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Mark's Market Blog

12-20-15: The End of Oil?

By Mark Lawrence

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Merry Christmas everyone! This is my last Blog for a bit. I'm going on vacation for a couple of weeks. Me and my doggies are going on an extended road trip - we're going to chase rabbits and pee on bushes in about 15 states. The markets will just have to hold themselves together without me. "The graveyards are full of indispensable men." -- Charles De Gaul le

Oil continues to drop, it's now at an 11 year low. Junk bonds are collapsing in a liquidity crisis. One bond hedge fund - Third Avenue Focused Credit - has declared itself bankrupt, another - Lucidus Capital Partners - has closed and returned all their investors money. The bond market is experiencing "carnage" as investors head for the doors, taking $13 billion with them this week alone. The market peeked above the 20 day moving average on Wednesday, then promptly dropped back down again on Thursday; we've been living under the 20 day for a week now. Jim Crammer says if you're in the market and "not cautious? You're either arrogant or clueless." I believe I've proven more than adequately to be very poor at foreseeing the future, but there's a lot of smoke out there and it really is time to gather up the wife and kids and go home.


S&P 500 June 22 2015 to December 18 2015

Janet Yellen raised rates from 0.25% to 0.5%. This is the beginning of the end, after seven years, of our emergency recovery monetary policies. The Fed is also sitting on a completely unprecedented $4.4 trillion in bonds; Yellen announced that as these bonds mature they will be replaced with new bonds, so there's no plan to get our children and grandchildren out of debt. Markets generally went up on the news, as US markets are really only interested in the next few weeks, not anyone's grandchildren. As I've said several times, markets don't respond to the first rate rise. By the way, the Fed has a very interesting way to achieve their rate targets. When they want to lower rates, they sell bonds to a select group of dealers, then buy the same bonds back the very next day at a higher price. When they want to raise rates, they sell bonds for less money than they had previously bought them for. Buy high, sell low - exactly the opposite of what your grandfather taught you. I certainly wish I was one of the select dealers - I'd love to be paid handsomely to loan the Fed overnight money. Meanwhile bond spreads - the difference between the 2 year and 10 year bond - are flirting with breaking a trend. If the Fed succeeds in raising the interest on the 2 year note but has no affect on the 10 year, we'll get a signal that generally means make sure your parachute is packed and strapped on.

Anticipating this move, back in August China uncoupled their currency from the dollar and instead pegged it to a basket of currencies. So far that hasn't had much affect. However we can safely assume that Yellen raising rates will only increase the value of the dollar, which is exactly the opposite of what China needs as they fight off recession. So far this year the Yuan has risen against 12 of 16 major currencies, which is the exact opposite of what China needs. We may safely presume in the near future China will devalue the Yuan, emphasizing that this move is only against the dollar and not against other currencies. China does not want to be seen as the country that throws down the gauntlet in a new currency war.

And of course this rate hike and the anticipated rise in the dollar, especially coupled with currency drops by China, followed quickly no doubt by Japan, Korea, Germany, will put emerging market countries in a completely impossible situation: if they don't drop their currencies then their exports will be too expensive and their companies will suffer from loss of sales and profits; if they drop their currencies then their companies will suffer from increased payments on their dollar denominated debt. And while these moves place north of $8 trillion in US denominated foreign debt at risk, simultaneously we are experiencing a credit crunch in this country starting in our high yield bonds and likely moving down through the entire bond system. The global economy is sliding on an icy slick mountain road with a wall on one side and a cliff on the other. It's hard to see how this ends well. For just this reason many oppose the Fed raising rates. I don't. Markets are artificial and out of control, and the sooner we let them move back towards normalcy the less traumatic the move will be. I think this is going to get pretty traumatic, but far less than if the Fed kept stimulating for another several years.

The fed is pushing hard to get short term rates up a bit. This is going to dramatically narrow the yield curve - the difference between ten year and two year bonds. Since the crash the Fed has managed to get this curve over 1.2% and keep it over, but it's hard to see how that can continue when we're already at the low point and they're now actively working to raise short term rates. If this curve goes negative, a strong possibility when the fed is tightening and high yield bonds are collapsing, then the chances of a recession will get very high.

