Understanding What Happens Next

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

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

Part II – Understanding What Happens Next

Global Carnage

During these turbulent periods, it’s best to back up, widen the view, and ask where we are. Since the beginning of 2011, we observe that global equities have been hammered for losses, while global oil (Brent) and gold remain positive for the year.

Interestingly, we see that commodities in general (CRB) are down less YTD than even the best performing stock market (New York), which is not quite what I would have expected. Commodities typically lose first and most in a global downturn, or rout, and the fact that they haven’t suggests that commodities are now being viewed as a safer place to be than equities. This is a stunning turn of events if it holds out going forward.

Of course, this would fit with my preference, which is to view commodities as a more direct and tangible form of wealth than stocks, especially in a world where global oil remains over $100/barrel and directly drives the prices of all the other commodities.

On a month to date (MTD) basis, commodities have lost slightly more than equities, so we’ll really have to wait this one out to see if a new pattern is emerging or not.

The Only Chart You Need

I’d like to return to the one chart that explains it all, our old friend Total Credit Market Debt. If there were just one single chart to reflect and meditate upon, this would be it.