Dr. Stephen Leeb on Commodities and Inflation - Is He a Genius or Alarmist?

I just finished reading a book called "Game Over" by Dr. Stephen Leeb, and I am not sure what to make of it. The basis of the book, at least how I have read it, is that there is going to be a pressing demand for resources (Oil, Natural Gas and all sorts of Mining products) that will push the price of these products to points that will force inflation-like conditions as there were in the 1970's (if not much worse).

His theory goes further on to say that unlike the 1970s (where most of the demand for oil was caused by Political conditions), this spike in prices is one that is more of a permanent nature, as the spike is more due to a lack of supply caused by a scarcity of the materials and/or the ability to extract the materials at a rate to meet the demand.

Because of this expected spike in Commodity prices, and the lack of choices available to the US Fed to control inflation (as it cannot risk further damage to the Housing market with the rise of Interest rates, nor can the US "Debt-ridden" consumer tolerate a spike in rates on their personal debt), Leeb contends that the Fed would rather tolerate High inflation (or maybe even Hyper-Inflation) rather than risk the chance of deflation.

Now, I will say that Dr. Leeb is much more of an alarmist than I ever would be, as he further goes onto to talk about how this may lead to the decline of civilization as we know it. However, he does bring up some interesting points. If his thesis were to come to pass (or even a slight variation of it), it would significantly change the way that most investors would need to think about their portfolio. Below I have listed some of his theories from the book. I have provided my opinion on them, and how Leeb and/or I suggest that you may utilize this theory in your investment strategies.

Leeb Theory #1

The World is running short on many key resources and will face critical shortages within 15 years.

Now, to be fair, Leeb isn't the only person out there suggesting that we are running low on key Resources. It is interesting that he has actually put a timeline for when we can expect to run dangerously low on some key Commodities.

Assuming that the rest of the world were to use the following resources at half of the rate (per Capita) that the US uses them today, the following are Leeb's estimates as to the current years of reserves:

Antimony - 13 Years

Chromium - 40 Years

Iridium - 4 Years

Lead - 8 Years

Nickel - 57 Years

Platinum - 42 Years

Silver - 9 Years

Uranium - 19 Years

Now, it would take a lot of development in the Developing world for them to approach even half of the Per Capita Consumption Rate that the US does today. However, even with a few more years added onto these totals, it is not unreasonable to assume that we may see serious shortages in key resources such as Silver, Uranium and Iridium before 2025.

Ways to play this theory:

Personally, I have started to watch BHP Billiton (BHP) a lot closer. They are a strong producer of several key Base Metals, as well as Iron Ore, Aluminum, and Coal. Their extra exposure to Oil and Diamonds are not a bad bonus, either. If the world economy starts to recover in 2010, BHP should do quite well. I would look for an entry point (for the US ADR) of between $47 to $50, as a good spot for a long-term hold.

Leeb Theory #2

The inevitable spike in Resource prices will cause Inflationary pressures unlike anything most of us have seen in our lifetimes

Leeb claimed that this would happen in his book earlier in this decade, "The Oil Factor". Did we have incredible inflationary pressure over the past few years when Oil exceeded $100/barrel, as he predicted? Well, it depends on who you ask. If you use the Government's normal way of measuring inflation [CPI], the answer would be that we had slightly higher than normal inflation over the past few years.

However, when you factor in Food and Energy (the two factors that are likely to see higher inflationary pressures with the rise in the price of Oil, and are not counted in CPI), one can't doubt that we did see some relatively strong Inflationary pressures. However, it would be a stretch to call them extreme. The same can be said for rising prices in other commodities from Food to Copper.

This doesn't mean that Leeb's Theory is incorrect. If we were to be running short on all of the commodities in the manner that he states in Point #1, then it wouldn't be hard to imagine 20+% annual inflation within the next decade. This is further exacerbated by how the Fed has been reacting as of late. The incredible amount of dollars that has been printed on the "Bernanke/Geithner Printing Press" in 2008/09 will likely lead to a higher level on its own. If we were to see such rising commodity prices as Leeb predicts, I fear that his theory may be bang on the money. This problem is further worsened by the amount of debt that is held by Consumers in the US, who could not afford to have an Interest-Rate Induced Recession to control Inflation, as per the Volcker years.

