Investing update

I thought I would update this story based on some recent revelations I had while riding my bike. (It always seems to work out that I do my best thinking when riding.) Thanks to all of you who commented on that posting by the way. I decided to break this down into a two part posting. If you aren’t interested in reading all this I promise I won’t be offended, it is quite long.

How do I invest my assets leading up to Peak Oil and it’s aftermath, in the short term?
My general assumption is that after Peak Oil most of America’s financial community will be on an overall downward trend. It may not always be down year after year, but overall the trend should lead to lesser financial returns. As Americans we have become accustom to nothing but growth in our financial markets.

Most of the decline we will experience will stem from the broad application of conservation of our remaining resources (I would hope) and less focus on continual expansion of everything around us. I would also expect that the world will experience a population decrease over time and this would lead to less need for these products, compared to now. This will obviously lead to less “growth” each year which could take on inflationary or deflationary trends, depending on how consumers and the Federal Reserve react to the situation. I think one way to be successful with this type of investing is to focus on what people must have to live, find companies that have operations around the world and focus on a strategy of conservation of your financial assets over continual growth of your assets..

I think if you break down what people will need to survive in a Post Peak Oil world it breaks down fairly simply. Food and Shelter. Additional minor pieces would be Transportation, Financial Services, Energy of some sort for heating and cooking, Personal Goods and Clothing.

Food
Shelter
Transportation
Financial Services
Energy
Personal Goods
Clothing

But even before we discuss investing for the future we should take care of some general housekeeping. Moving into a period of possibly unstable monetary policy by the government, potential for debt defaults by scores of individuals, companies and governments and a period of time that might just generally be unstable it is important to put your personal financial house in order, in my opinion. By this I mean, you need to own your house and have an extremely low level of debt. When you are thinking about how to plan for Peak Oil these two things should be your primary goals. Now I know, a mortgage is “good debt” (if you want to believe that I have some land in Florida I’ll sell you) but the sooner you pay it off the sooner you will quit giving the interest to the bank and start making the interest yourself. The interest you pay and the tax savings from the interest will never equal out. On top of that, if things really get bad I would want to hold title to my house free and clear so that I’m not dependent on anyone else in any way and can be assured of having a place to live that couldn’t be taken away from me very easily.

Having a low debt level is also important because you can’t guarantee that you’ll have a job through this period and the lower your monthly living needs are the more likely you are to make it through the rough period unscathed. Think about your life currently. Are you basically living to payoff the debt you’ve accumulated? The house, the car, the computer, the braces, etc. It’s enough of a struggle now let alone if or when the future is uncertain. Especially if you may have a household income that is dramatically reduced. Something to think about.

Paying off your debt is living by the old theory of paying yourself first. Everytime you pay more principal you are shifting value into your positive asset column and removing it from your negative column. Most of the debt you have will be in the 6% or greater APR range. I think it would be difficult to generate a return higher than that (after tax) for the forseeable future. For every dollar you pay down you are generating a tax free 6% investment return. Which would be roughly 9% before taxes. After we hit Peak (if we haven’t already) I think it will be hard to generate returns in excess of 9% due to the instability, high oil prices, interest rate swings and other general factors of a world without access to cheap oil.

Now that we have that out of the way let’s talk about what sectors to put your assets in after you’ve done all these things.

Food and Shelter
These are the two most difficult of this group to become personally invested in. Obviously you have the choice to invest in yourself and attempt to raise more of your own food goods, which I imagine all of us will be doing, and really that is one of the best returns available even in today’s markets. Today you could easily invest in Food and Shelter by picking any of the publicly traded grocery stores, or Wal-Mart/Target. And there are a plethora of public home builders to choose from. But as I think about what logically should happen in an environment of conservation and slower growth (or no growth) these don’t seem like good choices.

It would seem that with reduced oil resources for Grocers to transport goods to their stores that the large retail stores we are accustom to should either contract/disappear, be divested or take on a decidly local flavor where they would almost be local stores selling local products but sending the profits back to corporate. It doesn’t seem likely that these companies will change their method of operation to reflect the higher transportation costs so I would think that they would just close stores one at a time as they became less profitable each year. This is what Wall Street expects and most managers walk lockstep with how the Street expects them to act. This obviously leads to short term thinking, but could benefit local companies. The grocery void would be filled by local entrepeneurs who will bring back the local general type of stores and farmer’s selling direct to consumers. I can also see that some local private grocers might be able to withstand this time period because they won’t need to answer to Wall Street and can make the necessary changes to their stores to reflect the new world we will live in.

