Peak Oil, Transition and Depression – how Do You Invest For That?

An interesting take on the financial crisis from Nicole Foss, a.k.a. Stoneleigh from The Automatic Earth.  She gave this talk at the Transition Network Conference in June.

I personally fear inflation ahead, but it’s quite possible that my thinking is elementary and not deep enough if what Nicole is saying is right. As I understand her, she asserts that the enormous increase in credit since 1980 but especially after the dot-com bust has vastly inflated the money supply.

This is not, however, the same mechanism as governments printing money. Up to 2007, it had the same effect, witnessed by the real estate bubbles in the UK and US which is where the extra money went to find a home.

Believing their houses were worth more, people then “used their homes as ATMs” to extract equity, and spend it on foreign holidays, fine living and dancing girls…

That’s fine, as long as they’re on the pre-2007 side of this graph

click to see article on The Automatic Earth

Post 2007 these homeowners are dead men walking. For a start, if you have a mortgage then you are not a homeowner. At least in America, you can walk away from the home and the debt if you are in negative equity. Unlike in the UK, the American ex-“homeowner” may not have a home if he walks away, but he also doesn’t have any debt from the negative equity…

Stoneleigh’s argument is that what is happening is that the credit component of the money supply is being reduced by the destruction of the loans advanced against these ‘assets’ by the borrowers defaulting. This, she expects to cause an environment where cash is king, ferocious unemployment, credit hard to come by, but surprisingly little inflation.

A recording of the talk is available here – it’s about an hour and a half long. It is well presented, the slides are no longer there, but anyone familiar with the concepts will understand it without the slides. I find it reasonably compelling, and an interesting twist. The takeaways from this talk include many PF mantras. Her action plan includes:

  • Eliminate all debt. Your bank may well go bust but your debt then can get sold on to people with thick necks and wide shoulders. Debt is bad in a deflationary environment because it gets bigger in real terms as time goes on.
  • that means mortgages toorent rather than buy if you can’t buy outright
  • beware of future promises, ie pensions, shares and the like. They are unlikely to be honoured due to the suppliers going bankrupt.
  • cash will be king, but don’t hold it in banks, which will be destroyed by the bad debts (again). NS&I Linkers and physical notes in ‘creative places’
  • Gold is not as valuable as it might be in the short term, because people forced selling to buy essentials will drive the price down short-term. Over the long term, >20 years, it will serve as the traditional store of value. That’s physical gold, not ETFs which will be destroyed by counterparty risk.

A summary of the talk from someone who has been to a similar one called A Century of Challenges. TAE has a post that expands on forestalling options.

Stoneleigh’s viewpoint is that we are about six months away from the verge of a Great Depression the like of which has never been seen before.

So what am I doing about it? Well, I own my house, and I have an interest in land, though I have no food producing skills personally. These I have done independently illuminated by my own fears, mainly to hedge against a financial crisis by turning a significant part of my net worth into real stuff.

As for the rest of my net worth, it is in a mixture ofa pension,  ETF’s, investment trusts, linkers and cash in a bank ISA. All of  which, according to Stoneleigh, will be written off to zero in the coming months, with the possible exception of the NS&I linkers. Seems nuts, given that my own fears gel fairly well with hers, and the difference between expected outcomes of inflation and deflation is a technicality which probably reflects her greater understanding of economics.

I do that because the bear case is always more attractive, and it is writ larger on the backdrop of our nightmares, there is an inherent conundrum.

Nobody knows when or where the cross-point will come, when energy supply will be outstripped by demand and we go into something like Stoneleigh’s Long Depression, or the financial and potential societal failure I feared before.

I therefore want to have some exposure accounting for both views, accepting that to hedge some of the unknown I will lose money. I’d much rather this view turned out right, and my shares ISA and pension do the heavy lifting of securing my future, rather than Stoneleigh’s, where I end up possibly digging on the land or patching up generators using wood gas and scavenged car parts from the shattered streets to retain some vestiges of light and communication before they are extiguished for five thousand years in some dark Mad Max/James Kunstler future.

I do find Peak Oil reasonably convincing, from two viewpoints. One is the shape of oil consumption has flatlined

US Energy Consumed has Flatlined

The Oil Drum has more, as to why this is a Limits To Growth sort of thing rather than Americans deciding to turn the A/C down and drive/fly a bit less.

