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Mark's Market Blog

10-18-15: Markets are up all over!

By Mark Lawrence

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Inventories have risen to levels associated with the unset of a recession. Corporate profits and industrial production are off. Business to business sales are down. And Moody's has issued a recession warning. Are we headed into a recession? History tells us that economists are terrible at predicting recessions, and in fact have only about a 50-50 track record when we're two quarters into a recession. It would be the height of hubris for me to make a call. No prob, here's my call: I still don't see the US economy in trouble. The US economy is 70% driven by consumers, and I'm pretty sure from running my own company and talking to other businessmen that the American consumer is doing ok.

S&P 500 April 25 2014 to October 16 2015

The S&P has recovered almost to the key resistance level of 2040 - we're at 2033, about 0.3% below resistance. For almost a year the S&P has had a strong correlation with the Yen, the S&P going up when the yen went down. This was thought to reflect a huge carry trade: borrow cheap money in Japan, buy S&P shares, later sell the S&P at a profit and make even more money repaying the loan with cheaper yen. Now the yen is strengthening, which would mean the S&P should be going down if it's the Japan carry trade that's fueling this recovery.

China's stock market appears to be recovering. It was stuck for about a month between 3000 and 3200 as government intervention held it above the 3000 level. Now it has broken out to nearly 3400. I don't think this sustainable, as I think it needs to drop below 2000 before valuations make any sense and it can be said the market has cleared.

The European Central Bank is unhappy that their massive dose of QE is failing: inflation in Europe is not increasing. So members of the ECB central committee are starting to say in public that perhaps what's needed is an even larger version of their failing program. There will be a recession soon, perhaps within the next 12 months, and when that happens expect the ECB to both enlarge and extend their current $68 billion per month program. They're also mentioning the fed in their speeches, noting that no one has ever taken an economy off a long term of zero interest rates, and no one knows what will happen, so they urge the fed to do nothing. Quit smoking, quit taking heroin or cocaine, quit drinking six cups of coffee every morning, you feel awful for a while. Raising interest rates is going to be just like that.

Angela Merkel recently said Germany, a nation of 80 million, would take in 800,000 refugees this year and half a million a year every year for the next 20. Support for this in Germany is, predictably, dropping like a rock. 56% of Germans believe there are already too many refugees in the country and less than 20% think Germany can successfully take in more. In my experience closed groups are not stable: you need to bring in new blood or you stagnate and eventually collapse. But it seems obvious to me that as a country the immigrants you want are the ones that are young 20-somethings that are educated, motivated, looking to work and improve their lives. I find it curious that many liberals would love to find a way to outlaw christianity and think the perfect way to reduce the impact of God on society is to increase the impact of Al-lah on society. The immigrant thing is getting a bit ugly in the US, and I predict it's going to get even uglier in Europe.

The Chinese Academy of Sciences just released a paper on global warming. They claim that continued global warming would be good for China - something I've noted a few times in this blog. The paper says monsoons and flooding in southern China would decrease, and rain would increase in northern China. Currently Beijing is hot and dry most of the year and has a serious and growing water problem. The Academy paper suggests that continued global warming will bring China's rice region north all the way to the Great Wall, and that this is likely to happen soon. If you're a global warming believer, then I'm afraid you can cross China off your list of reliable partners. They already have economic and social reasons to keep burning massive amounts of coal; now they think they have an environmental reason.

There are 123,800 ultra-high-net worth (UHNW) individuals in the world, according to Credit Suisse's 2015 Global Wealth Report. These folks have a net worth of over $50 million. Furthermore, about 44,900 of them have a net worth of at least $100 million, and 4,500 have a assets worth of $500 million or more. Make me president and we'll have a wealth tax on assets over $100 million and high income tax rates on income over $20 million. And that carry interest deduction? Forget that, Wall Street will start paying actual taxes instead of campaign contributions.

