Investing update #2

This is part 3 in the series. 1 and 2 are linked if you want to look over them.

Energy
What to discuss in this area is quite a mystery. Obviously the oil/natural gas groups can be discussed. As I've said before I can't morally invest my assets in these areas, but if you don't have a problem with that these areas will be good areas, at least until they aren't able to obtain the natural resources. If you believe in Peak Oil then you obviously have no trouble making the leap that oil at $150 or $200 a barrel is quite possible, and if that happens the profits these companies are seeing now will be a distant memory compared to the profits then. But you would also need to remember how quickly the usage of oil would slow down with oil at those prices. So they will sell less oil, but most likely for a higher margin. It would basically be the same thought process for the Natural Gas companies, of which the big oil companies are heavily involved as well. The only real difference is that Natural Gas is expected to peak about 5-10 years later according to all the information I've seen to date.

Coal would be another possibility, but I don't see how coal will be a bonanza for the future. I know that America is the Saudi Arabia of coal, but how easy will it be to attain? Today they use huge machines to mine it. All these machines run on oil. Will it still be economically viable to continue to mine coal when oil is twice as much per barrel? Or three times as much? I don't see how it can be. Coal is a little too cloudy for me right now. Perhaps this would be something worth being involved in for the next 20 years but each year that oil is more expensive I think coal becomes less profitable. Perhaps it won't since it will be the fuel that most likely will be fueling a large portion of the remaining electric infrastructure. Currently 30% of our electricity is generated by Natural Gas. As Natural Gas declines it will have to be replaced by something. My first thought would be coal. (I also think we'll see large increases in the cost of electricity and thus, more conservation of electricity by its consumers) Coal is extremely polluting both in its burning and it's mining. For me, coal isn't an option because of these factors.

The last option I see would be renewable energy sources. There is obviously a lot of buzz now about wind energy, solar power, biomass, wave energy capture, etc, but I see a lot of problems with these sources. They are great now when oil is inexpensive and it is relatively easy to manufacture and transport these items. But what happens when that is no longer the case? Will the generation of electricity be a higher priority than other types of manufacturing, and thus they would be eligible to whatever resources are mined? Building wind turbines or solar panels requires massive amounts of inputs. Copper, silicon, steel, aluminum, etc that will all be difficult to produce in an environment where it is hard to mine for the resources and expensive to expend the energy to manufacture them. In these kinds of environments how will these great energy generators be built in the first place? (Life after the oil crash discusses this fairly well.) and amount of energy needed to manufacture parts of our life that we take for granted now) I don't know what the answer is. I'm interested in investing in this arena, but I need to answer some more questions before I can safely walk down this path.

Financial Services
Financial Services is a tough industry to analyze too. On one hand the services offered by these companies are extremely important to society, but on the other hand these companies should experience serious discomfort Post Peak Oil. I'm just going to come out and say that companies like Goldman Sachs, Morgan Stanley and other investment banks will suffer mightily after Peak Oil, and if they survive at all will be shells of their formers selves. The huge mega banks we have in place today will also suffer. Banks like US Bank, Bank of America, JP Morgan Chase and Citigroup should all experience a lot of problems and will likely meet their demise. I can't imagine running businesses that size in an environment of depleted energy supplies. How do you do it? In reality I think all banks will suffer mightily. Massive defaults for all types of loans and incredibly high interest rates should force banks into the same problems they had in the late 70s when interest rates went sky high and they weren't able to adjust their rates of return quick enough. Economic activity will grind to a halt and this will seriously tap out most of these banks. Most of them are running with their capital structure in such a situation that they are loaning out $4, $5, $6 or more for every dollar they keep back in reserve. When the loan payments stop coming in they won't be able to meet the demands of their account holders and they will have cash flow problems.

Another problem they will have is the massive devaluation of their assets/collateral. Real estate especially is going to experience a rapid devaluation so even a loan that appears to be adequately valued today will appear not to be in 6 months, and 6 months after that it will be worth even less. Their asset bases will deplete rapidly as loans are defaulted and they are given back properties that are worth a fraction of what was expected just a short time before. And as business' go under their loans will be defaulted, and borrower's who owned real estate to lease to business will default and the cycle will continue until it reaches a point where the level of activity is sustainable. And don't forget about all the loans that banks make for real estate development. Those loans will be defaulted for the most part, and the banks will end up with massive amounts of real estate on their books.

Bonds and stocks will experience a similar fate. They are both valued on Wall Street and are valued thousands of times per day so their drop can be even more quick and frightening. Banks and insurance companies hold plenty of stocks and bonds in their portfolios. These will have a large impact on their asset bases. Not to mention all the revenue and profit that comes from trading in these markets that will vanish very quickly.

Long term I think financial services is a great place to be invested, but I wouldn't get involved until the Peak Oil aftermath is stabilized and you have a fairly clear picture of what the future holds. I see in our future a lot of smaller companies serving our needs on a more regional basis and companies that will be more in tuned to the needs of their respective local economy. You'll see a return to a world where we will have all local/regional banks supporting our local economies followed by local/regional insurance companies serving the areas.

