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Mark's Market Blog

10-12-14: Volatility returns.

By Mark Lawrence

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It's October, the end of the Fed's (in)famous QE program, and everyone wonders what that means. Europe, including Germany, looks to be headed for recession and everyone wonders what that means. Ukraine and ISIL continue to be trouble spots and everyone wonders what that means. Ebola has everyone worried, 'cause, you know, it even killed Gwyneth Paltrow. The dollar is making multi-year highs, bringing exports, profits and job creation into question, and everyone wonders what that means. There no way the dollar can go up like that and the Fed can engineer inflation, which everyone knows is what they want. Bottom line: lots of volatility right now as people try to position themselves for a suddenly very foggy future. Right now it looks like maybe we'll be taking another 1% step down to the 200 day moving average, then perhaps recover from there. Or perhaps collapse further if we punch through the 200 day.

S&P 500 April 19 2014 to October 10 2014

Peter Schiff, yet another famous wall street talking head (YAFWSTH), says he doesn't believe the Fed will be raising rates anytime soon. Remember, Bernanke said we would have artificially low rates for the rest of his lifetime. Peter said, "I don't think they ever had a plan to hike rates. I think their plan is to launch QE 4, but they can't come out and admit that so they've been pretending that they're gonna raise rates. And I've been saying for months and months that they're gonna come up with an excuse as to why they couldn't. The latest excuse is 'well, the dollar's too strong.' You've got so many people that think the Fed can stop QE because they're convinced it worked. It hasn't worked; it's just made the U.S. economy more dependent than ever on QE and zero percent interest rates." I find that I agree with him. Raising rates would throw a huge ice water bucket on the housing industry, it would lower inflation, raise the deficit, cause the huge retirement funds to lose major money as both stocks and bonds go down, and probably do something harmful to apple pie. I am currently expecting more global uncertainty and trouble, and I am expecting that the Fed will most certainly not raise rates in this environment - they're far more likely, on current trends, imho, to start printing money again. And stocks? I will be unsurprised to see a 10% - 20% drop sometime in the next few months, but I don't believe Yellen has the balls to let any drop go much further than that. The minute a stock market correction passes 15% I will be convinced that QE4 is on the way. And I continue to believe that this out of control money printing will end very, very badly, but not in the next few years.

Another week, another tape of the Fed being too friendly with banks. Justin Fox, editorial director of the Harvard Business Review said, "The point here is that if bank regulators are captives who identify with the interests of the banks they regulate, it is partly by design. This is especially true of the Federal Reserve System, which was created by Congress in 1913 more as a friend to and creature of the banks than as a watchdog. Two-thirds of the board that governs the New York Fed is chosen by local bankers. And while amendments to the Federal Reserve Act in 1933 shifted the balance of power in the Federal Reserve System from the regional Federal Reserve Banks (and the New York Fed in particular) to the political appointees on the Board of Governors in Washington, bank regulation continues to reside at the regional banks. Which means that the bank regulators' bosses report to a board chosen by … the banks."

German 5 year bonds have slipped to 0.14%, below their current inflation rate and matching the interest rate on Japanese 5 year bonds. Basically this means absent deflationary expectations investors are paying the German government to hold their money for five years. Many organizations including the IMF are continuing to revise their estimates of global growth downwards, leading to more and more fear about stock markets going down. No matter what people say about their expectations, the bond market is where they vote with their feet. And dollars.

Oil has been dropping all week along with the other markets. It's now at $85 / barrel and at a two year low.

Factory orders in Germany fell nearly 6% in July and August, industrial production fell 4%, adding to the case that Germany is headed for a recession. Which adds to the case for the ECB printing more money faster. Which adds to the case for a continuation of the bull market. However Germany has made clear they will not be doing any deficit spending to mitigate any recession, and they will not approve extraordinary efforts by the ECB to print money. Much like how democrats and republicans in the US cannot agree on spending policy, Germans, French and Italians cannot agree on spending policy.

The IMF says that European banks aren't lending enough to businesses. They have a solution: banks loans to businesses should be guaranteed by the taxpayers. Their report on Global Financial Stability says the problem with the recovery in Europe is that banks can't do enough lending. And they further say if nothing is done Europe will "slide back into recession."

