The Fed, The Great Depression, And Your Roth IRA

by: Bruce Vanderveen

In the 1930s drought and the Great Depression blew with a vengeance into the U.S. Adding to the gloom: Depression-ravished East Coast cities often found themselves under a shroud of Oklahoma dust.

A new fangled invention called the tractor made sod busting easy. Fueled by tractors, generous government loans, land grants, and price guarantees settlers plowed under millions of acres of native buffalo grass (the buffalo had been wiped out in the 1870s). The result was predictable: overproduction, crashing wheat prices, abandoned exposed land, incessant dust storms and destroyed lives.

Oil fared no better. Prices plummeted from $1.30 a barrel to 10 cents as cheap Texas oil flooded depression markets.

Now, with Europe again on the brink, is it all about to happen again? Are we about to witness another deflationary collapse? Will another Great Depression push an over indebted world the dark ages again?

Yes, Europe, Japan, and the US are drowning in debt. However, we have a Fed chairman who will print at the drop of a hat (or market index) in order to avoid deflation. Mr. Bernanke studied the Great Depression - he and other Central Bankers abhor deflation.

Does this mean Central Banks of the world will print us back to prosperity? Hardly! Instead, as printing presses rev up, we will likely be cursed with deflations' evil twin: inflation.

Therein lies a great opportunity. In its rush to give everybody something the U.S. government has given us Roth IRAs. Roths allow the accumulation of capital gains and dividends tax free. Its one of the few investments which (we hope) will not be taxed.

With rampant money printing, I believe, Roth IRA assets should include real (meaning non-printable) assets. One of my favorite asset classes is companies with substantial unconventional oil and gas reserves.

As conventional oil production falls off new hydraulic fracturing and horizontal drilling technology is making vast expanses of North America newly productive for oil and gas.

You can see where unconventional oil and gas is located in North America here and here.

Below is a starting list of companies you may wish to consider:

Company Symbol Formation Comments
Devon Energy DVN Nearly all US and Canadian shale basins A conservatively run, cash rich mid-cap with extensive North American shale acreage. I recommend Devon as a core investment.
EOG Resources EOG Nearly all US and Canadian shale basins A well run company, EOG has lots of shale acreage. Some feel it is a little pricey at this point
Chesapeake Energy CHK Nearly all US and Canadian basins This company has extensive US acreage - they also have a lot of debt and a very controversial CEO.
Marathon Oil MRO Bakken, Eagle Ford, Niobrara If you prefer a diversified, established company which also has significant shale holdings consider Marathon.
Whiting Petroleum WLL Bakken North Dakota will soon be the second largest oil producing state. Whiting is a premier player.
Magnum Hunter Resources MHR Bakken, Eagle Ford, Marcellus, Utica One of a multitude of small caps with excellent North American shale acreage, multiple basins. Not yet profitable.
Penn Virginia PVA Eagle Ford Company attempting to convert from natural gas to liquids production.
Rosetta Resources ROSE Eagle Ford Small cap with good US Shale acreage.
Westfire Energy OTCPK:WFREF Viking Canadian small cap which is "on fire" in shale. Not yet profitable.
Penn West Energy PWE Cardium, Viking Penn West has extensive acreage in the Cardium. Good dividend.
Tag Oil OTCQX:TAOIF Taranaki Basin New Zealand, claims "Multi-Billion-Barrel Tight-Oil" potential, string of recent successes, no debt

Notes on How I Selected the Above Companies:

I'll readily admit the above list is only representative and somewhat arbitrary. There are literally hundreds of small and mid cap companies with assets in unconventional oil and gas basins across the US and Canada. This is only a starting point. I invite readers to comment on their own favorites (and why).

I selected Devon, Marathon, and EOG as they are large well established companies. I also included (with some trepidation) Chesapeake because of its vast land holdings. Right now the company is embroiled in controversy over the shenanigans of its CEO Aubrey McClendon.

Whiting is a well established Bakken producer with a large acreage position for its market cap. The Bakken is only in the early innings of production. Estimated recoverable oil reserves keep going up for the Bakken.

The others are generally high risk/high reward small caps, often with rapidly growing reserves and revenue. An added bonus: Small caps occasionally get bought out at a substantial premium by larger companies eager to get into unconventional oil and gas. Diversifying with several small-caps provides some down side protection.

Many of these stocks are selling 30-50% or more off 52 week highs so may present a bargain at this point.

Is Another Great Depression Coming?

It's true. During the Great Depression, a naturally deflating economic climate drove commodity prices way down. But, now we have 806 million motor vehicles in the world and declining conventional oil production. Consider: In 1930 there were far fewer vehicles and the fabled East Texas Oil Field drove up supply even as depression drove down demand.

And then there is this: Governments worldwide are falling all over themselves to see who can debase the fastest (to drive up exports). Rampant inflation will be the likely result. I feel that oil and gas reserves are a great inflation hedge - especially in a Roth IRA.

Disclaimer: This article is informative only - not buy or sell advice. Do your own research and due diligence before investing.

Disclosure: I am long WLL, DVN, MRO, OTCQX:TAOIF, CHK.