Home Featured Story DR. STEPHEN LEEB



American economist and author Dr. Stephen Leeb talks with the Opportunist’s Managing Editor Leslie Stone about resource scarcity, our prospects for energy independence and why China is the country to watch.

Dr. Stephen Leeb is regarded as one of the country’s foremost financial experts. He is famous for his accurate predictions, including $100-a-barrel oil, the Dow’s secular rise to 4000, and the dot-com bubble to name a few. How was he able to do this? “I make a lot of predictions, and if you make a lot of predictions some are bound to be right,” he jokes, adding that he enjoys figuring things out and trying to understand what makes one day different from the next. “What are the parallels between today and, say, five or even 100 years ago? I enjoy the scientific process and applying it to people and economies and societies. I try to find the points of inflection and come to tentative conclusions—no one ever comes to any real conclusions in this world—and when I get there it usually doesn’t last very long because something else comes up that I am completely flummoxed by.”

Dr. Leeb has written eight books on macroeconomic trends, including The New York Times best seller The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 A Barrel, in which he predicted that the decline in nominal home prices would be “the vicious circle to end all vicious circles.” A frequent guest on national TV and radio, Dr. Leeb is also founder and research director of Leeb Group, which publishes an extensive line of financial newsletters and e-letters reaching more than 200,000 readers.

Opportunist: How did you get into economics?

Stephen Leeb: Basically through my general interest in the world. I started as a Wharton undergraduate and enjoyed economics courses much more than plain business courses. I did pretty well, but I missed a chance to just go off into economics early on when I was invited during my sophomore year to go into the graduate program and didn’t. I took psychology classes and determined that economics is kind of a dead end if you want to understand things. So I went into psychology and math as a dual graduate degree. I was a good student and I got my masters in math and a PhD in psychology in three years. If you’re fairly good at math it translates into easily understanding other disciplines. I started in the stock market in the mid-‘70s because I thought it was the place that most readily translated into what was going on in the economy and I have stayed there ever since as sort of a base. Most of my writings are psychology and economics focused.

Opportunist: You have said that energy and other resource limitations have come to dominate global economics. Please tell us more.

Stephen Leeb: I think this is the critical problem the world has to deal with today. It is being masked dramatically by the slowdown in Europe, which to be very honest is one thing I did not expect. Who knew that Europe would be entering its sixth consecutive quarter of negative growth? There is a little evidence now that Europe is getting back on its feet, but resource scarcity will reassert itself and societies—especially younger generations—will have to face it going forward.

Opportunist: What does that mean for the future?

Stephen Leeb: There has been so much focus on ‘drill baby, drill’ or fracking, but that is no way to go about solving the resource problem. Hydrocarbons are a very limited resource and high hydrocarbon prices translate throughout the chain and equal a high level of interdependence. Water, energy and food all require massive amounts of energy, which is tapped. We certainly won’t get new sources of water unless we use lots of energy to get it.

Opportunist: About 10 years ago the term ‘peak oil’ had everybody worried. What happened with that?

Stephen Leeb: Peak oil is a terrible misnomer. We don’t have it. We’ve seen over the last six years a dramatic reduction in demand for oil—something on the order of 17 percent. When you look at the 12-month average, oil prices are pretty sticky despite demand and the signs that hydrocarbons are becoming ever more scarce.

Opportunist: In your recent book Red Alert, you talk about how China’s growing prosperity is threatening Americans’ way of life. Please tell us more about that.

