Born and raised in rural Tennessee, Sir John was the first person in his town to go to college. He went to Yale during the great depression and when things got tight, his father could no longer keep him there. So he helped pay his own way through college with his poker winnings, which sort of adds to his legend. He eventually went on and won a Rhode Scholarship, went to Oxford and set up in Wall Street in 1937.

Now, you can imagine what the world look like in 1937; a lot of bad news, the Great Depression, war looming on the horizon. And in this environment of chaos, Sir John got to work.

One of his famous bets came to him in 1935 when he bought 100 shares of every stock trading for less than a dollar in the NYSE. He made four times his money in the next four years. That was sort of a pattern throughout his career. He was always an investor who was able to find the opportunity during times of market upheaval. He famously bought stocks the day after the ‘87 crash, for example. He also bought airlines after 9/11 and made a lot of money in a short amount of time. So I think he is a good investor to focus on these days because, as investors, we have so many problems to deal with in the marketplace.

I also want to say he started his famous fund in 1954 and it was incorporated in Canada because there was no capital gains tax there at the time. And during 1954–1992 he racked up an average return of 15% a year. That’s a great track record over a long period of time.

He also offered a lot of phrases that we take for granted as common sayings today. “‘It’s different this time,’ are the most expensive words in the English language” — That’s Templeton’s. Maybe his most famous saying is, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” He later added that the best time to buy is during points of “maximum pessimism.”

When I think of Templeton’s influence on me, I think of two things. One is that he was one of the first really successful investors to invest overseas. He was an early investor in Japan, for example, and he drove home the idea that a quality investment idea doesn’t have to be large, U.S. blue-chip company. He was equally at home investing in South Africa, Australia, Japan, wherever. The second thing I think of is that he had this focus on finding great opportunities even when markets seemed like a really bad place to be.

He wrote this when he was approaching his 95th birthday: “Throughout history, people have focused too little on the opportunities that problems present, both in investment and in life in general. The 21st century offers great hope and glorious promises. It is perhaps a golden age of opportunity.”

Now, you might think he’s nutty saying that. And when you look, there is a lot of bad news out there. I think the U.S. economy is probably in recession and Wall Street is a disaster. The dollar is in the tank, debts are high and taxes are going up. My state of Maryland, for instance, just passed the largest tax increase in state history last year. That is pretty amazing considering all the things people get hit with nowadays. And now we are getting hit with higher taxes too. California also had an increase in taxes by some large amount, and Sacramento already has higher taxes than NYC. So to top it all off — as if that’s not bad enough — it’s also an election year! So we have to listen to all the politicians tell us how they are going to solve our problems with a wave of their magic pen.

Today, the big issue is scarcity. When you think about how the prices of everything from food to gasoline are rising, you might think we face scarcity in a lot of things. This may or may not be the case. One thing we don’t have scarcity of, however, is paper money. The money and credit growth for the last 12 months is really incredible. The Australian dollar, the Canadian dollar, the Chinese Yuan, the euro…all these currencies are increasing at 22%, 21% 18%. The only major currencies that are not increasing at a double-digit rate are the Japanese yen and the Swiss franc. So, when we look at market prices, this distorts what we see:

For example, let’s look at oil. Every time I hear that oil is in a bubble, I think of this chart [above]. Basically what it tells you is that as money supply increase, the price of oil has increased along with it. In fact, roughly 87% of the increase in crude oil can be explained just by the increase in money supply. So when you see oil make this huge jump, you have to put it in context. This is true for all commodities. It looks like we have skyrocketing prices, but what we are in fact seeing is the collapse of the dollar. It is just another factor that makes investing difficult, another factor we have to consider.

Regards,
Chris Mayer
August 14, 2008

P.S.: Do you think John Templeton would let the current market get him down? I don’t, and neither should you. Sure, it seems like good opportunities are hard to find these days, but believe me they’re still there. In fact, I know of one investments that will actually pay you income checks. That’s money you can count on. And it may never run out

Crisis Breeds Opportunity was originally featured on Whiskey and Gunpowder

And today’s aviation industry has a big crisis on its hands. As a percentage of airline costs, fuel is now about 35 percent of the total — up from only 13 percent at the start of the decade. It is the airline industry’s No. 1 expense. The cost of fuel puts enormous pressure on the industry. At the same time, regulators are pushing for cleaner planes with fewer emissions.

“The price of oil has challenged and changed all realities for the aviation industry,” says Tim Clark president of Emirates, a Dubai-based carrier. “This is the greatest crisis in aviation’s history — bigger than the Gulf wars, Sept. 11, SARS and past oil shocks.”

If oil prices stay where they are and nothing else changes, the airline industry will lose about $6 billion this year, compared with a profit of $5.6 billion last year. Many airlines will be taking that familiar stroll into the bankruptcy courts. Globally, 24 airlines have already filed in just last the seven months.

The industry is trying — and will try — lots of different tactics to fend off elimination. One of these is to push for more fuel-efficient aircraft. And that is the opportunity for investors to cash in on this crisis.

It starts with the jet engine. Recently, the Wall Street Journal published “Jet Engine Makers Launch New War” — all about the drive for new fuel-efficient engines. The piece notes that airlines worldwide want to replace their existing fleets with next-generation planes, not the current oil-guzzling models. The goal of the jet engine makers — or rather, the mandate put to them by their customers — is to deliver at least double-digit gains in fuel-efficiency.

As the WSJ reports: “Developing fuel-efficient engines requires the use of exotic alloys and ceramic coatings that can cope with internal engine temperatures that would be above the melting points of untreated metal components.”

Enter cobalt. It’s a tough metal with a high melting point of 2,700 degrees Fahrenheit. This higher melting point allows it to maintain its strength at higher temperatures than other metals can. Cobalt alloys have higher melting points than either nickel or iron alloys.

