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Mark's Market Blog

2-27-10: Regulate the Markets, Volcanoes, and the Climate!

By Mark Lawrence

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The market was more or less flat this week with high volatility and continued concerns about Greece. Friday was more or less a vacation day relative to the markets, as New York was being buried under snow and few made it in to work. This appears to continue to be a bull market running through a correction, not the beginning of a collapse in stock prices.

S&P 500 November 19 2009 to February 19 2010

Roughly half the population of Greece went on strike, protesting their government's austerity measures which would cut jobs and pay to government workers. The protestors said that the Greek government must not bow down to market forces. As a businessman, I find this statement roughly equivalent to living in the shadow of Pompeii or Mount Saint Helen and telling your government to outlaw volcanic eruptions. As incredible as this stand seems to me, much of the population of Europe believes that the market can be tamed and improved by governments. Time will tell if they are right, and tectonic activities and market forces can be moderated by government policies, or if I am right, and you should not live near active volcanoes or try to pass laws to change the economic desires and behaviors of several billion people. Actually, 20 years ago when the Soviet Union collapsed, it was widely considered that this debate was settled. But we're human, and Hope will always triumph over Experience. What is the market? It is the law of the jungle, the law of nature. And what is civilization? It is the struggle against nature. -- Edouard Balladur, former (conservative) prime minister of France.

The FDIC announced Tuesday that it had added 450 institutions to its list of troubled lenders. The number of problem banks rose to 702 at the end of 2009, compared to 252 at the beginning of 2009. Historically, few banks make their way off the troubled list without a bailout. Both the number of troubled institutions and their total assets are at the highest level since 1993. The FDIC insurance fund fell deeper into the red, ending 2009 with a deficit of $20.9 billion. That position was nearly $38.1 billion weaker than a year earlier. Today the FDIC took over the 20th and 21st bank of this year.

FDIC Troubled and Failing Banks, 1992 to 2010

How much has government grown under the Baby Boomers? Below is a graph of median income and government spending from 1970 to 2010. SInce 1970, median income in the US has grown by 32%, and government spending has doubled. Government spending rose under every single president; however it rose slightly slower under Reagan, Bush1 and Clinton, and a lot faster under Bush2 and Obama. The Tea Party would like to see this curve start trending downwards.

US Median Income v. Federal Spending, 1970 to 2010

Last month Obama's top economic advisors - Larry Summers and Tim Geithner, who never met a Wall Street banker they didn't love - got pushed to the rear of the bus after Kennedy's seat went to a (gasp) republican. 24 hours after Scott Brown won in an election that was widely seen as a referendum on Obama's health care and economic plans, Obama trotted out Paul Volker and announced "The Volker Rule," a proposed set of rules that would once again separate banking from stock market gambling and more or less outlaw Citibank, recipients of one of the largest bailouts in the last 18 months. Obama seemed to have taken a sharp right turn towards the center.

Well, this week Volker has been pushed under the bus as Jamie Dimon (chairman Citi), Larry Fink (director of huge hedge fund Blackrock), and Lloyd Blankfein (Darth Sachs, chairman of Goldman) made their opposition to the Volker rule known. Who cares what these overpaid Wall Street Welfare recipients think? Well, in as much as Goldman was the #2 contributor to Obama's election campaign and Dimon personally led most of Wall Street to the fountain of Obama Kool-aid, Obama does. Shortly after the Great Depression, the Glass-Steagall act separated banking from market activities. Under Clinton, this act was repealed, with results we all know too well. The Volker rule would have restored much of it; while many thought the Volker rule flawed (in most cases saying it didn't go far enough), it was a good starting point for a conversation. Today, warmed-over health care is back on top of the national agenda and the Volker rule is laying in the middle of the highway waiting for the ASPCA truck to come sweep it up. A month ago on 60 minutes Obama famously said he "did not run for office to be helping out a bunch of fat cat bankers on Wall Street." This assertion may mollify his constituents, but it is not consistent with his administration's own policies. I'll go on record: Something similar to the 80 year old Glass Steagal act must be reinstated, separating banking from the stock market; Goldman's new status as a bank holding company, allowing it to borrow money from the Fed at essentially zero interest must be revoked; and Citi, BofA and other banks must be forced to divest themselves of their investment divisions and restrained from taking excessive risk with depositors' money.

Obama has called for a bi-partisan health care summit, however a couple days before the summit started he revealed his new health care plan, basically a rehash of the plans already passed by the house and senate with a couple small new cost containment features and extra powers for the government. So much for the right turn towards the center, it appears that under pressure Obama is running home to the left. The democrats are considering having the house pass the senate plan, then add a few bills later to make small changes. The democrats apparently calculate that they must pass something, and so they're going to try, even though their current bill is pretty unpopular with the public and centrist democrats. Republican response was that the bill needs to be scrapped and negotiations start from scratch. The republicans are unlikely to negotiate in good faith as their voters want no bill, which Obama acknowledged.

Meanwhile, the health care death-spiral has started: California blue cross announced a 40% rate increase for the year, which is due in large part to many people quitting their plan as too expensive to continue, leaving only sick people buying insurance. Raising rates by 40% in a recession will only increase this problem. My own Kaiser rates went up by 15% this year, to my deep annoyance. Apparently we're moving towards a pay-for-service + bankruptcy health care system. Four months ago my son Steven fell off his motorcycle, and was shoved into an ambulance by a group of 5 firemen and paramedics. He did not even require a band aid. Total emergency room bill: $19,000 for 4 hours of sitting around and getting a couple (negative) X-rays. I have no sympathy for the hospitals. Or the insurance companies. This entire system is out of control.

Heard the housing crisis is almost over? In January, builders sold 1000 houses per day nationally; Foreclosures rang up at 4300 and Notice-of-Defaults at 5100 per day nationally.

Freddie Mac, which has lost a total of almost $80 billion since the housing crisis started in 2007, said a record 4 percent of its borrowers are at least three months behind on their payments and facing foreclosure. Its chief executive, Charles Haldeman, warned Wednesday of a "potential large wave of foreclosures" still to come. Freddie Mac and Fannie Mae have already siphoned $111 billion from the government. That number is expected to hit $188 billion by fall 2011. Fannie and Freddie back about 70 percent of the mortgages made last year.

Burt Rutan is one of my personal heroes. It was his home built aircraft that won the race for a non-government ride into space. His was also the first aircraft to circumnavigate the earth without refueling. Burt has done extensive investigation into global warming. Here's Burt's video presentation on his findings, and here's an on-line PDF of his power point presentation. The Global Warming Climate Crisis people have an agenda, which Burt does an excellent job of exposing. By the way, now that it's becoming apparent that the Earth has spent the last seven years cooling down instead of warming up, it's no longer "Global Warming," it's now "The Climate Crisis." Apparently we're to pass laws and build a huge new Government agency to stop the Earth from changing its climate. And if the Earth persists in ignoring us, I suppose we'll get the UN to pass sanctions against the Earth. Science is not about consensus, and consensus is not science. -- Burt Rutan.

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