Martenson Reports

Monday, July 12, 2010

Executive Summary

• A war with Iran seems likely before the US elections in November.
• The US has committed an act of war in deciding to embargo Iranian fuel shipments and international financial activities.
• The "urgency for dealing with Iran" is driven more by oil competition than military crisis.
• The US militarily occupies or diplomatically controls every strategically-located oil producer in the Middle East except for Iran.
• The most probable explanation for the sudden concern about Iran is likely centered over energy and the 'requirement' of growth that our economic and financial systems demand.
• Seeking militarily-secured access to oil halfway around the world is a weak strategy.
• An Iranian war has the potential to severely disrupt developed economies due to another wild oil-price spike.

These days I am troubled by the renewed beating of the Iranian war drums by the West and Israel.  Troubled, in part, because the world economy needs a war with Iran right now like it needs a hole in the head.  Or perhaps I should say a hole in the barrel, because the most likely immediate outcome of an Iranian war would be a diminution of oil traversing out of the Persian Gulf and a gigantic leap in the price of oil.

Both would add terrible stresses to the global financial system at this particular moment.

The last time I wrote about the urgent beating of the Iranian war drums was in December of 2009.  Then, too, we saw a near-perfect coordination of the media in breathlessly "reporting" whatever the US and Israeli military elements wanted communicated.  Basically it boiled down to something like this:  "THE US MUST IMMEDIATELY DEAL WITH THIS URGENT THREAT RIGHT NOW - NO WAITING - IT IS THAT SERIOUS!!!"  Sorry for shouting there, but that's how it came across to me before it all, oddly and quietly, slipped off of the headlines and out of our collective consciousness, until just recently.

Monday, June 28, 2010

Executive Summary

• Housing data is weak and just took a turn for the worse
• Stimulus efforts were essential to keep housing propped up
• The stimulus has ended
• QE and stock market prices are correlated
• What’s coming next
• What you should do

We bought our house in November of 2009.  This will turn out to have been a very bad financial decision.  We’ll be underwater on that purchase for a very long time; maybe forever (or until Bernanke’s great experiment takes the final turn towards massive currency destruction and inflation; whichever comes first).   

Of course, we bought it knowing that.  Our decision to buy centered on our valuing time more than money.  What I mean by this is that all of the changes that we are now fully engaged in around our house, ranging from insulating to installing solar panels to putting in a fruit orchard, all take time.  Time became more important to us than money, and so we bought.

But for every nation dealing with the after-effects of a housing bubble, what matters is that house prices start to climb again.  Of course, the housing bubble was just a symptom of the larger and far more damaging credit bubble, but housing is a useful indicator for where we are in the larger credit-bubble story.

Because of its importance to both the bubble’s bursting and its eventual repair, I track housing for signs of true recovery.

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.   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!”

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?"

Monday, April 19, 2010

Executive Summary

• Why creating inflation is our official policy.
• Deflation would destroy our economy, our financial system, our hopes, and our dreams.
• For budgets and pensions to be repaired, we badly need a return of economic growth. Or inflation of our asset markets. Or both.
• The flood of liquidity that we've been tracking is very real and is distorting prices for all financial assets.
• This 'recovery' is a gift.  Use the time wisely. 

Monday, April 5, 2010

Executive Summary

• Record-breaking Treasury auctions continue to go off without a hitch, thanks to massive foreign participation.
• However, the amounts reported to be bought in the auction results do not match the Custody Account or TIC report amounts.
• The Fed is allegedly all done buying MBS and Treasury paper.  This cuts off an important source of liquidity for the Treasury, commodity, and stock markets.  
• How will these markets respond to a liquidity drought?

The end of March is upon us.  I need to take a moment to re-analyze the data to see what might happen now that the stimulus money has worn off, and, more importantly, now that the Federal Reserve's massive Mortgage Backed Security (MBS) purchase program is over.

This is important for a variety of reasons.  The first is that the enormous flood of liquidity that the Federal Reserve injected into the financial system has found its way into the Treasury market, supporting government borrowing and also lowering interest rates for the housing market.  How will the Treasury market respond once the liquidity spigot is turned off? 

The second is that this flood of liquidity has supported all sorts of other asset markets along the way, including the stock and commodity markets.  What will happen to these when the flood stops?  Will the base economy have recovered enough that the financial markets can operate on their own?  Will stocks falter after an amazing run?  Or will the whole thing shudder to a halt for a double-dip recession?