Stephen Leeb: If it weren’t for China, I think oil prices today would be about $60 rather than $95 and we probably wouldn’t be having any of this discussion. Their population is about 1.3 or 1.4 billion—at least that’s what they own up to in their census, but it’s probably more like 1.7—and they are industrializing at a pace never seen before. This requires massive amounts of resources and lots of those resources come from an energy infrastructure. Solar requires lots of silver. The smart grid requires copper. We fought a war in Iraq but where is the prize? China has a paramilitary taking oil out of Iraq right now. While we were fighting in Afghanistan they had a paramilitary presence mining massive amounts of copper and stockpiling it. This type of behavior and activity tells me they get it: resources are scarce. The largest economic bloc in the world, the euro economies, are in on one of the deepest, most protracted recessions that might be worse than what they experienced in the 1930s. Despite that, and again, the euro bloc is a larger economic bloc than the United States, and despite profound weakness and 25 percent unemployment rates in Spain and Greece, resource prices remain rather high. If it weren’t for China gobbling up everything we would have an entirely different world today. I believe it’s going to get worse. Even the IEA [International Energy Agency], the most pro hydrocarbon people in the world, admits that the cheap oil is gone. And regardless of what people hope, once oil is expensive it doesn’t get cheaper all of a sudden. It gets more expensive because it gets harder to find and it will take ever more resources to find it.

Opportunist: Why are people generally so quick to blame the Middle East for our oil woes?

Stephen Leeb: You cannot blame the Middle East. They are the only ones pumping out conventional oil to any extent and they are pumping all they can. It’s not in their best interest to see the world’s economy slow down. Oil interests in the United States are very much against blaming high oil prices on lack of supply. They want to blame it on relatively high demand. If there is a question of the Middle East, I don’t think that’s the case. The Middle East is doing as much as they can, though I am not sure they’re pumping at 100 percent of capacity. There is too much demand relative to how much oil we have. China has the most energy use of any country in the world because so much of it is in coal. China is by far the largest incremental source of increased oil usage.

Opportunist: Do you believe the United States can become energy independent in our lifetime?

Stephen Leeb: You know, I think it’s possible but how we do it is the question. The amount of energy required just to achieve independence could starve the society. Talking about doing it by virtue of fracking is a ticket to catastrophe. Will we get on the right path? Maybe. I hope. I pray. What happens over the next couple of years when the gains from fracking start to trail off and energy prices start to rise again? I don’t have a crystal ball. There are too many moving parts and too many people with a stake like the big oil companies with all the power.

Opportunist:  People seem to be at opposite poles over fracking. Why is it so controversial?

Stephen Leeb: We can get oil out of the ground with fracking but it takes tremendous energy to get that oil. It’s not a long-term strategy because it will take as much oil to get to that oil and nothing will be left over for society. You don’t want to come to that position. I fear that, especially in this country—and this is where psychology comes in to some extent—because the masses tend to follow authoritarian opinions and march like sheep to beats they should not be marching to. It really worries me. Ironically, the country that has energy right appears to be China.

Opportunist: What is China doing?

Stephen Leeb: China is investing more in broad-based energy infrastructure, smart grids, solar, wind, and oil and coal. They’re energy agnostic, and they want to have a grid that can accommodate all these energies. In order to continue to enjoy some measure of prosperity countries are going to have to find different energy sources. I will add that I am ignoring climate change at the moment and just talking about resource scarcity. I think China gets that picture. That’s the reason for all the investment we’ve seen. Some, like the IMF, say it’s excessive. Some is no doubt wasteful, but you cannot be as big as China and spend as much as you have to without wasting some. It takes high-speed trains to take materials from one part of China to another. And factories that produce panels and turbines, steel and iron ore. So yeah, there is some over capacity and cyclical problems, but most of the problems have to do with Europe. China used to be an export-driven economy and now they are no longer, but they have the right idea about how vital energy is. I think the United States has totally lost its way in this area and is following a course that could be catastrophic to our next generations. Unless we invest in a smart grid that can accommodate all sorts of energy and invest in renewable energy, I have great fear for my children and their children. That’s basically how I see the world.

I recently read a brief little factoid about Spain in New Scientist. It was talking about the smart grid and how there have been days in Spain, which has invested lots of money in wind energy by the way, where there was enough wind to have powered the entire electric grid. That’s what China wants to do is make the best use of all the energy they have in the system. That’s what they’re investing a lot of their energy toward. There’s plenty of wind and sun in the world and a lot of it is cheaper than oil. Solar is about even with oil, but wind and solar together are definitely better than hydrocarbons.

Opportunist: What is your opinion on the current state of the euro zone?

