Beached Whales and Economic Omens

ON A RECENT TRIP TO CALIFORNIA, I grabbed a copy of the Los Angeles Times that featured a page-one photo of a massive beached whale. The poor critter was a female blue whale. The carcass was about 80 feet long and tilted the scales at nearly 100,000 pounds — making her one of the largest animals in the world.

Beached whales may have nothing to do with the world’s exhaustible supply of crude oil…or inexhaustible supply of dollars. But I see a connection…an ominous connection.

It is difficult to say how old she may have been, but certainly north of 50 years is a safe bet. Apparently, this whale was migrating along the coast of Southern California when a massive object, probably a cargo vessel, struck her.

The impact crushed numerous bones, including ribs and vertebrae, damaged her nervous system and caused significant internal hemorrhaging. There is evidence that the vessel dragged the whale through the water for some distance. Eventually, the whale succumbed to the injuries, died and washed ashore near Ventura, Calif., just northwest of Los Angeles.

The death of this particular whale brought the financial world into my consciousness with a certain shocking level of reality. There is actually an old school of thought, for example, that regards the discovery of a beached whale as a sinister portent…and so it may be.

In the 17th century, the English writer Thomas Hobbes (1588-1679) published numerous works that laid out much of the template for modern political philosophy. Among the most famous works by Hobbes was Leviathan (a fancy word for whale) — doctrine for the foundation of societies and legitimate forms of government, in which the state is portrayed as a whale-like monster.

In Leviathan, Hobbes articulates the necessity of a strong central authority to avoid the evil of discord and civil war. According to Hobbes, any abuses of power by this authority are acceptable as the price of peace. The sovereign must control civil, military, judicial and ecclesiastical powers. Hobbes argues that the sovereign has the authority to assert power over matters of faith and doctrine, and that if he does not do so he invites discord.

The use of the term “leviathan” by Hobbes was no mere random choice of words. Whales are large, beastly creatures that were reputed to swallow men whole (Jonah comes to mind). And according to Leviathan, life in the raw state of nature is “solitary, poor, nasty, brutish and short.”

So let’s play a little game. Let’s imagine that beached whales actually portend some kind of bad luck or grim event. What grim event, therefore, might the beached whale in Ventura County, Calif., portend? Allow us to suggest a couple of possibilities: Oil higher; dollar lower.

Oil and Energy

Oil has climbed to a record-high $92 per barrel. Why is the price rising?

The Peak Oil paradigm is beginning to gain traction. I have discussed Peak Oil extensively and often in my investment letter, Outstanding Investments. America’s Secretary of Energy and former Director of Central Intelligence James Schlesinger recently noted at an international conference on the subject of energy, “The battle is over, Peak Oil is now accepted as inevitable, and the debate only becomes as to when.”

This is a remarkable statement, coming from one of the most “inside” of U.S. political insiders. One of the long-term trends you can expect to see is that oil prices will remain high. Oil supplies will be precarious and subject to disruption by weather events, natural disasters, and fourth-generation warfare aimed at “systemic disruption.” Also, new discoveries will trail consumption. The global oil industry will extract at least three barrels of oil equivalent for every “new” barrel it finds via discovery of reserve growth.

So looking ahead, oil and natural gas in the ground, as booked reserves or realistic and exploitable resources, is more and more valuable. It also means that oil service companies with a lock on technology and the operational skills to create technological systems for extracting hydrocarbons are also more and more valuable.

The Feeble Dollar

Recently, the gold price jumped to a new high as the dollar flirted with new all-time lows. Gold’s strength highlights the ongoing decline in the value of the U.S. dollar via chronic, gross and ought-to-be-criminal monetary mismanagement. For example, on Tuesday, Sept. 18, the U.S. Federal Reserve cut its key federal funds interest rate by 0.5%, as if the big problem of the U.S. economy in recent years has been not enough cheap credit.

The Fed rate cut, as expected, made many Wall Street traders happy and goosed the stock market indexes. According to the Fed, “Developments in financial markets since the committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.”

But the Fed action also caused an immediate spike in the prices for gold, silver and oil futures. So evidently, some savvy players understand that temporarily cheaper dollars are not necessarily good for the long-term health of the U.S. currency or economy, and this understanding is reflected in things with intrinsic value like precious metals and energy fuels. Even former Fed Chairman Alan Greenspan has stated that he believes that we will see double-digit interest rates at some time in the future in order to salvage the long-term value of the dollar.

Back to That Whale

So let’s get back to the beach in Ventura County. Within a few days of the whale’s discovery, the wildlife biologists had examined it and learned whatever they could discern from the necropsy. And for reasons of public health, the authorities had towed the carcass to an isolated spot on a different beach for as respectable a burial as is possible when using bulldozers. RIP, blue whale. The omen came, the omen passed.

But we know an omen when we see one. Do not let this whale perish in vain, dear investor.

Beware the false prophets of the conventional media who tell you that everything is fine and that there is plenty of oil (”if only we would drill in such-and-such locale,” goes the refrain), or that the dollar is sound. You need to understand that the energy supply of the U.S. — and the rest of the developed world — is in a precarious state.

We cannot just drill our way out of it. And you need to know that the situation with the U.S. dollar, the world’s reserve currency, is quite tenuous. We cannot just borrow and spend our way out of it. The government and monetary authorities, the “leviathan” of Thomas Hobbes, have overplayed their hands, abused their powers and are slowly but surely wrecking the long-term value of the dollar.

Sure, things may just drift along for a while like a dying cetacean hit by a cargo ship on the high seas. But sooner or later, the trends will manifest themselves and you will be glad that you have a portfolio filled with energy stocks and precious metals. As the old whalers used to say, “Thar she blows.”

Until we meet again…
Byron W. King

October 29, 2007

The Daily Reckoning