As a result, one of the main uses of cobalt is in superalloys such as those that jet engine makers need. In fact, the making of superalloys consumed about a quarter of global cobalt production, of which about 75 percent wound up in aircraft.

Cobalt would seem to have a nice backdrop of long-term demand. But it doesn’t stop there. Defense spending is also on the rise globally. A Financial Times report on aerospace notes that India, China, Brazil and certain Middle Eastern countries are all upping their defense spending. India alone may spend $40 billion in 2009.

Cobalt is an important part of all that, too. In fact, the U.S. and the Soviet Union used to stockpile cobalt for defense purposes. Those stockpiles are long gone, but the role cobalt plays in defense still exists.

As exciting as the aerospace angle is, a potentially bigger market could be batteries for hybrid cars. As I pointed out in the last issue, there are 5-10 pounds of cobalt in a typical hybrid car battery. Hybrid car sales will probably hit 500,000 cars this year. And that is growing rapidly.

Kitco recently noted that cobalt holds an electric charge better than almost any other metal. That makes it hard to replace, even at $50 per pound. “And the current electric batteries work so well,” Kitco notes, “[that] there is little incentive to change their structure (and other metal prices have skyrocketed, as well as cobalt — nothing is cheap anymore).”

With the failure of banks and the troubles of big financials such as Fannie Mae, cobalt seems a nice place to be. A while ago, I recommended a “cobalt play” to the readers of my investment service, Mayer’s Special Situations. The name of the stocks is OM Group (OMG: NYSE). I should warn you that the stock is a bit speculative. But let me share a few of the particulars…

OMG carries a seemingly absurd valuation. It’s not often that you find profitable and growing companies with no net debt trading for big discounts to book value. The specialty chemical industry — a tribe to which OMG belongs — is undergoing heavy consolidation. Companies are getting bought out left and right. Dow Chemical bought Rohm and Haas for a 74 percent premium. And then Ashland came along and bought Hercules for a 38 percent premium.

Companies that make low-margin chemicals are looking to beef up on companies that make high-margin, or specialty, chemicals. Because OMG is cheap and very profitable, it has to be on someone’s radar. I hope that it doesn’t get bought out. I think we’ll do better holding the stock. But the deal-happy scene in the chemical business is another potential backstop of value here.

Hard to believe that anyone could buy all of OMG for anything less than at least book — which is $36 per share. And even that would bring howls of protest. After all, the stock was in the $50s for much of the past year. We will see.

In any event, let’s bring this back around to the aviation crisis. A familiar theme in the pages of my letters over the years has been this Templetonian notion of focusing on the opportunities that problems present. The late great John Templeton made this idea a key component of his investment — and life — philosophy.

The high price of oil is a big problem for many industries.

So if you have a good way to mitigate the high price of oil, you have a business. I think the big winners over the next few years are going to be those companies that have a solution to the high price of oil. Those companies have products that other people will pay up for, because fuel-efficiency is a must. The aerospace industry must become more fuel-efficient.

Cobalt alloys will be a big part of that trend.

Regards,
Chris Mayer
July 22, 2003

P.S.: Cobalt alloys are certainly going to be a big part of the coming efficiency renaissance in energy. But there has also been another breakthrough recently that could be the biggest moneymaking opportunity available to you. Some are already calling this energy breakthrough a “miracle” and for good reason too. My readers of Mayer’s Special Situations have already been told about this.

Fuel Efficient Airlines was originally featured on Whiskey and Gunpowder

Speculators are speculating because there is something about which to speculate. (Let me thank my sixth-grade English instructor for teaching me how to compose that sentence.)

Remember when oil ran up back in 1979 and 1980, when the entire Iranian oil industry collapsed in the wake of Ayatollah Khomeini’s Islamic Revolution? About five million barrels of oil per day simply left the world marketplace. It was gone — poof! Not there. No tankers.

Even though five million barrels went away, people could still look to places like the North Sea, Alaska, Angola and elsewhere. And they could feel certain that sooner or later, there would be future oil supplies flowing down the pipelines.

But that’s not the case today. When people look ahead now, they don’t see from where the oil of the future will come. Most of the world’s current large oil fields are in decline.

As for the so-called oil speculators, they are just defending the value of their money. They are looking forward a few years. What do they see? All of the current energy development projects will just barely replace the oil that will NOT be coming from declining oil fields. So peering ahead, there’s no net increase in future oil output. We’re looking at a plateau in output, if not the backside of the Peak Oil curve.

But we are looking at growing energy demand, as well as demand for other resources. So investors have placed hundreds of billions of dollars into energy and other commodity funds during the past two years. They are both hedging against dollar inflation and anticipating future supply shortfalls.

Long term, this is great news for one of my Outstanding Investments recommendations, a Canadian tar sands company. This company is facing higher capital costs, as well as higher costs for inputs like natural gas. And it suffers from a raw political bias (suicidal, in my view) against synthetic crude oil because of the carbon dioxide emissions.

Along those lines, some politicians in the U.S. want to renegotiate the North American Free Trade Agreement (NAFTA) that includes Canada. Word to the wise: Don’t go there!

Really, if the U.S. renegotiates NAFTA with the Canadians, our friends to the north will have some surprises in store. The U.S. will rue the day that it tore up NAFTA with the Canadians, because that will just plain shut off many of the valves on a lot of pipelines.

Seriously, the Canadians have eager buyers for their energy resources, and they don’t need us Yankees. Just keep in mind that downstream, people will demand oil, and companies that have it will make money.

Getting back speculation, those “speculators” are not the problem. Speculators are sending a message that policymakers had better heed. American politicians better get serious about finding pathways through the “energy issue.”

