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Mark's Market Blog

10-9-10: Drugs and Education: Mark on a Soap Box.

By Mark Lawrence

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The markets continued trending up on increasing volatility and decreasing volume. Soon Bernanke and his trained bankers will be the only people left trading stocks. Increasingly, this is not a market place for stocks, it's a casino at 5am, only the die-hard addicts with their dice and cigarettes and whiskeys remain. As Jack Nicholson put it, "Decent people shouldn't live here. They'd be happier somewhere else." I predict the market will continue to lurch and stagger upwards for a few more weeks, like Frankenstein's monster climbing a tower in a lightning storm. We all know how that ends. . .


S&P 500 April 18 2010 to October 8 2010

Obama is starting to feel some serious heat. Bob Woodward reports that Biden is near to being dumped, and we should expect the 2012 ticket will be Obama / Hillary. Personally I think VP is a step down from Sec.State. Maybe Hillary thinks a term as VP will seal the deal that she's next. Hillary will never be our president, any more than Sarah Palin will - both are far too polarizing. Obama is an excellent politician and without doubt sees clearly that Hillary appeals only to the left. Perhaps this move is to shore up his left flank when he moves to the center. Maybe he thinks Hillary can appeal to the center. Maybe Hillary comes equipped with $$$. I have to admit, I find this move confusing.

RealClearPolitics continues to forecast a republican controlled house after the next election, and surprisingly, this week for the first time forecasts a senate split 50-50. In this case the tie breaking vote is cast by Biden, so that's still a thin democratic majority. None the less, the country's distaste for deficits and handouts is palpable, and the democrats inability to adjust to this fact is stunning. I suppose 4 years ago democrats were saying something similar about Bush and republicans. We've spent a trillion dollars in the last 10 years propping up the defense industry and fighting wars that I frankly don't understand; we've spend another trillion dollars in the last three years bailing out monopoly bankers and wall street fat cats; we've let China and Germany bribe us with another trillion dollars to ship several million of our jobs to them; and we've spent another trillion dollars in the last 10 years paying exorbitant prices to pharmaceutical companies, hospital administrators and insurance companies. Every one of these travesties has broad bi-partisan appeal: throwing out the republicans changed nothing, and throwing out the democrats will also change nothing.

There are now 900 banks on the FDIC problem list, about 25% of all the banks in the US. The big four, BofA, Citi, Chase, Wells Fargo, have jumped from 22% of all deposits in 2000 to 39% of all deposits today. Too big to fail is turning into too big to believe. No matter that Obama says "I didn't become president to help out a bunch of fat cat bankers," the fact is Wall Street has prospered under his watch at the expense of taxpayers.

September's unemployment numbers came out. Official unemployment held steady at 9.6%. Absent the harvest and farm workers, private employment dropped - the first such drop since 2009. When you include people who have given up and stopped looking for jobs, "U6" unemployment, that jumped up from 16.7% to 17.1%. "Discouraged workers" have more than doubled in the past year from 503,000 to a bit over 1,200,000. The private sector simply is not hiring in any substantial way - uncertainty over the economy, health care costs and taxes have frozen corporate types. Census jobs continue to be lost, and state and local governments are starting to layoff. Next year, states are going to desperately need a bailout. What do you suppose the chances are that a Republican majority house agrees to spend $500 billion or so to maintain union government jobs in historically liberal states like California, New York, Illinois? Expect a bloodbath next year. If I were a vampire, Sacramento is definitely where I want to be.


S&P 500 April 18 2010 to October 8 2010

Hal Lewis has resigned in protest from the American Physical Society, over their support for global warming and refusal to follow their own constitution and convene an investigative committee. Dr. Lewis claims that money and politics are perverting the APS. He's right.

Currency wars continue, as everyone races the US to the bottom. Currently we're winning, as no one can print money as fast as the Fed. To lower your currency's value, thereby making your exports cheaper and imports more expensive, you print up a bunch of your own money and use it to buy currency and notes from other countries. So in this race to drop currency values more/faster than anyone else, enormous amounts of money are being printed up everywhere. Who else is winning? China, as their yuan is pegged to our dollar, so the more we drop, the more competitive they get; and OPEC, who just raises their prices to compensate. As of this instant, the big losers are 1) future taxpayers, who will have to pay for this someday in increased taxes and/or inflation; and 2) Europe, who doesn't have a central government capable of making a quick decision to print. The Euro is skyrocketing towards $1.40, and German sales and profits are eroding. Other European countries (Spain, Italy, Greece etc) are seeing their products being priced completely out of the market just when they most desperately need growth. Today, the bet would be that Europe will fire the first protectionist shot. Personally, I'm doing well - I'm shipping a surprising number of windshields to Europe, given that motorcycle riding season is about over there. And I hired an employee recently. Obama should make me his poster boy. When the bill comes due for all this world-wide printing, where will you keep your assets to protect against inflation? I'm not entirely sure right now, but gold, Swiss franks and Canadian dollars currently look pretty good. Beach front property is always good, they stopped making it a couple hundred billion years ago.

