January 14, 2010 in Investing

How to deal with the coming economic crisis

Investment expert and author Stephen Leeb believes we’re entering the beginning of the end when it comes to the commodities that hold our modern world together. Resources such as oil, copper and iron are being rapidly depleted — and with the needs of developing countries, demands are only increasing.

At a glance
Name: Stephen Leeb, Ph.D.

Hometown: New York City

Education: B.A., in economics, University of Pennsylvania’s Wharton School of Business.

M.A., in mathematics and Ph.D. in psychology, University of Illinois.

Career highlights:

  • Editor of The Complete Investor, an investing newsletter.
  • Author of “The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a barrel.”
  • Author of “The Oil Factor: Protect Yourself — and Profit — from the Coming Energy Crisis.”
  • Author of “Defying the Market: Profiting in the Turbulent Post-Technology Market Boom.”
  • Author of “Game Over: How You Can Prosper in a Shattered Economy.”

The economic fallout from the end of technology as we know it today will be enormous, he says. Many of the resources used in manufacturing today are interconnected. Oil powers much of the world: It fuels our cars and is used in the mining of other materials — for instance iron ore and copper, each of which is a finite resource that is vital to manufacturing. The depletion of natural resources will have a profound effect on the way things are made.

Bankrate talked to Leeb about his perspective of the world and how investors could protect themselves.

You make some pretty dire predictions about natural resource shortages. Why is that, and when will they begin?

I think they’re starting already. Oil is over $80 a barrel and you have 10 percent unemployment in the country — you’re already seeing it. With U.S. demand for energy down, energy prices — except for natural gas, which is a domestic commodity — have gone very high.

And the same thing is true with copper and other commodities. It’s quite exceptional to see commodities rise to the extent to which they’ve risen. In the context of a pretty sharp recession in the developed world, I think you’re already seeing this.

The tragedy of it is that we’re going to see it more and more because what we haven’t figured out, what has not occurred to so many people, is that the green movement or avoiding resource scarcity — whatever motivates you — whatever gets you to green, is necessary.

Whether you’re an environmentalist or someone who’s looking at peak energy or peak other things, green is an answer but green itself is very resource intensive.

That is a quandary that we haven’t faced up to in any way, shape or form. We just don’t get it. There are a lot of major dots that have to be connected and we haven’t started that. We are really far behind.

And really far behind the Chinese, for that matter — way, way, way behind in switching to green technology. In 2010 they’re already the leading producer of hydroelectric and solar power and by 2011 will be the leading producer of wind power. They are literally outspending us on their smart grid by 200 to one. They have allocated $670 billion to their smart grid expenditures, their electric grid. We’re spending about $3.5 billion.

This is not good.

You did mention in the book that it’s easier for the Chinese to get things done quickly in some cases.

They’re not as encumbered as we are. We have a wonderful society here. We are free. And one reason we can stay a wonderful society and one reason we have been able to remain free is that during times of war, we’ve been able to grant the president emergency powers and come together as a nation. But right now, we’re not anywhere near it.

Everything is being passed along party votes. No one is even talking about resource scarcity and resource shortages. Someone has to wake us up, and if they do, I hope we’ll be able to recover.

I’m certainly not rooting for any of this to be happening. I hope I’m wrong, but I’m just trying to be a messenger.

You talk about “absolute peaks” in regard to natural resources. Can you explain this?

Peak anything is when you are unable to produce more of it. I wanted to get across that it is very unlikely that you’re going to reach peak energy or peak oil or anything like it without reaching peak lots of everything else.

That is because you need oil to produce iron ore; you need oil to produce copper; you need copper to produce oil. You need all these commodities to make more water. So when one critical commodity reaches peak, that might be peak for a lot of commodities and you might get to the point that the world can’t produce any more commodities. And everything stops. You stop growing at that point or you find technological solutions.

We’re not really at that point, we’re trying to fund — to some extent — energy technologies, but we’re not placing priorities on that at the moment.

This to me is the equivalent of a war. The Chinese are winning and we don’t even know that we’re in a race. Basically war may be too strong a word, but I don’t think it is.

We are in the race for our lives and we don’t know it. And they are running full steam ahead.

You’re also predicting that inflation will reach 30 percent to 40 percent. Why will that happen and what will be the result?

In 2008 when we got into high oil prices the Fed decided to — I can’t say they got stingier — but they kept interest rates high. They kept the economy in check because they were worried about high commodity prices.

Well it was easy then because there was no unemployment problem then.

But now here come high commodity prices again and you can’t really expect the Fed to try and restrain the economy in the face of high commodity prices. Unemployment is already 10 percent. What are they going to aim for — 20 percent?

If anything, they have to get looser. High commodity prices like high oil when you pay more to fill up your tank, that’s like a tax. I think the Fed will have to get looser not tighter with high commodity prices and that is the making of an inflationary cycle.

What should people do to prepare themselves? What investments should they hold?

Canned goods, head for the hills?

I consider precious metals as an asset group. That doesn’t mean you put 100 percent in precious metals, but I would certainly consider gold, silver and platinum as strong candidates for my portfolio. That is the least I would do.

Or perhaps investing in resource-rich countries.

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