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.