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Mark's Market Blog

3-15-15: Khamenei still lives, but Putin is missing.

By Mark Lawrence

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Stocks dropped all week on news that stocks were dropping. Next week they'll likely go up on news that stocks are going up. Meanwhile the dollar continues to go up, the outbound carry trades continue to be unwound to the extreme detriment of third world nations who were getting huge amounts of money, the Yen carry trade continues to fuel asset appreciation in the US, and now we have a burgeoning Euro carry trade. I really don't see how US markets can go significantly down - more than, say, 5% to 7% - in an environment where people the world over are simply flooding the US with money. Unless Iran nukes Israel, or Putin dies, or Japan declares themselves a nuclear state. Then all bets are off.


S&P 500 September 18 2014 to March 13 2015

Last week I reported that the Ayatollah Ali Khamenei, Iran's Supreme Leader, had apparently died. While it was an excellent idea, apparently it hasn't happened. Yet. But almost certainly soon, as he has advanced cancer. Since the Islamic Revolution in 1979, the Iran has only had two supreme leaders, meaning there's only been a single power transition in 35 years. Khamenei has ruled as Iran's supreme leader since 1989 after the death of the first supreme leader, Ruhollah Khomeini. After Khamenei's death, Iran's constitution stipulates that the next supreme leader is to be chosen by the Assembly of Experts, a body which hasn't been consulted in decades. The assembly, comprised of 86 elected religious leaders, would have the ultimate say in who will replace Khamenei. His replacement is all but certain to be another hard liner, so if you're hoping for moderation good luck with that. You might reasonably ask how 86 white beards who had collectively read perhaps a dozen books outside of the koran get to be called an Assembly of Experts. My answer: the same way it got to be called the People's Democratic Republic of China. Khamenei did take time out of his busy day lying in a hospital bed to warn that the US "is deceitful and stabs in the back," and branded a letter from Republican lawmakers as a sign of America's "extreme decadence of political ethics and the collapse of the American system from within."

Putin has not been seen in public since March 5th, canceling at least two high level meetings, leading to a lot of speculation and rumors - is he dead? in the hospital? locked away? dealing with a power sturggle? On Friday, Russian state television released footage of the "perfectly healthy" 62-year-old leader meeting with Supreme Court chairman Vyacheslav Lebedev to discuss judicial reform system. Unfortunately it turns out that video was originally seen in October of last year, so the effect was only to heighten suspicion. Next they announced he'd had a lovely meeting with Kyrgyzstan President Almazbek Atambayev — even though the meeting is tomorrow. Two weeks ago prominent opposition figure Boris Nemtsov was assassinated within site of the Kremlin's walls. In 2006 Alexander Litvinenko, a highly prominent critic of Putin, died of radiation poisoning in London. This week it came out that he was poisoned with polonium that could only have come from the Avangard facility in Russia, meaning he was obviously killed and Putin almost certainly knew about it. What's going on? I have no clue. Putin is ridiculously popular in Russia, if there has been a coup it will be taken badly by the citizens.

Spain is an interesting country with a long history, but little of that history includes democracy. In Spain there is pretty much no such thing as bankruptcy. Banks in Spain, as in most countries, have the right to auction houses in foreclosure. But if no buyers appear, the bank can take ownership of the house for 60% of its face value. The banks then have 15 years to go after the homeowner. Indeed, most Spanish foreclosure victims end up personally liable for not only much of the outstanding loan, but also thousands of euros in penalty interest charges and tens of thousands of euros in court fees. In the end they could end up owing more than the original mortgage. Put simply, in Spain debt is for life and bankruptcy is never an option. Other countries in the European Union also have personal debt mortgages, but you can go to the courts and get relief. Not in Spain. This has lead to an interesting situation - since their housing crash in 2008, Spanish banks have been evicting thousands of homeowners each month - 68,091 in 2014. When word gets out frequently neighbors will stand between the house and the riot police which show up to perform the eviction. Standing passively and non-violently in front of the police is also a crime with penalties of thousands of euros. The government has put themselves in the position of enforcing bank rules and arresting and fining citizens €1,000 to €30,000 for protesting. This is why the Spanish government so desperately wants to see the Greek government fail: in Spanish elections this fall there's an excellent chance this entire system will go down in flames. The election of a far left party in Spain would almost certainly lead to a crisis for the Euro.

Retail sales in the US have been abysmal so far this year, due almost certainly to the horrible winter weather over most of the country. We had the same affect last year although this year it's perhaps even more pronounced. Expect most company profits to be well below trend for the first quarter. I'm sure many in New England would have been thrilled to ship a lot of their lifestyle-crushing snow here to the P.R. of California, where we desperately need it.

Oil rose briefly the last few weeks in what's called a "dead cat bounce," but it's on the way down again now. US oil inventories are the highest they've ever been for this time of year and growing - we're making oil faster than we use it. European inventories are also starting to grow. California gas prices remain well above $3 because we use "special" gas and there was an explosion at a California refinery limiting production; the rest of the country is seeing gas prices drop quickly to $2 and is likely headed back below $2.

Relations between Germany and Greece are very tense right now. The Greek minister of justice is publicly threatening to allow Greeks to seize German property as reparations for WW II; German ministers are talking about shoving Greece out of the Euro, saying it's like amputating a gangrenous limp to save the Eurozone body. Will Rogers said, "Diplomacy is the art of saying 'Nice doggie' until you can find a rock." There isn't much "nice doggie" happening between Germans an Greeks right now.

