Q1. In its client consultations, Endurant Wealth provides information and guidance which is aimed at mitigating both current and future investment risks. Why does Endurant Wealth advise clients to take specific measures to mitigate potential investment risks which are not widely recognised in conventional wealth consulting?
Peter: I understand why some people may question the need to take specific actions to manage risks which are not widely discussed in the public domain or in most of the mainstream media. The problem is that the risks in today’s investment environment are often being overlooked or ignored. Most of the investment advice being offered out there to investors, savers, retirees and such does not seem to consider many of the key risks and trends which are likely to impact their clients. Moreover, governments and politicians do a very poor job of conveying accurate information concerning current and emerging issues. This is partly because of ignorance in relation to the current issues and partly because they don’t want to generate fear or don’t want to advocate uncomfortable solutions or reforms which would reduce their chances of getting re-elected. Due to these circumstances, most people aren’t presented with facts and information that depict how tremendously exposed their wealth and lifestyle is to the increasing array of risks facing them.
The most important step that people can take right now is to educate themselves about these issues and ongoing trends. Without the right context it is very difficult to make the right choices whether it concerns investments or any other important life decisions. There are many people here in Australia and elsewhere in the world who have worked hard and managed to accumulate assets and life savings over their lifetime. Some of whom have reached the stage of their life where they are now depending on those savings for retirement. It would be unfortunate if people were to suffer a considerable loss on their savings simply because they are acting on false and inaccurate narratives that for various reasons are being presented in the public domain.
I realise that people have different ways of perceiving things. Some people are willing to consider alternative views while others prefer to stick with the more widely accepted notions. One big misconception I often find out there is a common belief among many people that prices of specific assets, whether it is real estate, stocks or some other asset class, will always continue to trend upwards. Such beliefs can be hard to change because people will always cling to a specific explanation that supports their particular views.
I believe people would be doing themselves a big disservice though by dismissing or ignoring many of the risks facing the investment environment today. Also, many of the investments and methods of storing wealth that people consider to be inherently safe are actually not safe at all and provide a false sense of security. This becomes apparent when you analyse and scrutinize these instruments more closely and by simulating how they would hold up during various adverse scenarios.
There are more and more people though, including many prominent entrepreneurs and investors, who are beginning to realise what is going on and they are beginning to diversify into alternative investments and to look at alternative ways to mitigate the current risks. I therefore think it is important that the average private investor and everyday people also begin to make their own arrangements to ensure that they are not the ones who will suffer most of the losses during periods of uncertainty.
Peter: The reason that we recommend that people take specific measures to protect their wealth here and now, is that it is prudent that people take such steps well before any adverse outcomes are likely to unfold. It is better to be one year early than one day too late, so to speak.
For instance, most people may not be aware of this but we are living in a highly unstable economic environment in which we may experience a severe financial disruption at any time. Something that could result in a significant or even total loss of wealth for many people. Most people, in all fairness, don’t realise how close we were in 2008 to a much more severe economic crisis. We were only days away from a collapse of the global financial system and a crisis just as severe as the Great Depression in the 1930s. Hundreds and probably thousands of banks around the world would have failed and the losses in the Australian and global stock markets would have been much greater than what actually occurred. This is something that would have wiped out many people’s wealth. The world economy avoided such severe consequences, although it came at a great cost in terms of a significant rise in government debt around the world. Today the global economy and financial system is even more unstable than prior to the last crisis. Policymakers and most investors have learned very little from the mistakes that led to the past crises. In the next crisis, we might not be able to avoid such severe consequences. Governments and central banks are already fully engaged in providing economic stimulus and they may be close to reaching the limits of what they can do. Central bankers have basically backed themselves into a corner and the only tool that they still have left at their disposal is whatever remains of public confidence in their ability to continue to keep the financial system afloat.
People should therefore ask themselves whether they are willing to continue to risk a significant part or possibly even all of their wealth, based purely on faith that the next time there is a crisis it will once again be successfully contained by governments and other policymakers. Our clients are understandably not willing to make such a huge gamble especially since most of the policymakers were not capable of foreseeing the crisis of 2008 in the first place.
Peter: The reason we provide the services that we do is because there is a huge need for personal wealth and risk management services which consider the implications of external macro risks and trends. Such services are not widely available elsewhere. We realise though that our particular approach is not in line with conventional investor wisdom and investor behaviour which nowadays seems to be more focused on managing wealth without consideration of the nature and severity of the inherent risks which are at hand. The people who decide to consult with us are people who already possess an acute risk awareness and who have the ability to comprehend diverse risks. Otherwise, they probably wouldn’t see the need to approach us. Unfortunately, there are too many people who are eager to dismiss the risks that we and others out there are drawing attention to because they contradict with the current investment dogma.
