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Mark's Market Blog

5-10-15: Politics turns right.

By Mark Lawrence

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Markets went down this week then back up on news that, um, ok there wasn't any significant news they just went down then up. What's next? Who knows. More volatility, almost certainly. Perhaps a modest correction, perhaps not. I believe the market continues to want to go up, but we have to get clear of this period of uncertainty over Greece, liquidity, the fed and employment numbers. The fed is watching employee pay closely - when average hourly earnings start to go up, so will interest rates. So far average wages are not going up. Meanwhile US investors continue to take money out of the market and foreign investors pour money in even as it continues to be near record levels.


S&P 500 November 10 2014 to May 8 2015

Jobs are being created all over the world. Spain is recovering at a record rate, but their unemployment remains above 20%. They have elections coming up in a couple months, so I think it's too little too late for their current government. In the US unemployment dropped to 5.4%, however I must consider this number suspect on a couple grounds: 1) the labor participation rate continues to be under 2/3 at 62.7%, and wages still haven't budged; these two numbers certainly make it appear it's no problem hiring people. And we lost 50,000 jobs in mining and oil so far this year, which doesn't bode well for the economy going forwards. imho the unemployment numbers are lipstick on a pig. The fed is believed to watch average wages more than unemployment, lending credence to the view that they don't really trust the unemployment numbers either.

Fed Chairman Yellen said this week that equity market valuations are "generally quite high" and there are "potential dangers." Yah. A whole bunch of us have been thinking that for some time. Don't worry, no one listens to the Fed about stocks. Greenspan famously talked about "irrational exuberance" and it took four more years for the dot com bubble to burst. Meanwhile the NASDAQ had quadrupled.

The UK had elections and although the polls said it was too close to call and so close that no one would be able to form a government and parliament would be hung, in fact the liberal democrats were crushed and labor did poorly. In Scotland the Scottish National Party basically completely wiped out the labor party. David Cameron's conservatives perhaps won half the seats and may be able to govern without an alliance. The message seemed to be more freedom - more for Scotland, more distance between the UK and Europe, fewer immigrants, smaller and less intrusive government. UK elections have had a history of foretelling US elections, so I find this shift to more conservative and nationalistic policies gratifying.

Bill Gross, the reigning king of bonds, says our super cycle in stocks and bonds is ending. The unconventional money policies that have fueled markets are running out, says Gross. "The attempt by global central banks to cure a debt crisis with more debt doesn't have much further to run." Bill is 70 now and sensing his own mortality and comparing the markets future to his own. Warren Buffet agrees, saying he'd love to short government bonds as he sees their prices inevitably declining and taking stock market prices down with them. Carl Icahn gave a talk over the weekend saying, "I'm very concerned about the market. I think that you have a situation where this market keeps going up ... and yet a lot of the economic news isn't all that good, and also more importantly, earnings aren't good. What's even more dangerous than the actual stock market is the high-yield market. Junk bonds." When the Fed raises rates, junk bonds are going to collapse.

The interest rate on German bonds has fallen to the point where people are now paying the German government to hold their money. Who does this? In a world with a growing economy and with tech companies inventing new things seemingly daily, is the best use for your money to pay someone else to hold it? One might think this is an illusion, that somehow people aren't actually buying these negative interest bonds. One would be right. This is almost purely an artifact of Super Mario buying German bonds. In the graph below we see German bond outstanding volume in blue, and the outstanding volume minus the bonds bought by the ECB in red. Whatever you may thing about the markets, the truth is we're standing on the sidelines watching a high stakes game being played by the central banks and the various governments, with fallout affecting stock markets everywhere.

China's stock markets doubled last year, a very impressive performance by any measure. However it's hard to see how this can continue. Half the listed companies in Shanghai have a P/E over 40, and 10% have a P/E over 100. Here in the US where we fear our markets are overvalued the historic average P/E is about 16.5 and currently about 20. As China seemingly slips into recession, with raw material consumption down, hiring down, wages down, exports down and property companies defaulting on loans, the stock market continues to climb - this is clearly unsustainable in the long run. Meanwhile China's central bank cut interest rates further, which will goose their markets further. We're living in interesting times.

China says they're building up their military to avoid a repeat of WW II, when the Japanese occupied much of China and were rather harsh. I see this as ridiculous; China was fragmented in the 30s and 40s and unified today; Japan is a nation with a declining population and has no intent or hope of occupying major portions of China. Well, whatever the rational, China is following that Roman edict: Si vis pacem, para bellum.

NATO is holding major exercises in the baltic sea, apparently sending a message to Putin that invading NATO countries will not be tolerated. Ukraine is apparently gearing up for a major offensive.

North Korea tested a submarine launched ballistic missile capable of holding a nuclear warhead and reaching the US mainland. They have further to go before deployment, but their goal and determination are clear. In the US we have a long history of feeling protected by the oceans; that's about over.

In a recent poll it was found that 44% of German executives surveyed think that Greece should leave the eurozone of its own accord. A further 13% think Greece should be actively ejected from the monetary union.

Nokia, Microsoft's Finland phone company, is selling their high definition mapping software. Car companies need this for self-driving cars. Daimler (Mercedes), Volkswagen and BMW have joined together to bid about $800 million for the software. Uber, the silicon valley taxi company, has apparently offered $3 billion. We haven't heard from Apple yet, but Apple is worth more than Daimler, Volkswagen, Renault, Peugeot, Fiat Chrysler, Ford and General Motors put together. The car companies don't want silicon valley to own the next generation of their dash boards and the data that gets generated, but I don't see how they can realistically compete.

Coming soon to a water table near you: fracking. Fracking involved injecting millions of gallons of stuff into the ground to loosen up the trapped oil. Federal law says frackers don't have to tell you what they're injecting, but whatever it is last year a leak killed 70,000 fish in Ohio. Some people near frackers have wells, and the water they pull up to drink can be lit on fire. What's in your water? Here's some of the chemicals frackers use: Methanol, benzene, toluene, xylene, ethylbenzene, diesel fuel, kerosene, lead, hydrogen fluoride, naphthalene, sulfuric acid, formaldehyde. Yummy. If you catch your teenagers pouring a glass of water then walking around sniffing it, be afraid.

Global Warming Watch: We just passed 400ppm CO2 in the atmosphere, which for climate changers is one of the signs of the apocalypse. And the National Academy of Sciences says as the world gets richer and hotter, little Korean and Chinese window air conditioners are going to destroy the planet. It took a meteor a 10 miles across to kill off the dinosaurs, but we're going to kill off everything with a couple billion little air conditioners. I don't believe in any of this: 1) the world is not getting hotter in any hurry; 2) I don't believe the world has the resources to lift 5 billion people into the middle class; and 3) I think a huge war is a lot more likely than a few billion people getting air conditioning.

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