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Mark's Market Blog

10-11-15: Medicine is the US economy's cancer.

By Mark Lawrence

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The markets shot up this week on news that it now seems interest rates will stay low forever and ever. There's strong resistence at 2040, it's hard to see the markets going up more than another 1% or so. I still maintain the easy path for the markets is down. And I'm being rather calm about it, the number of pundits calling for a 50% or larger crash seems to be increasing every day.

S&P 500 April 18 2014 to October 9 2015

The stock markets went up for eight straight days, restoring over half their losses. Think the correction is over and it's safe now? None of the big money managers do. Us US Treasury had an auction this week, and they sold off $21 billion of six month t-bills at an interest rate of 0.065%. They also sold off $21 billion of three month t-bills at an interest rate of 0% - the first time that ever happened. And the sale was over-subscribed by 4.14 : 1 - they could have sold over $84 billion at 0%. 30 day t-bills are now trading at slightly negative rates. The bond market is telling us we're already in a recession. The stock markets politely disagree.

Five large purchasers of US Treasuries – China, Russia, Norway, Brazil, and Taiwan – are dumping Treasuries at the fastest rate on record. For the 12-month period ended July, sales of Treasuries by central banks around the world reached a net of $123 billion. This would tend to lower bond prices which is equivalent to raising interest rates. But interest rates haven't really budged. If this continues at some point interest rates will go up even if the Fed doesn't act.

There have now been three straight quarters of declining corporate revenues in the US. This is normally a strong indicator of a recession. However, this time many think it's largely because the rest of the world is going into recession, not the US. What's the truth? I think we're going to have a year of uncertainty in the US economy, as I think we're basically still sound but the rest of the world is having trouble.

The Chinese are building artificial islands in the Spratly chain by moving sand over reefs. Then they build airports, administration buildings, barracks, and move in a bit of military. Then they claim the land and the surrounding 12 miles as Chinese territory. The US recently announced they would send navy ships past the islands; the Chinese said this will be an invasion of Chinese territory and highly provocative, and that they would respond militarily. Personally, I think they're out of control, and if the uninhabitable Spratlys belong to anyone it would be the Philippines.

Russia is building up forces in Syria, including tanks, ground and air attack jets, attack helicopters and men. They're supporting Assad, the happy dictator who likes to gas his own people and is the proximate cause of the 10 million Syrian refugees. Putin claims he's fighting ISIL, but over 90% of his attacks have been against Syrain opposition groups who want to unseat Assad. I find this confusing: we sent troops to Iraq and Afghanistan and there's no evidence we accomplished anything except to kill a bunch of people and create a refugee crisis. Russia of course famously went into Afghanistan and accomplished nothing. I see this as Putin trying to elevate Russia's political power in the world, but I think he's going to over-extend himself and wind up bankrupting Russia. Meanwhile most of the Syrian refugees in Europe say they are fleeing Assad, not ISIL. So as an added bonus Putin gets to produce more pressure on Europe. I believe Putin would like to see the EU and NATO break up.

Oil prices are low and countries in the middle east and Canada are suffering. Not Norway. In 1990 Norway started their oil fund, which now holds almost 2½ years of GDP. Norway is technically in recession, but they've boosted government spending, using up 2.8% of their rainy day fund this year. Since the fund is growing at 4% they're not even spending all their earned interest. What a curious way to run a country: save money in case you run into problems.

Obama is looking to reform our prison system. There are roughly 100,000 drug offenders in our federal prison system. These are not guys who were caught with an ounce of cocaine or a couple pounds of marijuana, these are dealers who had large amounts of drugs. Under the proposed new sentencing guidelines 46,000 of them would be eligible for early release. As a trial run 6,000 of them are being released between October 30 and November 2 into halfway houses and home confinement.

Medicare rates will likely rise by 50% next year, but only on the 30% that made either the mistake of retiring starting in 2016 or those who filed and suspended. Those who are collecting social security are guaranteed by law that medicare increases cannot exceed cost of living increases. If you're 65 or over and not collecting social security, you still have time to switch over this year and save yourself a bundle of money. By the time I'm 65 - a rather depressing handful of years in the future - I expect that medicare costs will eat up substantially all of my social security. I'm going to have to seriously consider "retiring" at 62, just to lock in medicare rates.

The Fed didn't raise rates because of stagnant wages and the threat of emerging market recessions. Productivity has risen enormously in the last 15 years, so why are wages stagnant? The stagnant wages conclusion is incorrect - wages are rising rapidly. Workers just don't see the money in their paychecks. That's because the wage increases are all being sopped up by the medical industry, which is now 20% of our economy, a seemingly unstoppable cancer tumor. According to Kaiser, the worker's share of premiums for a family policy went from $1,543 in 1999 to $4,955 in 2015, more than triple. The employer's share went up almost as much, from $4,247 to $12,591. In the past five years, inflation rose 9%; earnings rose 10%; insurance premiums rose 24%; and insurance deductibles rose 67%. This is why workers feel so squeezed. The walls are closing in on them. Where's your raise? Right there, it went to your health insurance.

Bangalore - India's Silicon Valley, or as I like to call it Silicon Sweatshop - is a bit down river from a large lake. Every monsoon season the city is inundated with toxic foam. The foam comes from Bellandur, a 1.4-square-mile lake that for years has been polluted by chemical and sewage waste. Every time it rains, the lake rises and wind lifts the froth up and carries it into the city. The toxic foam burns your nose if you smell it, and burns your skin if you touch it. To my eyes this is overpopulation and the associated pollution carried to biblical extremes. I find it intensely curious that 30 years ago my generation's slogans were "make love, not war," and saving our mother Earth. Today as we age and worry about our retirement income and health care, now suddenly we're all about money and immigration - more warm bodies to pay for our social security and medicare and provide the nurses that we project we'll need. I shouldn't be surprised - after all, my generation's most abiding slogan is "follow the money."

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