Although I do have political opinions, I try to keep them private, especially careful not to hurt the feelings of any of my readers.

But that does not mean that I don’t have opinions within areas of my own expertise. If you are reading this, you must know that oil prices have doubled in the past year. There are profound supply issues looking forward. (I’ve been writing about Peak Oil and related issues for Agora Financial for four years.) And world demand is still rising, despite the very slight pullback in U.S. oil usage in the first half of 2008.

Whoever wins the race had better be ready to think in terms of energy. And I mean from day one.

Energy is not just “another issue.” It’s not as if a politician could “do energy” and then move onto other important items on the agenda — like appointing your friends federal judges and handing your political donors prestigious ambassadorships.

Energy will be the defining issue of the next president’s term of office. This is already baked into the cake. Nothing will change it, short of a major war. And even fighting a major war will be controlled by the energy issue (as was World War II, by the way — another long story). The U.S. won’t go to war over most things. But we’ll fight over energy. Or where have you been?

Every U.S. president has had something associated with his term of office. It might be good. It might be bad. But it’s the shorthand way in which we remember the guy. When I think of Lyndon Johnson, I think of the Vietnam War. When I think of Richard Nixon, I think of Watergate. When I think of Ronald Reagan, I think of him meeting with Gorbachev and winding down the Cold War.

The next president’s big issue is already on the table. It’s energy. It has been decided.  The gods and fates have so dictated. Everything else is window dressing. Everything else is just the White House Easter egg hunt. Nothing else will control the outcome of the next president’s term of office. Energy, that’s it.

Energy. Take it or leave it. Except you can’t leave it. The nation needs to get energy right. We can have energy supplies for the economy. Or we can just decide to wind down the 232-year-old experiment called the United States of America. We can hop, skip and jump into James Howard Kunstler’s The Long Emergency. It’s that stark.

Here is the slogan for the next White House Situation Room: “It’s the energy, stupid.” Practice is over. It’s game day. It’s time to suit up and play. What’s your plan?

And we can’t just do 20 more years of energy research. Really, suppose that nobody ever filed another patent for a new and better invention in the field of energy. We could spend the next century just rewiring the nation based on what we already know how to do. The future is one of systems engineering. The future is all about taking the ideas and technology that’s already out there. Bring them down off the shelf and make them work to run the country.

So if the next president-elect is not ready to tackle the energy issues of this nation, he just ought to stay home on Inauguration Day. Don’t waste our time.

Until we meet again…
Byron W. King
July 8, 2008

P.S.: It’s become clear that oil and energy have become the dominant issues in this closely contested election. The sky-high prices along with increased media attention mean that solving this problem is paramount to many politicians and innovators alike. That’s why we’ve seen some incredible improvements recently that could go a long way toward solving this problem. One of the best inventions we’ve seen in a decade is finally being released and could be the solution we’ve been looking for.

Oil Speculation was originally featured on Whiskey and Gunpowder

I believe the charts I have in this column contain some powerful insights. You will want to keep them handy when things get rocky. They come courtesy of Barry Bannister, an analyst at Stifel Nicolaus, who delivered an interesting talk in Baltimore recently.

I’ll focus on oil, though a similar story holds true throughout the commodity sector. I don’t put a lot of faith in macro predictions — as no one can predict the future. But you can study track records. You can look at history. History reveals some interesting clues about what the future may hold.

The quick take? It doesn’t look like the party is over just yet. But even if it is, past peaks in oil give us clues. When you dig a little deeper into those relationships, you find a great road map for making money.

If you look at the price of oil, you find something interesting. Since January 2001, you can explain the move in the price of oil largely as a function of increasing money supply. As the amount of money grows, the price of oil rises. In fact, almost 87% of the move in the price of oil can be explained by the increase in money supply, as this next chart shows:

Basically, $100 per barrel oil is what we would expect to see, given this relationship between the oil price and money supply. Given that we are still in the midst of a credit crisis of sorts, it seems unlikely the Fed will tighten money in any way at all. That leaves a clear path for the price of oil and commodities to continue to rally in nominal terms.

The other thing to remember — and people forget this by worrying excessively about a U.S. recession — is that the story of oil is no longer a U.S.-centric story. You’ve surely heard about how the rapid growth in China and other emerging markets drives oil demand. Well, it’s good to keep that in mind. See the chart below:

China and India are only beginning to consume oil at any meaningful level. Right now, they are consuming oil at a rate the U.S. did in the early years of the 20th century. But look, we don’t need China to start guzzling oil like we do. Even if it moves half the distance between it and Hong Kong, that’s a lot of extra demand. The way I look at it is this: What’s more likely, China stays at 1910 oil usage or moves somewhere closer to, say, 1950s U.S. oil usage? I think the latter.

Even if oil has already peaked, that doesn’t mean oil is headed back to $40 per barrel or lower. In fact, if this oil boom follows history at all, we’re looking at years of oil prices right around $100 per barrel.

After studying the history of other recent oil booms, what you learn is that in no prior oil boom did the price of oil retreat rapidly toward where it was before the boom began. In each case, the price of oil stayed up for years after the peak. If you’ve got investments tied to the booming oil prices, that means you’ve got plenty of years to make more money.

So where do you go to make that money?

The one obvious place people will automatically look is to own oil and gas producers. That’s not a bad idea at all. But I’ve got another angle here. If you look at the capital and exploration spending of both Exxon and Chevron from 1928-2007, they show spending bottoms in 1948 and 1974. After each bottom, there was a long run of spending.

Spending peaked nine years after 1948. Spending peaked seven years after 1974. If 2005 proves to be the bottom on capital spending — and it seems so, since Exxon only recently announced it would increase its capital spending to $25-30 billion over the next few years, a 25% increase — we won’t see capital spending peak until 2012 at the earliest.

