Stephen Leeb on Peak Oil, Resource Scarcity and the Dangers of a Resurgent China

The Daily Bell is pleased to present this exclusive interview with Dr. Stephen Leeb.

Introduction: Dr. Stephen Leeb is a recognized authority on the stock market, macroeconomic trends and commodities, especially oil and precious metals. As Chairman and Chief Investment Officer of Leeb Capital Management, Dr. Leeb combines his knowledge of macro-economic trends and current market conditions with detailed information about specific companies he follows in order to guide the committee's investment decisions. These decisions are then implemented within the portfolios under the firm's management. Dr. Leeb is also Founder and Research Chairman of the Leeb Group, which publishes an extensive line of financial newsletters and e-letters reaching more than 200,000 readers. The publications, which have received multiple awards for editorial excellence, include The Complete Investor, Leeb's Income Performance Letter, Leeb's Cash Cow, Leeb's Real World Investing, Leeb's Aggressive Trader and Leeb's Million Dollar Portfolio. Dr. Leeb is a prolific author of books that present his macro-perspectives on global economic trends along with advice to investors.

Daily Bell: Give us some background on yourself. Where did you grow up? You went to university and gained many degrees. Tell us about them and why you got them. What did you do once out of university. Did you teach? Go through the rest of your experience, ending up with your current positions as head of Leeb Capital Management, a New York-based money management firm.

Dr. Stephen Leeb: Yes, well, I can summarize. I started out as a business and economics major at Wharton, which is the business school at the University of Pennsylvania. This is where my parents wanted me to go because of business and it has a nice reputation, etc. I came to the conclusion while I was studying there that economics, which was my passion, probably wasn't going to allow me to go very far. I felt you really had to understand psychology, so at the last moment, and I'm talking my senior year, I decided not to go to business school, not to go to law school but to take a degree in psychology.

So I ended up at the University of Illinois in Champagne, which at that time had one of the top three psych programs in the country. I was lucky to get in, as I had only taken two or three courses in psychology as an undergraduate. Wharton students don't normally study psychology but I did and it was probably due to a girlfriend I had at the time. I actually really loved it and I loved math. I studied hard. That was one reason I liked economics a lot. So at the end of three years, I just found myself with a bunch of degrees. I had a Ph.D. in psychology; I qualified for a Master's degree in both math and statistics and obviously psychology, and ended up with a Master's degree in math.

From there I had a couple of jobs, I was head of personnel research for a big bank. I taught at NYU for a little while and then I decided I wanted to be on my own. Then I thought about the stock market. With all it's psychology, with all its relationship to economics, all the math that goes into it, it really fit. So that was about 1976 and I have been involved in the stock market ever since. I have been writing books on the stock markets and financial markets and lately I have been more drawn to economics than financial analysis but still very much involved in markets, economics and finance. My goal has always been to understand and advise people and that's why I write books and newsletters.

Daily Bell: You are head of the Leeb Group, a publisher of investment newsletters and services including The Complete Investor (general investing); Leeb's Real World Investing (commodities); The Cash Cow (exchange-traded funds or ETF's) and finally Leeb Income Performance Letter, which is dedicated to income investors. Give us some background on these publications.

Dr. Stephen Leeb: Let me say I have a lot of help producing this stuff and I have a wonderful staff. The one I put my heart and soul into, so to speak, and my baby has always been "The Complete Investor." It's basically a panorama of stock markets and to some extent economics. It tries to pick portfolios in different categories, from mutual funds, big cap growth stocks, to small stocks, to income growth stocks. We try to give people perspective on where the world is right now.

Daily Bell: You've written eight books on macroeconomic trends, finance and investment, including The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel. Tell us about these books.

Dr. Stephen Leeb: The Coming Economic Collapse was a book about oil prices, oil being very scarce and my prediction that oil would continue to go very, very high. I still think oil prices will get to $200 per barrel.

Daily Bell: Your latest book is latest Red Alert, co-authored by Greg Dorsey. What's that about?

Dr. Stephen Leeb: Red Alert is basically about American complacency as regards China. It argues that eventually we are going to need renewable energy and we are going to need a lot of it because hydrocarbons and non-renewables are really peaking – not necessarily right now but even coal is going to peak in the next decade or 15 years. I think we are really going to be left in the lurch unless we have massive amounts of renewables and that China gets this in spades.

