|Mark's Market Blog|
10-3-15: Volkswagen attempts corporate suicide.
by Mark Lawrence
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Last week I predicted a drop to 1855 or below. We dropped to 1880, and then shot upwards. Is it safe? Nah, I still feel just fine about my prediction. I'm less confident that we'll end the year at 2150 than that we have another leg down yet to go. Last week everyone thought Yellen was chicken and damaged the Fed's credibility. This week the jobs number was poor and makes her look prescient. Now everyone is saying rates will be low forever.
On Monday junk bond rates rose by a rather staggering 2.46%. This is very bad news for certain cities, states and corporations, and it's especially bad news for various emerging countries. We're still on a path towards a dollar short meltdown. It's also considered an early harbinger of doom for the stock markets, showing a decreasing appetite for risk. In 2008 it was frequently said that emerging markets like China were rescuing the old world of the US, Europe and Japan. Now the tide appears to have turned and soon we will see if the old world will return the favor and rescue the emerging markets. My bet: no chance. Joe Kennedy used the Great Depression to make a hundred million dollars in real estate; today we have thousands on Wall Street plotting to make billions. Each. Buying stuff in emerging markets on the cheap. And you already know their most treasured rule: buy low, sell high.
|Country||Debt 2006||Debt 2014||GDP 2014||debt/gdp|
|US||$8.5 trillion||$17.8 trillion||$16.8 trillion||1.06|
|China||$4.3 trillion||$17.3 trillion||$10.3 trillion||1.68|
China's industrial profits are dropping deeply into recession territory, contracting at a 10% rate. It's been pretty much a year since Chinese industrial profits were increasing. Although their stock market is more or less holding up, continuing to hover in the 3000 - 3200 range, it's becoming obvious that this is almost entirely due to the government spending wildly to prop it up and a sensible market would be much lower. Next year is going to be economically difficult.
The employment numbers came out and a little digging makes you realize they were pretty bad. The raw number was 142,000 new jobs, unemployment holds steady at 5.1%. Doesn't sound so bad, huh? Oh, and August's 173,000 new jobs was revised downwards to 136,000. Also the average work week dropped from 34.6 hours to 34.5. When you multiply that by the 120 million jobs in the US that's the equivalent of losing 348,000 jobs. Add that in and you're looking at a net loss of 265,000 jobs. Consumers on net are tightening their belts. This has been the trend for the entire year. The Fed is all over these numbers and this no doubt is a good portion of why rates didn't go up. Many are now predicting they won't go up next year at all, and sometime in the next 12 to 24 months we're likely to get a new recession, so perhaps Fed rates will never go up. Bernanke, of course, is on record that interest rates will stay low for the rest of his life, so this was no surprise to him. If we hear a report of Yellen humming a variant of Peter Pan's song - "I'll never go up, never go up, never go up. . . Not me!" it will be time to get scared. Of course in my first blog of this year I had a chart indicating that the Fed is boxed in; at this point an interest rate of even 1.5% would likely put us into recession.
The EU is currently doing their own QE, about $75 billion per month. In the face of China's recession and south east Asia's weakness, coupled with recent events at a large car company to be named later, it's not enough. The EU central bank is considering doubling their QE to $150 billion per month and extending it through 2018. If Spain continues to politically deteriorate they may be forced to do this to prop up the Spanish bond market. Europe has had almost no economic growth since 2008 - perhaps 2% overall - which, since Germany has grown by 7% masks how poorly the rest of Europe is doing. European productivity has stagnated this entire century so far, substantially because the tax climate punishes anyone dumb enough to spring for new equipment. Even Germany hasn't bought any net new equipment since 2008. Up until 2008 banks in many EU countries, especially in the south, were making massive loans to consumers, but that's all over now. Domestic demand in most of Europe is off 15%. Unemployment jumped up from 7% to 12% after the 2008 crash, and is just now meandering its way down to 11%. Bottom line: outside of Germany, the Euro simply isn't working.
Saudi Arabia is "allowing" oil prices to get and stay low so as to drive US and Canadian producers out of the market and increase the Saudi market share. It's working, sorta. The number of US oil rigs is dropping quickly, but production has barely budged as companies quickly get more efficient. However Saudi foreign reserves have dropped by $73 billion so far this year as their GDP and revenue has crashed and their spending hasn't changed. It's been estimated that they're running a deficit of 20% of GDP, a deficit of about $150 billion per year. They still have about $670 billion in foreign reserves so they can keep this up for several more years. I hope they do. Imho, the broker they get, the calmer the middle east and the world will be.
Faisal Al Yafai, chief commentator at the UAE-based newspaper, The National, had this to say about Obama's actions in Syria: "What would it take to make the Americans intervene? Would it take children and women being slaughtered? Well that happened. Will it take millions of people on the move? That happened. Will it take hundreds of thousands of civilians murdered? Well that happened. America wasn't willing at any point to intervene so why now would it suddenly intervene? It is a free field for Putin and the Russians." The only upside I can see to Obama's policies are that Russia is being tempted to over-reach at a time when their own home economy is staggering.
