Walter Morton

RBS Predicts Global Market Crash: What's In It for Them?

Recession, at least regionally, is already a fact in the USA. If we are to look to any historical models, the US economy and large parts of the world economy now resemble Japan circa 1990, when a decade of bullish bubbles and growth in financial markets was followed by 10 years of recession from 1990-2003, with many Japanese real estate investors losing 4/5 of their net worth. (The Japan model is one George Soros favors for comparison, the American economy is much larger which could make things better -- or worse.) So rather than a "crash" of the S&P 500 to 1050, consider the S&P gradually moving down to 600 over the next 10 years. That would roll back the clock to 1995 when the S&P was 600. Not so impossible.

RBS Predicts Global Market Crash: What's In It for Them?

RBS analysts saying we are about to plunge into a financial abyss is not exactly shocking news. A number of authors (Stephen Leeb, Warren Brussee, James Kunstler, Peter Schiff, etc.) have been predicting since 2005 that we should expect shocks and a downturn in the US economy for a rational list of reasons including:

1) An 830 Billion Trade deficit.
2) The falling value of the dollar since we left the gold standard in 1972.
3) Lack of investment in infrastructure and education in the USA.
4) Increasing world population demand of all commodities.
5) Dependence on oil in the face of declining oil production and rising exploration costs.
6) Outsourcing manufacturing, production, skills, and technology.
7) High USA per capita debt, low individual savings.
8) Increased competitiveness in foreign markets.
9) Growing debt from expenses of the Iraq war.
10) Aftermath of dotcom tech stock boom / bubble.
11) Aftermath of real estate investment boom / bubble.
12) Falling confidence in financial instruments & institutions (i.e. Bear Sterns)

You can look to the Wall Street Journal, The Economist, or The New York Times to find ample numerical support for these 12 issues and pressures on the economy. What you will not find is a "tried and true" investment strategy being argued by RBS or any of these authors for what to do in June 2008 because the world has never seen an economic scenario exactly like the current one. Analysts cite Bernanke and The Great Depression (1928-1933) and the "stagflation" of the 1970's but the global economy was not as dynamically linked in those earlier times by electronic media, instant trading, etc. Also, growth in population, manufacturing, and modernization has shifted strongly to Asia in the last 50 years. The food supply and energy supply has never been under greater demand pressure. A different world order is emerging and the USA's position of unchallenged dominance is unravelling.

What to do? Taking all your money into cash dollars in a safe in your basement is a bad idea, because in many scenarios (inflation, hyperinflation) the U.S. dollar will devalue radically never to return. Some would argue that investing in gold is the best safety play, but it is unclear whether this venerable instrument of antiquated wealth will respond as it has in the past by holding value while paper currency falls. Commodities seem a good safe haven since the world needs food & fuel and based on simple supply & demand metrics, there will be need for all commodities into the 21st century, but it is also possible a global depression could curtail growth and suppress commodity value. Another safe haven in the past has been the material security of real estate. But the real estate bubble continues to deflate and if a depression comes, real estate prices could be in free-fall for years to come, taking prices back to 1978 levels. Some (i.e. Peter Schiff) suggest that investing in diverse, growing foreign economies that are not tied to the USA is the best course. That could work if the global economy "de-couples" with Brussee likes TIPS, but TIPS rely on the US Treasury accurately calculating inflation to pay you back in (still a fiat currency) dollars.
Where does that leave the investor? Some ideas that appear sound are global diversification into assets that are either:

1) backed by a material resource (Gold, Oil, Wheat, etc.)
2) are required for human civilization (energy, food, infrastructure.)
3) technologies of increasing / emerging importance (solar, wind, bio.)
4) Not directly tied to the strength of the USA dollar.

Though it is one of the oldest common-sense rules of investing, there has never been a better time to remember: "Don't have all your eggs in one basket."

Vietnam and the New Frontier

There has been some coverage in the WSJ about Vietnam over the last 18 months. Vietnam is now where the rest of Asia goes for cheap labor and rapidly modernizing agriculture (food production.) It's definitely a hot economy and will have ups and downs. I do not see a lot of win-win investments. Vietnam has also been called "the poor man's Hong Kong" with some aspects of openess to trade and rapid development. I do not own any shares in any Vietnamese enterprise but am looking at businesses that are taking advantage of conditions there, i.e. this kind of thing:
www.kepcorp.com/press/...

