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Mark's Market Blog

1-10-16: China teeters and quakes.

By Mark Lawrence

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The Chinese are looking to devalue their currency; but every time they do anything, even the tiniest little move, their stock market reacts violently. The chinese rich sense the end is near for them and they're pulling their money as fast as they can and getting as much out of China as they can. I expect currency controls in the near future. Those will be backed up with a few people arrested and shot. Finance is a high stakes game in China. Oil also dropped precipitously on increasing expectations of a chinese recession and Iran pumping major amounts of oil. The US markets followed the chinese markets and oil down, but in a more muted fashion. George Soros says this is 2008 all over again - a financial melt down that won't be stopped. If that's true then one of my predictions for 2016 - US markets will be fine for the first six months - will have been trashed about 12 hours after I made it. So much for my predictive powers.

S&P 500 July 15 2015 to January 8 2016

US markets dropped 6% on the week - the worst opening week ever, and that includes the great depression. Markets all over the world dropped, most more than ours. China appears to be coming unglued and that increases fears for other highly indebted emerging economies, starting with Brazil. World trade is grinding to a halt, commodities are at all-time lows and oil seems to have no bottom. The US economy continues to be ok, there's no obvious recession happening. However the Fed is no longer supporting the markets, and this nice little chart by Doug Short makes it seem obvious that the markets are rolling over. Is this it? Is this the beginning of the next crash? Just last week I said it would most likely not happen this year. I continue to think that the world's central banks will somehow buy another delay; I don't think this week will prove to be the start of a 50% decline in stock prices. However, it's clear that right now there is little in the world outside of the money printing presses supporting the markets. It's very hard to see how this is a good time to be owning stocks.

China has been slowly devaluing the yuan without any formal announcements of their intent or goal and it's scaring everyone. On Monday China's stock market dropped 5%, which triggered a half hour time out. When trading resumed it dropped another 2% which triggered a market stop. On Tuesday the government intervened and bought stocks, increased rules against major shareholders selling and against short selling, and basically put the word out that the crash was to stop immediately. It stopped, more or less. They can do that in China. For a while. But everyone knows that the market really wants to go down. On Thursday the market dropped 5% in the first few minutes, got a 15 minute time out, then dropped 2% more in another couple of minutes, resulting in a shutdown for the day after a total of 14.5 minutes of trading. Rich chinese are pulling their money out of China at record rates which is not going to help the Chinese economy or markets in the slightest. It has, however, fueled some interesting housing bubbles in Vancouver, San Francisco, New York, London, Sydney, Hong Kong. It seems clear to me that the chinese need to devalue the yuan relative to the dollar by at least 10%, perhaps double that. Rich chinese know this and want their assets out of a declining currency asap. We've seen this movie before in the late 80s when rich Japanese bought up every building n the US and didn't care what they paid, and we already know how the movie ends. Same plot, same dialog, same ending, new actors. In the market chart below the flat areas are where the markets were closed, either for lunch or because they were shut down. China announced on Friday that their emergency shut down mechanism was making things worse and they were no longer going to use it.

The European Central Bank's quantitative easing program is fueling house price bubbles in several countries. Germany, Norway and the UK are judged most at risk. Moody Analytic's Anna Zabrodzka said rising prices and the ECB's €60bn-a-month asset-buying program have caused "the risk of house price bubbles" to "resurface." "While bond markets have experienced a correction and yields on German sovereign debt climbed recently, they are still extraordinarily low. This has encouraged investment in the property market, which yields a higher return." Since 2010 average house prices in Norway have risen more than 30 per cent, in Germany by nearly 25 per cent and in the UK by nearly 15 per cent.

Oil continues to drop. Increased tensions in the middle east as the sunni arabs recall ambassadors from shi'ite iran would normally drive oil prices up; they're having no discernable affect. Although the US has shut down about two-thirds of our oil rigs last year our oil output has not changed - frackers are getting very good at what they do very quickly. Russia continues to pump at full speed; they desperately need the income. Saudi Arabia is also pumping at full speed to protect their market share and damage the oil industries and governments in the US, Russia and Iran. And Iran is about to come on line with a lot of oil which they produce at exceptionally low cost. Oil dropped this week to below $33, a 14 year low, and showed no sign of hitting the bottom. Some are claiming that oil will overshoot and drop as low as $18 per barrel. I'm no expert on oil, but it's clear to me that, absent a shooting war, oil isn't going up anytime soon.

Every time the Chinese markets trigger the circuit breakers gold goes up. It's up about 4% this week.