John Kerry and Senate democrats are pushing a bill to spend $1 billion to assist in the relocation of Syrian refugees. They also want to increase the number of Syrian muslims the US takes in over the next two years to as many as 250,000. It's been estimated that if we increase the number of refugees as Kerry wishes, the bill will easily be double the $1 billion they seek.

The EU specifically outlawed "defeat devices" that let cars sense when they were being tested and change their emissions. Four years later the EU put out a report that portable emissions measurement systems showed road emissions were up to 14x EU limits. The EU was apparently perfectly aware that Volkswagen was flaunting the standards. When asked why they had taken no action, the EU's pollution commission said enforcement was up to the member states. Now we're negotiating a "trade agreement" with Europe, the Transatlantic Trade and Investment Partnership, This agreement is substantially secret, even from politicians, but some parts have been leaked, including a portion that allowed mutual recognition of product standards and the rights of companies to use which ever standard they prefer. So if the TTIP gets signed and car companies don't like the US EPA standards, they can buy off Brussels and use their standards. Volkswagen funds 43 lobbyists in Brussels and has been spending about $5 million per year making sure that Brussels does the testing but the member states are responsible for enforcement.

Walmart, our #1 employer, has their shares drop by 10% on wednesday on no particular news. They said in their shareholders meeting that their capital spending would rise next year by $11 billion, but those new capital investments turn out to be higher wages and training - neither of which may be depreciated and neither of which clearly leads to an increase in future profits. Walmart projects that their profits will fall between 6% and 12% next year. Walmart's customers - the 80% of our country that hasn't been helped in the slightest by the Fed's $5 trillion Wall street bailout - are tapped out, and generating growth from them is proving impossible. Walmart also announced a $20 billion share buyback scheme - considered a trick to goose the share price in the short term so that executive stock options are more valuable, but a waste of investment cash in the longer run. In Walmart's last three fiscal years their profits have dropped by 3.7%, but thanks to the Fed producing an overheated stock market their share price has increased by 75% in the same time frame.

Boeing, our #1 exporter also had shares their drop, by 4.3% as the chairman of Delta noted in his earnings call that there were a lot of 777 leases expiring in the next couple of years and Delta would be shopping for cheap used airplanes. This calls into question Boeing's investment in 777 production and their forecast of selling a bit over eight 777s per month for the foreseeable future. Analysts agree that it will be a buyer's market for used 777s and A320s.

The People's Republic of California is apparently going to have a ballot measure next year to ban the possession of large capacity magazines (it's already illegal to buy them, now it will apparently be illegal to own them); to require background checks to purchase ammunition; and to fund a program to confiscate the guns of convicted felons (it's already illegal for felons to possess guns, and this is the one part of the bill I can agree with.) Without question the democrat super majority that runs this state is looking to edge towards outlawing guns entirely.

Wanna grow an economy quickly? To employ people you need someone spending money, but to have someone spending money you need to employ people. The chicken and egg thing. The US figured out a cute solution after WW II: we had our banks create massive amounts of money out of thin air and lent it to everyone, for example using the GI bill to send hundreds of thousands to college and then help them buy homes. It worked great: our economy took off, inflation rose up a bit helping nudge people into spending instead of saving, and lowing the cost of the government's huge WW II debts. (I left out the part where we also did this at a time when oil and coal were dirt cheap so it was easy to make huge amounts of cheap power.) Now everyone wants to do it, 'cause it seems to mind bogglingly simple: lend a huge amount of money to anyone who wants to build something, and sit back and watch your economy take off. This time a lot of countries are doing it with logical and efficient central planning instead of capitalism's messy system of creative destruction. Instead of millions of small debtors who are striving to buy a house and a car, why not have just a few debtors building some really terrifically large thingies. How will it end? I think you all already know what I think, but my point today is just that this program of building airports where no one lands and cities where no one lives has been enormously popular: debt to GDP ratios keep climbing at a huge rate, even after the recent little debt problem we had in 2008. Soon we're going to see a bunch of emerging economies including China wrestle with huge debts, much of it dollar denominated, during a time when the dollar is shooting up and deflation has taken hold of the world like a cat playing with an exhausted mouse. And that debt crisis we just survived, did we learn anything? Nope.