Switzerland has joined the ranks of European nations with a negative interest rate: the banks have to pay the government to hold deposits, which deposits the banks are required by law to make. Now 70% of swiss franc denominated corporate bonds trade at negative rates. This shows clearly that investors believe we're headed deeply into deflation. Several central banks are now trying to get their governments to basically outlaw cash. Sweden is close: most banks have a $250 daily limit on cash deposits and withdrawals, and about half of all businesses won't take cash at all. If you try to spend more than about $100 in cash, people will ask you if you're a drug dealer. The thinking is if you can eliminate cash then the banks can charge depositors to hold their money and the depositors won't have any options. I consider this insane: these governments will certainly take this too far and the citizens will inevitably find alternatives. The idea that banks can charge citizens for holding money is right up there with holding back the tides. Meanwhile, how's that working out? In Switzerland there was widespread anticipation that soon mortgages would carry negative interest: the market would pay you to help you buy a house. Stunningly, that hasn't happened: when faced with paying the governments to hold their deposits, banks found they have to make money somewhere and amazingly they have turned to their borrowers. Mortgage rates have gone up in Switzerland and continue to go up. What's really happening is under these insane conditions money is getting scarce - it's starting to find somewhere else to live, presumably somewhere with more sensible rules. Like, you know, the US, where interest rates are positive and rising. Perhaps your average Swiss doesn't know how to move their money seamlessly into and out of the US, but sooner or later brokers will invent new forms of banking that let people do just that. I predict a new cat-and-mouse game, where various european governments try to write new laws forcing their citizens to act stupidly and the citizens look for ever more clever ways to not be stupid. Perhaps eventually this will end with the brightest and most productive packing up and moving away - it would not be anything like the first time stupid european laws have driven their best and brightest to emigrate. If I lived in a country that was bringing in unprecedented numbers of immigrants who were causing crime and chaos on an unimaginable scale - in Scandinavia well north of 90% of all rapes are committed by muslim men and one in four scandinavian women will be raped - and then they started charging me to hold my money, I would leave.

The negative interest rate experiment is growing quickly across Europe. I believe we're seeing a major world economic change. For several hundred years technology and population growth kept the economy growing, meaning lending money against future receipts was a good business: the economy was likely to grow, borrowing and spending today helped maintain and accelerate that growth, and banking was pretty much good for everyone. This really peaked after WW II when banking led to a huge expansion, first in the US with the GI bill and the emergence of the middle class, later in Europe, then Japan, then Korea, now China. But I think that's pretty much over. China has a bit over 1 billion people living on $3 per day or less; India has another billion living on $2 per day or less; Africa another 800 million or so living on $1 per day or less. These people are never joining the middle class, there's simply not enough fresh water or oil or fish or rice or wheat. I think we're nearing the end of population and economic growth and entering an age of declining commodities, declining and aging population, deflating economies. In this environment we have no model that allows banks to continue to grow. They're continuing to grow in the US and Europe because they figured out that managing the trillions of dollars in retirement funds would make then very very rich, but I think that's coming to an end too. I believe we're witnessing the end of banking.

The bank of Japan increased their level of quantitative easing, announcing that since they already pretty much owned all the bonds in Japan they would now start buying stocks and real estate investment trusts.

The Philly fed manufacturing report came in at -5.9, the third time in the last four months that it's been negative. Manufacturing is not healthy right now on the East coast. This is an economy balancing on a knife edge.

Last week Obama agreed to a major climate change package negotiated in Paris. The biggest carbon dioxide emitter is already China with India hot on their heals, but those two countries didn't agree to much. Anyway, global warming stopped 17 years ago. What's this treaty about? The slogan of my generation is "Follow the money." This treaty spells the end of Big Oil and the beginning of Big Solar. I'm actually ok with that - Big Oil funds terrorism. Big Solar only funds a handful of billionaires who don't want to draw attention to themselves or kill anyone. Jim Chanos, a billionaire Wall Street talking head was recently asked about oil prices. "It's down an awful lot," he said. "Having said that, I think if you were to look out five or 10 years, if I was a member of OPEC I would be pumping as much as I could today while it's worth something because it might not be worth a whole lot by 2030." I would be perfectly happy to cut back dramatically on the use of coal and oil - better for the air, better for the oceans, better for peace.