The second reason is, let us assume this were a limit to production but not a decline, China and India’s consumption will grow rapidly and the people aspire to a US lifestyle. Population growth in all these countries will need proportionally more energy to maintain the same lifestyle.

What can you do about peak oil? Not much. What’s great about oil is its remarkable energy density – ever since the first lumps of coal went into Newcomen’s steam engine in Victorian Britain, fossil fuels allowed humans to punch above their weight.  There were 1 billion of us in 1804, and next year we are due for 7 billion. Cheap oil is what has enabled much of that increase, and there is an obvious corollary to that oil becoming scarce.

We have made scientific and intellectual progress since then much of which will serve us still, though the boosters of genetic modification etc are talking out of their hats IMO. That might have worked/be worth the risk in a world flush with cheap energy. Post peak oil the world with become a much larger and much more localised place, unsuited to that sort of centralised control and distribution model. We will be working with soils that have been horrendously damaged by 50 years of external fertiliser input – an input that won’t be there any more.

The Transition Network – an approach to Peak Oil and Climate Change

Although I occasionally drink beer with the Transition Ipswich guys I don’t really get the community angle from a gut feel. Growing up in London probably queered the pitch for me, and having benefitted from a long career in a reasonably good job makes me favour self-reliance over community.

However, I can understand the intellectual basis for a community response, which is more eloquently expressed here. Basically, human beings are social animals with the need to sleep a third of the time. Turning up in a remote area bristling with guns and cans of beans sets up an indefensible high-value position, and you’ll get sick of beans, sleep deprived and jumpy. What kind of a life is that…

Transition does tend to be an awful lot of talking and not enough doing, but it is as good a start on responding to Peak Oil as any.

the bearish argument ALWAYS sounds smarter

Hat-tip to Monevator for the phrase. He’s right, dammit, particularly in a time when Mr Market is feeling down, but perhaps more generally. The bearish argument always has more drama to it, since it inherently assumes a change to the status quo. There’s no news buzz in ‘sun rises today’, no excitement to draw the attention.

There are a lot of things that I could name, that indicate that the world is going to hell in a handcart.

  • Peak Oil
  • population increase
  • the increasing risk-aversity in the West
  • the baby-boomers retiring and stiffing the stock market for the next 20 years by selling out of it
  • inflation fallout from the credit crunch of 2007

The problem is that at any time in history one could find a litany of things that were going to end the world. In the 1960s and 1970s it was nuclear armageddon, starvation, global cooling (!), oil running out.

Some part of me still sees an incoming crapstorm, as the West surrenders its economic and intellectual fire to the East, and it is hard to insure against that sort of thing. Turning paper investments into real stuff is the only way to hedge that, and in the extreme you end up hoarding tins of lentils and lots of ammo. I’m old enough to come to the conclusion that’s not a life I want to live.

I’m older than Monevator. I remember watching the moon landings on the black and white TV at primary school, and being enthralled. There were no limits to growth, then. My optimism survived the 1970s, and my college years, but something went badly wrong in the 1980s. Ever since watching Survivors on TV in the late 1970s I’ve had a penchant for the apocalyptic vision.

Jenny from the 1970s Survivors series, played by Lucy Fleming

At that time I also had a penchant for Jenny 🙂 So I tend to be drawn to posts like Early Retirement Extereme’s The Wealthy Shall Inherit The Earth.

I’m on the general same wavelength, though I hadn’t thought it out anywhere nearly as well as Jacob. Peak oil will roll back the advance of globalisation by increasing the costs of transportation, and will probably define the high-water mark of living standards as measured by stuff.

Britain isn’t in too bad a position as far as Jacob’s prognosis – largely above 50 degrees North, with ample water, reasonable amounts of coal and fertile soils. But it does probably have too large a population.

Peak oilers and folk like Jacob are well outside the mainstream, but their ideas seem to be spreading. Insurance group AXA are taking a pretty dim view of future life in Southern Europe and in particualr the PIGS economies. EC head honcho Jose Barroso is anticipating dictatatorships in Club Med, purely from the financial fallout, rather than rising oil prices etc.