The aim and purpose of our services is not to provide advice in relation in to achieving a regular and consistent rate of return on an investment portfolio. Our number one goal and concern is to help to better protect the wealth and prosperity that our clients already have attained and accumulated. This is a different approach than conventional wealth management which is mainly concerned with attempting to grow a client’s wealth or savings at a specific yearly rate of return, dependent on the individual risk appetite of the client. Unfortunately, there is good analysis which indicates that conventional investment strategies will provide little or no protection against the risks posed by the predicaments that we face today. In the current environment, people should therefore be more concerned about the return of their money rather getting a return on their money. We highlight alternative measures which mitigate the consequences of these specific predicaments.
I believe that any individuals who have not taken such specific steps to protect themselves are taking a significant risk with their wealth. I am not saying that people necessarily need to make significant and drastic changes. Even a few specific measures can go a long way in better securing their wealth and lifestyle. It is up to each client to decide in the end what level of protection and risk exposure they are comfortable with.
Peter: We have carried out extensive research and analysis over many years and we have identified a wide range of different issues and megatrends which are critical to consider when determining appropriate long-term wealth strategies. We continually monitor economic and other macroconditions both domestically and globally. One of the main factors that we look at are global macroeconomic conditions. The global financial system has become highly unstable as a result of many decades of private and government debt accumulation and unsustainable monetary policies being pursued by central banks around the world. We are now near the end of credit super cycle which has lasted many decades. This credit super cycle has been partly responsible for several bubbles over the years such as the internet stock bubble in the late 1990s and the global real estate bubble which popped in 2007/2008. What we have now is once again a new cluster of bubbles in several asset classes. That is why we are seeing policy makers fighting tooth and nail to prevent not only these bubbles from popping but also to prevent the entire credit cycle from unravelling on their watch as the consequences of such a disruption would be detrimental worldwide.
It is important to understand though that most governments around the world as well as large parts of the global financial system are basically technically insolvent. Governments no longer seem to have any intention or capacity to ever repay all of their debt and they are constantly rolling over their existing debt. In other words, they are issuing new debt to pay off existing debt and also to pay the interest on the existing debt.
This continued debt growth is now only made possible because we have a situation where major central banks around the world are creating a huge amount of currency out of thin air. They are then using that new currency to go out into the bond markets to buy up government debt in the form of government bonds and even buying corporate debt, such as bonds of private companies. This keeps interest rates artificially low and generates inflation in financial asset prices as many large companies borrow money to buy back their own shares. Unfortunately, most of this new currency creation is for the most part only resulting in inflated asset prices rather than improving the real economy. It is a temporary illusion of wealth which is temporarily benefiting those parts of society who own assets such as stocks, bonds and real estate. This is one of the main reasons why we are seeing a lot of social discontent and populism emerging around the world. These economic policies can’t go on forever though. This credit cycle will come to an end one day, most likely sooner rather than later. Creating currency out of thin air to create sustainable growth has never worked before in history and there is no reason to think that now is any different. The debt crisis we are currently witnessing in Greece is a prelude of what we can expect to see in many other countries eventually.
Besides the macroeconomic conditions that I just outlined, we also consider impacts associated with demographic and technological trends and geophysical trends such as climate change and energy scarcity. Most people are aware of the climatic changes occurring globally but few realise that we have also recently entered a period where oil resources are no longer as abundant as they used to be, due to the finite nature of this resource.
Q5. You briefly mentioned the subject of oil depletion, which is often referred to as peak oil. Peak oil has been discussed for many years now and received quite a bit of media coverage not that long ago. Recently though it seems to have lost some of its credibility in the mainstream media, coinciding with the recent fall in oil prices. Should we still be concerned with peak oil?
Peter: Yes, peak oil is still relevant and should still be of concern. It is a very complicated question and I am going to try to answer this question in detail because it is probably one of the most important issues of our time. Let me start off by giving a definition of peak oil because there is widespread misconception of what the term actually means. Peak oil is not about running out of oil. Our modern industrialised society will stop using oil long before we ever run out of it. The problem with oil is that it becomes more difficult and costly to produce over time. This is because oil companies naturally go after the easily available oil first. This is the low-hanging fruit principle. Eventually we start to reach a point where all of the good and easy to extract oil fields are exhausted and we have to replace those with oil fields which are increasingly difficult and costly to extract. Technological development has helped over the years but not nearly enough to prevent the rising cost of oil extraction.
