The end of disintermediation?

Extraordinary times. In case I ever forget, remind me never to invest in investment banks! Having had direct experience of the "old" Barings back office many years ago I could write loads about rogue traders. Unfortunately Kerviel will not be the last. And who indeed would be central banker in these conditions? But I have just bought Alan Greenspan's autobiography which might provide some useful insights.

My biggest economic fear at present is actually imported inflation (oil and commodities) and falling tax revenues leaving the Government powerless to apply stimulus. I am still optimistic that the recession will be short lived, and not as bad as some share prices suggest, but I haven't yet worked out the implications for the capital markets which, besides everything else, are only now starting to react to the downgrade and possible demise of the monoline insurers.

A few years ago the story was all about "disintermediation"; rather than investors depositing in banks whom in turn lent money out, debt has increasingly being securitised and distributed direct to those investors. Traditional banking credit skills became less relevant since business was based on clever packaging, the co-operation of rating agencies, credit enhancement and aggressive sales. Thus the "old fashioned" banking model was replaced by fancy investment banks whom took fees rather than put their own capital at risk (apart from big underwriting). It appears that is all shot to pieces.

What will the world be like without all that debt capacity and credit enhancement? Certainly a lot of business models need to be rethought.

Yesterday I made my first ever direct investment into a US company. This was ConocoPhillips being part of my oil & gas theme. Fair enough I was originally drawn to COP by Warren Buffett but ultimately what appealed was a low valuation compared to proved reserves, good reserve replacement, strong cashflows and importantly a management team clearly committed to shareholder value: For 2008 they expect to buy back $10bn of shares which represents around 8% of the market capitalisation.

Twilight in the Desert

Back after an extended Christmas "blog break" during which time I read "Twilight in the Desert" by Matthew Simmons. Simmons is an M&A advisor specialising in the Oil and Gas Industry whom also writes and speaks as a very high profile "peak oiler". His book is very well written and impressed me by deep and thorough research based on a review of over 200 technical papers by engineers and scientists involved in the key Saudi oil fields and presented to the Society of Petroleum Engineers.
In short this shows that production from these very large fields is no longer "easy" and Saudi Aramco are having to use state of the art technologies to keep production up. Given the technical difficulties faced it is simply impossible to be confident about being able to sustain high levels of production from these fields for decades to come and this leads to grave doubts about the level of the reserves Saudi Arabia claims still exist. Much of the argument can be followed by looking at Ghawar, the greatest oil-bearing structure ever known and which first began production in 1951. Ghawar has now produced over 55bn barrels of oil and still supplies around 5m bpd which equates to around 55% of Saudi output and 6% of global supply. It is believed that water comprises about 33% of the liquids produced, which increases complexity and expense and clearly shows that this is a mature field. Someday soon production at Ghawar will peak, if it hasn't already. When Ghawar peaks so does Saudi Arabia and so does the world.