What"s more, you"ll have plans in place to make a fast exit to a safer area if things get too dangerous. If there is a real oil crisis, people will start going hungry pretty quickly. The average supermarket only has about three to four days worth of food stocks on its shelves. In an emergency situation or real disaster, this food is going to disappear in a matter of hours as people stock up. While large-scale shortages in the United States will likely be short term, this will incentivize people to store food-worsening a supply squeeze longer term.
Bottom line: The bull market in food should continue. A decline in the U.S. dollar would add extra oomph to grain prices, because grains priced in dollars are relatively cheaper for foreigners to buy with their currencies. Investors can play along with some exchange-traded funds that focus on agriculture and farm equipment stocks.
Climate Crisis
Severe weather already costs North America tens of billions of dollars annually in productivity and damaged property, and those costs are expected to rise, according to a UN report.5 Droughts will also occur more often in the U.S. Midwest and Southwest as warmer temperatures evaporate soil moisture. Droughts will worsen the depletion of underground aquifers-not only the huge Ogallala aquifer but also ones like the Edwards Aquifer in Texas, which supplies two million people with water.
Our use of fossil fuels gets blamed for much of global warming. But part of it is a cyclical pattern in Earth"s weather. And a much bigger contributing factor than fossil fuels is modern industrial agriculture, which is responsible for an estimated one-third of emissions that contribute to global warming and climate change, according to a report from the International Forum on Globalization.6 Pesticides and chemicals used in agriculture, as well as deforestation and the burning of bioma.s.s, contribute about 25% of a greenhouse gas, carbon dioxide, which is raising global temperatures.
Paradoxically, one of the biggest victims of climate change is agriculture. Some scientists say that for each temperature rise of 1.8 degrees Fahrenheit (1 degree Celsius) above the historical average during the growing season, there is about a 10% decline in grain yields.
Looking ahead, global warming could lay waste to a wide arc of fertile, wheat-growing farmland stretching from Pakistan through Northern India and Nepal to Bangladesh.
But agriculture isn"t the only victim of global warming. Global warming makes storms more severe, and intense hurricanes and other mega-storms will likely hammer countries around the world. And we could see the global icecaps melt much faster than scientists have predicted so far-the melting outpaces all models. As a result, sea levels could rise as much as three feet by the end of this century-or worse.
If the American people really start to worry about global warming, we could see money pour into green stocks-stocks that help the environment or work in alternative energy. That, in turn, should be good for exchange-traded funds that hold baskets of these stocks.
Four Plus One Equals Potential Catastrophe
It"s plain that these four crises I"ve described-in energy, water, food, and climate-can all feed on each other. Fixing these problems will take the ability to make tough choices even when they aren"t popular, as well as a willingness to embrace change, ingenuity, and money. And it"s that last one-money-that can be so critical. It"s hard to have expensive new government initiatives or spark new private investment when credit is tight or even unavailable.
That brings us to the fifth emergency: Indebtedness. The synchronized collapse of credit bubbles around the world raises the risk of sovereign defaults. At the same time, the credit crunch is making it more difficult to borrow money. Munic.i.p.alities that want to put in a new water treatment plant or augment their power with a solar array, for example, find it nearly impossible to raise money.
Meanwhile, the debt of households has climbed much faster than their net worth in the last 50 years, according to data compiled by the Federal Reserve. Finally, enough "s enough-in late 2008 and into 2009, consumers started unwinding their debt. But this raises a couple of problems.
First, we"ve seen periods where consumers reduce debts before. These unwindings last for about 10 quarters on average. And an average unwinding of debt would suck about $300 billion out of the economy.
Second, consumer spending, which accounts for 70% of total economic activity, tends to go down along with consumer debt. This batters the economy and kneecaps attempts at recovery.
This, in turn, means states and cities have less revenue, so they need to borrow more money-but when credit is tight, this becomes difficult. As a result, spending priorities get skewed to absolute necessities, and projects that would alleviate future crises in energy, food, water, and climate just don"t get done.
The Many Other Dangers. In addition to these five emergencies, there are numerous dangers a.s.sociated with a weakening economy and failing currency. Here are three examples:Danger #1-Government intervention in the markets. The market bubble could continue to deflate, with the S&P 500 heading to 500, 400 or lower. In response, the government may activate its plunge protection team to bid up stock prices. This is a danger because (1) this prolongs whatever pain the market was going to go through anyway, (2) you can only artificially hold up stocks for so long, and (3) it will spark false hopes and bring more investor money into the market at the wrong time.
Danger #2-Devaluation. If the government continues to paper over its problems with fiat currency, there is a danger that China and other nations that underwrite Uncle Sam "s profligate spending will balk at buying more U.S. Treasuries. This could send bond prices crashing, bond yields soaring, and the U.S. dollar slumping lower. This would be bad for all Americans, but especially bond investors.