Ways to play this Theory: See Theory #4

Leeb Theory #3

Traditional "Defensive" Investments will offer bad (if not Negative) returns in this upcoming Inflationary environment.

In his book, Leeb re-states the common phrase of "History rarely repeats itself". Since this is likely true, it is impossible to know for sure which investments will be the optimal ones for any upcoming inflationary period, since the causes of the inflation are different than those from the late 70's, as an example. However, the period from 1970 to 1979 does allow us to at least see how traditional Defensive investments held up during the last major bout of inflation.

According to Leeb's research, here is how the following investments fared (in Real Returns) during the period of 1970 (at the High) to 1979 (Low):

Beverages -13%

Cosmetics -45.6%

Staples Retail-34%

As you can see, many of the commonly-held theories on what will perform well during downtimes do not appear to apply during times of high inflation. The reason is that although these companies may offer a service/product that people need for everyday life, and they also may be able to pass on many of the escalating costs onto their customers, they tend to be High P/E stocks to start with. Inflation tends to have the effect of lowering down P/E ratios.

The Question then becomes.....are there any Defensive stocks that will perform well during Inflationary times? The two types of Companies that comes to mind for me are those companies who have fixed prices that are linked inflation and those companies who hold a lot of "Hard Assets" as part of their Portfolio.

For the first part, Utilities and/or Pipelines should hold up fairly well during these times, at least in my opinion. First, these companies have fixed contracts that often allow them to raise their rates based on the Level of inflation (on a negative note, however, the inflation rate that they can raise rates is generally linked to the CPI, which can often not reflect the true inflation rate, but it is at least better than nothing).

The second important point is that while these companies often carry a lot of debt for their infrastructure, the rising inflation actually helps to reduce the "Real Cost" of that debt, allowing them to pay it off faster. On the negative side, many of these offer the Interest rates a little, the yields for these companies will seem a little less appealing to some investors.

As for companies with Hard Assets, two types of companies come to mind. The first is Pipelines/Utilities, where they often own a significant amount of Hard Assets. If the debt for these assets becomes less in Real Terms (due to rising inflation), but the value of the same assets manages to keep up with Inflation, this could be a "Gold Mine". The 2nd group that comes to mind are the REITs, since Real Estate Values has often kept up with Inflation. However, history does not always repeat itself, so it is hard to say if it will this time.

My Personal recommendations to Play this Theory:

- TransCanada (TRP) and Enbridge (ENB) can help with both the Utilities and Pipeline side. As well, Kinder Morgan (KMP) is a good play if you want exposure to primarily Pipelines.

- On the Pure Utility side, I personally like FPL Group (FPL), as they are not only a strong player in the Utility space, but they are also a rising player in the Wind space, which should see some rise over the next few years.

- On the Real Estate side, for most people, my recommendation is "Own your home". Since this would likely make up a large percentage of one's total Investments, most people do not need to make any extra investments in this space. If you're not in this position, I would look at REITs that have a low Debt ratio and focus mostly on Industrial / Commercial markets. The reason why I would go after this space is that I suspect that we will see a run on Infrastructure Needs over the next few years, making this a better focus than on Office space.....

Leeb Theory #4

Gold is your best investment, followed by investments in: Oil Services Stocks, Oil Producers, Base Metals Miners, Gold Producers, "Solution Companies", TIPS and Defence Stocks

I can see the rationale behind holding Gold as a primary defense against Inflation. My only fear about owning Gold is for the other reason that most investor chose to own Gold, namely as a "Safe Haven" in a time of crisis. If we are indeed about to hit Peak Oil / Period of Hyper-Inflation, that sounds like a likely time to turn to a Safe Haven like Gold. Problem is......weren't we just in a similar time, with the possible Collapse of the Financial System? If Gold is supposed to be universally considered to be a Safe Haven, then I am curious as to why Gold is not $1500 an ounce now? Nevertheless, the average investor should hold some gold in their portfolio at all times.

