Book Notes: The Coming Economic Collapse
Review and Notes on The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel
Stephen Leeb and Glen Strathy, 2006
Read September 2006
Kind of a sequel to The Oil Factor, but a bit more gloomy and urgent. In fact, Leeb says one reason he wrote this book was that since he wrote the previous one, he realized that the situation was more dire than he thought. His goals are to help sound the alarm and try to spur our society to move on from oil, while at the same time updating his investment advice. I enjoyed the book overall, but again I don’t have the background to really critique his advice.
Synopsis
[All opinions are the author’s, except where otherwise noted.]
Chapter 1:
The Bursting of the Tech Bubble.
One of Leeb’s main points is that we are nearing an energy crisis. That is not the conventional wisdom, and he knows it. So he wants to show us how conventional wisdom can be wrong, and to do so he gives the example of the late 1990’s tech bubble, when otherwise respectable people were saying ridiculous things and making ridiculous predictions.
Pessimistic about the ability of science to save us. The rate of scientific breakthroughs is decreasing. Says the only breakthroughs in the 1970’s were quantum cosmology, chaos theory/fractals, and antiviral drugs. 1980’s – only DNA replication, and none since. [ed note: weird; the impact of the first two is far far less than the explosion of the Internet (granted, that was an engineering triumph, not basic science).]
Chapter 2: A Collision Course with Disaster
Recaps three key points from The Oil Factor
1. Since 1973, the price of oil has been the most important leading indicator of the U.S. economy and stock market.
2. Much of the U.S. oil supply is in the hands of other countries, and therefore vulnerable to external political and economic factors.
3. Oil demand is growing faster than production (if production is growing at all)
But nobody – government, Wall Street, media – seems to care all that much.
Chapter 3: The Collapse of Civilization: Causes and Solutions
Quotes Tainter, The Collapse of Complex Societies, and Diamond, Collapse.
Tainter: energy availability drives complexity, but as that energy becomes less available, complex socities become increasingly vulnerable. Diamond: societies can become unable to make changes that hurt in the short-term but avoid long-term extinction.
Strategies for a society’s survival
1. Become less complex.
2. Zero-growth.
3. Develop new energy supplies
Chapter 4: Our Psychological Blind Spots: Conformity, Authority, and Groupthink
Again, Leeb knows he’s going against established opinion, so he wants to show us he’s not crazy.
The Milgram/Asch experiments, etc. This book wants to be something that sticks up against groupthink.
Chapter 5: The Madness of Wall Street: How Investors Can Profit by Overcoming Groupthink.
Argues against Efficient Market Theory and Modern Portfolio Theory. Key examples are successful investors like Warren Buffett and George Soros.
“The general boom/bust cycle results from investors having a flawed perception of the fundamentals.”
Warren Buffett: “Success in investing doesn’t correlate with IQ once you’re above the level of 125. Once you have ordinry intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
To be a successful investor, you need to be able to avoid groupthink, to have awareness and mastery over your own emotions, and to keep an open mind.
The current oil market is influenced by groupthink and as such undervalues oil.
Chapter 6: The Most Dangerous Crisis of All
The coming energy crisis will be severe. It cannot be solved quickly by throwing money at it.
Chapter 7: Chindia and the Future of Oil
Chindia = China + India, two countries that are expected to compete more and more for the world’s oil supply, thus driving prices up.
Energy conservation is great, but it causes recessions (since fewer goods are being purchased). Leeb doesn’t believe that the U.S. economy can stand a recession with its high debt levels, and that the government will not allow one to happen. Likewise, the Chinese economy would suffer severely in a recession, so conservation is out of the question for them as well.
Chapter 8: The Havoc That Will Result from $200 Oil
Inflation, Deflation, and the Policymakers’ Dilemma. Rising energy prices are both inflationary and deflationary. Inflationary for the obvious reason that they make everything more expensive. Deflationary because they reduce the amount of money to spend on other products and services. So they reduce growth and increase unemployment.
Same argument as in The Oil Factor; government spending is on the rise, which will add to inflation.
The Fed will not likely raise interest rates. Especially given the amount of adjustable-rate mortgages now, a serious increase in interest rates will cripple the housing market. Consider that it was only the strong housing market that saved us from meltdown in the early 2000’s. Home prices, stocks, and the economy could slump in a vicious circle, causing massive unemployment. The only way out will be to keep the economy growing, which will hopefully be possible.
Chapter 9: What the 1970’s Tech Us About Investing in the Coming Decade
The basic strategy for the 1990’s was to make regular deposits into an index fund, generally for the S&P 500. That would not have worked in the 1970’s, when real returns were negative.
In the 1970’s: good companies with solid growth often delivered poor returns. Inflation swallowed up the growth. The strongest growth was in small-cap stocks. Oil was one of the best sectors; ditto for gold. Buy and hold was not very successful.
Chapter 10: The World of Tomorrow: Decline, Stasis, or Armageddon?
Doesn’t think that technology will deliver us miracles. Quotes from (but does not always agree with) Kunstler, The Long Emergency.