We seem to be in a phony war with the recession, and losing ground as time goes on.

And yet…what if Monevator is right? More recently, the UK has looked better relative to other European countries. Some part of that is the promise of an end to the profligacy of Gordon Brown, though overall I’m glad he and Alistair Darling handled the crisis itself, rather than the as yet untested Osborne. I’m not sure I would go as far as to say Britain is booming again, but I sure hope it is. How do I get exposure to the upside of that?

Well, to some extent I do already. My AVCs are invested in L&G Global 50:50 FTSE and it’s the best investment I’ve made so far, which is just as well as it has most of my cash in it 🙂 It makes sense to do it in my pension savings, which I don’t plan to access for up to ten years. If Jacob’s vision comes to pass, then pension savings have no real meaning anyway, for the debased currency will hold no value. It will be destroyed by successive waves of inflation in booms and busts as the oil price see-saws, choking off each recovery as it gets off the ground when the increased demand for oil meets the implacable limitation of declining production.

My post-tax savings in ISA and cash I am using to buy productive assets and investing in establishing a business that I can use to generate an income after finishing office work at The Firm. That way I am riding the bulls with long-term pre-tax savings while trying to hedge the bears with more immediate post-tax savings. I hope the bulls will pull ahead, and that my attempts to hedge the bears will turn out to be misallocated resources

Peak Oil and The National Automobile Slum

James Kustler has made a decent living of calling the end of the world, in particular its peak-oil incarnation. One thing I like about it is he responded with at least some good humour to the wags that keep reminding him that he got y2k wrong and that the world hasn’t ended due to peak oil. Good humour is something I’ve observed to be in short supply among peak oilers.

I thought I’d revisit some of his work after reading Movevator’s post on the End Of Oil. I disagree with the cheerful thrust of the video protagonist’s argument on that post, which essentially boils down to

We’re humans. We’re smart. So far in the history of the world we have never come across something that was so big that we couldn’t think our way out of it.

Don’t get me wrong, I sincerely hope he’s right. And I can’t argue with the fact that these statements on their own are correct. However, past performance is not a guide to future performance, of species as well as stocks. The dinosaurs were pretty successful in their way too and look what happened to them.

One of the items I dredged up was Kunstler on one of his other hobby-horses, the dire straits of US urban design. Brits can take a look at a more local example of the horror at something like Lakeside shopping centre, though it thankfully hasn’t got the associated residential sprawl.

Something that struck me on holiday in America, particularly the West Coast, was that public urban spaces was designed to accommodate the motor car so completely. Parking is hardly even an issue ad you never seem to pay for it when shopping. The streets are wide enough for people to do U-turns. Try doing that in Britain and you’ll take out ten pedestrians, a lampost and a couple of shop fronts.

The downside is that everything ends up so far away from everything else. I was in a LA motel selected for its low price rather than ambience, and fancied a beer.

I asked directions to the nearest place, and was told it was only a short distance by car. Trying to walk that distance, however, was an exercise in frustration because it was the devil’s own job to cross the roads – the streetscape is really not designed for pedestrians, and those pedestrian crossing that there are are designed for the likes of Usain Bolt, not a guy carrying beer.

Either the average American citizen is a damn sight fitter than I am or the traffic light timing is set by someone who hates pedestrians with a vengeance. I’d typically only get half-way across before the hurry up signal started to hassle me. I learned my lesson and drove everywhere after that.

Kunstler is not as engaging as Richard Sears on Monevator’s The End of Oil post, but he has his own charm. He gets pumped up on the worthlessness of US surburbia in a post-Peak Oil future in the last few minutes.

As a European I don’t have his intense dislike of suburbia. Our suburbs are typically mixed-use, which seems rare in new-build America, and I can walk from one end of town to the other in a couple of hours. At home there are three co-op stores, several convenience stores and newsagents, a laundrette and a few odd stores like butchers, hardware and takeways all within a one-mile radius. So he may have a point that the Old World may have an easier time getting around because our cities were designed before the automobile, on a slightly more human scale. Even London shows its history as an agglomeration of almost village-sized units once you get past Hyde Park to the west and Bow to the east, something I wasn’t really able to detect in LA.