Agora Financial’s Rude Awakening

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• Peak Oil: “Now Accepted as Inevitable”
• A gigantic harbinger for the dollar and energy,
• What’s in your portfolio? 4 companies to consider and more…

Eric Fry, while watching the stock market go up, reports…

Today’s edition of the Rude Awakening is a bit longer than usual. (That’s because we think it’s a bit better than usual). So instead of presenting a lengthy preamble, we’ll dive right in…

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Beached Whales and Economic Omens
By Byron King

Beached whales may have nothing to do with the world’s exhaustible supply of crude oil…or inexhaustible supply of dollars. But I see a connection…an ominous connection.

On recent trip to California, I grabbed a copy of the Los Angeles Times that featured a page-one photo of a massive beached whale. The poor critter was a female blue whale. The carcass was about 80 feet long and tilted the scales at nearly 100,000 pounds –making her one of the largest animals in the world.

It is difficult to say how old she may have been, but certainly north of 50 years is a safe bet. Apparently, this whale was migrating along the coast of Southern California when a massive object, probably a cargo vessel, struck her.

The impact crushed numerous bones, including ribs and vertebrae, damaged her nervous system and caused significant internal hemorrhaging. There is evidence that the vessel dragged the whale through the water for some distance. Eventually, the whale succumbed to the injuries, died and washed ashore near Ventura, Calif., just northwest of Los Angeles.

As the L.A. Times noted in a companion article, “In Ventura County on Friday, lookie-loos parked by the roadside to take photos of the dead whale and give their children an up-close, if somber, look at a colossal example of an endangered species. An Amtrak train stopped on tracks across the road as the engineer took a photo with his cell phone and passengers goggled out the windows.”

Indeed, I suspect that the sight of a dead whale brings out the “lookie-loo” in most of us. Almost everyone in our modern era lives their life in houses and office buildings, moving about in cars or trains or airplanes, walking about on concrete or asphalt surfaces. But in its death, the sight (and, if you are near enough, the smell) of a beached whale brings the natural world back into our consciousness with a certain shocking level of reality. A dead whale is Mother Nature’s way of getting in your face.

The death of this particular whale also brought the financial world into my consciousness with a certain shocking level of reality. There is actually an old school of thought, for example, that regards the discovery of a beached whale as a sinister portent…and so it may be.

Let’s start with a bit of background…

In the 17th century, the English writer Thomas Hobbes (1588-1679) published numerous works that laid out much of the template for modern political philosophy. Among the most famous works by Hobbes was Leviathan (a fancy word for whale) – doctrine for the foundation of societies and legitimate forms of government, in which the state is portrayed as a whale-like monster.

In Leviathan, Hobbes articulates the necessity of a strong central authority to avoid the evil of discord and civil war. According to Hobbes, any abuses of power by this authority are acceptable as the price of peace. The sovereign must control civil, military, judicial and
ecclesiastical powers. Hobbes argues that the sovereign has the authority to assert power over matters of faith and doctrine, and that if he does not do so, he invites discord.

The use of the term “leviathan” by Hobbes was no mere random choice of words. Whales are large, beastly creatures that were reputed to swallow men whole (Jonah comes to mind). And according to Leviathan, life in the raw state of nature is “solitary, poor, nasty, brutish and short.”

So let’s play a little game. Let’s imagine that beached whales actually portend some kind of bad luck or grim event. What grim event, therefore, might the beached whale in Ventura County, Calif., portend? Allow us to suggest a couple of possibilities: Oil higher; dollar lower.

Oil and Energy

Oil has climbed to a record-high $82 per barrel. Why is the price rising?

The Peak Oil paradigm is beginning to gain traction. I have discussed Peak Oil extensively and often in my investment letter, Outstanding Investments. I have taken quite a bit of heat for this view – from many quarters – but I have stood with the concept through thick and thin.

And now, if you still don’t want to hear it from me, no less an authority than America’s first Secretary of Energy and former Director of Central Intelligence James Schlesinger recently noted at an international conference on the subject of energy, “The battle is over, Peak Oil is now accepted as inevitable, and the debate only becomes as to when.”

This is a remarkable statement, coming from one of the most “inside” of U.S. political insiders. Here are the long-term trends that you should expect to see:

· Oil prices will generally remain high, and trend higher
 
· There will be little to no growth in exports, outside of the former Soviet Union, and even Russian oil will be more expensive and problematic, for numerous political reasons.
 
· Oil supplies will be precarious and subject to disruption by weather events, natural disasters and fourth-generation warfare aimed at “systemic disruption” (e.g., ongoing sabotage to Mexican pipelines or Nigerian petroleum infrastructure)
 
· New discoveries will trail consumption. The global oil industry will extract at least three barrels of oil equivalent for every “new” barrel it finds via discovery or reserve growth.

So looking ahead, oil and natural gas in the ground, as booked reserves or realistic and exploitable resources, is more and more valuable. It also means that oil service companies with a lock on technology and the operational skills to create technological systems for extracting hydrocarbons are also more and more valuable.