Volkswagen, who thought emission standards didn't really apply to them, gave their emission bypass software to their luxury subsidiary Audi who apparently sold another 2.1 million cars using the cheat. Volkswagen shares continue to drop with no obvious end in sight. London's Financial Times warned that the Volkswagen scandal would turn out to be "worse than Enron." Gordon Brown's labor party is under pressure now for putting in place tax cuts for diesel car owners. UK conservatives say these cuts resulted the number of diesel family cars jumping from 1.6 million to 11 million in the last 20 years and in air that doesn't meet EU standards and has killed tens of thousands of British. Diesel is dead, dead, dead. I must admit I spent much of the last 15 years enamored with the new "clean" diesel engines - you can find entries in this blog where I was an advocate. I completely missed the fact that the beautiful results were being fudged. I can't really imagine that Germany will allow Volkswagen to fail entirely, but this black smudge on the export-dependent nation's reputation must be cleaned up. The EPA has sent feelers to Germany asking about extraditing Volkswagen executives to face criminal charges in the US; Germany's response was that the US can perhaps have them after Germany and then the EU are done with them. A whole bunch of people are going to go to jail, a lot of fortunes will be lost, tens of thousands and perhaps a hundred thousand manufacturing jobs are going to disappear. There's huge overcapacity in world wide auto manufacturing right now and Volkswagen has suddenly volunteered to let their 13% share be the swing producer. I'm sure Ford and GM are quietly very satisfied with this. Now everyone is being tested and it's been found that diesels from Renault, Nissan, Hyundai, Citroen, Fiat, Jeep (owned by Fiat) and Volvo also fail standards when they're on actual roads. GM's very public refusal to discuss a merger with Fiat-Chrysler is suddenly looking prescient.
Germany, who has earlier this month announced they'll take in 800,000 refugees this year and 500,000 per year for the next 20 years, just published their constitution in arabic so that refugees can "learn and integrate." Vice-Chancellor Sigmar Gabriel, also chairman of the center-left Social Democrats (SPD), told Bild daily that refugees were welcome but that they have to make an effort to fit in. "People who come here must not only learn the German language, but also learn the rules of the game of living together." Gabriel said refugees have to accept principles such as the division of church and state, equal rights for men and women, the right to be homosexual and freedom of expression. He also pointed out that anti-Semitism is not tolerated in Germany. Good luck with that. France leads Europe with 7.5% of their population muslim; Germany, Britain, Netherlands, Belgium, Sweden, Denmark and Austria are close behind with around 5% - 6%. If Germany does indeed take in 10m refugees in the next 20 years they're likely to be around 20% muslim. According to a Pew poll 60% to 70% of Germans, French and British have a favorable view of muslims. Obviously my opinion is different from theirs because I see Northern Europe as committing cultural suicide.
There were just elections in Catalonia, the north east corner of Spain. It was won by parties advocating Catalonia declaring independence from Spain, leaving the EU, the Eurozone and Nato, and repudiating their share of Spain's rather massive debts. They have not yet formed a coalition and a government, but the drama in Spain has increased. I expect this will be reflected almost immediately in Spain's cost of borrowing, but I also expect that Super Mario and his bank will stomp on that and keep rates low. Of course to do that the EU central bank is probably going to have to buy up most of Spain's debt. The crisis in Europe is nothing like over. Countries are closing their borders; some are saying they will refuse their Brussels required "share" of refugees; Greece continues to flounder in a depression worse than the 30s; Italy and Spain are deep in unsustainable debt; and now Spain has to deal with a suddenly empowered separatist movement. Spain itself will now have to try to form a government that will carry out required austerity and reform programs while a major portion of their assembly refuses to have anything to do with this. Spain is looking a lot like Greece but about five years behind.
I consider myself pro immigration. I'm deeply annoyed that we let hundreds of thousands come to this country to study engineering, science, medicine and business, then refuse them visas when they want to stay. For me, immigration should be about whether or not the people are likely to contribute. I also believe contribution has a generational component - perhaps cultural, perhaps family values on education, perhaps genetic. It's considered axiomatic on the left that all people are the same and the children of illiterate hispanics have the same chance to go to Princeton or Harvard as the children of highly educated asians, or at least they would if liberals could just find the right way to throw money at the problem. I strongly disagree with this, and I believe the data supports my views much more strongly than the liberal dream of egalitarianism. I have watched the 40 year huge influx of latino immigrants to California and the south west with great dismay. It turns out, however, as our economy moves away from low level jobs and the economies of Mexico and other south and central american economies pick up, immigration trends are changing rapidly. I'm personally very gratified by this. I suppose some will think this makes me a racist, and at this level I suppose I am.
