Global warming and peak oil
...I believe in the secular bull market commodities thesis the strong conviction that we are still in the early-to-middle innings of the natural resource ballgame. This is an "obvious" point, but one that is important to re-emphasise when storm clouds darken the horizon...
Justice Litle - Other articles
Wed 20 Sep, 2006
We tend to see urban pollution as a modern problem. But did you know that urban pollution was a serious problem for Western world cities as far back as 200 years ago?
The greatest source of pollution for 19th-century cities was, believe it or not, the horse. Horses were ubiquitous back then. They drew pretty much anything that was heavy and had to move. Horse-drawn carriages, trains, wagons, supply carts...you name it.
Of course, there were no horse toilets, so these animals had to relieve themselves in the streets. This might seem like a quaint issue until one realises that the average city horse could produce up to 35 pounds of manure and 2 pints of urine a day. Yuck!
Today, we have to deal with global warming and Peak Oil – back then, they were dealing with global stench and peak manure. It truly was a serious problem. And they couldn't keep up with it, because the cities were growing rapidly. So the conventional thinkers of the day had no problem breaking out their 19th-century spreadsheets and calculating that at the rate the population was increasing, everyone would soon be up to their knees in dung. Again, a serious problem!
With the benefit of hindsight, we know how the problem was solved. But think about the solution for a moment.
The horse pollution problem was not solved through tinkering with the current system. Nobody put nappies on the horses. Nobody figured out how to vaporise the manure. Nobody figured out how to make the stench disappear. Nor was the problem solved through political intervention. No government policies, no politician's promises, no rules and regulations did the trick.
The problem was, in fact, solved in a way that almost no one at the time could have expected. It was solved through a combination of technology and innovation. The automobile ultimately all but vanquished the horse from the cities. Before that, electricity pitched in by electrifying virtually all the streetcars in the late 19th century, removing the need for horse-drawn trains.
So we know something else: The problem was not solved overnight, and multiple processes were involved. What does this mean for us today?
There is an old saying, "When the going gets tough, the tough get going". To make that useful from an investing perspective, the cliché could perhaps be modified to read, "When the going gets tough, the tough get tactical". Tactical considerations are less important when the sun is shining; if all is well, then the key thing is putting capital to work. When the waters are rough, however, tactical considerations become much more important. There is more value placed on traits like patience and discipline. A smooth sea never made for a skilled mariner.
I believe in the secular bull market commodities thesis – the strong conviction that we are still in the early-to-middle innings of the natural resource ballgame. This is an "obvious" point, but one that is important to re-emphasise when storm clouds darken the horizon. Bull markets of 10-20-year duration are not immune to drawn-out corrections, sometimes measured over long stretches of time. In fact, the odd thing would be for a secular bull run to go without significant correction of any kind.
Yet in spite of the likelihood, and maybe even the inevitability, of a drawn-out correction, it is important to take the full measure of the move – to be there, triumphant, for the final crescendo some 5-10 years from now. The type of patience and perspective required to do this must be nurtured and developed. It does not occur naturally. There is nothing in the human experience that orients us to sweeping time frames; one could say we are wired to lean the opposite way.
Nor is it only the long term that keeps me interested. In spite of the short-term turmoil that seems inevitable, there are reasons to be bullish in the intermediate term, too. The Big Oil majors may yet be pressed by circumstance into more acquisitions, thanks to competitive pressure from state-owned rivals. Energy, commodities and precious metals could keep riding high on stimulative monetary policy and the reality of a disintegrating dollar. As Marc Faber has observed, if the purveyors of "funny money" manage to continue inflating asset values, the Dow could go up another 150% in the next few years, in which case, the price of gold could rise 600%, with other real assets in tow.
On the other hand, if we get a deflationary consumer slowdown scenario, gold and other real assets could ultimately win out in their role as a shelter from the printing press. And by the way, if crude is at $75 in 2006 dollars, and the dollar gets cut in half over the next four years, does that give us $150 crude by the end of the decade without any major disruption? It's hard to calculate future valuations with a rubber yardstick, and there are countless behind-the-scenes variables, but the point is that there are powerful trends, monetary and otherwise, working in favour of resource investors like my "Outstanding Investments" subscribers. Developing world demand is but one of them.
What does it look like, in practice, to develop more of a tactical emphasis? Overall, it means being especially cognizant of broad market conditions, being more willing to wait for a favourable price and more willing to look for opportunity in offbeat places. If corrections are inevitable, the natural resource investor can make them work in favour of the long-term health of the portfolio, rather than against it, by taking advantage of temporary discounts. For example, natural gas and coal are two areas that have been downbeat of late. Natgas recently popped on inventory drawdowns and weather concerns, but shortsighted pessimism has not been fully banished.
Now, I believe to understand how we're going to get out of this mess we're in – this gigantic financial mess the world is in – it is necessary to conceive of a solution that represents as radical a break with the past as the automobile was with the horse-drawn carriage.
What's amusing about the historical analogy just discussed is that it has more relevance to the present day than one might think. Consider how our fiat-based global financial system is now strained almost to the breaking point by the tons and tons of manure heaped on it by politicians! Also similar to back then, the answer to today's fiat currency problem is not to try to accommodate the horse's rear end – ie, politicians – but instead, to figure out how we can bypass it completely.
I believe we can do this, that we can cut politicians out of the monetary loop, through grass-roots, free market solutions that embrace technology and innovation. The revolution begins at the periphery, and, over time, will engulf the centre.
Regards,
Justice Litle
for The Daily Reckoning
dailyreckoning.co.uk |
