In his book "The Coming Economic Collapse", Stephen Leeb, PhD makes the case that America is on the verge of economic meltdown due to an impending, devastating energy crisis. Leeb states early on:
An economic crisis is near at hand in America today, the kind of dramatic, earth-shattering crisis that periodically threatens the very survival of civilization. More specifically, it is an energy crisis brought about by the conflict between rising global demand for energy and our growing inability to increase energy production.
Pretty strong stuff. Seeking to answer the reader's obvious question "How can you expect me to believe that America - the world's undisputed military and economic superpower - is on the verge of societal or economic collapse when things seem to be running normally, just as they have for years?", Leeb devotes the initial chapters of the book to psychology. Leeb introduces the reader to the concept of groupthink - also known as the blind leading the blind. Per wikipedia, groupthink is "a mode of thought whereby individuals intentionally conform to what they perceive to be the consensus of the group."
Leeb's target is Wall Street, and he effectively shows us groupthink in recent action (dot com bubble & crash) as well as debunking the efficacy of the Modern Portfolio Theory (diversify holdings for best results), which is the de facto investment strategy of most money managers. Leeb is clearly a contrarian and he argues that political and business leaders are unable to see the forest through the trees, leading to the herd mentality which promotes the status quo.
Accepting that oil supply will not keep pace with oil demand from rapidly growing "Chindia", Leeb next addresses how he thinks $200/barrel oil will impact the American economy. This is where it gets tricky. Leeb sums it up nicely when he writes,"The problem with rising energy costs is that they are both inflationary and deflationary at the same time, which makes it difficult for the government to choose the right [monetary] strategy."
Inflation from rising cost of oil is a major problem, because "the higher oil prices get, the bigger the increase in the price of fuels." Rising inflation tends to slow down the economy, which is deflationary. A slower economy typically results in higher unemployment, which reinforces the economic slowdown. Leeb believes that stagflation is upon us and here to stay for the next decade at minimum.
So how, in Leeb's opinion, will the government choose to deal with stagflation? It can either raise interest rates to slow inflation, or accept a very high inflation rate. Leeb feels that the government will be unable to raise rates, because doing so could collapse home prices. American consumers have leveraged their homes to the hilt. Destroying the value of homes would be catastrophic to the consumer. Leeb states his position about future policy:
Unable to fight inflation without risking an economic meltdown, policymakers will put all their efforts into keeping the economy growing, so that wages rise faster than interest rates and debt does not overwhelm the average citizen.
Believing that the meta-trend for the next decade is higher inflation, Leeb then transitions into how to play rising inflation in the stock market. His recommendations are solid, if not ground breaking. If Leeb is correct that the Fed will be forced to accept hyperinflation, his picks and recommendations could turn out to be wise investment vehicles. I, for one, found his argument compelling and thought provoking.
"The Coming Economic Collapse", which accepts the theory of peak oil, should be considered required reading for those looking to map out investment strategy in the coming decade.
