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Mark's Market Blog

1-17-16: Oil and Immigration

By Mark Lawrence

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The US is cutting oil rigs like mad, but oil production hasn't budged. We're getting much more efficient. ISIL is blowing up rigs, but oil production hasn't budged. The Saudis and Iranians are in a spitting war but oil production hasn't budged. Shell Oil and T.Boone Pickens assure us that oil has bottomed, but the price keeps dropping. This week it hit $29, a 14 year low, and shows no signs of recovering anytime soon. Iran will most likely be allowed to sell oil soon, perhaps this week, so the price is dropping in anticipation of a huge new supplier coming on line. This is driving all markets down. IMHO, people talking about oil bottoming are telling you their wishes or needs, not their rational prediction.


S&P 500 July 22 2015 to January 15 2016

Sanctions on Iran were lifted today. That means they instantly get access to $100 billion locked up in bank accounts, and they can ship oil. I understand they've been pumping for a while and they can fill up tanker after tanker for some time as they work off their excess. What does it mean? Iran is going to get a huge cash infusion quick. This is bad news for Israel and Saudi Arabia, bad news for regional stability. We can expect they will share their new found riches with various pro-shi'ite organizations like the PLO, Hezbollah, and various groups in Yemen, Iraq and Syria. Good news for arms dealers. And the uncertainty about their pumping is gone, which should be a positive for the markets. Obama has been pulling back from the middle east - it's taken me several years to find this perspective, but I do agree with much of his middle east foreign policy. Now the Arabs are going to see how much stability we had provided for the last 70 years and what life is like when Americans go home. My money is on the Persians.

A year ago Jeff Gundlach, a major hedge fund guy on Wall Street, said if oil dropped below $40 there would be "considerable geopolitical tensions building in the world." This week he was reminded of that prediction. His response was, "and now we're having major problems."

Saudi Arabia is considering selling share in Aramco - the Arab American Oil Company. Saudi Arabia has about 275 billion barrels of reserves. If you resume their cost of production is about $15/barrel and the oil sells for $40 per barrel, then those reserves are worth about $7 trillion. Why sell shares in the company? 1) How will shareholders see any of this money? What will shareholders actually get? Will this just be a huge scam? 2) Saudi Arabia senses a need in the near future for a whole bunch of cash, this is a good way to get a bunch quickly. Global economic uncertainty, potential conflict in the middle east possible damage to their wells, and cheap oil is making their welfare state suddenly very costly. 3) If they sell these shares, they're making a strong statement about their view of the future price of oil, and it's not $150.

Bank of America is telling their clients that the high yield (junk) bond market carnage "ultimately foreshadows further economic and risk asset malaise in 2016 and 2017. There is no question that defaults are going higher in 2016 and that investors are not being compensated for an increase in credit losses." That's bank speak for get out now.

Italy now has $216 billion worth of non-performing loans, which is about 17% of Italian GDP. Italians don't deposit their money in banks, instead they buy bank bonds. Curiously, italian citizens own bout $240 billion worth of bank bonds. Italian bank bond holders are not protected by deposit insurance and are going to get cleaned out.

RBS - the Royal Bank of Scotland - sent a note to their customers this week to sell everything except high quality 10 year government bonds. Their outlook for China is poor, their target for oil is $26 in the short term with a risk of $16, and they think China is going to drag the rest of the emerging world down with them. They say absent a recession in the US and Europe the downside risk in stocks is 10% - 20%. From here. We're already down 9% from the November highs.

The hong kong overnight lending rate on the chinese yuan shot up this week to 66.8% - this is how banks fund themselves day to day. It's thought that this is due to the chinese government doing everything it can to drain liquidity in the yuan from off-shore markets. Governments do this to make it hard to take currency out of their country and to defend themselves from international speculators like George Soros. The chinese are doing it at nuclear weapon levels. It's difficult to see this and not conclude that the chinese government is terrified of financial chaos. Plagues, famine, usurious interest rates, these are all signs of the apocalypse.

This week saw something unprecedented in the last 20 years. The North Atlantic was completely free of cargo ships. World trade is crashing. The major exporters, Hong Kong, Singapore, Ireland, China, Belgium, Netherlands, Luxembourg, Malaysia, Thailand, Switzerland, Denmark, Austria, Korea, Germany, Sweden and the arab oil producers all have exports as 40% to 80% of their economies. These are the countries on the front line of the world trade collapse, the ones most likely to have major recessions if this continues. Note that most of northern europe makes the list - major recessions in these countries will only make the other european issues like borders, immigration, monetary policy and bailouts of the southern countries harder to settle.