The problem with developing a society that runs on renewables is it takes a tremendous amount of resources. For example, the most useful form of solar is photovoltaics. Now, photovoltaic requires silver and there's just not that much silver in the world. Windmills and wind turbines require heavy rare earth and China has them. Building out a smart grid will require massive amounts of copper, as will their organizational efforts.

So the gist of this book is that China gets it, they understand the need for renewables and they also understand that resources in this world, whether it be oil or copper or silver, are scarce and getting more scarce. In the current economy, the developed world has seen no growth over the past five years, yet oil prices this year are likely to be close to record levels on average throughout the year. When you see record level prices with no growth, especially commodity prices, that's unheard of. The only explanation is major scarcity. Ditto for food prices. Ditto for almost all commodity prices.

The developed world has not seen five years of stagnant growth, no growth, since the depression, yet commodities, which are traditionally cyclical, have come down. But if you take something like copper, it's literally three-and-a-half times the price it averaged in the 1990s. That's a sign of massive scarcity. It's all over the board.

China right now is preparing to build out an infrastructure that will take them through the 21st century. They think long term. China does not think in nanoseconds. They think in 100-year-old intervals, if you will, 20- and 30-year intervals. This country is unfortunately complacent and it thinks very short term, quarter-to-quarter, election-to-election, etc. We're at a tremendous disadvantage because of that. By the time we get around to realizing what we are supposed to do the resources won't really be there. It takes tremendous amounts of critical resources and minerals that are all scarce in order to develop the kind of infrastructure we're going to need to thrive in the 21st century. It really is that simple and China does get it.

Daily Bell: How does the dollar compare to Chinese currency?

Dr. Stephen Leeb: I think the dollar and other currencies are shot. Governments are trying to keep up and promote growth for their citizens by printing more and more currency but basically, because resources are getting ever scarcer, it's not doing anybody any good. There's probably never been a time in modern history where the essentials of life relative to median income in the US has been higher than it is today. It's a situation that's not going to get better. You may get better in a year – and I don't mean year to year but in a two- or three-year time period. It's a situation that is going to get worse and worse. We have to do something about it. We have to wake up and that was the thrust of Red Alert.

It's also one reason gold is going up. Obviously, silver, for reasons I just mentioned – it's a critical metal in building one critical energy source. Incidentally, photovoltaic is one of the few energy sources that does not use water

Every time we use water it's a trade-off between food and energy. So one reason you want renewables is because many of them don't require water. Even minerals don't require water. You can situate them offshore, which is what China is doing. They will probably have a terawatt of wind in the next 10 or 15 years and they will have a smart grid so they are able to make use of all these different energy sources.

One thing a smart grid does is allow you to use wind, allows you to use solar, it allows you to use nuclear, it allows you to use hydropower all at once. So if the wind isn't blowing in one place or blowing in another, fine, that's okay. There was a recent piece on one blog that was picked up by a British magazine that said if there were days in Spain where if they would have had a smart grid in place, they could have powered the whole country by wind. China is doing that. They are putting a smart grid in place.

Daily Bell: Smart grids have proven controversial in the US. Will a smart grid be fully implemented there?

Dr. Stephen Leeb: Well, it depends how much copper is left in the world. In another book I wrote called Game Over, which was before Red Alert, I said that if we don't have enough water we aren't going to be able to get copper. Chile right now, as an example, is the biggest copper producer in the world by far, but Chile is having a devil of a time opening new mines – why? Because they don't have enough water and they don't have enough energy. All these commodities are interconnected and interrelated with one another.

This is the point I have been trying to get across: A) we don't get the interconnectedness and B) we don't get the growing scarcity. And China, hence the title Red Alert, does get it. They get it because they are willing to look ahead and see far and they want to position themselves for the 21st century. We want to position ourselves for January 1, 2013. We can't even decide what to do over the next week or month. It's just a totally different mindset.

Daily Bell: China is still a more authoritarian country than the US, isn't it?

