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Mark's Market Blog

2-25-11: Libya in flames

By Mark Lawrence

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This was meant to be last week's blog, but my hard drive died. It's taken me a full week to recover, and I'm not done yet. We finally got our market correction, thanks to Qaddafi. I expect it will continue for a couple more days, thanks to the Arabs and the new Irish government. Then I expect Bernanke will continue to have his way, at least until the end of June when the money runs out. By then the S&P will likely be in the 1450-1500 range, up from the current 1325 or so. You may expect that starting on July 1, absent some new Fed program, the markets will get quite ugly quite quickly.


S&P 500 September 1 2010 to February 25 2011

Why did Egypt erupt? A few reasons: Egypt's very high birth rate means the population is growing fast. A growing population has a lot of kids, teens, young adults, and normally relatively few jobs, as these are generated by companies run by the few older people. Population pressure in the past had been mitigated by immigration to Europe, but that's been cut back severely by new European immigration standards. Egypt is a large desert with a small strip of livable land along the Nile; in Egypt if you count only arable land, there are about 5500 people per square mile. And food prices have been going up as Egypt is not even close to being able to grow enough food to feed their current people, much less the 3 to 5 kids each woman has. Basically, Egypt has been a demographic train wreck for years. All over the world birth rates have been dropping for a decade or more to sustainable levels, except for Africa and the middle east, the Muslim countries. Soon they will have too many babies for even Bill Gates to inoculate and feed. Meanwhile, the Egyptian Army, which has been the real power broker in Egypt for my entire life, continues in control of the country while they seek a new front man.

Libya has all but fallen. Unlike Egypt, the military is not a stabilizing force in Libya, as Gaddafi has always been suspicious of them and maintained his own separate troupes of mercenary Africans. I expect Gaddafi to fall this week, however behind him I expect chaos. In the worst case Gaddafi could sabotage Libya's oil pipes, leading to a minor crisis until they are repaired. As the Libyan resistance closes in on Gaddafi at a high cost of lives, Obama has helpfully scolded Gaddafi on TV and put sanctions into place. The UN, jealous no doubt of Obama's bold actions, will meet this week to discuss placing blue-uniformed UN peacekeepers inside heavily guarded UN compounds inside of Libya, to cower, distribute crumbs of food, and rape unprotected women. God help Libya, no one else will.

Conflict is increasing all over the middle east, particularly in Iran, Algeria, Bahrain, and Yemen. Arabs are starting to feel empowered by the seeming success of popular uprisings in Tunisia, Egypt and Libya. I say "seeming" because I believe firmly that a year from now this will all very clearly be "meet the new boss, same as the old boss." I also believe the unrest will continue to grow and spread, due to high population growth, poor education and medical systems, high unemployment, and food price inflation.

Oil has hit $100 per barrel. The Saudis have managed to talk the price down a bit, but I don't expect that to last - I expect oil to continue up a bit more. There is general agreement that an oil price of somewhere in the region of $105 - $115, tips the US economy over into recession. For all the heat we've taken in the past two years about our outmoded and discredited form of capitalism, the simple fact is that the American consumer continues to lead the world out of trouble. If we go back into recession, Europe and Asia will be hit even harder.

China is very aware of what's happening in the Arab world. The Chinese army has been mobilized as a precaution. The Chinese "revolution" has a name - the "Jasmine Revolution." The word "jasmine" has been banned from all Chinese search engines. Also Facebook and LinkedIn have been disabled inside China. In a speech this week, the Chinese Premier said that "harmony" must be their main social goal. You may expect as the heat in China raises, certain unharmonious scapegoats will be found, tried, and summarily executed. China is facing increasing inflation due, according to their government, to Bernanke's policies. Below is the increase in money supply in the US and China, judge for yourself:

Ireland had elections on Friday, and as expected their government was thrown out on their tails. The previous government had guaranteed all foreign bondholders of Irish banks and accepted a "bailout" from the EU and the IMF that had previously been compared to the Treaty of Versailles - the treaty that led directly from WWI to WWII. This bailout, in the view of most economists, paid off all foreign debt holders at a cost of 12-18 years of Irish depression. You may expect that in the coming week or two, as Europe realizes that this new government will almost certainly repudiate these agreements and force "haircuts" on foreign bondholders that there will be a certain level of panic in banking centers like London, Paris, Berlin.

The World Bank is forecasting that over 1 billion people will be pushed into chronic hunger this summer by food price inflation. World Bank president Robert Zoellick said the rise in food prices, coming so soon after the 2007-08 crisis, suggested the world was not dealing with a "one-time event". Rather, long-term demand was likely to keep upward pressures on prices for "years to come".


Food Price Inflation, 2003-2011

Wisconsin Gov. Scott Walker has passed a bill removing collective bargaining rights for public employees. Wisconsin was the first state to pass a comprehensive collective bargaining law in 1959. The American Federation of State, County and Municipal Employees - the national union representing all non-federal public employees - was founded in 1936 in Madison. Many other states are watching with great interest - we can expect this to spread in our country. I predict that states that don't follow suit, e.g. California, will come under greater and greater pressure as the tax payers see the difference this makes.

Childhood obesity in the United States has more than tripled in the past three decades, and prior research has linked maternal employment to children's body mass index (BMI), a measure of their weight-for-height. A new study in the January/February issue of the journal Child Development has found that children's BMI rose the more years their mothers worked over their children's lifetimes. The findings were strongest among children in 5th and 6th grades. Surprisingly, changes in children's physical activity, time spent unsupervised, and time spent watching TV didn't explain the link between maternal employment and children's BMI. Moreover, the time of day moms worked wasn't significantly associated with children's BMI.