Power generation is going through interesting times. In many countries solar and wind are the cheapest form of generation due to government subsidies; furthermore, once you've built your installation the power is more or less free, so you can sell one more watt for almost nothing. Germany now gets a third of their power from solar and wind. This means in the winter when power use is high to heat homes and solar almost doesn't work due to the sun being low and the days short, most of their power comes from the next cheapest source, coal. We've found that hydroelectric is hard on the downstream ecologies and nuclear is unpopular these days. Few nations use as much natural gas as the US, so mostly that leaves coal. If we really want to clean up our power generation we're going to have to somehow make coal unpopular - carbon taxes, laws, some external push to get away from this dirty, nasty stuff. Coal is dirty and dangerous to mine, and dirty to burn. I'd like to see it stop worldwide.

A teacher in Paris, France was stabbed in the side and throat with a box cutter by a man citing "Islamic State," according to the BBC. The Islamic State's French-language magazine Dar-al-Islam called in its November edition for supporters to kill teachers in the French education system, describing them as "enemies of Allah" for teaching secularism and "in open war against the Muslim family." Over the last few days, French authorities kicked down doors, closed three mosques, and in the process found an alarming amount of weapons, ammo, and terrorist propaganda. Since the devastating Nov 13 Islamic terror attack in Paris, French security officials have searched at least 2,235 homes and buildings, confiscated 334 weapons, and taken 232 people into custody.

In a recent poll by ABC news it was found that 77% of people feel the government cannot protect them from a terrorist attack, 47% thought citizens carrying guns was a better solution, and 53% oppose a ban on assault weapons.

Every school in the Los Angeles Unified School District (LAUSD) was closed Tuesday due to a "credible terror threat." Jorge Villegas, the assistant chief of the LAPD, said, "The school district received a safety threat that we're in the process of evaluating and vetting." Schools will all be searched, and the FBI has been notified of the unspecified threat. When asked why LAUSD took the step of closing all schools, LAUSD Superintendent Ramon Cortines mentioned the terrorist attack in San Bernardino, California less than two weeks ago, which killed 14 people. The Los Angeles Times reports the threat was a bomb threat called into a school board member.

Malala, the 18 y/o Pakistani nobel peace prize winner who was shot in the head for advocating teaching women, is speaking out against Trump: "Well, that's really tragic that you hear these comments which are full of hatred, full of this ideology of being discriminative towards others. The more you speak about Islam and against all Muslims, the more terrorists we create," she told Britain’s Channel 4. "So it's important that whatever politicians say, whatever the media say, they should be really, really careful about it. If your intention is to stop terrorism, do not try to blame the whole population of Muslims for it because it cannot stop terrorism." While I have nothing but respect for Malala, it has not escaped me that she has no children and she was shot by her own countrymen for voicing her views on education. She has every right to place herself in harm's way to further her goals of equality, but she has no right to place my children in harm's way to further her goals. I agree with Trump: we need to distance ourselves from the muslim culture. We need to withdraw our armed servicemen from trying to control their countries and chosen forms of government, and we need to keep them away from our country and our citizens.

On Monday some teenagers sent an email claiming there were bombs in nearly every school in LA. LA unified school district called in the FBI and shut down everything for the day. They found nothing. On Wednesday similar threats were made in Texas, Indiana, New York and Florida.

For the computer nerd who has everything: the $85 Asus Chromebit. The Chromebit is just under 5 inches and turns your large monitor or TV into a computer running the latest Chrome OS. Just plug the Chromebit the HDMI port and pair it with a Bluetooth keyboard and mouse. It comes up running the Chrome OS and Chrome. You can browse the net and do anything that can be done online. Google Docs lets you work on simple spreadsheets, if you use Quickbooks on-line you can do your accounting, and of course you can spend money like mad. When you're done you walk away with a keyboard and a largish thumb drive. Personally I believe I prefer a Chromebook, but this is interesting.

