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Mark's Market Blog

12-11-10: Inflation, Bankruptcy, Debtor's Prison.

By Mark Lawrence

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After a week of huge gains, the markets continued to stagger upwards this week to a new 2-year high. My prediction: this market wants to leap up some more; after a few more days of stagnation there will be a bit of good news, like the democrats voting for Obama's tax deal, and the markets will over-react to the upside. Thanks for the great December, Ben.


S&P 500 June 27 2010 to December 10 2010

Obama announced a deal with republicans that the Bush tax cuts would be extended for 2 more years; unemployment benefits for 13 more months; lots of tax breaks for poor people; and a 2% break on social security taxes for many. Unfortunately, he announced it before he discussed anything with his fellow democrats, who are feeling more than a little left out. Obama is veering sharply towards the center, exactly as Clinton did after his mid-term election catastrophe. If Obama continues like this, although republicans are likely to take the Senate in two years, Obama himself will most likely be re-elected. This deal still has to be voted on, which means the democrats have to fall into line. I expect they will, but not before an appropriate amount of kicking and screaming and demanding something. Until then it's not a done deal. By the way, the unemployment extension is an extension of the program, not of the benefits: under the proposed extension benefits still stop after 99 weeks.

For the last year the feds have been buying up state and municipal bonds in a $175 billion (to date) program called Build America Bonds. The point here is to subsidize interest rates for states and cities, lowering their borrowing costs. It's generally agree that under republicans this program is dead. In fact, republican representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more realistic rate of return. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds. So for the last month state and municipal bonds have been dropping like rocks, that is state interest rates are skyrocketing. We live in an interesting time where "progressives" are doing everything they can to protect the government from progressing away from the status quo, and "conservatives" have no intention of conserving the current system, they appear to want to tear it down wholesale. Expect blood in the streets next year in Sacramento, Springfield, Albany, Lansing, Trenton, Carson City.

Florida, probably the state hit hardest by the foreclosure crisis, is not only leading house prices down, but the banks there are actually holding off as best they can on foreclosing more houses. The average Florida home that gets foreclosed is now nearly 2 years behind in payments. Anyone who says this housing crisis is nearly over has been smoking a bit too much pixie dust.


Days Delinquent Before Foreclosure of Florida Homes

As the Fed continues to debase the dollar, oil prices continue to move upwards, nearing the $90 threshold where Opec says they want it to top out. Somewhere just above $100 the US economy slows down and people stop buying trucks and start buying little 4 cylinder car-like thingies.


12 months of Oil prices

As the Fed continues to debase the dollar and China's emerging middle class continues to want to eat more meat, food prices continue to move upwards. Two years ago just above the current level there were food riots across much of SE Asia. This will get worse.


3 years of food prices

This week Jerry "Moonbeam" Brown called for a meeting with California state senators and assemblymen to discuss their budget plan for next year - a budget which is currently $29 billion over projected revenues, and that deficit is rising weekly due to their bond interest rate. Brown noted that the budget shortfall, projected over the next 18 months, is larger than annual state spending on prisons, welfare and the University of California and California State University systems combined.

Here in the US, we have this concept "bankruptcy," coupled with a constitutional mandate for "no debtors prison." So if your debts get 'way out of hand, you get to declare bankruptcy, wipe out most of your assets and debts (cash out of the game), and start over. Unfortunately for the Greeks and Irish, and soon no doubt the Portuguese, Spanish, and possibly Brits, there is no bankruptcy court to handle things between countries. Iceland bankers got in 'way over their heads; as Iceland is not a Euro country, effectively their government declared bankruptcy. A bunch of people who owned bonds in Iceland banks got stiffed. Iceland immediately cut the value of their currency in half, which means relative to the rest of the world Iceland workers took a 50% pay cut. When the price of Toyotas, gasoline and rice all double more or less overnight, then you basically took a pay cut. Several Iceland banks closed their doors. Today, 18 months later, Iceland is on the mend.

Ireland, however, has not let their banks and the bank's bond holders take one on the chin. Instead, they have accepted a "bailout." This means the senior bond holders in Irish banks, who all live in the UK, France, and Germany, will be paid off. The money to pay them off is coming from various taxpayers, including the Irish at the front of the line. Ireland is a Euro country, so they cannot devalue their currency to jump start their economy. Instead of everyone in Ireland "agreeing" to take a pay cut, they will go through a long process of high unemployment and austerity programs to achieve a similar result. So a few Irish bankers screw up big time, and now the Irish taxpayer will live in debtors prison for several years, the European Central Bank and the IMF their jailors. If this sort of thing continues (it will), there will come a time when it will be open season on bankers.