Investing Into the End of the Hydrocarbon Age

It took 100 years to perfect internal combustion engines as the technology that drives our economy. A complete switch to solar power will take a long time but it is the "best bet." Huge infrastructure issues exist -- and the technology for very cost-effective solar is barely there. Advances in solar cell efficiency have been forthcoming, but not radical, and many of the newer solar technologies (i.e. thin film, nano) have not been tested in the field for long periods and may degrade or perform poorly. New ideas in materials, methods, manufacture are required. There has not been any revolutionary gain in understanding of electricity from the sun (photons to electrons) since Einstein explained it in 1905. Any advances since then have been in materials science and engineering, not at a conceptual level.

So why is solar the most-favored option for long-term energy future? Coal-burning will accelerate climate destruction and pollution. Bio-fuels require a lot of energy "input" for very little gain. Wind-power is not feasible in most locations. Tidal power and hydroelectric limited to restricted locations. Nuclear is a potential option but the supply of nuclear fuel is limited (some estimates say exhausted in 30 years.) And we do not know how to build effective fusion reactors -- yet. New reactor designs may help, but humans are understandably a bit nervous about reactors, radiation, and maintenance after Chernobyl & Three Mile Island. If we built 500 new reactors, the odds are we'd see new accidents. NUclear fission can never be a perfectly safe technology.

The most workable answer for our future is solar (because it's free, unlimited, safe, clean) but the technology infrastructure to capture the sun's energy on mass scale is daunting. For a good review of what sort of mass program it would take to run America on solar, read Scientific American's article on a "Grand Plan" : www.sciam.com/article....

There's a Solar Shakeout Coming - Citigroup

One random analyst standing behind Citigroup making stupid claims.
Any solar analyst needs to take into account the practical physics that are being exploited by various approaches to solar "tech." ESLR may not have gotten the Jim Cramers of the world raving about them, but their "String Ribbon" technology absolutely works, and is a dependable way to fabricate solar cells. While it is generally agreed that "thin film" solar cells are the most promising way to build cells and it is on this technology that FSLR has become an early leader (watch out if Nanosolar can deliver) their is no long-term deployment of the FSLR type thin film solar cells in use. What happens to thin film cells after they've been on your roof for 10 years? Do they degrade? Nobody knows. Conventional cells of the kind ESLR makes are reliable over 30+ year periods. With oil prices going up, solar in ALL forms will continue to be attractive.

Interview with Peter Schiff

Peter Schiff has been correct in his predictions with high accuracy and anyone interested in finance should at least study his ideas. Predicting the future and predicting how it will affect your personal investments are two different beasts however. Some of his investment ideas require a vast change from the way things work today, i.e. a "decoupling" between the USA economy (backed by devaluing dollars) and emerging economies (backed by hard assets or actual growth in production.) This decoupling has not yet happened, though it may in the next decade if the USA can't find a sound financial course. And even if decoupling occurred it's effect would be unclear. Today, the USA companies doing OK are the ones (Caterpillar, IBM) with large sales overseas. Overseas customers are happy to buy these products priced in cheap USA dollars. This trend may turn the USA into the "discount mall" for the rest of the globe, but discount malls often do a lot of business. If you've traveled to Asian factories in the last few years (I have) you know that broadly speaking the people in Japan, China, and South Korea are working harder, and longer hours, and more efficiently than any workforce I know of in America. This is partly a result of cultural values -- many Americans take for granted they deserve a slice of the "good life" and should not have to work more than a 40-hour week to get a big fat reward. The Asian work ethic I witnessed was: "first you apprentice, then you work very hard, then you work even harder, then you pass on your craft, then you rest only when you are dead.” I may have deviated from direct commentary on Peter Schiff’s gold talk here – but his big-picture idea is how USA investors should position themselves in the global economy. The halcyon days when you could just buy stock in the top 5 USA-based companies (GM, Ford, Citigroup, Wal-Mart, Bank of America) and know you’d have a nice nest egg for retirement are over. Those companies are dinosaurs. In 20 years, those 5 will all be controlled by foreign sovereign wealth funds if they exist at all. Crazy talk? Not really, there are over 100 defunct USA auto manufacturers. (en.wikipedia.org/wiki/... ) In any case, if you want to know whether you should believe Schiff’s analysis I suggest you buy his book, read it, and come to your own conclusions.

Oil & Gas Industry: Projecting What's Ahead in 2030

Interesting set of statistics and perspectives. $113 per barrel oil assumes that production can continue as it has for the last decade. The situation would shift dramatically if the "peak oil" theorists turn out to be correct. Even the most conservative energy analysts (Cambridge Energy Research Associates) say that we have reached a point where it will be very hard to do anything more than keep production levels where they are. And the oil companies admit:

"All the easy oil and gas in the world has pretty much been found. Now comes the harder work in finding and producing oil from more challenging environments and work areas.”

