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Mark's Market Blog

5-21-11: The World Is Still Here!!!

By Mark Lawrence

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It appeared on Wednesday that our little correction was over; however growing protests in Spain and raising interest rates in Greece got many concerned that Europe was about to implode. Stocks fell on Friday, led down by bank stocks, due to fears about their exposure to Europe and the certainty that no one in Bank Management will survive judgement day.

S&P 500 November 21 2010 to May 20 2011

By now you've noticed that you weren't swept up in the rapture, and no doubt you've heard a lot in the media about the failure of Harold Camping's prediction. Well, here's a different spin: Maybe he was right. Maybe there were only a dozen or so in the world worthy of being swept up directly to heaven, and maybe they were swept up without the rest of us noticing. The Jehovah's Witnesses believe just that. Perhaps this is Hell, and you and I are now permanent residents. . .

Eurozone scares and government actions against insider trading have taken a toll on bank stocks. Goldman Sachs is now trading for $2 / share over book value. Absent the bank stocks, the S&P is already at a new high. I've said for some time that bank stocks would lead us in the next leg down, and the sign right now is July and August won't be pretty. A few weeks ago I predicted that the S&_ would hit 1480 or so by the end of June. I no longer think that, we lost a few weeks to our mini-correction that I didn't anticipate. I now expect perhaps 1380-1400 as the top.

Sometime this fall, Los Angeles will have 1 million people on food stamps. I lived in LA for several decades and I'm here to tell you that at least half of those million people aren't citizens. Here in California illegals get free education, free medical care, food stamps, subsidized section-8 housing. Were I governor of The People's Republic of California, they would get a free bus ticket. I'm truly mystified how it is that we're going broke as a country, and we're paying 13 million uneducated and largely non- productive people to hang out here - and thousands more to join them every day. Meanwhile Asians and Indians finish a PhD program at a US university and are summarily thrown out due to visa quotas. On the Statue of Liberty we have a sonnet by Emma Lazarus, Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me. Somehow we have turned into a country that prefers wretched refuse to educated self-motivated proven winners. And just as everyone in Milo Minderbinder's army gets a share, every one of these homeless wretched refuse gets a vote, or will soon when our government finds a path to amnesty. I'm livid.

Russia is second only to Japan in the list of countries with an aging and declining population. When your population declines, there are very few young working adults to support a lot of retired old people. So 3,000 Russian grannies formed a flash mob on the Moscow subway this week, wearing parkas that said "What's the matter? Have a child." Not a particularly catchy slogan - Russians are not the best marketers in the world. Anyway, the protests against childless young women have started. Apparently 20-something women are suppose to have and raise kids so that 50-something women will have someone to provide for them. I dunno, I have no memory of ever being a woman, but from what I've seen of motherhood and the required sleepless hours and non-stop worry, I don't think I would find that argument compelling.

Greece is now backing Europe into a corner. The European Central Bank is not allowed to own junk bonds; if Greece were to default in any way, including a restructuring, their credit rating would almost certainly drop instantly to junk and the ECB would be unable to participate in any bailout. There's no political backing in the northern countries for sending more money to Greece, and if they don't send more money a default looks inevitable, followed likely by Greece being forced out of the Euro within days, then the contamination spreading to the other PIIGS. In terms of the French dream of European unification, this is the equivalent of the US throwing Mississippi and Louisiana out of the union for having poor economies and education systems. Kind of the civil war in reverse.

Greece is already in recession, and their government is being forced to raise taxes, cut government worker's pay and retiree's benefits, and sell off assets. This is exactly the opposite of what economists would have you do to get out of a recession and grow your way out of debt. The alternative is for French and German taxpayers to keep funding Greek bureaucrats and retirees. There's simply no easy solution here. But there is no monetary crisis this year, Greece has plenty of money to continue they ways for many more months. Party on, Dudes!

Spain had massive protests this week by unemployed youth - reminiscent of Egypt a few months ago. Spain has 21% unemployment, but among 20 to 25 year olds unemployment is 45%. The Spanish are starting to have a slogan: they want the Iceland solution, where you tell your creditors to go pound sand. Spain is having elections today, you may safely expect that the voters will be expressing their dissatisfaction. In between getting arrested for sex scandals, the European Financial Elite are trying desperately to put a lid on this boiling pot. It's not working. When the Fed prints money, trillions of dollars, the US stands behind this. My question is, when the European Central Bank finds itself needing to print up a couple trillion Euros, who will stand behind that? The PIIGS are broke, Germany and the Nordic countries are unwilling to bail them out. Who does that leave? What will happen to Europe? I don't feel competent to predict two to four years out, except that these little sequential mini-crises will eventually get too big to handle, then suddenly it's going to look a lot like the US in 2008.

There's a magic number - when your debt gets to 150% of GDP, countries never come back from that. The historic result is runaway inflation and/or debt default. Greece is there, pretty much today. The US is at 90% and rising - on present trends, we have the rest of this decade before we flat-line. Japan today is at 200%, but importantly they owe the money almost exclusively to themselves: Japan has very few foreign bondholders. None the less, Japan has had roughly zero growth since 1990, and their future looks quite bleak. China likewise has very few foreign bondholders, and this is why I think that their banks are toast by western standards, but no Chinese banking crisis will occur in the immediate future.

Chinese have a new game. They form a company in China and borrow some money. Then they buy a small company in the US that's listed on the stock exchange. This effectively means their Chinese company is now listed on the US stock exchange, but without going through any of the normal audits and SEC filings. They issue some revenue statements showing how their growth is through the roof, and the shares rocket up in price. The Chinese sell their shares, then they say, "Whoops, the revenue statements were mistaken." Meanwhile the money is all in China. In the last two months alone, 24 companies have been delisted or had their trading suspended for variants on this trick. Once again, the Wall Street Masters of the Universe are looking just a little short of Economics Nobel Prize material. If you have a chance to buy shares in a Chinese company that's rocketing up, my advice: don't.

China, Korea and Japan are exploring starting up a free trade area. It seems clear soon there will be three big economies in the world, NAFTA (Canada-US-Mexico), Euro Zone, and the new unnamed Asian zone. Other economies (Russia, Brazil, Malaysia, Australia) are going to have to find a way to join one or find themselves locked out looking in.

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