Now, why is this important? Think about what the oil companies spend money on. Where do they go shopping? They go shopping at the oil field services and equipment companies.

So that is where you want to be. Because even if oil has peaked, we’re still looking at years of strong spending by the oil companies. You want to have some exposure to the receiving end of all that spending. Such companies will mint cash. And they give you a little different payoff than owning a straight producer. As Bannister pointed out, it can sometimes be better to own the picks and shovels. You don’t actually own or produce the oil or gas, but your equipment is vital to those that do.

He used Newmont Mining, the big gold producer, as an example of a producer that has profoundly disappointed investors amid what may be the greatest gold bull market in history. Newmont’s costs rose so fast and so much that it never really enjoyed (at least not so far) the higher price in gold. But if you were in some mining equipment manufacturer, you got paid.

So the key takeaways here are these: The price of oil has room to run yet, in part because of the growth in money supply and in part because of pressing international demand. Secondly, even if we already saw oil peak, history says that prices won’t retreat by much over the next several years. And finally, the capital-spending boom by the big oil companies is just getting started, which is great news for investors in oil field services companies.

Regards,
Chris Mayer
May 20, 2008

Rising Oil Prices was originally featured on Whiskey and Gunpowder

I seem to be one for knowing why, however.

Now, perhaps it’s because I’m a simpleminded half-rube without intensive education in economics that I can see the reason so clearly — I’m simply not close enough to the trees for them to obscure my view of the forest, so to speak. The Associated Press and other sources claim that violence in major oil-producing Nigeria is what drove crude over the C-note mark. That’s not what did it, though…

While it may be true in the most literal sense that this recent upheaval in Africa resulted in the particular spike in oil prices that crested the legendary $100-per-barrel mark, the actual reason crude’s spiraling upward is because America is sucking down a big batch of killer green Kool-Aid — instead of the oil we should be guzzling for the betterment of planet Earth.

Yep, you read that right: For the betterment of the Earth.

Crude Economics 101

This essay was intended as a conclusion to my Carbo-geddon series, but the historic $100-a-barrel mark for crude has given me an opportunity to shoehorn another essay which underscores the main cause of not only skyrocketing oil and gas prices, but also levels of atmospheric greenhouse gas (GHG). Knowing this is important to understanding my rationale for what should be America’s energy policy (I’ll spell that out in my final installment — coming in just a few days).

Now again, and for the record, I’m not saying that I believe — or that the bulk of evidence supports — that man-caused CO2 and other gases are responsible for the modern trend of global warming (which does indeed exist). I’m merely using that supposition as a framework for my arguments, since it’s as obvious as a case of Tourette’s Syndrome that just about everyone else in the country is sold on the theory of man-caused global warming.

This has caused some confusion among readers — many of you have written in to chastise me for what you perceive as my buying into the mainstream’s stance on global warming. I hope, with this, I’ve cleared up any misconceptions. Trying to argue about the causes of global warming is like whizzing into the wind, so I’ve been making the case for consumption using the cleaner-Earth arguments everyone else is using to defend crude conservation.

Now, bear with me if I’m covering ground you already know (I’m sure I am) but one basic truth warrants repeating if you’re going to understand my “global” point with this essay: With a few caveats, the price of any commodity goes up when demand for it outpaces or approaches the limits of supply.

In the case of oil, there are some other factors. Firstly, and as we see right now with the Nigeria situation and a few years ago with Katrina, the price of petroleum products are to some degree at the mercy of certain external forces — things like third-world political strife, weather events, oil spills, pipeline sabotage, mad dictators setting whole oil fields on fire and price collusion or manipulation within oil cartels. However, these kinds of factors typically only cause temporary changes in the price of crude.

Secondly, oil’s price is itself a major driver of production. The profit a company can make on a barrel of oil must justify the time and expense of finding it and extracting it. In order for new petroleum reserves to be tapped — and their yields finally brought to market years down the road — oil’s price per barrel must be high enough to warrant it, and with no price decline in sight. Otherwise, the anticipated profits won’t justify the costs…

Thirdly, and perhaps the most significant to my argument, is that unlike supplies of a lot of other commodities (corn, wheat, etc.) — which can typically be increased to meet demand relatively swiftly — the world’s flow of oil can’t be ratcheted up very quickly. There are a bunch of reasons for this: Exploration costs, new site infrastructure expenses, R&D costs of new technologies for the extraction of oil from dwindling fields or alternative sources (like oil sands or shale), and about a million other things…

But enough Crude 101. Like I said before, underneath ALL these ancillary factors is the very simple economic truth that rising demand is what really drives sustained increases in oil prices over time. And for the foreseeable future, world demand for oil will increase at a pace that’s far greater than the rate at which new supplies could come on line (you’ll see why in a moment). Hence, the recent $100 price-tag for oil futures — which, I predict, won’t end up being the commodity’s high-water mark.

Yes, this skyrocketing demand for oil is America’s fault. But not because of our rampant consumption of it.

How Consumption = Conservation

As you learned in Part 1 of this series, America’s thirst for crude has actually declined in recent years, despite steady increases in both population and GDP. We’re now using less oil per capita and unit of wealth created than at any point in recent history. Continuing this trend is exactly what many in the environmental relig-, er, movement, would claim is the key to a cleaner Earth in the future, since we’re the world’s biggest consumer of fossil fuels…

Their smarmy, capitalist-guilt-driven belief is that if the largest petro-consumer (the big, bad U.S.A.) consumes less, that just HAS to result in less global pollution and GHG. Now, this would be true if every nation on Earth consumed its oil with similar outputs of GHG/pollution per unit consumed. But as I’ve spent 20,000 words or more showing you over the last three years, this simply isn’t the case.

