|Mark's Market Blog|
7-27-14: Stagflation: It's Baaaaack.
by Mark Lawrence
Mark's Market Blog
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Yet Another Flat Week. The market cannot break S&P 2000 and won't go down. My take: soon we'll break 2000, then there will be released upwards pressure that takes us quickly to 2100.
There's an abandoned Russian military base in Cuba that was built for the missiles in the Cuban Missile Crisis. Except it's no longer abandoned. Russia has made an agreement with Cuba to re-open it and staff it with signal intelligence people - the Russian equivalent of the NSA. Apparently Putin thinks he can do anything and Obama will just talk. I think I agree. However, very harsh words have been spoken: VP Joe Biden says he told Putin "Mr. Prime Minister, I'm looking into your eyes and I don't think you have a soul." Gosh, why do we seem to be having trouble getting along with Russia?
Argentina is now officially against the wall. The have one week to either pay their back debts, negotiate a settlement with the "vulture hedge funds," or default. If Argentina pays the hedge funds then a clause in the settlement with their other creditors says they have to pay everyone in full, which will more or less bankrupt them - they have just barely enough foreign reserves to pay everyone off, then they need more credit or to start heating their homes with wood stoves. Cars, airplanes, electricity are out. If they don't pay the hedge funds and go into default, that will most likely bankrupt them as they get cut off from international credit sources. And the hedge funds have no interest in negotiating - they want to bankrupt Argentina then buy up the country at fire sale prices. Personally, if I were running Argentina I would default and pass a bunch of laws that foreigners can't buy land or major companies or large blocks of stock. I would announce it's time someone stood up to Wall Street. But then if I were running Argentina it would look a lot more like stable profitable Chili and lot less like nearly bankrupt Argentina. The problem here is that you need a conservative government for about 4 years out of every 16-20 to put things on the right track, then the liberals can mess everything up the rest of the time. Argentina has no conservative party. Anyways, I expect to be announcing some exciting news about Argentina in the next week or three, one way or another.
And now, coming soon to a store near you, genetically modified salmon. AquAdvantage salmon is undergoing FDA approval, expected to take another couple of years. They took the growth hormone gene from a pacific salmon and the gene that turns it on from an Ocean Pout and grafted them into n atlantic salmon. The result is the growth hormone gene is always on and the fish grows really fast. Like ready for market in 16 to 18 months, half the required time for natural atlantic salmon. And after your teenagers eat a bunch of this stuff, perhaps they'll grow really fast too. Also natural salmon eats other fish, about 3 pounds of fish for every pound of salmon. AquAdvantage can grow quickly on a half plant half fish diet and overall require 25% less food. There are concerns about the GMO fish escaping into the wild and crowding out other species, but AquaBounty assures us that this is impossible. I do not think that word means what they think it means.
A new virus, Middle East Respiratory Syndrome (MERS), is emerging in Saudi Arabia. MERS causes fever, shortness of breath and eventually pneumonia, and being a virus can't be cured by antibiotics. MERS appears to be a camel flu virus that has adapted to humans. To date there are 850 known cases resulting in 327 deaths, a rather sobering death rate. Now MERS virus has been found in air samples in a barn housing an infected camel, raising the possibility that this virus can be transmitted through the air - a rare and deadly trait for a virus. HIV is transmitted only through blood to blood contact, making avoiding HIV relatively straight forward. The flu is transmitted through the air and we all get that from time to time. In any case, if you're traveling to Saudi Arabia, try to keep your distance from camels. And people who cough. And barns. Maybe best just keep your distance from Saudi Arabia.
Obamacare on life support! The DC court of appeals has ruled that subsidies can only be given to obamacare policies that were bought on state exchanges. 38 states use the federal website, and in those states the 5m people getting subsidies are suddenly going to have their average policy cost leap from $85 to $343 per month. Later the same day a Virginia appeals court found the same provision was legal. This isn't over. We can expect an appeal to the DC court of appeals where there are 7 democrats, 4 of them appointed by Obama, and 4 republicans. Then no matter the ruling we can expect an appeal to the supreme court. Curiously, the liberals are screeching that medical costs will explode if this decision is upheld. Curious 'cause when I took economics the first thing they taught me was the more money you throw at a market, the higher prices go; the less money the lower the prices. You know, you have one gallon of lemonaid at your stand and 20 people in line, you raise your prices. Or maybe I remember that backwards. You know, you got one doctor and 20 people in line, then you give more people more money to wait in line. And make sure you don't let any foreign medical school graduates stay in the country, it's far better to have disease ridden illiterate immigrants.
