What now?

It's been some time since I posted here. But a lot has happened. I thought for sure that oil would continue to rise. But it rose too fast. It included the rise that should be there due to increasing scarcity of oil, but it also included the investments of many people who felt that oil stocks would continue to go up. The combination caused the price to shoot to $147 a gallon and gasoline to over $4 a gallon. People need gasoline to do their business. When they could not get it, they cut back on other things, including the mortgage payment. This caused the foreclosures, which in turn endangered the banks and threatened the entire financial system. When this happened, a severe recession occurred, causing even oil to drop drastically in price, all the way down to $35 a barrel and $1.46 a gallon for gasoline, causing me to get a gasoline bill in the single digits. The price of oil has moved back up to $57 a barrel.

So what's next? That's hard to say. The Fourth Turning says that history comes in cycles or turnings. The stages of life are 22 years long, and so are the lengths of generations, so history also comes in periods of 22 years, called turnings, which come in First, Second, Third, and Fourth varieties. The first is a High in which high hopes for society are made. This is followed by the disillusionment of the Second Turning, when the babies of the First rebel against the previous Crisis parents, as in Jimi Hendrix, campus protests, and marijuana. The Second Turning also included a mini-depression and two major oil crises. This gave way to the decadent Third Turning, or unraveling, with the focus placed on the individual, as societal pillars wear away. This leads to a Crisis, the Fourth Turning. The last Fourth Turning was the Great Depression and World War II.

I believe now the Fourth Turning has started. It started on 2007 July 27, when the Dow plummeted 400 points because of mortgage foreclosures. It really gained momentum in late summer 2008, when many institutions teetered on the brink and had to be tarped out.

HS Dent is a stock market advisor who bases his decisions essentially on the Strauss and Howe Turning theory. He predicted a big boom in the late 1990s, and booms in the Double Zero years, and now he calls for the Great Depression of the 2010s. I read his column, and he is calling for the current deflationary conditions to continue. Keep your money in money market funds and it will stay the same while deflation occurs; hence your buying power increases.

However, the major crisis on the horizon is Peak Oil. Apparently the production of oil has peaked. It dropped drastically this year, from 88 million barrels/day to 82, but that was because of lack of demand. Still it forms a peak. It may not recover from this, because the oil fields are starting to run out. A stock advisor who is aware of peak oil is Stephen Leeb. He says the low price of oil is temporary. The economy will pick up again this year, and when it does, so will the price of oil. We are already seeing this. Oil goes up and down with the market. He is calling for this to continue, with first prosperity, then a runaway inflation.

So which is it? Will we have deflation or 100% inflation? It's hard to say. It is a vicious cycle:

1. When the economy improves, the demand for oil will go up.
2. So oil prices go up.
3. So demand for oil (and other things) goes down.
4. So oil prices go down.
5. So demand for oil goes up.
(go to step 2)

When oil goes up, its demand goes down, and then oil prices go down. Hence the second derivative of oil prices is roughly proportional to the negative of oil prices. If you write this down as a differential equation and solve it, you get a sine function, a sinusoid. Both demand and oil prices go up and down over and over again. What happened in 2007-9 maybe the first such oscillation.

So now I can't predict much what will happen, so that makes it hard to invest. I don't want to invest in stock funds, only to lose my money in a stock bust like in 2008, but I don't want to hold it in money market funds, have inflation go way high and lose the purchasing power of my money and become a pauper in a multi-million-dollar house. Leeb and Dent have their ideas as to what to do, and they are as different as night and day. Dent says invest in bonds, money market funds, and Treasurys. Leeb says invest in commodities, such as BHP Billiton stock. I will be watching the market carefully to see which way to go.