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Mark's Market Blog

1-2-15: Deflation in Europe.

By Mark Lawrence

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We had another short week because of new year's day; volume was low, momentum was uninspiring. Stocks ended 2014 by dropping, and started 2015 by dropping some more - something that hasn't happened since 2008 and is a bit unusual. Volatility continues to increase as the market goes up, a worrying sign. There's nothing seriously worrying out there right now, so I expect this little correction to turn around quickly, likely some time this week. However, the signs and portents are leaning more and more heavily towards this market forming an intermediate term drop - that is, it looks more than a little like a 10% correction is in our near term future. Perhaps we're just starting it now.

S&P 500 July 14 2014 to January 2 2015

Oil started the year continuing its price drop - down to $52. No bottom is currently evident an further drops would be unsurprising.

The Greece parliament tried three times to elect a new president and failed. There will be elections for a new senate on Jan.25. This is likely to be exciting and produce a new crisis for Europe. Germany says the safety nets are in place for the European banking system and they're ready for Greece to leave the Euro.

Germany put in place their minimum wage law, the first ever. Their minimum wage is €8.50, which is about $11 / hour.

Spain is now running 1.1% deflation. The ECB will consider this intolerable - this is like a kid with a cold at daycare.

Japan's Shinzo Abe is very popular inside of Japan with his money printing and spending policies. Outside of Japan? Not so much. Foreign direct investment in Japan is down 94% this year. There's a pretty strong consensus outside of Japan that this will not end well.

ISIL has killed 1878 civilians in the last two months, and another 120 muslims who flew to Syria to volunteer then wished to go home.

"The rise of populism should be a wake-up call," said the ECB's chief economist Peter Praet. "Populist parties in some countries promise quick solutions - but they offer only recipes for disaster," Praet warned. "Nobody should be under the illusion that you only need to return to the old system and everything will be better," he argued. Notice that "populist" means any party gathering significant votes that doesn't toe the unelected EU officials' party line. Europe is transitioning into a crisis of democracy v. entrenched bureaucrats. Socialists are making great progress in the southern countries ravaged by unemployment and debt; the far right is making great progress in the northern countries that are implicitly being asked to pay for past transgressions of the southern countries.

Peter had a big interview day, as he also said that inflation figures will spend a large part of 2015 in negative territory (deflation). Praet's comments are some of the most dovish to come from the ECB, making it sound all but guaranteed that the central bank will start a quantitative easing program in January. He's also given a hint towards the makeup of the likely QE program, saying that government bonds are "the only type of bond in which there is a significant market volume." This means the ECM means to start buying up, for example, Greek, Italian, Spanish and French bonds, effectively subsidizing their massive deficits. Germans fear the result of this is that they will have to pay off these subsidies. Central bankers, as I have previously noted, seem to think the bonds will never have to be paid off, they can just be rolled over in perpetuity.

Harper-Collings published maps and school books for the whole world. Curiously, H-C maps and books that ship to the middle east don't have Israel on them - instead they show most of what we consider Israel divided up between Lebanon, Syria and Jordan with a small splot for Gaza. I can't imagine the Palistinians like seeing "their" country divvyed up by the Arabs. Harper says this is a condition to import books to Saudi Arabia and other arabian countries. Personally, I think in a few years Iran will drop a few bombs on Haifa and Tel Aviv, rendering much of Israel uninhabitable.

Indians have a lot of religious ceremonies that happen in their rather wildly polluted rivers. Here's a ceremony in the Yamuna river which at the time of the photo is foaming like a washing machine going full bore. The pollution starts in a northern suburb of New Delhi, Wazirabad, and continues into the Ganges river. Interesting that a country with one of the highest birth rates places such a low value on their water.

The top .1% of earners continue to accumulate rather appalling wealth and are headed quickly for the level where, imho, capitalism breaks down and the wealth gets redistributed in the following depression. We had one of these little episodes after the 1907 banking crisis and another during the roaring 20s. That latter one was a precursor to the great depression which lead to WW II. Already outside of the US there are increasing voices saying that capitalism has run its course and is broken; one can only wonder how long until this spreads into the US. It would seem we haven't learned a thing.

Last week I put out my predictions for 2015; I'm quite bullish for the year. This week Doug Kass and Ambrose Evans-Pritchard put out their predictions; they think we're walking up to the edge of the abyss and we're going to take a bold step forwards. The world would be boring without differing opinions. They think central bankers will step up to the plate this year and strike out - the EU will not be able to take a bold enough stance to stave off European deflation, and the Fed will find that a rate increase or two will cause a major stock market correction and start a recession. They both think China will devaluate their currency in the next phase of the world wide currency wars. And Doug thinks this is the year derivatives blow up, nearly taking out a couple US banks and causing yet another massive bailout. Both of these guys are very good and cannot be dismissed out of hand. I believe I agree this is the year we learn that Super Mario has no clothes - I think it unlikely the ECB will print anywhere near enough money to save Europe. I agree about the Fed in the long run, but history repeatedly tells us the first interest rate increase doesn't cause major problems, and I doubt we'll see two rate increases this year. But the Fed will soon enough prove they're backing into a corner: zero rates are causing a bubble, and raising rates even 1.5% will put the US budget into crisis due to interest payments and cause a major recession.

In 2013 an Asiana Airlines plane was attempting a landing at San Francisco. SFO told the pilots to make a visual approach. Basically the pilots couldn't - left to their own devices, they selected an auto pilot approach and they picked the wrong autopilot mode, resulting in a crash that killed three people. Later it came out that the Korean pilots are trained to use the plane's computer systems, but untrained in how to fly the plane manually. This week we had a crash of an Indonesian plane that flew into a thunder storm. They asked for clearance from Malaysia flight control to fly over the storm; Malaysia was slow to respond. Apparently the pilots pulled back on the sticks for a last-second climb and stalled the aircraft - not entirely unlike 2009's Air France crash. It's becoming clear that the pilots flew into circumstances that the autopilot could not handle, and they too were untrained in how to fly the plane manually. The FAA tells us that this is now the #1 cause of airplane crashes: pilots losing control of otherwise good aircraft when the autopilot turns control over to the pilots.

A British 19 y/o posted a youtube video of him tearing up a koran and burning the pages. He's been arrested on suspicion of a racially or religiously aggravated public order offence. In 2011 Sion Owens filmed himself burning a copy of the Qu'ran. The clip was leaked to the British newspaper The Guardian and he was subsequently arrested. Then, the Home Office stated: "The government absolutely condemns the burning of the Qur'an. It is fundamentally offensive to the values of our pluralist and tolerant society. We equally condemn any attempts to create divisions between communities and are committed to ensuring that everyone has the freedom to live their lives free from fear of targeted hostility or harassment on the grounds of a particular characteristic, such as religion."

California's snow pack is at 51% of normal for this date, and 17% of normal for an entire season. And there's no rain forecast for the next 10 days. Unless things change soon, they're headed for another year of drought.

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