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Chris Martenson

Image | Oil, Greece, and a Bounce in the Markets
Oil, Greece, and a Bounce in the Markets
 PREVIEW

As expected, markets are beginning to act as if the world’s largest money-printing experiment, QE II (quantitative easing), is really going to end. My views here, first expressed in The Coming Rout (March 8) and reiterated since, is that commodities will get hit first and hardest, then stocks, and then bonds, beginning with weaker issues first before progressing towards the center.

This process is unfolding right in line with my expectations.  The next few months may well prove to be far more interesting than your average summer, although my preferred time for real difficulties remains early fall.

To begin our coverage, the stock market was off to a truly horrible start today, plunging by a couple of hundred points (Dow) before finding a base, and then being ‘rescued’ by a late day rumor that the Greece situation had been resolved.

Here’s the rumor:

Oil, Greece, and a Bounce in the Markets
 PREVIEW

As expected, markets are beginning to act as if the world’s largest money-printing experiment, QE II (quantitative easing), is really going to end. My views here, first expressed in The Coming Rout (March 8) and reiterated since, is that commodities will get hit first and hardest, then stocks, and then bonds, beginning with weaker issues first before progressing towards the center.

This process is unfolding right in line with my expectations.  The next few months may well prove to be far more interesting than your average summer, although my preferred time for real difficulties remains early fall.

To begin our coverage, the stock market was off to a truly horrible start today, plunging by a couple of hundred points (Dow) before finding a base, and then being ‘rescued’ by a late day rumor that the Greece situation had been resolved.

Here’s the rumor:

Image | The Dance of the Big, Round Number
The Dance of the Big, Round Number
 PREVIEW

As expected, the “dance of the big, round number” is underway, with the Dow flirting with 12,000 all week, plunging under it, bounding over it, bouncing off of it, and then landing on it to end the week. My view is that a stock market rebound is likely over the next couple of weeks, but this view is based on charts and momentum and liquidity, not economic fundamentals, which are deteriorating.

The macro view here is that much of the value to be found and prices to be seen in various credit markets and the stock market is really just a reflection of the belief that the system will be bailed out. “Too big to fail” is now an operating maxim applied equally to the next Lehman wanna-be and Greece. All of the big players took appropriate notice of the actions of the monetary and fiscal authorities to prevent big institutions from suffering the fate of their poor risk management practices and investment decisions.

The faith that nobody (of any substance) will be allowed to fail is now a pronounced feature of our markets and partially explains the elevated prices we are currently seeing in nearly everything. Another major component of these elevated prices is the excessive liquidity that the Fed, ECB, BOE, and Japanese central bank continue add to the markets

However, we are now less than two weeks away from the end of the second round of quantitative easing (QE II), and everyone should be concerned with the impact that the loss of this liquidity will have on various markets. I think the early warning signs are already in place.

First, the fundamentals.

The Dance of the Big, Round Number
 PREVIEW

As expected, the “dance of the big, round number” is underway, with the Dow flirting with 12,000 all week, plunging under it, bounding over it, bouncing off of it, and then landing on it to end the week. My view is that a stock market rebound is likely over the next couple of weeks, but this view is based on charts and momentum and liquidity, not economic fundamentals, which are deteriorating.

The macro view here is that much of the value to be found and prices to be seen in various credit markets and the stock market is really just a reflection of the belief that the system will be bailed out. “Too big to fail” is now an operating maxim applied equally to the next Lehman wanna-be and Greece. All of the big players took appropriate notice of the actions of the monetary and fiscal authorities to prevent big institutions from suffering the fate of their poor risk management practices and investment decisions.

The faith that nobody (of any substance) will be allowed to fail is now a pronounced feature of our markets and partially explains the elevated prices we are currently seeing in nearly everything. Another major component of these elevated prices is the excessive liquidity that the Fed, ECB, BOE, and Japanese central bank continue add to the markets

However, we are now less than two weeks away from the end of the second round of quantitative easing (QE II), and everyone should be concerned with the impact that the loss of this liquidity will have on various markets. I think the early warning signs are already in place.

