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Mark's Market Blog

10-23-10: The Government Supports (Half of) Everyone.

By Mark Lawrence

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The Frankenstein market continues to stagger upwards, this week at a bit slower pace. What we're seeing here is asset inflation - all that money the Fed is printing has to go somewhere, and it's certainly not in my pocket or helping keep food or gas prices down. It's being funneled by the banks into various investment markets - bonds, stocks, international markets. The effect is getting so large that several countries have enacted capital transfer taxes or limits - if Thailand sells their government bonds to us, Thai jobs will follow. So they put a 15% tax on foreign purchases of Thai bonds a week ago, and are even now considering raising it.

S&P 500 May 2 2010 to October 22 2010

One week to go to elections. The house is all but certain to become republican. For the first time RealClearPolitics is forecasting a republican majority without even counting the too close to call elections. The senate is moving towards being in play: 50-50 would be a surprise, but not a shock. Republicans are likely to take 30+ of the governors races. Governors races are important, as immediately after a census most states redraw their districts. New district lines can have a huge effect on party representation for the next ten years.

Gallup released their unemployment figures. They showed a large upswing in unemployment in the 2nd half of September that would not have been caught in the government's October report. Expect the unemployment report in November, just after the election, to show 10% - back to double digits. The brunt of this "mancession" continues to be taken by the construction industry, with the result that male unemployment is more than double female unemployment - men have lost 219 jobs for every 100 lost by women since late 2007. It's well known that the divorce rate skyrockets when the husband's income drops below 1.5 times the wife's income. Persistent male unemployment in construction; most hiring is of women to work in government or health care jobs; women are 60% of our college undergraduates; among recent college graduates in large cities, women now earn more than men: the American family as currently constructed is under siege. I believe we can forecast that a record proportion of our children will be raised by single moms this decade.

Male v. Female Unemployment 2002-2010

The states are projected to get a new hit this winter. Foreclosures are increasing, and more and more people have simply stopped paying their mortgage. My neighbor hasn't paid hers in about 8 months, even though she has a couple people renting rooms from her - nice job if you can get it, pocketing rent on the bank's property. So, when December 15th comes around, do you suppose she'll pay her property tax? Expect property taxes to take a double hit this year as values decline and more people simply don't pay them.

Last week I talked about foreclosuregate, where it's not clear who owns the titles of US homes. BofA announced Monday that they had their paperwork sorted out and they were resuming foreclosures. I also noted there were serious questions about some of the bonds they sold, and the possibility that they would be forced to buy some back. Tuesday the New York Federal Reserve Bank as part of a consortium have launched a lawsuit against BofA regarding Countrywide mortgages. All told, these parties may be looking for as much as $80 billion in reimbursements for soured mortgages. This is extremely surprising, as the NY Fed is mostly charged with keeping banks healthy, not with suing them. Countrywide was the originator on $1.4T of mortgages, so BofAs exposure could easily run into hundreds of billions. If this suit is found to have substantial merit, BofA is basically bankrupt and JPMorgan Chase and Citi will follow. If banks are leading the stock market, as I claim, then the direction is becoming clear.

The gravity of the situation is highlighted by the fact that the New York Federal reserve bank and Freddie Mac along with giant investment houses such as Pimco, Blackrock, Neuberger Berman and Met Life, sued Bank of America to take back securitized mortgages that they bought from the bank or its Countrywide subsidiary. Other leading banks may subsequently be sued as well, and other purchasers are likely to join the lawsuits. In addition the banks are being investigated by the FBI, various federal regulatory agencies and most of the statesí attorney-generals. With the huge sums of money involved, it does not take much imagination to realize that this could turn out to be another big threat to the financial system.

Six more banks closed this week, 138 on the year. Next year will be bad too.

A couple weeks ago I noted that China cut off shipments of rare earths to Japan, related to various diplomatic problems between the two countries. Rare earth shipments to Japan have not resumed. In fact, China has now cut the US off from several rare earths. A couple pounds of rare earths go into each electric car (Prius, Nissan Leaf, GM Volt). A metric ton of rare earths go into each 1 megawatt windmill. China intends to dominate battery and electric motor / generator related industries, and get their way on some political scrums along the way. Several mines around the world are gearing up to produce rare earths, but none will be productive before late 2012. About five to ten years ago China started dumping rare earths at very low prices, resulting in the shut-down of nearly every rare earth mine outside of China. This will get worse before it gets better.

