Book Review: The Age of Deleveraging: a tome by A. Gary Shilling

I heard Gary Shilling speak at a conference last month and his discussion of demographics was interesting and insightful so I sought out his most recent book: "The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation".  This book was 500 pages long.  Five hundred.  I told B. I felt like I was taking a graduate level course in economic forecasting.  I'm not even sure how to integrate this book into my body of knowledge, but here's my attempt.

The first 125 pages or so are on the subject of why we should listen to him.  Each chapter is about triumphs in prognostication he had over the years, his "Seven Great Calls" when he predicted major economic changes.  I found the history to be occasionally interesting and skimmed the chapters looking for what he considered the markers of change.  The main thing he appears to do is to really dive down into the STORY that the economic indicators are telling.  Look at the big picture: where are the demographics?  What is the existing inventory level?  What makes SENSE to happen next?  I found his methods to be plausible and in line with the way I look at the world, too.  Each of the many threads emerges into a tapestry if you stand back and look at the big picture.  This is why I read so many threads and go for long walks to let it gel.  I'm not Gary Shilling, but I don't have to be if I can listen to people who see the big picture.

The central premise of this book is that Gary Shilling sees slow growth ahead.  Period.  He stands with Mish Shedlock in the deflation camp (although he never mentioned Mish Shedlock.)  Instead, he takes on more esteemed heroes of mine.  He pooh poohs Peak Oil (we'll switch to natural gas, he says, and doesn't sound cornucopian when HE says it.)  He dismisses Milton Friedman's definition of inflation "as always and everwhere a result of excess money."  What is money, asks Shilling?  If you have a $10,000 credit line on a credit card - whether you use it or not - isn't that money?  American Express cards have no limits on them... what does THAT mean to the money supply?  Instead he talks about there being seven varieties of inflation/deflation:

1. Commodity
2. Wage-price
3. Financial asset
4. Tangible asset
5. Currency
6. Inflation by fiat
7. Goods and services.

I have to admit, I really liked having seven dimensions to this issue.  It is far more satisfying that Friedman/Martenson/Austrian versions.  It fits reality better.  It's hard to hold them all in my head at once, and they often move in tandem, but they actually are NOT identical and our current world situation has allowed the effects of different parts to be teased out better.  If I ever re-read this book it'll be for Chapter 8: "Chronic Worldwide Deflation".  This is where he makes the case that he isn't just some cranky old man moaning about how things were better when he was young (and get off my lawn, kid!)

Chapter 9 talks a bit about what help we can expect from the Fed, IMF and Congress.  It's a short chapter.  (Synopsis: none.)

Chapter 10 is about the outlook for stocks.  The short version there is that he expects very low earnings going forward.  He pretty much stayed away from the question of whether to buy index funds or managed portfolios in a confusing way, by saying managed portfolios will do better, except most of the time they don't.  He is not a fan of long-term buy and hold and hates asset reallocation strategies, too, thinking it's foolish to sell your winners to buy your losers.  Far better to just buy winners low and sell them high.  (D'oh, why didn't *I* think of that?) So, all in all, this chapter was pretty worthless to me.  (Because every book that says, "first, start by buying a high quality stock cheap right before it goes up" is similarly worthless, although is certainly fine advice.)

Chapter 11 was his explanation of twelve investments to sell or avoid.  This is worth elaborating on:

1. Big Ticket consumer purchases (because people will be more austere and expect prices to fall so they'll wait to buy.)
2. Consumer lenders (who are about to find out that "deleveraging" means that they don't get paid back)
3. Conventional home builders (demographics suck)
4. Collectibles (there's a distinct shortage of greater fools)
5. Banks (see #2)
6. Junk securities (did you notice how the lenders faired in #2 and #5)
7. Flailing companies (uh, when WERE those a good idea?)
8. Low tech equipment producers (becoming obsolete and fungible at the same time)
9. Commercial real estate (low growth = high vacancies)
10. Commodities (they're being played by speculators)
11. Chinese and other developing country stock and bonds  and
12. Japanese securities.

