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Mark's Market Blog

11-11-11: The Death of Democracy.

By Mark Lawrence

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Another week, another pop up over the 200 day moving average and then pop back down. Really, this is quite insane. Even Jim Cramer of Mad Money, hardly a paragon of personally stability, says "In 31 years I've never seen markets this crazy." This week Italian bond yields shot up over 7%, indicating they were joining Greece in the list of Zombie economies, then dropped back down as the European Central Bank applied a temporary band-aid and bought perhaps $25 billion worth of Italian bonds. The Prime Ministers of both Italy and Greece resigned over European pressure.


S&P 500 May 19 2011 to November 11, 2011

US government spending about 23% of the US GDP. US personal income is now about 23% from government transfers. For most of my adult life that number has hovered between about 15% and 17%. The US government is now primarily in the business of redistributing wealth.


US Income Transfers as a percentage of personal income, 1959 to 2011

Fukushima follow up: debris from the tsunami is starting to wash up on US shores. What about radioactive ocean currents? We're not allowed to know. What we do know is that there continues to be a 24 mile wide evacuation zone and news blackout around the reactors, and radiation readings in Japan as far away as Tokyo are 10 times what the government says they should be. All those years of Godzilla coming out of the radioactive ocean to destroy Tokyo, and it turns out the real life Godzilla is home grown.

Mortgage giant Fannie Mae is asking the federal government for $7.8 billion in aid to cover its losses in the July-September quarter. Taxpayers have spent about $169 billion to date to rescue Fannie and Freddie. The government estimates that figure could reach up $220 billion.

Europe got fed up with the popularly elected PM of Greece, Papandreau, and his hideous plans to put major government policy changes to a vote. So he's gone as of last Monday. Next they got fed up with the popularly elected Italian PM Berlusconi, so as of today he's gone. Both will be replaced with "technocrats," that is PhDs in economics that will sit up and beg for their new German and French masters. Elections are to follow, whatever that means. It's worth remembering that the coalition that elected Berlusconi in the first place is still around, so Berlusconi Act II is not at all impossible. Europe's excuse for this highly illegal meddling? Once you are begging for money from the outside, you pretty much forfeit your right to democracy. Will the new (hopefully) well trained technocrats fix the problem? Not a chance. The basic problem is the Euro is too strong for the southern economies - instead of $1.40, they need the Euro at more like $1.00, or perhaps even $.85. This would raise the price of their imports and lower the price of their exports making them competitive and perhaps starting up some growth to pay down their debt. Instead they must live with a value of the Euro that makes imports cheap, exports impossibly priced, and gets them new governments elected by a handful of guys in Brussels, Paris, Berlin. What the French and German armies could not accomplish in 250 years of warfare the French and German banks have quietly accomplished in the last 15 years without firing a shot: One by one the southern countries are being conquered, with occupation governments being put into place. We're already seeing the Greek and Spanish version of Occupy Wall Street. Expect to see something similar in Rome.

Don't think this can't happen in the US. When 1% of our population owns nearly half of everything, 20% owns 95% of everything, do you really think the common uneducated under-employed minimum wage food stamp guy is going to get a vote that actually means something?

Italy: too big to fail, too big to save. The good news is Italian debt has an average life of seven years, so Europeans can cheaply buy time. The bad news is without question Italy needs a currency depreciation to solve this problem. In the meantime the ECB can continue to buy a bit of Italian bonds, but a full-on Bernanke-style Quantitative Easing is outside the rules. What's next? There's really only two possibilities: the ECB can start writing unlimited checks to the southern countries, debasing the Euro and starting up inflation, something Germany viscerally opposes; or the southern countries can leave the Euro and devaluate their new currencies. I'm very unclear on the timing, but a breakup of the Euro is looking more and more inevitable.

France is showing early signs of contagion. The ECB currently has no mandate to buy any French bonds. This is as bad as you can imagine. The fact that it's still just sniffles that can be handled with Kleenex doesn't change how scary this is.

Last week we were all excited about the European Financial Stability Fund and their plan to leverage their money with bonds. Bonds sold to, um, aliens perhaps. Friday the EFSF had a bond auction, trying to sell up to 1 trillion euros worth of bonds. They sold about 100 billion, 10% enough, and about 97 billion of those they bought themselves. Another failure in confidence. If only these stupid unconfident bond traders would buy what they're told to buy at the indicated prices, this entire crisis could be managed by the smart trustworthy politicians.

Global Warming Watch: Richard Muller, who works at the University of California, Berkeley and Lawrence Berkeley National Lab, is partially bankrolled by a foundation connected to global warming deniers. He pursued long-held skeptic theories in analyzing the data. He was spurred to action because of "Climate gate," a British scandal involving hacked emails of scientists. After a two year study of the data, he found that the land is 1.6 degrees warmer than in the 1950s. Those numbers match those by the National Oceanic and Atmospheric Administration and NASA. "The skeptics raised valid points and everybody should have been a skeptic two years ago," Muller said in a telephone interview. "And now we have confidence that the temperature rise that had previously been reported had been done without bias." In a brief email statement, the Koch Foundation noted that Muller's team didn't examine ocean temperature or the cause of warming and said it will continue to fund such research. "The project is ongoing and entering peer review, and we're proud to support this strong, transparent research," said foundation spokeswoman Tonya Mullins.

Arctic ice continues to melt each summer. Chinese hope to start sending ships to Europe through the Canadian Arctic, cutting their shipping mileage in half. Given how the Chinese are making a complete mess of their own country's environment, I think we should be very, very scared. If I ran Canada, I would put the Chinese on notice that a lot of their ships would be inspected, followed, and checked up on for proper operation. By the way, for 250 years Europeans searched for the Northern Passage to Asia. The Chinese found it first.


Arctic Summer Ice, 1979 and 2007


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