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by Mark Lawrence
Mark's Market Blog
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Interest and Growth
Money Utility and Risk
Trade Deficits and Inflation
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Distribution of Wealth
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Markets punched through S&P 2000 again, then slowed again. A couple Wall Street talking heads called this a top. I doubt it - money is still flying fast and furious.
The Fed continues to ramp down QE, it's basically over now. However they say "that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends." They say the labor market continues to show "significant underutilization." So the party on Wall Street will continue until businesses across the country hire more people. Liberals are livid about income inequality; conservatives are livid about the buildup of debt and the long term damage being done to the dollar; and the Fed is at the center of both problems, imho. What's a "considerable time?" The Fed notes seem to indicate that interest rates might be normalized by 2017; Bernanke however has said he expects low rates for the rest of his life. I'm not at all clear that our government can survive paying normal rates on our debt.
What is the real inflation rate? What does "is" mean? The government assures us that inflation is a bit under 2%. If you buy grocerys or gasoline with any regularity you doubt that number. The well-respected John Williams of the web page ShadowStats calculates inflation by other methods using different weighting and baskets of goods and tells us that inflation is more like 10%. If you bought food or gasoline during the 70's you doubt that number too - today doesn't feel anywhere near as bad as 1979. What's the truth? As usual, there is no one truth, but in my estimation inflation is more like perhaps 3% for most americans. Because the economy is running at far less than 100% my suppliers cannot raise prices very much, and china is perhaps even lowering prices as they seem to slip closer and closer to recession.
Currently we have China, Japan and the EU printing money. The Fed is ramping printing down, scheduled to be finished next month. In the face of this, unsurprisingly the dollar is going up in value against most other currencies. This is good news for consumers: prices of imported goods will fall. But it's bad news for the trade deficit and for American jobs. The Fed may find themselves in a position where they have to print just to keep up with the international race to the bottom.
Fitch, one of the ratings companies who failed completely to predict the 2007 crash, is now predicting a debt-deflation feedback loop for Europe. Deflation because they can't generate jobs, and all the money in the world won't generate inflation unless you have people buying more than is produced. Debt 'cause most european governments are addicted to it. Not unlike our government. Will it happen? Personally I can't see how the Euro can stay together in the long run. The southern countries simply aren't interested in working hard like the northern countries, so either you have to have massive money move south as we do in this country, or you have to have currency depreciations in the less productive economies. Germany won't allow money to move south, and the Euro makes selective depreciations impossible. Deflation means banks are in trouble as people walk on loans rather than repay them, just as happened in the US when the real estate market crashed. It means retail sales slow as people wait for better prices. It means tax revenues drop because everyone is selling less, paying less sales and income tax.
China has tried to moderate growth by slowing bank loans, but it hasn't worked. Instead "shadow banking" has emerged and become huge. Loans made by non-banks are now equal to roughly 50% of GDP. The people making these loans aren't as good as banks at assessing risk - almost by definition all these loans were first considered and turned down by a bank. And the people funding these loans don't have protection in the form of being backed up by the central bank. China is moving towards a financial crisis right now.
Last week I noted that the BIS said "By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility." This week the IMF warns that financial market indicators suggest investments funded with borrowed money looked "excessive" and that markets could quickly deflate if there were surprises in U.S. monetary policy or the conflicts in Ukraine and the Middle East. "New downside risks associated with geopolitical tensions and increasing risk taking are arising."
There are now 44 start-ups with a valuation of more than $1 billion each preparing to enter the public markets, led by Alibaba, the Chinese Ebay with almost no transparency and very poor buyer support. The last time this happened was 2000, just before the dot-com bubble blew up. And the last time stocks were this expensive was 2007, when the subprime/finance bubble blew up. That was also the last time share buybacks by US corporations passed the $600 billion mark, which they will do again this year. Italian ten year bonds pay slightly less interest than US ten year bonds, and French ten year bonds pay more than 1% less than US bonds. I can't see how any rational person can claim the markets right now are setting values according to fundamental principles.
Singles now make up more than half the adult population in the US, up from 38% in 1976.
