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Mark's Market Blog

5-12-13: Bread and Cell Phones.

By Mark Lawrence

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Markets made new all-time highs last week, breaking through the psychological barriers of 1600 for the S&P and 15,000 for the Dow. Even Warren Buffet has said bonds are a terrible investment right now, so the stock market is the only game in town. This is how the money velocity is dropping and how the Fed can print money on supercharged presses without starting up inflation: the new money is all going to banks then to rich people, and they have little they wish to spend it on, so instead of going into general circulation and perhaps stimulating the economy and creating jobs, it's just being parked in the stock market. Low money velocity, deflationary forces, liquidity trap, depression, call it what you will but Bernanke has his foot heavy on the accelerator and the rear wheels are just spinning in the mud. What's next? Everyone knows that the stock market has to continue to go up, because, because, um, well just because. So I expect a correction soon. Admittedly I'm wrong a lot.

S&P 500 November 14 2012 to May 10 2013

Israel performed two air strikes on Syria last week, saying they were targeting Iranian missiles bound through Syria for Hezbollah. Meanwhile, a Syrian general who has defected to Turkey says the Israel targets were chemical weapons stores and plants which housed Russian and Iranian experts and were guarded by at least 3,000 Iranian Revolutionary Guards. He added that the guards suffered heavy casualties. What's the truth? We're not supposed to know. Iran is propping up the Syrian government, sending guns and ammo and people.

Reinhardt and Rogoff are Harvard economists and authors of the incredibly persuasive book "This time is different" that argued that when debt hit 90% of GDP economies stopped growing. It was found in the last few days that they made a mistake in one of their spreadsheets and the 90% number is now suspect. After the fact people all over Europe and the US are claiming this book provided the intellectual case for austerity, so now austerity is dead. Of course the fact the European governments are more and more mired in deep recessions with a quarter of their populations unemployed is also part of the argument. Reinhardt and Rogoff are fundamentally correct: if interest rates ever rise from their current Fed induced artificial low, the interest portion of the Federal budget will quickly grow and crowd almost everything else out - the welfare state will get eventually get dismantled as the US finds their ability to service their debt and issue new debt comes into world wide question. Without question austerity has been very harsh on the people of the UK and Europe. So is going cold turkey on a heroin addiction. But that's not an argument for having just a little heroin to ease the suffering. Liberal economists like Paul Krugman say our only hope to get out of this generational recession and eventually pay off our debt is to stimulate the economy with cheap money from the Fed and huge deficits from Washington. I don't think the US economy will return to 2.5% - 3% nominal growth during my or my children's lifetime: I think we've entered a new reality where farmland and water are scarce, energy is expensive, and pollution is the price for industrialization of 3rd world economies. Who's right? Time will tell. Meanwhile, Paul assures you that your social security and medicare will never be brought into question if the government just act appropriately (meaning follow his precepts), and I say if you're counting on these drug pushers to keep you in your old age, well, good luck with that.

Remember N.Korea? I know, that was so last week - all that talk, and nothing happened. The joint US/S.Korean military exercises are over and we're returning to normal. N.Korea is massing troops near their port of Nampo, apparently preparing to have their own exercises soon. If there's going to be a stupid action taken, it will likely be during their exercises, scheduled so that they can tell the world that their show of force scared off the US. Meanwhile, the pentagon announced that soon N.Korea will be able to reach the US with their nukes. "Soon" was not defined. The only point I can see to this announcement is to move the US public along the path to accepting a pre-emptive strike on N.Korea.

South Korean trade figures came out. S.Korea is considered the "canary in the coal mine," when the world economy sinks their exports sink first. Their trade numbers were pretty poor.

Australia appears to be slipping towards recession, thanks to a reduced demand from China for iron and copper.