The Chicago business barometer dropped to 48.7, into recession territory. Many US businesses are struggling as the dollar goes up and other countries fall into recession - Caterpillar is laying off 10,000 in anticipation of severely dropping international sales. 2016 is shaping up to be a tug-of-war in this country between those parts of our economy that are healthy and those parts that are following the rest of the world into recession. Fortunately China has resolutely refused to import much from the US beyond treasury bonds, so their recession will have almost no affect on us. You can't cut imports that don't exist. Personally, I continue to think the US economy will be fine next year. However, this war will almost certainly be reflected in continued turbulence in the markets. We just finished six years of the markets going almost straight up with almost no back tracking. It's almost inconceivable this will continue. And of course the US will go into another recession at some point, and when that happens the government and the Fed will likely find they have almost no credibility left and very few tools to fight it.
Evenwel v. Abbott, the Supreme Court case which will decide if districts are based on census population which includes illegals or if they should be based on voters, has moved past the deadline to file briefs. We can expect a decision in a few weeks I think. The argument is that the principle of one person, one vote is being tromped on by the current system where some districts in a given state have almost twice the voters in other districts; the counter argument is the 14th amendment guarantees "equal protection of the laws" and doesn't distinguish between eligible voters and illegals and felons and children. I certainly know how I would vote were I on SCOTUS, but with the actual sitting judges I can't predict how the swing voters will line up. If they vote to maintain the current system, I think conservative rural counties should build huge federal prisons and take in huge numbers of protected non-voters. If the Supreme Court finds for voters and against warm bodies, the implications will be huge but only after the 2021 redistricting.
The 79 year old multi-billionaire Carl Icahn released a video Danger Ahead this week where he says the Fed's ultra low interest rates have distorted business and markets to the point where he fears a generational crash, something that would make 2008 seem like a little correction. He goes on to support Trump's proposals for income tax which include removing the carry interest deduction - the deduction that lets Wall Street pay almost no income tax on their billions of dollars of profits.
Mining companies Glencore and Anglo American have had their stocks crash this last week - Glencore dropped by 29% on Monday alone. Commodities continue to drop and there's no end in sight. Companies that make their money digging up iron and copper are in real trouble.
Election watch: Hillary continues to be in free fall in the polls. I'm completely unsurprised by this - the precise reasons for the drop are confusing to me (A server???), but I never believed she was a viable candidate due to age and various baggage. Her platform seems to consist of "I'm the smartest person in the room and it's my turn." Bernie Sanders is finding a ready audience for his socialist ideas on jobs, inequality and taxes and has raised $26 million to date, dwarfing the $14 million Mitt Romney had raised at the similar point in his election cycle. Biden continues to flirt with running, but 1) the man is an idiot, 2) he can't give a decent speech, 3) his platform seems to consist of "I'm not Hillary and my son tragically died," and 4) he has no money. I don't take the Biden rumors seriously. Among the republicans Trump's act is wearing thin and his numbers have apparently peaked and are on the way down. He's a fantastically self- destructive person, for example taking on Fox news which is the only media likely to give him a fair hearing. I'm comfortable predicting he will not be the republican candidate. Ben Carson is in ascendance. He's raised $31 million to date and has a formidable fund raising department and a ready audience for his anti-washington message. Fiorina continues to shine as the best prepared speaker in the group; as of right now I see her as a formidable vice president / attack dog. I don't believe her baggage (paid $100 million to oversee an HP shareholder loss of 50%) will allow her to be the candidate. The republicans are going to have to come to grips with the fact that most of the conservative electorate is fed up with washington insiders. Cruz, Rubio and Bush continue to be the favorites among the party elite, but no voter seems to connect with any of them. Bush, the nominal front runner of the party elite, seems to have as his major platform that he's married to a hispanic, he acts like an adult and he's neither The Donald nor Obama. But Bush is reportedly sitting on $100 million, so one can't count him out. In the end it's about money and votes, mostly money. And someone is going to have to come up with a positive message, a platform they want the electorate to embrace. Today of the serious candidates only Trump and Sanders are doing that. I can't believe a republican will get elected by saying "I hate abortion, hispanics need to go home and washington needs to change." I feel confident the "Hope and Change" message has run its course. Among all the candidates only Sanders and Trump are willing to talk about what they want to accomplish. The recent history of the US suggests we very much like split government, so perhaps we will get a democrat president and a republican congress. Who will then almost certainly preside over a pretty good sized recession and stock market drop, combined with challenges in Europe, the middle east and China.
Global Warming Watch: We've passed the Arctic Ice Minimum, which happens in mid September. How'd we do? In the chart below you can see that 2012 was pretty bad, 2015 was much better. The Arctic is, um, healing. In fact we're spending most of the year well inside the normal range - all but about two weeks. And those two weeks were because the minimum came a couple weeks early this year - another sign of global cooling. Unfortunately the northern passage was still clear for several weeks this year, continuing to raise the possibility of Chinese ships taking the Arctic shortcut to Europe, polluting and dropping weird species the whole way. The Chinese scare me far more than global warming.
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Revised Saturday, 03-Oct-2015 19:45:41 PDT