In a speech this week on Ebola at the CDC, Obama said, "More than 2,400 men, women, and children are known to have died and we strongly suspect that the actual death toll is higher than that. Hospitals, clinics, and the few treatment centers that do exist have been completely overwhelmed. Patients are being turned away. And people are literally dying in the streets. Here's the hard truth: In West Africa, Ebola is now an epidemic of the likes we have not seen before. It is spiraling out of control. It is getting worse. It is spreading faster and exponentially. If the outbreak is not stopped now, we could be looking at hundreds of thousands of people infected." Ebola historically has been much easier to control; this new outbreak is surprising everyone with its virulancy. What's changed? That's an excellent question, no one is sure. There are lots of rumors but no hard evidence for any of them. Even hospital workers with protective gear are getting infected. For this much of his speech, I agree with Obama. He went on to say, "First and foremost, I want the American people to know that ... the chances of an Ebola outbreak here in the United States are extremely low. We've been taking the necessary precautions." We don't know what's different about this outbreak compared to the previous 19 outbreaks, we don't know why 175+ World Health Organization workers have caught the virus, we don't know why this time the World Health Organization has failed completely to contain an ebola outbreak. Given the huge uncertainty here, to claim any knowledge of likelihood of this spreading outside western Africa is, in my opinion, unsupportable. Two researchers at the European Centre for Disease Prevention and Control have recently published a paper where they say there's an excellent chance this is an uncontrolled epidemic and the number of cases by the end of 2014 - 14 weeks away - could be, in the worst case, as high as 275,000. With about two-thirds of those eventually dying. Dr. Richard E. Besser, previous director of the CDC, is calling for a military type response with several thousand US troops to contain this. And on Wednesday Obama announced he was sending 3000 US troops and a 2 star general to fight an enemy they can't see, aren't equipped to survive and don't understand. The last time I wrote about ebola, about a month ago, there were about 700 deaths. Today that number is more than 2600, with deaths doubling every three weeks. 75% of the deaths are women - caretakers. I don't understand this epidemic in any detail right now - no one does - and I can't make any predictions about whether it's likely to be contained soon, or limited to the three main countries - Sierra Leone, Guinea, Liberia - or if it's likely to spread beyond them perhaps as far as Nigeria or even the Congo. I also don't know if there's any significant chance of this spreading beyond Africa. What I do know is, due to over population, awful sanitation and a near complete lack of government organization, this time is different.
Remember in the '60s when president Johnson was losing control of the country? When he had the Air Force bring in maps of Viet Nam every day and he would personally select the bomb target? Remember wondering, "Really? This is what a president does? Select individual missions for airplanes?" On Thursday the white house announced that Obama will personally sign off on any airstrike against ISIL. "Obama can better ensure the operation remain focused on his main goal for that part of the campaign: weakening the militants' hold on territory in neighboring Iraq." Secretary of State John Kerry added that the U.S. would "communicate" with Assad's government in Syria to avoid any potential clashes. Mike Doran, senior fellow at the Center for Middle East Policy said "Practically speaking, Obama is in an alignment with Iran against ISIS. That includes alignment with Assad."
About 45,000 Iraqi Kurds have crossed into Turkey anticipating the arrival of ISIL and a potential genocide. The Kurds aren't stupid, they've lived under muslim rule for hundreds of years and they're very aware of how Armenians and Christians have been treated. Remember to be more tolerant of muslims and their sensibilities, 'cause they are a peace-loving tolerant people.
Yemen looks to be next. The relatively poor country of 25 million is home to Al Qaeda's presence on the Arabian peninsula. Now they're looking for power while shi'ites and sunnis look ready to duke it out. It's looking likely that civil war will break out there any day now. The US supplied a certain level of stability in the middle east previous to Obama, and absent that interference things are breaking down quickly. Obama and the muslims think we should let them develop on their own. I think we need to protect our interests, but frankly I'm not clear on what those are exactly. Anyway, as long as it's just muslims shooting at each other my primary reaction is to just step back and stay out of it.
NASA awarded Boeing $4.2 billion and Elon Musk's SpaceX $2.6 billion to build the next space capsule and transport system. They're competing with each other to put a NASA astronaut on the space station by 2017. Right now we're paying the Russians $70m / seat to launch Americans, but that relationship suddenly looks, um, strained. Boeing has built nearly every manned spacecraft in US history and is seen as the safe choice. SpaceX looks like a bit of a gamble to me, but with far more upside. Boeing was recently awarded a contract to build the Space Launch System (SLS) which eventually should be able to launch 143 tons into space. The SLS is more or less four space shuttle main engines strapped together. Those solid rockets the shuttle had that killed astronauts - yah, those are gone forever. The Saturn 5 sent Apollo to the moon and was only able to launch 130 tons. NASA thinks we're going to be doing something really big in space in the next 20 years. I don't think I agree. I think in 20 years we're likely to be in a world wide depression and launching people to Mars or building a habitat on the moon are going to seem pretty frivolous.
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Revised Sunday, 21-Sep-2014 17:15:50 PDT