Chris Martenson

Deep Impact: Why The Deepwater Disaster Spells Serious Trouble

Wednesday, June 9, 2010

Executive Summary

• We can say with absolute certainty that future oil exploration and development costs are going to rise.
• Our date with an oil supply shock now seems probable for the 2011 to 2012 timeframe.
• A new paradigm is emerging, in which downsizing trumps growth.
• A permanent energy crunch will lead to higher prices for all things connected to energy.
• It would not be too strong to suggest that our federal commitment to energy efficiency is a farce. 
• In terms of personal planning, do not take anything for granted.
• While I am not sure how this will play out yet, I am quite comfortable stating that the age of abundance is drawing to a close.

While we are all still in some stage of shock over the BP gulf disaster – myself over the impacts on fragile marine ecosystems; others over the prospect that we might not be saved by technology after all – it’s worthwhile to begin assessing the impact that this disaster will have on future oil supplies and prices. 

My view is that the economy, a complex system, owes its rich complexity to the very same thing as all complex systems: the constant throughput of energy. 

Actually, because we have a debt-based economy that is predicated on and thoroughly reliant upon exponential growth, I can amend this to say that our economy owes its rich complexity to constantly increasing inputs of energy.  And it’s not the total amount of energy that’s important here; it’s the total amount of net energy that matters.  So I can amend the statement further to say that our economy owes its rich complexity to constantly increasing inputs of net energy.

If you understand this, you understand the heart of my analytical framework.  I attribute much of my success in predicting the economic pain that we’ve been going through to the rigorous application of this line of thinking to the question, “Are we doing anything serious or credible in the way of rapidly increasing our energy efficiency?”  Sadly, the answer to that question is a resounding, “No!”

Well, what a lousy week in the stock and European bond markets that was.  The S&P recorded its first weekly close below the 50 week moving average (wma) in a year, as viewed on the weekly chart below.

The S&P 500  is also sitting below the 200 day moving average (not shown below) and bounced off it twice from below, once in late May and again on Thursday.  It was soundly rejected both times.  It now seems probable that the rally over the past year was an ordinary bear market rally – albeit a long one fueled by the trillions of dollars in stimulus and thin-air injections – and is over and done.

So the question is, what next?

Well, I am on the road again.  Right now I am in St. Paul, Minnesota, readying myself to give a one-hour talk and one-hour Q&A session to the general public at the request of the MN state legislature energy commission.

As I scan the news, I am seeing a number of worrying trends, not the least of which are the number of high-level money managers who are essentially throwing in the towel on the financial system.  They have either lost faith that markets are worth participating in, because they are too heavily influenced (or manipulated) by governments and/or their agents, or they have lost faith in the idea that we can ever grow our way out from the mountains of debt that we not only created in the past, but continue to pile on, even today.

Once the big money folks lose the connection to value of fiat money (something I lost a while ago), then I would predict some rather sudden changes to the system.

The biggest new trend or potentially disruptive event is harder to track, but profoundly important.  One of the dominant themes holding the narrative together for many, many people is the role of technology in ameliorating, if not solving, our future problems.

The impact of the Deepwater incident lances deep into that narrative, creating a wound at a terribly delicate time.

Is Gold In A Bull Market?

Friday, May 28, 2010

Executive Summary

• Asking whether gold is in a bubble or a bull/bear market misses the point.
• Better questions to ask involve fiat money management, government responses, and financial market risk.
• Gold is not in a bull market; rather, faith in our decision-makers is in a bear market.
• Trust is hard to come by these days. 
• As for whether or not to buy gold, there are a number of factors to consider.

I’d like to clarify my views on gold, because I approach this topic from a unique perspective that I think has value.

For most, the idea of investing, or even speculating, is a matter of placing one’s money somewhere with the anticipation of getting more money back out at a later date.  Naturally, the footnote to this expectation reads, “…assuming money is worth the same.”  In this idea of investing, ‘more money’ is assumed to be synonymous with ‘greater purchasing power,’ because devalued money may represent a significant loss.  The shifting target in this story since 1971 has been the untethered value of the currency itself.

For many investors, it has been a useful frame of reference to define various asset classes and markets in terms of being either “bull” or “bear” markets, where prices for investments have risen or fallen over some period of time, respectively.

Sometimes, when a bull market ramps out of control and then crashes, it is said to have been in a “bubble.”

Recently, the WSJ asked the question of whether or not gold is in a bubble, which is an important distinction for many investors, because if the answer is “yes,” then the next question is, “So when will it crash?”

Well, we are getting our second taste of a multi-day power outage for the second time in a month, and this one may last for the better part of a week.  We had a ripper of a thunderstorm come across the entire region on Wednesday.  The power company is saying that the damage is worse than last year’s ice storm, which was the most destructive event in their history at that point.

We’ve got some amazing damage up here.  One lady in town had a string of 5 trees all get ripped up and pushed over, and now she has a literal wall of roots 50′ long and 15′ high, dead vertical, right where her shady backyard used to be.

So score another one for harsh weather.

Right now the power suppliers are on full triage and are focusing on getting power back to hospitals and emergency services, then grocery stores, nursing homes, etc. etc. etc., until they finally get to residences – and even then, they’ll go for higher-density areas first.

Today the Dow closed below 10,000 for the first time since February 10, when it finished at 9,908.  Trying to figure out which way this thing is headed has proven difficult.

Such high volatility is often a feature of tops and bottoms.

Again we find that the markets were trading as the inverse of the dollar, which had another strong day.

Money sloshed this way and that way.  Etcetera and so forth.

I don’t necessarily want to diminish the psychological importance of closing below a ‘big round number,’ but it hardly has any real significance at all.

The real problems remain firmly in my view.

There are four truisms that form the core of my near-to-intermediate-term outlook: