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Mark's Market Blog

3-5-11: As GM goes, so goes the Nation

By Mark Lawrence

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Qaddafi continues to bomb his own people in an escalating Libyan civil war. Unrest in Bahrain, Yemen, Oman, even Saudi Arabia continues to increase. Oil is up to $104 and continuing to rise. The market? Huge tug-of-war between reality and Bernanke's $7 billion per day drug fix. This week was a draw. Everyone is all excited to hear about how much cocaine Charlie Sheen used on his last binge, but almost no one is talking about the Fed supplied cocaine fix for Wall Street and the banks. Short term outlook: continued intermittent thunder showers until this Arabian storm front passes. Or Bernanke runs out of cocaine. The arab thing isn't going away any time soon.

S&P 500 September 12 2010 to March 4 2011

I was wrong about Qaddafi, he's doing an admirable job of hanging on. Violence in Libya is spreading and increasing. Qaddafi's troupes are counter-attacking and are taking back many towns, airports, oil fields previously lost. The US and UK are considering implementing a no- fly-zone in Libya to prevent Qaddafi from using his air force against his populace, or more importantly to use against his oil fields. Libyans or Libyan oil, which do you think our governments really care about?

The Saudis have banned all protests, and have given their security forces the arab version of the riot act to deal with protesters - there's basically no limits on the security forces. The Saudis are seriously scared.

We common dumb man-on-the-street types look around and we see food and gas prices rising like mad, so why is it that Bernanke says there's no inflation? 1) Gas and food are things we more of less buy regardless of price. Raising their prices means we have less money for anything else. So these prices rising may actually be deflationary. 2) Interest rates affect real estate prices, business investment, government deficits. But they don't have much to do with food or gas prices. Bernanke is focusing on what he can control.

Why are home sales slow? A quick look at the average FICO score to get a mortgage tells a story. It's been rising for a couple years, and it's now over 700. The message: if your credit isn't perfect, get a mobile home.

RBC analysts estimate that 7 million units of shadow inventory - delinquent loans plus loans in the foreclosure pipeline - wait in the wings. On top of the 8.1 months of visible supply, the shadow inventory represents an additional 18 months of supply at the prevailing pace of sales. House prices aren't going up any time soon.

Some time ago the SEC arrested Raj Rajaratnam for insider trading. Today they filed a complaint against fellow Harvard graduate Rajat Gupta. The claim is that Gupta, while a member of the Goldman Sachs and Proctor and Gamble boards, fed information to Rajaratnam. The SEC says they can show from phone records that seconds after board meetings, Gupta phoned Rajaratnam, and minutes after that Rajaratnam bought or sold stock.

A small California city, Costa Mesa, has announced that employee pensions are bankrupting them, so they're laying off 43% of their workforce and outsourcing the jobs. Public employees too expensive? Don't have any.

Employment continues to, um, improve.

Job Losses in Various Recessions

Arkansas has had an unusual series of relatively strong earthquakes. This may signal the New Madrid fault is active again. The New Madrid has caused the largest earthquakes in the recent history of N.America. If the New Madrid goes it could flatten everything from Memphis to Chicago. In 1811 and 1812, the New Madrid had three 7.7 earthquakes in a row, each the same size as the 1906 San Francisco earthquakes. Above the fault is the Mississippi river, a thousand mile long ground liquefaction zone, and a bunch of cities with no earthquake zoning regulations: Little Rock AR, Memphis TN, St.Louis MO, Evansville IN, Bowling Green KY, Springfield IL.

China and India each announced 12% boosts in their military spending. It will be surprising if these two don't wind up in some sort of border skirmish in the next few years.

The Tarrance Group just did a survey of 800 likely voters and found some disturbing results. There are widespread misconceptions about the federal budget. A majority of voters incorrectly believes the federal government spends more on defense/foreign aid than it does on Medicare and Social Security (63%). Also, a similar majority (60%) incorrectly believes problems with the federal budget can be fixed by just eliminating waste, fraud and abuse. Less than half (44%) believe Medicare and Social Security costs are a major source of problems for the federal budget (49% disagree). The waste in government is a strong concern to voters - again 60% believe fixing the waste will solve the nationís budget problems, and voters say that a mean of 42% of each federal dollar is wasted. Of course these misconceptions are significantly due to politicians running on a platform of eliminating waste and fraud. We'll see below how incredibly wrong these opinions are. Of course there's waste and fraud - were I president, the entire Energy department would get layoff notices at 8am Monday. We all hear how medicare is fraught with fraud. But add that all up, along with $800 defense screwdrivers, and you're talking about perhaps $25 billion to $50 billion out of a $1,200 billion deficit. Waste and fraud are enraging, but eliminating them will only solve a couple percent of our problem.

For 50 years, GM had a corporate policy of giving their unions what they wanted - more pay, more vacation, earlier retirement, better pensions. We all know how that turned out. Now the US government has gotten themselves in the business of promising our citizens more benefits, retirement, pensions. How will that turn out? Mary Meeker of Kleiner Perkins has published an excellent analysis of the financial condition of the United States. Mary is a financial analyst who looks over companies and projects their finances. She applied her standard analysis methods to the US Federal Government. It's not pretty. Here's a condensed version of her presentation:

Ten years ago, the Congressional Budget Office, probably the least partisan of the people making projections, said in 2060 entitlement spending plus interest on the debt would equal government revenue - that is, we would have to shut down the entire government and defense department, nothing would be left but paying people to be retired or poor. Or both. Today, the CBO says that date has moved up from 2060 to 2025. Their new projection is that in 2060 the government will be handing out $2 for each $1 it takes in.

How did this happen? When social security was passed, the average person lived to be 62 - less than half of everyone ever collected anything. Today about 90% of everyone lives to collect. The result? Since 1965 our economy has multiplied 2.7 times, government has multiplied 3.3 times, entitlements have multiplied 11 times.

We used to have a very small government which spent about 3% of GDP, until FDR changed all that. Since his election government has grown from 3% of GDP to a quarter, and is on track to get to half of GDP by 2060. Originally more than half our government was about defense. Today, in spite of being in a couple very expensive wars, defense is less than a fifth of the government. More than half is now payouts to voters in the form of medical care, help for the poor, pensions.

The primary problem is health care. We spend a small fortune on each person helping them die. How does this work out in terms of national health? Our results are extremely unimpressive compared to other countries. We spend more than half of all the health care money spent in the OECD, but have only about a quarter of the total population; and most of the other government covers all their citizens, ours only covers about a third.

What do we get for our money? Middle of the pack performance for twice to triple the money. We spend five times the money per person that S.Korea spends, and yet they still have a higher life expectancy than we do. Don't worry about that, though: as KFC and McDonalds move into their country, I'm sure their life expectancy will start to drop.

What happens next? It's said that there are three votes for every retired person: the retired person votes for them self, their children vote for their retired parents, and working people vote for their future retired self. By contrast most poor people don't vote at all, and no one votes for them. When entitlements finally get cut, the first axe will fall on medicaid, the program with the most out of control growth and the least voter support.

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