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Mark's Market Blog

10-19-14: Almost a correction.

By Mark Lawrence

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The S&P made it almost to 10% down, then Thursday and Friday recovered a bit. This isn't yet officially a correction. Will it be? Yes. I think we're only about half way through this thing in both time and percentage. Jim Cramer says Friday constitutes a tradable bottom, as we've made progress on ebola, ISIL & Ukraine, oil has bottomed out, all stocks got hit, tech stocks bottomed out. Apparently he has much better eyesight than I because I don't see any of that stuff happening.

S&P 500 April 26 2014 to October 17 2014

QE1 ended. The S&P dropped 20% and the Fed started QE2. QE2 ended, the S&P dropped 20%, and the Fed started QE3. That ended, 20% drop, QE4. Now QE4 is ending and we're about 10% down and dropping. Who could have predicted it? Bill Fleckenstein, Yet Another Wall Street Talking Head (YAWSTH) said, "There is no way on Earth that the S&P is going to stay near 2,000 without the Fed printing money. They tried to exit from QE1 and QE2 and it failed and the market tanked. Does anybody really think that they can print $1.5 trillion over the space of a year and a half, and then stop and not have the markets go down?"

It's October and the government tells us this month how great they are. On Wednesday, the Treasury Department released its statement for fiscal year 2014. Receipts rose $247 billion to $3,021 billion, outlays rose $50 billion to $3,504 billion for a deficit of $483 billion. At 2.8% of GDP, as the media gleefully pointed out, proportionately the smallest since 2007. And to fill that $483 billion hole, the US government borrowed $1.086 trillion. $7,750 per taxpayer. Imagine that - we're being lied to.

A second nurse in Dallas has been diagnosed with Ebola. So here's where we're at: a Liberian with Ebola flies to Dallas to see if he can get married to his ex-girlfriend from over a decade ago. He checks into a Dallas hospital. He dies. Now two Americans have ebola as a result of treating him. And liberals tell us that we cannot bar West Africans from coming to the US 'cause that will just make things worse. Bad news: things are worse. The CDC is investigating how the two nurses contracted the disease. Turns out they're not sure, they think their procedures should have protected the nurses.

Ebola deaths world wide to date: 4700. WHO says we could easily be looking at 10,000 new cases a week by December. African hospitals are completely unequipped to handle this, many lacking soap, clean needles, running water. Because so many hospitals are seen by the locals as death traps (my friend got Ebola, went to the hospital and died), many refuse to go to the hospital at all, thereby spreading the disease faster by staying home. Average IQ in Guinea and Sierra Leone: 67. 70 is routinely considered the cutoff for basic literacy. There are currently about 10,000 total ebola patients being handled by about 300 native doctors - 33 patients per doctor. Imagine when there are 10,000 new cases per week. Estimated cost of 50,000 hospital beds for the region with associated doctors and nurses etc, about $1 billion per month. Where will the money, doctors, nurses, sheets, buildings, beds, support personnel come from? This epidemic is going to get much, much worse.

Ebola works a little bit like HIV - it first attacks your body's immune system, then takes on your blood vessels after your immune system is unable to respond to it. Culturally ebola works in a similar fashion - it's attacking the extremely sparse health care organizations in West Africa, taking up beds and killing health care workers. Some estimate for everyone dead of ebola there are several others dead of malaria and diarrhea due to not having access to health care right now.

Russian gas is transported to Europe through Ukraine pipelines. Putin says that if the Ukraine steels gas from the pipeline, he will reduce supplies to Europe.

Interest rates are starting to rise on Europe's periphery. Greece rates, for example, are going exponential. Portugal, Spain and Italy are also showing signs that the bond market's love affair, arranged by Draghi and the ECB, has hit a rough patch. Is this a short term issue, or are we headed for yet another Europe banking crisis? Stay tuned. . .

As the dollar rises in value so do Chinese exports, which are up 15% year on year. Cutting QE and eventually raising US interest rates is going to be great for China.

China is slowing, meandering towards banking and property crises, and having productivity and profit problems. I believe this will continue for some time - China's vast foreign reserves will see them through a lot of turmoil before they crack. However the day must come, and I think soon, when they will have to start to dip into those reserves to preserve the stability of their government. China has a long history of booms and collapses, this is nothing extraordinary for them. Right now China is a mass of conflicting data, some positive, some very negative. Into this morass, the China central bank has started printing again, trying to keep up with the Japanese and Europeans. They're injecting $65 billion of liquidity into their major banks. One day we're all going to drown in this massive, unprecedented world wide liquidity, but not just yet.

In an interview last weekend, Elizabeth Warren, my favorite liberal senator, said, "He [Obama] picked his economic team and when the going got tough, his economic team picked Wall Street." The interviewer says that it seems Obama's economic team "just about every time sided with Wall Street." Warren agreed, "That's right. They protected Wall Street. Not families who were losing their homes. Not people who lost their jobs. Not young people who were struggling to get an education. And it happened over and over and over."

Last week I noted the rising dollar would put pressure on the Fed to print more money. The Fed apparently agrees. San Francisco Fed President John Williams said, "If we really get a sustained, disinflationary forecast ... then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider."

Oil continues to drop, now quickly approaching $80. Some are claiming that this is Saudi Arabia trying to kill off the US fracking boom, as somewhere between $65 and $80 oil most fracking sites become uneconomic. I'm not sure I credit the Saudis with that much power or foresight. In any case the fracking oil has sitting there for a few million years, delaying pumping it for a few years doesn't change things in the long run.

The Washington Post has a story that highlights some of the more disturbing aspects of a police tactic known as civil forfeiture, which lets cops make money from seizing cash and property from alleged criminals. Police can seize your assets even if you're never convicted of a crime as long as cops believe you obtained the property illegally. The Washington Post examined 43,000 reports on asset seizures dating back to 2008, which reported $2.5 billion in spending from these seizures. According to the Post's analysis, 81% of that spending came from seizures in which the property or cash owners were never indicted.

Federal safety regulations say that a yellow light should last 3 seconds. Chicago recently allowed a private company to install red light cameras at many of their intersections and reset the yellow lights to 2.9 seconds. They took in $8 million in red light violations in the last six months. Recently under complaints from judges, Chicago put the yellows back to 3 seconds. Now they're trying to find a way to not have to refund the $8 million.

Sweden says they have pictures of some sort of Russian sub operating in their waters and they're out to catch it. Sweden has a nice little defense department going - they have their own home-made extremely quiet submarines and radar absorbing ships. The pictures are in what Sweden says is "a sensitive area."

Lockheed claims a huge breakthrough in fusion reactors. They say they have a self-regulating magnetic containment field that cuts power requirements dramatically. They say they have something commercially feasible which is small - seven feet by ten feet - and produces energy with almost no radioactive waste. They claim they can have a prototype working in five years and could be manufacturing reactors in ten years. I dunno, I've been hearing about fusion my entire life. I'll believe it when I see it.

Fun Science Facts: It's now been revealed by scientists that sexual intercourse was invented 385 million years ago in Scotland. I suppose when it basically either rains or snows or both every single day of the year you have to find something to occupy yourself. The first happy critters were some armored fish. These fish - placoderms - apparently invented paired limbs, jaws, teeth, and grabbing females. Apparently the first pair of arms was evolved for just that purpose. We don't yet know if they were the first critters to bite their women on the neck, but they were certainly the first equipped to do so.

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