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Mark's Market Blog

4-15-12: Greece Burns and Spain Smolders

By Mark Lawrence

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I took a couple months off. I decided I needed an attitude adjustment. Markets went up for most of that time, but have been going down for the last two weeks. This correction is for two reasons: the market went up for a long time uninterrupted, it was due; and investors are getting fearful of Spain and Italy again. What's next? The market will likely continue to go down for a time until the European Central Bank steps in and applies their next short-term fix to Spain. Then we should recover, as the economy in the US is doing kinda sorta ok.


S&P 500 October 27 2011 to April 15,2012

Europe passed a law throwing Iran out of the SWIFT money-transfer system. SWIFT handles pretty much all cross-border bank transfers, so this move has reduce Iran to barter. Iran has cut off the UK and France from oil exports, but most Iranian oil flows east to Asia, where China is using their power as Iran's last major customer to force lower prices. Hillary has sent a message to Iran, "This is your last chance." Israel is stocking up on bunker busting bombs, and so are we. What's next? I dunno. Maybe the Iranians will come to their senses and negotiate something. Maybe Obama will decide his only reelection shot is as a wartime president and bomb them anyway. If he does, expect to see $5 / gallon gas instantly, perhaps peaking at $6 / gallon or even more - I've seen estimates run as high as $10 in the worst wartime case.

A deal is in for Greece, at least for the next round of money. The assumption is that Greece's economy ha already bottomed out, and will return to growth by 2014, with growth hitting 3% by 2016 and staying there for the rest of the decade. Meanwhile the Greek government budget is to change from running about a 12% deficit to running an 8% surplus. This is absolute nonsense; there can be no Greek budget deficit, and the economy will not return to growth this decade with the government running a surplus. But perhaps Greek default has been put off for several months. We still have a lot of hedge funds heavily bet on a default. Greece has elections in about 3 weeks, there are serious question if the new government will disavow all these deals - after all, the current "government" sorta just appeared, they were never elected. And Finch just cut Greece deeper into junk status, saying default looked more and more inevitable. Meanwhile unemployment and riots are continuing to spread in Greece and it's very unobvious that the situation there will improve any time soon - like in the next several years. Here in the US about 55% of our people are working. In Greece the equivalent number is 39%. It's inconceivable that Greece can grow and pay off their debts when dearly two thirds of everyone is retired or unemployed.

How are the interest rates doing for the PIIGS? Spain and Italy are on the rise again, recently hitting the 6% threshold that gets everyone's attention. The ECB's $650 billion bailout was working, and the can was successfully kicked down the road, at least for the governments. Meanwhile al of Europe continues to fall into recession and unemployment in the south is hitting jaw-dropping levels. But now that's all in question. Spain has 50%+ youth unemployment and 23%+ overall unemployment - worse than Greece. Meanwhile Spain has a worse housing crisis than the US ever had, but while our house prices have fallen by half in the most over built areas, Spain's have only fallen by about 20% - the Spanish real estate / banking crisis has yet to hit. In the last nine months the ECB has loaned out about $120 billion to Spanish banks and another $220 billion to Italian banks. The ECB program is designed to buy time. Time for what? Well, that depends on who you ask. In Brussels the politicians claim they're working on political unification, a United States of Europe if you will. Meanwhile to keep interest rates down, the banks of each country, using nearly free ECB money, are buying up the treasury bonds of their own country like it's free gold. Also meanwhile most banks, especially in Germany and France, are trying to unload the bonds they hold from other suspect countries. Where will this lead? Eventually the money printing will start to catch up withe everyone and inflation will rear its ugly head, along with the drop in foreign trade exports that comes with it. Even Germany will wind up with an inflationary recession on present trends. That's probably a couple years out. At that point, however, things will be sufficiently unwound that perhaps the common market can simply explode, or break into two or three regions. Meanwhile, I expect this latest crisis will be met with more free money - the ECB has already made their bet, they have to ride with it now.

Here in the US if you take the total net worth of the top politicians, the congress, senate, the President and his cabinet, and the supreme court, you find that the 660 of them own in aggregate about $7.5 billion, an average of about $10 million each. We're run by rich guys. The richest of them is Darrell Issa, a California Republican worth $700 million. In China there are about 3,000 politicians at the top, as their party congress is quite large. The richest 70 of them, the top 2%, had their net worth increase last year by $11 billion, more than the worth of the top 660 American politicians combined. Those top 70 Chinese politicians are worth $90 billion. This in a country where the average person makes $2,425 per year. How do they do it? Massive government loans to buy property which is expropriated from the people, then more massive loans to develop the property, building airports, highways, shopping malls, sometimes entire cities. It's almost all what we Americans would call corruption. I can't imagine that this system is stable. Apparently they can't either, as more than half of all the Chinese rich have passports and property from other countries. When it all goes down, obviously they hope to flee with the bulk of their assets and their lives.

Ever hear of Harold Simmons, Contran Simmons, Sheldon Adelson, Peter Thiel, Bob Perry? These five guys and their wives have donated one quarter of all the Super-Pac money raised so far this election cycle. All to conservative causes. Collectively the five have donated a bit over $30 million, roughly 3% of the $1 billion expected to be spent on determining who will be our next ineffective hog-tied president. No matter who wins, taxes are going up. Defense and entitlement spending will decrease. The number of federal employees will decrease. And about a third of our citizens will scream for the next four years that we're all going to burn in hell. An ongoing debate is do the times make the man, or does the man make the times? I'm a big believer that this decade the times make the man.

Talk is moving towards January 2013, when the Bush tax cuts expire and the mandatory government spending cuts kick in. Near the same time the government debt ceiling will also be hit. Estimates are that if nothing is done about this the US GDP will contract by 5%, a major recession. Will it really happen? Will republicans and democrats hang together and cut a deal with either president Obama or Romney, or will we all hang separately? Stay turned to this channel for more. . .

Ocean radiation from Fukashima has been carefully measured in the ocean now. Levels of radiation up to 1,000 times normal have been detected up to 400 miles away from Japan. Much of this radiation is due to Cesium-137 with a half life of 30 years. The good news? The radiation levels detected are still generally a tenth of what is considered harmful.

Head injuries are at the top of everyone's sports concerns. Football is the worst: even high school players sustain multiple sub- concussion hits per practice day that are adding up to 18 year olds having cases of CTE - chronic traumatic encephalopathy. This is where the brain starts to substitute scar tissue and calluses for neurons. 20 years ago only a few boxers were known to have this condition; now it's estimated that perhaps a third of NFL players do. I've seen the numbers, and better helmets won't save football - many of these guys would use up two or three $200 motorcycle helmets per practice, and it's still completely unobvious that their brains would be protected. The lawsuits have already started, and will continue and grow. I won't be surprised if high school football is effectively outlaws by insurance companies sometime this decade. The #2 sport for concussions? Girl's soccer. The good news is the girls aren't slamming into each other, using their heads as battering rams; this is just falls onto grass, which bicycle type helmets can handle. Expect youth soccer leagues to institute helmet rules in the near future.

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