Between 2003 and 2013 right-to-work states generated 3.6m new jobs, had wages increase by 15% and manufacturing gdp increased by 26%. The other 26 states generated 1.5m new jobs, had their wages rise by 8.2% and manufacturing gdp rose by 13.8%. Put simply, right to work states out performed union states by about a factor of two. Before Obama I had never heard of SEIU; now it seems I see their signs at least weekly here in the People's Republic of California, effectively chanting for fewer jobs and slower growth.

The dollar has gone up 25% in the last 9 months. Meanwhile, in the last couple of years foreign corporations have been on a borrowing spree, selling dollar denominated bonds at historically low rates. The result is there is now $9 trillion in dollar denominated bonds outstanding in emerging countries while the Fed is getting set to raise rates, perhaps as many as three times this year according to our lords and masters the Bank for International Settlements. The last time this happened in the late 90s the dollar rise was not nearly as steep and the foreign borrowing not nearly as large, yet Russia basically went bankrupt and most all of Asia went deeply into crisis. Here in the US this was reflected in the bankruptcy of LTCM and the Fed choreographed panic level bailout. To make matters worse, as Japan and Europe devalue their currencies to improve their economics, the rest of the world including China is obliged to follow or get economically left behind. And as the dollar continues to rise the carry trade - where people borrow in one currency like yen and loan in another like dollars - is increasingly sending foreign money to the US, which is only driving the dollar up further and inducing the Fed to raise rates sooner and more strongly. There's some massive positive feedback going on here and the end will not be pretty (btw, feedback is one of those rare things where "negative" is good and "positive" is bad.) Historically when the dollar hits extremes in value it causes serious problems for someone. Expect a growing international crisis starting roughly this summer and continuing through the rest of the year, with a lot of foreign companies in serious trouble, perhaps many even in existential trouble. Also there have been a lot of home mortgages priced in dollars in several countries; these people will require a bailout or their countries will risk a housing collapse. Some of this will be reflected back in our economy as the very predictable rush to buy dollars will force many foreigners to sell US assets to raise money, causing at the least a pause in our real estate markets. The days of Chinese buying New York hotels for a multiple of their value are quickly coming to an end, and some of those wildly over priced properties are likely to hit the market at fire sale prices. Much like when Japan went crazy in the late 80s.

On March 12, 2015, Secretary of State John Kerry said to the Atlantic Council in Washington, "When an apple falls from a tree, it will drop toward the ground. We know that because of the basic laws of physics. Science tells us that gravity exists, and no one disputes that. Science also tells us that when the water temperature drops below 32 degrees Fahrenheit, it turns to ice. No one disputes that. So when science tells us that our climate is changing and human beings are largely causing that change, by what right do people stand up and just say, 'well, I dispute that, or I deny that elementary truth?'" Apparently I do not have the right to question either the laws of gravity or the laws of climate change. I feel I must apologize to my readers for my presumptuousness. Well, none the less, with a complete lack of respect for Secretary Kerry's credentials either in the field of science or freedom of speech, my response is available here .

Here in the People's Republic of California, water is getting serious. The snow pack is at 17% of normal for this date. This is the 4th year of drought. What's happening is a persistent high pressure system sits over PR Ca in January and February, pushing the jet stream up into Canada. The jet stream picks up a bunch of Canadian and Arctic water, then comes back down into the US around N.Dakota or Minnesota, resulting in massive snow falls and very cold weather in the east and warm and dry winters on the west coast. A similar thing in Europe results in cold snowy weather in Europe and relatively warm, dry winters in SIberia. This pattern is historically what generates ice ages - during an ice age Siberia and California are relatively livable; New England and northern Europe are not. And Siberians walk across to Alaska and down into California and points south. Jay Famiglietti, the senior water scientist at the NASA Jet Propulsion Laboratory at Caltech wrote in an LA Times opinion piece, "...the state has only about one year of water supply left in its reservoirs, and our strategic backup supply, groundwater, is rapidly disappearing. California has no contingency plan for a persistent drought..." Anyway, so far the government here isn't doing much of anything - no warnings, no visible preparation. What's up? I've met governor Brown, he's an exceedingly smart and amoral person, and I promise you he has a plan. He will wait until July or August when there's an obvious crisis and people are screaming for him to do something, anything, and then he will present his plan. Tunnels under the Sacramento river delta. Meters on private wells. New quotas for farmers and cities. Restrictions on watering lawns and washing cars. I obviously don't know the details. Right now California water is run by an uneasy coalition of three powers - the California Water Resources Control Board, LA's Metropolitan Water District, and the Feds who manage the dams and outflow. Everyone here would like to cut the Feds out of the pie. There are also a lot of historic rights to streams and rivers. I expect some bills that will attempt to change all that radically, and we voters will not find out for quite a while what the bills mean. Brown is far too smart to waste a good crisis, either by inaction or by acting too soon.

Hoping to retire someday? JP Morgan offers this handy chart to tell you how far behind you are. Move across the top to your salary, then move down that row to your age. If your salary is $150,000 and your age is 50, you find the number 5.3. Multiply your salary by this number $150,000 * 5.3 = $795,000. That's how much money you should have saved up. At 65 with a salary of $150,000 you should have $1,740,000. Read it and weep.

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