Markets are getting very highly correlated - everything is moving together. This is a bad sign for a healthy market, and tends to indicate that much of the pricing is artificial, caused by easy money from the Fed and their first cousin the ECB. Markets are compressing into what's called a "flag" formation, shown below with blue lines. Clearly the markets have to either flat-line (they never do) or break out to the upside or downside. Which? Ah, that's the big question. In the short run, I continue to think the correction has yet to run its course; in the medium run of the next few months, with China continuing to have real estate pricing issues, Spain nearing a bond crisis and elections coming up in the US, it seems easy to predict the printing presses will be running fast and furious the world over.
Fire and Ice: Nokia was the world leader in dumb phones, a market in which it made a lot of money for a long time. However, there's no longer any money in dumb phones. Microsoft, the monopolistic world leader in selling bloated, buggy software desperately needs to get into smart phones, as the iPad (basically an overgrown iPhone) shows clearly that smart phones are the way of the future. So Microsoft married Nokia, definitely an example of a marriage that's "any port in a storm." In the words of Nokia's chairman Stephen Elop, standing on a burning oil platform in the middle of the north sea means certain death, while jumping into the ocean means a shot at life. How's the marriage between the chubby 42 year old smoking / drinking / ex-prom queen and the out-of-shape beer-bellied blow hard high school football star doing? It turns out that jumping into the north sea mostly results in a race to see if you freeze to death or drown first. Nokia / Windows phones aren't selling, and at current cash burn rates (over $1 billion last quarter) Nokia will be bankrupt in about two years.
Google is going to give away stock. Sortof. Google's three founders, Larry, Sergey and Eric, own special stock with 10 votes per share. This stock is supposed to guarantee that they never lose control of the company. But they just announced a "dividend," where every current shareholder is going to get a free second share of Google stock, the free second share having no voting rights. Of course this is a stock split, not a dividend, and both shares will quickly be worth roughly half the previous share value. New shares issued to pay off employee stock options and acquisitions will be the non-voting type. Larry, Sergey and Eric currently control about 69% of the votes, but that's not secure enough apparently. It's worth noting that Steve Jobs controlled Apple while only holding a couple percent of the votes - he controlled Apple by being insanely great. Google's corporate motto is "Don't be evil." Their behavior in the last few years - editing blogs for political content, moving search results around to suit their own agenda, and now making sure that shareholders will never get a vote - make me far less enthusiastic about the future of Google. If Google were a country, it would be the People's Republic of Google (who does no evil).
There are some serious questions about whether Apple can keep up their incredible growth rate or if they will stumble, but at the 13 mile mark of this marathon their main competitors - Google, Microsoft, RIMM - all seem to be either staggering with a hang-over from last night's premature victory party or turning off the course for a victory beer. Disclosure: I don't own stock in any of these companies, and at current prices I wouldn't dream of buying any.
Spain and Italy had "successful" bond auctions. This means the ECB gave a bunch of money to Spanish and Italian banks, who were then instructed to buy the bonds. No one investing their own money is having anything to do with these. In any case, they day after the Spanish auction "succeeded" the stock markets shot up. The chart below makes clear that Spain is now completely dependent on the ECB for continued funding of their government, and the Spainish are drawing their money out of banks at a record rate.
How are the rest of the PIIGS doing? I think the graphs below make it clear that Greece is expected to default further; Portugal will be next; no one wants to buy Irish, Spanish or Italian debt unless the ECB is subsidizing it; there are growing suspicions about France; and money is flowing like mad into Germany and the UK.
Much of Europe is sliding deeper into recession, in the case of Greece and Spain with over 20 unemployment I think depression is legitimate. Austerity budgets, the prescription of the Germanics, seem to be making things only worse. France just finished their first election, with moderate Sarkozy finishing a bit behind Socialist Hollande. If elected, Hollande promises to raise taxes on the rich, lower taxes on the lower income, lower the retirement age from 62 to 60, create 200,000 new government jobs, and stand up to Germany in the Euro-bailout negotiations. Sarkozy and Hollande will have their run-off election in two weeks.
