Wikinvest Wire

The Billionaire Pessimists Club

Wednesday, December 14, 2005

We've heard many times from Warren Buffet about the difficult road ahead for the U.S. economy - the dollar, the perils of living in Squanderville, and the ascendant Sharecropper Society are his most notable objections to the rosy picture painted by Wall Street economists and government officials.

Even Mr. Buffet's much younger, slightly richer, sometimes side-kick, and occasional bridge buddy Bill Gates has been rather down on the dollar lately due to rapidly accumulating debt and the plethora of promises made by the U.S. government.

George Soros and Jim Rogers of Quantum Fund fame are bearish on Bush economic policies and bullish on commodities, respectively. Both of these views bode ill for the American way of life as it has been known for the last half century. That is, the American way of life for most of the citizenry - for the upper few percent of the populace, rising energy and raw material costs are more than offset by a reduced tax burden.

Sir John Templeton has been predicting a U.S. real estate disaster for some time now, and Bill Gross at Pimco has likened the current state of affairs to Rome burning, and much worse.

What do all these gentlemen have in common?

They are all billionaires, they all speak freely, and they all have very serious concerns about the course that the nation's economy has charted.

Is anyone listening to them?

Very few - clearly, not enough. Maybe if there were more billionaires out there talking about issues like this, they could really make a difference. But who? Don't look for the Walton clan of Wal-Mart fame to start talking, or Larry Ellison of Oracle, or Michael Dell of Dell. They don't want to ruin the good thing they all have going.

And certainly don't look for Oprah Winfrey or Donald Trump - they are likely weak on macroeconomics in general and global imbalances in particular.

Just when it looked like the outspoken "Billionaire Pessimists Club" was beginning to lose their momentum, along comes Richard Rainwater.

Richard who?

Good question. Appearing in the current issue of Fortune Magazine, meet Richard Rainwater, billionaire pessimist, dour survivalist, peak oil alarmist, and new hero to this humble blog:

Richard Rainwater doesn't want to sound like a kook. But he's about as worried as a happily married guy with more than $2 billion and a home in Pebble Beach can get. Americans are "in the kind of trouble people shouldn't find themselves in," he says. He's just wary about being the one to sound the alarm.

Rainwater is something of a behind-the-scenes type—at least as far as alpha-male billionaires go. He counts President Bush as a personal friend but dislikes politics, and frankly, when he gets worked up, he says some pretty far-out things that could easily be taken out of context. Such as: An economic tsunami is about to hit the global economy as the world runs out of oil. Or a coalition of communist and Islamic states may decide to stop selling their precious crude to Americans any day now. Or food shortages may soon hit the U.S. Or he read on a blog last night that there's this one gargantuan chunk of ice sitting on a precipice in Antarctica that, if it falls off, will raise sea levels worldwide by two feet—and it's getting closer to the edge.... And then he'll interrupt himself: "Look, I'm not predicting anything," he'll say. "That's when you get a little kooky-sounding."

Rainwater is no crackpot. But you don't get to be a multibillionaire investor—one who's more than doubled his net worth in a decade—through incremental gains on little stock trades. You have to push way past conventional thinking, test the boundaries of chaos, see events in a bigger context. You have to look at all the scenarios, from "A to friggin' Z," as he says, and not be afraid to focus on Z. Only when you've vacuumed up as much information as possible and you know the world is at a major inflection point do you put a hell of a lot of money behind your conviction.

Such insights have allowed Rainwater to turn moments of cataclysm into gigantic paydays before. In the mid-1990s he saw panic selling in Houston real estate and bought some 15 million square feet; now the properties are selling for three times his purchase price. In the late '90s, when oil seemed plentiful and its price had fallen to the low teens, he bet hundreds of millions—by investing in oil stocks and futures—that it would rise. A billion dollars later, that move is still paying off. "Most people invest and then sit around worrying what the next blowup will be," he says. "I do the opposite. I wait for the blowup, then invest."

The next blowup, however, looms so large that it scares and confuses him. For the past few months he's been holed up in hard-core research mode—reading books, academic studies, and, yes, blogs. Every morning he rises before dawn at one of his houses in Texas or South Carolina or California (he actually owns a piece of Pebble Beach Resorts) and spends four or five hours reading sites like LifeAftertheOilCrash.net or DieOff.org, obsessively following links and sifting through data. How worried is he? He has some $500 million of his $2.5 billion fortune in cash, more than ever before. "I'm long oil and I'm liquid," he says. "I've put myself in a position that if the end of the world came tomorrow I'd kind of be prepared." He's also ready to move fast if he spots an opening.