To recap a bit: Measured in terms of GHG-per-unit-of-oil-consumed, America burns its crude with less than half the greenhouse gas output of Russia or India — and with around one-third the atmospheric GHG as pollution-belching China. In fact, according to a report released last June by the Netherlands Environmental Assessment Agency, China became the world’s largest gross emitter of CO2 in 2006 — by a decisive 8% margin over the next-closest nation, the U.S. This, despite consuming ONLY 37% AS MUCH OIL and around 72% as much total energy as the U.S. did…

But did you read about this on the front page of the big papers — or hear the talking heads trumpeting it on the evening news? Not likely.

A scarier question, one I’ve asked before, is: How do you think the global GHG/pollution picture is going to look once China consumes as much oil as we do — or more?

Bottom line: If the pervasive mainstream GHG theory is correct (whether it is or not isn’t today’s topic), the U.S. is directly responsible for accelerating the warming of the planet. In the name of cutting our own consumption — and in our quest for ever-cheaper shelving units, blenders, shavers, towels, clothes, sporting goods, rubber balls, Happy Meal prizes, lead-painted toys, killer pet-foods and shoddy tools — we’ve sold our manufacturing soul to a nation with no environmental conscience whatsoever.

And in so doing, we’ve outsourced nearly three times the pollution and GHG that we’d have produced had we made these things ourselves…

THIS is what’s really driving the price of oil upward: The fact that China is now factory-to-the-world (instead of the U.S.), and it takes that nation several times more fossil fuels to produce the same stuff that America could have — plus the fact that we’re lining up in droves to buy as much of their cheap, often-hazardous and always wastefully-produced junk as we can.

So you see, high oil (and gas) prices ARE America’s fault. Seduced by all manner of cheap stuff — and bamboozled by our own politicians and the media into believing we need a cleaner “Earth-print” — we’ve facilitated the rise of the Chinese manufacturing juggernaut. And now they’re putting pressure on world oil supplies, which can’t ramp up fast enough. Prices are soaring as a result.

Now, with all this in mind, I repeat the same question that I’ve been asking you in so many words for three years: If your primary concern is the environment — and you believe that man-caused global warming is ruining it — who would you rather have consuming fossil fuels to make the things you need and want: China or the U.S.?

Here’s another way of looking at this: If the world oil supply spigot is wide open and still not meeting demand (it must be, since oil prices have gone nowhere but up for more than a year), and if Chinese consumption of oil yields 2.8 times more GHG than American consumption, doesn’t it make for a cooler Earth if the U.S. consumes more of the oil coming out of that spigot — and China less?

Once again, folks, the blunt, inconvenient truth is that America’s increasing consumptive restraint and ongoing transition from a manufacturing-based economy to a services- and finance-driven one only serves to fuel an exponentially growing, hyper-industrial monster that cares nothing for the Planet — except as a market for its inexpensive products.

Think about that as you look at the “Made in China” labels on just about everything on the shelves in Target, Wal-mart, Toys-R-Us, PetSmart or even Home Depot.

The Carbon Catch-22

But hey, that Chinese-made stuff is really cheap. If the Reverend Owl Bore turns out to be right (again, I’m not saying he is — just that most people seem to believe he is), we’ll all be able to afford sunscreen, melanoma treatment and inland real estate with the money we’ve saved by paying China to cook the planet…

Indeed, the data show that what China does best from an industrial standpoint isn’t efficiency or quality or eco-consciousness. They’re the masters of doing things cheaply. But that’s only by virtue of their inexpensive labor and a lack of costly environmental regulation to comply with — not any true innovation in manufacturing or design. That kind of stuff is left to the Japanese, Americans and Germans (not coincidentally, Nos. 1, 2 and 3 in the low-GHG use of fossil fuels)…

Therein lies the quagmire, the Catch-22.

Imagine what a shock it would be to the U.S. economy if people all of sudden had to pay, say, three times as much for everything that’s currently made in China.

Let’s just say, for the sake of argument, that it somehow dawned on everyone in the U.S. at 8:00a.m. tomorrow morning that Chinese-made goods were contributing to global warming at a far greater rate than if those same products were made right here in America…

And lets also say that by 9:00a.m. tomorrow morning, everything on every store shelf in the country with a “Made in China” label was situated right next to a similar product made in the USA, with far less waste, pollution and GHG…

However, owing to our democracy — which regulates how polluting our manufacturers can be, forces them to pay their workers a decent wage and enacts standards for product safety and quality — all that Earth-friendly American-made stuff was three times the money. Do you think people would spend the extra cash to (maybe) help keep the Earth a degree or two cooler?

Would you?

Democracy’s Crude Awakening

All this should make you wonder: WHY does the U.S. consume its oil/coal/whatever so much cleanlier than China, Russia, Korea, et al? (Hint: It’s the same reason that products made in the U.S. are more expensive). It’s called democracy.

As a system, democracies are at a distinct manufacturing disadvantage in a global free-market economy. That’s because they’re beholden (theoretically, at least) to the interests of concerned citizens who won’t tolerate waste, pollution, near-slave-labor and low standards of living.

However, democracies (where costs of living and taxes tend to be higher) thrive on cheap stuff. In America, we depend on a tide of it from China, Taiwan, Sri-Lanka, Bangladesh, etc. Ergo, the real price of economic globalization is a dirtier global environment — since the countries that can produce things the cheapest are those with the least constraints on pollution, quality control and wages (usually non-democracies).

Now, don’t get me wrong. I’m not knocking democracy. It’s the least crappy system of government ever tried — and ours in America, as flawed as it may be, is still the least wretched among major world democracies. However, democracies, when not properly led, can be the victims of their own majorities. I’m seeing evidence of this right now with the global warming debate.

