Podcast

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

Part II – How The Coming Decline with Play Out

Understanding The Economics Driving Energy Transition

Robert Allen of Oxford University has done some of the best work on the Industrial Revolution but he has also helped us understand the historic energy transition from Wood to Coal, in England. Along with the work of Vaclav Smil, Allen has shown that energy transitions are long, drawn out affairs that do not comport with the faith in efficiency that defines contemporary economic theory. This chart of BTU prices shows that natural gas is being offered each day in the bargain bin to the economy, but the economy is so inextricably tied to oil (liquids) that its existing infrastructure cannot take advantage of the opportunity.

Contributing editor Charles Hugh Smith notes that markets are at an important inflection point. The direction things take from here may likely be apparent within the next few days.

As I noted in my previous exploration of the U.S. dollar and the technical evidence for a long-term uptrend in the dollar index DXY, global markets for stocks, commodities and currencies are on a simple see-saw: On one end is the U.S. dollar, and on the other are all other major currencies, global stock markets, commodities, etc.

The U.S. stock market has been recently surging on hopes of a comprehensive settlement to the European debt/banking/euro crisis. Technically, this surge exceeds the recent trading range, and thus is seen by many traders as a valid breakout; i.e., the signal a new Bull market is underway.

This aligns with the views of many experienced technical analysts, who expect a strong rally to start from here and last into early March.  The reasons many expect such a rally, despite the headwinds of global recession, are seasonal and cyclical: Stocks almost always rally strongly in Nov.-Dec., and the third year of the presidential cycle (2011) is generally positive for stocks. In addition, various timing tools and indicators can be interpreted as supportive of a major rally from this point.

A much smaller number of analysts (including Chris) see increasing probabilities of a global stock market crash.

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

Part II – The Flashing Market Indicators To Watch For

Custody Account Holdings Fall

In Step #1 (in Part I), the first thing I am watching for is a decrease in central bank holdings of Treasury debt. The easiest way to track this trend is through the custody account at the Fed, which is where most of the official holdings of US government securities held by foreign central banks are stored. In this custody account are both Treasury and Agency debt; luckily, they are reported independently. 

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

Part II – What to Expect for Gold in 2012

As I covered in Part I of this report, Dr. Krugman uses Hotelling rather creatively to explain the strength of gold from an investor’s point of view. I actually think Krugman is also applying a kind of traditional, discounting method of valuation. In essence, he is arguing that because interest rates are so low, the penalty normally associated with holding a non-income-producing asset, like gold or even cash, has evaporated. Indeed, this is the deflationist view, that cash is king because its purchasing power is increasing while the price of goods and services is falling. However, for those of us who prefer gold to cash, we are asking that gold provide additional services by offering protection against instability in the system and maintaining purchasing power more completely over all prices produced by economists and governments, not just price indexes.

But what about gold from the producer’s point of view? Remember, Hotelling says there’s a declining incentive for producers to extract and market their natural resources if the price appreciation taking place in situ (in the ground) is greater than the capital they could earn after having turned those resources into cash. Let’s take a look at more than a century of global gold production, updated with the latest data from the USGS.