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Kurt Cobb's (view
article) position that Peak Oil investing doesn't really matter in the
long run represents a defeatist's position. There are at least two significant
reasons for individuals, institutions, corporations, and governments to invest
using the concept of Peak Oil as a guide:
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R&D: Capital invested in alternative energy companies, as well
as traditional oil companies, drives the stock prices of those companies
higher. As the stock prices of these companies rise, so does their financial
strength and ability to increase research and development activities that
are critical to reducing the severity of the impact of Peak Oil. The act
of investing in energy stocks, or physical oil via options contracts, indirectly
draws attention (people will notice when gas is at $5.00 a gallon) to the
problems associated with Peak Oil. As oil prices rise, so will the profile
of Peak Oil.
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Life goes on: Even in the worst-case scenarios, such as a severe
global recession, people will still have to exist, eat, and provide shelter
for themselves and their family. Obviously, access to additional financial
resources would be helpful in any time of economic downturn or crisis.
In the event that you agree with these positions, how does an individual or
institution allocate their investment capital to (a) create a profitable portfolio,
and (b) encourage more research and development of alternative energy sources?
Before we can attempt to answer that question, it is important to understand
some basic concepts that may shape the investing landscape in the event of
a global energy shortage.
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Inflation: Rising energy prices push the prices of all goods and
services higher. Energy is consumed to produce all goods (even food). As
the cost of inputs increase, so do prices on the shelves. Even services
providers, such as consultants, will incur higher costs in travel, office
supplies, etc.
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Economic weakness: High energy costs and rising inflation will
hurt economic activity globally. Enough said.
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Monetary policy: When economic times get tough, central bankers
(like our Federal Reserve or FED) lower interest rates and print more money
in an effort to stimulate economic activity (see policies post 9/11). These "easy
credit" policies are also inflationary. We have all seen easy monetary
policy contribute to rising stock, real estate, and now commodity prices.
After the deflationary disaster in Japan from 1990 to the present, global
central bankers will use all weapons in their arsenal to fight deflation,
which in turn may result in inflation. Between high energy prices and easy
monetary policy, we may see hyper inflation sometime in the next 10 years.
For those in the deflationary camp, recent central bank policies and the
writings of Ben Bernanke point toward inflation first, possibly followed
by deflation.
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Weak U.S. dollar: The U.S. dollar has not been backed by gold since
Nixon closed the gold window in 1971. The U.S. dollar is backed by the
full faith and credit of the U.S. government. The dollar is simply an IOU.
Between the trade deficit, budget deficits, Social Security, Medicare,
and high consumer debt, the full faith and credit of the U.S. government
is becoming more questionable each year. If our FED combats weak economic
conditions by lowering interest rates and printing more money, this will
only contribute to the increasing lack of confidence in holding U.S. debt
and U.S. dollar denominated assets (stocks, bonds, real estate, etc.)
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Higher interest rates: Inflation, excessive money printing, economic
weakness, and high levels of debt, will put upward pressure on interest
rates.
Listed above is a small sample of issues to consider when building a portfolio
for Peak Oil. Next, let's discuss some asset classes and how you may want to
approach them in the environment outlined above.
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U.S. stocks: The average stock will most likely drop. You may want
to consider finding a manager who can purchase "insurance" against falling
stock prices. This is done via options contracts. If things get really
bad, you may want to have a manager who has experience selling stocks short.
Be very careful shorting stocks. As of this writing, I would not advocate
that the average Joe go short. You do have to be rich to access these investment
strategies. They are available to even modest investors. On the other hand,
in an easy credit and inflationary environment, stocks may surprise on
the upside especially in the early stages of a new FED easing cycle. I
would be careful becoming wedded to either the bullish or bearish case
for stocks in the next few years. Let the market be your guide and you
won't stray too far.
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Foreign stocks: As a way to combat possible future weakness in
the U.S. dollar, it does make sense to consider moving some of your stock
investments outside the United States. This is something that you may want
to consider right now. It may help your returns in the early stages of
a downturn, but ultimately, Peak Oil will not be good for global stocks.
Hedging with options will most likely become important here as well.