South Korean exports continue to fall - 13.8% year on year in December. This is seen as a strong indicator that the world is slipping into recession.

Last week the Saudis broke off diplomatic relations with Iran. This week the divide broadened as Bahrain, Sudan, Kuwait and UAE joined the Saudis in recalling ambassadors from Iran. Problems in the middle east will only rise from here.

World trade continues to drop; prices to ship containers is at an unprecedented low. There's a huge over supply in container ships.

Many retailers make their money at christmas time - the rest of the year they simply hope to cover their costs. So as more and more shopping goes on-line to Amazon and others, the large retailers are having more trouble making money. This year from black friday to christmas on-line sales rose at a record rate, with the result that UPS, FedEx and the post office were swamped. On the other side, Macy's, Nordstroms and Kohls all failed to meet earning guidance and look to be in some trouble.

N.Korea claims they've tested a hydrogen bomb. A 5.1 "man made" earthquake was detected centered on their main nuclear testing center. The bomb's yield appears to be about 10 kilo tons, which is consistent with a fission bomb but not a fusion bomb. In a fission bomb the extremely large and unstable atoms of uranium or plutonium are split in half, releasing enormous energy. In a hydrogen bomb you inject hydrogen into the middle of a fission bomb millionths of a second before it goes off. The hydrogen combines into helium because of the intense pressure and heat from the atomic bomb in a process similar to how the sun creates energy. A hydrogen bomb would have been in the million to 50 million ton range, a hundred to five thousand times more powerful. A N.Korea hydrogen bomb mounted on a missile would give them the weapon they need to create an electro-magnetic pulse over the US, which would destroy all transistors and lead to the deaths of perhaps half of our population over the course of the next 18 months or so, as transportation, water, communications and food distribution were completely halted. Probably this was a test that failed, but I expect it was a test showing their goals are clear - nuclear weapons of mass destruction. Don't forget, most believe that Iran and N.Korea are working together, so it would seem Iran is also making progress towards a hydrogen bomb. Here's a simple math equation for you: 1 hydrogen bomb = 1 Israel. I think this should not be allowed to happen, but I have no idea how to stop it. Personally, I would be perfectly happy if a major bomb were dropped on N.Korea next time they had a party meeting, taking out most of their government and military leaders.

Obama recently made an executive order about background checks on guns. In his press announcement he said, "We do have to feel a sense of urgency about it because people are dying and the constant excuses for inaction no longer suffice. That's why we're here today. Not to debate the last mass shooting, but to do something to try and prevent the next one." Lily Tang Williams is a Chinese immigrant who earned her citizenship and become politically active to protect her newfound liberty. Speaking of Obama's new executive order she said, "If you believe more gun control by your government is going to save lives, you are being naive. The champion of all the mass killings in this world is always a tyrannical government."

Valentina Garcia Gonzalez entered the US illegally in 2002 from Uruguay, traveling with her parents as a 6-year-old. She was raised in Georgia, educated in their tax- payer funded school system, and by all accounts did well. When it came time for college she found that Georgia does not give in-state tuition to illegals. With the help of Freedom U, a group that says "OUR MISSION: To empower undocumented youth and fulfill their human right to education," she managed to get herself accepted at Dartmouth in New Hampshire. She recently posted her thanks to the Georgia taxpayers who generously gave her this huge educational leg up, something I assure you is impossible in Uruguay. You may choose to express your feelings directly to Ms.Gonzalez at

On Thursday the US dept of agriculture and the dept of health and human services put out their new dietary guidelines, something they do every five years. Their new guidelines remove the previous limit of 300mg per day of cholesterol. Eat all the eggs you want! On Friday the USDA and HHS were sued over the new guidelines. In making the new guidelines the government worked closely with the Dietary Guidelines Advisory Committee - an "independent" committee made up of "experts." It turns out this committee is funded by the egg industry.

The CDC did a survey of the sexuality of 9,175 american adults. According to their data, all this fuss about marriage and bathrooms and wedding cakes is about roughly 1.5% of our population. Panem et circenses. A huge distraction from the real issues.

Fun science facts: It's estimated that the earth holds about 8 billion billion grains of sand. With our telescopes we can see about 200 billion galaxies, each containing about 200 billion stars. Our current best understanding is that most of these stars have multiple planets. This means for each individual grain of sand on the earth there are perhaps 25,000 planets in the universe. One can only speculate on what fraction of these planets has life and how many different forms this life takes. Or perhaps the earth is unique, and the entire rest of the universe was created just so astronomers could build expensive telescopes and stare at it all night. "If it's just us, seems like an awful waste of space." -- Carl Sagan.

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