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Mark's Market Blog

4-26-15: China slows down?

By Mark Lawrence

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Markets were stuck inside what's called a "flag pattern." That ended Friday, when the Nasdaq broke 5000, setting a new all time record. The S&P also set a new record. Good times are back. Meanwhile, US investors have pulled a net of $79 billion out of the market year to date including net outflows in 9 of the last 10 weeks. It's not US money propping up the market; as I've said several times, this is the Japanese and European carry trade.


S&P 500 October 27 2014 to April 24 2015

Both the Baltic Dry Index and the Shanghai Containerized Freight Index are at all time lows. This means there's a lot of ships out there that are sitting empty instead of hauling ore to China or containers from Asia to Europe or the US. It's considered a strong indicator that the world economy is not at all healthy. Drewry Maritime Research calculates that at current rates 85% of ships are unprofitable. Commodity prices continue to decline, which casts doubt on the validity of the current bull markets - if companies were doing all that well, they'd be buying more ores.

The IMF has issued a warning that "markets could be increasingly susceptible to episodes in which liquidity suddenly vanishes and volatility spikes." Soc Gen's global head of economics, Michala Marcussen, wrote "The IMF is not alone in issuing these warnings and it is no surprise that the IMF's Global Financial Stability Map showed an increase in risks." He goes on to say that the increase in correlation between various markets means there are "greater risks of contagion across asset classes or borders." In plain english, this means the faint hearted should be in cash or US government bonds, everyone else hold on to your butts, we may be going for Mr.Toad's wild ride later this year.

We're coming down to the wire on Greece. They're running out of cash quickly and their options are disappearing. The EU says Greece must cut pensions dramatically, privatize more government businesses and functions and liberalize laws for business. Syriza, Greece's new far left ruling party is not on board with any of this, they want to increase pensions and government employment. The EU believes Greece can default and/or leave the Euro with minimal side effects. I've been clear in my mind for some time that we're going to see a default, almost certainly by the end of May, capital controls, and an exit from the Euro. Pensions will be cut, not by lowering the amount of the check, but by lowering the value of the Drachma. So long as Greece stays in the Euro, they have no ability to adjust their wages and prices and there will be no solution short of a politically impossible massive bailout by the Germans.

Later this year China, Hong Kong, Korea, Taiwan and Singapore will start to live with an affect that Japan and southern Europe have lived with for some time: their working age population, those between 15 and 64, will start to shrink while the numbers of those over 65 will continue to grow. This leads to deflation, zero or negative growth, and in extreme cases political instability. Coupled with China's 20 million excess unmarriageable 20-something men, it looks like an interesting brew.

China is going to invest $46 billion in making a transportation corridor through Pakistan. Roads, trains, internet, oil pipeline. They want to get access to the Indian ocean and have an alternative to shipping oil past Singapore and through the south China sea, where they correctly forecast a strong likelihood of conflict. Japan has managed to navigate these waters with some success: they have had persistent problems with deflation, but their per-capita GDP has held constant or perhaps even gone up a bit. Southern Europe, of course, is a bunch of basket cases now looking forwards to massive political instability as parties on the far left and far right promise solutions. How will the Chinese do?

China warns the US that their estimate is N.Korea has 20 bombs (double the 10 I wrote about a couple weeks ago) and enough weapons grade uranium to make 20 more this year. Of course I think this means Iran and N.Korea have 10 each and will have 20 each soon. Johns Hopkins estimates that N.Korea could have up to 100 bombs within 5 years. U.S. Admiral William Gortney said the U.S. military believes North Korea has the ability to miniaturize a warhead and mount it on a ballistic missile. In 2009 William Forstchen wrote a very realistic book, One Second After, about a rogue nation sneaking three nuclear missiles on a barge up into Baja California, launching them at the US, then blowing them up at 250,000 feet. The blasts made no direct damage and went largely unnoticed; but the resulting EMPs shut the entire US down for over a year, resulting in over 100,000,00 deaths. Forstchen has testified several times before congress and is a popular speaker on the beltway now. The world is getting seriously scary.

China is trying to crack down on government corruption - mid level government officials who profit off public resources and have 20-something kids who crash Ferraris. They have a list of the 100 most wanted from their "Sky Net" operation. 40 of these 100 are currently living in the US along with their allegedly ill-gotten gains. Sadly, China, who has refused for years to extradite, now finds itself on the other end of that stick: Europe and the US are showing a profound lack of interest in rounding up their fugitives and returning the people and the money.

Europe is in crisis over immigration. Last week an Italian fishing boat carrying about 700 refugees sank, killing everyone. This raises the death toll to over 1300 in the last three weeks. What's at risk here? Europe is a puddle away from Africa, where war, famine, disease, overpopulation and oppressive governments are making lives miserable for roughly a billion people. Europe could make thinks much better, in the short run, by taking in a few hundred million of them, but then Europe would no longer be Europe. Far left liberals hate the thought of watching all that human suffering next door without doing something, preferably something we conservative see as intensely self-destructive. However it's become painfully clear that most of these immigrants fail rather badly to integrate themselves with a modern capitalist democracy; instead they bring joblessness, welfare dependence, hatred and violence with them. We're told frequently that if you improve the health and education and economic prospects for women they will have fewer children on their own. It's not working - all the wealth of Croesus Gates has proven unable to slow the overpowering tide of underfed and unhealthy babies. Even though great inroads are being made in eradicating diseases like malaria, every couple of years the estimates for future population of Africa go up. I know my solution: a bit of humanitarian aid and a lot of free contraceptives - I'd send sacks of rice, fresh water, doctors and nurses and drugs, and literally billions of condoms, IUDs and implants. People getting food and water would also get immunizations and birth control counseling, meaning I'd pretty much make an IUD a requirement for free food. It's very clear to me that continued uncontrolled breeding will destroy this planet, not to mention pleasant tiny little hamlets like Europe. What will Europe choose to do? I'm watching with great interest. The Roman empire was brought down by a combination of corruption, plague and immigration - the barbarians. Modern Europe already has the corruption. Europe is a laboratory that will foretell some possible futures for the US.