If Hollande wins the French election, it seems likely that new governments will quickly follow in the southern countries that will be more insistent on bailouts and less willing to cut deficits and lay off workers. I don't see either path as useful in the long term: austerity means trying to shrink your economy and pay off debt at the same time, a seeming oxymoron. The alternative, running large deficits, is what got us here in the first place, you can't borrow money and use it to pay people to sit home or do unproductive jobs forever. So long as only a few countries in Europe make things that can be exported there will be serious problems and an economic crisis. In the movie Syriana, Matt Damon yells at an Arab Sheik "Your country's second largest export is used cars, and #3 is dates, on which you lose 5 cents a pound." Greece's major exports are Yogurt, olive oil, and titles to small islands in the Greek Mediterranean. Can you really pay for 60% of all your adults to sit home in retirement or unemployment based on the income from olive oil and yogurt exports? A major export item from Spain is motor vehicles - quick, can you name a Spanish motor vehicle? (answer: Gas Gas or Beta motorcycles.) Austerity budgets will drop imports to a sustainable level by reducing everyone's standard of living to a much lower level. Running deficits will paper over the holes in the walls and ceilings, but will not result in creating new productive and competitive industries, so there will be another collapse whenever the next economic storm hits. What's the answer? Change the culture to emphasize education in science, math, engineering, business, finance; to allow easy and rapid formation of new companies; to allow old companies to die and free up their captive production resources to be bought cheaply by newer businesses. European countries with their three generation history of guaranteed jobs and cradle-to-grave social welfare programs are not good candidates to make these changes quickly. The idea that some guy doing a job that was worth $30 per hour twenty years ago now has no marketable skills is simply unacceptable in most of Europe - he has a "right" to his job, health care, vacations, retirement. 65 million years ago, I'm sure there was a loud debate over whether to conserve the shrinking supply of ferns with austerity diets, or just continue eating like normal thinking that the ferns would recover in a couple of years. And I'm equally sure there was wide-spread agreement that the annoying little fuzzy mammals and their inedible grains and grasses should just go away.
Bahrain - the small island oil kingdom that's the battle ground between Saudi Sunnis and Iran Shi'ites, is hosting a formula 1 race this weekend. Bahrain is a group of a few hundred Sunnis who are and live like oil billionaires, and a few hundred thousand Shi'ite citizens who live in rather glum ghettos. Security is tight, as only Arabs can do. If some problem emerges with the formula 1 race, Saudi Arabia, which has reportedly already given secret approval to Israel to overfly their airspace in a strike on Iran, will be even more livid with Iran. Iran has strikingly few friends. The difference between Sunni and Shi'ite? 1) Mohammed died without a son, so the Arabs said the next leader should be taken from his closest advisors and the Persians said it should be his son-in-law (a Persian, Ali); 2) today Shi'ites are predominantly Persian, Sunnis are predominantly Arab; and 3) Sunnis believe in a personal relationship with God while Shi'ites believe you need the intervention of an Imam (priest).
Argentinean president Cristina Elisabet Fernández de Kirchner has decided to nationalize YPF, Argentina's oil company. YPF is majority owned by Repsol, a Spanish company. Spain is absolutely livid about this. Three years ago she nationalized Argentina's independent pension funds, effectively appropriating $30 billion in her people's retirement savings to pay for her government's under funded programs. A year later she nationalized Aerolineas, Argentina's airline. Kirchner has proven completely incompetent at managing Argentina's economy, and is widely held responsible for their 20%+ inflation rate, high unemployment rate and low growth rate. In response, as many Argentinean politicians before her, she's turning to populism, blaming foreign interests and the rich, stoking resentment over Britain's possession of the Faulkland Islands (Las Malvinas in Argentina speak), and filing criminal charges against an Argentinean economic consulting company for "publishing false economic data" which refuted the government's official (understated) unemployment and inflation rates. Argentina has historic close ties with Spain, who ruled the country until 1816. Argentina is perhaps the world's most lily-white society, with 88% of their population having pure European heritage and less than 2% identifying themselves as indigenous S.American Indians. A substantial fraction of the immigrants to Argentina are from Italy, and it seems they brought their Italian talent for poor government and shaky banking with them. Ms.Kirchner has declared that she intends to be a modern Evita, an Argentine populist who won lots of elections for her husband and herself, but who's lack of grasp of economics still haunts the country. Ms.Kirchner became president after her husband had served two terms, the constitutional limit, and she ran and won in his place - something that could have all too easily happened in this country, where four years ago we were facing a potential of spending perhaps 28 consecutive years being run by either a Bush or a Clinton. We Europeans do seem to like our governments inbred.
