Documentary: Commanding Heights

It’s interesting to watch a documentary that advocates the free market at the same time when the biggest financial crisis since the Great Depression is unfolding.

The documentary is based on a book by Daniel Yergin and Joseph Stanislaw.  It tells the story of how competing economic views jostled for the mind-share of governments and the public since World War I.  The narrative covers the historical background of our modern economic system.  It describes how Keynesian economics reigned during the post-WW II era where state control and regulation of major sectors of the economy were the dominant economic ideas and how the shift to free markets started during the Reagan / Thatcher administrations in the 80s.

The authors have a strong disposition towards the free-market and ideas from Jeffrey Sachs and Milton Friedman are illustrated with case studies.  One shortfall of this documentary was that it avoids cases where government intervention especially in numerous East Asian economies played a key role in developing local industry.

What I found tremendously useful was the context in which Commanding Heights lent the current financial crisis.  There is nothing inevitable about globalization or free markets – the “borderless world” that I’ve grown with is probably the most important casualty one the dust settles.  The biggest risk I believe is that protectionist tendencies may overcompensate as countries try to protect and insulate themselves from these financial risks.

Oil Shortage a Myth?

A recent article from the Independent was forwarded to me with the headline “Oil shortage a myth, says industry insider“. I was wondering why someone in a prominent position (Richard Pike was the CEO of the Royal Society of Chemists) with little to gain from either supporting or criticizing the oil industry would make such a statement.

Well, a little more investigative work led me to the original article published in the Petroleum Review in June 2006 with a title “Have we underestimated the environmental challenge?” The title seemed like a far cry from the dramatic newspaper headline – I had to find out why.

My interpretation of Dr Pike’s original article was that it made a case for how to account for CO2 sequestration (presumably as a counter to global warming and to meet Kyoto Protocol obligations) – how environmentalists and policy makers must use the larger value (proven + probably) estimates of oil reserves, instead of just the “proven” estimates. The quote “the world is understating the environmental challenge facing generations to come” actually refers to the challenge of actually removing or mitigating the effects of greenhouse gas emissions – and not of producing sufficient oil to meet current demands.

That’s why I found it strange that the Steve Connor (the Science editor of the Independent) picked up on this article and made the connection with Peak Oil, which was not the original intent of the article. Since the article was published in June 2006, oil prices has risen from $63.44 to $135 – it’s more than 100% over two years – so my guess is that there’ll be no shortage of articles trying to explain either (1) why prices are so high and should go higher OR (2) why prices are so high and should collapse.

I don’t think there’s any contradiction with the article’s findings and Peak Oil theory – the problems anticipated by the Peak Oil theory is not one of whether there is sufficient proven or probable reserves but that the production of oil will peak and decline and this prediction is not based on assessments of reserves, but on the amount of oil discovered each year (which peaked in the 1960’s at about 55Gb/year).

The only question is: when is Peak Oil? Latest EIA statistics (http://www.eia.doe.gov/emeu/ipsr/t21.xls ) indicate that world oil production has not increased since 2005 – where the average production plateaued at a little less than 85 mil barrels/day. There is increased public awareness that oil is a finite resource – witness the number of headline stories in the New York Times and bold pronouncements of $200 / barrel and $150 / barrel prices by Goldman Sachs and Deutsche Bank analysts.

But the unfortunate fact of peak oil is that it can only be recognised after it happens.

Inflation Hits Home

Everyone is hearing about rising inflation. Besides the sky-high petrol prices, it’s been mostly subtle – a few cents here and there.

When it hits home is when my favourite “deal” becomes less of a bargain…My favorite coffee roaster in Mountain View on Dana Street just raised it’s prices this month. A latte goes for $2.45 (from $2.15). And my bare-bones hair dresser now charges $6 (from $5). Ouch. In Singapore, inflation is at 7% and Malaysia raises petrol prices by 40%. Even oil-exporting countries are not spared.

Is this a symptom of how rising energy prices will dramatically alter the way we live?

Oh, and crude oil hits another record today, closing at $138/barrel.

The World Awakens To Realities of Peak Oil

In the Wall Street Journal today, the International Energy Agency (IEA) is said to be revising its forecasts of oil supply. Here is an excerpt:

For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.

For decades now, the IEA and it’s US government counterpart (EIA) has forecasted continuing increased oil product that kept pace with economic growth. 2008 will mark the year when these agencies (and major newspapers) finally admit that supplies will be harder to come by. There seems to be a growing awareness amongst investors about the inevitable shortages, driving the prices up.

Today, crude oil is at $135/barrel. It was just at the beginning of this year that oil prices breached the $100 barrier. Where will the limits be? Not until the world can demonstrate demand elasticity sufficient to offset the declines in supply. Right now, although gasoline consumption in the US is down, there is still little short term declines in oil consumption.

