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Mark's Market Blog

3-23-14: Electorate starts to turn conservative

By Mark Lawrence

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The market has traded in a range the last two weeks; it can't seem to build up any momentum to break out to new highs, nor will it drop significantly. This won't last. The question is, which way does it go?

S&P 500 September 26 2013 to March 21 2014

Janet Yellen had her first press conference as chairman of the Fed. I have to admit that although speaking in public doesn't bother me I believe I would be a bit intimidated by these surroundings. Anyways, she says QE will continue to ramp down and the FED will maintain low interest rates for now. She also said she's looking at inflation, not unemployment as the key to when she will allow rates to rise. We may not get inflation this decade, so we may be looking at a Japan-style combination lost decade plus asset bubble. However, Yellen said rates may be raised starting in as little as six months. Stocks immediately turned down.

Speculation is rampant that China has met their "Minsky Moment," named after economist Hyman Minsky. The idea is that you can buy growth and employment for a time with low interest rates and lots of investing, but at some point every possible scheme seems to pay off due to the artificially low rates and easy money. Then bad investments are made, bonds start to fail, and it all ends in tears. I don't follow China closely enough to have an opinion on if we're there now, but the excesses in their economy make clear to me that this will happen sometime in the next few years. When it does China will experience a massive de-leveraging, much like we did fir years ago. Real estate prices will plunge, many people's net worth will be wiped out, banks will be insolvent, millions of jobs will disappear. China's currency, the renminbi, will plunge, making exports cheaper and imports more expensive as they attempt to go back to exporting stuff and importing US bonds and jobs. In the meantime they have an excess of over 35 billion square feet of construction - think of that as 35 million unoccupied apartments - and they're building 2 billion more square feet every year. And their manufacturing wages are increasing at 18% per year - faster even than medical costs or university costs in the US. In the last five years worldwide credit has grown by $30 trillion, a number that scares most of us. $15 trillion of that, half, is due to China, a country with half the GDP of the US and double the debt. We should not think there will be a market panic like there was in the US five years ago: it must be remembered that in China the government owns all the banks and most of the economy, so the debt is a deal they make with themselves. None the less, it has to be the case that a large portion of this debt is worthless. Japan was in a roughly comparable situation in the late 80's. Their stock market crashed in 1990 and they still haven't recovered, 25 years later, as the government keeps bailing everyone out and rolling over the bad loans. One of the keys to running a successful capitalist economy is bankruptcy, where you let inefficient businesses die and their assets and employees move over to more efficient businesses. Europe, Japan and China are not real big on letting large businesses die.

France had elections today. Two years ago they elected socialist Francois Hollande who promised a worker's paradise, as usual. He promptly raised taxes on the rich, prompting several to leave the country. Meanwhile unemployment hasn't budged, in no small part because in France it's basically illegal to lay off or fire a worker - your hiring has to be perfect. The big winners in the elections are the anti-immigrant National Front, who think muslims and gypsies are ruining France. There will be run-off elections next weekend, then we'll see the results. Meanwhile, prime minister Ayrault says all other parties should close ranks to guarantee no FN candidates win. Meanwhile a good weekend in France is one where only half a dozen cars are set on fire, and muslims routinely block roads in Paris to pray in the streets, something that is against the French secular constitution. We're seeing the star of Europe's turn to the right.

Obama has his excuses all lined up for November: "The problem is not that the American people disagree with us on the issues," Obama said. "The challenge is, is that our politics in Washington have become so toxic that people just lose faith and finally they just say, you know what, I'm not interested, I'm not going to bother, I'm not going to vote. And that's especially true during the midterms. During presidential elections, young people vote, women are more likely to vote, blacks, Hispanics more likely to vote. And suddenly a more representative cross-section of America gets out there and we do pretty well in presidential elections. But in midterms we get clobbered either because we don't think it's important or we've become so discouraged about what's happening in Washington that we think it's not worth our while." Meanwhile Nate Silver, who rather famously forecast the votes on the last several elections pretty much perfectly, says republicans have a 60% chance of taking over the senate.