According to the IMF, on purchase power parity the Chinese economy just overtook the US economy to become the world's largest. Purchase power parity which means the values of the dollar and renminbi are adjusted for the fact that stuff is cheaper in China than in the US. Measured by exchange rates, the US economy is still about a third larger than the Chinese. And currently as the dollar strengthens and the renminbi weakens we're still pulling ahead.

Brokerages in London report that purchases of 12.5kg gold bars by the super-wealthy have increased 243% this year. Such a bar is worth roughly $500,000. Switzerland is set to vote on a proposition that the Swiss central bank should hold 20% of their assets in gold. If this passes on Nov.20, then Switzerland will be buying 1700 tonnes of gold. China is already a major buyer as they are in the middle of acquiring 4000 tonnes of gold. The $1200 level for gold is looking a bit like a bottom right now.

That guy in Dallas who flew here from Liberia, then went to the hospital and was sent home, then went back two days later and was found to have ebola? Yah, well, he died wednesday. No big surprise, 70% or so do. Now we wait another week or two to see if anyone else he contacted has ebola. A Dallas Sheriff's deputy who had checked out the Liberian guy's house without wearing protective gear checked into the hospital on Thursday. Turns out he doesn't have ebola. However an female nurse from that hospital is now positive for ebola - the first case transmitted on US soil. And two people who had recently been in Liberia showed up at a Boston clinic with some symptoms, and were quickly stuffed into hazmat suits and carted off to a hospital that could handle isolation. The world death toll is now up to 4500 and continuing to climb faster every week - this epidemic is nothing like contained.

FBI Director James Comey said on 60 minutes, "There are two kinds of big companies in the United States. There are those who've been hacked by the Chinese and those who don't know they've been hacked by the Chinese. I liken them a bit to a drunk burglar. They're kicking in the front door, knocking over the vase, while they're walking out with your television set. They're just prolific. Their strategy seems to be: We'll just be everywhere all the time. And there's no way they can stop us." Comey said they're looking to steal industrial secrets, not credit card numbers.

This year a bit over 1000 French citizens and legal residents have left France to travel to Syria and Iraq to support ISIL.

"Nationalism is an infantile disease. It is the measles of mankind." -- Albert Einstein. Well, no matter what old Albert thought, nationalism is on the rise in Europe. Marine Le Pen's far-right National Front won 25% of the vote in France (up from 6.3% in 2009). Nigel Farage's UK Independence Party, which took 27.5% of the UK vote, giving it 23 MEPs and forcing Labour and the Conservatives into a humiliating scrap for second place. Scotland just held a referendum, pushed by nationalists there, on whether to leave Britain (and by default Europe). The nationalists got 45% of the vote. In Greece, the radical left coalition SYRIZA came on top of the polls with a 26.6% share of the total. Rising anti-European sentiment has been attributed to the ongoing eurozone economic crisis, which has left up to a quarter of the working-age populations of countries like Greece and Spain out of work and caused the region's economy as a whole to flat-line.

It appears that something interesting is happening in North Korea. Kim Jong Un, the chubby 31 y/o supreme dictator, hasn't been seen in public for a little over a month. He missed the Supreme People's Assembly last month, which is simply unheard of. Pyongyang, the capitol, has been in lock down for a couple weeks. No one gets in or out. And a few N.Korean officials suddenly popped up in S.Korea for a diplomatic visit. What does it all mean? Who knows. Certainly no one outside of N.Korea. Perhaps Kim is mortally ill, or dead, or deposed, or locked up. Perhaps Kim is purging the government of his rivals, putting an end to frequent claims that he's just a figurehead. Perhaps it will end suddenly and we won't be able to tell what changed. Anyway, if you're a N.Korean, this is interesting times. . .