First, the fundamentals.

Image | Ready, Set, Plunge!
Ready, Set, Plunge!
 PREVIEW

The economic data coming out now is really quite dismal. What appeared to be a reasonable, if unspectacular, recovery is now in serious doubt. Even more notable is that the economy remains this weak despite all the trillions in stimulus and Fed balance sheet expansion.

The stock market reacted badly to the news, shedding roughly 1.5% on each index, with the Dow closing below the big, round number 12,000.

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Here are my thoughts and observations about the past week’s stock market performance and recent economic and monetary news that drove the recent losses.

Ready, Set, Plunge!
 PREVIEW

The economic data coming out now is really quite dismal. What appeared to be a reasonable, if unspectacular, recovery is now in serious doubt. Even more notable is that the economy remains this weak despite all the trillions in stimulus and Fed balance sheet expansion.

The stock market reacted badly to the news, shedding roughly 1.5% on each index, with the Dow closing below the big, round number 12,000.

height=

Here are my thoughts and observations about the past week’s stock market performance and recent economic and monetary news that drove the recent losses.

Image | Understanding The Endgame
Understanding The Endgame
 PREVIEW

Understanding The Endgame

Wednesday, June 8, 2011

Executive Summary

  • Greece as a case-study in sovereign debt collapse
  • Why peak oil assures we will not be able to pay our debts
  • Understanding the dynamics of a future of less/no growth
  • Steps we as individuals need to be taking in preparation
  • How to preserve purchasing power during the coming market rout

Part I – Death by Debt

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – Understanding The Endgame

How might the end game for a debt crisis play out?  We need look no further than one of the PIIGS for our answers.

Greece

Greece is in immediate danger of defaulting on its sovereign debt.  As one of the charts in Part I makes clear, the pain of such a default will land primarily on German, French, and UK banks.  Sure, they can probably kick the can down the road a bit longer, but it won’t change anything. 

The levels of Greek sovereign debt alone are far beyond anything that can reasonably be repaid, even under very aggressive growth scenarios.

Understanding The Endgame
 PREVIEW

Understanding The Endgame

Wednesday, June 8, 2011

Executive Summary

  • Greece as a case-study in sovereign debt collapse
  • Why peak oil assures we will not be able to pay our debts
  • Understanding the dynamics of a future of less/no growth
  • Steps we as individuals need to be taking in preparation
  • How to preserve purchasing power during the coming market rout

Part I – Death by Debt

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – Understanding The Endgame

How might the end game for a debt crisis play out?  We need look no further than one of the PIIGS for our answers.

Greece

Greece is in immediate danger of defaulting on its sovereign debt.  As one of the charts in Part I makes clear, the pain of such a default will land primarily on German, French, and UK banks.  Sure, they can probably kick the can down the road a bit longer, but it won’t change anything. 

The levels of Greek sovereign debt alone are far beyond anything that can reasonably be repaid, even under very aggressive growth scenarios.

Image | Death By Debt
Death By Debt

One of the conclusions that I try to coax, lead, and/or nudge people towards is acceptance of the fact that the economy can’t be fixed.  By this I mean that the old regime of general economic stability and rising standards of living fueled by excessive credit are a thing of the past.  At least they are for the debt-encrusted developed nations over the short haul — and, over the long haul, across the entire soon-to-be energy-starved globe.

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The sooner we can accept that idea and make other plans the better.  To paraphrase a famous saying, Anything that can’t be fixed, won’t. 

The basis for this view stems from understanding that debt-based money systems operate best when they can grow exponentially forever. Of course, nothing can, which means that even without natural limits, such systems are prone to increasingly chaotic behavior, until the money that undergirds them collapses into utter worthlessness, allowing the cycle to begin anew.