Last week I reported that Russia will deliver S-300 air defense rockets to Iran later this year, making Iran almost impossible to attack with conventional aircraft. Today VP Biden announced that the US will supply Israel with F-35 5th generation stealth fighters, which can attack and penetrate the S-300 rockets. Or so we're assured. We're back to cold war tactics where Russian and US arms dealers profit immensely from tensions in the world. Lockheed has to be very happy about this, as NATO allies have been very reluctant to commit to buying the $170m aircraft.

Puerto Rico is running out of money quickly. They have $70 billion in debt against 3.5 million people and a GDP of about $100m. They're trying to pass new taxes and are threatening that the government will be forced to shut down entirely by August without the additional tax revenue. Their bonds are trading above 20%, indicating that investors are concerned about a default.

JP Morgan Chase, the largest bank in the U.S., recently enacted a policy restricting the use of cash in selected markets; bans cash payments for credit cards, mortgages, and auto loans; and disallows the storage of "any cash or coins" in safe deposit boxes. Citigroup's Chief Economist Willem Buiter speaks of "the cost that the anonymity of currency presents to society." France's finance minister Michel Sapin puts much of the blame for the Charlie Hebdo murders on the assailants' ability to buy guns with cash. Shortly thereafter he announced a €1,000 cap on cash payments, down from €3,000. Such radical counter measures were necessary, he said, to "fight against the use of cash and anonymity in the French economy." Guillermo de la Dehesa, a Spanish economist, international advisor to Banco Santander and Goldman Sachs, says, "Without cash, we would live in a much safer, less violent world with enhanced social cohesion, since the major incentive fueling all illegal activity [i.e. cash] would disappear." Corporations and governments agree: without cash they can keep much better track of you.

GM made $2.2b in the first quarter, mostly because cheap gas is helping sales of their big pickups and SUVs. The average Cadillac Escalade sells for $83,000, and you can just forget about rebates or any of that nonsense. The Texas assembly plant that makes Tahoes and Suburbans and Escalades is running 3 shifts, 24/7, and failing to keep up. What happens to GM when gas prices go up again? Don't worry, gas prices will stay low forever, of course, and GM will be profitable forever, of course.

Google is changing the world again with "Mobilegeddon." Starting April 21, web sites that are not "mobile friendly" are now ranked much lower in their search results. About 60% of online traffic is now from mobile, and they've decided that web pages will look good on phones or they won't be shown anymore. If you have a web site, Google has a test page that will tell you if your web site passes. Mine failed rather miserably, but it turns out it only took me about 90 minutes to fix it. My customers are all pretty much over 50, meaning if they want to see something on their phone they hand the phone to a kid and ask them to find it and read it to them, but Google doesn't care about any of that. I used code from here to test if my page was being viewed by a phone. If so I redirected you from "index.html" to "indexMobile.html." Then I edited that page until it looked good, which basically meant instead of the three columns I had been using on a proper screen I dropped down to one column. I also added phone links.

Three years ago scientists at Berkeley had a breakthrough in genetic editing - they could do it on fetuses with about 40% success. The biologists published a paper, then called for research in this field to stop before it got out of hand. Unsurprisingly, China kept working on it. They have announced success at editing the genomes of monkey fetuses.

Retired Navy Captain Jerry Hendrix makes the case that aircraft carriers are simply not suited to the future of naval warfare. "At $14 billion apiece, one of them can cost the equivalent of nearly an entire year’s shipbuilding budget. Each carrier holds the population of a small town. Americans are willing to risk their lives for important reasons, but they have also become increasingly averse to casualties." Beijing has also invested heavily in anti-ship cruise missiles and submarines that could target US aircraft carriers while evading the US Navy's Aegis Defense System. "For this reason, the modern carrier violates a core principle of war: Never introduce an element that you cannot afford to lose," Hendrix writes.

Boston College psychologist Peter Gray says that the helicoptering can smother a child's development. "My historical research on this question suggests that there's never really been a time or place in history, aside from times of slavery and intense child labor, when children have been less free than they are today in our society. This is a very, very serious issue." Recently a Maryland family let their kids walk home from parks alone. Child Protective Services charged the parents with "unsubstantiated child neglect" in March. Is the smothering a reaction to a dangerous world? Hardly. Statistics show how much safer things have gotten for kids in the US:
• The physical abuse of children fell by 55% from 1992 to 2011.
• Sexual abuse fell by 64% from 1992 to 2011.
• Abductions by strangers fell by 51% 1997 to 2012.
• Motor vehicle deaths for children under 13 years old fell by 43% in the past decade.
• In 1935, there were just under 450 deaths for every 100,000 kids between ages 1 and 4. Now there are 30 deaths per 100,000.
• More than 800 child pedestrians were killed from being hit by a car in 1993. There were fewer than 250 such deaths in 2013.
• Reports on missing persons under age 18 have gone down 40% from 1997 to 2014.

The Apple watch - an accessory for your iPhone - sold out initial production in the first few hours. Market researcher Carl Howe from Think Big Analytics estimates that Apple almost instantly sold more than 3 million units: 1.8 million Sports, 1.3 million Watches, and 40,000 Editions, for total revenue of $2 billion. He estimates their gross profit margin at 60%.

Men give directions like a GPS: go four lights, turn south. Women prefer landmarks: turn left at the cute little house with the white picket fence and roses. Apple has filed a patent on giving map directions based on landmarks.

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