Danger #3-Hyperinflation. Following hot on the heels of a U.S. government bond default and devaluation would likely be hyperinflation-the collapse of the U.S. dollar against hard a.s.sets like gold. While people who own gold will be able to preserve some of their wealth, the cost of imported goods will soar for everyone. Since the United States has exported many of its factories to Mexico and China, this would be terrible news for consumers. The economic carnage would likely devastate the stock market.
Even if these dangers don"t rear their heads, we"re going to be in one of the trickiest investing environments in living memory. However, the important thing is not to let your fears get the best of you, because even in the worst of times, there are areas where you can do well.
Three Potential Profit Bonanzas
Now that I"ve scared you out of the market forever, let "s take a deep breath and talk about things that could go very right for investors. These three potential areas for profits may give you a reason to get in, if you"re comfortable with the risk in the market.
Potential #1: A New Industrial Renaissance
If the government and banks can work out the debt problem, then we can see spending on new projects. And new technology exists that could revolutionize the way we live and are just waiting to be financed.
Renewable forms of energy-solar, wind, geothermal, hydropower, bioma.s.s, and even ocean waves and currents are all within reach. Some, like solar, have seen amazing breakthroughs in just the past couple years.
Research and Development. We"re already seeing billions invested in renewable energy research; for the cost of what we"ve spent on the Iraq War-probably less-it could become a doable reality.
One of the biggest developments is reimagining buildings not just as places to work but as power plants, with independent solar power systems. This is already happening in parts of Europe, and it could take place in the United States, too.
Back to work! To bridge the gap between the murky now and a bright future, we"d need an industrial effort like the United States hasn"t seen since World War II. The nation"s industrial muscle turned into the rust belt over decades, but if we enact a moon -shot level renewable energy push, there will be a new use for those old factories-building the power systems of the future. Cities like Pittsburgh, Buffalo, Youngstown, Cleveland, Detroit, and more were built at their locations before cars came around. That means they have excellent access to waterborne transport and existing railways-exactly the kind of industrial centers we "ll need in a post-oil age.
Power Up! One project those factories will be working on is a new power grid-our old one is falling apart. The new grid can be a smart grid-a self-monitoring, automated grid that can provide power to where it is needed the most with vastly improved efficiency.
President Obama already announced plans to modernize 3,000 miles of transmission lines and install smart meters in 40 million homes.7 A real smart grid will do the same on a much bigger scale. According to some reports, utilities will need to add an aggregate of nearly 40 gigawatts of clean energy generation by 2030, and to get all that power to customers, a total investment of as much as $2 trillion into transmission and distribution networks will be required.
The power-up could be enhanced by a build-out of new power lines using new superconductors;8 materials that transmit electricity with zero resistance. A set of cables carrying five gigawatts of power can fit into a pipe just one meter across, and it can be buried underground. Part of the pipe will be taken up with a cooling system; these superconductors work only when kept at the temperature of liquid nitrogen. The cooling equipment draws some energy from the cable, but still far less than the losses in today"s cable.
None of these three pillars of the new industrial renaissance are cheap. But they would be a brilliant investment for our country.
Potential #2-A Transportation Revolution
A transportation revolution will use some of the same industrial platform as potential profit area #1, but since the United States is car-centric, it deserves its own discussion.
Electric cars are only part of the solution. And they"ll have their own limits; if everyone switches to electric cars, we"re going to run up against the limits on how much lithium the world has to offer. But a vibrant electric car market is only one step down the road to a new transportation future.
Reimagined fossil fuel vehicles are another. We"ll see vastly more efficient gasoline and diesel engines, as well as cars and trucks that run on natural gas.
Finally, we"ll see a lot more rail. And if we follow the examples of Russia and China-two countries that know a thing or two about how to build railroads-we"ll build electrified rail. Most European and j.a.panese railroads are electrified, too. At theoildrum.com, Alan Drake has laid out the case for why the United States cannot afford to get onboard electrified rail before that train leaves the station.
We"ll probably be using more rail transport in the future anyway. Today"s diesel railroads are roughly eight times more energy-efficient than heavy diesel trucks. Trucks get subsidies that railroads don"t; that"s probably going to change. At the same time, Alan writes:USA railroads have pointed to property taxes as the reason that they have not electrified (no taxes on their diesel, property taxes on electrification infrastructure). Exempting any rail line that electrifies from property taxes under the Interstate Commerce clause would promote the rapid electrification of many rail lines.
The United States once built 500 electric streetcar systems in 20 years. Most towns of 25,000 and larger built a non-oil electrical transportation system. The USA did this with a population of less than one-third of today"s, approximately 3% of today"s GNP, and simple technology. We did it once; we can do it again!9 As for my view, I know that politicians love big projects they can show off. Nothing shows off nice and pretty like a brand spankin" new railroad engine. And, frankly, if we took just some of the money we now spend building ever-more-horrific bombs and spent some of it subsidizing railroads, we"d probably get along better with our neighbors.
