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Mark's Market Blog

5-18-14: Universities, a tick sucking blood from our economy.

By Mark Lawrence

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The stock market continues to play a game of internal tug-of-war as money rotates out of riskier stocks and into blue chips. As noted last week we're already in a bull market for the average stock, but the indices continue to creep upwards in a completely unconvincing fashion. I continue to believe this market wants to go up and has another 10% or so left in it. I also believe in the Easter Bunny and the basic goodness of mankind, so it's entirely possible you don't share my belief systems.


S&P 500 November 21 2013 to May 16 2014

Producer price inflation is around 2% now, meaning that consumer price inflation is likely to follow. Food prices are leading the way with an inflation rate of 2.7%. It's very difficult and expensive in this country to eat real food. The Fed is starting to get squeezed: the stock market has made clear that it will not react well if the Fed continues to taper; unemployment isn't moving anymore, we're just moving people out of the labor force; and inflation is climbing. A little longer and perhaps inflation will hit 2.5% or 3%; then the Fed has to stop printing money and raise rates, but the markets will react very badly to that.

Treasury bills were expected by some to crash as the Fed tapered off their printing presses. Hasn't happened - in fact we're in the middle of yet another huge bull market in bonds. Some on Wall Street are saying we're close to a major short squeeze, meaning bond prices may leap upwards in the next couple of months and government interest rates will drop ever closer to that big zero.

How's the economy doing? From the point of view of the average American, not so great. Two-thirds of our population makes less than $20/hour. 20% of our families have no one employed in the house. The number of women on food stamps outnumbers the number of women with jobs. There are 60 million more Americans receiving federal benefits than there are Americans with jobs. Liberals point to this as a huge win for the welfare state: in a poor economy, American families have a safety net. Conservatives recall Clinton's promise: a hand up, not a hand out.

Are we headed for a recession? Large stock market corrections are almost always caused by a Fed mis-step or an impending recession. Doug Short watches this closely and he says the indicators are doing just fine. Unfortunately it's not obvious these are leading indicators - like your mother-in-law in the back seat, they may only speak up after you made the mistake.

India's election month is over, and Narendra Modi will be their new prime minister. His party BJP was elected with an outright majority for the first time in decades. Now we get to see if he can reform an economy where there's a popular magazine called "Bureaucracy Today." India has a lot of bright, educated young people, many with entrepreneurial skills. It's also true that half their population lives with amoebic dysentery, two-thirds have no access to clear water and 90% live on $2/day or less. A technology growth spurt could go a long way to alleviating many of their worst problems, but can Modi reign in the bureaucracy enough to let this happen? 5,000 years of civilization say "no," while a relative handful of politicians and young people yell "yes." This should be interesting.

Interest rates are rising in Greece, the ruling party PASOK is seeing their meager support crumble away, and fringe parties on the far right and far left are gaining strength daily. Some say Greece has hit bottom and it should be starting recovery now. If they can hold it together.

Some years ago Sears merged with KMart, apparently under the theory that if dinosaurs stick together they'll be safe. It's not working. Sears is burning through cash at a horrendous rate. Analysts expect Sears to close a quarter of their stores in the US in the next few years, and likely sell off Sears Canada thus losing another 20%. Sears was once the nation's largest retailer and biggest employer. Now sales have declined every year since 2006, and Sears has been losing money since 2011.

Half the US population is now taking prescription drugs - apparently the average person is sick and needs Big Pharma to get better. 10% of our population is taking 5 or more drugs. The top drugs: blood pressure medication, cholesterol lowering and antidepressants. Deaths from overdoses of opioids like Vicodin and Oxycontin are up four times since 2000.

Talk is building up about raising the minimum wage to a "living wage." In Seattle a $15/hour minimum wage has been passed, although it will take a couple years for them to step up to that. Vermont will raise theirs to $10.50. The Swiss voted today on a $25/hour minimum wage and rejected it. The idea is that this puts more money into the hands of our poorest workers - some people lose their jobs, but more get raises. Already we go through the agony of self-checkout lines most everywhere ("Please remember to take your items!"). I believe raising the minimum wage will result in more and faster automation - automated hamburger cookers, ordering and paying with your phone, robots that deliver your meal to your table, robots that stock the store shelves - and the most severe burden will fall on the uneducated under 30 who will be priced out of the employment market entirely. Liberals are completely oblivious to the laws of unintended consequences - it's far more important to them that they do something that feels good than that they check on what actually happened and if they got their intended results. Of course I'm assuming that the labor participation rate will continue to drop, especially for younger workers; but it's been dropping unimpeded for 15 straight years, so I don't think making that assumption is very risky. Multiple studies have shown that high youth unemployment has career lasting effects. Personally I think the earned income tax credit is a far better way to put people to work and get money into their pockets. Paid for by a huge income and wealth tax on Hollywood and Wall Street. If we're going to work towards income equality we need to focus on the top .01% just as much as we focus on the bottom 25%. Sandra Bullock made $70m last year on the movie Gravity - that's 2,300 people at $30,000/year. The top 25 hedge fund managers make over a billion dollars a year each - that's another 73,000 unemployed boosted into the middle class. My personal opinion is the hedge fund managers didn't contribute any more to society than the unemployed guys living on the streets. And for a bonus, draining the money from Hollywood and Wall Street will drain a substantial fraction of the money from politics as well.

