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Mark's Market Blog

2-6-10: Market adjustment? Or the next leg down?

By Mark Lawrence

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I'm confused by the market these past couple of weeks. Obviously, there's been a significant drop - about 10%. This has been in the face of rather decent economic reports - the unemployment number is down to 9.7%, profits are up a bit at most companies, the Christmas season was decent, certainly not a car crash. It was time for a pullback, but I would have expected something more in the 5% range. This market adjustment has been driven by China tightening down on its banks, and growing fears of a default by Greece, Portugal, and possibly Spain. The EU can handle Greece with a bailout if they choose, but if Spain and Portugal start to go, that could well signal the end of the European Economic Union and the end of the Euro. We've been discussing the PIIGS (Portugal, Italy, Ireland, Greece, Spain) for some time, and now that topic is front and center. There are also growing questions about China - some think they are following Japan's path of the 70's and 80's, and will enjoy a couple decades of substantially uninterrupted growth at 10% per year or so. Others think China is the largest example in the history of the world of "cooked books," meaning this is an entire country that looks to go the way of Enron. Here too, I don't really know what to think about China. Although I think this market is likely to fall a great deal this year, it doesn't seem to me like this is the time for it. On the other hand, I'm also not willing to predict a quick return to previous market levels, meaning the highs of only three weeks ago.

S&P 500 October 23 2009 to January 15 2010

Unemployment was reported in January to be 9.7%, a direct contradiction to my prediction just a month ago that unemployment would stay above 10% all year long. I'm not worried. The unemployment numbers use population as part of the calculation, and the January population numbers are skewed by accounting for many of the year's projected deaths all in one month. Also this does not represent a large gain in jobs so much as it represents that a lot of people have given up looking for work. Since Clinton was president, we've been cooking our own unemployment books by saying that people who are unemployed for more than a year are no longer unemployed, they've dropped out of the labor force. The Bureau of Labor Statistics reports another number, "U6," which includes most all unemployed and under-employed people. U6 is stuck around 17%, reflecting nearly 26 million Americans out of work. The charts below compares the last several recessions. Until 2000, recessions caused a drop of about 4% in employment, and lasted about two years. This time is clearly different.

The European Economic Union includes a treaty, signed by all countries involved, that promises various things. One of the promises is that each country will keep their debt to under 60% of GDP. As of today, every country in the EU except Finland is in violation of this agreement. Projecting forwards on current trends, in 2020 the treaty will be a complete joke. It's generally agreed that when debt hits about 100% of GDP, economic growth slows and unemployment starts being persistently high. The US is at about 90% today. Greece and Italy are already well over this threshold. Ireland is projected to be another basket case. Of course, current trends will not last until 2020 - before things get that bad, there will be another recession and the EU will fall apart with much finger-pointing.

Debt as a percent of GDP for member countries in the European Union

The American Council on Education says the gender gap on campus - about 57% female, 43% male - is troubling, but it's not getting any worse. They suggest policymakers and educators can have the greatest effect by focusing efforts on Hispanics. Just 9% of Hispanic young men have earned a bachelor's degree, the lowest attainment level of any group studied. 14% of Hispanic young women have earned a bachelor's. Noting President Obama's goal to increase college attainment, Lorenzo Esters says, "It is less likely that we will be able to do that if we don't take a significant look at black, Hispanic and other minority males." My personal editorial response: Without men, civilization would last until the oil needed changing. -- Fred Reed.

As part of his efforts to cut the state budget deficit, California's governor, Arnold Schwarzenegger, suggested the state could save a further $1 billion if it built prisons in Mexico to house the 19,000 illegal immigrants currently residing in its jails.

Meg Whitman, former president of EBay, is running for Governor of California (Lord alone knows why she would want this thankless job. . .) In her ads, she say California is 10% of the US population, but has 32% of the country's welfare cases. I checked these numbers out, and they're substantially accurate. California, which currently has a budget deficit of $20 billion, is spending about $35 billion per year on welfare. There can be little debate on the statement that reform is needed.

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