Death By Debt

One of the conclusions that I try to coax, lead, and/or nudge people towards is acceptance of the fact that the economy can’t be fixed.  By this I mean that the old regime of general economic stability and rising standards of living fueled by excessive credit are a thing of the past.  At least they are for the debt-encrusted developed nations over the short haul — and, over the long haul, across the entire soon-to-be energy-starved globe.

src= 

The sooner we can accept that idea and make other plans the better.  To paraphrase a famous saying, Anything that can’t be fixed, won’t. 

The basis for this view stems from understanding that debt-based money systems operate best when they can grow exponentially forever. Of course, nothing can, which means that even without natural limits, such systems are prone to increasingly chaotic behavior, until the money that undergirds them collapses into utter worthlessness, allowing the cycle to begin anew.

Image | Exclusive Arnie Gundersen Interview: The Dangers of Fukushima Are Worse and Longer-Lived Than We Think
Exclusive Arnie Gundersen Interview: The Dangers of Fukushima Are Worse and Longer-Lived Than We Think

"I have said it's worse than Chernobyl and I’ll stand by that. There was an enormous amount of radiation given out in the first two to three weeks of the event. And add the wind blowing in-land. It could very well have brought the nation of Japan to its knees. I mean, there is so much contamination that luckily wound up in the Pacific Ocean as compared to across the nation of Japan – it could have cut Japan in half. But now the winds have turned, so they are heading to the south toward Tokyo and now my concern and my advice to friends that if there is a severe aftershock and the Unit 4 building collapses, leave. We are well beyond where any science has ever gone at that point and nuclear fuel lying on the ground and getting hot is not a condition that anyone has ever analyzed."

So cautions Arnie Gundersen, widely-regarded to be the best nuclear analyst covering Japan's Fukushima disaster. The situation on the ground at the crippled reactors remains precarious and at a minimum it will be years before it can be hoped to be truly contained. In the near term, the reactors remain particularly vulnerable to sizable aftershocks, which still have decent probability of occuring. On top of this is a growing threat of 'hot particle' contamination risk to more populated areas as weather patterns shift with the typhoon season and groundwater seepage.

In Part 1 of this interview, Chris and Arnie recap the damage wrought to Fukushima's reactors by the tsunami, the steps TEPCO is taking to address it, and the biggest operational risks that remain at this time. In Part 2, they dive into the health risks still posed by the situation there and what individuals should do (including those on the US west coast) if it worsens.

Click the play button below to listen to Part 1 of Chris' interview with Arnie Gundersen (runtime 36m:31s):

[swf file="http://media.PeakProsperity.com/audio/arnie-gundersen-2011-06-03-part1.mp3"]

Download/Play the Podcast
Report a Problem Playing the Podcast

Or start reading the transcript below:

Exclusive Arnie Gundersen Interview: The Dangers of Fukushima Are Worse and Longer-Lived Than We Think

"I have said it's worse than Chernobyl and I’ll stand by that. There was an enormous amount of radiation given out in the first two to three weeks of the event. And add the wind blowing in-land. It could very well have brought the nation of Japan to its knees. I mean, there is so much contamination that luckily wound up in the Pacific Ocean as compared to across the nation of Japan – it could have cut Japan in half. But now the winds have turned, so they are heading to the south toward Tokyo and now my concern and my advice to friends that if there is a severe aftershock and the Unit 4 building collapses, leave. We are well beyond where any science has ever gone at that point and nuclear fuel lying on the ground and getting hot is not a condition that anyone has ever analyzed."

So cautions Arnie Gundersen, widely-regarded to be the best nuclear analyst covering Japan's Fukushima disaster. The situation on the ground at the crippled reactors remains precarious and at a minimum it will be years before it can be hoped to be truly contained. In the near term, the reactors remain particularly vulnerable to sizable aftershocks, which still have decent probability of occuring. On top of this is a growing threat of 'hot particle' contamination risk to more populated areas as weather patterns shift with the typhoon season and groundwater seepage.