As for the Commodity Producers (Oil Producers, Oil Services companies and Miners), Leeb's theory behind this one is to own the producers of the products that are causing all of the Inflation, as the price of their respective commodity is likely to rise as fast (or faster) than the rate of Inflation. This is likely a good theory, and one that I subscribe to.

There are two possible things to be concerned about when owning these companies during an Inflationary period. First, Inflation is unlikely to go straight up forever, as there will be inevitable times of low inflation or even deflation. So, it is unlikely that one would want to hold these stocks infinitely, but rather to trade them at signs that inflation may be cooling. The other thing to watch is to see if their rate of earnings / revenue growth is keeping pace with their costs, as many of their input costs (Materials, Energy, Skilled Labor and more) will also be rising at a fast pace. So, watch to see if the bottom line is increasing as fast as the top line.

As for the last two, TIPS is the easier one to explain. Having an investment that is designed to return slightly over the cost of inflation is a good thing during a period of Inflation. What is not a good thing is that it doesn't necessarily track the rate of the "true" inflation. The other concern is one of taxes, so these are best owned in your Tax-free accounts.

As for Defense stocks, Leeb claims that the US will have to spend an increasing amount to bolster their Military to allow them to replace a lot of older equipment, as well as to increase their strength to defend access to necessary future resources. I think this is a reasonable scenario and would subscribe to this theory.

My Personal recommendations to play this Theory:

Gold (GLD)

Oil Producers (CNQ, SU, COP, DVN)

Oil Services (RIG, BHI, SLB, WFT)

Base Metal Miners (BHP, TCK.B)

Solution Companies (FLR, Veolia)

Gold Producers (G, ABX)

TIPS - TIP

Defence - Northrup Grumman (NOC)

Leeb Theory #5

One of the only companies that do not fall under the above list who will thrive will be Berkshire Hathaway

Leeb's theory has more to do with Berkshire's Re-Insurance business than with the stock picking prowess of Buffett. This is obvious, as while he praises Berkshire's Insurance businesses, Leeb also criticizes owning many of the very companies that make up a significant part of their Stock holdings (namely AXP and KO). Leeb's theory is that Berkshire's tremendous strength is their large position in the field of Reinsurance, which he refers to as a "rapidly growing Industry". With their strong Capital base (one that Leeb claims is 3x larger than its nearest competitor), he feels that this should ensure growth in the "Mid-Teen percent" area, even during times when other Insurers/Reinsurers are performing badly.

Leeb Theory #6

One would be wise to invest in the "BRAC" Countries (Brazil, Russia, Australia and Canada) as these are the 4 countries who have the most resources that they are able to export

This is a bit of a variation of the famous "BRIC" acronym which refers more to the top 4 emerging economies. What Leeb is getting at is that these countries will be in a position to export significant amounts of at least one of the key resources needed by the world. His advice is to invest in all aspects of these economies, but for slightly different reasons.

The "BR" part of the equation are more growth plays. While they will be exporting a significant amount of their resources (which you can invest in through ETF), you are also investing in the domestic growth that these two emerging economies are going to undergo. In the case of the "AC" countries, you are investing more in their export side of their economies as neither of these countries are likely to see the same growth rate as the first two. This helps to balance out the risk/reward equation.

In the case of Canada, you are getting the widest variety of resources (as they have dominant resources in Oil, Nat Gas, Potash, Diamonds, Uranium, Base Metals and Fresh Water), where as the other ones tend to have their resources more focuses on a couple of different commodities.

I do differ a bit from Leeb in one manner, in that he mentions owning an ETF for the Broad stock market for each individual country. While this may make some sense, you do have to be careful in that you may be owning significant parts of your portfolio in companies that will not do well in the upcoming Inflationary environment.

