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Mark's Market Blog

12-2-12: The Fiscal Cliff Looms...

By Mark Lawrence

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Markets traded down on rumors that the fiscal deal was falling apart, then up on rumors that it was all fixed. There's no way on earth that this deal will happen before the end of December, and in between there will be lots of rumors and drama. Expect lots of volatility in the markets for December as hope springs eternal, then is dashed, repeatedly. Last week we were all optimists. This week, maybe not so much.


S&P 500 June 10 2012 to November 30 2012

Greece got about $20b in bailout money this week, with promises of two more such handouts. German officials indicated that some relief on Greek debt might be possible around 2015, if the Greeks stay the austerity course. I'm not personally sure there will be a Greece in 2015 if the Greeks stay the austerity course. That reminds me, I'm offering a new product: life insurance. Send me $1000, and if you live to be 120 years old I'll pay you $1,000,000. No medical exam required - smokers and heavy drinkers accepted with open arms. Greeks accepted too. And Germans.

Syria is laying land mines, the only government in the world to be doing so. Since the Ottawa Convention of 1997 banning land mines, deaths due to mines have dropped by almost 2/3. Syria has also shut down their internet - the entire country seems to be off-line. This is presumably to stop the rebels from communicating.

We're starting to hear a bit about the proposed fiscal cliff deal. Nothing is done, but right now what's on the table is $1.2t in tax increases, mostly on those making more than $250k / year, and $1.2t in spending cuts, about evenly distributed between medicare, defense, and everything else. And the debt limit gets eliminated. Here's the fun part: the tax increases and defense cuts start right away, the medicare and welfare cuts start in 10 to 20 years. So what we're really talking about is the democrats dream: raise taxes, cut defense, make noise about entitlements. Boehner reports he said to Geithner "You can't be serious?" Boehner said. "I've made it clear to the president that every time we get to the debt limit, we need cuts and reforms that are greater than the increase in the debt limit. It's the only way to leverage the political process to produce more change than what it would if left alone." Will republicans stand firm on their convictions? Not a chance. If this drags out past January, polls make it clear that the republicans will take the blame. And how will the democrat's proposal work? Right now 45% of all income taxes are paid by the top 2%; democrats apparently want to increase that percentage into the 50s. California did this several years ago in the interests of "fairness," and when the Great Recession hit and the top 2% saw their income drop, California went into a tax deficit death spiral that they still haven't pulled out of. The lesson, plain for everyone save democratic politicians to see, is that taxes must be broad based. There can be no free ride for 60%+ of the citizens on the backs of the top 5%.

Citi and the OECD lowered their 2013 estimates for Italy to a 1% contraction in GDP on top of the 2012 2.3% contraction. In the face of economic trouble, Italy has raised taxes but hasn't really cut spending. Both organizations are predicting Italy will require a bailout in 2013, likely at the same time as Spain heats up as a trouble spot again. Here's a train wreck of a crisis for Europe that we can see coming. No doubt after a few weeks of hand wringing and posturing the ECB will once again come to the rescue with their printing presses. This won't work forever, but it probably will get us through 2013.

Argentina took their creditors to court and was told "You owe the money, pay up now." Argentine president Christina Kirchner is watching her options shrink and her popularity in free fall. Ms.Kirchner has nationalized industries, passed strict labor laws, throttled the media, and is throwing people in jail who disagree with her inflation numbers. The IMF has told Argentina to revise their economic reporting including inflation, or be expelled. Expect something dramatic - Argentines love their political drama. I can't even imagine a song, "Don't cry for me, Deutschland."

How's the world doing? Some cities are doing quite well, some are major drags on the world's economy. Here's a map:

Windows 8, the solution in search of a problem, is flopping. No one wants it. The #1 seller of Windows PCs, Lenova, sold 13.7 million PCs last quarter. Apple sold 14 million iPads. Microsoft's new tablet, the highly advertised Surface, is also attracting no attention - Microsoft just cut their initial order in half on initial sales that have been called "nonexistent" by analysts. Microsoft announced a new tablet, the Surface Pro, that costs $900 - half again more than an iPad - and has terrible battery life. Microsoft's phone is thick and heavy and selling like pumpkins the week after Halloween. We can only wonder how long Microsoft Office, their big money maker, will last, as businesses turn to iPads and mobile computing. We're watching the demise of a company that was at one time the highest valued corporation in the world. It will take several more years to completely die off, but at this point it seems inevitable.

A year ago Harrisburg PA said they wanted to file for bankruptcy. PA law requires cities to have permission from the state, and that permission was denied for a year. The year ran out this week. Meanwhile, Harrisburg's debt has increased over that year from $300m to $340m, and they're talking a December bankruptcy. Scranton PA is also on the edge of bankruptcy.

How did the FHA get into trouble? Well, it took a long time. It used to be you wanted a house, you went to a S&L with a 20% down payment and good credit. That all ended ten years ago, as we all know; the S&Ls are mostly dead now. The FHA would guarantee pretty much any loan, with the result that now 17% of FHA loans are non-performing. What are they doing about that? If you tell them you're unemployed, they won't start foreclosure proceedings until you haven't paid for twelve months. And if you make a payment in the twelfth month? The clock starts over. As one prescient economist once said, "Never in history has a rented car been returned waxed. Always in history 'renters' treat houses more poorly than owners, and owners not making payments are not even renters... they are merely squatters."