The stock market had a correction - a 10% drop - in August. Now we just had another in January, two within six months. This is the 4th time this has happened in the last one hundred years. The previous three times were 1929, 2000, and 2008. You might recall that those years turned out to be not so great for investors: they turned into the Great Depression, the tech bubble crash, and the Great Recession. What does this one portend? Nothing good imho.

The New York manufacturing index cam in at the lowest level its seen since 2009. Manufacturing on the east coast is definitely taking it on the chin. This is not the story of the entire country: GM is still running several of their plants 24/7.

It's not all bad news. Consumer sentiment is up, more than expected. Low gas prices are putting unexpected cash in people's pockets.

Is this is? Are we crashing? Nah, this is just another correction. There are certainly legitimate worries about a crash, but crashes don't happen because of worries. Crashes happen because things start unraveling faster than it's thought the various governments can handle them. Here's are some news stories I expect you'll hear about during the (I think) coming rash: Sweden and UK housing bubbles burst leaving a mortgage and bond crisis in their wake. Germany, the lone european country experiencing growth, goes into recession due to exports dropping dramatically. China's slowing economy starts to experience a hard landing. Brazil, Mexico, Malaysia, Turkey and other emerging markets have a huge bond problem leading to major bankruptcies. The US goes into a recession. Europe will experience yet another existential crisis, this time about open borders and immigration. And I must admit this time I think simultaneously we'll see shooting break out in the middle east, in the south china sea, perhaps in western china. When we start seeing dominoes like that fall, then there will be a real crash: markets will drop at a breathtaking rate, and each time a band aid or tourniquet is applied to stanch the blood loss, a short time later there will be another hit somewhere else. There will be a sense that it will never end and the entire world will collapse into chaos. That will be the crash, not this little period of nervousness about China's external yuan dropping in value and oil dropping to $30.

I know this is not a popular view, but I hold Nixon and Kissenger in high esteem. I'm well aware of their faults, but I think their insight into foreign affairs has been unparalleled since. I've learned a lot about world affairs from just a few short quotes of Kissenger's. Once he was asked, "Why does Israel refuse to negotiate in good faith with the Palestinians?" His answer moved my world view instantly and permanently: "When there is a group whose avowed purpose is to kill you, it is not difficult to believe they are also willing to lie to you." A different quote of his is my point today: when asked why the US and Russia didn't just eliminate all nuclear arms, he said, "In the absence of nuclear weapons, the US would still be a world power due to her economy. Russia would not." As an aside I'll point out that Russian adventurism in Ukraine and Syria is explained well by this. But my main point is, "What's going on in China?" At the nominal exchange rate China's GDP is 60% of the US. As they devaluate their currency by 10% to 20% that percentage will only shrink. No one alive knows their real growth rate but the analysts in whom I have the most faith estimate it at about 3.5%, not enough to catch up with the US in a reasonable time frame.* Chinese export growth has been negative for a whole year. Their per capita GDP is about 15% of the US per capita GDP; two-thirds of their people, 800 million people, live on $3 per day or less. The wealth in China is highly concentrated, and the richest are pulling money out of China at a rather alarming rate - $600 billion last year, $100 . This represents a huge contraction in their money supply and a huge loss of potential consumer demand. China says they're trying to switch over from a manufacturing / export economy to a consumer economy, but what can that possibly mean when two-thirds of your people can't afford an iPad and a lot of the rest are desperately trying to get their money out of the country? In fact the communists that run the place have no faith in markets - even less than none since their stock market bubble burst - and they're up to their standard tricks of loaning money to huge state owned enterprises and forcing more or less healthy companies to merge with gangrenous zombie corporations. There is a limit to this: for the last couple of decades China has been building up savings, but that's changed now. After several hundred years of being dominated by Europe and Japan, China is determined to re-claim their place as the major economic force in the world, but I really don't see that happening anytime soon. Their expectation of being a world power is being denied to them. As this becomes more and more obvious to their people, I believe their government will become more and more frustrated, more and more unstable, more and more dangerous. In fairness I must note this is very much a minority view - most continue to believe that the 21st century will be the century of China.

* the gory details: China's GDP must roughly double to catch the US. The rule of 72 makes this estimate trivial. Currently their growth rate is 3.5% (and shrinking), ours is 2.2%, so they're catching us at 1.3% (and shrinking.) 72 / 1.3 = 55 years to catch up. 2070. And this is if their growth rate stops declining immediately and their aging population has no affect. No proper auditor would ever allow those two assumptions. It's more likely they will not have caught up in GDP by 2100, and at present trends their per capita GDP will not catch up for several centuries after that. Forget the Chinese consumer economy, it's really not happening; not in my life, not in my grandchildren's lives. Jim Rogers, my all time favorite talking head, would happily tell you that the US national debt will crush our economic growth and China is a powerhouse that can't be stopped. For all my great respect for Jim, I disagree. He's got a younger and prettier wife than I have, he has more cute daughters than I have, he lives in a better place than I do, he has a lot more money than I have, he's traveled far more extensively than I have and he gets interviewed on TV weekly, it's happened to me precisely once. He's still wrong about this.

China sent some dredgers to the south china sea and built some sand bars there, which they call islands. The built a "city" (something at which they excel), stationed about a hundred military guys there and elected a "mayor." Now they've announced regular flights to Woody Island and are inviting people to come build houses there. Get in early! Get the best view lot! Have Gilligan as your Neighbor!

Back in the 80's we were assured that soon the Japanese would own everything and we would work for them. Didn't quite work out like that: their various market bubbles burst, the US properties they bought up at a premium were sold at a discount, and their markets have never recovered. How is China different? They came along 20 years later and they don't have the compulsion for high quality that the Japanese have.

Last year Volkswagen famously was caught cheating on diesel emissions. Now a probe has been launched against Renault, the French car company. How come all these famous companies in Europe, the progressive dream state, keep cheating on the environment?

Sweden is pretty clearly having a housing bubble. House prices in Sweden rose by 11% in Q4 and the entire country ran out of toilets for construction. A 1 bedroom basement condo in Stockholm with no windows goes for $850,000. Since they have rent control no one is building new rentals. The waiting list for an apartment in Stockholm is 13 years long. We're building up tension in this artificial free-money induced asset frenzy all over the world, and I think it's likely to all go at once.

In Germany there were over 600 reported attacks on women by "arab and north african men" over new years eve, many in the city of Cologne. The attacks were perpetrated by immigrants - it's an arab custom called "taharrush gamea" which is Arabic for group sexual harassment of unaccompanied and uncovered women. The attacks were clearly organized, as they involved well over 1000 men operating in at least six cities. The police were nowhere to be found as individual women were grabbed, groped, robbed, raped by dozens of men. One woman was set on fire. Huge numbers of refugees are being brought in - over 1 million last year in Germany, a nation of 80 million, so they added over 1.2% to their population in one year. In neighboring Sweden and Norway it's been found that over half their welfare payouts, 90% of their crime and 98% of their rapes are being caused by immigrants. When conservative groups in the same cities gathered to protest the unfettered immigration and resulting chaos, they were met by huge groups of police who used pepper spray and water cannons to disperse them. The German press is completely covering this up, if you want to read or see film you have to go to the BBC. Germany's chancellor Angela Merkel said, "We must accept that immigrants are more criminal." Cologne mayor Hennriette Reker said, "people from other cultures" needed to be given "a better explanation" about appropriate behavior during street celebrations. She went on to say that "Women need a code of conduct to prevent future assaults." Cologne chief of police Wolfgang Alers said it was "absolutely inadmissible" to speculate that the perpetrators were refugees. "We don't currently have any suspects, so we don't know who the perpetrators were. All we know is that police at the scene perceived that it was mostly young men aged 18 to 35 from the arab or north african region." Next time you're thinking of traveling to northern europe, remember that group groping, robbing and raping unaccompanied women is pretty much ok, but protesting government policies that result in uncontrolled immigration and crime is definitely not. Notice that the pepper spray in the photo below is being used at a man walking away, not unlike the pepper spray used a couple years ago at U.C.Davis on unmoving seated protesters. Something suicidally insane is happening to western civilization, the group that has brought modern medicine and technology to the world. This is a misguided attempt to prove that psychotic self-destructive cultures are just as valid as ours and filled with nice people who we would love as neighbors. "Taharrush gamea." They have a popular phrase for something we consider unthinkable. Of course there's a point to this: in strict islam women may not travel in public unaccompanied by male relatives or with their heads uncovered - the immigrants are just trying to bring islamic sensibilities and traditions to their new godless country.

Germany is a country, economy and culture in trouble. About 50% of their GDP is from exports - a model that is now suddenly extremely fragile. They're part of a dysfunctional economic union that is somewhere between suffering and staggering - unemployment is over 20% in Spain, Greece, Italy and the Balkans. Germans quit having kids a couple decades ago, so they have an aging population with few young people to pay for their retirement care. So they're importing millions of young male immigrants from mostly muslim countries. You might ask, when there's over 50% unemployment for young men in Spain, Italy, Greece, why not import a bunch of those as your workers? They're europeans, they substantially share your values and culture, many have excellent college degrees, and they don't believe in gang raping women as a holiday entertainment. Instead Germany is taking in 3200 muslim refugees each day. I don't have an answer for this - there's some primal drive that I can see but with which I cannot understand to suddenly import millions of angry young men from the most uneducated and impoverished nations in some misguided belief that these are our beautiful new enlightened progressive citizens. If they think the christian religious right is hard to deal with, wait 'till they get a load of these guys. And if the thinking is that later these guys will import muslim wives and that will calm them down, well, that theory didn't work out very well in San Bernardino.

Sweden has similar problems with migrants. Their entire city of Malmo, their 3rd largest city, has been effectively over-run by muslims and is basically not safe for others. There have been many attacks on women, uniformly hushed up until this week when the women are rising up and demanding answers. Here's an example: A group of North African migrants living in a tent city in Stockholm have been found guilty of brutally gang-raping a 23-year-old woman. The attack began when the migrants approached the young woman, who was crying, and attempted to console her. The men took the woman to a viewpoint overlooking the city, then one of them "gripped her neck, ripped her clothes off and raped her." Other boys then arrived and proceeded to take turns raping the woman before she managed to escape and board a night bus at 3am. Two of the boys, who were all aged 15 to 18, were sentenced to six months in juvenile detention while another received nine months. They will all be back out on the streets by next summer. In 1975 Sweden had 421 sexual assaults. In 2014 they had 6,620, making them #2 in the world for rapes - 53 per 100,000 - surpassed only by Africa's Lesotho.

In Norway three African immigrants brutally raped a 14-year-old girl until she wanted to kill herself. They were given extremely light sentences, with one receiving community service and avoiding prison altogether. Norwegian police are also investigating the gang rape of a three year old boy in a refugee center. In the United Kingdom an 18-year-old girl claims she was gang raped by recently arrived Syrian migrants for five straight hours. They immigrants arrived in the country without documents claiming to be under 18 and from Syria. THere were New Years Eve attacks on women in Zurich, Switzerland, and there's a lawsuit in Austria accusing Vienna police of covering up attacks on women - "You want the Truth? You Can't Handle The Truth." In Finland police say they have evidence of coordinated migrant sex attacks in Helsinki. What are the germanic countries doing about it? Telling women to dress more conservatively, don't look at or talk to strangers, and try to not go out alone. This immigrant crisis is just getting started. We're going to hear more and more about this.

And of course here in the US were told that we must take in more immigrants, especially muslims. This country is already, imho, over populated. Why are we taking chances on immigrants from countries where the people are trained from youth to hate us? Why are we taking in large numbers of immigrants at all? The world bank projects the US as one of the most strongly growing populations in outside of Africa in the next 30 years. - population up 20% by 2050 and 50% by 2100. Why are we doing this? Who's great plan is it? Who will benefit? We're running short of fresh water, we're watching automation replace most unskilled and low skilled workers, our schools are coming apart at the seams, workforce participation is down and dropping, welfare is up and rising, and we're seemingly breeding a permanent and angry underclass. Why do we want more people?

On Thursday the World Health Organization declared the world ebola-free. On Friday a new case was found in Sierra Leone.

Canada has somewhat more restrictive labor laws than the US, and so companies are motivated to replace low skill labor with automation. Those who are in favor of higher minimum wages in the US can expect to see this coming here, soon. Along with unskilled refugees. An unhappy combination if you ask me. The picture below is a McDonalds in Alberta, Canada.

Mark's version of the State of the Union.

Under Obama:

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