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Mark's Market Blog

11-5-11: Seven Billion.

By Mark Lawrence

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After blowing through the 200 day moving average Thursday last week like it was wet tissue paper - something that historically doesn't happen all that often - on Monday this week it dropped back down under the 200 dma. Crossing the 200 dma is something that should happen a few times a decade, not as often as Kim Kardashian or Jennifer Lopez get married and divorced. When I look around, I see a financial crisis in Europe that looks like a train wreck about to happen. Others think it can be managed with a series of short-term solutions and time. And in this environment, the markets really want to go up. I have to admit I really don't understand this market right now.


S&P 500 May 19 2011 to November 4, 2011

On Monday Greece decided to put their negotiated budget cutbacks to a public vote. It's presumed that Greek voters will vote against the cutbacks. It's presumed that such a vote leads to a nasty, disorderly Greek default. Markets dropped like a rock. On Thursday under massive European pressure the public vote was canceled. Markets partially rebounded. So much for democracy v. back room dealings by the power elite. Greece rightfully prides themselves on having been a democracy for 2500 years. It was a great run, but it's over now. Next up: Papandreau is expected to resign tomorrow, a "National Unity Government" will pass the austerity program, then call for new elections. I'm jealous: I sure wish our leaders would resign and call for new elections.

It's time for the update on our monthly jobs graph. Nothing interesting has changed, we're still on track to full employment sometime in 2020 or so.


Unemployment for Recessions

Are these jobs numbers real? Are the new jobs real jobs, or McJobs? There's one number that doesn't lie: the government's collection of social security contributions, which is 7.65% of the entire US payroll, it's just that simple. So if there's more good jobs, there must be more money coming in to Social Security, right? In the graph below we see receipts for September, October and November compared over the last four years. Basically receipts haven't changed a bit, even though job numbers are going up. We're laying off one guy making $50k and hiring three guys at minimum wage.


Social Security Revenue 2008 - 2011

We just crossed an important threshold: a bit over 50% of all unemployed people have now had their benefits run out.

It's generally agreed that this last week the world population passed seven billion. We have little or no water, food, oil, energy, clean air, farmable land, educational spots or jobs for these teeming masses. Most people are seeing this problem linearly: more people means more farmers, more teachers, more workers, more consumers, it will all work out. I see this problem non-linearly: when you grow bacteria in a petri dish, at first the bacteria is very happy with lots of food, no predators, controlled temperature and environment. Then one day the bacteria hits the edge of the petri dish. I believe firmly humanity is just now bumping into the edge of our petri dish, and soon humanity will start to choke on our own wastes.

How to grow the economy: Everyone agrees we need more people buying more stuff - after all, the measure of our success as a society is how fast our garbage dumps grow, right? So, let's think for a minute about some policy options; you can ask yourself which of these you think are most likely to make you want to go buy more stuff:

  1. Ben Bernanke announces the start of QE3, where he will buy up to $500b of various obscure and possibly occult securities.
  2. Obama announces that employers don't have to collect social security taxes for six months, so everyone gets a 6% pay raise.
  3. Greece, Ireland, Portugal, Spain, and Italy announce that they have had a Jesus moment, and they will all embark on serious austerity budgets to get their unsustainable governments under control and pay off 100% of their debt.
  4. Mario Draghi cuts interest rates in Europe and starts massively funding Greece, Italy and friends.
  5. Someone gives you a stimulating job with high pay, excellent benefits and great security for years to come.
Take your time, I know it's a tough question.

Our new friend Super Mario Draghi, who just took over the European Central Bank, dropped rates from 1.5% to 1.25% to stimulate growth. This in the face of 3% inflation in Europe. My take:

  1. I believe firmly the entire western world is in a liquidity trap, so this move is essentially meaningless.
  2. This is going to seriously piss off Germany who hates inflation like nothing else.
  3. This shows me that Draghi is Italian first (Italians desperately need growth and/or inflation) and European second (Europeans overall want price stability.)
Notice in the charts of interest rates below, Italy has recently shot (again) above the 6% rate that generally signals a market-wide loss of faith. What will Super Mario do about this? Stay tuned. . .


Interest Rates on 10 year bonds

And how are our other European countries doing? Greece, at 27%, is all priced out for default in the next year or so. Portugal at 12% and Ireland at 8% are clearly locked out of world bond markets for all practical purposes. Italy at 6.5% is also pretty much a dead duck. France is showing some early signs of concern. And the US and Germany are seeing their rates drop as money floods into the few remaining "safe" havens. Are they really safe? What does "is" mean?