Here in the US we've bailed out our "bankers," in this case a few bankers and a whole bunch of market speculators who call themselves bankers. Now we're devaluing our currency by printing money like mad, and starting up inflation. High inflation, high unemployment - haven't we already seen this movie? Inflation is just another way of everyone in a country taking a pay cut. When your currency inflates, then the price of Toyotas, gasoline, rice all go up. Some people think they're immune to inflation - government and union workers have CPI clauses in their contracts, so do retirees on Social Security. Of course, this depends on the government telling the truth about inflation in the short run. In the long run, they will price themselves out of the labor market - we've already seen an entire state, Michigan, do this. Governments in 20 other states are just a bit behind, and the feds just another step behind them.

Worried about your job? The Hackett group says that the big losers in corporate America are in HR, IT, Finance. Over a million jobs in these departments were lost or outsourced overseas in 2008 and 2009, and they project another million in the next 3 years. These are all cost centers, and companies are cutting costs.

In a Sacramento address to state leaders, Los Angeles Mayor Antonio Villaraigosa declared that education in Los Angeles stands at "a critical crossroads," and he assailed United Teachers Los Angeles for resisting change. During the last five years, the mayor said, union leaders have stood as "one unwavering roadblock to reform." He called for change in contentious areas such as tenure, teacher evaluations and seniority - all volatile arenas in which teachers unions have balked at proposals for reform as eroding their rights. "At every step of the way, when Los Angeles was coming together to effect real change in our public schools, UTLA was there to fight against the change and slow the pace of reform," Villaraigosa declared at a forum of the Public Policy Institute of California, a nonpartisan think tank. Joshua Pechthalt, LA's Teachers Union vice president, replied, "We reject the notion that real reform has to come at the expense of the rights of teachers and other educators. All of these reforms are part of a vision that suggests the interests of children, and the people who work with them, are best served by a competition that exists in the marketplace," he added. "And we have seen how disastrous that competition has played out on Wall Street."

Jim Rickards of Omnis has an interesting anecdote about gold. He tells a client of a major Swiss bank who was refused access to his one ton of physical gold ($40M) and was forced to make threats to convince the bank otherwise. "Eventually the individual did get his gold. It took lawyers, it took threats of publicity, it took a lot of pressure to do that, which my inference is that that gold was not there. The bank had to scramble, go out and find it somewhere before they could make good delivery."

X-37B space plane builder Boeing released these photos of the unmanned spacecraft just after its landing on Dec. 3, 2010. The spacecraft spent 220 days in space before gliding to a predawn landing at the Vandenberg Air Force Base in California. The X-37B is about 29 feet long and has a wingspan of just over 14 feet across. It stands just over 9 1/2 feet tall and weighs nearly 11,000 pounds. For comparison: Two X-37B vehicles arranged in a line nose to tail could fit in the payload bay of the space shuttle. The space shuttle will be retired soon, and that will be nearly the end of US manned space flights for an extended period. This ship is designed to replace the space shuttle for the purposes of launching spy satellites, which is what the Air Force and the NSA really care about. No one really cares about the international space station, and the Hubble is now on its own, as the Hubble telescope is bigger than this plane.

In the paranoia department: all passports issued since Oct.2006, most credit cards and most drivers licenses now contain RFIDs - Radio Frequency ID chips. This means there can be a little device embedded in a wall anywhere - airports, walmarts, shopping malls - and when you walk by that wall these cute little hidden chips respond by broadcasting your name, driver's licence number, passport number, visa number, height, weight, eye color, etc. I dunno about you, but this bothers me. My son Steven has been using a stainless steel wallet for a couple years for just this reason. You can get wallets and passport cases that block RFID inquiries and protect your info - basically if there's metal around it, you're safe. Wrapping your passport etc in aluminum foil works just fine. A bit more stylish solution can be had for about $20 each on EBay. Search for "wallet RFID" or "Passport RFID." Even Walmart.com sells these things, but they charge more. Walmart requires RFIDs in most of their products to speed up their warehousing. Earlier this year they had a trial at a couple Walmarts, you throw stuff into your basket and just walk out the door. The door adds up what you have, gets your Visa number out of your wallet, and bills you while you walk. They had to turn it off, it completely freaked out everyone. That is to say, they had to turn off the part where they bill you. Who knows if they're still collecting the basket contents and personal info... Privacy is dead in this society, but personally I'm not just rolling over.

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