The fact that energy demand will rise faster than production is scary, since it could cause wars.
Chapter 11: Planning for Survival: Alternatives to Oil
Promotes wind, hydrogen, coal, nuclear. But scaling these up to replace oil will be a massive undertaking.
Chapter 12: Misplaced Priorities: Our Biggest Obstacle Today
Few people are taking the possibility of a coming crisis seriously enough. Government is focused on increasing production. Note that our government currently gives between 9 and 17.8 billion dollars in tax breaks to oil companies. Take those subsidies away, and that would translate to between gas prices from five to fifteen dollars a gallon. In other words, our government is paying us to burn oil. Not a smart move.
Consumers – when gas prices increase, will we bite the bullet or pressure our government to act to reduce those prices, at long-term detriment.
Industry – the oil industry stands to make a mint when oil prices skyrocket due to high demand.
Academia – global warming and the environment are the rage; energy is not on the radar scope.
Chapter 13: Your personal Choice: Insane Wealth or Pitiful Poverty
Investment pitfalls for the high-inflationary times:
· cash
· bonds (except inflation-protected ones) (TIPS)
· stocks, i.e. covering the overall market
o in particular, defensive groups such as food, retail, and cosmetics.
o and companies whose revenues and profits are inversely related to energy prices: airlines, U.S. automakers, and chemicals.
· small-cap stocks (performed well in the 1970’s, but the hot markets in the future will be China/India, where many of these companies will not have access).
Chapter 14: Making Money in the Coming Collapse
Suggested buys
· Gold and gold shares
o streetTracks Gold Trust – invests in actual gold
o Apex Silver
o Impala Platinum
o Tocqueville Gold Fund
· Oil and oil shares – Schlumberger; drillers – Noble (offshore), Nabors (land), Transocean (deepwater)
· Real Estate
· Chindia (i.e. companies that sell to them: 3M, Coca-Cola, Intel, P&G, Texas Instruments)
· Deflation insurance – zero coupon bonds.
Chapter 15: The Next Hot Investment Sector: Alternate Energy
Suggested buys
· FPL group (wind, LNG)
· Scottish Power/PPM
· GE (wind, power)
· Petro-Canada/Suncor/EnCana/Canadian Oil Sands Trust
· Air Products and Chemicals; Sasol (gasification)
· Cameco (uranium)
· Toyota/Honda; Panasonic EV Energy (batteries for hybrids) or Matsushita (parent of Panasonic EV)
Suggested portfolio
Stephen Leeb and Glen Strathy, 2006
Read September 2006
Kind of a sequel to The Oil Factor, but a bit more gloomy and urgent. In fact, Leeb says one reason he wrote this book was that since he wrote the previous one, he realized that the situation was more dire than he thought. His goals are to help sound the alarm and try to spur our society to move on from oil, while at the same time updating his investment advice. I enjoyed the book overall, but again I don’t have the background to really critique his advice.
Synopsis
[All opinions are the author’s, except where otherwise noted.]
Chapter 1:
The Bursting of the Tech Bubble.
One of Leeb’s main points is that we are nearing an energy crisis. That is not the conventional wisdom, and he knows it. So he wants to show us how conventional wisdom can be wrong, and to do so he gives the example of the late 1990’s tech bubble, when otherwise respectable people were saying ridiculous things and making ridiculous predictions.
Pessimistic about the ability of science to save us. The rate of scientific breakthroughs is decreasing. Says the only breakthroughs in the 1970’s were quantum cosmology, chaos theory/fractals, and antiviral drugs. 1980’s – only DNA replication, and none since. [ed note: weird; the impact of the first two is far far less than the explosion of the Internet (granted, that was an engineering triumph, not basic science).]
Chapter 2: A Collision Course with Disaster
Recaps three key points from The Oil Factor
1. Since 1973, the price of oil has been the most important leading indicator of the U.S. economy and stock market.
2. Much of the U.S. oil supply is in the hands of other countries, and therefore vulnerable to external political and economic factors.
3. Oil demand is growing faster than production (if production is growing at all)
But nobody – government, Wall Street, media – seems to care all that much.
Chapter 3: The Collapse of Civilization: Causes and Solutions
Quotes Tainter, The Collapse of Complex Societies, and Diamond, Collapse.
Tainter: energy availability drives complexity, but as that energy becomes less available, complex socities become increasingly vulnerable. Diamond: societies can become unable to make changes that hurt in the short-term but avoid long-term extinction.
Strategies for a society’s survival
1. Become less complex.
2. Zero-growth.
3. Develop new energy supplies
Chapter 4: Our Psychological Blind Spots: Conformity, Authority, and Groupthink
Again, Leeb knows he’s going against established opinion, so he wants to show us he’s not crazy.
The Milgram/Asch experiments, etc. This book wants to be something that sticks up against groupthink.
Chapter 5: The Madness of Wall Street: How Investors Can Profit by Overcoming Groupthink.
Argues against Efficient Market Theory and Modern Portfolio Theory. Key examples are successful investors like Warren Buffett and George Soros.
