Economy

The big macro story here, perhaps the most underappreciated of them all, is the decline in net energy from our energy extraction efforts.

Energy drives all economic activity. Without energy nothing is possible. It all centered on food energy once upon a time. Food was the limiting factor for the populations of every country, just as it is for every other organism. With more food comes greater populations. 

Once we discovered other concentrated forms of energy that could be converted into food, and the food energy problem was effectively solved, then humans could turn their attention to other pursuits – even dedicating entire lives to things besides food production, such as painting and science.

That is, we turned ancient stored sunlight into food and reaped the benefits. Hallelujah!

However, as with all too-good-to-be true-forever stories, this one comes with an ending. And signs that the final act has begun are all around us if we care to see them. Most do not, but you are reading this, which means you are willing to face ‘what is’ rather than ignore reality.

Understanding What Happens Next

Wednesday, September 28, 2011

Executive Summary

• The sentiment on commodities is shifting in an important way.
• What happens when a global credit bubble meets a secular rise in energy costs? (Answer: nothing good.)
• The only chart you need to understand the future
• Why the next steps of the Fed and other central banks is imminently predictable at this point
• Given the high probabilities and their huge impact, you need to take steps now to position and protect yourself.
• The three critical questions you need to be asking

Part I – What Just Happened

Over the weekend, we reached out to several popular precious metals experts to get their quick take on the recent downdraft in gold and silver prices.

• David Morgan
• Ted Butler
• Turd Ferguson

Here’s what they had to say:

Bernanke, et al., stood pat, much to my great surprise given the macro data they had in hand, and the stock and commodity markets reacted badly. Very badly. The rout I had been expecting has finally arrived, albeit about a month later than I originally thought back in March.

What now?

Commodities are still poised to run from here, stoking inflation, although everything hinges on what the Fed and ECB do next.

The entire world awaits the Fed’s pronouncements on Wednesday, September 21st. Will it announce just a little more thin-air money to be injected into the system, or a lot? Or maybe none at all?

To those of us watching all of this unfold, it’s every bit as surreal as it appears. How can it be that we’ve gotten to the point that trillions upon trillions of global paper assets are poised to inflect upwards or downwards depending on whether seven people currently seated around a board room table decide to manufacture infinitely leverageable ‘wealth’ out of thin air now, or wait another six weeks before doing it?

That true wealth cannot be manufactured out of thin air seems lost on quite a few market participants, who are more than happy to continue trading stocks and bonds back and forth for as long as the music continues to play. What their exit strategy is for when the music stops is open to question, but in many cases it will be a forlorn hope such as, “I’ll get (my clients) out in time!”