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  • Stagflation and Peak Oil: How Related Are They? (Part II)
    A good summary. Unfortunately your very first suggestion is all but useless. TIPS track the CPI, which is not a realistic measure of price increases. They may do somewhat better than ordinary Treasuries, but ultimately the understatement of price rises and the tax disadvantages (see also gold - is it shocking to anyone that inflation protection is taxed so brutally?) will cause them to lose purchasing power.

    Then there's the supply problem. The deficit is already enormous and is growing as more bailouts and "stimulus packages" force the Treasury to borrow ever more. For now demand appears to be keeping pace, but there are limits. When (not if, when) foreign central banks decide they've had enough, this game will come to an end and interest rates will rise abruptly. TIPS all have intermediate to long duration (no 1-year TIPS, sadly) and will be crushed when 10-year rates inevitably hit 10% while the CPI continues to be reported at benign levels like 4-5%.
    Jul 27 14:44 pm |Rating: 0 0 |Link to Comment |View article
  • Oil Will Peak at $150-200 - Barron's Interview
    Leonard, electric cars don't solve the problem. How was that electricity generated? Probably by burning natural gas, since gas-fired plants provide most of the supply for peak load (i.e., they're the ones at which supply can be readily increased). It takes years to build power plants.

    Too many people are writing about the run-up in oil as if it has a single solution: we need more alternative energy sources, some say; others demand that we drill more; still others insist that biofuels are the solution. Yes, yes, and yes. WE HAVE TO DO ALL OF THAT AND MORE! The solution to this problem involves many components, some of which will be quite painful. On the demand side, much heavier use of more efficient freight transport (rail instead of trucking and air), getting most people out of cars and airplanes altogether and onto much more efficient rail and bus transit, and replacing the remaining inefficient cars and trucks with less fuel-hungry models. Higher-efficiency heating, cooling, and lighting equipment needs to be phased in sooner rather than later, and many cities and towns in energy-intensive climates need to shrink or be abandoned in favour of more temperate areas with lesser heating and cooling needs. On the supply side, the time to start building more clean electric plants is now. Those reductions in demand will eventually be overtaken by economic and population growth, so supply has to increase. We must figure out how to safely dispose of nuclear waste, or determine that we cannot and that fission is a blind alley. We must determine how much electricity we can generate using solar, wind, and tidal energy, then build out that infrastructure as far as practical. Biofuels are viable, but not all of them; we need to find the best way to make them without shrinking the food supply or expending more oil than we replace. We must increase exploration and drilling, especially for cleaner-burning natural gas, and we must learn how to get the most energy out of our massive coal reserves without choking the air with CO2, sulfur, and soot.

    Consider history as well: the 20 years following the 1980 spike top. From 1980 to 1998, the price of oil fell from $37 to $12; both years were highly anomalous. If we suppose that 2008 is also anomalous, that oil puts in a top at $150 this year, and that the same price pattern in 1980-2000 follows, the price would be at or below $75 in only 10 of the next 20 years. The average price in that time would be $87.11, the lowest $47.73 in 2026, and in 2028 we'd be at $109.79. Extend it out another 5 years from there and we'd be well on our way to $650.

    So is $75 possible? Sure, but I wouldn't expect it to last very long. Without major investment globally and especially in the US - in efficiency, demand reduction, increased oil and gas supply, and alternatives for electricity generation - and much tighter US monetary policy, the fundamentals will impose a positive tilt on that historical cyclical price chart and push the 20-year average well over $100 with a 2028 target of $200, even if $150 really is the top for this cycle. Then there's China...

    Thing is, a year ago, oil was $65 a barrel. When you analyze oil stocks, it's instructive to look at the year-ago price (when oil was falling after a 7-year bull run). In most cases, the market has already priced in a long-term fall back to the $70-90 range. There's plenty of room for the better producers to run here; every day that oil stays above $90 is another day of big-time earnings power that the market has not priced in. After 1980, it was 5 more years before oil fell that far (40%). You would have to be a legitimate oil bear (with 1-year and long-term price targets for oil below $80) to dislike today's prices on producers with the ability to maintain or increase their output. It's hard to like crude at $139 but there's surer money to be made elsewhere.
    Jun 08 14:26 pm |Rating: 0 0 |Link to Comment |View article
  • In Light of Peak Oil, Financial Diversification Is a Bad Idea
    richjoy, I agree with you to a point. "It's different this time" are the most expensive words in finance. But I doubt your final advice to stay with the S&P500 and especially bonds, not because it's different this time but because it isn't. Explosive monetary expansion is devastating to growth; anything devastating to growth is devastating to equities. It should surprise no one that the infamous "Death of Equities" cover appeared after a decade of negative real interest rates and out of control price growth. Here we are again, with interest rates negative and prices spiraling upward. But we're not there yet: stocks are not cheap and interest rates are not high.

    Equities did not die, nor will they this time. They not only survived but thrived, thrived on the discipline Volcker imposed on the money supply. True, some companies will be winners and others losers in this madness, depending mainly on how long we allow the Fed to persist in its folly. But if US equities are to recover as they have before, that folly must end. Real interest rates must soar, and with prices rising rapidly, nominal rates must soar even faster. For this reason, I say that your parting words are self-contradictory: if equities are to be good investments again, surely anyone holding bonds must lose his shirt in the process. If these events do not take place, US equities really will die, to be followed in short order by Treasuries as the American economy collapses. You cannot have it both ways, but bonds are toast in either. I challenge you to describe a scenario in which Treasury prices do not decrease substantially over the next decade.
    Jun 01 00:45 am |Rating: 0 0 |Link to Comment |View article
  • The Triple Play: Oil Addicts, The Credit Crunch and Deflation
    Got that right, mixter. If you don't like the price of oil, you should use less of it and/or buy stock in oil companies. You'd think people would understand that if you're consuming something and don't intend to stop, you are effectively short futures on that thing; if you expect the price to rise, you should hedge that out by building long exposure elsewhere. It's amazing to me that every car-owning American doesn't have a few hundred shares of some oil companies socked away somewhere. As an example, STO just paid out about $1.67 per share. If you use 2 tanks of gasoline a month, we'll figure that at $120. So 900 shares of STO would cover your gasoline bill, more or less indefinitely, regardless of whether oil and the stock itself go up or down. This is a stock that as recently as January could be had for $25; considering the fact that interest rates are negative, securing a lifetime supply of gasoline for a one-time investment of about 23 years' inflation-unadjusted cost at $22500 should look pretty attractive. As a bonus (and a big bonus it is), the more oil goes up while you hold it, the bigger your profit when you eventually quit driving and sell your shares. Similar calculations could be done with XOM or XLE or Canroys or even futures and options, depending on which risks one is willing or unwilling to take on. I guess Americans are afraid of or don't understand the capital markets; in the era of ETFs and easy access to every kind of security (and the constant creation of new ones) they offer plenty of ways to take on, or hedge against, almost any imaginable combination of risks.

    Instead of using the system we already have, they'll demand some boneheaded moves from Congress. This kind of reaction is why I find America so unappealing as an investment target. The people have no discipline and would rather whine and blame others than get their own houses in order.
    May 22 10:42 am |Rating: 0 0 |Link to Comment |View article

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