Japanese securities were because Japan is a stagnant aging population with a serious debt problem whose heroes all die in kabuki plays (or something like that.)  But the Chinese and other developing country stocks and bonds was because of currency risk and because the economy is still too dependent on exports to the First World.  Until a country develops a sizeable middle class that can purchase its own GDP the economy is too tied to ours, he claims, and so you just end up with the currency risk that will eat up any growth.  He also thinks that China has been stimulating itself into creating too much capacity that they aren't yet using.  In other words, he's expecting deflation there, too.

Instead, he suggests you buy:

1. Treasuries and other high-quality bonds. (This guy loves him some long bonds.  He had a unique voice on that subject and I should probably reread this section because I find myself really confused how the Long Bond could be a good investment in a 0% world.  He appears to be expecting the interest rate to go still lower!)
2. Income-producing securities (sort of the opposite to #7 above, I mean, duh.)
3. Food and other consumer staples (because they won't be subject to people putting off buying them.)
4. Small luxuries (fluffy toilet paper?  Watches?  Cosmetics?)
5. The U.S. dollar (he made the case that no one else has anything better.)
6. Investment advisers and financial planners (Wuhoo!  He makes a case that we're worth our keep.)
7. Factory-built housing and rental apartments (so, buy those REITS but make sure they aren't commercial, merely residential housing.  Uh, good luck with that.)
8. Health care.  (Demographics, government unicorn funding, the thing people want above all else)
9. Productivity enhancers (because everyone wants to run their business without actual people)
10. North American energy (because we're massive hogs who care not one whit about climate change and want our air conditioning RIGHT THIS MINUTE without having to negogiate with Iran for oil.   Sounds like a solid bet to me.)

The pieces I find myself thinking about in new ways are 30 year treasury bonds (it comes as a surprise to me that someone LIKES those) and that emerging country growth won't be as solid a play as I was thinking.  He also gave me some instruction on how to think about the Big Picture, and my brain may be ready for more on that subject after I rest up from reading this book.  It was tough going at times, and he occasionally veered into stories about his days meeting with captains of industry or highly placed officials.  I guess he's allowed.  He's pretty proud of the job he did replumbing the house he bought in 1968 and still lives in.  I found myself liking the man, much the way I like Jack Bogle and Bud Hebeler.  Overall, recommended, but be prepared to skim some parts.

Book Review: Plan C: Community Survival Strategies

Plan C: Community Survival Strategies for Peak Oil & Global Climate Change  

Have you ever gotten a book out of the library and then deliberately kept it out extra long just to reduce the chances that some poor soul will read it and be influenced by it? I felt that way about Plan C: Community Survival Strategies for Peak Oil and Climate Change by Pat Murphy. I wanted to like it. The title is everything I've been working on for the past year. My sense after reading his book is that he's more on my side than not in terms of preparing to transition to a world without cheap oil.

But with friends like these, who needs enemies. His writing reminded me of a Michael Moore film. Even though though his point is substantially correct, he makes it in such a sloppy and annoyingly inaccurate way with completely inappropriate side trips that you find yourself stuck with an indefensible argument of what ought to be well-established.

This guy has little mean-spirited diatribes through-out the book. Things like, "only get 1/2 an hour of non-propaganda news each day" and "corporations are evil" and "don't eat meat" and "white colonialists perpetrated slavery on innocent Africans." He hates everything about modern American life, including regional malls, the internet and the way we've structured our family life. The first part is a ninety page treatise on how we're all going to hell in a handbasket and richly deserve it because of the many crimes we've committed. I kept wanting to ask, seriously, "Why do you hate America so much?"

The middle section is his version of what changes he thinks we need to make in terms of buildings, transportation and food. He's not entirely wrong. It's that the entire book is filled with his crotchety yearnings for what people OUGHT to do instead of what they WANT to do. It's pretty clear that he's happy to impose his will on the cretinous public because he is right and they are wrong. My particular favorite is his assertion that we ought to fax messages rather than email them to - uh - save electricity. (???) What can I say, he mentions his desire for people to stop using the computers in general and the internet in particular several times.

The final section is mercifully short. It's a brief recap of each of the previous chapters with no additional insight. I really appreciated it because now I could suggest that people picking up this book just start on page 227 to get the fifty page version of the book. (He has nearly fifty pages of end notes and index, a trait I've noticed is common among people who play fast and loose with the truth: they bolster their bullshit six layers deep. If you actually look at his cites they are ridiculously sourced for the most part.)