Apple is forecasting sales of 45 million IPads next year. This means in 2011, Apple will generate nearly as much revenue from IPad sales as the entire company generated in 2008. Conclusions: 1) Absent a market melt-down, Apple stock is headed for $500; 2) prepare for a slew of imitators; 3) be the last on your block to own one (it's already 'way too late to be the first); 4) Microsoft is toast. They've got a demo of a 200 pound $80,000 coffee table that will soon do most of what a $500 IPad already delivers. Not quite as portable though. Utilities don't innovate, and Microsoft is your Certified Windows Provider.

Eddy Elfenbein just posted an interesting model for the price of gold. Whenever the dollarís real short-term interest rate is below 2%, gold rallies. Whenever the real short-term rate is above 2%, the price of gold falls. Gold holds steady at the equilibrium rate of 2%. For every one percentage point real rates differ from 2%, gold moves by eight times that amount. So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (thatís been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate. Since Bernanke and friends are committed to keeping interest rates artificially low for the foreseeable future, this model predicts gold will appreciate at 10% to 15% for the same period. If Bernanke keeps interest rates at their current level for a year as projected, this model predicts gold is at $1550 to $1600 per ounce, up from today's $1330. I'm not personally a big fan of gold. Industrial uses comprise a couple percent of what we mine; jewelry another few percent. The rest, as Warren Buffet likes to say, we dig up so that we can bury again.


Modeling the price of gold with real interest rates

Costco saw a 16% increase in sales in its fiscal Q4. The company's revenue increased to $24.13 billion for the fiscal year, up from $22.38 billion in the previous year. This is what happens in a recession: people are loath to live with less "stuff," so they accept a drop in service in exchange for a drop in prices. Before the Great Depression there was no such thing as supermarkets, people bought their groceries at four different stores. Before the 1972 recession, there was no such thing as self-serve gas, before the 1980 recession there was no such thing as Costco or Sam's club. Today Walmart stores are getting huge, selling a lower selection of products than other grocery stores and incredibly shoddy clothing, but at low prices. Unemployment keeps going up, and the number of people employed to make our lives easier keeps going down. This makes painfully clear, to my eyes, that the minimum wage needs to drop or we need to seriously reorganize our economy with much higher trade barriers. There are three billion people in India and Asia who are very happy to work for $150 to $250 per month, that is about $1 to $1.50 per hour. If you connect two bathtubs with a tube, the water level equalizes. Container ships are the connecting tube, and our unskilled workers will equalize at about $2 per hour so long as that tube is in place. Any talk of solutions to unemployment and the trade deficit must take this into account.

Today I'm going to indulge myself and include a couple social rants.

The War On Drugs

We're living in a 50 year experiment in outlawing drugs. California is about to vote on legalizing marijuana, the first step in ending Prohibition II. This drug prohibition is resulting in the near complete destruction of several other countries - Afghanistan, Columbia, Mexico to name a few. It's also resulting in as many of half our minority young men spending several formative years in jail at an average cost of about $40,000 per year, plus the highly likely destruction of their future economic life. We nearly all agree that 50 years into this experiment, the War on Drugs is not close to being won, to the contrary it looks unwinnable. What's the alternative?

Harvard economics professor Jeffrey Miron says all drugs should be legalized nationwide. "Legalizing drugs would save roughly $41.3 billion per year in government expenditure on enforcement of prohibition. Of these savings, $25.7 billion would accrue to state and local governments, while $15.6 billion would accrue to the federal government." His report also estimates that drug legalization would yield tax revenue of $46.7 billion annually, assuming legal drugs were taxed at rates comparable to those on alcohol and tobacco. Approximately $8.7 billion of this revenue would result from legalization of marijuana and $38.0 billion from legalization of other drugs. Overall, a swing of roughly $88 billion per year. Even in today's world of trillion dollar deficits, that's real money.

Walk down any city street and you can already buy legal drugs in multiple establishments: Caffeine at Starbucks, nicotine at the supermarket, alcohol at bars and restaurants. No one robs a liqueur store to get $8 for a Starbucks double espresso. When Budweiser and Coors have a dispute, they work it out with advertising and lawyers, not gangs and guns. Supermarkets have a huge incentive to keep cigarettes and liqueur out of the hands of minors, and are substantially successful at this - certainly far more so than the federales are at keeping drugs away from high schools.

Our current drug policy doesn't work, Miron observes. Despite roughly $40 billion per year spent on enforcement and prosecution, drug use is still widespread. Meanwhile, because the drugs are illegal, they're dangerous, low-quality, and unregulated, and they generate zero tax revenue. Legalizing drugs would solve those problems, Miron says. It would help close the budget deficit. And it would eliminate a bizarre double standard, in which Americans are encouraged to drink and smoke themselves to death while guzzling addictive coffee and tea, but become criminals if they dare to get stoned. No one ever smoked a joint then went home and beat up their wife.

