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What is MDEF™ Investing? Strategy before tactics. Strategic investments dictate tactical actions in the Metals, Defense, Energy & Food sectors.

- Jeffrey C. Borneman

Throw a Lever, Cause a Collapse Or a War - Or Both

Jeffrey C. Borneman | December 4, 2014

Another US banking collapse is a very real possibility. It is so apparent that even the mainstream media is discussing it today, complete with charts depicting break-even levels for corporate debt at various oil prices. For those who do not watch the geopolitical moves of troops and military hardware, this may seem like a domestic issue that will somehow work itself out, while the consumer rejoices over saving a few extra dollars at the pump.

But oil and war have been intrinsically linked since Winston Churchill ordered the British fleet to switch from coal to oil in 1912. Since then, this statement remains true of oil: Wars have been fought for it, and lost for lack of it. Here is the lens investors must use: All geopolitical events since 1945 have revolved around Energy.

Russia is currently the world's largest producer of oil. The US goal of a Russian government collapse is patently clear. Russia (among other nations) cannot survive economically with oil prices at current levels for much longer. How dire is the Russian situation? The ruble has fallen 36% this year (that equates to a minimum of 36% Inflation although Russia follows the US model of reporting Inflation, so will acknowledge only an official rate of 9.7%) and its treasury has lost $100 billion so far in 2014 with capital outflow of another $125 billion. The US/European sanctions have closed the international banking system to Russia, essential for maintenance and upkeep of its Energy infrastructure. Perhaps most telling, the average Russian is now choosing between heat and food.

What of the other players? With global DEMAND for Energy falling slightly and massive new US supplies, OPEC has been losing influence quickly.

In the short term, the US has made every effort via the EPA to slow or shut down US production (Clinton's comment on abortion applies to oil production as well, "keep it rare, safe and legal"). Assuming the twin goals of a defunct Russia and temporarily truncating new US oil production capability, how best to achieve them? Temporarily driving down oil prices would achieve both aims for the US and benefit the Saudis as well, renewing their influence (control) over oil prices. That is clearly Plan A.

There is, however, the possibility of a Plan B coming to fruition. The current scenario playing out risks collapse of the US banking system while simultaneously pushing Russia into a military solution. Putin must act somehow and soon to drive prices higher or risk a financial collapse. Thus far, the US appears willing to risk its own domestic collapse to ensure Russia's demise. Given this stalemate, is Plan B clear? Victor Davis Hanson said in Townhall yesterday, "The ancient ingredients of war are all on the horizon" and he is correct. Hanson gives an overview of the players and events leading to WWII, and while the oil connection is absent, the circumstances are eerily similar.

It is not surprising then that the US and NATO are moving yet more military hardware to the Baltic region (100 more tanks), and have tripled the available air power. In response, Russia has declared a 33% increase in the number of war-games planned for 2015. The world is still playing “Speed Chess” and while the moves seem slow and perhaps disconnected, when coupled with the kabuki theater of US domestic politics, the game remains no less dangerous on every front. There is the possibility that the ultimate US goal is to replace Russia as the world's largest oil producer and share the stage with Saudi Arabia. This idea is not as far-fetched as it may seem at first glance.

Astute investors are studying each move by international players with one eye on the clock. Which country’s financial system will collapse first, the US or Russia? Is war still avoidable, and if not, what might be the "Arch Duke Ferdinand moment?” Despite the current foment, wise investors are also secure in their understanding that DEMAND in Metals, Defense, Energy and Food (MDEF™) cannot abate no matter which path the world is on.

If you want to know more about how the MDEF™ Investing strategy is positioned in this, or other geopolitical possibilities, please contact us directly.

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