Instead of leading and educating the American people about the environmental pitfalls of outsourcing more and more manufacturing to the developing world, politicians from each side of the aisle are simply testing the winds of public opinion (which blow according to the biases of the media and the hot air of guru-celebrities), then kowtowing to it for votes.

It doesn’t matter that they’re crippling our economy in the name of fuzzy-math ecology.

So what’s the answer, you’re asking? Is it economic isolationism or protectionism? Is it hording up the world’s oil? Is it regulation of the media? Is it sanctions against China?

I’ll tell you what I think it should be in the conclusion to my Carbo-geddon series, next week. Stay tuned…

Doing my part to consume and conserve,

Jim Amrhein
Freedoms Editor
January 11, 2008

The Carbon Kool-Aid and the Catch-22 was originally featured on Whiskey and Gunpowder

Oil and Gold Still Rising

My Outstanding Investments colleague, Kevin Kerr, and I both expect to see a price increase to $150 for a barrel of oil, and even $200 oil would not shock us. Expect to pay $5 or more for a gallon of gasoline within 18 months, as well. It is part of the Peak Oil future, and that future is now. Darn, we were hoping to have more time. But then again, our society has been wasting time for two generations, since the early energy warnings of the 1970s. And while we are on the topic, we expect to see gold at $850 per ounce in the not-too-distant future. Then $900 and $1,000 within 18 months, if not sooner.

If we have your attention, we regret having to say all of this because it means that the U.S. dollar will be losing value in a precipitous drop during 2008. It will not be a pretty sight. Just imagine the loss of purchasing power and the associated destruction of capital that our society collectively will experience as this occurs. Imagine a scenario of asset deflation and price inflation. What can you do? We’ll discuss that later in this article.

Superheroes, Light and Dark

Yes, oil and gold have risen in price and will almost surely rise some more. In the marketplaces and bazaars of the world, where oil and gold are traded, it is as if a well-muscled superhero is leaping into the sky, blue tights shimmering and dark cape flowing, yelling, “Up, up, and away!” But is this masked character, rising upward and representing the prices for oil and gold, one of those good superheroes who are dedicated to helping mankind? Can higher prices for oil and gold somehow be good for us all? Or are we dealing with one of those evil superheroes, a vicious soul who has been corrupted by the darkest forces of the universe?

As no less noble a character than Batman once inquired, as he looked over a room full of devices that he was considering adding to his battle rattle, “Does this come in black?” Thus, to bring Gotham toward the light, its mythical warrior-savior wears the color that absorbs all wavelengths and reflects none. The Dark Knight wears black. How gothic.

Hard Questions About Oil and Gold

Ask yourself, dear readers: Are the prices of oil and gold rising for simple reasons? Are the upward price trends merely tactical events in the daily battle space of the market place? Or are oil and gold now subject to certain inexorable forces of history, no longer governed by the old rules of a political and monetary world that is now obsolescent, if not obsolete? We have to wonder. These are hard questions.

Will the political leadership and monetary authorities interpret the fast-rising prices of oil and gold as warning signals of imminent and profound trouble? What about those who hold positions of trust and responsibility within the media, business, academe, and even religion? Will this nominal and — we regret to say, somnolent — leadership cadre ignore these key signals, while they waste time counting their retirement points and dismiss these glaring klaxon signals of rising prices as mere “trading activity,” or worse?

However ineptly the leadership interprets or misinterprets the message, there is no denying that there is trouble within our economy, if not within what passes for energy and “money” in our world. At Outstanding Investments, we work to position ourselves and our investments away from the troubles. That is what distinguishes the investment community from the rest of the sorry lot. We are playing with our own money on the table. We don’t want to lose it.

But still, we have to ask if leaders anywhere can act in time to change things for the better. Is there time to plan and implement change, no matter what it is that must be accomplished (and that is very much)? Does the leadership cadre have the knowledge, let alone the wisdom, even to understand the message and the problem?

The End of the Postwar Era?

When we see the prices of oil and gold rise so quickly and inexorably, we wonder if these trends reflect some profound underlying change to the firmament of our national and political existence. A few weeks ago, while I was in Houston for the conference of the Association for the Study of Peak Oil & Gas (ASPO), I had a conversation with a retired employee of the CIA. Our conversation drifted to the question of whether or not the global political construct of the world post-World War II was finally coming to an end. After 60 years of running on the formerly immense momentum of that victorious war, is it all finally grinding to a halt as the U.S. literally runs out of oil and its currency disintegrates in relation to gold? The former Soviet Union encountered severe oil shortages, ran out of money, and all but imploded within a matter of months. Is there some law of nature that declares that something similar could not happen to the dramatically overstretched U.S.?

Through the Eyes of Leo Tolstoy

Look at the basics. Clearly, the prices for oil and gold are rising. That is the easy observation. But are we witnessing a fundamental transformation in the alignment of all mankind, similar in a way to that observed and described by the Russian novelist Leo Tolstoy? Are the prices of these two critical commodities, oil and gold, reflective of the broader themes of war and peace, mankind’s ability to both hate and love, the artificial and the natural, the erotic and the sublime? Where will it all end, and how will it play out?

As the prices rise for oil and gold, are we seeing both sides of a clash between the most profound forces of God and nature? In the rising price trends for oil and gold, are we observing two opposing pathways through life? One era is ending, that of cheap energy and strong dollars. Another era is beginning. What era will that be? Yes, our oil and gold-mining stocks go up while the dollar-based world around us grows poorer. Would it not be better for our stocks to go up while the dollar-based world grows richer? Oh, if only it could be so.

Can You Buy Your Way out of Trouble?

