Martenson Reports

by Gregor Macdonald, contributing editor

Monday, January 30, 2012

Executive Summary

• The decision whether to export its commodities will become increasingly strategic to the US
• Understanding why Washington has decided to kill the dollar
• What's driving the dollar now
• What to expect from a coming secular decline of the dollar
• Why the deflation risk is ending and grand quantitative easing (QE) is now underway

Part I: The Price of Growth

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

Part II: Prepare for the Collapse of the Dollar

The just-released GDP report, which wraps up the 2011 performance of the US economy, made for unhappy reading.

While the headline number was stronger in the fourth quarter, after adjusting for inflation, the reading for the entire year came in at 1.7%. As Business Insider’s Joe Weisenthal put it, that is the "final, pathetic growth number for 2011."

Many writers over the past year, including me, have hammered away at the idea that the performance of the US economy in real terms was statistically indistinguishable from a flatline in the aggregate.

No one disputes that some sectors of the economy, like exports and shipping, are growing. At issue is whether the economy as a whole is operating for the majority and not just segments of the populace. (Again, in real terms.) At a growth rate of 1.7%, we can at least conclude that no meaningful headway can be made in employment. Since the 2008 crisis, the US has been building a multi-million sub-population of people who are unemployed long-term. Only monthly job growth that first utilizes all new workers coming into the labor force will be able to eventually cut into this labor pool. Hence the revelations from the Federal Reserve this week related to targeting inflation, maintaining a zero-interest rate policy through late 2014, and conducting further quantitative easing (QE).

Before we dissect this week’s Fed meeting, let’s take a look at the recent trend in exports.

by Charles Hugh Smith, contributing editor

Monday, January 23, 2012

Executive Summary

• Why we may need to revisit how we determine "fair market value"
• Local factors to consider
• The importance of sentiment, and how to use it to your advantage
• The emerging two-tier pricing structure for most markets
• Five tools that will enable you to estimate how near (or far off) prices in your local area are from a bottom

Part I: Searching for the Bottom in Home Prices

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

Part II: Determining The Housing Bottom for Your Local Market

In Part I, we examined how the policies of the Federal housing agencies and Federal Reserve have fundamentally socialized the U.S. mortgage markets and are propping up housing sales and valuations via zero-interest rate policy (ZIRP), housing subsidies and various loan guarantees.

Along with the structural factors outlined in my December series, Headwinds for Housing, this is the backdrop for our individual assessments of “is this the bottom in my local real estate market?” 

Why This Time May Indeed Be Different

Before we look at some tools that will help us make that assessment, I want to stipulate that this overview is aimed at small-time investors, not institutional players, and that it may first strike experienced real estate investors as too basic. However, we must be alert to the possibility that this real estate market, so dependent on Central State intervention, ownership and policy, is qualitatively different from previous eras. And so the lessons of previous markets could be misleading, akin to “fighting the last war.” Thus we would be wise to start with the most basic tools as a foundation for further investigation.

by Gregor Macdonald, contributing editor

Tuesday, January 17, 2012

Executive Summary

• What current gold demand is telling us about economic growth expectations
• The dangerous conclusion from the famous Simon-Ehrlich wager
• Simpler energy sources are becoming cost-competitive with complex ones
• Why we will move towards greater simplicity, willingly or not 
• Why many of our leaders are blind to this trend and will spend the next decade futilely fighting it. Will you?

Part I: Returning to Simplicity (Whether We Want To or Not)

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

Part II: Why We Must Embrace Simplicity Now

The English thinker Thomas Malthus argued in his famous essay on the principle of population that there was no longer sufficient land to feed the world’s rapidly growing population, threatening poverty and famine. But an agro-industrial revolution soon transformed the economies of Europe and North America, and his fears proved unfounded. More recently, conventional wisdom held that market forces would always come to the rescue. Until ten years ago, this hope was largely fulfilled. During most of the 20th century, resource prices—of food, water, energy, steel, for example—declined, despite strong growth in the world’s population and even stronger growth in GDP. Prices fell because of a combination of new low-cost sources of supply and technological innovation. But in the past ten years, demand from emerging markets, particularly in Asia, has erased all the price declines of the previous century.

- Resource Revolution, from McKinsey and Company

It’s taken ten years of relentless inflation in food and energy, with myriad data showing declines in the quality and availability of many natural resources, for it to appear that the global consultancy McKinsey finally “gets it!”

I take this as a potential sign that Kahneman’s Availability Heuristic is about to undergo a sea change with regards to the prospects of technology-driven progress. Two hundred years of history exert a powerful force over people’s outlook, but a solid ten-year reversal of those trends just might be enough to induce some folks to begin reconsidering their previously-unshakable confidence in previous trends.