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U.S. bonds: As interest rates rise, bond funds can be a very unattractive
place to be. If you own bond funds, use funds that hold bonds with shorter
maturities. Avoid bond funds that invest in long maturity bonds in a rising
interest rate environment. A small portion of inflation protected bonds
(know as TIPS) may be a good idea.
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Global bonds: If the U.S. dollar does continue to weaken vs. other
currencies, you can get a "double return" in select foreign bonds. For
example, if I own Brazilian bonds and Brazil's currency appreciates vs.
the U.S. dollar, I get my interest payment and I also get a 2nd gain when
the interest is converted back to U.S. dollars. Keep your maturities medium
to short.
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Gold & silver: Since no major world currency is backed by gold
or silver, gold and silver remain the world's only true currencies. Owning
physical gold, physical silver, or stocks in precious metals companies
can help you combat a falling U.S. dollar and rising inflation. These are
the primary reasons why precious metals have seen increased buying interest
in recent years. People are getting nervous about the vulnerability of
the U.S. dollar. With the new gold ETFs (exchange traded funds), owning
an investment backed by physical gold is easier than ever.
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Energy & energy stocks: As stated above, investments in this
area will improve the probability that alternative energy sources can be
developed which may be able to lessen the blow of Peak Oil. Unfortunately,
unless something miraculous happens, it is unlikely that any alternative
energy source can be brought to market in time to improve our situation
in the next few years. However, capital invested in alternative and traditional
energy, will improve the somewhat slim chances of a miracle. Regardless
of how fast new technologies can be brought to market, energy investments
will help shorten that window. Ultimately, we need to find alternatives.
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Other commodities: Oil is not the only natural resource that is
facing a possible supply and demand problem. Due to still inflated U.S.
stock valuations, rising inflation, and a weakening U.S. dollar, diversifying
a portion of your assets into physical commodities and commodity related
stocks could help reduce your correlation to movements in stock and bond
prices.
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Real estate: While there is no question that U.S. residential real
estate is expensive vs. historical norms, real estate does perform well
in an inflationary environment. Like all the asset classes discussed here,
diversification is very important. Since most of us own real estate in
the U.S. in the form of our homes, placing a small portion of your assets
in global real estate has some merits on several fronts. This can be accomplished
via stocks, or even in a small number of mutual funds.
In closing, I am far from an expert on Peak Oil. While I have been a professional
investor for over a dozen years, I also realize the importance of keeping an
open mind in our ever changing world. Our current investment strategy is diversified
across several different asset classes and remains flexible based on what actually
happens in the coming years. Investors should be developing an investment game
plan that works in today's world while having a contingency plan in which to
migrate to as the investment landscape inevitably changes in the coming years.
Getting help, in the form of a money manager or via mutual funds, may be crucial
to navigating successfully in the coming years.
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Chris Ciovacco
Ciovacco Capital
Management
Chris Ciovacco is the Chief Investment Officer for Ciovacco
Capital Management, LLC. More on the web at www.ciovaccocapital.com.
All material presented herein is believed to be reliable
but we cannot attest to its accuracy. Investment recommendations may change
and readers are urged to check with their investment counselors and tax advisors
before making any investment decisions. Opinions expressed in these reports
may change without prior notice. This memorandum is based on information available
to the public. No representation is made that it is accurate or complete. This
memorandum is not an offer to buy or sell or a solicitation of an offer to
buy or sell the securities mentioned. The investments discussed or recommended
in this report may be unsuitable for investors depending on their specific
investment objectives and financial position. Past performance is not necessarily
a guide to future performance. The price or value of the investments to which
this report relates, either directly or indirectly, may fall or rise against
the interest of investors. All prices and yields contained in this report are
subject to change without notice. This information is based on hypothetical
assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES,
EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM
ANY INFORMATION CONTAINED IN THIS ARTICLE.
Ciovacco Capital Management, LLC is an independent money
management firm based in Atlanta, Georgia. CCM helps individual investors and
businesses, large & small; achieve improved investment results via research
and globally diversified investment portfolios. Since we are a fee-based firm,
our only objective is to help you protect and grow your assets. Our long-term,
theme-oriented, buy-and-hold approach allows for portfolio rebalancing from
time to time to adjust to new opportunities or changing market conditions.
Copyright © 2006-2008 Chris Ciovacco
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