There's a Canadian guy, Leonard Cohen. Born in 1934, he's 81 today. He was born a Jew, of course, and like many jews became an atheist for a time, although he continued with jewish practices like the sabbath. In the 90s he became an ordained zen buddhist monk. Since zen is not about any deity or practices of worship he's said repeatedly he sees no conflict between judaism and buddhism. He's a song writer and performer and his ballads were a bit popular in the 60s. Lately he's experienced a bit of a resurgence in his popularity. One of his most famous hits is "Hallelujah," a song questioning the meaning of the phrase hallelujah, especially from the perspective of an agnostic. Hallelujah is a hebrew word and a reasonable translation is "praise the Lord." Curiously this song has been picked up by christians and is rapidly becoming a very popular religious ballad. 2500 years ago Buddha preached repeatedly, "Don't pray to any gods for salvation: there are no gods who will save you. Work out your own salvation with diligence," and "When I'm gone, don't pray to me. Because when I'm gone, I'm gone." Today in buddhist temples all over the world you see people on their knees praying to buddha for salvation. Similarly a ballad written by an agnostic questioning the meaning of faith has somehow been co opted as a statement of unquestioning faith. It doesn't matter what you say, people will hear what they want to hear.

Top ten google searches for 2015: (I haven't searched for any of these, apparently I'm completely out of touch. . .)
10. "American Sniper"
9. Caitlyn Jenner
8. Ronda Rousey
7. "Fallout 4"
6. "Furious 7"
5. Paris
4. Agar.io
3. "Jurassic World"
2. Charlie Hebdo
1. Lamar Odom


Why I think evolution is junk science

Part 2: DNA is the brains of the cell.
by Mark Lawrence

I got a significant response to my part 1 in this series, and I was stunned to find it was very significantly positive. So I'll be writing more parts.

Curiously, biology, one of the world's great sciences, has a central dogma: the coded genetic information hard-wired into DNA is transcribed into individual transportable cassettes, composed of messenger RNA (mRNA); each mRNA cassette contains the program for synthesis of a particular protein. Or as Francis Crick put it first: The central dogma of molecular biology deals with the detailed residue-by-residue transfer of sequential information. It states that such information cannot be transferred back from protein to either protein or nucleic acid. The central dogma has also been described as "DNA makes RNA and RNA makes protein." This is curious because Buddhism, one of the world's great religions, does not have a central dogma. In fact Buddha expressed this by saying, "Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense." How is it that a science as a dogma but a religion doesn't? This seems to me to be a serious problem.

We're assured by the Central Dogma of Biology and it's main popular interpreter Richard Dawkins that the genes runs the cells and organisms like you exist only to propagate genes. If that's true, then knocking out genes should kill off mechanisms in organisms and eventually kill off the cells. Does it? Nope.

You have a heart beat. That heart beat is common to all animals and is called the sinus rhythm. It's central to the life of all animals - your heart stops beating, pretty soon you're dead. There's a protean, IbNa, which regulates the sodium channel in your heart and contributes about 80% of the current to your heart beat. What happens when you knock out this protean and the DNA that encodes it? You might think that since this protean does 80% of the work, you're dead pretty quickly. Nope. In the picture below we see that as the IbNa protean is progressively knocked out by 20% - 40% - 60% - 80% - 100% (blue trace below) the secondary protean mechanism If takes over and the heart beat barely changes. What does happen is the minimum electric voltage on your heart starts to go very slightly negative (red line below) which tells the secondary mechanism to kick in and take over. Killing off critical genes doesn't kill you. This gene which seems to be in charge of 80% of your heart beat only affects your heart rhythm by about 10% when completely knocked out.

There are about 6,000 genes in yeast. A study was done recently where these 6,000 genes were knocked out one by one. What happened? For 80% of the genes, nothing measurable happened. For 4,800 of the genes, knocking them out was completely silent. So the genes, which are supposed by many to regulate the cells, are not in fact regulators at all. In fact for 80% of the genes in yeast knocking out the gene doesn't even reveal function, much less regulation.