Stephen Leeb: I feel a little bit better about Europe overall. We are seeing hints in PMI [Purchasing Managers’ Index] surveys and the data from that indicating that industrial production is improving in Europe. I can see the euro rallying to $1.30, which is not such a bad number. I wouldn’t be surprised at all if it rallies. I would not sell the euro here though—not because of the austerity but because of the risks associated with austerity. I have to say that Germany and some of the other countries in the euro zone are starting to loosen up on this, and I think they may be coming around to what is a clear recognition of austerity and a greater willingness to promote growth.

Opportunist: Was Standard & Poor’s recent decision to downgrade the credit rating for Cyprus to selective default justified?

Stephen Leeb: It’s dreadful and it’s courting disaster. Taxing bank depositors in Cyprus was just a horrible idea. It’s hard to believe human beings act this way. I think the Europeans, and especially the Germans who are basically calling the shots, are living in fantasyland. Unemployment in Greece and Spain is at the kind of depths that lead to terrible social upheavals and dictatorships. Unfortunately, we have wars in this world that kill millions of people. We have seen that kind of crazy behavior before in Europe. Germans cite the Weimar Republic and hyperinflation as contributing factors to the rise of the Nazis but that isn’t what brought on the takeover of Germany. It’s true that it created massive dislocations, but by and large unemployment didn’t skyrocket and the government stayed in power. Germany segued into a Goldilocks economy—not too hot or too cold—and saw strong gold prices and very little inflation. What brought on the Nazis was a depression that started in the United States and allowed the Nazis to rise into power.

Opportunist: Where do you stand on gold and silver?

Stephen Leeb: I’ve been very bullish on both. My thoughts are that I should go out and get drunk and hope they never go down. [Laughs] You can look at gold as a $19 stock that’s gone to $12. I started feeling this way about it toward the end of last year. Gold is a real threat to the Western world. That’s another area where China has sort of gotten our number. Gold is universally recognized but not everyone recognizes it as a major currency, especially if you buy into resource scarcity. Who’s going to exchange paper for scarce resources? No one. If you have something really valuable how likely is it that you’re going to exchange it for something you can create out of thin air? Paper currencies don’t fit the bill. We’ve gotten a temporary break from resource scarcity, and longer-term I believe gold is going to have a major role to play and I think the West sees this. A telling factor in why gold went down occurred when the central bank’s central bank issued liquidity rules. Everybody had memories of 2008 in mind. General Electric almost bought the farm because it had no sources of funding. We were in a severe liquidity crisis. The BIS [Bank for International Settlements] set up rules for what banks had to hold for liquidity purposes. Everybody expected gold to be named because it performed well during the financial crisis, held its value and was less volatile than a lot of assets such as stocks. Then, lo and behold the BIS comes out and gold is not mentioned. It sort of made it easier for the EU to tell Cyprus ‘We want to see you sell your gold’ when they were in trouble. It was clear the West was fighting gold becoming a currency. It will keep on rising because it would be the only currency in the world. It would not matter in a world of plenty, but in a world in which there are scarcities gold’s role in currency is a very critical one. In retrospect, I view this as what the West had to do. People were buying things with gold and silver and they had to stop that. The next crisis will probably be some sort of resource crisis. This may be months or even years away, but without question the price of gold will be much higher—many, many times higher. I think it will rally some between now and then, but not a lot.

Opportunist: What if anything can be done to strengthen our currency system?

Stephen Leeb: Our currency system today is fine until we get into a resource crisis. Then everything we get out of Europe in terms of a strong PMI survey is going to be bad. The world is going to live or die on its ability to supply demand for resources. China’s median income is less than the world’s average. If we are going to get up to anything resembling prosperity, not to mention India and Indonesia and other countries where income levels are still considered moderately prosperous, the amount of needed resources is going to exceed what the world has to offer. That will lead to the advent of gold as a major factor in any currency basket.

Opportunist: Will the nation’s manufacturing base and competitiveness ever be restored?