I'm expecting massive defaults, bankruptcies and divestures in the financial services are Post Peak Oil. Because of these defaults I would recommend moving your cash out of the large mega banks and into lowly capitalized local/regional banks that are more conservative on the hope that when things teeter they won't fold and take your cash with you. Granted bank accounts are FDIC insured, but I'm not sure if the FDIC (or Uncle Sam) will have enough money to pay out all the claims I would expect them to have during this period.

Clothing
How do you determine what clothing would be deemed "necessary" by the masses after the time of Peak Oil? While I doubt it would be places like Abercrombie and Aeropostle, I also can't be completely certain that the clothing would consist of only Carhartts and Levis. (Which aren't publicly traded companies anyway.) It would seem that in a time of financial contraction clothing appearance and style would seem to be less important than what is expected today, but perhaps people will cling to their appearance as the last means of showing the world how things were in the past and flaunting their wealth? I'm not sure. Besides, clothing is not within my circle of competence as anyone who has seen me dressed can tell you. I'll take a pass on clothing as an option, personally, but if you are someone who understands clothing it might be a good option if you can figure out where the market would head.

Personal Goods
Personal Goods is something that I think holds quite a bit of merit. I think Personal Goods can be broken down into a myriad of different categories. One category would be personal care products. By this I mean razor blades, aspirin, shampoo, medicines, etc. While it's true that a lot of these objects can be made at home, a lot of them can not. Even when people are in dire financial straits it stands to reason, to me, that they would still take care of themselves. (Using personal care products seems like a little inconsequential way to brighten up your day in you are struggling with your lot in life too). Now there are issues, such as how to manufacture these products and transport them in a world of dwindling oil supplies, but the manufacturing was more localized in the past and it could be in the future. Because these products don't expire (for the most part) they can be transported using slower methods like horses or trains. Companies like P&G, Clorox, J&J, Church Dwight and Co (Arm and Hammer) could all stand to benefit as they manufacture common products that we all use in our everyday life. Granted, some of these products are frivolous and might disappear, but a lot of them will stick around for the foreseeable future. These companies also have the benefit of having significant overseas operations. While I think Peak Oil will be felt the world over I think the impacts in America will be the greatest and the impact to Europe will be much less because they have done a better job of being less dependent on oil. Although they are seeing more suburbanization lately. I would expect these companies to see a pretty large drop in revenues though to correspond with the drop in population we will most likely suffer, but I still think they will be a valuable part of our economy.

I also think there is a future in the changeover from our current mechanized world to a future of less mechanization. Stores like TSC (Tractor Supply Company), Farm and Fleet, Theisen's and others could potentially benefit from this changeover, provided they adapt quickly enough to our reduced need for motorized items and refill their stores with appropriate items. I also think we will see a resurgence in the localized hardware store of the past which will be better able and more suited to fill the needs of each individual town's demands. Currently it's easy for a Lowe's or a Home Depot to fill the needs of a lot of consumers, because we all have needs that are similar and easily grouped together for purchase. But going forward I would think we would see a branching of the consumer into a lot of different groups based on how able and willing they are to adapt to the changes in the world. Some people may need a nice straight forward type of hardware store and these big box retailers may fill that need. But I think a lot more consumers will be more interested in maintaining items they own then they are currently. I think advice will also have a lot more importance in the future. These things are the bread and butter of the local hardware store. Already I've stopped going to the big box retailers in favor of the local Ace because it's A) closer and B) full of people who know what they hell they're doing. It's smaller and as soon as I walk in the door someone asks what I need help with and directs me to that area of the store and answer my questions. That never happens at the blue or orange stores. Frankly, I think it's worth a few extra bucks for the information.

The unfortunate part of this whole thing is that local hardware stores aren't public companies for you to invest in. ACE or True Value would be good options as they are the providers for most of the local hardware stores that are left, but they aren't available. TSC is a public company. I don't think Orscheln's, Farm and Fleet and Theisen's are. Are there any other stores in this category that I'm not thinking of?

One area that I hadn't thought of before was newspapers. As energy costs rise I would expect to see the Internet disappear (sorry folks). The internet is a huge suck of electrical use, which should be prioritized to other areas, and people are going to be too busy working and trying to live to spend excess hours on the internet getting information. While this will be too bad for our communication and information needs (the internet is a great tool for this) shifting back to more localize information will help rebuild local communities. Part of this will be the resurgence of the local newspapers. I wouldn't expect that TV will hold such an important place in our society after Peak Oil either (not to mention the idea of how important would all of our sporting events be then?? Or video games?? Or cell phones?? How will all our young people survive??). Newspapers will take over this role as the information source for the majority of people in America. I would also expect that we will see a return to magazine/periodical/book reading as a means of entertainment and information gathering. Investment wise this will be a good thing after the initial fallout, but there will be some rejiggering of the newspaper business as right now it is massively consolidated. There should be an initiative underway to localize the operations to take advantage of the newspaper advantage on a local level. Of course, newspapers are energy intensive too so they could have problems in a world with less available energy.

As this post is long enough, I'm going to detail a 3rd post to summarize all this information into one easy to use page and give a basic outline of my personal plans on how to handle this approaching time period.

FGLB