John Kerry, our resident Foreign Policy Intellectual and Secretary of State, said of Crimea, "You don't just, in the 21st century, behave in 19th century fashion by invading another country on a completely trumped-up pretext." Apparently he hasn't heard of Iraq or Afghanistan.

Air Canada suspended all service to Venezuela; other airlines are expected to follow quickly. The airlines must sell tickets in Venezuela's currency, the bolivar, but then they can't convert the bolivar to real money. The various airlines claim they're owed a total of $3.5 billion, and aren't selling any more tickets until they get paid.

Insurers warned this week that obamacare rates might skyrocket next year, jumping up as much as 300% in some states. Avalere Health's Vice President Caroline Pearson said, "Early exchange enrollment is skewed toward older enrollees, so some are concerned that plans will need to raise prices in 2015." Also, while Obamacare policies are frequently cheaper than comparable employer base policies the out of pocket expenses are much higher - 42% higher copayments and deductibles on average.

Thinking of going into on-line retailing? Better have a plan to be better than Amazon, who accounts single-handedly for about 35% of all on-line retail. No one else is even close. Certainly I'm not. In fact Amazon contacted me and asked me to open a store front on their page.

How's that recovery doing? London, Paris and Tokyo each account for a bit more than a third of their respective countries GDP. Concerns are high in these countries for finding ways to spread the recovery wider among the populace. My opinion: these countries have central banks printing money like mad, and as a result their primary money makers are banks and financial companies. They cannot imbalance their economies as a matter of policy then complain of that same imbalance. The same thing is happening here - although New York only accounts for about 7.5% of US GDP, banks and hedge funds have been accounting for as much as 80% of total US profits in some years. If banks and hedge funds produce anything of value I'm completely unaware of it. David Tepper, a famous corporate raider and hedge fund manager, bought a 6,000 square foot beach front mansion in the Hamptons for $43.5 million, tore the house down, and is now almost done with the new construction. Bill Gates made all our computers work. Steve Jobs gave us computers that really did work, portable music, and modern phones. David Tepper specializes in finding tearing companies apart, he's never build anything but value for himself. He should be very pleased I'm not in charge, 'cause I'd invent a leech tax and he'd get hit hard.

It's been two weeks and we have no clue where Malaysian Airlines MH370 is. For a week now they're showing us the 8:11am satellite ping from the RR engines. However there are 7 more pings they're not showing us - enough to help make a track. We're being kept in the dark. If the plane was in the water there's no reason to hide this info. If it's in the water, it's a nut case pilot who committed suicide, or perhaps a hero pilot who didn't let his plane be used as a weapon. Either way, we want to find it and there's no reason for secrecy. It's not in the water. Maybe the Chinese found that lost container that almost killed Robert Redford in All Is Lost.

California's rain season is pretty much over. The final tally: the snow pack is at 25% of normal. California grows about a third of the nation's produce, so expect higher food prices and lower quality this year. This problem is not limited to California - the entire west is in various depths of drought, extending as far east as Wisconsin. Below are pictures of Folsom lake, near me, and Shasta lake, a hundred miles north of me.

Fingerprints, DNA - now it's bacteria. You are about one trillion human cells - cells that contain copies of your DNA - and about ten trillion bacteria hitching a ride. Whenever you touch something you leave some bacteria behind. Now it turns out these bacteria can be used to identify you to 95% accuracy - probably not good enough for a conviction, but good enough for search warrants, probable cause, and to let the detectives know that you're almost certainly their guy. Thinking of committing a burglary? Get one of those Tyvec painter's suits, some Tyvec booties, nitrile gloves and a surgical mask. If anyone asks tell them you're on the night shift at Intel's new fab line.

Wanna live forever? Here's some data from the Social Security administration:

Your AgeProbability of making it to:
0 95979194828764733143510

I've a friend I lost track of for several years, but miracle of email, I got in touch with him this week. After a bit of a conversation I sent him my favorite poem:

Search all the parks in all your cities
you'll find no statues of committees
A couple minutes later I got this back from him:

Search all the parks in all your cities
you'll find no statues of committees
yet one of life's great mysteries
if we examine our histories
we see without those damned committees
there'd be no parks; there'd be no cities
I love having smart friends.

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