The Congressional Budget Office released a report on Social Security showing that age warfare is in our future. The results of the CBO results: If you were born in the 1940ís the probability that you will receive 100% of your scheduled benefits is nearly 100%. If you were born in the Sixties the odds are 76% that you will get all of your scheduled benefits. However, if you were born in the Eighties you have a 13% probability that you will get what you are currently expecting from SS. If you were born after 1990 you have no statistical chance of getting what you are paying for, instead the CBO estimates that benefits will be cut by 30% to 40%.

FERS, the Federal Employee Retirement System, is taking in $4B in contributions from current workers, and paying out $70B in benefits to retirees. Contributions from the Federal government are another $17B. This is another train wreck in the making. This government pension issue is likely to continue to simmer for a couple more years, but by 2014 or so many large states are basically out of money. So somewhere in 2013-2015 I expect all the plans will be grouped together and nationalized. After all, we're Americans: we don't even start shopping for a parachute until we've already stepped off the cliff.

Iceland had a near-collapse of their entire banking industry two years ago. How's things there today? Inflation is running at 15% to 20% per year. Incomes are down by 20%. 63% of all Iceland mortgages are under water. 40% of all Iceland households are technically bankrupt, that is they have substantial negative net worth.

The government has become a central part of the lives of half our citizens, with multiple programs feeding out support money. Here's a quick look, thanks to the Heritage Foundation, at several of these:

Agriculture Payments 1962-2010. In addition to putting billions of gallons of corn alcohol into our gas tanks, in the face of highly inflated food prices the government simply continues to pay farm support. Jim Rodgers says, "Want to be rich in the coming decade? Move to Illinois and become a farmer. Don't want to farm? Open a Masarati dealership and sell fast cars to farmers.

Education 1962-2010 - No Teacher Left Behind

Social Security 1962-2010 - Old people vote.

Welfare 1962-2010 - The recession is swelling the ranks of the poor. So, perhaps, is government policy.

Housing Assistance 1962-2010 - Poor people gotta live somewhere, especially when their homes are foreclosed.

Medicare / Medicaid 1962-2010 - Doctors, Lawyers and Drug Companies need your support too.

Filing No Tax Return 1962-2010 - More and more people don't even pretend to pull their own weight.

French president Sarkozy announced that the French retirement age will raise from 60 to 62. They have no money to pay 60 year olds to sit in cafes and drink coffee. Everyone is rioting - those 50+ because they don't want to work two more years, those 15-35 because if the old people don't retire, there will be no jobs. Unemployment in France is 25% for their youth. France has not created any net new jobs in several decades, and early retirement is one way they spread their few jobs around.

The Development Relief and Education for Alien Minors (DREAM) Act would allow undocumented (illegal alien) high-school graduates to gain citizenship if they either attend college for two years or serve two years in the military. This act, currently stalled in congress, has a couple purposes: 1) get citizenship for a lot of illegals and 2) get more recruits for the military, which is having trouble filling their ranks. Like many conservatives, I think this proposal has some merits. I would be in favor of a program where the requirement was four years military service (the standard enlistment) or a four year college degree from an accredited university. Two years of college means they attend a free junior college for a couple years taking choir, drama and PE and become citizens - this just doesn't work for me.

How do junior colleges currently stack up? Seventy percent of students seeking AA (two year) degrees at California's community colleges did not manage to attain them or transfer to four-year universities within six years. Only about 40% of 250,000 students tracked between 2003 and 2009 had earned at least 30 college credits, roughly equivalent to completing a freshman year at a university, the minimum needed to provide an economic boost in jobs that require some college experience. Nearly 2.8 million students are enrolled in California's 112 community colleges, about 75% of public college students in California. Students who pass college level math and English early in their college careers and complete at least 20 credits in their first year of enrollment had higher rates of success.

It's clear that we need revisions in the requirements for AA degrees or transfer programs, insuring that these more serious students are getting the college level math, english, history, and science courses associated with success in the work place. By the way, I say these things from a position of some experience: I started my college experience at Fullerton junior college, basically completing my freshman year of college there; I've continued to take classes at junior colleges such as business law and singing; I'm a state certified teacher for California junior colleges and have taught several classes at California junior colleges; my son Richard completed his freshman and sophomore years of college at a junior college and is now a junior at the University of California; and my son Steven is currently a freshman at a junior college. I think this institution is fantastic if used correctly as a stepping stone into a university or for continued adult education, and a complete waste of time if used as an extra year or two of elective courses tacked on to high school.

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