A team at Morgan Stanley is predicting the Death of the Auto Industry. What does that mean? They're predicting that driverless cars are coming far faster than most people imagine - like well within 10 years. And at nearly the same time car ownership will disappear as people rent cars for a day - something that's already popular in scandinavia. Meanwhile Tesla announced a new versions of their model S sedan, the D with dual motors and four wheel drive. It's faster than the previous version and has a very advanced autopilot feature. In autopilot it reads speed limit signs and uses long range ultrasonic sonar to avoid obstacles. If you can't find it in the parking lot you can call it up on the internet from your phone and tell it to come to you, driverless. Why walk out in the rain when your car can pick up at the Nordstrom door? Or step out of the car in your driveway and tell it to park itself in your garage. Whatever. If I'm still alive, I'll still be splitting lanes on my motorcycle.

On Monday the Supreme Court refused to hear cases from Indiana, Oklahoma, Utah, Virginia and Wisconsin on gay marriage. You may recall that the feds insisted that Utah define marriage in their constitution as between one man and one woman in order to become a state. Now the feds have found that that clause is unconstitutional. This is it: when Oklahoma and Utah have to perform gay marriages, everyone does. Gay marriage will be legal in all 50 states by the end of 2015, I guarantee it. Meanwhile half of republicans are moving on, like Scott Walker (governor Wisconsin) who said "For us, it's over in Wisconsin. To me, I'd rather be talking in the future now more about our jobs plan and our plan for the future of the state." The other half think this will be a hot button issue in 2016, and no presidential candidate will be nominated unless he backs a constitutional amendment making marriage state law only. I got bad news for Ralph Reed and his Faith and Freedom Coalition: I don't like how this was done so undemocratically, but it's done. The poll numbers are clear, it's over, it won't be reversed in my lifetime. All he's going to accomplish is to alienate young voters.

Warren Buffet, the Oracle of Omaha, said this week, "Hillary is going to run. She's going to announce it as late as possible. Hillary is going to win. I will bet money on it. I don't do that easily."

Three Japanese physicists have won the Nobel prize for inventing blue LEDs. There's no such thing as white LEDs; what those actually are is an array of red, green and blue LEDs. Personally, I don't get this award; I just can't see blue LEDs as being comparable to general relativity, quantum field theory, the Higgs particle. . . but then if you go to any physics department and chat about the Nobel prize, quickly you'll hear, "It's awarded by the Swedish academy of Science. Who are these guys? Has anyone every heard of them? What have they done?" Einstein was proposed for the Nobel prize pretty much every year from about 1908 until 1920 and never won. There was a guy on the Swedish committee who blocked it, saying, "This is not science, it's Jewish science." That guy, what kind of scientist was he? A dentist. Einstein finally got the award when Sommerfeld, a previous winner, went to the committee and said, "Look, everyone alive knows Einstein is the greatest living physicist. At this point if you don't give him the award, you're just making the award worthless." Einstein was given the 1921 award.

Scientists at the University of Southampton studied 2,060 people who suffered cardiac arrests at 15 hospitals across Britain, Austria, and the United States. Of the 330 who survived, 140 said they had experienced some kind of awareness while being resuscitated, when they were clinically dead. One 57-year-old man described the noise of the machines and what the medical staff were doing during this time. Dr. Sam Parnia, who led the study, told the Daily Telegraph: "The man described everything that had happened in the room, but importantly, he heard two beeps from a machine that makes a noise at three minute intervals. So we could time how long the experience lasted. He seemed very credible, and everything that he said had happened to him had actually happened." Dr.Parnis further said, "We know the brain can't function when the heart has stopped beating. But in this case, conscious awareness appears to have continued for up to three minutes into the period when the heart wasn't beating, even though the brain typically shuts down within 20 to 30 seconds after the heart has stopped. There is no moment of death; it begins when your heart stops, and goes on for a period of time"

It's October, pumpkin time. There is absolutely no real pumpkin in a Starbucks Pumpkin Spice Latte. Pumpkin Spice Lattes were named after the spice mix used in pumpkin pie — cinnamon, cloves, ginger and nutmeg. Most pumpkin pies aren't made with real pumpkin, either. Most are made with Libby's Select Pumpkin Mix, which is made with Libby's specially developed "Dickinson pumpkins," a type of squash known as Cucurbita Moschata.

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