Children of working mothers are twice as likely to experience overnight hospitalizations, asthma episodes, and injuries or poisonings. than children of mothers who don't work outside the home, according to new research from North Carolina State University.

Thomas Hoenig, president of the Kansas City Federal Reserve bank, gave a speech where he said our systemic risk due to large banks has not been addressed. He said in his opinion the largest banks must be broken up, and something like Glass-Steagall must be reinstated - the depression era law that forced companies to choose between being a bank or playing the stock market. Glass-Steagall was repealed in the late '90s with disastrous results. I sent Mr. Hoenig an email telling him I agreed completely, and I was thrilled to see someone in government take up this case. I also told him, were I President, Mr. Bernanke would be enjoying an exceptionally long vacation in the Bahamas, and he would have Bernanke's job.

The moratorium on foreclosures is over, and the foreclosure rate in California, Washington and Arizona is up over 50%.

Obama proposed a new budget. His budget includes at least 15 new taxes, including:

How serious was Obama with his cuts? Here's a chart of his budget: income in blue, deficit in red, cuts in green. Try to find the green.


Obama's proposed budget and cuts, 2011

Entitlements weren't touched. His new budget is considered DOA in the republican controlled house. The republicans, now having control over the purse strings, have talked a big line about how they're going to cut the budget. I'm waiting to see what really happens after the lobbyists get done with them. What does it mean that entitlements weren't touched? A quick glance at the chart below makes this clear: it means the cuts are all but meaningless.


Federal Income and Expense, 2011

This has been called the "Mancession," as most of the job cuts have fallen on men, not women. And those cuts have been disproportionately on the poorly educated.


Unemployment Rate by education, Feb 2011

And how is that unemployment doing? We've been hearing all these great things from the government: payroll tax receipts are up, new unemployment claims are down, everything is getting brighter and shinier, right? Here's our favorite graph updated through the end of January:


Job Losses for post-WWII recessions, updated Feb 2011

Like gold jewelry? It's going to get very expensive. Chinese see gold as an asset to protect themselves against inflation. Zhou Ming of The Industrial and Commercial Bank of China said "Last year we sold more than 15 tonnes of bars and coins and we have a strong start in January with almost 5 tonnes of sales." China is the world's largest gold producer, and still imported 209 tons of gold last year. When 1.2 billion people all decide they want gold, the price is going up.

Science stuff: Caterpillars live for a few weeks. They spend all their time eating (I can identify with that...). Then they form a cocoon, release a digestive enzyme into their bodies, and dissolve pretty much all their cells into amino acids, proteins, and phospho- lipids, leaving only a couple dozen stem cells. The stem cells then assemble a butterfly from the goo. The butterfly spends all it's time seeking sex (I can identify with that too.) Here's the kewl part: researchers recently trained some caterpillars to avoid certain scents. The resulting butterflies also avoided the same scents. These learned memories weren't stored in the neurons, 'cause there weren't any neurons in the cocoon. I've been saying for 20 years that memories aren't stored in the brain, now we have clear evidence. I'm pretty good at neural networks - every neural network chip ever made by mankind was programmed with my software. I'm pretty good at quantum and relativistic physics. And I'm here to tell you that life and intelligence do not obey the laws of physics as currently formulated. We're rapidly approaching the day when scientism (science as a religion) is going to have to give way and a non-mechanistic view of life will prevail.

Computer stuff: My hard drive failed. I had been using Microsoft backup every morning at 3am. MS backup doesn't save programs, so I've had to reinstall all my software - I'm still not caught up after about 14 hours of work. Firebird and Thunderbird in particular don't handle this very well. If I weren't good with computers, I would have lost all my bookmarks, email addresses, passwords, saved emails. If you have a company that relies on your computers, I strongly suggest you go buy a new hard drive, about $75, exchange it into one of your computers, and try to restore the machine. You might be in for a big surprise. Such a surprise will be much more easily handled when you can just swap back the original hard drive. If you're a home user and this is too much for you, well, good luck with that. My luck ran out.

I was given a Kindle. I love it. They hold about 3500 books, but the organization capabilities are so rudimentary that I can't imagine having more than a few hundred. I have about 110 books on it now. The 3G model downloads books in under a minute. If you turn off the Wi- Fi (only useful for downloading books), the battery lasts for a few weeks. You recharge by plugging into the wall or any USB port. It's got a built-in web browser which is all but useless - this device is just screaming for a touch screen. When you're reading a book and put it down (or fall asleep) it turns itself off, but when you turn it back on it's back on your page. Very kewl. For air travel you can bring a few hundred books with you in about a third the space and half the weight taken up by a single paperback. If you forget your reading glasses, you just increase the font size to huge and turn the page a lot. Books that are out of copyright are free on Amazon or Google - this means Jane Austin, Tarzan, War and Peace, Great Expectations. If you're a reader, you simply have to have one of these. Amazon reports that digital readers are now outselling hardcover books. The only drawback is that slightly old books like The Da Vinci Code are $8.50 for the Kindle edition, $4 new paperback, $1 used paperback or hardcover at Amazon.com, Half.com, Addall.com . Ebook prices don't take the used book market into account; this will have to change. I have three kids in college, I'm an expert at getting books at discount.

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