What's next for Europe? The solution for the southern economies is completely obvious: they need to European Central Bank to print money, lots of money, right now. The new money will finance their debt, create inflation that reduces the level of their debt, and debase the Euro which makes their exports more attractive and imports more pricey. The problem? Germany isn't having any of that nonsense, they're holding out for severe austerity cutbacks in government spending and programs, and increased central control over the spending habits of the southern countries. The north/south fault line is only growing wider and deeper. It's becoming clear that the fastest solution is for Germany and possibly France to leave the Euro, as pretty much everyone else is a basket case while Germany holds the power. It makes sense to me that there should be two euros, a strong northern euro including Germany, Benelux and Scandinavia and an inflationary southern euro for the rest. I should tell you that politics rarely moves in a direction that makes sense to me.

According to the Bank for International Settlements guarantees provided by US banks on government, bank and corporate debt for Greek, Portuguese, Irish, and Spanish issuers has increased to $518 billion. The primary issuers of these swaps are JP Morgan, Morgan Stanley and Goldman Sachs .

Israeli Prime Minister Benjamin Netanyahu and his Cabinet are considering a military strike against Iran. It is generally understood that such a momentous decision would require a Cabinet decision. Israel's 1981 destruction of Iraq's nuclear reactor was preceded by a Cabinet vote. High ranking Israeli defense ministers have been seen in London conferring with British and US counterparts. My take: the clock is ticking on Iran.

Science: Evidence is growing that sugared drinks and fatty junk food are addictive, with brain scans showing the same results as previously obtained with cocaine addiction. In fact lab rats preferred sugar water to cocaine, and exhibited withdrawal symptoms when the sugar water was removed. Everyone knew for years that tobacco was addictive and a health hazard, the lawsuits started when it came out cigarette manufacturers were manipulating nicotine levels. Will Pepsico be sued for manipulating corn sweetener levels? McDonalds for fats? Stay tuned. . .

Last week I wrote about cars. It was a bit simplistic. For example, the 2012 Camry Hybrid gets about 40 mpg for about $28k (one magazine got 37 on their loop); the 2012 Camry L gets about 30mpg for $22k (the same magazine got 34 on the same loop). $6,000 will buy a lot of gas, and 34 mpg isn't all that different from 37 mpg. In any case, we're nearing or perhaps at the limits of OPEC production, and world wide oil demand continues to rise. The World Bank estimated this week that gas prices will rise about a dollar per gallon each year for the next three years or so. If you're driving something that gets 20mpg or less, you might consider changing cars soon while your gas hog still has a bit of value. That Ford F250 pickup or Detroit Deluxemobile won't have much value at all when gas gets on the high side of $5.

A hybrid is supposed to work by using an electric motor to slow the vehicle and store the energy in a big battery, instead of brakes that turn the energy (gasoline) into heat. The big trick with hybrids is they have to have enough electric power and battery to make this work. For example, the Prius weighs about 3000 pounds and its electric motor can put out about 80hp, but its battery limits it to about 36hp. This is enough that the electric motor can substitute for the gas motor or the disk brakes most of the time in traffic - thus the power you store in the battery when you stop at a light is available to speed the vehicle back up when the light turns green. A full size SUV weighs nearly 7000 pounds - to get similar performance at slow speeds, this car would require about a 175hp electric motor and a battery about 2.5 times the size, weight and cost of the Prius battery. They don't have it. And for good highway mileage, the SUVs need to be far more aerodynamic. The Honda Insight weighs about 2750 pounds and has a 13hp motor. This is why it gets less mileage around town than the Prius: it needs at least twice the motor and battery to equal the Prius performance. As it is the Insight is burning gasoline and using its brakes far more often than the Prius.

Anyway, you have to be careful about buying hybrids. The Prius is a good value, in my opinion, if you're going to keep it for six years or more. So is the Insight, but a bit less so. It's less obvious that the Camry hybrid is a better value than the standard Camry; and if all you're concerned with is basic transportation and low gas consumption, then the Chevy Cruze Eco (non-hybrid) is a far better value than Chevy Volt (super-hybrid). If you're interested in a certain standard of luxury and good gas mileage, I recommend you wait for the prestigious 2013 Lexus ES250h, which should equal the performance of the Camry hybrid at a price prestigious people can afford. Or of course there's the Fisker Karma plug-in hybrid: 80+ mpg, Porsche speeds, Lexus luxury, Aston Martin styling, all for the low, low price of $100,000, with about an 18 month waiting list.

I expect battery technology will improve substantially in the next few years, and change some of these equations. Vehicle weight will not change much, nor will electric motors. $6.50 per gallon gasoline in 2014 will make most everyone far more aware of these issues.


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