In Part 1 of this interview, Chris and Arnie recap the damage wrought to Fukushima's reactors by the tsunami, the steps TEPCO is taking to address it, and the biggest operational risks that remain at this time. In Part 2, they dive into the health risks still posed by the situation there and what individuals should do (including those on the US west coast) if it worsens.

Click the play button below to listen to Part 1 of Chris' interview with Arnie Gundersen (runtime 36m:31s):

[swf file="http://media.PeakProsperity.com/audio/arnie-gundersen-2011-06-03-part1.mp3"]

Download/Play the Podcast
Report a Problem Playing the Podcast

Or start reading the transcript below:

Image | Housing Tumbles (or, Why the US is Headed Towards a Bond Market Disaster)
Housing Tumbles (or, Why the US is Headed Towards a Bond Market Disaster)
 PREVIEW

There has never been an economic recovery without a rebound in housing. Of course, we don’t really have an economic recovery now; it’s more of a statistical mirage, thanks to trillions in thin-air money printing.  And we don’t have a recovery in housing.

I have written extensively on the housing topic over the years because a rebound in housing will be an important signpost that some sort of stable economic recovery is actually underway.  

In the Crash Course chapter on bubbles, I suggested that if the housing bubble behaved like other bubbles throughout history, then 2015 would be a reasonable place to begin looking for a rebound. The evidence is now beginning to support that rough guess.

We begin with home prices, which hit a new low in the post-bust era, effectively rolling prices back to those last seen in 2002:

Housing Tumbles (or, Why the US is Headed Towards a Bond Market Disaster)
 PREVIEW

There has never been an economic recovery without a rebound in housing. Of course, we don’t really have an economic recovery now; it’s more of a statistical mirage, thanks to trillions in thin-air money printing.  And we don’t have a recovery in housing.

I have written extensively on the housing topic over the years because a rebound in housing will be an important signpost that some sort of stable economic recovery is actually underway.  

In the Crash Course chapter on bubbles, I suggested that if the housing bubble behaved like other bubbles throughout history, then 2015 would be a reasonable place to begin looking for a rebound. The evidence is now beginning to support that rough guess.

We begin with home prices, which hit a new low in the post-bust era, effectively rolling prices back to those last seen in 2002:

Image | How To Position For The Next Oil Shock
How To Position For The Next Oil Shock
 PREVIEW

How To Position For The Next Oil Shock

Friday, May 27, 2011

Executive Summary

  • Saudi Arabia’s reserve capacity is a myth
  • World oil demand is increasingly overwhelming supply
  • Why exports matter more than total world production
  • What the next oil shock will do to stock, bonds, commodities, precious metals, and real estate
  • What you should do to prepare

Part I: Past Peak Oil – Why Time Is Now Short

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How To Position For The Next Oil Shock

Putting It All Together

Let’s review the situation in the KSA:

  1. Despite assurances of 12.5 mbd of total capacity, the KSA has not yet produced more than 9 mbd on a sustained basis in 2011.
  2. The IEA is begging the KSA to pump more.
  3. The KSA has turned to outside companies to help it begin to unlock heavy oil reserves that will take a lot of time, energy, and money to prosecute.
  4. The KSA has a vastly expanded rig count as they expand drilling operations to produce more oil (odd behavior for a nation with an alleged 3.5 mbd of spare capacity?).

The simplest and therefore most likely explanation for all of this is that the KSA does not actually have 12.5 mbd of total capacity, it is already at peak, and it’s now struggling to maintain even 9 mbd of total output on a limited basis.

Of course, there are other possibilities, but since those will not shake the world to its bones if they happen to be true, the safe course of action here is to go with the ‘KSA is at peak’ story.  Sooner or later it will be true, so there’s not a lot of harm in being early to it, while being late could be costly.

Now let’s move onto the last part of this puzzle: demand.