In a Peak Oil world, you might not be able to buy your way out of trouble. Not even if you are rich. Yes, that’s the bad news, and it is very bad. And if you move all of your investments to foreign currencies, along the lines of what our old friend Jim Rogers has announced he is doing, you may still suffer the effects of the declining value of the dollar. If the U.S. economy is, as the analogy goes, the world’s economic locomotive, then this train is about to derail. Think of the looming Citigroup disaster as the financial warm-up act for the last great concert of the Woodstock generation.

Take long-term monetary mismanagement by the Federal Reserve, plus fiscal decadence at home by the U.S. Congress, and an unaffordable war abroad, and you have the ingredients for economic disaster. Stand by for a domestic recession, as the value of the U.S. dollar drifts downward. There will be pockets of prosperity, in export-related fields, such as some high-tech and large capital goods like commercial aircraft (thanks, Boeing). But if you don’t earn a living building Dreamliners, we suggest that you get out of debt fast, and out of dollars faster.

At Outstanding Investments, we think that some protective moves include owning gold or shares in gold miners. Or you could invest in one or more of the foreign currency or commodity-backed FDIC-insured certificates of deposit (CDs) that our friends at EverBank offer. We have to note that Agora Financial has a business relationship with EverBank, through which we promote EverBank products. But still, we assure you that we would not even mention the EverBank CDs if we did not believe that they are suitable investment opportunities for our readers. Check them out.

Until we meet again,
Byron W. King

November 15, 2007

Oil, Gold, Batman and Leo Tolstoy was originally featured on Whiskey and Gunpowder

After the Vancouver event ended, my family and I headed north for another visit to the great state of Alaska on behalf of my Outstanding Investments subscribers. Among other things, I looked at some old gold mines and new mining prospects and had some serious fun hiking in the forests of the southeast coastline along the Pacific Ocean. I even had a chance to explore my “inner Army Ranger” by zip-lining across the treetops at the edge of the Tongass National Forest, traversing deep gorges on rickety rope bridges and rappelling down steep cliff faces. In all honesty, I did that for me.

Now I am back at home in hot, muggy Pittsburgh, PA. But as compensation for the present and rather uncomfortable weather, the local sweet corn, fruits and other vegetables are coming in, and it has been just a great (and delicious) growing season. The Steelers have a new coach and a lot of exciting prospects ahead of them. And by the end of this month, we will enjoy the glorious fall weather and colorful foliage of Western Pennsylvania that make this part of the world such a delight. So let’s try to look forward with a positive attitude, despite the many heartbreaking issues that form the daily news headlines.

The Grand Old Duke of York

Looking at the stock markets and the headlines they’re making of late, I am reminded of the Grand Old Duke of York. He had 10,000 men. He marched them up to the top of the hill. And he marched them down again.

Except in the case of another York, this one being the New York Stock Exchange and its bellwether Dow Jones average, for example, the march went up to 14,000 points or so, courtesy of a long-term credit expansion that flooded the markets of the world with excess, if not seemingly endless, liquidity in an environment of apparent disregard of risk. Then in mid-July, the New York Dow started its retreat when a piece of the subprime mortgage market went critical. Liquidity contracted like a hangman’s noose.

Risk was rapidly revalued, if not repriced, downward at the rate of the acceleration of a man falling through the trapdoor of the gallows. And in mid-August, in what may be the early phase of a long march down the proverbial hill, the soldiers of the Grand Old New York Dow marketplace pitched camp near the 13,000 level. What next?

Are we watching the Dow Jones marketplace dig in and make a stand? Or is this just one more daily stop along the line of retreat, if not a slow-motion rout? Things change, of course, and in the stock markets of the planet, sometimes they change very fundamentally. By way of analogy, recall that what started as the road to Stalingrad for the Germans eventually became the road to Berlin for the Russians. It was the same line on the map, but a different outcome, depending on who was marching where.

When You’re Up, You’re Up

Getting back to that Grand Old Duke of York, he once said, “When you’re up, you’re up.” Are our stocks up? That certainly makes for a good day, except you also have to remember to sell at the top if you want to book the gain. What? How does one know that it is the top of the market? Just listen for the bell. Doesn’t somebody always ring a bell at the top, as the cable car drivers do when they reach the crests of the hills of San Francisco?

And When You’re Down, You’re Down

And as the Grand Old Duke of York also said, “When you’re down, you’re down.” So are any of my favorite stocks down? That makes for a bad day, except that maybe it is also a buying opportunity in the context of the long perspective. Again, how does one know that it is the bottom of the market? Just read tomorrow’s newspaper, of course. I’d be glad to loan you my copy, but I must have mislaid it somewhere.

And When You’re Only Halfway Up…

Finally, as the Grand Old Duke of York said, “And when you’re only halfway up, you’re neither up nor down.” Well, it depends upon when you joined the ranks of Outstanding Investments subscribers. If you have been with us for a while, you are probably up despite any recent market retreats. If you enlisted recently in the subscribing ranks, you may be down a bit, but not down as much as the poor wretches who failed to pad their portfolios with energy and natural resource shares. Long term, the material-energy world is the world of reality. It is the place to be. I’ll take you there if you’ll click here to subscribe to Outstanding Investments.

What Is Going On?

So you ask, “What is going on?” I hesitate to offer any categorical answer about the state of the stock markets. I have no universal field theory for why the stock markets of the world are doing what they are doing, and hence do not want to say anything that is outside my bailiwick. But I see that, for example, the price of oil has pulled back and I know a few things about the price of oil.

The Price of Oil

Back during mid-summer, oil was pushing $78 per barrel, and there were many forecasts for higher oil prices going forward. At one time or another in the not-too-distant past, players as diverse as the president of oil superpower Venezuela, Hugo Chavez, and the oil analysts at money-managing superpower Goldman Sachs were predicting oil at $100 or more per barrel. And really, would the reviving military superpower Russia have bothered to send an expedition to claim the resources of the North Pole if its leadership thought that long-term energy prices were going to decline? Can superpowers ever be wrong?

