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Mark's Market Blog

12-8-13: Bears going extinct.

By Mark Lawrence

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The bull market seems to have stalled for a bit. There's a bit of apprehension that the Fed will scale back QE as a Christmas present for Wall Street banks, stock owners, and people looking to buy homes. I don't believe it, they're already unpopular enough without ruining Christmas. QE tapering will most likely start in a few months; it will result in a huge market correction which will scare Yellen enormously, then she will return to QE indefinitely. We're going to print money until it's worthless. That may take a few decades, but it's going to happen.

S&P 500 June 17 2013 to December 6 2013

Global warming and the Fed seem to be causing bears to become extinct. Polls show there are almost no bears left on Wall Street; perhaps the NY Fed will have to find a few breeding pairs just to keep the species alive. Traditionally the bull market isn't over until the last bear gives up - we're very close to there.

Japan's reserve bank is printing money like crazy - their economy is about a third the size of the US, but they're QE program is about equal. Their stated goals include driving down the yen to increase exports and import jobs, and it seems to be working. Yamaha just released a new model motorcycle that looks like about an $11,000 bike with a price tag of $8000. Of course China and Korea will do whatever it takes to keep up with Japan. This will plausibly have three important consequences: 1) new job creation in the US is going to slow as jobs move overseas; 2) good luck to Yellen trying to start up inflation when all of Asia is in a price war; and 3) US corporate profits are likely to suffer as collateral damage from this price war. This is going to put a cap on the S&P. If/when Yellen decides to taper off QE purchases this will only magnify the effect on making the stock market drop. I will be completely unsurprised if a taper starts in March and is reversed by August. IMHO we're officially addicts, and Yellen is the new head of the monetary Medellin cartel.

Shanghai warned residents to stay indoors as the "level of the most harmful pollutants exceeded more than 10 times the level deemed safe by the World Health Organization."

China has declared a new Air Defense Zone out in the pacific covering a bunch of islands that are disputed by Taiwan and Japan, and, incidentally, also covering what is thought to be a major natural gas deposit. The US and Japan immediately sent planes through the defense zone. China responded by sending fighters and their version of the AWACS (a flying radar and tracking station) and issuing veiled threats. When it comes to resources, China is like a 3 y/o screaming "My legos!"

A new report from the US National Research Council warns that global warming is proceeding at a much faster than expected rate, based in part on the disappearance of the Arctic sea ice. They're calling for massive carbon taxes and an "abrupt climate change early warning system." Perhaps we could have sirens and school children could practice cowering under their desks to protect themselves from a climate onslaught. The report says we need to cut carbon emissions by 6% per year. Due to industrialization in the 3rd world, of course carbon emissions are increasing quickly - in a year or three China will pass up the US as the world's greatest carbon emitter. France has converted almost completely to nuclear power and Denmark to wind power, but their carbon emissions are dropping by only 2% per year - we would have to do three times as good. As I type this we're having record low temperatures across the country, and the central valley of California may well have some once-every-few-decades snow. California, ruled by the democratic party with a better than 2/3 majority, has recently added a 1% lumber tax. Trees pull carbon dioxide out of the air and make wood; when we buy lumber we're removing carbon dioxide from the atmosphere, but that process is now taxed. Well, no one ever accused democrats of being consistent. If I believed in global warming, I would say the single best thing we could do to combat it would be a world-wide birth control policy. If we were to drop world population from 7 billion to 2 billion, none of this would be an issue.

Angela Merkel's conservative CDU party won the election in Germany, and has just announced, two months later, that they have completed negotiations to form a government with the center-left Social Democrats. The SDs will submit a ballot to their 470,000 members to see if they agree with the terms, which include a new $11.50 / hour minimum wage, social security reform, and allowing children of Turkish immigrants to hold dual citizenship. Ms. Merkel will perhaps be sworn in as Prime Minister a week or so before Christmas.

Detroit will be cutting pension benefits - previously considered sacrosanct. Illinois followed them the same day with announced cuts to their pensioners. San Bernardino is arguing for such cuts in their bankruptcy case - California guarantees pensions in the constitution, but bankruptcy courts are federal, they don't care about no stinkin' state constitution. New young workers are being hit especially hard as their contributions are being raised along with their retirement age.

On top of massive youth unemployment and a crashing economy, Greece has failing hospitals due to a lack of money to pay for basic supplies. HIV is quickly expanding in Greece to epidemic levels. At least when the trojans or spartans attacked they knew who to fight; their current problems don't have any clear enemy to attack.