Potential #3-Asia Transitions from Producer to Consumer
Potential profit area #3 builds on the other two points-if we can jumpstart an industrial renaissance and if we can proactively work on solving the next energy crisis before it begins, then the United States will be positioned to get a piece of the biggest action in the twenty-first century-the transition of Asia (led by China and India) from the world"s backroom factory and call center to 2.4 billion consumers.
The United States" industrial revolution reshaped it into a world-cla.s.s economic and political power; it created t.i.tans of industry and wealth like the world had never seen, it rewrote the rules of the global economy, and it created America"s middle cla.s.s. These things are already starting to happen in China. And if China leads the world out of the recession, we could see a lot more of it.
Energy: Chinese citizens are transitioning from bicycles to mopeds to cars-and using more energy all the time. While China"s oil imports flattened out in early 2009, that"s probably just temporary-and we"ll see demand grow enormously in the future.
Metal: Chinese consumers are buying more finished products-boosting China"s demand for aluminum, lead, zinc, nickel, iron, copper, and all types of metals.
Grains and Meat: As the Chinese get more money, they still eat noodles but they eat a lot more meat. In 2008, pork consumption in China rose 25%.
Drugs: China is the world "s seventh-largest market for pharmaceuticals. And as China"s consumers get more cash, they"re buying more western drugs. China"s pharmaceutical sales are projected to rise 20% annually. After some embarra.s.sing deaths due to counterfeit drugs, the government is cracking down on the counterfeit drug trade, which opens the door to potentially big profits for legitimate firms.
Each of these profit areas could be an exciting place to invest in the years ahead. There is peril in this market, but also the potential for a big payoff if the global economy shifts into higher gear.
So should you invest? That depends on how comfortable you are with risk.
Three Levels of Risk and Reward
So far I"ve told you about five intersecting emergencies that could shake the world and Wall Street. I"ve also told you about three dangers facing investors, as well as three potential areas of profit. I could write a lot more about each one. But by now, you might be asking: Which of these dangers are inevitable? Which of these potentials is going to happen?
The truth is, I don"t know, and anyone who tells you they do is a liar. What I can do is talk about some investing styles and how you can invest for each one. Thus, you"re going to have to define your own comfort level and make the investments that are appropriate for you.
Investment Risk Level #1-Get Out and Stay Out
One way to invest for these emergencies is to be extremely conservative-simply get out of the markets. If you have this investing mindset, you put most of your money in short-term Treasuries, with some in physical gold as an inflation hedge.
Staying out of the stock market is not necessarily a bad strategy. You avoid the risks from short-term disasters-man-made or natural-that could shake investor confidence and send stocks tumbling.
On the other hand, disaster may not arrive on our doorsteps tomorrow, or next month, or next year. The magicians on Wall Street and illusionists in Washington are adept at pulling the wool over the eyes of a public that is desperate to be fooled into a sense of normalcy.
Heck, I don"t have a crystal ball, and neither do you. The day of reckoning may not come for years; it may not come in your lifetime. That"s not likely, but you have to at least admit the possibility.
And there are circ.u.mstances where you may wish to keep at least some of your money in the markets, working and growing. That brings us to . . .
Investment Risk Level #2-Long-Term Buy and Hold
Some of us need to grow our capital, and cash won"t do that. But what kind of investing do you want to do-buy some solid funds (or even stocks) for the long term, or trade in and out? There is no one-size-fits-all right answer. It all depends on your investing style and appet.i.te for risk.
Wall Street is busy telling us that buy-and-hold is dead. That "s because Wall Street makes its bread and b.u.t.ter getting investors to trade as much as possible. I believe in a mix of investing styles, just as I believe in a mix of investments in my (or any) portfolio. And buy-and-hold has a place in your portfolio if you believe in long-term trends.
Those trends include the five emergencies I mentioned earlier. But they also include mega-trends that are shaping our world and will likely continue to do so no matter if the U.S. economy prospers or slumps. I"ll share some ideas for long-term buy-and-holds with you in just a bit.
First, let"s talk about areas of potentially enormous opportunity in the years ahead for buy-and-hold investors.
Invest With Mega-Trends in Mind. There are big trends taking place regardless of economic cycles. In his 1982 landmark book Megatrends, author John Naisbitt forecast five major shifts:1. Industrial society to information society 2. National economy to world economy 3. Hierarchies to networking 4. North (developed countries) to South (developing countries) 5. Simple choices to multiple options These trends have all been realized, some more than others. And they shaped not only the world we live in, but also the world in which we invest. Google, for example, is riding both the information society and the multiple options mega-trend. Multinational corporations like IBM and McDonald"s are doing well thanks to the world economy.
Trends don"t last forever, and new mega-trends take shape. For example, a great wall of baby boomers, born between 1946 and 1964, are approaching retirement age. The oldest baby boomers turn 63 in 2009, and when the trend peaks in 2030, the number of people over age 65 will zoom to 71.5 million-one in every five Americans.