In the case of Canada, you would be owning up to 40% of the portfolio in Financial-related Stocks, many of which have significant presence in areas of the world that may not do well in the upcoming times. My preference would be to own stocks that are direct plays on the commodities themselves, plays on where the wealth of the commodities may be invested, and direct plays on the increased wealth of the economy (such as Retail companies/REITS that are specifically focused on those domestic markets)

Overall, as a small investor, I can only hope that Leeb's theories do not come true (I believe that he even states this in the book). The reality is that the book shows a long-term view on a problem that many investors/politicians may be too short-sighted to see. I would recommend it as a good read, even if you don't subscribe to his theories.

Disclosure -- Long on TRP, GLD, RIG, BHI, SLB, WFT, TIP, BRK.B,

No Current Short Positions in any of the stocks mentioned.

Comments

[buyitcheap:]

Great review. Thanks! This fits with my own notion of recovery in the hard asset countries who can export to a spending China.

Jun 17 08:39 AM

[Graham and ...:]

Dr. Leeb is a contributor, just like anyone else. As such, he will have some right and some wrong opinions. And some of his posts will be right or wrong to a greater degree than others. It is our job as readers to sort through his analyses and correlate them with the facts as we see them.

Jun 17 08:45 AM

[Larry Belle...:]

Update -- I actually did take a small opening long position in BHP Billiton yesterday, with the anticipation of making the position larger if there is any further weakness in the stock.

Thanks for reading, Buy it Cheap! Those who can sell things into any of the Emerging Markets are also likely to do well in the upcoming years....

Jun 17 08:53 AM

[morph366:]

Considered in isolation the one thing for which there is insatiable demand and which theoretically has unlimited supply is the US dollar.
Considered systemically it is a very different matter.

Jun 17 09:05 AM

[Andy1234:]

Good article which basically describes my portfolio exactly. wow...its like Dr. Leeb looked at my portfolio and said these are the places to invest.

Jun 17 09:23 AM

[mcl_mixer:]

"If we are indeed about to hit Peak Oil / Period of Hyper-Inflation, that sounds like a likely time to turn to a Safe Haven like Gold. Problem is......weren't we just in a similar time, with the possible Collapse of the Financial System?"

The current financial crisis was a deflationary threat, so gold was indeed a safe haven because it didn't decline in price like higher risk assets (stocks, real estate, corporate bonds, industrial commodities, etc.).

Jun 17 09:45 AM

[guapo:]

Larry you asked an interesting question I quote " If Gold is supposed to be universally considered to be a Safe Haven, then I am curious as to why Gold is not $1500 an ounce now?.

the answer is the same as where is the high inflation,
Let's say that with all the banking system witholding cash and China (not openly) buying gold, the gold price is limited as well but because of shortage of available cash.
Can you imagine if China would say openly that they do not trust us (US) any longer?
Rusia and Brazil are reducing their stakes in the dollar
We are in a historical breaking point.
The whole finantial system is in crisis, the global trust in their own gubernamental institutions (financially speaking) is in crisis because of transparency and there is no one currency that has the universal exchangeability as gold. and gold is and would the only one universal reference.

Jun 17 09:58 AM

[Larry Belle...:]

Thanks for everyone's comments.

MCI -- As mentioned in the article, Gold (in addition to its inherent protection against inflation) is often seen to as a Safe Haven. My point was more that people did not seem to view it in this way to the extent that one would expect (as seen by many of the investors/analysts). I still personally think that it is a great place to run and hide during bad times, but unless the masses think the same thing, we may not see the rise be as dramatic as it should. The other problem is the nasty decline that Gold took in the early part of this crisis when it should have exploded upwards, but I chalk that up to more of people unwinding positions that they could....

Guapo - Your points are well taken. I personally think that the US dollar may get to the point that even the main commodities themselves won't be priced in them by 2011. Then, it will be a freefall...

If nothing else, Leeb's views make one look at alternative ways to invest, ones that steer greatly away from the usual Wall Street mentality.