Thus, if you have refrained from accumulating stocks in the hydrocarbon or oil services sectors, you are now missing the boat. The Outstanding Investments portfolio has some great oil and service companies, like Apache (APA: NYSE), Halliburton (HAL: NYSE) and Superior Energy Services (SPN: NYSE), that should appreciate well over the next several years.

At the same time, our alternative energy plays, like Kaydon (KDN: NYSE), have also done well in recent months. That is because in the coming energy environment, in which traditional forms of hydrocarbon energy are scarce and expensive, things like wind and geothermal power will offer more and more relative value.

The Feeble Dollar

Yesterday, the gold price jumped to a new 27-year high of $740 per ounce, as the dollar flirted with new all-time lows. Gold’s strength highlights the ongoing decline in the value of the U.S. dollar via chronic, gross and ought-to-be-criminal monetary mismanagement. For example, on Tuesday, Sept. 18, the U.S. Federal Reserve cut its key federal funds interest rate by 0.5%, as if the big problem of the U.S. economy in recent years has been not enough cheap credit.

The Fed rate cut, as expected, made many Wall Street traders happy and goosed the stock market indexes. According to the Fed, “Developments in financial markets since the committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.”

Signaling that it might cut rates more if necessary in months ahead, the Fed announced that the central bank would “continue to assess” the economic outlook and “act as needed to foster price stability and sustainable economic growth.”

But the Fed action also caused an immediate spike in the prices for gold, silver and oil futures. So evidently, some savvy players understand that temporarily cheaper dollars are not necessarily good for the long-term health of the U.S. currency or economy, and this understanding is reflected in things with intrinsic value like precious metals and energy fuels.

Even former Fed Chairman Alan Greenspan has stated that he believes that we will see double-digit interest rates at some time in the future in order to salvage the long-term value of the dollar. Too bad he did not take some of his own medicine while he was running the show. In other words, the great challenge to the U.S. economy going forward will not be how to encourage more indebtedness. The great challenge to the U.S. economy will be to maintain some overall level of solvency within the broad economy and avoid widespread national insolvency in an era of unprecedented levels of debt.

Back to That Whale

So let’s get back to that whale on the beach in Ventura County. Within a few days of its discovery, the wildlife biologists had examined it and learned whatever they could discern from the necropsy. And for reasons of public health, the authorities had towed the carcass to an isolated spot on a different beach for as respectable a burial as is possible when using bulldozers. RIP, blue whale. The omen came, the omen passed.

But at Outstanding Investments, we know an omen when we see one. Do not let this whale perish in vain, dear investor.

Beware the false prophets of the conventional media who tell you that everything is fine and that there is plenty of oil (”if only we would drill in such-and-such locale,” goes the refrain), or that the dollar is sound. You need to understand that the energy supply of the U.S. — and the rest of the developed world — is in a precarious state. We cannot just drill our way out of it. And you need to know that the situation with the U.S. dollar, the world’s
reserve currency, is quite tenuous. We cannot just borrow and spend our way out of it. The government and monetary authorities, the “leviathan” of Thomas Hobbes, have overplayed their hands, abused their powers and are slowly but surely wrecking the long-term value of the dollar.

Sure, things may just drift along for a while like a dying cetacean hit by a cargo ship on the high seas. But sooner or later, the trends will manifest themselves and you will be glad that you have a portfolio filled with energy stocks and precious metals. As the old whalers used to say, “Thar she blows.”

[Joel's Note: Byron has chocked his Outstanding Investments portfolio with exactly the kind of energy and precious metals stocks that will prove a boon for his readers when the Peak oil/dollar debacle hits the proverbial fan. If you haven’t yet read his report on wealth insurance gold investing, I suggest you do so now. Read on here: Outstanding Investments: Wealth Insurance

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Rude Endnote: Over her in the Middle East, where they have a surplus of dollars and a good deal of the world’s remaining oil and gas supplies, speculation is growing over whether GCC countries will decouple from the once-almighty buck.

Kuwait, the third largest Arab oil producer, was first to cab off the rank back in May when it announced it would drop its dollar pegging in an effort to control its “inflation importing.” The Kuwaiti Dinar now aligns itself with a basket of currencies, including the pound and the euro.

According to Arabian Business, “Rampant speculation that the Gulf states are looking to revalue their currencies has pushed (UAE) dirham bids to a five-year over recent days.” Over in Saudi, the value of their currency, the riyal, is the strongest it’s been since 1986.

High inflation in the Gulf region (thanks to their dollar pegging) and the fact that only marginal adjustments were made in rates here after the Fed dropped by 50-basis points has fueled the speculation.

A report issued by the Saudi British Bank (SAAB) stated, “An expected change in the currency regime will take place only if the dollar weakens at an alarming rate and is sustained over the medium term.”

The dollar weakening at an alarming rate? Who ever heard of such rubbish? Oh, yeah…Thanks Mr. Bernanke.

Cheers,

Joel Bowman
Rude Awakening