Saturday, March 6, 2010

Executive Summary

• Nations around the world are insolvent and on their way to bankruptcy, a fiscal crisis, a currency crisis, or all three.
• World markets are currently interlocked to a troubling degree.
• A falling currency is always a cross-border event.
• The German DAX, the Dow Jones, and the FTSE 100 charts are nearly indistinguishable.
• A bigger trigger than Greece will be needed to set off the next round of global trouble.
• The UK is a highly qualified candidate for that role; Japan is also a likely possibility.
• Expect the unexpected.  The future is going to change suddenly and rapidly.

A significant issue facing all of us concerns the idea of a large decline in the value of our home currency, whatever currency that may be.  History is full of examples of currencies suddenly, and sometimes permanently, losing value.  Certainly, there is no greater financially traumatic event than having all of your perceived wealth evaporate like water on hot steel simply because your currency fails.

Once upon a time, evaluating the relative risks of various currencies was pretty straightforward, as they were independently run and market forces gave pretty clear signals.  Today, the major currencies are hopelessly intertwined, manipulated by central banks, and are therefore providing relatively poor information to market participants.

Sunday, February 21, 2010

Executive Summary

• The future has arrived.
• The "Broken Windows Theory" explains a lack of media coverage.
• Detroit is falling apart.
• Refugees are leaving urban centers.
• North Dakota's homeless numbers are increasing.
• Food stamps use rises sharply.
• State of distress – the public vs. private battle intensifies.
• We need to change our stories.

One of the questions I am most frequently asked is, "What will happen when…?"  As in, what will happen:

• When things finally take a turn for the worse?
• When the dollar dives?
• When the government hits a fiscal wall?

Essentially, these are all forms of the basic question, "What will happen when the future finally arrives?"

My work, as I see it, is to help you accept the following statement:  The future has arrived. 

It is already here.

Friday, February 5, 2010

Executive Summary

• Recent economic news comes in three flavors: good, bad, and ugly.
• GDP, retail sales, and manufacturing surveys point up.
• Petroleum use has dropped to the same level it was at in the late 1990s, pointing down.
• State sales tax receipts, unemployment, and the federal budget deficit are ugly.
• The current expansionary track of monetary printing and deficit spending will continue until something external forces a contraction.

Today we are experiencing many confusing and conflicting signals in the economy.  Perhaps conflicting signals are normal at a major turning point, and therefore we might be tempted to believe that we are about to embark on another vigorous leg of economic expansion.

Here we'll explore these conflicting signals and see what we can make of them.

Before we do, I want you to recall that I am of the opinion that the trillions of dollars (and yen, and euros, and rubles, and yuan, and so forth) will someday come racing out of their big-bank holding pens and ignite something that will look and feel just like an economic rally.  For a little while.  Then, raging inflation and an energy crisis will ensue.  Given this outlook, I view any economic respite from the decline, no matter how falsely derived, to be a gift of time, allowing us the opportunity to continue to build the economic, physical, and emotional resilience in our lives and the lives of those around us.

You should be using this time to get ready for the next period of adjustment, which I expect to be both longer-lasting and more profound than the previous one.

However, in terms of parsing our existing situation so that we can maintain an appropriate outlook on where we are and where we are headed, there is much to be gained by keeping a close eye on current economic statistics.

Tuesday, January 12, 2010

Executive Summary

• China is pursuing an active policy of resource mercantilism.
• China appears to be strategically preparing for resource scarcity.
• China's auto sales have surpassed those of the US.
• This year China also edged out Germany as the top exporter.
• As China's economy expands, its energy use increases.
• The US should be stewarding its remaining resources and transitioning deliberately to a very different economic model, but instead we are wasting both time and resources.

No, this report has nothing to do with golfing.  In the Chinese calendar, 2010 is the Year of the Tiger.

While the US and Europe are busy wasting time trying to figure out how to return to the condition of illusory economic health that defined The Aughts, China seems to be operating from a very different playbook.

For the moment, I want you to assume that the concept of rapidly (and permanently) depleting resources is a reality.  This shouldn't be much of a stretch, because this is true on a per-capita basis for nearly every critical resource, and some are already "past peak" by any measure.

Now suppose that you have a multi-year view of things and are in charge of running a major nation.  What would your strategy be?