Wednesday, January 11, 2012

Executive Summary

• Higher oil prices caused by an Iran conflict could very well be the trigger for the next major economic downturn
• Where oil prices will likely go, and how quickly, if a conflict erupts in the Persian Gulf 
• The prudent steps you should take now, in advance of a potential conflict
• How the financial markets will react, and likely safe havens
• Why a war with Iran will be much messier than the Iraq war

Part I: Iran: Oh, No; Not Again

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

Part II: Are You Prepared for $200 Oil?

In Part I, we connected a few dots and made the point that Iran remains the last unconquered oil province within the last great deposit fields left on the planet. Perhaps it is coincidence that Iran now finds itself in the crosshairs, but that is unlikely. Instead, the oil treasures of the Middle East remain the last great prize, and Iran is unlucky enough to be standing in the way.

Once one understands where we are in the Peak Oil story, all of these maneuvers make sense and conform to a brutal but coherent logic: If oil supplies are dwindling as fast as the data suggests, then controlling the last, best supplies will be considered essential by every interested party.

While such speculation is interesting to engage in, there's really nothing you or I can do to alter these events. Instead, our job is to prepare as best we can.

The larger set of world events is grinding inexorably towards a lower standard of living, with the squabbling at present really being over who eats the first sets of losses. However, the next leg of the downturn will be precipitated by some event, and a war with Iran that spikes oil prices would be a perfect catalyst.

by Gregor Macdonald, contributing editor

Tuesday, January 3, 2012

Executive Summary

• How urbanization is accelerating the loss of the world's arable land
• The three major trends that will impact global food prices and potentially create even more volatility in the next few years
• How virtual water introduces a new threat of resource conflicts
• Why our government's actions to revive the economy translates into higher prices for food and other hard assets
• Why greater volatility in food prices lies ahead
• Defensive strategies against higher food prices

Part I: A Punch to the Mouth: Food Price Volatility Hits the World

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

Part II: Preparing for Higher Food Prices

Close-up: The Loss of Arable Land Per Capita

Recent data from the World Bank shows that arable land per capita has been declining globally for 40 years. This has been true in most countries, especially the juggernauts of India and China. But we have compensated for that decline with fertilizer. As Julian Cribb points out in his book(page 72), it has been asserted that “over two billion people would not be alive today, were it not for the invention of the industrial process for making nitrogen fertilizer.”

Indeed, we know that 2008 was an important milestone in the history of humankind: That was the year that the majority of the world population, for the first time, lived in urban centers. The rapid urbanization -- and therefore loss of farmland -- in Non-OECD countries may have produced wonderful stock market returns for the past two decades as developed-nation capital hooked in to such rapid growth. However, it is not clear that this process has upgraded humanity’s overall quality of life. Energy inputs do upgrade diets. And energy inputs also can reduce the suffering of burdensome, human-powered labor. But the associated pollution and environmental destruction exacts a heavy price for such a transition.

by Charles Hugh Smith, contributing editor

Tuesday, December 27, 2011

Executive Summary

• Understanding the leading indicators for commodities prices
• Either bellwether copper is cheap or stocks are expensive
• S-curve analysis suggests we're entering a corrective phase for commodities
• Why those long on on resource investing should take a defensive stance

Part I: Are Commodities Topping Out?

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

Part II: Hard Times Ahead For Assets

Are commodities topping out? Since we know commodities are physically limited in supply while demand can continue rising, common sense suggests commodities will outperform over the long term as long as industrial civilization continues its consumption of those commodities.

However, it is also clear that the global economy is either slowing or entering an actual recessionary contraction. Thus it behooves us as investors to ask what that contraction of demand might do to the prices of commodities over the near-term, i.e. the next 24 months of 2012-2013.

In Part I, we examined the connection between stock markets and demand for commodities as reflected by the chart of the Reuters/Jefferies CRB Index, the commonly used bellwether for the commodities market. We found that if the stock markets of China and India are indeed leading indicators of demand for commodities, then the market for commodities will likely weaken.

We also found that margin debt seems to be far more correlated to the U.S. stock market than demand for commodities as reflected by the CRB, meaning the U.S. stock market may not be an accurate leading indicator of commodity demand or pricing pressure.

In Part 2, we’re going to examine a key technical correlation that has withstood the test of time, that of copper and the stock market, and explore a potential key dynamic which may exert outsized influence on the demand and pricing of commodities over the next few years.

As a side benefit, our examination of the commodities may also shed light on the direction of the stock market—another key interest for many investors.

Wednesday, December 21, 2011

Executive Summary

• The risk of cascading derivatives failures is the "nuclear option" scaring central planners into doing everything in their power to prop up the financial system
• The loss of small investors leaves market prices more vulnerable to the growing percentage of fickle, short-term, "hot money" trading systems
• Removal of China's 'deep pockets' from the EU and US credit markets could easily cause them to seize up
• Why currency devaluation via inflation still seems the likely endgame
• Recommendations for increasing your financial and personal resilience to this outcome

Part I: Worse Than 2008

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

Part II: Get Ready For Worldwide Currency Devaluation

Derivatives

You'd think that after AIG blew up spectacularly and the Lehman unwinding choked on a hairball of tangled derivatives (that is still being picked apart) that the lesson would be learned and that derivatives would have been reduced in both size and complexity.

