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Mark's Market Blog

2-17-13: A New Nuclear Arms Race.

By Mark Lawrence

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There's not a lot of market news this week. Japan is pumping major money into their economy with the expressed goal of raising prices on their stock market. It's working. Some of that money is pretty clearly leaking into the US markets. Meanwhile, industry insiders and hedge fund managers are dumping their stocks like crazy, signaling that they think things are most likely to go down from here.

S&P 500 August 12 2012 to February 15 2013

Walmart announced preliminary results for February, saying their sales had dropped significantly. Apparently the renewed SS taxes are having an affect.

What is the cost of a recession? The accepted way to measure this is to graph a country's GDP. There will be a best fit line, and the GDP will generally run slightly above or below that line. When it's above, you're doing better than expected, when it's below you're losing money. During a recession the GDP will run perhaps a couple percentage points below nominal for a year, perhaps two, then catch back up. The area between the two curves is the cost of that recession. But it doesn't always have to be like that. Below we see the European GDP since 2000 and the best fit trend line. Starting in 2008 when the financial crisis hit, the GDP drops about 12% below trend line, a rather steep drop. Then instead of recovering back to the original trend line, the GDP gets onto a new parallel trend line, meaning the GDP looks like it will never catch up to the original trend line and the formal cost of the financial crisis is infinite. Then in 2011 the European GDP drops even further, below the secondary trend line. Europe is hemorrhaging money and jobs with no recovery in sight or predictable. We may be witnessing a permanent drop in European standard of living.

We're told guns must be better regulated because of all the deaths they're causing. Ignoring old age, here are the top ten killers in the US. If we're worried about people dying unnecessarily, guns are #10. To save big numbers of people we would outlaw tobacco products and start trying to get a handle on medical deaths. It's been well known for decades that the bottom 10% or so of all doctors cause a huge fraction of all medical errors, but we're not allowed to know who is in that bottom 10%. AMA joke: What do you call the guy who graduated last in his class at medical school? ans: Doctor.

For all of my youth we were told to be afraid of nuclear war, including having air raid practices in elementary school where I was taught to duck under my desk. I don't really understand what a desk has to do with anything. As a teenager I was frequently shown the "nuclear clock" stuck at about 11:59:30, trying to tell me we spent a couple decades 30 seconds away from Armageddon. Sometime in the late 80s all this craziness stopped, my children were never subjected to this nonsense. Well, now it's baaaaaack. We're very close to a new nuclear arms race, in the opinion of many including me we're quite close to a war, and the chances of a nuke being used in the next 18 months or so seems higher to me than at any time since the 60s.

North Korea set off another bomb last week, and this time it worked. They now apparently can make a Hiroshima-class bomb. The next step is to make a bomb small enough to fit in an airplane or on top of a missile. In any case, their threat to nuke Seoul or Tokyo now has some teeth. N.Korea claims to be working on a hydrogen bomb. There are two types of bombs: one uses uranium or plutonium and splits these very large atoms, releasing energy. The other type injects heavy hydrogen into the center of a uranium bomb just before it detonates; the hydrogen fuses to make helium in a process similar to how the sun makes energy. Hydrogen or Thermo-Nuclear bombs are about 1000 times stronger than uranium bombs. The first one we tested caused a small pacific island to disappear completely. A single hydrogen bomb could kill half or more of S.Korea's population. S.Korea immediately issued a statement that they would preemptively strike N.Korea if they believed an attack was imminent. "The cruise missile being unveiled today is a precision-guided weapon that can identify and strike the window of the office of North Korea's leadership," said S.Korea Defense Ministry spokesman Kim Min-seok. The Libyan, Syrian, Iranian and N.Korean bomb projects all trace back to a single Pakistani physicist, Abdul Qadeer Khan, who sold them all detailed plans. It's believed the Pakistani government approved these sales, as Dr.Kahn is a free man in Pakistan today.

After N.Korea's test, Japan's defense minister immediately held a press conference where he said "When an intention to attack Japan is evident, the threat is imminent, and there are no other options, Japan is allowed under the law to carry out strikes against enemy targets." This is diplomatic speak for "We're going to make a bomb too and drop it without warning on N.Korea." N.Korea has threatened the US and Japan numerous times. Japan has very advanced reactor technology and clearly could make a bomb in under a year. For almost 70 years Japan has been a more or less disarmed nation, with only a small defense force. That might change this year, quickly, thanks to threats from both China and N.Korea. S.Korea also has advanced reactor capability and could likely make a bomb quickly, but apparently they don't find it in their interests to talk about it. For 35 years or so the threat of a nuclear attack has been very low, but that seems to be changing quickly. Five years ago I would have said that China most certainly didn't want to get into an arms race with Japan, they wanted to focus on their economy. Today that's less clear to me, China might welcome spending many billions on yet another "investment." Japan certainly doesn't think an arms race is in their economic interests, but if they decide the existence of the Land of the Rising Sun is threatened expect a powerful reaction. China has perhaps 250 nuclear bombs. If China decides they're in an arms race with Japan and need another 500 bombs, Russia might well feel compelled to build more too. N.Korea can't feed their people or light their cities at night, but they might be about to set off a new generation cold war that could potentially end very badly.

And if there is a nuke set off in Korea or Japan? Who gets it? After Chernobyl the winds brought the radioactive fallout to the Ukraine and Sweden. After a hypothetical nuke in Korea the winds bring the fallout to Vietnam, Cambodia, Thailand, Malaysia.

Two weeks ago I noted that the Air Force had moved a couple nuclear capable bombers to Guam, forwards basing them. This week Russia also sent a couple nuclear armed bombers to Guam - in this case they circled the island until the US scrambled some fighters and escorted them away. I frankly have no clue why Russia wants a piece of this action.

Obama has proposed raising the minimum wage from $7.25 to $9. This has no chance of passing the house, but ignoring that, what would it do? Studies have shown that raising the minimum wages causes jobs to decrease, but less than the wage increase, so there's more money flowing into the lower classes. They respond by taking on debt: buying a more expensive car or a new refrigerator. The average lower class person takes on $440 more credit card, auto loan and home loan debt after a $1 rise in the minimum wage. So a raise of the minimum wage is a stimulus package for the lower classes, auto makers, appliance makers and banks.

Retraction: I was mistaken about USPS ending Saturday delivery now; it won't happen until August.

Fun Facts: Below is a picture of JJ Watt, the 6'5" 295 pound Houston Texan defensive end. Um, he's the little guy on the right. The guy on the left is Yao Ming, the retired Houston Rocket 7'6" 310 pound center. I would just make it to JJ's neck line.

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