— William J. Cummings, ExxonMobil's spokesman in Angola, Dec. 2005

So given that production is going to be increasingly difficult, and costly or actually in decline by as much as 4% annually (Simmons) it seems impossible that oil will "only" be $113 a barrel in 2030. It seems equally likely it will be $280 a barrel. The only thing that may prevent that is a recession / global depression where oil consumption drops dramatically but this seems also unlikely to depress prices much since demand in the emerging markets will remain strong enough to absorb any "surplus" as supplies decline. The conclusion to take away is we will never see "cheap" oil again. Ever.

Headed For a Normal 20-30% Correction

Past cycles can be of limited use in future predictions. While there are lessons to be gained from studying history, this approach has definite flaws as well. You can say the market has changed, and matured, and globalized, and resembles little the market of 1929 or 1979, but that does not really help you predict 2009. Events of an unprecedented nature will be a part of the next decade, any of which could have huge impact, potentially much larger than the mortgage failures, including:

1. Oil at $150 a barrel due to "peak oil scenarios" or expanding wars around the globe.
2. Global warming impacts to farming & agriculture, etc.
3. The dollar collapses against world currencies to a new low.
4. China replaces us as the "#1 superpower nation."
5. A serious plague, earthquake, hurricane, or terrorist strike in the continental USA.

Any of these, or a combination of them, could take the Dow down by half, to 6000. Personally, I am usually a bullish investor and have done well in the last year on Apple, Cisco, RIG, XTO, etc. but it is highly possible that a "perfect storm" of events could set the markets in the USA back for a decade or more of bearish trends. Where to stay safe? Who knows? Cash, CDs, foreign bonds, gold -- your guess is as good as mine.

Why is Warren Buffett So Interested In The Railroad Industry?

Lee Johnson's analysis is correct. The last century of inexpensive liquid fuels has led us to a situation where we are just learning consumers need to do more sophisticated "energy math." The "energy cost" most Americans are familiar with is a measure like "miles per gallon" for a car, which has in a minor way influenced choices if buyers are seeking lower cost of operation, but efficient MPG has not been a "critical" factor in USA car sales for the last twenty years. Only as recently as 2006 have SUV sales "slumped" while "hybrid" sales taken off. Still, few people see that their car represents long-term energy costs of mining metals, building factories to make steel, glass, plastic, etc. People do not take the long view of infrastructure costs, they see a gallon of milk is $1.29 -- they don't think much about the cow, the farmer, or the field in the sun. Net energy theory looks at how you measure if you get "more energy out" than you "put energy in." A solar cell produces power for 25 years. But costs 3 barrels of oil (in energy equivalents) to manufacture. At what point -- if ever -- are you making a "net gain?" Cars and trucks are only an "efficient" method of transportation if gasoline is plentiful and cheap. As it becomes scarce and expensive, alternatives like rail become efficient, and will replace them. This conclusion requires a little understanding of math, physics, and free market economics, but is essentially inarguable if you look at the numbers. I'm not sure how Buffet is modeling "the numbers" for railroad's superior efficiency in moving large masses of goods, but it's pretty obvious if you've ever watched a train that it can carry a larger load from point A to point B than any truck. QED.

Solar Stocks Go Nuts On Supply Agreements

Impressive in the face of some fears that solar has been a "bubble" of investor enthusiasm. However, the enthusiasm may actually be supported by the many reports coming out in recent days and weeks about the sharp rise in demand for oil, the high cost of power plant construction, and a global-warming driven desire for workable "green clean" energy. Solar, despite the problem of low-efficiency, is shaping up to be more attractive than wind, ethanol, nuclear, etc. in many applications. The sun isn't going anywhere, and is the most reliable energy source we have.

