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Economist Jeff Rubin discusses the future of oil (peak oil) in an entertaining way that doesn’t take a PhD to understand. If you are a regular reader of Schaefer’s Blog this is a must-watch, even if you just watch the first 10 minutes.  Basically, Rubin lays out a convincing argument why triple digit oil, translating to $6-$7 per gallon at the pump is all, but inevitable and will probably come sooner than we think.  HT to Paul Kedrosky for this find.

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In a recent Washington Independent article, Spencer Ackerman asked the all-important, but seldom asked question, “Why Should Defense Spending Be Sacrosanct?”

It’s not popular to ask this question, especially if you’re a congressman because in doing so you’re bound to be labeled as not supportive of the troops.  However, the present course of the DOD is completely unsustainable. And in our current economic state ($12 trillion in debt and counting) I, like Ackerman and others, find it odd that there has been no serious talk of freezing the gargantuan DoD budget. In 2008, the US military spent more than the next 46 highest spending countries in the world combined (see here).

The spending problems come from personnel costs on one side — full retirement benefits for members who serve 20 years of active duty (most retire in their 40’s and now live well into their 80’s and beyond, a.k.a. 40 years of retirement pay), rising healthcare costs, salaries, housing pay, etc.  Equipment costs on the other — planes, bullets, tanks, UAV’s and an aging fleet of …well, almost every weapon system you can think of.  Just to send one combat troop to Afghanistan costs the taxpayer $1 million a year.

Almost everyone close to the organization knows we’re plowing ahead like a drunk driver headed for the cliff, but no one seems up to the task of fixing it.  Worse yet, much of the leadership seems bent on simply increasing spending rather than fixing a broken system.

Defense Secretary Robert Gates is making a noble effort, but the military-industrial complex is a three-headed monster, devouring every plan formed against it through strategic lobbying, creative bookkeeping and a view of the world based more on fantasy than reality.

Ackerman cites an October assessment from the CSBA’s Todd Harrison who compares the DoD to GM, explaining (emphasis mine),

Another similarity between the two is that both organizations are in a period of disruptive change in the competitive environment. In GM’s case, its market share rapidly eroded as gas prices climbed higher, the economy slowed, and consumers turned to smaller, more fuel-efficient vehicles. GM found itself building a fleet of SUVs and trucks that consumers did not want and could not afford. Similarly, DoD now finds itself saddled with a number of weapon programs whose capabilities are ill-suited for the types of conflict the military currently faces and whose costs have risen beyond what the Department can afford. Many of the new weapons being funded today are optimized for middle-of-the- spectrum conflicts—that is, conventional, military-on-military conflicts such as Operation Desert Storm in 1991. But adversaries are well aware of the United States’ overwhelming advantage in the middle and are instead moving to either end of the spectrum: irregular warfare on one end and high-end, asymmetric warfare on the other. The challenge for DoD, as it was for GM, is that the competition is adapting faster than it can keep up.

The last sentence is key, “…the competition is adapting faster than it can keep up.” Much of it has to do with the huge, inflexible, bureaucratic organizational structure of the DoD as compared the nimble, decentralized, open-source structure embodied by al-Qaeda and affiliate organizations. One bans twitter, facebook and gmail while the other uses the internet train to organize its cells all over the world.

Changing the DOD’s organizational structure is one thing, putting a freeze on the defense budget is another and one that may be a bit more realistic. However, none of this is bound to change anytime soon if we insist on keeping our country in a state of perpetual war.

Of all the enemies to public liberty war is, perhaps, the most to be dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes … known instruments for bringing the many under the domination of the few.… No nation could preserve its freedom in the midst of continual warfare. – James Madison, Political Observations, 1795

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People often ask me what is wrong/right with the U.S. military today and what I would change. Many times this is linked to a question about our work in Iraq and Afghanistan. Rather than rambling, I often wish I could just plop them down and show them this TED talk by Thomas Barnett.

Barnett has advised leaders on national security for many years now and has some of the most refreshing and spot-on ideas of how the U.S. military needs to change if we’re going to be effective in the 21st century.

He argues that we are still set up to fight a cold-war era opponent and that our military is being asked to nation-build when it was never meant to be used that way. But, rather than just criticizing, he offers a very clear solution: a large civilian force made up of highly educated civil servants who can focus on the post-fighting phase of helping rebuild a country like Iraq or Afghanistan.

I won’t spoil it too much, just give it a watch if you have a second.

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I’m currently sitting on my couch listening to newscasters on television report the latest drop in the stock market with gloom face and menacing tone. Even those who don’t follow the market have not been able to escape the constant coverage of the current financial storm that has hit markets both at home and abroad.

Here are just a few of the headlines in the news recently:

“Wall St tumbles on economic anxiety”
“Recession to be ‘Worse than the 1990’s,’ experts warn”
“Markets latest lurch down raises new uncertainty”

In the midst of such volatility, misinformation and outright confusion, it has been hard to draw any logical conclusions. But, surveying the scene over the past month an age-old lesson in skilled investing has resurfaced:

When the market is going down in flames, seasoned investors see incredible buying opportunities where novices see only doom and gloom.

Warren Buffet, billionaire investor, recently wrote on Op-Ed piece in The New York Times where he said the following (emphasis mine):

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Everyone likes to say the key to investing is, “Buy Low, Sell High”, but how many people actually follow their own advice? Startlingly few, actually. Most people tend to follow the herd, buying stocks when the buzz of how well the market is doing finally reaches their ears and selling when they hear on the news that things are bad. Thus, they do the exact opposite, buying when stocks are inflated by market hype and selling when they have been beaten down.

So why is now such a great time to buy? Because what we essentially have is a HUGE STOCK SALE! Some great companies are selling for half, even 75% less than what they were a year ago. What this means is for every share you could have bought a year ago you can now buy 2 or even 3 for the exact same price.

Right now is an incredible time to buy.  This is the opportunity that seasoned investors recognize that others do not. And it’s why some people will get rich off the current situation while others will go broke.

There’s no doubt we’re in hard times, but part of skilled living is keeping your head in the midst of stressful and complicated situations. When others are scared and running for the hills there are some that come out swinging. Learn from those people and imitate them.

I leave you with some final words of wisdom from Buffett:

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

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