Earlier this week as President Biden was taking a victory lap here in the US due to the latest CPI print that came in at 8.5%... 0.0%, I felt compelled to point out that even though there may be a temporary lull in the rate of change in government reported (hyper-manipulated) inflation numbers there are massive headwinds on the horizon. As we approach the end of Summer energy demand is waning and stress on grids here in the states is falling and that may seem all well and good, but if you look across the Atlantic and see what is unfolding in Germany the picture is anything but rosy. It is becoming glaringly obvious that, barring an unseasonably hot Winter in Europe, there is going to be mass energy shortages across Germany.
Most people who hear this think to themselves, "That sucks. It's going to be hard to watch our friends over in Europe suffer through energy rationing and cold nights." Painting a picture of individuals turning their heat down, dimming the lights, and being extra cautious to power everything down when they leave their houses for work. In reality, the extent of this energy crisis is going to have more profound implications for the German economy, Europe, and the rest of the world. We could be sitting in the eye of a storm that brings utter chaos to Europe that turns into a cascading doom loop that throws the global financial system into a crisis that makes 2008 look like a walk in the park.
When energy shortages materialize and the prices for the most important raw input that leads to end products throughout the economy, fuel, rise to a certain point it becomes untenable for many to produce the things everything needs. An energy crisis in Germany doesn't simply mean that people have to suffer through a few cold nights in their homes. It means that manufacturing begins to grind to a halt because it becomes uneconomical. That leads to job losses. Job losses in an environment of high inflation lead to a desperate class of people who have a lot of extra time to think about how they ended up unemployed, poor, cold and hungry. This leads to populist uprisings.
Making the situation even worse is the fact that Germany is the growth engine of Europe. It is the economy that subsidizes the rest of Europe. Production and wealth in Europe flows south from Germany. If the economic powerhouse of the region is forced to shut down because of an energy crisis that could very well set in motion a domino effect that leads to an epic credit crisis throughout the region. And since the global economy is a house of cards built on a foundation of sand and interconnected credit markets it's not hard to see how this could spiral into a global credit crisis in a relatively short period of time.
To make matters worse, Germany is being materially impeded from preparing for the storm on the horizon because of historically low water levels on the Rhine river that is preventing diesel from being shipped to certain parts of the country.
A biblical unfortunate confluence of events that has your Uncle Marty thinking that God is smiting the Western world and trying to send us a message.
Don't look now, but it seems that markets are beginning to price the looming energy crisis in. Hold on to your butts.
Few things more calming than a cool ocean breeze.