 million tonnes a year.
See http://www.ft.com/cms/s/0/f02c1e94-e4d6-11dc-a495-0000779fd2ac.html for the full story.
Enjoy your weekend!
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