Oskar Lafontaine, the German finance minister who launched the euro, has called for a break-up of the single currency to let southern Europe recover, warning that the current course is "leading to disaster". "The economic situation is worsening from month to month, and unemployment has reached a level that puts democratic structures ever more in doubt," he said. "The Germans have not yet realized that southern Europe, including France, will be forced by their current misery to fight back against German hegemony sooner or later," he said, blaming much of the crisis on Germany's wage squeeze to gain export share.

Douglas Elmendorf, the budget analyst at the helm of the non-partisan Congressional Budget Office, gave a guest lecture to an economics course at Harvard University. Expenditures are at an all-time non-war time high, and taxes are at an all-time low. 60% of the federal budget is now transfers to people and states; defense and interest payments make up another 35%. Projections into the future have transfer payments and interest payments only increasing. Washington believes that this problem will be solved by having our economy return to 3%+ growth per year; as I'm confident you already know, in today's world of high energy and food costs, I think such growth is completely unrealistic for an advanced economy. Neither democrats nor republicans have a credible deficit reduction plan: republicans want to cut taxes and welfare, but that's not enough; democrats want to increase taxes and cut defense, but that's not enough. Mr. Elmendorf concluded in his talk to the Harvard students that "Putting the debt on a sustainable path will ultimately require increases in taxes or cuts in benefits or services for people who consider themselves to be in the middle class." Such tax increases would be broad based, and such cuts would by necessity include social security and medicare.

Stocks continue to more seemingly unstoppably upwards; meanwhile traders are borrowing all the money they can to invest in the market. Margin levels are at a new all-time high. The graph below seems to indicate that the last bit of gain in a bull market is fueled by borrowed money, and we're there. Historically debt levels like this lead quickly to people jumping out of Wall Street windows. If this happens, I for one will miss all the cold calls I get from young smooth-talking guys in New Jersey and Florida boiler rooms offering to show me how to make money hand over fist.

Unemployment continues on its well established curve. We've been looking at this curve for about three years now, the curve has been predictable for three years now, there have been no big changes in the form or slope of the curve. Meanwhile the narcissists in Washington repeatedly tell us that Obama's policies are either fixing or destroying the economy, depending on their politics. A glance at this curve makes it look like Obama's and Bernanke's policies are having no noticeable effect at all, save for one little blip where we hired a bunch of people to go door-to-door for the census. The emperor has no clothes. Washington is just another soap opera: you can get addicted to watching it, but it really has little impact on your life.

There's a bacteria that infects citrus trees - oranges, lemons, limes, grapefruit - resulting in a disease known as Citrus Greening. A few years after the tree is infected, the leaves turn yellow and fall off and the fruit drops to the ground unripe, then the tree dies. There is no known cure. The disease is spread by a Chinese aphid which shouldn't be here. Citrus Greening threatens to completely wipe out Florida's citrus industry, and has also been observed in California, Arizona, Texas, Mexico and Brazil. Labs are working on a cure - however, it's noteworthy that humans don't invent ways to kill bacteria, we find them. All we can do is round up all the antibiotics we can find and see if there's one that will kill this bacteria without harming the tree. Then I guess we start giving the trees shots or something. Hopefully we can find a cure, and the cure won't cause Citrus Autism or something like that. Meanwhile, expect oranges to continue to get more expensive.

Immigration reform continues to gather momentum in Washington, and it looks like something will be done. I more or less like what they're doing, so if you're a liberal looking for wholesale amnesty and continuing to favor family members over educated young engineers and scientists, you're likely going to be disappointed. The new bill makes a lot of noise about a path to citizenship for the current illegals, but this path is a yellow brick road with witches and flying monkeys.

