Two giant economic trends dominate our lives:
- The impending and ongoing sovereign debt crisis that will eventually destroy the dollar as the world’s reserve currency.
- The shortage of energy commodities – namely oil.
I’m sure you’re aware of these two trends – but you may not be aware of how seriously and directly they affect you.
For just one quick and concrete example, take a look at this simple chart, which depicts the S&P 500 alongside the U.S. dollar index AND the price of a barrel of oil:
As you can see, our first trend (the dollar) tends to move inversely to stocks and oil.
And our second trend (oil) tends to be a leading indicator for stocks.
So whether you like it or not, if you’re an investor your lot is cast with the fate of oil and the dollar.
The first trend threatens to destroy the livelihood and savings of millions of people around the world. People tend to save and conduct commerce in the reserve currency. So even though, say, a Brazilian merchant may spend ‘reals’ (the Brazilian currency) at home, he’s forced to buy and sell in dollars – and to keep a balance of dollars on hand.
If you’re left holding the reserve currency when it loses its reserve currency status, you’re going to suffer. I also expect we’ll see all kinds of draconian measures enacted by the American government and central banks to try to avoid this circumstance. They’ll pinch and skewer the taxpayer; they’ll bully and steal from savers. They’ll make it impossible to take money out of the country.
It’s a dangerous trend.
And in the United States, it’s butting up against the second trend: energy scarcity.
Recently, the International Energy Agency (IEA) projected that the United States will be pumping more oil than Saudi Arabia by 2020. It’s an amazing turnaround that few analysts predicted even a few years ago.
If you’re like the average American, that projection probably makes you feel all warm and fuzzy inside. But it shouldn’t!
Yes, it’s good news that the United States is becoming more energy independent, but it’s not really fantastic news unless you’re a direct investor in the trend. Unless you have an ownership stake, your personal prosperity will probably not be appreciably affected.
Notice, however, that the second trend is still about scarcity of energy. I didn’t call it an “oil surplus.”
The most basic law of economics is the idea of scarcity. There aren’t enough resources at any given time to satisfy all market participants. Oil is still scarce. The idea that it may become somewhat less scarce is good news – but it’s not a cure for any of the problems associated with foreign dependence on oil, or war in the Middle East…
And most especially…
New oil production in the U.S. is NOT a cure for currency crisis.
The biggest single issue for the average investor should be inflation. It’s difficult to get ahead when inflation threatens to chip away at your gains.
So unless you’re well positioned to profit from the second trend (oil scarcity), then the first trend will surely hurt you.
My strong feeling is that you need to give yourself that ownership stake as soon as possible – and you need to build on it whenever you can.
Tomorrow, I’ll be discussing some simple ways you can start building that stake.