Detroit, in bankruptcy court for a year now, just negotiated a pension cut with retirees and employees. Pensions are cut 4.5% and cost of living increases wiped out. Except cops and firefighters, they get no cuts to their pensions and keep half their cost of living increases. I dunno why cops are special. And in my city all firemen do is rush to car accidents and shake down local businessmen for fire permits for various individual industrial tools. Charities and auto makers have chipped in nearly a billion dollars to keep Detroit from selling off their art work. It's now hoped that Detroit can exit from bankruptcy soonish.
San Francisco housing just hit the million dollar mark - a 2 bedroom apartment with no view, the median home, now averages $1m. Money is flooding into San Francisco from all directions - IPOs, Chinese buyers, overflow from Silicon Valley - and now real businesses are being priced out of the city. Companies like pInterest, armed with hundreds of millions in cash and a business plan that doesn't even dream of profits, bid on large buildings forcing rents through the sky. Dozens of smaller real companies are packing up and leaving Oz to return to Kansas, or where ever reality draws them. Industrial properties have had their rents triple in the last year; landlords are lovin' it. Will it continue on forever? Sure, real estate prices never go down. . .
In the 50s and 60s it was well known that you could not have inflation, low growth and high unemployment at the same time. In the 70s we had just that: stagflation. What caused it? We humans like to think things have simple causes, but still today, 40 years later, we're still debating what the problem was. One contributing factor was oil prices: oil jumped up in price in the early 70s as OPEC formed, and suddenly everything that needed energy or organic molecules was more expensive. Some think it was oil prices that caused the stagflation. I think it was more than that; Nixon had his ill-fated WIN - Whip Inflation Now - campaign, and the FED was too accommodating. However I have never been satisfied with the explanation that Volker took over the Fed, raised interest rates for a year, and 10+ years of inflation just stopped dead in its tracks. It's noteworthy that oil prices dropped at the same time. Anyway, in the 90s we were talking about the Great Moderation where growth was good, inflation invisible, employment high, recessions few and shallow. It was thought that this would go on forever. It was also thought that you could not have inflation and deflation at the same time. Today we look back and we think that this was a period when oil prices were low, computers were increasing in power exponentially, and China was producing massive amounts of cheap goods for American consumers keeping inflation down. Now oil prices are high and it seems likely that as Indians and Chinese demand more and more cars oil prices will only go up. China is facing their own list of problems including wage inflation, a real estate bubble and a poor consumer market; China is no longer nearly as good at exporting lots of cheap stuff. And computers have stalled out - the $600 laptop you buy today has very comparable performance to the $600 laptop you bought 10 years ago; certainly it's not one hundred times faster as Moore's law would have you guess. And we're seeing inflation and deflation in our economy at the same time. Energy, gas, food - these things are skyrocketing, with prices inflating at perhaps 5% or more a year and the rate increasing. Wages are stagnating so that standards of living are dropping. The consumer market is stalled with very little growth, meaning industry has little growth. And the Fed is printing money at obscene rates making easy profits for Wall Street and inflationary pain for the rest of us. Will this get better? Not as I see it. Oil prices are likely to stay high and get higher. Computer led productivity gains are now competing for jobs instead of making employees more productive. The latest generation of 20-something men are going largely without educations and have little interest in careers. And the 20-something women are going to college and preparing for an economic life like women never have before, but almost none of them are getting degrees in math, engineering, hard science. Bernanke tells us the Fed will keep rates low for the rest of his life. We had a great run in this country - from WWII to 2000 our per capita GDP rose at an average of about 2.5% and things seemed clearly better each decade. I think that's over. I think for the rest of my life wages will be stagnant, GDP growth will be more like 1.2%, unemployment will stay high (when measured the good old fashioned way: if you don't have a job, you're unemployed.) And the stock markets will stall out in the long run due to low GDP growth and boomers retiring and living off their stocks instead of adding to their investments. Japan has now gone 25 years with very little GDP growth and a stock market that bounces up and down 35% but hasn't set a new high since 1990. This, I think, is now our future. From 1950 to 1990 there was a Japanese Miracle - in forty years Japan went from a nation of hunger to, briefly, a nation with a higher per capita income than the US. Some think this will be China's century, that there will be a similar Chinese Miracle. I don't agree. Europe, Japan and the US did it during a time of low world population by current standards, oceans full of fish, cheap oil, lots of available farm land and fresh water. China is trying to replicate that during a time of oceans in crisis, expensive oil, declining farm yields, shortage of fresh water, and increasing populations everywhere. I think their period of 8%+ growth is nearly over.