University tuition, fueled by federally guaranteed student loans, has risen by 50% in the last 10 years. Students go to college, take out $30,000 to $60,000 in loans, get a degree in liberal indoctrination arts, then find out they're unemployable. Many businessmen I know won't even interview someone with a degree in women's or minority studies, thinking this person is just a walking lawsuit. A degree in history or literature means you're going to be teaching elementary school if you're lucky, wiping noses and changing diapers if you're not. It's a pretty simple equation, but one that 75% of our students don't seem to know: math based educations, like engineering, science or business pay off. Ivy league educations or degrees from our top 50 schools often pay off because of the contacts you make. If you get a government job then more degrees = more raises. Other degrees are mostly a waste of dollars and years. With the additional downside that student loans survive through bankruptcy and wreck your credit rating. My kids are getting science degrees and have no debt - 'cause they're working through school, not 'cause I write big checks.

Millennials and racism: Millennials, the generation born from roughly 1980 to 2000, now ranging in age from about 15 to about 35, have interesting attitudes about racism. 91% "believe in equality," 98% think everyone should be treated as equals. 62% believe that having a black president shows that minorities have the same opportunities as whites, and 67% believe it proves that race is not a barrier to accomplishments. 88% believe racial preferences are unfair as a matter of course, and 70% believe they are unfair regardless of historical inequalities. 73% believe that we should talk more openly about bias, only 20 percent say they're comfortable doing so. 48% of white millennials say discrimination against whites is as big a problem as discrimination against minorities.

Worried about Bernanke? Don't be. He's currently lunching in NY with hedge fund managers for $250,000 per lunch. Pretty nice paycheck - his last year as director of the Fed he made $199,700, so now in perhaps two hours he surpasses last year's total income. Hedge fund guys consider this a bargain to pick the brains of someone who knows the current Fed like no one else - or at least no one else available. Heck, the top 25 are making a billion a year, that's $500,000 during that same 2 hour lunch. What does Bernanke have to say? I mean, besides, "Thanks for the great lunch and the check, boys!". He thinks federal fund rates will be low for the rest of his life. If you're waiting for treasury bonds to hit their historic average of 4%, well, Bernanke is 60 and I hear he's eating pretty good food, so expect at least 20-25 years for that. He says the Fed is aiming to get inflation to 2% or above and keep it there for a long, long time. No surprise to my loyal readers, this is the only way the government will every pay off all these debts.

NASA says the collapse of the West Antarctic ice sheet in the Amundsen Sea is now inevitable. This was predicted in 1978 by John Mercer of the Ohio State University. But it will likely take 200 years. I dunno, I'm a single dad, planning dinner is about at my limits. Anyway this ice sheet is not floating, so when it collapses sea levels will rise by 5 feet. Including storm swell, best live at an altitude of about 12 feet or better. Miami could be swamped - all those Cubans and Haitians we "rescued" may need rescuing again, soon. Maybe it's true, but we've heard so much trash talking from the climate change people that it's hard to take any of this seriously.

While driving across the country I paid a fairly consistent $3.75 or so for mid-grade gas. I got a low of 44mpg and a high of 49mpg, with an average of about 46mpg. Until I hit Las Vegas - which uses California gas. Now I'm paying $4.50 for mid-grade and getting 34mpg to 41mpg, with an average of about 37mpg, a 20% drop. California gas is "specially formulated" for low emissions. Several years ago the California Air Resources Board applied for an exemption from gasohol, as our gas meets federal standards without alcohol. Denied. And of course CARB couldn't then relax our standards to the national average, 'cause then what would be their purpose? Our gas here is double oxygenated, double blended, and has about the potency of horse urine. On the plus side if Buddhist monks come to California to douse themselves with gasoline and set themselves on fire, I'm not sure it will burn.

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