Jun 17 11:07 AM

[Emerald:]

Generally agree with Leeb. We will approach "peak oil" not from a supply issue but from a cost of extraction point. Oil will trade , on average, above $70 once we have a recovery. Current estimates say we have sufficient oil but new supply is in the deeper ocean or from shale rock. Countires will develop more fuel efficient engines and supplement with batteries, etc. but not replace oil in their economies over the next fifty or so years. Wind and solar have their practical limits. Canada's natural resource companies are excellent investments for Americans due to their stable government and symbiotic trading relationship with us. Foreign taxes are deductible and many dividends are qualified. Note: Long ECA, PVX, PWE. Also, BHP,CVX, COP, TOT, BP, PBR, Rig, OII.

Jun 17 12:10 PM

[Donald Ingram:]

I foresee gold reclaiming it's premier position on the worlds financial stage as the ONLY true money.
Most items will be expressed for cost and price in gold.
The new valuation will be in metric terms not the 'old' standard measure. After all the world operates within the metric system now.
It is said that if the per capita American debt was expressed in gold then one ounce would be worth $36,000!
Could it be that we could see gold at $36.00 per milligram?
1000 milligrams to the kilo. 1 kilo = 2.2 pounds.

Jun 17 12:23 PM

[tipalia:]

Larry great article as usual and I was really missing reading you. I bought DEO at a great price after reading one of your articles, should have bought more. BHP has been on my watch list for a while and also KMP, but can this last one sustain its high dividend ?

Mike

Jun 17 12:43 PM

[ArtfulDodger:]

A worthwhile critique—pointing out the reasonable and the extreme and then using both ends to invest. Very good work, LB.

Thank you much!

Jun 17 12:56 PM

[bruno12:]

BRIC/BRAC

Jun 17 02:38 PM

[hksche2000:]

1000mg per gram, 1000g per kg


On Jun 17 12:23 PM Donald Ingram wrote:

> I foresee gold reclaiming it's premier position on the worlds financial
> stage as the ONLY true money.
> Most items will be expressed for cost and price in gold.
> The new valuation will be in metric terms not the 'old' standard
> measure. After all the world operates within the metric system now.
>
> It is said that if the per capita American debt was expressed in
> gold then one ounce would be worth $36,000!
> Could it be that we could see gold at $36.00 per milligram?
> 1000 milligrams to the kilo. 1 kilo = 2.2 pounds.

Jun 17 03:16 PM

[ozzy:]

Interesting points. I also am investing in similar positions, however for much different reasons. I disagree with Leeb in that I think history always repeats itself. As we have all often heard, whenever someone tells you it is different this time, remember, it is never different. Fear and greed are the one constant that are always present.

Jun 17 03:22 PM

[TradingHelp...:]

"BRAC". I like that a lot. Great article. I agree with the vast majority of your contents and it reinforces my view that the US is in a prolonged period of relative economic decline. The goods it imports, commodities, are going to suffer higher inflation than the the goods it typically exports. The US desperately needs a weaker dollar.

Admittedly you could say the same of China but the Chinese balance sheet is fundamentally stronger and will enjoy GDP growth about 2.5 times higher than the US as 20 million Chinese a year move from the country to the cities and buy the goods you and I take for granted.

Jun 17 04:00 PM

[Larry Belle...:]

This must be my most "Commented-on" article....thanks for all the great comments..

Emerald -- Can't agree with you more. I also like CNQ (which I am long on), due to the fact that I don't believe that their Horizon Oil Sands project has been fully priced into the stock.

Tipalia -- I have to believe that KMP's dividend is sustainable for now. I haven't seen their payout ratio, but Pipelines as a rule generally have one of the best cash flow reliability in all of the stock world. What I would be worried about with any of the pipelines is if they over-extend themselves (build too fast), or if there truly is going to be a lack of product (i.e. conservation) flowing through their product. Not likely scenarios.....Disclosure, no position in KMP

Ozzy -- I think that people, in times of distress, often turn to what they know, which is often the reason that History repeats itself. I think much of what worked in the 70's will indeed work....the only class that I can see not working as well is REITs, but it still will be a better investment than most.