Dr. Stephen Leeb: I am not an expert in Chinese politics, far from it, but if you look at how they pick their current standing committee, those seven people who are running the country, they really centralize power in two people and I think that was done very deliberately. They know they have a lot of things to do. They have to clean up a lot of corruption and they've got to get this machine working so they can accomplish their goal.

You have Shi who is now in charge of the military and president of the country, and then Prime Minister Li is succeeding Wen, who used to be number three. Li is number two man on this committee so they are going to be going all guns firing and developing this infrastructure.

There was a US congressional bi-partisan subcommittee report that came out about a month ago saying that right now China is a main supplier of 17 critical minerals. This stuff doesn't even make headlines. It gets buried and so what I am trying to do right now – because I am more worried about my kids than I am about me – is wake people up because I think this is a real critical situation.

Daily Bell: You are head of the Advisory Board of Leor Exploration & Production LLC (since 2006) and a member of the advisory boards of Electrum USA Ltd. (since 2007) and Sunshine Silver Mines. Tell us about these positions and the companies.

Dr. Stephen Leeb: Basically, I am an advisor because I understand the commodities base and have made a number of very good calls. I was the first one to say oil would go to $100 per barrel but before that I forecasted there would be a huge bust in the tech sector and the area of real interest for people should be commodities because there would be a huge boom in developing markets.

The prediction I am most proud of in general terms is I foresaw the problems with commodities and scarcity, etc., and why there would be a problem but I also said that the kinds of technologies that we were developing, and still are developing, building ever-faster computers, etc., this is going to answer nothing.

The world is far too complex and for computers that are faster than anything we can currently even imagine, I said that back in 1999 and that is still true today. We are trying to attack nature with computational speeds that pale in comparison with things that you see out there in the world. We need creative input. We need to use computers as tools rather than the sole source of invention.

We still think that information technology is the answer to all our problems and it isn't. It's like all the new psychotropic drugs, neurological drugs – in fact, most drug companies have given up trying to produce neurological drugs because of the way they try and do it. They look at all these different combinations of chemicals, etc., and our bodies are too complex. If you look at our DNA, you look at anything, and you try to count the number of combinations, they exceed the elementary particles in the universe. We are not going to understand this no matter how fast our computers get. You can build a computer the size of the universe and you probably aren't going to understand half the complexity of what is going on around us.

The only way to get anywhere is if you sit around and you have these intuitions about things. Einstein didn't have a computer in front of him, as did many other brilliant minds. The kinds of answers we need today are not going to be born in a computer; they will be born in human ingenuity and coming to grips with things. I think the Chinese realize that. They have a picture of the world that is so much clearer than our picture. Their picture is one of growing scarcity of critical commodities. They are not going to deal with that by trying to use computers to come up with solutions. They are going to take what they have and take what exists right now and build it out, go from there. If they can improve it they will. We just don't get it. It's very worrisome. Computers are great tools but our century, our last 20 years, could be described as the apotheosis of the computer and that's a very bad god to worship.

Daily Bell: You are also a member of the board and managing director of the PlainSight Group, an innovation company centered at Yale University. Tell us about PlainSight and what you do there.

Dr. Stephen Leeb: PlainSight is a collection of wonderful people, of whom I am just one of many. We try to develop new technologies and new ways of analyzing things. We try to do things that I think can't be done. We try to take big, big data sources and make them understandable. So we are using the computer as a tool. You have a particular theory about something, say how financial markets might work, and we'll test it out on the computer. It's not reversing. We aren't putting in a lot of numbers to see what we get out. That's not what we are trying to do. We say, "This is probably how the stock market works; let's see if we are right."

We are a sort of a private equity thing. We try to develop products. We have companies and we use technology that has been developed up at Yale. In particular – I am far from the brains here – the guy that has really developed a lot of the mathematics with whom my son is studying now – is a fellow named Ronald Coifman. He served at DARPA for 15 years. He's a national science winner, he's a really brilliant guy in the applied mathematical area and he's done a lot to make big data understandable. Not just looking at different combinations of things but trying to find metrics that make it possible to understand big data. That kind of application, that kind ability can be applied to not only the financial arena; it can be applied to mining, it can be applied to a wide variety of things, almost everything – really anything that has a lot of data associated with it. So that's what we try to do. We try to fit this data into a lot of ventures and products.