Warren Buffet has two plans which Obama likes. The first is that people making over $1,000,000 per year pay a minimum tax rate of 30%. I'm sorta actually ok with this - it's compatible with my corporate tax plan, 3% of revenue, no deductions. I'd like to see the tax code dramatically simplified. It's already simple for people making less than about $50,000, they don't pay taxes. I don't see why your income tax filing should take more than a page, maybe two for small businessmen with overseas operations. Warren's second plan is that you get chits from the government for exporting. If you want to import, you need a chit. Import chits can be sold or traded. Since I export far more than I import, I'd just love to become one of Walmart's suppliers - the kind they need to survive, not the kind that needs Walmart to survive.
We've had a very big week in science, I have three interesting results to report.
Science 1: Fire and Ice. Several billion years from now the sun will die. When it gets old it will first turn into a red giant, expanding so large that the sun's atmosphere will touch the earth, vaporizing it. A while after that, the sun will shrink down and become cooler, eventually turning into a cold dark dwarf star. It's different for larger stars. A star which is three to ten times the mass of the sun will go nova. Novas are very important to life: the big bang cooked up a universe which was about 97% hydrogen and 3% helium, every other element in your body was produced in a nova. The picture is of the Crab Nebula, the remnants of a star that was observed to go nova in 1054 AD. Novas were also thought to produce cosmic rays, which are particles that hit the earth at extremely high speeds. The most energetic cosmic rays are thousands or more times more energetic than anything we can produce in our biggest accelerators. There's a new telescope in Antarctica which has been in construction for several years; for the last three it's been partially working, and is now about 80% complete. This telescope is a cubic kilometer of transparent ice. Astronomers watch the inside of the ice, looking for the traces of neutrinos. There are also a string of satellites in orbit watching for novas. It was considered obvious that we would see a nova, and a short time later the ice telescope would record neutrinos coming from the same direction. Didn't happen. Now no one has much idea where all the high energy cosmic rays come from.
Science 2: We've all heard of dark matter - the
invisible stuff that supposedly holds galaxies together. Our galaxy, the Milky Way, is a barred spiral (the picture is of a very similar
galaxy, I haven't actually ridden my motorcycle to outside our galaxy and taken a picture) and should therefore have an exceptionally strong
dose of dark matter holding it together. Why dark matter? Astronomers love to take pictures they don't understand, and then announce that
physics has to change to account for their pictures. Dumping the problem on physicists leaves the astronomers more time to take more weird
pictures, and hit the talk show circuit talking about the weird stuff they thought up. Well, this week some Italian astronomers announced some
results. For the last several years they carefully tracked several hundred red giant stars which are more or less near the sun in our galaxy
and figured out their motions. They then used the law of gravity and their knowledge of the mass of all the stars and hydrogen clouds near the
earth to calculate what the motions should be. Their answer was that the dark matter in the area near the earth is less than 5% of what our
galaxy would seem to require to hold itself together, and their solution's best fit was for no dark matter at all. It's dark times for dark
Science 3: Biologists in the UK announced that they have successfully formed a synthetic DNA-like (Deoxy Ribo Nucleic Acid) molecule, but without using ribose, a sugar that forms the backbone of all DNA and RNA in all life on Earth. Their new molecule is also a double-helix and is stronger and more resistant to damage than DNA, but can participate in all the same types of chemical reactions that DNA and RNA can. The suggestion is that a new form of life could be based on their chemistry, a form of life which perhaps would have advantages in high radiation areas, like near novas or the centers of galaxies. Or perhaps Iran, Israel or N.Korea in the near future.