Peak oil, meet your cousin peak credit

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A very nice analogy from one Chris Cook:

The subject of “peak oil” is usually misrepresented to mean “oil is running out” but in fact means that, “while there may be plenty of oil in the ground, there is a maximum (peak) level of production which we may even have reached”. Peak oil has gradually evolved from a wild “crank” theory to the relative respectability of — a well-known phrase — an “inconvenient truth”.

The consequences of peak oil are not within the scope of this article but serve as an analogy for another phenomenon — peak credit, which, like peak oil, may in fact already have occurred. …

In the case of credit I don’t think we’re talking about an absolute amount that has permanently topped out. But as a percentage of GDP in, say, the U.S. and U.K., maybe. Here are some quotes along the same lines from money manager Manny Weintraub of Integre Advisers (from an e-mail sent out by his PR firm):

Credit expansion is over. Total debt as a percent of GDP has risen since 1982 from 170 percent of GDP to 350 percent of GDP. We have hit what seems to be a ceiling, so there’s contraction going on in the amount of leverage – and no matter how you slice it, that leverage is not going larger, it’s not going to 400 or 500 percent.

We’re talking about a real change in the way the world will work, with less debt, less liquidity…it won’t shrink to 170 percent, but the first step will be less. And it always hurts more on the downside than it felt good on the upside.

What does this mean for investing? For a lot of my career I’ve bought fear and sold greed, but this time I’m not willing to buy the fear here, because this is a real sea change.