Fun fact: Bangladesh has more people than Russia - 157m v. 144m. This is why I think the world is headed for a Malthusian crash. It's simply insane to put 157m people in a country the size of New York state and then tell them that Allah wants them to have lots of children. The boys grow up worthless, the girls grow up to have six (muslim) kids and sew t-shirts for $68 per month. And more than half their water comes from the Brahmaputra river, which is glacial melt starting in Tibet, running through water-starved China then draining through India and Bangladesh into the Indian ocean. Imagine if more than half of Mexico's historic water supply had come from the Colorado river - we no longer let any of that water make its way into Mexico. How long until China diverts the Brahmaputra northwards?
Here's a fun little list. The most dangerous cities in the world. Note the complete absence of European and Asian cities. In fact, except for a couple South African cities these are all in our hemisphere, all in the New World.
|54 Baton Rouge, United States||29.00||53 Brasilia, Brazil||29.73|
|52 Monterrey, Mexico||30.85||51 Durban, South Africa||30.94|
|50 Birmingham, United States||31.00||49 Oakland Ca, United States||32.00|
|48 Macapá, Brazil||32.06||47 San Salvador, El Salvador||32.48|
|46 Oakland, United States||33.10||45 Newark NJ, United States||34.00|
|44 Curitiba, Brazil||34.08||43 Baltimore, United States||35.03|
|42 St. Louis, United States||35.39||41 Maracaibo, Venezuela||35.44|
|40 Jackson MS, United States||36.01||39 Nelson Mandela Bay, South Africa||36.02|
|38 Pereira, Colombia||36.13||37 Victoria, Mexico||37.78|
|36 Port-au-Prince, Haiti||40.10||35 Goiânia, Brazil||42.01|
|34 San Juan, Puerto Rico||43.25||33 Chihuahua, Mexico||43.49|
|32 Valencia, Venezuela||43.87||31 Recife, Brazil||44.54|
|30 Santa Marta, Colombia||45.26||29 Cuiabá, Brazil||45.28|
|28 Cape Town, South Africa||46.04||27 Belém, Brazil||48.23|
|26 Kingston, Jamaica||48.48||25 Medellin, Colombia||49.10|
|24 Sao Luis, Brazil||50.16||23 Cucuta, Colombia||54.29|
|22 Detroit, United States||54.63||21 Ciudad Guayana, Venezuela||55.03|
|20 Juarez, Mexico||55.91||19 Cuernavaca, Mexico||56.08|
|18 New Orleans, United States||56.13||17 Vitoria, Brazil||60.40|
|16 Flint MI, United States||62.00||15 Culiacán, Mexico||62.06|
|14 Salvador (and RMS), Brazil||65.64||13 Fortaleza, Brazil||66.39|
|12 Guatemala, Guatemala||67.36||11 Manaus, Brazil||70.37|
|10 João Pessoa, Brazil||71.59||9 Barquisimeto, Venezuela||71.74|
|8 Nuevo Laredo, Mexico||72.85||7 Cali, Colombia||79.27|
|6 Maceió, Brazil||85.88||5 Torreón, Mexico||94.72|
|4 Distrito Central, Honduras||101.99||3 Caracas, Venezuela||118.89|
|2 Acapulco, Mexico||142.88||1 San Pedro Sula, Honduras||169.30|
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Revised Sunday, 27-Jul-2014 23:01:36 PDT