Also momentum is gathering for a new "market fairness" bill that means companies will have to charge you sales tax no matter where they are and where you live. Internet companies (that's pretty much everyone now except perhaps for your neighborhood butcher) will have to somehow keep track of literally thousands of different sales tax rates across the country. When Washington hauls out this word "fairness" it means we're pretty much all going to get screwed: that's their definition of fair. The current bill excludes businesses with under $1,000,000 in interstate sales. That won't last: if this bill passes, quickly internet web pages will pop up that take a sale amount and a zip code and return you a sales tax rate and amount; a few years from now the "fairness" will be "improved" to include everyone, including your 13 y/o granddaughter when she sells her Barbie collect on Ebay. What they're trying to do is stop retail jobs from collapsing, thinking that internet shopping is significantly due to sales tax rates and in any case state governments need the money to pay welfare for the newly unemployed. I beg to differ: I shop on the internet 'cause I get what I want faster and cheaper and don't have to burn a bunch of gasoline futilely looking for strange little widgets. Small speciality shops and huge warehouses beat local businesses pretty much every time on both price and selection, and sales tax isn't going to change that. Perhaps you prefer to support your local businessmen: great, by all means do that. But your children will not.

Google wallet is nearing the knee on the curve. I'm not using it yet but I expect to sign up soon. Already lots of businesses have little platforms attached to their card swipe machines: if you have a reasonably modern phone and Google wallet you touch your phone to the platform and touch the screen, and your bill is paid securely. I've had to get new credit cards twice in the last 12 months due to my number being stolen when I hand over my card, and I'm getting pretty sick of registering new numbers on a couple dozen websites. If you don't have a modern Android or iPhone, pretty soon you're going to be like that little blue-haired old lady at the grocery store who holds everyone up while she writes a check. Actually, I haven't seen her in a year or more, so being like her might mean you'll be extinct.

Apple, who currently has $145 billion in cash for which they have no use, is about to issue $17 billion in bonds, raising more cash for which they have no use. Why? I guess because the cash will come cheap - everyone is lining up to buy Apple bonds - but I'm still mystified by this. Of course they will use some of their cash to buy back stock - the recent 40% collapse in the stock price can't be making anyone at Apple happy. So, Apple is no longer the innovation leader, they've amassed a huge war chest of cash that they don't know how to spend, and they're buying back their stock to shore up the price. Sound familiar (*cough* microsoft *cough*)?

Who's buying stocks, raising stock market prices to new records? Here's a few large investors: The Bank of Japan (Japan's central bank), the Bank of Israel, the Swiss National Bank. In a survey of 60 central bankers this month by Central Banking Publications, 23 percent of them said they own shares or plan to buy them. Apparently central bankers are no longer willing to just buy bonds, ruin their return, and wait patiently for investors to be forced to move to stocks. Now the bankers are starting to drive up stock prices directly. How can this possibly end well?

Fed has promised to continue quantitative easing until such time as unemployment drops and is clearly and sustainably declining to more normal levels. Now suppose instead that the Fed divided its $85 billion monthly money production into 300 million checks of $283 each and sent these to every man, woman and child in America. Suppose, moreover, that the Fed promised to keep sending out these checks, worth more than $1,000 a month for a four- person household, until the United States reached its unemployment target. Suppose further that the Fed chairman added that he would increase the checks to $1,500 or $2,000 a month for that household if $1,000 monthly proved insufficient. There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment, and no doubt that it would be infinitely more effective than distributing money to bond investors and banks through QE.

Liberals are just thrilled to tell us that Reagonomics - the trickle-down theory - has been completely exposed as a money grab by the rich. Curiously, Obamanomics is even more focused: Reagan cut taxes for everyone; Obama and his lackey Bernanke are shoveling truck loads of free money to rich people on Wall Street and handing out ObamaPhones and disability checks to poor minorities, but the middle class is seeing taxes go up and good paying jobs disappear. Full-time jobs are likely to get even more scarce in the coming months as companies gear up for Obamacare, which severely punishes you for having more than 49 employees that work more than 29 hours per week. Sadly, no matter how awful this guy's economic policies are, he continues to get a "pass" from the electorate. Just, imho, for having coffee-colored skin. Or perhaps because his version of panem et circenses, bread and cell phones, is really popular. It's unfortunately obvious that there's no latin word for cell phones.

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