Michael Young -- It should be interesting to see what happens to the Non-Commodity sectors of the BRAC countries. As a resident of "Commodity Rich" Alberta, I can tell you that it became virtually impossible for a Non-Oil/Gas business to afford to remain competitive in Alberta, as the costs of labour just got out of control. As well, the CDN dollar began to trade with the rise in commodities, gaining it the nickname of the "Petro-Buck" locally. This virtually killed much of the manufacturing in the rest of the country, as the price of their shipments globally rose by close to 60% in 5 years. I think that it will be a lot of division in the BRAC countries, which is why I recommend to no use a General ETF to cover each country. It will also be fun to see how they keep inflation cool in the BRAC countries....

Cheers everyone,
Larry

Jun 17 06:34 PM

[cameroni:]

Really interesting article Garry. Dr Leeb has tried to project the worlds population needs into the future with considerations for peak oil, resource depletion and political uncertainties. He is a brilliant thinker in my opinion. We may all have differing ideas on his time-frames but he got one thing right.

There are just too many people and their demands exceed the finite resources available. That is why we are about to embark on the greatest commodity bull-run in all history.

There are simply no good alternatives for some resources once consumed and when you run out you are just out. You own stuff or you don't. Better to own the right stuff.

Uranium is a fine example. I think it will be one of the very best opportunities in the coming decades and we still have the chance to buy in cheap. The demands for clean energy are massive. The volumes of uranium reserves are finite and dwindling. "Buy quality Uranium plays" is one of my personal mantras. Better yet, buy it locally (as in North America and specifically Canada).

With the number of new reactors under construction or under consideration around the globe and the relative shortage of cake this could truly turn out to be one of the great cash cows of the century. Those who know me already know that I am a huge fan of copper, silver and potash,....but at the back of my mind I sense uranium to be one of the biggest opportunities of all. I buy it aggressively at the right price.

The world is shrinking. As a human community we are like locusts. Everything and all will be consumed in our wake. Commodities are the near equivalent of money itself and not taking an interest in those producers and refiners is a very big mistake in the coming decades.

So much for defensive stocks. I want companies that produce "stuff".

Jun 17 09:33 PM

[Albert Ling:]

Wow, this topic mimics my portfolio amazingly well..
i only own a handfull of stocks and most are cited in the article

just sold NOC though, as I i think defense is the only area where it will be politically feasible for obama to cut spending, and the US obv. needs to cut somewhere

Jun 17 11:12 PM

[Sovestor:]

If he is genius, why he is not that rich?

Jun 18 03:15 AM

[one eye:]

He is not that rich and he is peddling his wares, here, there and everywhere, because he is not a Genius when it has come to Market timing in the Present decade.

Jun 18 08:49 AM

[George09:]

Both Leeb and Bellehumour seem to have a fundamental misunderstanding of inflation. Higher oil prices do not cause inflation, they are a symptom of it.

Jun 18 10:45 AM

[ManAboutDallas:]

[G]enius "or" alarmist ? Why must there be the implied choice? Is a genius incapable of also being an alarmist ? And vice-versa ? The real, salient question, however, is: Which of Dr. Leeb's premises are correct, and which are not ?

Your discussion of the "BRAC" countries is incomplete without the inclusion of New Zealand. It lives and labours in the shadow of neighbouring Australia, and is thus - unfairly - relegated to afterthought status when it is not deserving of such. But it is poised to enjoy the same good fortune as Great Britain did in the 70's and 80's when its vast hydrocarbon deposits are exploited over the next several decades.

Jun 18 11:16 AM

[munny:]

Inflation in relation to the US dollar may actually be the result of a tacit "devaluation" of the dollar as it sinks in relation to other currencies as well as general inflationary trends. In a "devaluation" scenario, prices of everything would rise in dollar terms even if other currencies had mild price inflation. This was seen somewhat during the last oil price spike -- in Euros, the prices spiked less than they did in dollar terms.

In some part, Leeb's approach isn't necessarily designed to gain wealth in absolute terms. After all, buying gold today at $1,000 and continuing to hold it when its price has risen to $2000 is just holding real net worth flat if the cost of living has doubled.

But that isn't necessarily a bad outcome.