Daily Bell: Tell us how you arrived at some of your predictions.

Dr. Stephen Leeb: Basically, as I said, intuition is the key. Trying to put things together. The real skill that I have in life – I am pretty good in math, but what I think I do that is kind of unique maybe, is to take things from different sources.

One of the big discoveries I had – say, in putting together the oil factor – I still remember. When I saw our Department of Energy forecasting that Saudi Arabia was going to be able to produce 20 million barrels of oil by 2015 or 2020 I thought, wait, something's wrong. Obviously, they are not going to be able to do it. They won't even come close to it. Realizing that along with a lot of other data, putting together data from other sources always gives me my conclusion. I can give you an example right now. I just spoke about silver and how valuable I think silver is going to become. I am looking at the leading experts on silver and they're way off. They're way off on obvious things, way off on their estimates for photovoltaics – even in 2013 they are missing something, obviously.

The market is far, far stronger than they think. Like GFMS – they publish a lot of research on silver and it's apparent you can contradict it with other sources that are right in front of you. When you see anomalies – this is probably what I am good at – when I see anomalies, I'm able to try and rationalize them and figure out why they exist and what the implications are.

Like with oil, Saudi Arabia will never produce what people are saying. What are the implications? Silver, same thing. Technology, same thing. Where are we going? When you realize that the number of data points are many, many times the particles in the universe, you can realize you are not going to get very far trying to analyze this with computers unless you do something else first. When you see China coming on-stream, you realize that this is going to have consequences across the board, it's not a little thing; it's the world changing, a dramatic point of inflection.

So it's really intuition but it's intuition guided by looking at anomalous data that other people are not reporting on. Like these 17 minerals. This is unbelievable to me that the New York Times has not reported on this. This wasn't even a data point in the New York Times. Don't you think that a bi-partisan commission of our Congress comes out with a report saying we are very dependent on China for critical minerals – I think that's important. It's more important than almost anything I heard talked about in the debate. It's sickening and terrible.

Daily Bell: Do you use Austrian analysis in your research? Are you aware of it?

Dr. Stephen Leeb: You are the second person to ask me that in a short period of time. The world right now is at a point of inflection. The year 2000 marked a major change. I think you have to throw away most of the economic books at this point. I believe we are headed to a world in which we are going to have to make do with less, a world in which qualitative improvements are going to have to count for more than quantitative improvement. We've gone about as far as we can go with current economic analysis, whether it be Austrian, Keynesian, etc. At this point of inflection, it changes the nature of civilizations and it's going to be a struggle and it already is.

This is sort of one of the things I was trying to point out in defining the market. It's a new kind of analysis. It has to be based on a new quality of life much more than quantity of life. This is transcending climate change and things like that. I have no real opinion on that, although I do think their models are very unlikely to have produced anything resembling their proof. I do think the Earth is warming but it's not warming in accordance with their models. When I say quality of life, yes, we are going to have to do with less and clean environment, that's for sure. That is part of the quality of life. Better medical care, that's for sure. I am not smart enough to think what the world is going to look like in 50 years but I don't think it's going to be a world in which materialism is a governing and guiding force. I don't see that.

Daily Bell: When did you run into business cycle analysis?

Dr. Stephen Leeb: Well, I basically have been using that for a long time but the kinds of recessions that we are getting or you've gotten since 1960 or maybe 1970 are probably not the kind you can apply business cycle analysis. Historically, business cycle analysis is the inventories get a little bit too high, demand goes down and the economy is good for a while and then it comes back. But now we are in a more service oriented economy and the kinds of cycles you've seen over the past 20 or 30 years are much, much different than we've seen before.

So basically, it's a question of when did I realize the classic business cycle analysis was no longer appropriate for the world that we live in. I would say that was the end of the last century when I realized the world was going to morph into something we've never seen before and that we are not prepared for at all.

Daily Bell: Is China going to experience a hard landing?