How To Position For The Next Oil Shock
 PREVIEW

How To Position For The Next Oil Shock

Friday, May 27, 2011

Executive Summary

  • Saudi Arabia’s reserve capacity is a myth
  • World oil demand is increasingly overwhelming supply
  • Why exports matter more than total world production
  • What the next oil shock will do to stock, bonds, commodities, precious metals, and real estate
  • What you should do to prepare

Part I: Past Peak Oil – Why Time Is Now Short

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How To Position For The Next Oil Shock

Putting It All Together

Let’s review the situation in the KSA:

  1. Despite assurances of 12.5 mbd of total capacity, the KSA has not yet produced more than 9 mbd on a sustained basis in 2011.
  2. The IEA is begging the KSA to pump more.
  3. The KSA has turned to outside companies to help it begin to unlock heavy oil reserves that will take a lot of time, energy, and money to prosecute.
  4. The KSA has a vastly expanded rig count as they expand drilling operations to produce more oil (odd behavior for a nation with an alleged 3.5 mbd of spare capacity?).

The simplest and therefore most likely explanation for all of this is that the KSA does not actually have 12.5 mbd of total capacity, it is already at peak, and it’s now struggling to maintain even 9 mbd of total output on a limited basis.

Of course, there are other possibilities, but since those will not shake the world to its bones if they happen to be true, the safe course of action here is to go with the ‘KSA is at peak’ story.  Sooner or later it will be true, so there’s not a lot of harm in being early to it, while being late could be costly.

Now let’s move onto the last part of this puzzle: demand.

Image | Past Peak Oil – Why Time Is Now Short
Past Peak Oil – Why Time Is Now Short

Note:  With so much going on with Europe's debt crisis, the continuing disaster and economic contraction in Japan, and the potential for a very hard landing in the Chinese growth miracle (which is in the running as my favorite "black swan candidate" for 2011), I am going to return our attention to oil in this report.  The next report will assess the developing and unfolding debt crisis that will drag down most of the developed economies at some point, and this report will provide essential context for understanding why this result is inevitable and when it will occur.

The Next Oil Shock

The only thing that could prevent another oil shock from happening before the end of 2012 would be another major economic contraction.  The emerging oil data continues to tell a tale of ever-tightening supplies that will soon be exceeded by rising global demand.  This time, we will not be able to blame speculators for the steep prices we experience; instead, we will have nothing to blame but geology.

 
Past Peak Oil – Why Time Is Now Short

Note:  With so much going on with Europe's debt crisis, the continuing disaster and economic contraction in Japan, and the potential for a very hard landing in the Chinese growth miracle (which is in the running as my favorite "black swan candidate" for 2011), I am going to return our attention to oil in this report.  The next report will assess the developing and unfolding debt crisis that will drag down most of the developed economies at some point, and this report will provide essential context for understanding why this result is inevitable and when it will occur.

The Next Oil Shock

The only thing that could prevent another oil shock from happening before the end of 2012 would be another major economic contraction.  The emerging oil data continues to tell a tale of ever-tightening supplies that will soon be exceeded by rising global demand.  This time, we will not be able to blame speculators for the steep prices we experience; instead, we will have nothing to blame but geology.

 
Image | Japan Teeters Over
Japan Teeters Over
 PREVIEW

The first-quarter economic results for Japan were grim, revealing an annualized rate of contraction of -3.7% over the first three months.  Note that the earthquake struck on March 11, so there really are only a couple of weeks of “earthquake impact” in that number.

The next quarter’s numbers will be even grimmer (that’s a prediction), and this will catapult the Japanese deficit and sovereign-debt readings into brand-new territory.
Japan Teeters Over
 PREVIEW

The first-quarter economic results for Japan were grim, revealing an annualized rate of contraction of -3.7% over the first three months.  Note that the earthquake struck on March 11, so there really are only a couple of weeks of “earthquake impact” in that number.

The next quarter’s numbers will be even grimmer (that’s a prediction), and this will catapult the Japanese deficit and sovereign-debt readings into brand-new territory.
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