Wednesday, September 9, 2009

The Absolute Return Letter - September 2009: The Hamster on the Wheel – by Niels C. Jensen

It is not universally appreciated, but the last 25-30 years have, in general, been staggeringly good to most investors. Technology induced productivity enhancements combined with favourable demographic trends, minimal government involvement, accommodating labour unions and the globalisation of international trade have all contributed to a benign inflationary environment and strong economic growth, leading to arguably the biggest bull market of all times in both bonds and equities.

So much for the good news. The long lasting tail winds have finally turned around, and we now face, and will most likely continue to face, head winds for years to come. The list is long, but some of the most important factors contributing to this change include…..


In a series of articles over the next few months I will tackle these issues one by one, as they are all critically important. I open this month with an essay on oil. In March 2004, when crude oil was trading just below $30, I predicted $100 prices within the next decade. Please note I made that prediction way before Goldman Sachs made the same projection, for which they got the whole world to sit up and listen. Before I get too carried away, though, it should not be forgotten that Woody Brock, our economic adviser, inspired me to make the $100 projection back in 2004. Likewise, new research from Woody has inspired me to write this month’s letter.


Maybe the day is not that far away where oil producing nations – with their arms appropriately twisted behind their backs - agree to prices being regulated with oil and gas exchanges closed across the world so that investors can no longer speculate on the future course of energy prices. An extreme outcome? Not if you believe, as more and more experts do, that Peak Oil is now only a few years away and that the rate of decline on the other side of the peak will be quite steep.

Meanwhile, oil producers remind me of the poor little hamster on the wheel, spinning its tiny legs as fast as it possibly can just to keep up. There is only one problem – the hamster is getting tired - to the point of exhaustion. See for your self what happens next: