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Mark's Market Blog

1-26-14: California Dries Up. Won't blow away.

By Mark Lawrence

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"Big" drop in the markets this week - 3%. Is this it? The Beginning of The End? nah, I expect we're about through with this. There were some large hedge funds all strung out on treasury note shorts, expecting rates to rise. Rates fell. This is the resulting short covering "panic." We should be back to "normal" by the end of the week, whatever normal means. But normal no longer includes stock market corrections, we've simply gotten too civilized for those.


S&P 500 August 2 2013 to January 24 2014

As shale oil production in the US increases, we grow ever closer to hitting "the wall." It's been illegal to export crude oil from this country for 40 years - since the 70's oil crisis. We have enough refineries to make gasoline for ourselves, but not to export significant amounts. Now they're talking in Washington about lifting the export ban. I'm against that: I've always thought our best long term strategy was to leave our oil in the ground and burn up everyone else's first. Now we're thinking about letting other people burn up our oil. So that oil companies can make money now, and the government can tax it and spend it now. How much oil? No one knows for sure right now, but BP thinks our shale oil production will peak in about 10 years and decline in about 30. It's bad enough we're going to leave our children with $20 trillion to $30 trillion in debt, now we're looking to burn up all their assets too. Am I nuts? Well, here's a hint on that: the Saudis express gratitude for the US "stabilizing world oil production and prices," allowing them to "take several fields off-line for long overdue service." Apparently the Saudis will still have oil after we're cleaned out. Isn't that special?

A couple years ago SAP lost a patent case and was ordered to pay Trilogy Co $400 million for patent infringement. Since SAP lost the case, the US patent office has invalidated the patent, indicating that they think it never should have been issued in the first place. But SAP is still on the hook to pay for infringing on a patent that doesn't exist. What's next? Lotsa money for lotsa lawyers.

Richard Russell, the High Priest of Dow Theory and a famous perma-bear, said this week, "I'm not sure why, but I believe that this year is the year when the excrement hits the fan. My instinct is to be in gold and pray that it all turns out for the best. I think one of the main issues of the year will be the incredible disparity in income between the wealthy 1% and the rest of the population. I believe a second bone of contention will be computers and robots taking the place of middle and lower class laborers. As I see it, we are in the latter stages of a bull market. My feeling is that this long bull market will end in an absolute explosion of excitement as prices rise to unbelievable heights. We are not there yet, but the trend is up, and we have not seen the end of the melt-up. From this point on, I believe matters will accelerate, and time will be shortened. The year 2014 should end up as one hell of a year." Russell is predicting deflation and the collapse of the dollar. This is a very curious pair of predictions: the collapse of the dollar would raise the prices on Asian imports, causing inflation, substantially curing our trade deficit and restore the dollar's international position. I dunno, I respect Russell, but I think he hasn't really thought this one out.

Sometime in the next few weeks the International Maritime Organization (IMO) will announce new rules for shipping over the Arctic. The new rules are a great start if you're an insurance company - they regulate safety, training, certification, watch keeping, required ice class and set uniform rules for all vessels in all of the polar countries. That's the good news. The bad news is there's no rules on ballast water discharge, which often introduces non native species to a region, vessels may use heavy fuel oil, a risk as the fuel would contaminate waters in case of an accident. So it looks to me like some insurance companies and shipping companies got together and agreed how to make Arctic shipping more profitable. But the environment? Nah, not important.

A U.S. Postal Service program to open "mini post offices" inside dozens of Staples stores has drawn a sharp rebuke from postal employee unions. Workers are concerned the experimental locations -- staffed by Staples employees, not Postal Service employees -- will lead to the closure of traditional post offices and the loss of jobs with good wages and benefits. "The Staples-USPS deal has to be looked at in the context of a drive towards privatizing the U.S. Postal Service," said Mark Dimondstein, president of the American Postal Workers Union. His group is a network of local unions that represents over 220,000 current and retired mail workers. "We are willing to support this program as long as it's staffed with United States Postal Service employees," he said. Why should we tolerate people making $11 / hour selling us stamps when we can have people making $52k with a huge retirement selling us more expansive stamps?

Mike "Mish" Shedlock did an interesting exercise. Assume the CBO forecasts on the budget deficit are correct - something neither Mike nor I are comfortable with, but assume it. Graph 1 below shows how our national debt grows. Next, ask the question, "What happens when the Fed stops printing money and holding the interest rate down. That's graph 2. Historically the US has paid an average of 5.7% interest on the national debt; the highest curve shown is for 5%, lower than the historic average. The Fed simply can't let interest rates rise, the interest on the national debt will equal all federal income tax in under a decade. China, Japan, Korea and Europe also can't afford to let us go down, they will help keep our interest rates low for a time. But all Ponzi schemes must end, there's always a last sucker.