A few months ago I wrote of a brewing fight between Calpers, the California retirement fund, and bankrupt San Bernardino. San Bernardino filed for bankruptcy on August 1 and listed Calpers as its largest creditor, with unfunded pension obligations totaling $143.3 million. Calpers says that by state constitution they must be paid in full, first, before anyone else gets a penny. But Wall Street also has hundreds of millions in bonds at stake in the two bankruptcies, and they say federal law trumps the California constitution and everyone gets equal treatment. San Bernardino has halted their bi-weekly $1.2m payments to Calpers. Under federal bankruptcy law all lawsuits by creditors are stayed; Calpers has filed a motion with the federal judge to lift the stay so they could sue in state court, and said in their filings that if the stay is not lifted they will sue in state court anyway. Many expect this issue to wind up in the Supreme Court. I'm enjoying this. If Calpers wins it will be interesting when some city, perhaps San Bernardino, tells them, "Well, we can't pay, so I guess you own the city now." I wonder if they'll rename it Calpersville. This isn't over. Heck, it's just getting started. The fight between cities and Calpers will continue to grow for several more years, and in the end Calpers will lose simply because there isn't enough money in California to continue to feed this morbidly obese economic cancer.

Powerball - the Redneck Retirement System - a lottery shared by 42 states, failed to get a winner on their $325m drawing last Saturday. They sold 105,000 tickets per minute in the run up to Wednesday night's drawing. Try to imagine the states deciding that inducing our lower classes to gamble is bad policy and giving up a $105,000 / minute revenue stream. In fact, on January 15, tickets increase in price to $2. My favorite lottery jokes: 1) The beautiful part is the symmetry, your chances of winning are the same whether or not you buy a ticket; 2) Illinois is considering a Forever Lottery: the winner gets $100m - $1 per year for 100m years.

Looking for a husband? EV - Electric Vehicle - owners are white, male, well-educated homeowners whose median household income is $108,000, a bit more than double the national average. Find yourself a Volt and latch onto the driver. Act fast, numbers are limited - Nissan sold 9679 Leafs in 2011 and only 6791 so far this year; about 6400 Volts sold in 2011, but Volt sales will increase to about 20,000 in 2012. By contrast Ford will sell about 400,000 F150 trucks in 2012. Personally, I'm waiting for the Cadillac ELR - an enhanced 2nd generation Volt drive train in a luxury / performance car, due late next year.

Culture 1: Your parents told you to go to college and it would all work out for you. You told your kids the same thing. Is it still true? Not so much. College costs have been rising at about 6% per year for over a decade; pay for college graduates has dropped over the same period. College is getting to be a pretty bad deal for a lot of majors. My own view is if it's not science, engineering, business or medicine, you're wasting your time and money. Or someone's money, anyway - over 90% of student loans are owned by the government now - no commercial bank is stupid enough to loan someone $75,000 to get a degree in French Fry Studies. As the recession continues, student loans are apparently growing at something like a 6% annual rate, and recent college graduates' ability to pay them off is dropping at something like a 1.6% rate, it seems pretty easy to predict that more and more students will default every year. I dunno, I'm pretty decent at math, but this really doesn't seem like rocket science to me. When the inevitable bailout happens, we'll hear about the poor students who can't afford to pay. We won't hear about the decisions to major in feminist studies, nor will we hear about the professors of feminist studies who make $98k / year and teach one class. Anyway, here's how tuition, graduate earnings and the student loan delinquency rates are going:

And why are student loans important? After mortgages, they're easily the number 1 source of consumer debt. And growing:

Culture 2: Our nearest genetic relatives are the common chimp, Pan Troglodyte, and the Bonobo chimp. Common chimps are extremely aggressive animals who live in a male dominated culture. There's not much sex, it's mostly for procreation. Bonobos are far more peaceful, live in a female dominated culture, and have sex a dozen times or more per day. In every combination and position you can imagine, and perhaps a few that you can't. Here in the US sex is evolving quickly. In a 2010 study cited by the FBI, 20% of teenagers reported having sent or posted nude or seminude photos of themselves. By 2012, another study found that 28 percent of teens surveyed said they had gotten involved in sexting - sending nude photos over the phone. The reign of white males will end with my generation, the boomers.

Health 1: High-fructose corn syrup is now linked to diabetes. Countries where corn syrup use is common have 20% more diabetes after adjusting for body mass index. Audrie Erickson of the Corn Refiners association immediately called the research flawed - her degree in economics apparently also makes her an expert on the scientific method. Corn ethanol is ruining our cars and corn sweeteners are harming our children. Fructose is linked to liver disease, kidney disease and high blood pressure. 40% of the fructose the average american consumes comes from sodas.

Health 2: Canadian researchers are testing a new drug - DCA, dichloracetic acid - which they say shows enormous promise as a cancer treating drug. In some tests, DCA has shrunk cancer tumors by 70% in a couple of weeks. Cancer cells often have damaged or disabled mitochondria. DCA works by reviving the mitochondria in cancer cells, which then force apoptosis, "cell death." The bad news? DCA is a public domain drug, anyone can make it for pennies a dose. But it take about a billion dollars to do the full FDA drug certification. Needless to say, no drug companies are stepping up to spend a billion dollars to mollify the FDA on a drug that's already available as a generic, a drug where they might make a few thousand dollars a year. Some are blaming the drug companies for being cheap. Personally, I don't get why FDA certification has to cost a billion dollars, except that the drug companies secretly love it, as it guarantees no small poorly funded company will suddenly appear with a cheap cancer cure or something annoying like that. Have cancer? Take about a half a gram of DCA per day, preferably with black tea and vitamin B1. DCA is available for about 25¢ per gram, so a 200 day regimen will cost you about $25 plus the black tea and B1. Don't try this on colon cancer, preliminary data seems to show it makes that one worse. Is DCA a cure-all for cancer? Nah, there's no such thing - there are too many different cancers with too many different causes and attributes. Does DCA really work on some human cancers? No one knows for sure, it will be several years before the clinical results are in. But if you're desperate, DCA might help.

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