Personally, I would decriminalize most drugs immediately. I'd outlaw a few - brewing up crystal meth would be death penalty stuff in my world. Harder drugs like opiates would be sold at regulated stores and require a certificate from a doctor; to renew such a certificate you would have to accept a shot of depo-provera or equivalent to sterilize you for the duration of the certificate. I know this view is shocking to many, but imagine instead that drugs were legal and I proposed to outlaw them: to build a world where several countries were effectively ruled by drug lords, where half our children lived in neighborhoods where gunfire was a normal part of every weekend, their fathers were in jail, and joining a gang was their best shot at security. How beautiful does that world sound? I don't claim that legalizing drugs is a wonderful answer, I just claim that it would be a lot better than what we have now.

The War On Boys

The US is slipping badly in science education. Everyone is upset about this: the US economy is mostly about high tech inventions of one sort or another. No one seems to know what to do. I have an answer, but no one is going to like it.

1) Stop drugging our boys. Big Pharma has invented a disease, "ADD," which basically means young boys don't sit still like young girls do, and therefore need to be drugged into submission. Now that recess and gym are more or less illegal, it's turning out that about half our boys have ADD. When half of all boys have it, it's not a disease, it's just how boys are. Boys who are diagnosed with ADD have a lower graduation rate than boys who get arrested and/or involved with drugs. A diagnosis and treatment plan for ADD is an educational death sentence. ADD drugs make life easier for parents and teachers, and make lots of money for doctors and drug companies. In 95% or more of the cases, the drugs must stop, it's the schools that must improve.

2) Start educating our boys. Currently 60% of our college undergraduates are women. This is seen as a big win for women. I have some thoughts of my own on how big a win this will prove when these degreed women look for an equally educated husband, but that aside, the simple truth is women are not attracted to major in engineering, physics, mathematics, chemistry. I have no problem with women getting large numbers of degrees, but our men need to be educated too. Our girls are out-performing our boys by huge margins, and we still hear every day about some new program to give girls an equal chance.

3) Our public schools are mostly staffed by women - in fact, it's worse than that: our average public school teacher graduated in the bottom 3rd of their class from a bottom 3rd tier college. Our children are being educated by bottom 10% college graduates. Union rules say you have to let an English major teach physics if there are layoffs and she has seniority. We need to get some actual science majors into our high schools, and we need to pay them like science majors get paid, which is more than English majors get paid. The education unions must take second place to the welfare of our children. Socialism in the teaching ranks is stupifying our children.

4) There is a solidly held belief in this country that all children are alike, so if some do poorly at math that's due to parents or environment or bad teachers or inner city drug culture or outdated books or, well, anything but the idea that maybe some kids just aren't cut out for math. In the 60s, under pressure from Russia and Sputnik, we identified our brightest youth and got out of their way, resulting in Silicon Valley etc. Today we have "no child left behind," which I think means "no child gets ahead." The concept that some children are simply better at learning is repugnant to our society. Toffler pointed out that although we claim the point of our educational system is "the three Rs," in fact you can easily graduate high school without learning to read, write, or do arithmetic. The three lessons of our public school system are clearly: be on time; obey authority; complete senseless assignments. In short, if we're preparing our youth for anything, it's to be UAW auto assemblers or Teamster loading dock workers. Our brightest children need to be identified and put on an advanced college track. This does not mean "AP" courses taught by the same sub-mediocre numbed-out unionized teachers, it means real college courses taught at a real college pace from real college textbooks by teachers certified to teach at least at the junior college level. And when it turns out that our brightest kids are all Asians, Jews and Whites, we need to work to bring the remainder up to their level, not bring the bright ones down to the standardized test level and remove all challange from their lives.

Until Isaac Newton got to college he had access to almost no books other than the bible, his teachers were all ignorant preachers who taught that all knowledge was in the bible, his mother was substantially absent from his life, his father was dead, most of his neighbors had fetal alcohol syndrome. And absolutely no computer or internet access. In short, by today's standards, the worst of all possible ghetto environments. Today we would put Newton into Head Start, then free lunch and after school programs. He'd no doubt be given Welbutrin and Adderall for the depression and ADD caused by his broken family. He would certainly be diagnosed as schizophrenic (like all high-performance systems, stability was not one of Isaac's strong points). By the time we were done with him he would be lucky to get a job holding a ladle at a soup kitchen. Yup, we'd sure help him.

My children are doing just fine in math and science, but that's because in high school I put them on minimum day and had them take math and science at the local junior college. In the years before I got custody, they were diagnosed with ADD, drugged senseless, and flunked out of school. Richard had a .9 GPA and had been transferred to the special school for druggies and recalcitrants; Steven had a 1.8 GPA and was hot on Richard's heels. Now they're getting straight A's in college as physics and engineering majors, and ahead of their cohorts in units - this including Richard taking a semester off to go to Thailand. That is to say, they're doing fine because I got them off their drugs and out of the system. The very kids we most need to be educating for our future are the ones being drugged and destroyed by our anti-male culture. Not including my kids. Educating our girls is a fine idea, and I'm proud that we're doing it. Educating them at the expense of our boys is a travesty, a crime that may well prove the undoing of our society.

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