In recent months, I have reconstructed my portfolios to target energy investments. I have now broad holdings in oil exploration and production, drilling and services, rail – they have all done exceedingly well. This is probably a small consolation – I was able to identify the trends just months before the market did.
It might matter little if the entire economy is wrecked and there is widespread depression – but why not make hay while the sun shines.

I’ve been participating the the Motley Fool’s CAPS rating system as player ‘akok‘. Here, I share my picks for the impending realities of declining oil production – its not difficult to predict winners or losers. Just extrapolate fuel prices to twice its current level – I’m sure we’ll see $10/gallon gasoline or $300/barrel oil in the next five years (or sooner). Figure out which industries which consume lots of energy, but do not contribute to energy production while serving discretionary consumer spending (e.g., airlines, automobile manufacturers) – these are the losers.

One key risk is the form government intervention will take place. Already the US Congress has voted to stop filling the Strategic Petroleum Reserve – a vain gesture that only saw prices jump 2% the day it was announced. Truckers are demonstrating in front of the White House. President Bush has made two visits to Saudi Arabia to plead for higher production (and received a measly 300,000 b/day for his trouble). There’s always the risk of daft populist measures (like price controls, placing controls on oil futures markets, or *gasp* nationalizing the oil majors) – anything to appease the wrath of an angry population when the bounty of cheap oil is taken from them.

Another NY Times Article on Peak Oil

Another article by Jad Mouawad of the New York Times on how the rising oil prices have not spurred additional production. I think he’s a closet Peak Oil evangelist. As oil prices continue to break records, there does not seem to be an end in sight. Nevertheless, recent highs may be attributable to strikes in Nigeria and Scotland leading to panic buying of oil.

Here’s another take on my strategy for peak oil – it’s not elegant, but it makes sense to me: Last supplier standing dictates the price.  Find suppliers with calls to long term supplies of oil, and hang on to them.  Once production decline begins, oil prices may skyrocket.

The downside to this could be that government intervention may occur once supplies begin to decline.  Part of that action may be to penalize oil speculators/investors.  Can’t see how this can happen except under extreme circumstances, but who can foretell the future?

Peak Oil – further ruminations

Peak Oil has finally made it to US mainstream news. The New York Times has published an article titled “The Future of Oil” which although does not use the term “peak oil”, nevertheless calls out that oil supply is clearly overstretched. The columnist Krugman lent his weight with a broader swipe at industrial growth founded on cheap resources – “when an ever-growing world economy pushes up against the finite limits of a planet”.

Sadly, it has not yet made its impact on the political debate. Two of the three leading US presidential candidates are entertaining the thought suspending gasoline tax to provide relief for drivers – a short sighted effort which does nothing to address the root cause of the problem that oil production is now supply constrained. As all populist leaders, they must await a crisis before mustering the political will to act. The US would never have embarked on the Manhattan Project without Pearl Harbor.

On a personal level, I’ve ascended a little from the depths of despair. Declining oil production will be painful, but we are all in it together. If it’s painful for someone earning $100K/year in Silicon Valley, it must be much much worse for others in poorer places. It is no surprise that the food crisis of 2008 earned a special report in the Economist.

I spent the better part of the last four months rebalancing my investment portfolios. At least I have been forewarned (not by much). There are several resources out there that are useful for those who seek options and these are a few that I visit regularly:

• The Oil Drum. Unlike other peak oil websites, it does not focus purely on apocalyptic prophecies. It has a number of contributors who make some interesting observations about peak oil.
• Alternative Energy Stocks. Interesting ideas about possible suppliers of alternative energy.
• Energy Investment Strategies. A direct take on how to profit from the trends in energy production.

I have now placed a third of my portfolio in energy related stocks, with an emphasis to suppliers with sufficient reserves of oil, transportation alternatives and other energy suppliers.

Surprisingly, I expect a bubble around the oil prices driven by speculative interest. Broad admission of limited supplies will drive a gold rush to energy producers and costs of oil even higher. Already, there are calls on US government intervention, which will become a reality when gasoline prices reach $10/gallon.

My take is that $200/barrel is very likely by end of 2009, and even by end of 2008 if investors crowd into the market. What price would it force US consumers (and others elsewhere) to realize that behaviours need to be modified if we are to survive the next two decades?

Exchange Traded Funds

This month, I made some adjustments to my portfolio. I basically dumped my portfolio of Microsoft (MSFT) shares, and parked the money in a global index tracker. After six years of non-performance (zero returns over this period of time), it’s time to move on.

Personally, I’m in favour of index funds (or passively managed funds) because of their low cost. Over the last five years, my stock picks have not outperformed the market, and actively managed funds as a whole do not outperform passively managed funds. So the choice is clear – move to index funds!