Dr. Stephen Leeb: No, not right now. I think everything that's been done in China has been orchestrated very, very carefully. Look, it's one data point to prove it. Their interest rates for this whole period, for the past ten years, have stayed about what they have been on average and above average. There were no heroic stimulus measures, there were no heroic declines in interest rates. They just dealt with what happened as kind of a natural slow-down. It was us who imposed this idea of hard or soft landing. I mean, unemployment in China remains low, etc.

Frankly, another point I have raised about China is they are very happy to have us talking about their hard landing. I think they'll have a statue of Jim Chanos in Beijing because the more people are thrown off guard about how strong China is the happier they are. The saying is 'never let your enemy see your strengths; always present your weaknesses.' This is bizarre, talking about a hard landing for a country that's growing by 7-8%. I mean, no, they're not going to experience a hard landing now. The hard landing will come in maybe 10 years after they have the infrastructure set up and in place. They may rebound 3 or 4% but I don't think you are going to see any of that right now.

People see as evidence of hard landing huge stockpiles of copper, okay. That means China's demand for copper is down, etc. and these stockpiles have grown to the moon and they're in a lot of trouble. Well, the alternative is yes, maybe demand is down a little bit because they are trying to slow down the housing bubble, whatever, but the fact that these stockpiles are so high is not a sign of weakness. That's a sign that they are accumulating what they know they will need if they're going to urbanize another 300 million people and build out this smart grid. This whole hard landing with China is something they are very happy to have us believe. I don't think you are going to see it for at least another decade.

Daily Bell: What is your position on central banking?

Dr. Stephen Leeb: I think central bankers are doing what they can. They are between a rock and a hard place. Central bankers cannot print silver or copper or gold. They can just print money or take away money.

The problem in the world right now is scarcity of resources and the fact that median incomes in this country have fallen at incredibly rapid rates because resource prices have remained very, very high. Central banks can't print resources, they can't print food. They are doing what they can. They have no real solutions for it. If they print less money growth would probably collapse.

Incidentally, I know you may be from the Austrian school and I'm very agnostic about this but as a sidebar, when you look at history very rarely do you see horrible things happening because of inflation, even in Germany during the 1920s. I know this is hard to believe. You had this extraordinary inflation where one mark became one trillionth of a mark but that lasted for about two or three years. It did not even bring down the government and during that period of time you still had growth. You had massive dislocations, very painful dislocations, but the last half of the 1920s in Germany – or last two or three years of the '20s were fine. Inflation stopped. They said their mark was convertible into land and inflation stopped and the economy grew very rapidly.

So what really happened? What brought on the horror in Germany and a lot of other countries? It wasn't the inflation, per se. It was deflation; it was depression. That's what led to the rise of Hitler. Hitler never would have gotten anywhere if Germany hadn't fallen into this deep, dark depression. Same thing with Japan. Post-war Japan's inflation for a year or so was 40% a year. Now, I know that's not like Weimar Republic inflation but it was still extraordinarily high. Look at Brazil. Brazil today has been one of the great success stories. They came out of a period in which their inflation was probably 1000% a year. That is terrible and it's horrible to have high inflation but it's not going to necessarily bring down a civilization.

What will bring down a civilization is depression, deflation, the kinds of things this country is trying to avoid right now. As long as people can eat, that's okay. It's when people can't eat, when the essentials of life become unaffordable, that people will revolt. That's why the Weimar Republic stayed in power; they didn't have a change of power in Germany in the 1920s. They had horrible times and I'm not trying to diminish the horror of inflation. Inflation is horrible but it is the lesser of two horrible evils. The worst horrible evil is a depression. So central banks are doing the only thing they can do. Unless they figure out a way of printing food and printing more oil and printing energy and printing all these vital materials, there is nothing else they can do to ward off a catastrophe of unprecedented proportions.

Daily Bell: Are we headed for an international gold standard?

Dr. Stephen Leeb: I think gold is going to be the currency of choice if it's not already. When you have resource scarcity, who do you want to exchange your copper to – someone who's going to give you gold or someone who's going to print dollars or euros or yen? You don't exchange paper currency for commodities when they are scarce. Gold has value and will be very, very important. Whether it's the gold standard as we've known in the past – but gold will be very important.