Jun 18 11:49 AM

[User 433429:]

I dont understand why there is almost nothing hereabout agri commodities. They have a lot of potential thanks to peak water and peak soil and the other factors affecting commodities in general. Agri commodities tend to keep in step with oil prices. According to guru Jim Rogers, agri commodities have the most potential.

Jun 18 12:57 PM

[finmah@yaho...:]

But can anyone show me where they have seen a "decoupling" of foreign nations in regards to the economy? All of commodity pressure requires buying demand and consumption. I wish it were true that the investing world can compartilize into mortgage companies in Alberta or copper miners in Peru or builders in China. But if the last downturn in Nov showed- I simply don't see any evidence whatsoever.

The commodities the last few months went up with the US uptick - there has been no decoupling.

I hope that other nations can work around us - which would be beneficial but unfortunately I don't see a powerful world GDP without us. Maybe other nations should be careful about moralizing to us about overconsumption.

Jun 18 01:23 PM

[GeoJoe:]

If it can't be grown, it HAS to be mined. Everything. Period. More people on the planet = encroachment on natural resource plays = NIMBY explosion = lawsuits = undecisive regulators (EPA, ACOE, DEQ, etc) = no permits = dwindling raw materials = hyperinflation. I know this first hand as I'm working for a group attempting to start an operation in the U.S. Three and a half years into the permitting process and we are still no closer to hiring and producing...

Jun 18 05:58 PM

[Roman_Fiddler:]

I think Leeb is pretty much on the money. Growing population, dwindling resources, masses of money being 'printed'...it's kind of inevitable.

Of course, if a mutant strain of swine 'flu wipes out about 3/4 of the planets population things might change.

Jun 18 06:51 PM

[Larry Belle...:]

ok, having troubles keeping up with all the comments!

George09 -- Can't say that I totally agree. Oil's rise affects all things in the economy, from manufacturing to Ag to Transportation to heating your home. This spike in prices is not caused by inflation, but rather by a supply/demand inbalance. Look at the past few inflationary times (such as the 70s/80s) and it was caused by the sudden spike in Oil. Leeb's theory in the Oil Factor is that whenever Oil rises 80% over the previous year, inflation is bound to build up in the system to cause a recession within 18 months.

Dallas -- to be clear, Leeb coined the term "BRAC". I also agree with the previous comment that many of the Middle East Producing countries could also be mentioned. I wasn't aware of NZ's Commodity promises.....I am curious now.

433429 -- I think that Grain prices may also be an interesting thing to watch. I think that Leeb did mention is, but the major point was that Oil tends to be the commodity that is most noticed in Inflationary results. However, since Food is also left out of the CPI, Ag's true impact may not be fully known. Your point is well taken.

GeoJoe -- To quote the CEO of Suncor, when asked if we are in Peak Oil, "We wouldn't be, if the Oil Companies were allowed full access to all of the Oil that is held by the Nationalized Programs". Peak Commodities is as much Political as it is Geological.

Cheers
Larry

Jun 18 09:03 PM

[Dirty Oil B...:]

6.7 billion people growing at 1% annually equals how many people in 40 short years????????............ drum roll.........14 billion. anyone else long on pot ash? water, food, and oil to move it will trump all else. Invest accordingly.

Jun 19 01:19 AM

[Dirty Oil B...:]

And consider that it takes 'about' 1 barrel of oil too extract 2 barrels from alberta oil sands. and 1 barrel too extract 50 from saudi's.
as far as "net" energy is concerned the oil sands is a huge, disgusting waste of energy. it may become un economical long before it is all extracted.

Jun 19 01:23 AM

[chefdavid:]

If the dollar becomes significantly devalued from here, the commodity complex in general will go up in price (inflation) regardless of demand. In other words, it will take a larger pile of increasingly worthless dollars to buy the commodity.

Perhaps it would be better to begin talking about commodity prices in terms of ounces of gold to remove the price uncertainty if and when the dollar does a one-and-a-half gainer onto the parking lot below. For example, right now, an ounce of gold will buy about 13 barrels of oil (very simplified). How does that number fluxuate on a daily basis. Charts could easily be drawn for any commodity in relation to gold (or silver). Then we would have a rational basis for discussing the future value of stuff without having to calculate the inflation rate.