Coming back to your question, there is a notion in the mainstream media that peak oil has been discredited because new oil is still continuing to be developed and because oil prices started to fall again in late 2014 after trending upwards for about a decade. Unfortunately, most of the reporting in the mainstream press on this subject is done by journalists and pundits who don’t understand the oil sector very well and that is why it is easy for such myths to develop and spread. There are also vested interests in many parts of the oil sector in maintaining the confidence of their investors and creditors by asserting that oil will continue to be a stable and growing source of energy for many years to come. We therefore often hear that global oil production is still growing steadily and that there is nothing to worry about. It is important to understand though that the global oil production numbers that are being widely reported now also include unconventional oil and other forms of liquid fuels such as natural gas liquids and biofuels. This is a relatively new way of measuring oil production and it is very misleading because some of these different fuels are not actually oil and do not have the same energy content as conventional oil. Therefore, even though the volume of liquid fuels has gone up quite a bit, if you measure it in terms of actual energy that is available to oil consumers, the growth looks less impressive.
If you look at conventional oil production, it has barely increased since the year 2006 despite trillions of dollars being spent on finding, developing and producing new and also existing oil fields. We are now in a situation where oil companies are having to spend much more on bringing new oil to the market most of it being unconventional oil. The fact that some oil companies are using methods which involve digging unconventional oil, known as tar sands, out of the ground in places like Canada or drilling several kilometres underwater to produce some of this new oil is a clear sign that we are starting to scrape the bottom of the barrel. Similarly, the so-called shale oil in the U.S. is being heralded as an energy revolution in the mainstream media. Unfortunately, most of this oil is highly expensive to produce and environmentally intrusive even though the shale producers will claim otherwise. Also, most people don’t realise this but we actually passed the highest point of oil field discovery in the 1960s and the amount of new oil fields being discovered has been declining consistently ever since. Since the world is not replacing its dwindling oil reserves, we are basically living on borrowed time. Furthermore, every year the production in the existing oil fields in the world is declining on average about 4-5% per year. This means that every year the oil market has to replace an equivalent amount of oil just to maintain the current level of production. The big question is how long can the oil companies keep doing this while at the same time continuing to meet increasing demand for oil from developing countries such as China. The past 15 years they have only been able to do this because the price of oil increased almost 10-fold from the early 2000s and until early 2014.
Another problem with focusing too much on the total oil production numbers is that the net oil importing nations of the world, which makeup approximately two thirds of all countries in the world, do not really care about how much oil is being produced around the world. They are mainly concerned with how much oil is available for export. What we are seeing is that a growing share of the oil being produced in many oil exporting nations is being used internally as their economies grow and develop which leaves a smaller share available to be exported to oil importers.
I want to emphasise another critical point which is that over the years we have grown our economy, increased our prosperity and built most of our infrastructure with cheap and abundant oil which was discovered many decades ago. We are unfortunately deluding ourselves if we think that we can somehow continue to run our current economic system and our lifestyle on the remaining harder to extract oil. We have so far only been able to sustain global conventional and unconventional oil production because there is so much debt being created around the world and because interest rates are being kept artificially low. After all, it is new debt which finances much of the new oil production, especially shale oil in the U.S.. It is also continuous growing private debt and lower interest rates which has made it easier for consumers to continue to consume this much more expensive oil. Debt has thereby enabled the world to delay the date of the actual peaking of global oil production and it is the continuous availability of credit or any lack thereof combined with the rate of production cost increase which will determine the actual date of global peak oil. Unfortunately, we won’t know when this date will be until we see it in the rear-view mirror. Even if it turns out that the date of peak oil is still a few years away or more, the consequences of oil depletion are already here now. It is already impacting us in the form of higher trending energy costs and other associated economic ramifications.
Peter: Well, as is the case with peak oil there seems to be a big misconception concerning the impact that renewables will have going forward. The problem is that everyone is biased to some degree and people have a tendency to see things that they want to see and which supports their particular beliefs or personal agenda. That’s human nature. Unfortunately, there is currently an assumption that we can just continue to have economic growth and maintain our current standard of living by simply replacing oil and other fossil fuels with renewables such as solar and wind energy on a one-to-one basis. This is very much based on wishful thinking and also a lack of understanding of the true scale of the challenges we are facing in relation to future energy production.