But, really, don't even read the last fifty pages. There's got to be a better place to get this. Because, from him, you get stuff like this:

"Community is very weak in conglomerations of people living urbanized, industrialized lives. In those places the following characteristics hold sway.

• Teaching lust, violence and competition - Through corporate media giants, young people are taught violence and sexually inappropriate behavior. Most American TV shows, including cartoons for small children, are about little more than aggression, violence and sexual desire in some form or the other. The mass media also teach people to be fiercely competitive in sports, school, social life and work. Americans are taught that material possessions are the primary determiner of happiness."

There's quite a long list, I just chose one little gem.

Overall, this book struck me as a diatribe from a mean, angry man ranting about how no one has any friends anymore and no one volunteers or loves their family or watches out for their neighbor. It is demonstrably false in my life, but in his, gee, I bet he's right

Book Review: "Collapse" by Jared Diamond

Chwal Batay and "Collapse" by Jared Diamond  

I finished "Collapse".  It was much better reading than pretty much anything by Paul Ehrlich.  It read a bit like a SWOT analysis: evaluating Strengths, Weaknesses, Opportunities and Threats.  I like that framework; it peels away so much judgment and just gets to a baseline.  Here we are.  We face these threats.  We've got these tools.  Having been through business school, I appreciate reading case studies.  Most of them kept my attention, although Australia got pretty repetitive at the end.  (What, the editors didn't make it that far?)

I like it when a book lays out huge, insurmountable problems.  They inspire me to tackle them.  I look at these things from a perspective of a cog in a great wheel.  I'm a cog.  What do I do?  Make some jam, dig up a bit of sod to make a garden, ride my bicycle or carpool or take the bus, use a CFL bulb.  Each thing is so tiny (and there's always more to be done) that I have to remind myself that perfect is the enemy of good.  Good is good enough if it's on the trajectory towards perfect.  I also liked Malcolm Gladwell's "Tipping Point" concept: a few weirdos can become an unstoppable social trend seemingly overnight.

But every now and then it's good to find a Chwal Batay, a "Battle Horse", that can carry a great deal of momentum to get a bunch of people working on a single problem.  The term comes from Paul Farmer's quest to end AIDS in Haiti.  By getting well-meaning people to fund that, he was able to get an infrastructure in place that provides clean water, sustainable agriculture, public health systems and advocates for environmental issues.  All because people want to fight AIDS.  The money and attention and effort can do such a lot of collateral good.

One of Paul Farmer's messages, and the one I take from "Collapse", is that it really doesn't matter what chwal batay you take.  Work to sustain watersheds.  Work to preserve healthy soil.  Work to keep forests under sane stewardship.  Check out where your copper comes from... and your diamonds.  Think about mine tailings and the age of dams and how over-population in Pakistan affects you.  It doesn't matter what piece of the puzzle you grab, just grab one and work on it for a bit.  Come back and grab another later when you so choose.  It's that easy.

Book Review: Oil on the Brain

Everything you never knew about oil but really ought to find out  

I've just finished an amazing book.  It's taken me three months to read this, partly because the information was so astonishing and new that I kept having to put it down and go assimilate what I've learned. 

The title of this book is "Oil On The Brain: Adventures from the Pump to the Pipeline."  It's an investigative journalist's take on what's involved with getting gas or diesel or heating oil (and to some extent natural gas) to our fingertips. The author, Lisa Margonelli, is a journalist of the highest caliber: she writes for varied venues such as The Washington Post, Wired, Business 2.0, Discover and Jane.  She has the narrative presence of Bill Bryson and the astonishing access and insight of Tony Horwitz.  In fact, this book reminded me a lot of Tony Horwitz's amazing book "Baghdad Without A Map".  It opened up to me an entire world that I never knew a thing about.  And it's a world that matters to me - a lot - in every day life.

It is NOT a dire series of predictions.  I've read "The Party's Over: Oil, War and the Fate of Industrial Societies" by Richard Heinberg and this is much more balanced a survey of what IS, with little prediction of what will be. If Heinberg is talk radio, Margonelli is in-depth magazine article.