What happens if you simply remove the nucleus entirely from a cell. We know this in the short term from cloning: you remove the nucleus entirely from an egg, perhaps a dog, and replace it with a different nucleus, perhaps from your beloved by now expired Fido, and attempt to clone Fido. It works, the cell functions for several hours with no nucleus with no problem. Your red blood cells have no nucleus and live for about four months on average. In fact the experiment has been done more drastically. Cells have had their nucleus removed and lived for up to eight months without any DNA at all. This certainly resolves any question of DNA regulating or directing cell processes. DNA doesn't do this.

What happens if you remove the cell completely from the DNA? Take the DNA from any organism and place it in a petri dish with any mix of nutrients you wish in any proportion. Wait as long as you wish - 10,000 years. Nothing will happen. DNA requires enormously complicated mechanisms - proteans to read the DNA, skip over garbage, put the good pieces together, and then convert the spell and grammar corrected DNA to mRNA. Then you need another complicated protean to convert the mRNA to normal RNA. Then you need an enormously complicated protean to convert the RNA to proteans, and yet more proteans to fold up the new protean into its working shape. Take away the cell and the DNA is no more readable than the dead sea scrolls would be to your average southern baptist. This is the biggest failure of the central dogma: DNA is not useful when isolated from the organism and environment. Or, more simply, as Pasteur put it in about 1850, Life comes only from Life.

A really exciting experiment on DNA would be to take an egg from one species - perhaps a cat - and put in the DNA from another species - perhaps a rabbit - and see what comes out. The central dogma of biology would seem to assure us that this will result in the animal represented by the DNA. This has been done many times to date and the result is it gets up to perhaps 8 cells then freezes development then dies. Doesn't work. So far we can't learn anything from this. But we can transfer DNA inside a species. Carp and goldfish are both members of the species Cyprinidae. They can't breed with each other in the wild, but with help in the form of human injected hormones they can cross breed and produce sterile offspring, like a mule from a horse-donkey cross breed. We can, however, take a goldfish egg, remove the DNA, and substitute the DNA from a carp. What happens? Do you get a carp? Below is a picture of a goldfish, left; a small carp, middle; and a fish which came from a goldfish egg with carp DNA. A goldfish has 26 vertebrae while a carp has 33 vertebrae. Six fish were made with a goldfish egg and carp DNA; they had from 26 to 28 vertebrae. The cell did far more regulation than the DNA did.

We're told inheritance comes through DNA. Is it true? Lamark and Lysenko assured us that learned traits could be inherited. Lysenko explained that this was why heavily muscled blacksmiths produced sons which were heavily muscled. Modern biology discards these views as nonsense. Unfortunately, it's well documented that learned traits can be inherited. There's a small round worm, c.elegans, which is very popular with biologists for experimentation. If you give one of these roundworms a virus, they will eventually develop an RNA mechanism to silence the viral response. This response does not involve any changes to the DNA. However, the response has been shown to be inherited for 100 generations. Some of these worms lack the DNA to make this virus silencing RNA. If you breed worms which have the virus silencing response with worms that lack the DNA to make this RNA, you find that you get worms which lack the DNA but have the RNA. This is non-mendelian inheritance, a direct violation of the central dogma.

Any engineer will look into biology a bit, read that DNA is the computer that manages the cell, and quickly come to the same conclusion I did years ago: DNA is a cell library. It has no computer power, no decision making ability. It has almost no ability to change in the face of a changing environment. DNA is like a hard disk holding instructions on how to build particular proteans. Without a computer and some rather complicated software, a hard disk is just a funny shaped rock. So, what in the cell is the computer? Who wrote the software? Where does it live? These questions are completely unanswered in current biology; in fact if you want to investigate them you're unlikely to be funded. So it goes when you challenge the central dogma.

We can no longer say that the organism exists to replicate the selfish DNA, as Richard Dawkins has assured us. The central dogma, that DNA codes for RNA which makes proteans which control everything, is broken. We can no longer ask if it is broken; at this point we are left asking how often it's broken and when it's broken. We can no longed talk of the gene centered view of natural selection and the impossibility of inheritance of acquired characteristics, as we now know clearly that inheritance is multi level and acquired characteristics are inherited. Why has this insight taken so long, so very many decades? The history of religion assures us in the strongest terms that one does not question dogma lightly, and biologists have apparently learned this lesson well. All their effort goes into questioning christian dogma, leaving no room to question biological dogma.

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