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Mark's Market Blog

10-22-13: Government Open for Business.

By Mark Lawrence

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Crisis Over!!! well, for a few weeks, anyway. The government is open, back to printing more debt. The S&P promptly hit a new Fed- induced all-time high. Of course the real problems still exist.


S&P 500 May 1 2012 to October 21 2013

In the deal to reopen government, the government is funded through Jan.15, the debt limit is raised until Feb.7. A committee will be set up to talk. (That's the one part I'm certain of, committees do talk.) People receiving Obamacare subsidies must verify income. Basically the republicans completely caved in. This month. But we're all set up for round two in January. Perhaps we'll do this every two months for the rest of eternity. Obama told the republicans, "You don't like a particular policy or a particular president? Then argue for your position. Go out there win an election." I don't see the republicans winning the presidency for an extended period, so your kids and my kids are going to inherit huge debt, high taxes, slow growing economy and inflation. Actually, that last wasn't really fair: the republicans have been just as bad at spending as the democrats, the argument between those two groups is what to spend it on. In the chart below we see that mandatory spending i.e. entitlements are on a path to bankrupt us all. And we're effectively trusting politicians to stave off this catastrophe before it actually hits. Good luck.

JP Morgan bank has been fined $13.5B for failing to warn investors about mortgage backed securities. That represents about half of their Fed-backed profits last year. A criminal investigation continues.

The jobs number came out and it was disappointing. Stocks promptly rose on expectations that the Fed would continue printing money. The stock market, alleged to be a predictor of the economy, now likes it best when the employment numbers are poor.

I took some heat last week for my claim that Janet Yellen was a "dove," that she would if anything print even more money than Bernanke with the claim that she was helping produce jobs. The Fed has stated very clearly that QE-3, the current round, will continue until unemployment is at about 6% - there can be no doubt that this is being sold to the public as being about jobs. Is it working? Below are three charts which show QE-1, QE-2, and QE-3 against unemployment, the S&P 500 stock index, the 10 year treasury rate and bank reserves. To date the Fed has taken on $4.5 trillion in new debt, debt which must be paid off at some point. If you can see any change in the jobs graph below that correlates with the beginning or end of QE, you have better eyes than me. I have been claiming for several years that we are in a Liquidity Trap, where additional moneys lent to the banks just gets hoarded in their vaults because there's no one to whom the banks wish to lend. The story is told below - We have taken on a bit over $4.5t in new debt just so that the banks have piles of money in their vaults. What's next? If the economy ever should truly recover to the point where the banks are willing to lend, or if Congress should pass some law requiring the banks to lend, that money could flow into our economy at record rates generating a level of inflation not seen since Zimbabwe or Weiner Germany. Although I don't expect this, if it were to happen I can't imagine the Fed could raise interest rates far or fast enough to stop the damage.

What is gold? Many say it's the only true form of money. Take a gold eagle into Walmart and try to buy some groceries if you believe that. Gold is a scarce commodity, valued for its appearance and the fact that it's chemically non-reactive. Is it scarce? Sortof - when the Earth formed, the very heavy gold all sunk to the core. Since the Earth cooled about 4 billion years ago, we have continued to be hit by asteroids. All the gold on the surface of the Earth, all the gold ever mined comes from these asteroid hits. If we could get the gold in the core of the Earth, there's enough down there to plate the entire surface of the earth 12 feet deep. What's gold for? We wear 43% around our necks, traditionally so that we can flee a bad government and take much of our savings with us. Another 47% is in bars, coins, ETFs and bank reserves, or as Warren Buffet puts it, we dig it up so that we can bury it again.

In Switzerland if you can get 100,000 signatures on an initiative then it goes on a federal ballot. If it passes on the ballot it becomes law. You can even use this process to amend the constitution. Two recent initiatives that are going to ballot: the 1:12 initiative, which says that the highest salary in a publicly traded Swiss company cannot be higher than 12 times the lowest salary. If your company's lowest paid worker makes $10 per hour, then the CEO is making about $250k / year under this proposed law. If it passes, expect a lot of Swiss companies to either go private or lose major executive talent. A second initiative, the "unconditional income," proposes that a third of Swiss GDP be distributed unconditionally to citizens in the form of a $2800 per month check for everyone. Daniel Straub, one of the people behind the initiative, says, "We are not proposing a minimum income we are proposing an unconditional income. A minimum wage reduces freedom because it is an additional rule. It tries to fix a system that has been outdated for a while. It is time to partly disconnect human labor and income. We are living in a time where machines do a lot of the manual labor." He continues, "I don't count this as government expenditure because it is immediately distributed to the people who live in this society. It means less government power because each individual can decide how to spend the money. A lot of people are stressed and there is a lot of fear. Our resources don't lead to the freedom they could. And I am not saying that this freedom is easy but it could lead to more meaningful lives. If more people start to ask what they really want to do with their lives, Switzerland will become an even more beautiful place to live."

Arian Foster, the Houston Texan's running back, is going to have an IPO. A new company, Fantex, is paying Foster $10m for a 20% stake in his future income, including football and endorsements. John Elway is on the board of directors. After the deal is done, Fantex will register shares of this contract as a stock whose price can go up and down. They hope to do deals with more athletes.

How to diagnose Alzheimer's: Get a teaspoon of peanut butter. Have your subject close their eyes and right nostril; slowly move the peanut butter near them until they say they can smell it. Repeat with the left nostril closed. Someone with Alzheimer's will smell the peanut butter 4" further away with their right nostril than with their left.

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