His instincts tell him that another enormous moneymaking opportunity is about to present itself, what he calls a "slow pitch down the middle." But, at 61, wealthier and happier than ever before, Rainwater finds himself reacting differently this time. He's focused more on staying rich than on getting richer. But there's something else too: a sort of billionaire-style civic duty he feels to get a conversation started. Why couldn't energy prices skyrocket, with grave repercussions, not just economic but political? As industry analysts debate whether the world's oil production is destined to decline, the prospect makes him itchy.

"This is a nonrecurring event," he says. "The 100-year flood in Houston real estate was one, the ability to buy oil and gas really cheap was another, and now there's the opportunity to do something based on a shortage of natural resources. Can you make money? Well, yeah. One way is to just stay long domestic oil. But there may be something more important than making money. This is the first scenario I've seen where I question the survivability of mankind. I don't want the world to wake up one day and say, 'How come some doofus billionaire in Texas made all this money by being aware of this, and why didn't someone tell us?'"
Global imbalances, the U.S. dollar, unsound fiscal policies, raging commodities markets, a real estate crash, and Rome burning all seem to be manageable, but an economic tsunami as the world runs out of oil?

That sounds like something that we should keep an eye on.

16 comments:

john_law_the_II said...

if you want to see what peak oil may look like, study peak whale oil.

ajn said...

2nd place I read this today.

Peak Oil is real.

Peak Whale Oil was real too. But Whale Oil was never the industrial backbone like the Black Gold stuff.

Oh and natural gas prices are going up and up like crazy too.

Tim - Have you done much reading up on the pessimist view of Peak Oil?

Tim said...

AJN,

I've read a little bit about both sides. Naturally, I think Matt Simmons makes a pretty compelling case - theres a good interview with him here.

Daniel Yergin is representative of the other side.

This is an area where no one can really prove anything conclusively today, but Matt Simmons makes a good point that whenever someone voices an opinion, you should always try to understand what their motivation is (i.e., who's payroll their on, what they have to gain personally).

ajn said...

I have been following Peak Oil since before Matt Savinar wrote his website (LATOC), and Matt Simmons his book.

Actually, I was on the Energy Resources Yahoo Group, (still am. That is where I first saw the Fortune article above), when Matt Savinar first went public by posting a link there.

I was in the same state as the billionaire. I have let it pass. I found it not healthy.

Then I figured, I need to worry about my finances. Thought to myself, I want to own my own home. Saw the prices, saw my salary. Saw that I make over median income. Saw I couldn't afford even the cheapest condo.

Hmm what is wrong.. AHA.. It is not me, it is the system. It is other people taking risks I choose not to take. Housing Bubble! Where on the internet can I find more about that . Found Ben Jones site. Found your site from that site when I saw the debt inducing policies by Chairman Greenspan. Have been enjoying your site ever since.

It has all come full circle.

PS I just finished the book Greenspan's Fraud.. Have you read that?

Anonymous said...

I used to be a peak oil nut, until I did some actual research on it. We will not run out of oil, because as soon as it becomes more expensive, other alternative fuels will step up to the plate. This is important, because you have to realize that oil isn't really a "source of energy" per se, but a way to conveniently transport energy.

Other ways to create transportable energy that can become profitable in the near future:

*Thermal Depolymerization

Basically, you take ANY organic raw material (turkey parts, raw sewage, old tires, etc) and convert it to raw crude, minerals, and water. It's basically an oil plant with a couple extra pieces of equipment that does the job, and it's self-powered by methane gas given off in the reaction. In short, we could get oil from trash, and we have plenty of that lying around. Currently there is ONE functional plant, but because the oil produced by it costs $80 a barrel, there hasn't been much investment. Economies of scale, updates of environmental regulations would make it much cheaper.

*Oil Shale, Tar Sands

We have enough of that crap sitting under the US and Canada to power the whole planet at current energy levels for several decades. You bet your ass I bought shares of that stock (Canada Oil or something like that). It's just that it requires a lot more infrastructure to turn that into crude than arabian oil. It will become more profitable to extract it once the price of oil goes up further.

*Biodiesel

Basically, any animal or vegetable oil can be put through a simple process to be run in a diesel engine. The diesel engine doesn't need to be updated or anything to use this fuel source, and it's actually better for the environment and smells better. Currently all modern diesel fuel has some amount of biodiesel. In fact, the inventer of the diesel engine proposed to use vegetable oil before crude oil became vastly cheaper.

*Ethanol

I was reading about this, and apparently any unleaded fuel engine with a turbocharger permanently turned on can use a pure ethanol fuel source, with *greater* horsepower. Standard unleaded fuel engines can use pure ethanol, but at a large horsepower penalty. Ethanol can be produced with a simple mixture of yeast, starch/sugar, and water kept near room temperature.


Keep in mind that producing these fuel sources DOES NOT HAVE TO HAVE A POSITIVE NET POWER OUTPUT. The extra energy needed to produce fuel (which is merely any easily transportable power source) can be obtained through renewable energy sources, or nuclear power (in 50 years, fusion power).

ajn said...