Still, within a couple of weeks, oil dipped back into the $72 range per barrel. If you listen to some commentators, the economy is unwinding and we will soon be back to $2 gasoline. But not to worry, dear readers. The Peak Oil paradigm is still with us, and we will surely see $100 per barrel of oil, sooner or later. Be patient. We will get to that $4 gasoline, and probably much more, in due course. Really, when you think about it, the collective American addiction to driving and traffic congestion seems to subliminally demand higher prices.

From the standpoint of supply, there have been no major oil discoveries anywhere in the world of late. And at the other end of the economic equation, there has been no major breakthrough in the arena of demand destruction when it comes to oil usage trends going forward. Supply is tight. Demand trends are rising, as I will discuss below. So why the pullback in the price of oil?

Sometimes You Sell What You Have to Sell

In general, the price of something falls when there are more people selling than there are buying. And recently, there have been more people selling oil contracts than buying them. Why is that? Because there have been a lot of entities around the world that have had to raise cash to cover losses in the subprime mortgage meltdown, or otherwise to book some sort of gain to impress the clients. And when you have to raise cash in a hurry, sometimes you cannot sell what you want to sell. Sometimes you just have to sell things for which you can find or make a market.

Let me explain that a bit further. Many large players in the subprime mortgage arena, such as banks, brokerages and hedge funds, are heavily invested in subprime mortgage commercial paper. In most cases, they bought the subprime paper with the clients’ money, promising a certain return or yield over time and charging hefty management fees in the meantime. Up until now, the banks and others have carried the paper on their books according to a “model” valuation and have been able to keep the clients happy by sending them quarterly statements filled with fuzzy math that indicated all was well. Also, for the past few years, there was no real reason to question the underlying accuracy of the portfolio valuation model. Interest rates were low, and liquidity was available. The subprime paper traded in a reasonably orderly fashion, or at least with few evident problems. The business model appeared to be working like a Swiss watch, and in the perception of those who were living the dream, that business model displayed the soundness and inherent durability of the Swiss currency.

But starting a few weeks ago, when a number of Bear Stearns funds imploded, it became necessary to liquidate some of this commercial paper, backed by subprime mortgages, in a real marketplace and not in some la-la land of model valuation. The lesson of the Bear Stearns implosion was that the market for such commercial paper could evaporate almost instantly. The “for sale” sign was up, but nobody wanted to buy. So all of a sudden, portfolio managers across the world realized that the model valuations were sheer fantasy. When they gazed into the mirror, they really weren’t getting better looking each day. When the time came to sell, there was no market. Time to panic, right?

As I said above, when you cannot sell what you want to sell, you might be forced to sell things for which there is a market. So many banks, brokerages and hedge funds have been raising cash by selling their oil futures, for which there is a market.

Hence, presto! The price of oil has fallen. And with the falling price of oil, we have seen declines in the share prices of oil companies, oil service companies and drilling companies.

Where Do We Go From Here?

So where do we go from here? Well, there might not be a market for subprime mortgages, but there sure as heck is a market for oil.

The daily world oil supply is in a precarious state, with the depletion of numerous major oil provinces approaching crisis proportions. From the North Slope of Alaska to the North Sea, from Mexico’s Cantarell to Kuwait’s Burgan Field, the reality of depletion is hitting home. Daily oil output from older fields and regions is declining, and many new hydrocarbon projects are coming online slowly, behind schedule and over budget. Add to this the problem that there are significant constraints in the labor force and in the availability of critical equipment and mechanical systems. There is trouble out there, with a capital “T.”

Yet total world oil demand is still rising, driven by the usual suspects China and India, where oil use is soaring (as well as by the developed world of Europe, North America and Japan, where it has already soared). Deutsche Bank, for example, estimates that Chinese demand alone for oil will increase by at least 6% in each of the next two years.

Also recently, the International Energy Agency (IEA) revised its forecasts to raise its global oil demand estimate. The IEA predicted that oil use would rise by an average of 2.2% per year (about 1.7-1.8 million barrels per year) for each of the next five years. IEA also predicts that the amount of world oil usage and consumption within developing nations will rise to 46% of worldwide demand by 2012, up from the current 42%.

According to the IEA, within five years total, world demand for oil will increase to almost 96 million barrels per day, up from about 86 million barrels per day currently. These are just estimates, just extrapolations. There is almost no way that the global oil industry will be able to extract sufficient hydrocarbon product from the rock formations of the Earth (oil, natural gas liquids, tar sands, oil shale, you name it) to meet this forecast level of demand. Something will have to give, and the sure bet is that the price of oil will be rising.

Live in the Material-Energy World

So make sure that you live in the material-energy world of real oil, and real resources, as opposed to the make-believe world of “model portfolios” backed by subprime mortgages issued to people without the ability to repay them. This latter part of the economy is a mess, and it will surely get messier. What we have seen in the past month is the bow wave of a larger phenomenon that will play out over the next two years, at least. Be prudent as the markets gyrate, and be wary that the U.S. economy may contract (or worse) in an oncoming recession. This also applies to the economy of Euroland, and, by implication, to many other regions that depend on exports to the developed world.

But do not be overly afraid of using market retreats to accumulate shares of well-managed companies with oil reserves in the ground, or great oil service companies that will be critical to the future of resource extraction. You can accumulate on pullbacks, and please accept our best wishes for your future success. And thank you for reading Whiskey & Gunpowder.

Until we meet again…
Byron W. King

September 6, 2007

Living in the Material-Energy World was originally featured on Whiskey and Gunpowder