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Mark's Market Blog

5-14-11: Europe looks shaky.

By Mark Lawrence

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Stocks bounced around a lot this week, but ended up pretty much where they had started. The silver crash seems to be over, but there's been a run on the dollar, driving the value of the dollar up, commodities down, and interest rates down a bit. This looks to me like a combination of things: I think there's a flight to safety in advance of June 30, when Bernanke officially takes his leftovers and leaves the party; and Japan and Europe have everyone a little spooked so they're moving into dollars. For all the heat we take about being last century's leader and a current has-been, as soon as things get a little scary everyone runs home to momma dollar.

S&P 500 November 14 2010 to May 13 2011

The rapture is scheduled for next Saturday. You have one last week to catch up on your bacchanalia, then confess your sins quickly.

Have a 401(k) or IRA? You're going to love this. The Irish government, which has run out of money, is proposing to tax private retirement accounts .6% of principle per year for "four years" (note that we're still paying the WWII temporary rubber excise tax on tires); in other words they propose to grab 2.5% of all private pensions and redistribute the money. Of course, this could never happen in the US. . .

How are rare earths doing? Prices are up by factors of 15 to 30 - rare earths that cost $2/lb in 2009 now cost $60/lb.

Only 1 percent of U.S. companies export; and of those that do, 58 percent export to only one country, typically to Mexico or Canada. I find this a stunning indictment of US marketing: if you have a good web presence and a good product, you export almost by default. This got me interested, so I did some statistics on my business. I export about 14% of my production. That trade deficit thing? It ain't me. I do have to admit that I run a personal trade deficit with China: they buy nothing from me, I buy lasers from them. To date I have shipped to:

I look over the list above, and notably missing is China, India, South East Asia, the Middle East, and essentially all of Africa: three quarters of the world's population. Apparently I pretty much only sell to white people.

Also on a somewhat personal note, many motorcycle dealers are reporting that they cannot get product: the Japanese earthquake has disrupted supply chains quite badly, and dealers are being told their allocations are being cut by 50% to 80%. I expect similar things are true for cars, but that's not quite my field.

While California goes broke, more union members thrive. This week it's Newport Beach lifeguards. 13 full-time city lifeguards earn over $120,000; the top lifeguard earns $211,000. They retire at age 50. One retired lifeguard, age 51, gets $108,000 per year. Brent Jacobsen of the Lifeguard Management Association told the Orange County Register, "We have negotiated very fair and very reasonable salaries in conjunction with comparable positions and other cities up and down the coast. Lifeguard salaries here are well within the norm of other city employees."

How's Asian inflation looking? A bit scary, if you ask me. The dominoes are lining up. India and Vietnam, in particular, look to me like they've hit a tipping point. Any little outside hit on the system, like a poor harvest in a few exporting countries, could make this get really ugly really fast.

Inflation in the Asian economies, May 2011

In spite of an austerity program, Greece's deficit continues to go up. So do strikes and demonstrations in Greece. No one is happy with the current situation. Germany is proposing a restructuring, lengthening the term of the Greek loans. This won't work; it's becoming clear that Greece needs some loans forgiven. And a much lower value on the Euro, like under $1, to make them more competitive. France has vetoed lowering Ireland's bond interest rate unless Ireland raises their corporate tax rate. Ireland drastically cut their corporate tax rate over a decade ago and attracted companies like Intel, HP, Google, and associated high paying jobs. France wants Ireland punished for this. I think the Irish have the upper hand, as eventually they will simply repudiate some of their debt, perhaps starting with bonds held by French banks.

Originally the Euro was presented by the French to the Germans as the price of German unification: Germany could unify if they were bound more tightly to Europe. However, the Euro is monetary unification without political unification. The Euro meant that Ireland, Spain, Portugal, Italy, Greece could borrow at low German interest rates without the discipline of the German central bank, which fears inflation above all else. Today the Euro is bent nearly to the breaking point, as the southern countries have built up debt that almost certainly can never be repaid, debt mostly held by German and French banks. The old system, where Greece borrowed at low German interest rates to fund government handouts like highly paid government jobs and retirement at 50, cannot continue. Looking into the future, it seems more and more clear that there are only two viable paths: political unification, where all the countries are governed by one set of rules for borrowing and retirement policy, or the breakup of the Euro. For reasons which frankly elude me, France is strongly behind political unification. Germans don't want to be seen as breaking up the Euro, but they're also not going to stand for a bunch of French, Spanish and Italians setting their monetary policy. Meanwhile half the countries have clearly unsustainable debt, unemployment, and government policies, and all the countries have severely declining populations of Europeans, and rising populations of angry Muslims. Where will it all end? I think no matter what they decide, Europe will be in a near-continuous monetary and political crisis until about 2075. Starting probably sometime next year. This year there's still a rug.

And again this week we have breaking news. There are two big bank facilities, the World Bank and the International Monetary Fund. By unwritten convention, the US names the head of the World Bank and Europe names the head of the IMF. The IMF is a huge part of any bailout or negotiation, they supply the money. The head of the IMF, Dominique Strauss-Kahn, is a quite famous politician who, until a few hours ago, was favored to become the next President of France. That was until NYPD walked onto his Air France flight moments before takeoff and arrested him for rape. Seems he has a taste for lower level IMF employees and hotel maids. We may expect that the effectiveness of the IMF in the current negotiations on Greece, Ireland and Portugal will be a bit compromised.

Science stuff: You know how in science fiction movies the sky is always so much more interesting than ours? Well, maybe not. Nick Risinger took 37,440 photos of the night sky and stitched them together into this zoomable picture. Below is a low-res version.

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