This is also NOT a political polemic.  In fact, there's very little opinion offered at all.  If anything is subject to debate at all it would be some of the analysis she brings to bear on situations, but I'm grateful for the insight into things I'd never considered before. 

Besides her ability to tie things together into a whole, the other strength in this book lay in her amazing access.  She spent 2003 to 2006 traveling around the world doing in-depth interviews with a variety of subjects and telling their compelling stories with an overall theme of Oil.  Each time she brought up a situation I had no knowledge about (which was pretty much every chapter) I'd go google and read up on it.  She provides twenty pages (full pages - in a small font) of end notes to this book.  It's a scholarly work.  If she has a political position in the U.S., it doesn't show.  At one point she references the costs to people in Africa of keeping wildlife free in Alaska, but more as a point that you need to look at ALL the stakeholders, not just some, when making a decision.  She doesn't make the decisions, she identifies the stakeholders.

And she tells interesting True Life Stories.  She talks about the Black Giant in the 1930's in Kilgore, Texas and then explains how the mishandling of that gusher lead directly to Venezuela's Juan Pablo Perez Alfonzo founding OPEC.  She went to Venezuela and discusses what it looks like when the government is essentially a subsidiary of the oil company.  She puts Chavez in context - for which I'm intensely grateful.  She can allow someone to be a clown and a despot, savvy and intellectually flawed all at the same time.

She follows up with visits to other oil-producing third world countries and her adventures in Chad and Niger do more to illustrate the woe that befalls people who live lives of external locus of power.  At one point she makes a compelling case why income taxes lead to a self-determining functional democracy.  The intellectual level of this discourse is at the highest level.

She somehow manages to get on Iran's Salmon Complex Oil Platform and relates the fall-out from the U.S. bombing of Iranian Oil Platforms on April 18, 1988.  She quotes naval historian Craig Symonds as saying it was "one of the most influential naval engagements in the U.S. History, right up there with the Battle of Midway."  Did you know about that?  I knew Iran had lost 800,000 people in the Iran-Iraq war.  I knew we accidentally shot down an Iranian Airbus in the Persian Gulf later in 1988 (I personally spent the next five years of my life as a defense contractor working on gun-sights for Aegis Class Destroyers to prevent that from ever happening again.)  I just didn't know we'd come in so explicitly on Iraq's side, so explicitly against Iran.  Every Iranian knows this.  Why didn't I?

She goes to the site of the U.S. Strategic Oil Reserves and discusses its economic impact as well as its geology.   She tours inside an oil refinery (on a day with an incident causing injury) and makes gas station deliveries in a tanker truck.  She works overnight in a gas station/mini-mart and spends a day in the trading pit of NYMEX.  She hangs out with guys on a drilling rig and drives a military hydrogen test vehicle (which requires a tow truck) and attends analternative fuel vehicle event in China.

The whole trip to China was illuminating.  The gist of what she found is that they might be ready to leapfrog over gasoline engines straight to alternative fuel cells.  The cities are too polluted, the government is capable of enormous levels of directed compliance, and the infrastructure isn't already owned by Big Oil.  It's a compelling case on the theme of why China might be about to eat the U.S. for breakfast. 

The blurb on the cover says "If you drive a car, you must read this book, but please not at the same time."  It's a good synopsis.  You ought to know this stuff.  As they say in China, "If you pump oil, you have to fight for it."  (It's a pun when you say it in Chinese, "pump" and "fight" sound similar.) 

I loved her a little bit for how much she didn't hate oil.  She points out at one point that the discovery of oil saved the whales.  This book is not about climate change or running out of oil or stopping exploiting indigenous populations, although all these subjects get at least a paragraph.  It's about THINKING about this subject.  How's it working for us?  Can we do better?  She concludes with a task,

"We need many fuels, not just one.  As we try to move toward energy that is both economically and environmentally sound, we need to question whether the innovations of Oil City - the cars, the corporations, the antitrust laws, the network of roads, the murky relationship between government and industry - are still working to our advantage.  Are they giving us the strategic flexibility we need?"

I recommend this book