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Throw All Your Ideas On Investing & The Economy Out The Window

12 July 2010 One Comment

Usually when I read a really good article on the internet, it’s either super complex or its super long.  Last week I read an article by Chris Martnenson that was excellent, simple and succinct.  I’d like to share it with you today.  The article can be read here.

In this article Chris lays out a high-level view of why he thinks everything economically is going to change in the next 20 years.  This includes our views on stocks, debt, investing, energy and more.  If his ideas, which we’ll get into in a second, are correct, it means that every model and theory on investing that the vast majority of Americans embrace should be absolutely trashed.  If these views come to fruition, these traditional models and theories will absolutely be trashed years from now.

First up, Chris discusses the overall economy.  A big driver of growth over the last decades is the parabolic rise of debt levels.  In the last decade, we basically doubled our debt.  The previous decade, debt doubled as well.  Essentially to continue the trend, we will need to double our debt again which involves essentially another $50 trillion in total debt.  Chris says:

Can debt continue its parabolic growth? If it doesn’t, it’s safe to say that the behavior of the economy that most investors accept as “the way things work” will change, and probably quite dramatically. By extension, much of what we’ve learned about investing in stocks and bonds during this period will mislead rather than guide.

Moving on, Chris believes energy will be a major catalyst for change in the coming decades.  While the concept of peak oil is hotly debated, most believe we are at least moving towards a period where the easily extracted oil that drives our global economy is being depleted.  This is likely to cause major, major changes as Chris explains:

To a long-term investor, none of these are acceptable outcomes because they all indicate that the mechanism of economic growth and wealth creation will profoundly change within zero to 10 years.

Lastly, the environment is a major catalyst for change as well.  By environment, Chris isn’t spouting off Al Gore like theories, but instead is focusing on minerals and resources that also drive economy output.  With many elements reaching peak levels of production, many changes might result:

Does all economic activity cease with the depletion of a few key elements? No, of course not. But neither does our economy continue to operate in precisely the same way that it did when demand alone dictated supply.

And that’s my key message here. There is a wealth of data suggesting that a period of profound change is either already upon us or coming soon enough to capture the attention of any serious long-term investor.

The point in these arguments is that there are a number of major factors that can result in significant changes in the way everything about our economy works.  In a global economy where growth has been driven for years by cheap, plentiful energy & resources and driven by increasing levels of debt, the stage is set for massive, massive transformation.  In such a transformational period, concepts like historic 10% stock returns are not just incorrect, they are ludicrous.

With this in mind, our financial models go straight out the window. We’ll need new thoughts, tools and expertise to guide us towards wealth creation and maintenance. Stocks and bonds in general simply will not behave as they have in the past as we enter a new world of constant economic shrinkage. Current discount models feed on earnings growth and compounding interest that will no longer be obtainable.

Americans looking for financial security moving forward should be very wary of the Wall St. model of having maximum allocation to risk assets no matter what.  This highly-embraced financial philosophy over recent decades is likely to only produce one winner: Wall St.  New ideas are being embraced and will continue to grow in my opinion.

A trend moving away from paper, financial instruments and towards real assets is gaining momentum and will continue in my opinion.  What real assets am I referring to?  Precious metals is a good place to start, but that’s only the tip of the iceberg.  The concept of real assets can be extended as far as you want to take it.  Consider the idea of security.  Security comes with the knowledge of being able to provide life’s necessities for oneself in the future.  Perhaps, real assets includes reserves of life’s basic necessities?  Perhaps, real assets includes a garden that produces food for consumption?  Just throwing ideas out here…

I appreciate Chris’s article and a very succinct explanation of some of the catalysts that are likely to transform the way we view the economy and investing.  What do you think?  Do you agree with this?  If so, what are you doing about it?

One Comment »

  • wingtipwalker said:

    I thought the baby-boomer angle was interesting…I had never considered the fact that the switch from being asset buyers to asset sellers as the boomers enter retirement will put downward pressure on asset values. It's very clear to me that the younger generations (who don't even have a positive savings rate) won't be able to absorb the increase in supply.