But ever since Vanguard popularized the index fund, the number of funds and indices have multiplied. There are now indices that track every conceivable market niche and a bewildering choice of funds that track these. How can one choose a good fund to invest in?

The right choice comes down to the goals of investing. To me, investment is not about getting rich – it’s about protecting your assets from the vagaries of the market economy. The primary enemy here is inflation, and investing the money allows the returns to combat the loss of earning power.

However, the key to choosing which market (and therefore index) to invest in is the choice of which society one intends to live/retire in. Inflation in Timbuktu has absolutely no impact on me, but inflation in Singapore or in the US has absolutely every impact on my quality of life. So therefore, I need to make sure that my assets are parked in investments that can grow with the costs in these markets.

Today, my strategy is to cover several markets as follows.

• US Market – the principle is that what’s good for the US economy is good for the world. The chosen fund here is the Vanguard Total Market Index
• Singapore Market – this covers Singapore and Southeast Asia since most of the companies listed here do business regionally. Limited choice – the most accessible is the STI ETF 100, although this is constrained by low trading volumes.
• World Market – a backup in case runaway growth in other major markets hike up costs or if I end up somewhere else. The broadest coverage here is the MSCI EAFE index, tracked by EFA (iShares)

To complete this, I hold a sprinkling of Bond funds to protect against Equity fallout, and some Real-Estate Investment Trusts as a proxy for property prices.

Savings Deposits in Singapore Banks

Many in Singapore trust their money with DBS, the dominant bank in this market. Little do we know that the it provides the lowest interest rates and as incumbents, have very little incentive to innovate. Here’s just one example.

For several months, while waiting for our visas before moving to California, I had liquidated much of my assets in Singapore – primarily my car (don’t ask me how much I lost in just one year due to dropping COE rates!), and placed this money in a Savings account in DBS. This account pays a measly 0.275% for amounts above $3000. OK, so immediately I thought of a Fixed Deposit. Placing $50K for a month gets you 1.6% p.a. interest. I felt a little better.

Until I came across Maybank’s savings account – the iSAVvy Savings Account pays 2.38% p.a. for amounts above $5,000. And this is not even a fixed deposit. The downside of higher interest rates is that you are charged for any over-the-counter services like visiting a branch, etc

OK, I don’t care much for the name, but this is an idea that is long overdue. Ever since the advent of Automated Teller Machines and more recently, Internet Banking, I’ve had few reasons to visit a bank office except to open and close accounts. An account that doesn’t force me to pay for this service makes a lot of sense!

Why haven’t any of the major banks (DBS, UOB, OCBC) come up with this? And Maybank isn’t one of those high-profile foreign banks that open offices here mainly to hawk credit card and personal loan accounts.

Straits Times: Content Analysis

Ever wondered how much of the papers were filled with advertisements? I do. In recent years, I’ve felt that much of the local Singapore newspaper (the Straits Times) has been filled too much commercial advertising, and too little content. My rough guesstimate was that about 60% of the paper was dedicated to advertising.

Last week, I pulled out a paper and tried to do a quantitative analysis. Starting with only the main section (I didn’t cover Life, the supplement) I captured digital pictures of each page and assigned a percentage of each page and how much was advertising and how much was content.

Here are my findings:

• Date: Thu, 15 Sep 2005
• Total number of pages: 44
• Content: 51%
• Advertising: 49%

Surprised? I was, until I realised that most of the advertising appeared near the front of the papers, presumably where there was more reader attention. In the first 22 pages, advertising occupied 55% of the paper, which probably led to the impression I had that the Straits Times held much more advertising than it really did.

Lessons learnt:

• Instincts may not be entirely accurate- nothing beats quantitative research
• Newspapers have some more capacity to increase advertising revenue (provided they can halt the slide in readership levels)

My raw figures can be found at this link (Excel spreadsheet).

Financial Musings

Here’s a site that has some interesting posts regarding the Singapore financial scene. WallStraits.com hosts an interesting forum that appears to have a decent community with intelligent comments. Various members have posted views on unit trusts, ETFs, REITs and some of them are actually decent.

I’m sure a number of them have vested professional interests so I’m normally cautious when reading their opinions. I suspect a number of them offer financial consulting services and use this forum as a means of outreach. As with everything else, caveat lector.

On a related point (I got this link through the above forum), I posted a review of Kiyosaki’s The Business School for People Who Like Helping People last year at Amazon. It came into my hands through someone involved in network marketing, and merited my attention because of Kiyosaki’s Rich Dad, Poor Dad bestseller. The author claims to have lots of experience in the real estate market and his book’s claim to fame is revolutionising how people should seek financial independence.

My opinion of him has dipped since I’ve learned about his association with Network Marketing folks, but here’s someone else’s highly critical analysis of Kiyosaki’s writings. Hmm… again, caveat lector.