“The general boom/bust cycle results from investors having a flawed perception of the fundamentals.”
Warren Buffett: “Success in investing doesn’t correlate with IQ once you’re above the level of 125. Once you have ordinry intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
To be a successful investor, you need to be able to avoid groupthink, to have awareness and mastery over your own emotions, and to keep an open mind.
The current oil market is influenced by groupthink and as such undervalues oil.
Chapter 6: The Most Dangerous Crisis of All
The coming energy crisis will be severe. It cannot be solved quickly by throwing money at it.
Chapter 7: Chindia and the Future of Oil
Chindia = China + India, two countries that are expected to compete more and more for the world’s oil supply, thus driving prices up.
Energy conservation is great, but it causes recessions (since fewer goods are being purchased). Leeb doesn’t believe that the U.S. economy can stand a recession with its high debt levels, and that the government will not allow one to happen. Likewise, the Chinese economy would suffer severely in a recession, so conservation is out of the question for them as well.
Chapter 8: The Havoc That Will Result from $200 Oil
Inflation, Deflation, and the Policymakers’ Dilemma. Rising energy prices are both inflationary and deflationary. Inflationary for the obvious reason that they make everything more expensive. Deflationary because they reduce the amount of money to spend on other products and services. So they reduce growth and increase unemployment.
Same argument as in The Oil Factor; government spending is on the rise, which will add to inflation.
The Fed will not likely raise interest rates. Especially given the amount of adjustable-rate mortgages now, a serious increase in interest rates will cripple the housing market. Consider that it was only the strong housing market that saved us from meltdown in the early 2000’s. Home prices, stocks, and the economy could slump in a vicious circle, causing massive unemployment. The only way out will be to keep the economy growing, which will hopefully be possible.
Chapter 9: What the 1970’s Tech Us About Investing in the Coming Decade
The basic strategy for the 1990’s was to make regular deposits into an index fund, generally for the S&P 500. That would not have worked in the 1970’s, when real returns were negative.
In the 1970’s: good companies with solid growth often delivered poor returns. Inflation swallowed up the growth. The strongest growth was in small-cap stocks. Oil was one of the best sectors; ditto for gold. Buy and hold was not very successful.
Chapter 10: The World of Tomorrow: Decline, Stasis, or Armageddon?
Doesn’t think that technology will deliver us miracles. Quotes from (but does not always agree with) Kunstler, The Long Emergency.
The fact that energy demand will rise faster than production is scary, since it could cause wars.
Chapter 11: Planning for Survival: Alternatives to Oil
Promotes wind, hydrogen, coal, nuclear. But scaling these up to replace oil will be a massive undertaking.
Chapter 12: Misplaced Priorities: Our Biggest Obstacle Today
Few people are taking the possibility of a coming crisis seriously enough. Government is focused on increasing production. Note that our government currently gives between 9 and 17.8 billion dollars in tax breaks to oil companies. Take those subsidies away, and that would translate to between gas prices from five to fifteen dollars a gallon. In other words, our government is paying us to burn oil. Not a smart move.
Consumers – when gas prices increase, will we bite the bullet or pressure our government to act to reduce those prices, at long-term detriment.
Industry – the oil industry stands to make a mint when oil prices skyrocket due to high demand.
Academia – global warming and the environment are the rage; energy is not on the radar scope.
Chapter 13: Your personal Choice: Insane Wealth or Pitiful Poverty
Investment pitfalls for the high-inflationary times:
· cash
· bonds (except inflation-protected ones) (TIPS)
· stocks, i.e. covering the overall market
o in particular, defensive groups such as food, retail, and cosmetics.
o and companies whose revenues and profits are inversely related to energy prices: airlines, U.S. automakers, and chemicals.
· small-cap stocks (performed well in the 1970’s, but the hot markets in the future will be China/India, where many of these companies will not have access).
Chapter 14: Making Money in the Coming Collapse
Suggested buys
· Gold and gold shares
o streetTracks Gold Trust – invests in actual gold
o Apex Silver
o Impala Platinum
o Tocqueville Gold Fund
· Oil and oil shares – Schlumberger; drillers – Noble (offshore), Nabors (land), Transocean (deepwater)
· Real Estate
· Chindia (i.e. companies that sell to them: 3M, Coca-Cola, Intel, P&G, Texas Instruments)
· Deflation insurance – zero coupon bonds.
Chapter 15: The Next Hot Investment Sector: Alternate Energy
Suggested buys
· FPL group (wind, LNG)
· Scottish Power/PPM
· GE (wind, power)
· Petro-Canada/Suncor/EnCana/Canadian Oil Sands Trust
· Air Products and Chemicals; Sasol (gasification)
· Cameco (uranium)
· Toyota/Honda; Panasonic EV Energy (batteries for hybrids) or Matsushita (parent of Panasonic EV)
Suggested portfolio
| oil rising/falling moderately | rapidly | |
| inflation hedges – precious metals | 25% | 10% |
| Chindia | 30% | 30% |
| Energy | 25% | 10% |
| Deflation hedges | 20% | 50% |
posted by Jim at
9:34 PM
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