Unfortunately that lesson was not learned and we have to square up to the fact that derivatives are now roughly $100 trillion larger in aggregate than they were in 2009:

by Gregor Macdonald, contributing editor

Monday, December 19, 2011

Executive Summary

• Western economies are more sensitive to oil prices than the developing world.
• Global oil supply is extremely tight by historical measures.
• Oil prices will likely not go much higher in 2012, due to the failing global economy.
• The next oil-price induced recession (coming ASAP) will have predictable outcomes on the economy and its key sector.
• Understanding these predictable economic outcomes resulting from oil supply dynamics
• Prediction offers more value to the investor than simply betting on oil prices (which will likely be extremely volatile).

Part I: Why Oil Prices Are Killing The Economy

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

Part II: Why Its Now Easier to Predict The Outcomes of the Coming Recession

The Oil-Sensitive West

Consumption of oil in the West started to flatten out as early as 2004. And, readers of my previous essays know that after the crisis started in ‘08, both Europe and the US shed even more oil demand. Let there be no doubt: oil demand in the OECD has been highly elastic (responsive) in the face of oil prices above $80. In the data, you can even see some early signatures of reduced demand coming in 2004, when oil prices rose above $40.

One of the paradoxes that repeatedly trips up analysts, because it’s so counter intuitive, is the fact that the wealthy Western countries are hurt more by high oil prices than the poorer, emerging market countries:

Your average Westerner is consuming quite a lot of oil, per capita. It's embedded in shipped goods, shipped foods, and also comes via high penetration of automobile ownership. Westerners drive lots of miles, comparatively. But people in emerging markets have only just begun to use oil. It hardly matters whether petrol is $4.00 per gallon or even $8.00 per gallon if you have just upgraded from a rural existence, and for the first time ever your family is consuming 4-6 gallons of petrol per month (enough to power a motorbike each day for a short distance). This is precisely what Bernanke is alluding to, when he allows we have no control over emerging market oil demand.

More vexing is that emerging market economies are primarily running on coal, so they are able to produce and align their consumption with the power grid, while being more discretionary about liquid fuel use for mobility. This is really perplexing, as I said, to Western analysts but I do want to point out that its empirically true (see Stuart Stanford’s post on the subject, Wow, Just Wow, from earlier this year).

by Charles Hugh Smith, contributing editor

Monday, December 12, 2011

Executive Summary

• The three macroeconomic factors that will suppress employment -- and in turn, housing prices -- for years to come
• Expect an overshoot as housing prices revert to their historic mean
• Why those who are buying now are likely "catching a falling knife"
• Relative valuations for determining when the housing market will have hit bottom

Part I: Headwinds for Housing

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

Part II: How Low Will Housing Prices Go?

It’s a truism that “all real estate is local,” and to the degree that the ultimate price of a property is only truly “discovered” when a specific buyer purchases a specific property at a specific point in time, then this is certainly true. It is also true that many key inputs to real estate valuation are locally derived, such as employment, wage levels, demand for rental housing, the attractiveness of neighborhoods, and so on.

But to say that interest rates managed by the Federal Reserve or subsidies provided by the Federal government have no influence on real estate valuation is clearly untrue. Valuation is directly influenced by global, national and state economies, and by the policies of the central bank and government.

In attempting to answer the question, “when will housing hit bottom?,” we might start with the coarse-grained systemic inputs and then move to the more-fine-grained local inputs.

Wednesday, December 7, 2011

Executive Summary

• Exponential change 'speeds up'
• When it finally happens, change happens quickly
• Collapse progresses from the outside in
• Complex systems will become simpler when energy is scarce
• We fool ourselves at our peril
• The rules will be changed
• If you can't accurately assess the risks, don't play the game
• Your goal in a systemic bear market

Part I: How To Position Yourself For The Future: Step 1 - Financial Security

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

Part II: The Framework For Predicting Our Financial Future

Okay, assuming you have the basics covered, I now want to share with you my views on the markets and how things will unfold in the future. My assumption is that you have completed the Crash Course, or one of the shorter versions at least, and are familiar with the exponential function and how it permeates our everyday life.

This framework is always subject to revision as new experiences and data points become available, but its central themes have been operative for me for several years.

Again, this body of work represents my personal observations, historical readings, and faith in the idea that cultures and laws may change, but that humans tend to behave in predictable ways. As always, I reserve the right to change my forecasts as new information becomes available.

Exponential Change 'Speeds Up'

Understanding the nature of the systems in which we live is the centerpiece of our analytical framework. And at the heart of that is the concept that we live in a world dominated by exponential functions and curves.