Thailand seems to be having yet another coup, their 19th since becoming a democracy in 1932. In 2006 their populist prime minister, Thaksin Shinawatra, was overthrown by the military and is still living outside of Thailand. His sister, Yingluck Shinawatra, became prime minister in 2011. Now it's looking like her time is about up. Thailand is a country of extremes - some are quite wealthy, many have what they consider a middle class existence, and a large number live in staggering poverty. Thai politics puts the poverty-striken north into conflict with the richer and more industrialized south. Populists have the best chance of winning an election if they promise lots of benefits, but if they attempt to deliver they risk a coup.

For a credit line of about $3.8b, China has gotten Ecuador to grant them rights to about $12b / year of oil for several years. Suppose they would expect 10% on their money lending to a country like Ecuador - for less than $400m / year, they now control $12b / year in oil. I don't know if I'm supposed to be more impressed with how smart China is, or how desperate Ecuador is. Why didn't we do this?

American Airlines and US Air will merge on Monday to form the biggest US airline. Southwest and JetBlue are winners here, the DOJ required American to give them more landing spots at LaGuardia and Reagan airports.

Ford announced the 2015 mustang. I think they screwed it up - to me, it now looks like a car from the lost years of 1974-2004. They nailed the previous model, however it's getting a bit over sold; both the Camaro and the Challenger are out selling it. It retains a base 6 cylinder engine; the next upgrade is a dual turbo 4 cylinder. A 4 cylinder mustang? Either I'm a dinosaur, or this is just wrong. The much-cherished V8 will also be a $$$ option.

GM is discontinuing selling Chevys in Europe. Instead they will sell the Opel and Vauxhall brands. The new Corvette will still be available. GM hopes that the new Corvette will prove to be competitive with Porsche even in Europe.

In 1965, Gordon Moore, a founder of Intel, proposed Moore's law: every 18 months the price and size of a transistor halves. We've been living on this curve pretty much ever since. A few years ago we had our first stumble - smaller transistors should go faster, but we got stuck in about 2004 at about 3ghz for computer chips due to radiation and power losses in the wires. Now it looks like we're going to fall off Moore's law completely for a different reason: the fabrication lines are simply too expensive, nearly $10 billion, You can't amortize the costs over enough chips. We will keep making smaller transistors for a time, but they won't be faster or cheaper, just smaller. We've stayed on Moore's law for transistor size - we're now making chips with 22 nanometer features. In 1965 the best chip had 64 transistors; today the latest graphics chips have 7 billion. The wavelength of visible light is about 500 nanometers, so if you look at a new chip in a microscope you can't see individual transistors, the smallest thing you can see is about 400 transistors. It's believed by many that we will make it to 7 nanometer fab lines, perhaps even 5 nanometer fab lines around 2020 to 2023. At that point we're likely to be stuck for a different reason: a nanometer is about 10 atoms, so transistor features would be only 50 to 70 atoms in size. At some point they quit acting like a smooth feature and start acting like a bunch of quantum atomic thingies. So the iPhone 8 or so is going to be about as good as it gets; laptops aren't going to get a whole lot faster or cheaper than they are now. Screens and batteries might improve, laptops might get lighter and thinner, but not faster or cheaper. What is the result of this? Computer chips will become a commodity, made no longer by the cleverest people but rather by the people with the best cost advantage. This will be the end of the hardware portion of Silicon Valley. Don't get caught holding Intel or AMD stock after about 2018.

The holy grail of electronics is room temperature superconductors. Such a material would conduct electricity without generating any waste heat. Current superconductors mostly work at about 450 degrees below zero - if you get an MRI, the superconductors are cooled to within 3 degrees of absolute zero by liquid helium. New research seems to indicate that tin can superconduct at temperatures as high as boiling water if the tin is only 1 atom thick and mixed carefully with fluorine. This won't result in high efficiency power lines anytime soon - as much as half the power generated in this country at dams, nuclear plants, gas and coal plants is wasted as heat in long distance power lines and transformers. But it may result in superconducting chips, which will make computers run a bit faster and cooler. Personally, I'm concerned that fluoridation of our computer chips is a monstrously conceived and dangerous international communist conspiracy to sap and impurify all of our precious bodily fluids.

Engineers at Michigan State have announced an open-source 3d metal printer based on a welder that they say can be built for about $1200 (below right). Previously the same guys released an open-source 3d printer, the RepRap (below left) (Replicating Rapid-prototyper), that has proven inexpensive to own and operate and quite accurate. I'm going to build myself a RepRap. I dunno what I'll do with it, but then I didn't know what I would do with my laser when I built that 8 years ago and I've since sold about $2,750,000 worth of motorcycle windshields that I made with it. The RepRap makes plastic parts from 3d drawings that have a precision of about a thousandth of an inch - good enough to print threads in the holes. A sample of printed parts is bottom center. I expect it will take me several months to digest this - I'm going to have to find a decent and inexpensive 3d modeling program, preferably one that runs on Linux as I'm trying to get Windows and Bill Gates completely out of my shop.

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