Firstly, replacing oil is not just a question of merely developing a lot of renewable electricity. The problem is that we also have to replace or transform most of our transportation system because it runs on liquid fuels such as petroleum and diesel and not on electricity. Secondly, this is the first time in history that humanity is going through an energy transition where we are moving towards a source of energy that has a lower rate of energy return on energy invested. Previously, when we moved from wood to coal and then eventually started producing oil we were moving up to a higher level in terms of energy rate of return. Now we are going to head back down again so to speak. This is because fossil fuels are unique in terms of the amount of energy they provide compared to the amount of energy that is required to extract them. The energy and capital required to produce renewable energy is much higher and their development is also still reliant on the continued use of fossil fuels, for instance as intermittent energy when the sun doesn’t shine or when the wind doesn’t blow.
There are many other reasons why it is highly unlikely that we will ever voluntarily move away from fossil fuels in any meaningful way. These are some of things that we lay out during our informative consultations, as it will provide our clients with a more clear context amid some of the inaccurate and conflicting information being reported by the mainstream media and by others who have various vested interests.
Peter: I have worked with risk management for many years and I realise that whenever someone draws to attention to specific risks, especially unwelcome risks, they are often accused of exaggeration or even scaremongering. As risk management professionals, we are not in the business of promoting either pessimistic or optimistic views. We are in the business of managing risks for our clients and we look at this from a neutral perspective. Our number one concern is helping maintain our client’s wealth and prosperity. We determine the likelihood and consequences of potential scenarios based on an assessment of the available data and on actual fundamentals. We analyse and look at the data from many different angles in order to determine the most likely outcome. Some of the forecasts that we make could be described as quite adverse but, unfortunately, we don’t get to decide the attributes of the current trends. We are just an observer and a messenger and we let the data and the facts speak for themselves. Sometimes the world goes through periods of considerable change and even turmoil. That is the nature of the world that we live in. It is better to acknowledge the path of current trends and to mitigate potential adverse outcomes resulting from these trends rather than simply ignoring them and hoping for the best. I fully understand though why some people may choose to cling to a more comforting narrative. Some of the wealth management risks that we outline in our consultations can be quite uncomfortable to accept. That is also one of the main reasons why these issues aren’t being discussed in public very often. Our political system for instance, in its current form is not designed to encourage such discussions or to deal with future issues of such magnitude. Even if some policymakers may have a basic awareness of some of these issues it is a safer career move for them to simply kick the can down the road for as long as possible rather than trying to implement difficult reforms and changes. It is therefore up to each individual person, to make their own arrangements if they wish to avoid some of the ramifications of these future trends as they cannot rely on governments or anyone else to do what is best for them.
Finally, people also need to bear in mind that the issues which we are likely to face going forward also offer tremendous opportunities. After all, in a period of financial or economic disruption one person’s losses are another person’s gains. This is because a person’s wealth is rarely destroyed –in the case of tangible wealth especially it is merely transferred into the hands of others. You are either on the receiving end of such a wealth transfer or on the losing end. What we are aiming to do for our clients is to make sure that they for the most part are on the receiving end.
Peter: Anyone who makes predictions about specific future events where there are numerous variables involved are either making a wild guess or at best an educated or calculated guess. Nobody has a crystal ball that enables them to predict the future with complete precision. At Endurant Wealth we are not aiming to predict the future. That is impossible because there are too many variables interacting to create all the different events that happen to unfold in our world. What we are instead concerned with is determining and analysing risks and trends. It is these risks and trends which give us a strong indication of possible and likely future scenarios. Based on these likely scenarios we then determine what the consequences of such likely outcomes are and identify ways of mitigating such consequences. In reality, many of the likely consequences that we seek to mitigate for our clients are the same no matter which particular scenario may happen to unfold. In other words, many of the potential outcomes lead to the same type of consequences, specifically in relation to financial consequences.
Peter: Financial products are currently the cornerstone of most superannuation and investment portfolios. We differ from most wealth advisory firms in the sense that we are not a financial planner and we do not provide any advice in relation to investing in financial products such as shares and bonds or financial services.
Our focus is instead on providing guidance on tangible assets which mitigate some of the specific risks associated with the current state of the global financial system.
We assist our clients in being better protected and positioned to withstand the dynamic aspects of current and future trends and to make our clients more financially resilient. The scope of our services varies from client to client. Some people who contact us may choose to supplement their existing wealth management with alternative wealth protection measures identified by us. Others may wish to do a more extensive overhaul after gaining a better understanding of the numerous risks they are exposed to.
We also provide guidance on asset management solutions such as storage of tangible assets and property consultation. An important part of our services also involves providing up-to-date information to our clients in terms of briefing our clients on the nature of the current trends and circumstances which may affect them. After all, it is essential that our clients understand the context in today’s world before carrying out any significant decisions of financial importance.