Again, China gets it. In my opinion, and I have asked Chinese people this – of all the resources that they want and that are scarce, they'll settle for an abundance of two. Water, which they don't have very much of and that's something that could bring down China, and gold. They know if they have enough gold, anything that they don't have they'll be able to get. We think our dollar will always be able to buy scarce commodities? Forget it. When commodities get scarce enough you will want another commodity for it. As they become scarcer, gold will become more the de facto commodity in the world. In China, incidentally, they are setting an ETF in gold as we speak. They want as much gold as they can possibly get without disturbing the market.

Daily Bell: Is the world headed toward a global currency beyond a gold standard? IMF SDRs?

Dr. Stephen Leeb: I think maybe it is headed toward a global currency but a global currency that will be backed by gold. Probably the yuan. I think the yuan is going to play a very major role in future currencies. I think the yuan itself will partially be backed by gold, and that's where the Chinese are headed, in my opinion, will certainly be the critical, most important currency.

Daily Bell: Is the US dollar finished?

Dr. Stephen Leeb: I think finished is too strong of a word. I think there will be dollars in 20 years but I don't think they'll be worth much. It's not going to be the reserve currency for much longer – maybe another five years or less depending on how fast things develop. The dollar's role as a reserve currency – I think its days are numbered.

Daily Bell: Where do people go from here? Are the 2000s like the 1970s?

Dr. Stephen Leeb: On steroids. This whole century has been on steroids. The '70s were really so political. At the end of the '70s you had this huge surge in commodity and the price of oil. A lot of that was political. Also temporary scarcities, yes, OPEC and boycott's and things like that. There's nothing really that political about what is happening. So of the things we are going to see in the next ten years are a harsh bear market in bonds and, conversely, if the world hangs together in any sort of way, I think you will see a bull market in gold and silver stocks that are much larger than the '70s. In the '70s you had at least a 10- or 20-fold bull market on gold stocks. This time around it's probably going to be more than that.

Daily Bell: Any other points you want to make?

Dr. Stephen Leeb: My goodness, I have gone on like a Singer sewing machine. I know I don't have a very rosy view. But I will say, I asked a friend of mine – a lawyer who thinks like me – "How do you think this is all going to end up and resolve itself?" And he said, two words, "Resource wars." I hope not. I hope we get through this without wars and I think there is a way out but there has to be a change in the way we are thinking.

This is a world that's worked well. Adam Smith said materialism has been the guiding force in this world for a long time, and it's over, finished, done. So, we've got to segue into something that's much different and we've got to do it in a hurry and we've probably got to do it as a world, not as a country. That's going to be hard to do. I am confident and I feel hopeful that if enough people wake up to what's happening we'll have a chance to do it.

Daily Bell: Interesting insights. Thanks for your time.

Dr. Stephen Leeb: Thank you.

There are several paradigms available in the alternative media. Our position should be clear to those who are kind enough to frequent The Daily Bell. We believe a power elite is orchestrating world government and using directed history to do so. Among other tools, it uses dominant social themes – fear-based memes – to frighten middle classes into giving up power and wealth to globalist institutions.

Another paradigm regarding the way the world works is Dr. Leeb's. From our point of view, he is taking fear-based Tavistock-elite promotions at face value and suggesting ways to ameliorate them. Interestingly, if one believes a power elite is behind these sociopolitical and economic memes, one can still make a case that Dr. Leeb's investment advice is correct. He may not agree with the causation we present but betting WITH power elite memes in the past 100 years has been a way of making profits, perhaps big profits.

Of course, it sometimes it doesn't work to support elite memes from an investing standpoint. In the 21st century, we'd argue that what we call the Internet Reformation has made it more difficult for elites to impose their globalist vision. Themes such as global warming, fiat central banking and even the war on terror are all receiving significant pushback.

From our point of view, it is better to recognize a manipulation than to take it at face value. One may end up adopting investment positions that Dr. Leeb offers, but for reasons we'd argue are based on a complex worldview that denies the validity of scarcity-based phenomena even while granting that artificial scarcities can be lucrative.

This is the irony, after all. Better to invest in a power elite meme with the knowledge that it is a manipulated trend rather than taking it at face value. Your worldview may eventually provide you with superior information that will manifest itself in expanded profits while avoiding losses that accrue to true believers.