Stephen Leeb: Well, I think you need a low dollar to do that. And I think that’s what we should be focused on. America has sort of been handed a gift in the form of low natural gas prices, which has given manufacturing a boost. We really need to assemble a lot of wind factories and launch a major effort to build out a smart grid. And we need a low dollar so we can export to other countries. I think a strong euro would do us a lot of good as well. Are policies in place to bring it into fruition? No, but I do believe it’s possible and I have not given up hope of that happening.

Opportunist: How can we get Americans back to work?

Stephen Leeb: I don’t really have anything brilliant to say about that other than I am an advocate of education. Every piece of data you look at says education is a major lure and a way to get people back into the workforce. I believe aggressive infrastructure programs that are well meaning and well structured would also be a way to employ people. We wasted our chance in the 1990s and in the aftermath of the recent bubble. At those times we should have gone gung-ho on energy infrastructure projects. Projects like that, along with a real strong emphasis on education, are what I would recommend.

Opportunist: Will the economy suffer long-term effects from the sequester?

Stephen Leeb: I don’t think it will have much impact at all. I really don’t. We will get around it. We should be concerned about other problems and the kind of money printing the government is doing. The media is focused on the sequester because it’s front and center and an example of how the government is breaking down and unable to get its act together or come to any real decisions. We have turned into a country of differing opinions and fighting ideologies rather than coming together to make right decisions for all the people. It’s not just conservatives and liberals—it’s people in the oil industry and the thinking industry as well. All these industries represent corporate states with their own interests and agendas, and they are clashing together kind of like Islam and Judaism. It’s tough to make peace. I feel our children and our children’s children will pay a very dear price for it. It’s so emblematic of the religiosity that we have in this country that seems to govern us. It seems like no one is an American anymore. Everyone is this ‘ism’ or that ‘ism,’ but I want to see red-blooded Americans come to the fore.

Opportunist: Do you believe the U.S. economy is going to continue its rebound?

Stephen Leeb: Oh, I think we will muddle along right about where we are right now at 1.8 percent or maybe 2.2 percent growth but not to where we are really creating enough good jobs to drive us forward in any meaningful way unless we change things. America has to wake up and we just aren’t there yet. We are sound asleep. Every time Chinese interest rates tick up for a week or two we think all our problems are over because China is going to fall apart. But that is not the case.

Opportunist: Is the American Dream an unobtainable ideal or is it still within reach?

Stephen Leeb: It’s less and less obtainable because the country is becoming more and more fractured. We have rich vs. poor and less upward mobility than we have ever had. To put it bluntly, we have gone backwards. This is the first generation that does not live better than its parents. Does that mean we cannot resurrect the so-called dream? No, but we are unquestionably going in the wrong direction. Americans as a whole must realize this if we are to come together to right the ship. We took a very bad turn and I don’t know why. Some historian 200 to 500 years from now will be in a much better position than I am to know why. Ironically, winning the Cold War led to a lot of complacencies. We had a goal to beat Russia on some level and we accomplished that through our economic strength but subsequently became complacent. If only we had shifted our thinking in the 1990s to ‘Hey, let’s find ways of protecting ourselves against energy shortages by developing new energy resources’ or if we had waged a war on developing resources. Why didn’t Bush make resources a top priority rather than going into Iraq? I don’t know. America should have seen things panoramically but instead was more focused on the center of the picture in the wake of 2001, and that was to get Al Qaeda and anyone associated with it. If they’d been focused on the panorama there would’ve been no 2001 because we would have been totally sufficient in energy. Not only would the Middle East be less of a threat, but also people of the world would’ve eaten better.

No, I haven’t lost faith in America. We can come together as a great society, but we are not on the right path today.

Opportunist: Do you have any other books in the works?

Stephen Leeb: I am writing a book on gold but I am taking my time. Like I said, gold will become the dominant currency in the basket of currencies along with the yuan. We are still no closer, though I continue to write and when I think it’s closer to becoming a reality I will hand in my proposal. If I saw fracking failing then I think that might be a clue for me. I haven’t seen the catalyst yet but that’s the next book I will write—if I live long enough to do it. [Laughs]

Follow Dr. Stephen Leeb on Twitter at @dr_leeb

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Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in Florida. Follow her on Twitter at @les7989.