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Mark's Market Blog

12-13-15: The Fed Raises Rates?

By Mark Lawrence

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Oil continues to drop. Junk bonds are collapsing in a liquidity crisis. Emerging market bonds and companies look extremely shaky. And Yellen is about to raise rates. Carl Icahn warned a few weeks ago of just this, and now says he thinks the meltdown is just beginning. Meanwhile the Third Avenue Focused Credit Fund barred redemptions because the market for junk bonds was too illiquid, meaning any selling into the junk bond market causes large price drops. It was all too much for the stock market which took on the chin. Down is the likely trend for next week, too.


S&P 500 June 15 2015 to December 11 2015

Smog got so bad in Beijing this week that the government took unprecedented action. Cars were limited to odd/even license plates on alternating days. Government agencies were ordered to lower driving by 30%. Factories and schools were ordered closed. Until thursday afternoon, when winds would come in and blow the soup over the pacific and into Los Angeles. They don't have anything like our air resources board, and they have almost no working limits on cars, busses or factories for emissions. This could have all been avoided if they had simply adopted similar standards to the US or Europe ten years ago - all the technology is worked out and off the shelf now. But they wanted factories and cars built quickly so they allowed smoggy crap. Cleaning up the existing cars is going to prove next to impossible.

Smog in India is even worse. They have announced odd/even driving for the next few months., and a shut down of their coal fired electric generators. These measures are hoped to cut airborne particulates in two, which will bring Delhi pollution levels down from 650 (hazardous) to 325 (hazardous). US cities are normally well under 100. In India there are a lot of motorcycles and trikes using 2-stroke engines. These are all but illegal in the US and Europe because they're next to impossible to clean up.

World leaders met in Paris and announced a new commitment and agreement to fight global warming. I don't even remotely believe that man's activities are causing global warming, however I do think trying to transform our economies from coal and oil to solar and wind is a very worthwhile endeavor. I'll be more impressed when it turns out the top 1% of the world's inhabitants are paying for it: they generate by far the majority of the world's carbon.

Elon Musk wholeheartedly agrees with this sentiment. Tesla lost $19,800 on each car it sold in the 3rd quarter, up from $16,000 in the 2nd quarter and up from $10,000 per car in Q3 of 2014. Musk thinks he has one chance to build a bigger and better transformational car company so he's focused on alleviating global warming, not on making money. His interest is in getting from 50,000 cars per year to 500,000 by 2020, not on making money. Meanwhile his stock is up 1000% in the last few years as the current market values dreams above results.

Oil continues to drop, hitting $35 this week. This is the lowest it's been in seven years. Investors are spooked as this implies more layoffs for the US oil industry. OPEC agreed to discontinue limits on pumping. Iran expects to start selling about a million barrels a day early next year into a market which is already glutted with oil. Oil dropped almost instantly into the $30s. Expect prices to continue to drop to the $20s. Saudi Arabia is willing to face low oil prices to make sure Iran does too. Cheaper gas is going to only make smog problems worse in the 3rd world. Expect waiting lists for Suburbans and Escalades.

Ms. Kirchner, the outgoing president of Argentina, spend her last few weeks on a spending spree. She raised money selling short-term options on the Argentine peso for dollars and used the money to pay off supporters. The new president comes into power with less than $1 billion in cash and a lot of debt to pay. He's facing a major currency crisis and near-certain bond default. If I were him I would put together a quick speech on the mess Christine had left with some charts and within a week of taking office I'd give a national talk on how we were broke and had some very rough times ahead paying for the excesses of the Kirchners. Then I'd take the worst of it right at the begriming of my team, so that by the end of my term it was over and we were recovering. We'll see what he does. If he seeks to delay and string it out like the Kirchners did he'll still face a collapse, but it will be late in his term dooming him and his party.

France intends to pass laws eliminating public wi-fi and anonymous web browsing. They want their police to be able to track individual's web browsing and message sending. Seems to me it would be easier to eject the muslims.

Trump is taking serious heat for suggesting that our country, like Japan, should make it difficult for muslims to visit. I agree completely. Curiously, even though islam is some sort of religious / political / legal system practiced by every members of single race, it's now said this makes Trump a racist. "Climate scientists" assure us that in the coming decades drought conditions in the middle east are going to only get worse; much worse. This is the area in the world with the highest population growth rate. Tens or millions or perhaps even hundreds of millions of muslims are likely to have to leave the middle east in the coming decades. As far as I'm concerned, the sooner we put hard limits on the number of these unschooled and violent religious fundamentalists we will accept, the sooner we will exempt ourselves from the coming world calamity they are going to produce.

I the last two years the ruble has roughly cut in half compared to the dollar - from about 32 to about 70. The oil price collapse has been particularly hard on Russia. As a result prices on imports have shot up - especially cars. Imported cars, of course, are roughly twice as expensive, but Russian cars use a lot of imported parts and their prices have shot up too. Car sales in Russia are off by over 40%. Particular brands have done even worse:TOyota and Nissan off 53%, Chevy off 71% year on year. As oil continues downward in price for at least the next six months these numbers are very likely to continue to deteriorate. Stratfor predicted this year that Russia would collapse within a decade, forcing US forces to enter their territory to secure their nukes. Right at this instant that prediction looks pretty safe.

Another side affect of the drop in oil prices is Russian oligarchs and Arab princes are having to tighten their belts. Yacht sales are dramatically ff with a couple of the biggest yacht makers entering bankruptcy. Sales on boats priced from $500k to $4m have collapsed.

Is marriage dead? Not quite, but it's on life support. Here's some numbers by state:

Private colleges in the US have entered some unusual territory. The presidents make an average of $438,000 per year with the top 32 presidents making over $1m. Meanwhile three-quarters of all professors are non tenure track and make an average of $25,000 per year. Why do they do it? They hope that by teaching individual courses for poverty level wages they will eventually be offered a tenure track position; however the three-quarters figure makes clear that this is a false hope. This trend is not limited to for-profit universities - Columbia, NYU and the New York school have 60%, 79% and 91% of their teaching staff as non tenure track hourly workers. Next time you're interviewing an Ivy league graduate consider that well over half their courses may have been taught by people making $15/hour or less. Meanwhile everyone in majors other than science, technology, business or medicine continues to build up huge debt with no chance of ever paying it off. Actually, my son who just graduated tells me it's even worse than that: in his experience, engineering majors graduate with perhaps $25k in debt; art or history majors with more like $100k, as they simply must have the latest iPhone, a couple summers in Europe and Spring Break in Aruba.

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