Go to gata.org to read about the gold and silver price suppression schemes underway by large banks, the Fed, and the Treasury. Go to jsmineset.com for more such information. Stay away from CNBC and other mainstream "news" organizations and search out independent sources of information. Stay informed. Read. Think for yourselves. Plan ahead.

Got gold?

Jun 19 03:07 AM

[chefdavid:]

GLD might be dangerous if the gold supposedly held in trust has actually been leased and sold into the market. SLV has the same problems. Would you really trust JPMorgan or Barclays to hold your wealth in their grubby hands? A better solution is to invest in the Central Fund of Canada (CEF) for a gold/silver investment, or GTU (same management as CEF) for a pure gold play. Either way, their precious metals are held in segregated storage and are audited every six months. Plus they have been around since 1962, before gold was fashionable to discuss and legal for individuals to own

Jun 19 03:16 AM

[KSAccountant:]

Interesting article and perspective. I have been watching BHP for some time and could kick myself for not picking some up at $24...but got greedy and thought it could go lower. I believe Leeb has some valid points. However, one thing I noted missing from this commodity discussion is food and water. Does anyone have any thoughts on their track in the coming years? Also, should one look at purchasing farmland as a way to play both food inflation and land inflation? Also, any thoughts on ADM and MOO or suggestions on water plays?

Jun 19 11:49 AM

[KSAccountant:]

Also, does anyone have any thoughts about holding Gold in coin form?

Jun 19 11:56 AM

[Larry Belle...:]

thanks for everyone, who took the time to read and comment.

KSA -- I would personally rather look at Viterra than ADM, as it is more of a pure play on Grain prices. If you prefer ADM, you would also have to likely think that there is some validity to the expansion of Ethanol. As for MOO, I just took a look at their holdings. I rather like the broad exposure (Equipment, Fertilizer, Seeds and more). Might not be a bad play.

ChefDavid -- I have heard that argument before. Since there is so much scrutiny on these large companies now, I would have to believe that they are following what is in their mandates. You never know, though, I guess...

DirtyOil -- One does have to admit (even someone who benefits from the Oil Sands, like me, as I like in Alberta), that the Oil Sands do burn off a lot of other resources, including Water and Nat Gas. However, the world simply needs to produce more oil, or risk the price skyrocketing over the next few years. The Oil Sands producers are under extreme pressure to clean up their acts, and with the Billions being thrown at them, one has to hope that they can.

Jun 19 06:25 PM

[Doc 224899:]

Great article. I'm on page 132 of "Game Over", and have been reading and re-reading Leeb's "The Coming Economic Collapse" for the last 2 1/2 years. I also read "The Limits to Growth" by MIT and the Club of Rome in 1972, which Leeb quotes in "Game Over".

One distinction Leeb makes is between integrated oil companies, which he discourages people from investing in, and oil services companies, which he recommends.

Jun 21 12:53 PM

[semsem:]

He did not predict the recent market crash. He said the market would crash because of $200 oil. Not because of leverage / housing.

Jun 22 07:23 PM

[Doc 224899:]

The way I read Game Over, Leeb explains the deterioration of our systems of banking and finance as the consequence of the decline in real estate values, and the consequence the people designing mortgage and derivative instruments as having bet that a decline in real estate values would never occur.

The market crash was ultimately due to Peak Oil effects, but the proximate cause was the decline in real estate values.

Leeb is a genius, and he's relying on facts, though he isn't correct about every little detail that he discusses or about every element of timing that he discusses. Nobody could be. As for the broad strokes and the assessment of fundamentals, Leeb is strikingly accurate.

Leeb is also correct about a bunch of other notions that will help you beat the market, if you can understand them well enough to apply them consistently well in unique and unpredictable situations.


On Jun 22 07:23 PM semsem wrote:

> He did not predict the recent market crash. He said the market would
> crash because of $200 oil. Not because of leverage / housing.

Jul 02 02:37 PM