Energy, Cycle Theory and a Weak Dollar

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How about some reader mail?

Regarding our latest observation that we may be at the start of a great, resource-intensive cycle of industrialization, one reader mentions the natural limit in the growth of any system: energy. “When we consider the growth of different economies and the cycle of resources I think it is of great importance to consider where we are in peak oil! Oil will be the final and deciding factor of this cycle of expansion.” Probably so.   Check out Exxon Mobil’s thoughts on Peak Oil.

Another reader puts the “cycle theory” of global growth in perspective. “There is an “economic day” that follows the celestial day around the globe. The “economic day” takes much longer, of course… centuries… but it has moved from the Cradle of Civilisation in the Middle East, through the Mediterranean, into Europe, across the Atlantic to North and South America, then across the Pacific to Japan, Korea, and now… China, India and the antipodes, Australia and New Zealand. The 21st Century will belong to China and Australia/New Zealand, with India close behind. The Chinese are simply doing what they’ve always done best throughout their history: being consummate mercantilists. The 50-year experiment with “Communism” will be nothing more than a footnote on China’s history centuries hence. The “economic day” has reached them, and now it is their day in the sun.”

Here is a very practical question from a reader: “How does one buy Australian stocks for $7-8 a pop as we do here in the U.S.?” Sadly, the best of our knowledge (which we admit is limited) you can’t. Retail investors get rough treatment here in Australia, both in the pricing of execution only stock trades, and in the quality of useful and inexpensive trading data. We are aiming to change the latter, and suspect the market for Australia’s $1 in managed funds will attract more competition for the retail investment dollar, improving service. You can always hope…

Another question about the U.S. dollar. “To my way of thinking, Bill’s argument about it being $30 for a steak in Dallas and $60 in London would mean the opposite to what he is implying. It means the dollar is way over valued, not “cheap”. The currency would need to depreciate by 50% to make it $60 for a steak in Dallas, the same as London. Therefore the dollar is chronically over valued and the dollar should go down. Or am I missing something?”

Answer: Nope. You’ve got it right Dave. By “cheap” we think Bill meant that when you take it abroad, the dollar just doesn’t go as far as it does at home. He means “cheap” in the tawdry, miserly, way. Not cheap in the attractive, beaten-down value way.

His story does point out one strange aspect of the dollar’s weakness: no one in America notices it. Americans don’t notice the dollar’s decline because its purchasing power, at least inside the U.S. has not noticeably fallen. Quite the opposite, in fact.

Cheap imports have kept retail inflation at bay. Also, huge foreign buying of U.S. bonds has kept U.S. interest rates low, which makes it a lot easier to keep racking up big credit card debts. And Americans are in love with the other aspect of inflation: rising asset prices. Who doesn’t want a stock or house to double in price? If that’s inflation, bring it on!

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. This is a good article, and it should be read with the excellent linked article on net energy.

    Dr SamSam Bahktiari, ex senior exec in Irans National oil company describes oil as the master dominoe. Indeed it is. Everything else depends on it, including food. The massive increases in yields since WWII have a lot to with oil: pesticides, fertilizers and machinery. Once oil production set in, there is going to be less food and famine is going to become a much bigger problem than it is today.

    If I have a criticism of this article it is that it presents a notion that at will be business as usual, sort of. After Peak Oil it will not be, unless we can crack the net energy issue. How do we manage economies without growth? Our capital markets work because there is growth.

    Neoclassical economics has made a right royal stuff up in terms of how we have managed oil. They really need to get their thinking caps on to determine how we can manage economies without growth.

    Then there is the issue of government, or lack of it. Our political leaders really are lamentably poor. There are one or two stars: Turnbull is one, but even he is locked into a system carefully cloreographed by plodders. And what plodders they are! Very, very ordinary, to a man (and woman).

    We need someone who is honest, not just that he doesn’t lie, but intellectually honest, someone who also has vision and the charisma to lead. We need a real statesmen. Energy is the defining issue of the times and the current crop of plodders are just not going to do anything worthwhile. They haven’t even understood the problem, or if they have, they are lacking in the necessary honesty, vision, inspiration and courage to do anything about it.

    Rod Campbell-Ross
    May 4, 2007
    Reply
  2. Marc Faber narrates yesterday, how american financials have not participated in the april may 2007, dow rally.
    This is not the case here in Melbourne, with the banks.
    Out at hoppers crossing, where there is mile upon mile of new land and house packages($250,000-$300,000)things still seem upbeat.
    Not so with the 20 year old,plus, housing market,in Werribee, Wyndam vale, and Laverton.Here mortgagee sales are being passed in at the $160,000 mark.
    Back in 2003, there seemed to be plenty of carpenters ,telstra techs etc who were buying 10 properties ,to hold for 10 years,to bank a cool million.
    Nice work if you can get it.
    Whoops!
    These guys have been driven insane by the continual share market headlines and are now big sellers.
    The sucker family,(Thats bedrooms for the kids,and a letter box to stuff the bills in) is on the ropes and the rent is the last priority.All in all, a lot of for closure, and rapid urban decline.
    So how come the Australian Banks ars still rallying?

    Reply

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