Book Review: The Oil Factor - A Must Read

This is another foray in predicting what will happen after we reach world "peak oil" production, estimated variously by experts as somewhere between 2004-2030. I have read Leeb's previous book "The Coming Economic Collapse" and in that work Leeb does his modeling off the energy crunch of the 1970's. In the earlier book, Leeb suggests investors can profit by avoiding energy-intensive industries (i.e. airlines, autos, chemicals) and investing in: 1) Gold 2) Oil and Oil Shares 3) Real Estate 4) China/India. I personally do not think that any investor would do well to blindly go into those 4 areas this time around. Gold no longer seems the sure hedge against inflation it has been for decades. Real estate is certainly unwise, at least in the USA, as we are in some late phase of a bubble with record defaults in some markets. China and India, while offering legitimate high growth, are politically unstable and contain substantial risk. China and India are great for any investor with high tolerance for risk. This leaves the prudent investor with the option of -- in a coming energy crisis -- investing in energy explorers, producers, providers. And to be sure, some of these companies will do very well in a crunch and see their profits soar, while others may find themselves under political pressure, restricted supply, or unable to meet demand. I have spent a lot of time on my portfolio, in analysis of what energy companies will be "winners" in the coming energy crunch, and I invite other readers to share their ideas about that in this forum.

16 Reasons To Be Bullish On This Market

An interesting analysis, though IMHO overly focused on financial benchmarks. I appreciate that the Mr. Merkel concludes his post admitting “real risks” as opposed to financial measures, so I’ll list six realities that make me a “nervous” investor as well.

1. The USA is stuck in an expensive war on the far side of the globe costing more than $100 billion a year at present. It seems unlikely we will be able to withdraw for some years. We will emerge with a lot of debt.

2. There is growing evidence that world oil demand in permanently exceeding supply, and no technology on the drawing boards (wind, solar, fuel cell, etc.) offers the efficiency and versatility that cheap oil has provided for the last 75 years.

3. Atmospheric CO2 is currently measured at 383 parts per million, whether you believe in “Global Warming” is a liberal media buzz word or not, something measurably new is happening to global climate, and the physics of a higher CO2 atmosphere will probably have major impacts on agriculture and regional economies over the next 10-500 years.

4. Between 2002 and 2006, USA housing prices have increased 73% creating an 8 trillion dollar “housing bubble” perched on low interest, and no painless soft landing for people who’ve bought in at the top. The American myth of "own your own home as the best, safest investment" may come seriously undone.

5. In 2006, the trade deficit reached $760 billion (6% of USA GDP) due to an overvalued dollar, which has suppressed foreign consumption of USA-made products.

6. There is no evidence that political leadership and will-to-change is forming in the US congress to adequately address any of the previous 5 issues.

All that said, I am bullish that selected industries will profit even in troubled times and that the 6 "problems" I note above can also be investment opportunities, seen from the right perspective.

iShares Asia Region ETFs Weekly and YTD Returns

The Demos think tank in the UK has written some great in-depth reports on selected Asian economies. They send a researcher to the country and spend a lot of time putting their data together. Reports are first-rate writing and free to download & review as a PDF. A very useful resource for any US investor who wants a detailed picture of a foreign culture and economy. Here's a sample written by Molly Webb on Korea: www.demos.co.uk/public...

U.S. Oil and Gas Producer Exposure to Gulf Area Hurricanes

In the WSJ today, they cited data from Colorado State Univ. researcher William Gray released his newest forecast Thursday -- an expectation for 17 named storms and nine hurricanes, five of them intense.
Dr. Gray described 2007 as a very active season. He said there was a 74% chance of a major hurricane making landfall somewhere on the U.S. coast. There is a 50% chance of a major hurricane making landfall on the East Coast, including the Florida Peninsula, according to the new forecast; the long-term average is 31 percent.
The chance of a major hurricane hitting the Gulf Coast between the Florida Panhandle and Brownsville, Texas, is 49 percent; the long-term average is 30 percent. There is also an above-average chance of a major hurricane making landfall in the Caribbean, according to the forecast.

Is Apple Beginning Its Long Delayed Descent?

I have heard at various times of customer service problems with various Apple products (iPods, laptops, etc.) but for the most part Apple's response has been reasonable. If a customer has ' non-working product, and it was Apple's fault, it was replaced at no charge. Apple seems to be aware that their customers want a higher standard of care, and Apple is willing to sell it to them in the Applecare insurance program. My friend Philip dropped his ibook laptop down a flight of cement & steel industrial stairs. After this, it did not work. I know of no piece of electronic equipment by any manufacturer (Dell, Nikon, Sony, etc.) that would have survived this fall unscathed. Because he had Applecare, the $1400 laptop was replaced without much discussion. I think it's hard to say "Apple has bad service and shoddy products" because it's just not true. They do release some cutting-edge electronic devices and sometime there are bugs. A piece of older software may not work. That's the nature of personal computing. You want to try the newest stuff? It's not going to work on your old Amiga 500 hardware. I also note that I find Apple's customer service to be better than many other major companies. I could go into my "worst customer service" story, but that involves United Airlines and is outside the scope of this discussion.