Argentina is struggling against irresistible forces. As their central bank reserves dropped to a critical level that began to bring into question their ability to pay their foreign debt, they instituted currency controls - no pesos could be converted to dollars by citizens, a maximum of two internet purchases per person per year. The Argentine peso crashed 13% in one day. Now the central bank says the peso has reached an acceptable level - about 8 pesos to the dollar according to them, about 13 according to the black market. The currency controls are accordingly lifted. I consider this the end game for yet another Argentine crash / default, and were I an Argentine I would convert my pesos to real estate or dollars or gold as quickly as possible. Some people just can't handle a credit card. Some countries just can't handle an international bond market. What will this do to us? Nothing, Argentina is the West Virginia of countries: they make the news from time to time, nearly always in a bad way, but it really doesn't have much to do with anyone else.

Japan has government debt that totals 200% of GDP, a record among wealthy countries. Japan can do this because they have few foreign owners of their debt; it's mostly held by their own citizens. However, a recent survey found 320 of their top 400 companies are planning for a euro-style debt crisis sometime in the next decade. When they have theirs, there won't be a Germany nearby to give credibility to one of their bankers saying he will "do whatever it takes to stabilize" the yen. Their new Prime Minister, Shinzo Abe, raised the national sales tax from 5% to 8% and promised to balance the budget within 5 years. This week a Japanese government agency said what everyone else already knew: it's not going to happen. Balancing the Japanese budget will require massive tax increases, which of course would choke off any economic growth that they had achieved. Japan is up against the wall, smoking their last cigarette imho.

Pollution from China now travels across the Pacific Ocean to the United States. On some days, acid rain-inducing sulfate from burning coal in China can account for as much as a quarter of sulfate pollution in the western United States. Cities like Los Angeles receive at least an extra day of smog a year from nitrogen oxide and carbon monoxide from China's export-dependent factories. Cities in Japan and Korea have been dealing with this problem for years, now it's hitting the US too. The obvious pollutant is nitrous oxide, that's what makes the ugly brown clouds. However the seriously harmful pollutant is tiny carbon particles, that's what causes lung cancer and emphysema. Japan and Korea have been getting large doses of particulates from China for years; now the amount of Chinese particulates hitting the US is small but measurable. We're getting less efficient at exporting our pollution.

Why are there still tickets available for Sochi? Here's one reason: Sochi is in Russia, but about 25km (15 miles) from the Georgia border. There are serious concerns about suicide attacks at the Olympics. Due to the conservative nature of the cultures in this area, it's much harder to search women, so there are worries about female suicide bombers.

Last week I mentioned that California was in a historic drought. This is a very warm state surrounded by mountains and deserts - nearly all our water must come from the snow pack on the Sierra Nevada mountains between California and Nevada. No snow now, no water later. Here's a satellite picture from a year ago, when we had water rationing due to the below average snow pack, and this year. Thinking of coming out here for a ski vacation? Think again. In addition to the almost complete lack of snow, notice that there is also a huge lack of green. If you live near any California hills this is the year to have fire insurance. Fun fact: "Sierra" means "mountains" and "Nevada" means "snowy."

Racial tensions are inflamed at the University of California at Los Angeles following several incidents — most notably, one where a professor corrected the grammar, punctuation and capitalization in minority students’ assignments. Val Rust, a UCLA professor of education and information, was recently officially told by UCLA that correcting black graduate student's grammar and spelling was "micro- aggression." 25 of his students staged a protest sit-in, claiming, "a hostile campus climate has been the norm for Students of Color in this class throughout the quarter as our epistemological and methodological commitments have been repeatedly questioned by our classmates and our instructor. The barrage of questions by white colleagues and the grammar 'lessons' by the professor have contributed to a hostile class climate." Rust responded "I have attempted to be rather thorough on the papers and am particularly concerned that they do a good job with their bibliographies and citations, and these students apparently don't feel that is appropriate." It's now UCLA official policy that Students of Color are not to be corrected for spelling and grammar. These are PhD candidates who will no doubt wind up chairmen of the board of education in inner city districts or directors of curriculum at black universities. I wonder if any of these students see the contradiction here: they're angry because blacks don't get their piece of the pie. But they refuse the grammar, spelling and dress code that is required for everyone else who wants a piece of the American pie.

How do kids succeed? Get born to the right parents: educated, top 20%, married will do the trick. Of course liberals think if kids were swapped at birth, the benefits being all nurture, the lower class kids would then prosper. Yah. And if I had been swapped at birth with an inner city black family, I would have gotten a basketball scholarship to UCLA (I'm 5'9"). In the charts below we see (1) as family income rises, so does college attendence; (2) as family income rises, teenage girls don't get pregnant; and (3) as family income rises, so does the expected income of the kids. Your kid's expected income is about half of your income.

Here's a little 5 minute must-see tv that's gone viral. Income Inequality. The movie singles out CEOs; I think this is gratuitous. We could be upset about $100m sports figures, but the truth is most of those guys are bankrupt within 10 years of retirement. We could be upset about Bill Gates or the Waltons, but at least they earned their money. Nah, for me this is about Wall Street bankers and hedge fund demons. We need to get serious about these guys - guys who become billionaires by putting the entire world economy at risk. They keep the winnings, the losses get spread around to everyone else. And of course this is all enabled by a bunch of corrupt Washington jerks.

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