I whole heartedly disagree ferromancer.

EROEI(Energy Returned on Energy Invested) is the key here.

All new technologies mentioned above have a lower EROEI.

The real key is lowering our societal dependence on energy. Because in the future energy will be expensive and precious.

Does that mean we should not look into those techs. Of course not. We have to expand our basket to figure out what works and what doesn't.

john_law_the_II said...

peak whale oil was real. peak oil is real. sure, new sources of energy will be found, but that's going to:

1. take a long time
2. be disruptive
3. happen at a MUCH higher price

many alternatives involve oil somewhere in the process anyways.

Anonymous said...

My point is though that EROEI *doesn't matter*. Yes, using 1.1 barrels of oil to get 1 barrel of oil out of the ground would be pointless. But using, say, a windmill to bring oil out of the ground even though the windmill is more expensive than the oil doesn't matter, because the oil is simply a very compact form of energy.

Moreover, the EROEI for Thermal Depolymerization is actually very good. If you put in one ton of trash (that you probably don't want to burn for environmental reasons) will yield about 65% percent of its energy in the form of a barrel of oil, which is much more desireable to burn. In other words, 35% of the trash's energy (which is useless energy) was used to convert it to oil, a very compact and useable form of energy.

It doesn't matter where our energy comes from, as long as it comes in a nice little package that we can stuff into mobile vehicles. Liquid fuel just happens to be the best mobile fuel at the moment.

Also, you can't control society's dependence on energy, at least not directly. We can *try* to reduce the amount of energy used per person, but if our population doesn't level off, we will continue to use more and more energy each year. I have faith in the market however, that as it becomes more expensive to drive to work and heat your home, people will live closer together and save energy.

ajn said...

In the mean time more and more McMansions are built that require high heating and cooling costs in the middle of a desert.

I think of this as an opportuninity though. We can set up the market and government (they go hand in hand in my world) to promote living closer together and saving energy.

I don't have complete faith in the market by itself though. Industrial capitalism does not work when things are shrinking. Growth is the mantra. Actually it is usually called a recession or even worse a depression when output is shrinking.

That is why in our democracy we have to work all the way around the issue. Not just supply by the markets, but demand by the consumers, incentives by the government, a collective societal shift on what money should mean.

There is hope and it will be fun to see what will happen. Much easier on the soul than thinking of the dieoff. Although in my mind it is still a possibility.

iron56 said...

Actually, as solar power gets cheaper and cheaper (see, e.g., pyronsolar.com), deserts are likely to become very valuable. If you _really_ want to get off the grid, the middle of the desert is probably where you want to be.

Anonymous said...

After the housing boom goes bust. McMansions will be made into affordable apartments. Which will have less energe use per person. Its happened before. where I live there are tonns of apartments that were single family homes pre 1920's. Humans are addaptable.

For every loser there is a winner. Oil prices go up = oil co makes more money, oil prices go down = less money for new production/investment. I really don't think were all going to die. Things could get really tight when the merry-go-round breaks down. I think we'll see a new currecy and tax system. Or some other human idea to make trade work. Until then I think the Gov'ment will just do what they "think" works.

Anonymous said...

anonymous: Of course we're not all gonna die. Only "some" will, and "some others" will have their living standard and quality of life more or less severely curtailed. Which may include some of us or not. OTOH quality of life is to a larger extent than commonly imagined a function of social organization, and less of material goods (aside from basics like adequate food and medical care).

Anonymous said...

They are just over the hill bitter investors that cannot embrace the new paradigm.

Just kidding...

Diversified and liquid is not bad.

Local food will be important as Simmons stresses.

From a pure self interest perspective the future doesn't look bright.

From a species point of view no big deal.

Punctuated Equilibrium is a term in evolutionary biology. That long periods of stasis are interrupted catastrophically and that is when evolutionary adaptations occur.

I believe that we are approaching one of those moments now.

Anonymous said...

Oh darn! We're running out of oil!! Does that mean I have to get rid of my Hummer?

Rachel Luxemburg said...

I was one of those people who was seriously concerned about "Y2K". No so seriously that I bought a year's worth of food and holed up in the wilderness with guns, but I had hard copy of important records, some cash on hand, and a "3 day" disaster kit prepped for New Year's Eve 2000.

I've come to believe that 99 times out of 100, the disaster predicted is not going to be as bad as people think it will be. Whether Peak Oil is one of the 99 remains to be seen.

Anonymous said...

You say, "But you don't get to be a multibillionaire investor—one who's more than doubled his net worth in a decade—through incremental gains on little stock trades" but according to the rule of 72 you can double your investment in 10 years by earning a mere 7.2% on your money, easily done with incremental gains on little stock trades, or in fact a bond index fund.

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