Back in the 70s when Mao was running the Cultural Revolution China build many re-education parks where intellectuals would be sent to learn how to grow rice by hand and become truly useful citizens. China is at it again - they're building large numbers of huge education parks, but this time they want to train hundreds of thousands to be machinists and programmers and engineers and bookkeepers. As of 2010, only 24% of China's workforce had attended high school. A nation of 1.2 billion has a severe shortage of skilled workers. Unfortunately for them this shortage is also showing up in their schools: fewer than 10% of their computer teachers have ever had a job using computers.

As of last month we have located 1,892 planets outside of our solar system. We do this by watching stars closely for a long time. When a planet comes exactly between the earth and the star it makes a tiny partial eclipse, blocking a fraction of 1% of the star's light. A really huge planet like Jupiter orbiting very close in like where Mercury is in our system may block as much as 1% of the star's light. But now we've found an exception: a star with the completely unromantic name of KIC 8462852 is having its light blocked by as much as 15% to 22%. And a planet will cause the light to dim on a fixed schedule, once per orbit like a clock. This star is dimming without a schedule. Astronomers just love things like this, and they love speculating wildly on what it is. 50 years ago when they found the first neutron stars using the brand new radio telescope technology they initially thought they had found the ever- elusive LGMs - Little Green Men. Later they figured out that the signals they had found were too precisely regular to have been made with electronics, and a bit after that we figured out the signals were from very quickly spinning tiny burnt out stars with huge magnetic fields. Today the speculation is we're seeing a star where there's an advanced civilization building a Dyson sphere - a huge belt of solar panels orbiting the star to gather immense amounts of energy. Unfortunately, a Dyson sphere would also be in orbit and would also show periodic behavior so precise that only gravity can make it. It's exciting times to be an astronomer.

Perhaps the worst component of air pollution is very small particles in the air. These particles mostly come from burning coal, diesel and kerosene. The worst of these particles are those under 2.5 microns which become lodged in the lungs and cause asthma and lung cancer. These are called Particulate Matter 2.5, or PM 2.5 for short. If you measure up to 10 microns you call that PM 10. The density of these particles is measured in micrograms per cubic meter; the World Health Organization says this number should not exceed 10. Here's the worst cities in the world if you're planning on inhaling:

Country City PM 2.5PM 10
Iran Ahvaz 70 320
Bangladesh Khulna 70 102
Bangladesh Rajshahi 70 195
China Lanzhou 71 155
Turkey Osmaniye 73 109
Egypt Cairo 73 135
India Bhopal 75 171
Turkey Afyon 75 112
India Chandrapur 76 174
Egypt Delta cities 76 140
India Dehradun 77 175
Bangladesh Barisal 77 160
Turkey Batman 77 115
Mongolia Darkhan 80 174
Qatar Al Wakrah 85 152
India Jodhpur 86 196
Bangladesh Dhaka 86 180
Afghanistan Kabul 86 260
Bangladesh Gazipur 87 166
Country City PM 2.5PM 10
India Agra 88 200
India Khanna 88 200
India Allahabad 88 202
Bangladesh Narayonganj 89 181
Turkey Igdir 90 135
India Ludhiana 91 207
India Amritsar 92 210
India Kanpur 93 212
Qatar Doha 93 168
India Firozabad 96 219
India Lucknow 96 219
India Ahmedabad 100 67
Iran Khoramabad 102 121
Pakistan Rawalpindi 107 448
Pakistan Peshwar 111 540
Pakistan Karachi 117 273
India Raipur 134 305
India Gwalior 144 329
India Patna 149 164
India Delhi 153 286

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