The home builders make their profits by continually building new houses on new land in the suburbs, or possible mixed use projects in the city. These don’t seem like very good options just for the simple fact that I don’t imagine that a lot of people will be buying new houses, and I would foresee interest rates being quite high which would make borrowing money quite expensive, for anyone. It would seem more likely that people would buy older houses in the city and remodel them if they needed housing. Unfortunately I don’t know of any remodeling firms that are public that someone could get involved with. I am going to lay off home builders just because I can’t see anything very clearly with their future.

Another aspect of shelter would be REITs. REITs are an asset class that could experience some serious discomfort during this period. REITs rely on financing to acquire properties, and to keep the properties they have. Financing will be difficult to obtain or expensive if you can obtain it. REITs also work because they lease either apartments or office/industrial buildings to individuals or companies. If the economy is in a downward trend and we are experiencing a population decrease I would expect that REITs will experience significant vacancies in their properties as time progresses. These vacancies will lead to lesser valuation of the properties (commericial real estate is valued based on the income it generates. Less renters = less income) which could lead to massive losses in their portfolios. I think this sector could possibly be a valuable addition to a portfolio once the situation stabilizes, but I’m unsure when this might be, but it also encompassess a lot of risk because it is really hit or miss on which companies, propeties and areas of the country will experience the most sudden downturn.

Transportation
This grouping could be broken down into automotive/trucking, trains, boats and planes. I’m going to skip automotive/trucking and planes because I don’t see those being a potentially lucrative area and want to focus on other areas. If you think of how things were shipped in the pre-oil days it was by wagon, train or boat. Well, trains still exist today and are easy to get involved with. It stands to reason that trains could be converted back to running on coal (or even better, electification. Electrification is much more efficient than any other method of transportation. By the way, if I read this on your site let me know and I’ll give you credit. I can’t remember where I read this now.) and trains can be used for the majority of our transportation again. Actually, it would seem that this is something that really should happen and should have already happened. Trains can carry a large amount of goods per load vs. a truck which really carries the same amount of goods as one railway car. To me this smacks of an obvious situation where trains should return to our country’s primary means of goods transportation, however, don’t forget that we would be living in a time of decreased consumption so I wouldn’t expect any growth. I would expect that it would mostly be a means of maintaining the funds you have put into this group. In order for trains to handle more cargo (and possibly passengers) the rail system will need to be upgraded and expanded.

Another method of transport that could be discussed is by boat. While I imagine there will be new companies started up over time that will use the waterways more to transport goods, we have done a very good job of damming up our rivers and these dams may limit the rivers that could be used for navigation. Additionally, the rivers now are much more channelized because of flood protection. I’m not sure how this would affect their ability to transport goods, but it might be something to think about. I’m not currently aware of any boating companies that specialize in transport of goods by river. If you spend any time on the Missouri or Mississippi rivers you will see plenty of barges moving around, but I can’t figure out who owns them. Perhaps train companies? I don’t know. Either way, this seems like something that will be worth keeping an eye on in the future as there could be potential to get in on the ground floor of some new businesses this way.

Stay tuned for part 2 where I will discuss Financial Services, Energy, Personal Goods and Clothing and hopefully wrap it all up.

FGLB

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4 responses to “Investing update

  1. Hey Matt, Richard Rainwater has been on the peak oil bandwagon recently (or at least how to make money from it). One story is here:
    http://www.energybulletin.net/11695.html

    but you could google his name and “peak oil” and find others as well.

    Take care!

  2. Nice writing.

    The only money we owe anyone is about 5 more years of morgage.

    I hate owing people money.

  3. Tuco-Thanks for the link. I subscribe to Fortune so I had already read those articles. They were good, but like any smart guy, Rainwater kept his ideas to himself.

    George–Only 5 more years and that baby is all yours!!

  4. Dig this: Sail Transport Network.

    Now I gotta go read pt 2!

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