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Mark's Market Blog

5-27-13: The bond market intimidates everyone.

By Mark Lawrence

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Japanese bonds went up significantly and scared everyone. US stock sold off too, just a little bit. It's about time for a 5% to 10% correction, but we got 3.1%. Money keeps flowing into this craps table, as the dice are hot.


S&P 500 November 28 2012 to May 24 2013

China's manufacturing index fell below 50, indicating contraction and possibly recession. Recession won't be allowed right now, so if this continues expect to see some response by the Chinese government. More cheap and easy money.

Last week I noted Japanese bond rates had risen from mind-bogglingly low to merely absurd. This week everyone else noticed and the Japanese stock market dropped a gut-wrenching 7% in one day. What's next? Japan is dead set to start inflation up to cure themselves of the deflation malaise they've lived in for the last 15 years. This has to make bond rates increase as people become convinced the government will succeed. However, much more is at stake here than a bit more government debt as interest rates rise. The Japanese central bank will likely announce, or at least start some new program to buy even more Japanese government bonds and keep the price up. Can market forces be contained? Not forever, but for a while they can. . .

Japan has been struggling with deflation and a poor economy for 24 years now, and they're determined to jump start their economy by throwing money at it. Of course, we've already seen that to jump start an economy you need to add money plus have the velocity of money go up. Japan's new money is doing the same thing as America's new money: sitting in banks, flowing into their stock market. This year the yen has moved from 75 to the dollar to 102 to the dollar. Each time the yen moves by one point, Toyota's profits increase by $375 million. The yen has moved by 25 points, so this should increase Toyota's profits by $8 billion. In order to keep this up, Japan would need to move the yen to 200 to the dollar in the next 3 years. If they do this a Lexus will cost the same as a Hyundai. This is going to provoke reactions sooner or later, and the world may see the first full-blown currency wars since the Great Depression. In the short term this is good for the US: we're exporting inflation and importing deflation, and we're getting lots of stuff for cheap. In the longer term we're also exporting jobs.

And now US bond rates are starting to rise. "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody." -- James Carville. Meanwhile bonds of all flavors including junk bonds continue to fall in price - sound familiar? Here's Euro junk bond rates:

France's socialist president Hollande is making changes, especially to the tax code. More than 8,000 French households' tax bills topped 100 percent of their income in 2012, the business newspaper Les Echos reported on Friday. In 2011, 5,221 households had a tax rate of more than 100 percent on their revenues, 6,203 households had a rate of more than 85 percent and 6,343 house holds a rate of more than 75 percent.

Goldman Sachs, the Leaders of the Free World Economy, has released their official targets for the U.S. stock market. "We expect S&P 500 will rise by 5% to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015," says Goldman's Chief U.S. Equity Strategist David Kostin in a note to clients. Apparently everyone believes it because margin levels - borrowed money to play the market - are at record highs. Will the markets crash soon? Probably not: notice the last two times this happened the markets continued more or less upwards to sideways for five to eight months before the rug got pulled.

We've all heard for over a decade now of yuppies moving into the city, buying up distressed properties in poor neighborhoods and turning the neighborhoods around. What happened to the poor people? Turns out they packed up and moved out to the suburbs. Growth of poverty in the suburbs has been over double the growth in urban areas for over a decade. From 2000 to 2011 the urban population living below the poverty line grew by 20%; the suburban poor population grew by 64%. In urban areas you can put in bus lines to connect poor people with job opportunities, but suburbs aren't set up for this. We're used to urban schools taking in disadvantaged kids and dealing with them; the school districts of the suburbs have no such experience. I can speak to this first hand, my kids finished high school in a school with a bunch of poor minorities and found themselves stunned by attitudes and performance of their peers. My solution was to start my kids in jr. college when they were high school juniors so that they only went to high school half days and had other perspectives. Urban police departments are better equipped to handle the crime and drugs associated with poverty, suburban police are getting overwhelmed. It used to be middle class people fled to the suburbs for a quieter, safer life for themselves and their children. Perhaps that's now reversed and the middle class will flee to the cities for the same reasons.

Water, water everywhere. . . With about half of the country still suffering from last year's extreme drought, farmers and businesses in the Western United States are looking at another hot, dry summer. A Columbia University Water Center study reveals that several major metro areas, including New York City, Washington, D.C., and Los Angeles, are at high risk for water scarcity, along with the Great Plains agricultural belt extending from North and South Dakota down to North Texas. "All cities and all businesses require water, yet in many regions, they need more water than is actually available — and that demand is growing," said Upmanu Lall, director, Columbia Water Center. "The new study reveals that certain areas face exposure to drought, which will magnify existing problems of water supply and demand." The study notes that US population has doubled since 1950 producing a 127% increase in water use. "Even if you don't believe in climate change, the North American continent historically has had frequent and severe droughts," Lall said. "There are very significant droughts that have happened here historically — they are not that unusual." Due to the drought we are depleting resources of the High Plains Aquifer, which provides irrigation for agricultural centers in the Midwest. In 2011 and 2012 the average water level in Kansas’s portion of the aquifer dropped 4.25 feet — nearly a third of the total decline since 1996. Replenishing this water takes hundreds or thousands of years. And in the middle of this drought, the new oil fracking technology being used in some of the plains states (Texas, Colorado, the Dakotas) requires massive amounts of water.

According to data compiled by Bloomberg, U.S. corporations have a record $1.73 trillion of cash sitting on their balance sheets as of the end of the first quarter. Here's the top 17 by cash reserves:

Either most human beings are about to become economically obsolete, or the information economy can find a use for their talent and hard work. Much depends on which of these two pictures turns out to be the best description of the future. If we believe in the first alternative, we are need to start planning for the mother of all welfare states. There will be a period of transition, but something like 80 percent or more of the population is going become superfluous to the economy. There will be no jobs where the work of this group could command a living wage; the state must somehow make provision for them or wait for them to fall into poverty and risk the social explosion that will probably follow. It's likely that an information age welfare state would consist of two components: straight out welfare and "social inclusion" payments for some, subsidized make-work jobs (like Postal Service employment in an age of email) for others. The money to fund these programs will have to come from corporate profits and from the incomes of those who still manage to surf on the waves of digital change. That suggests rising tax burdens and a constant class struggle between the economically connected citizens who want to keep what they have earned and the clients of the welfare and make-work state. If the information economy works like this, the whole country would start looking more like California and New York City: unbridgeable class divides, huge inequality, fountains of innovation, and tiny islands of great wealth and privilege surrounded by proles on the dole. Inside the glittering bubble, the digerati and their courtiers would live lives of intense purpose and excitement. Outside the bubble, life meaning would be the good in scarcest supply. To have a life where your work means something and your hands help steer the world would be the exclusive privilege of a tiny handful of enlightened, intelligent, and energetic people. This is Blade Runner softened by food stamps, but as in the public housing projects and other warehouses where we store "surplus" people today, the most acute form of poverty and deprivation will not be the lack of food, clothing or even shelter. It will be a lack of social connection, of independence founded on achievement, on the human dignity that comes from doing work. Bellies will be full, but lives will be empty, and with that emptiness will come ills of every kind: addiction, brutality, ugly, and stunted sexual and emotional lives for many, neglect of the young and the old. My partial solution: every girl in the US gets an IUD at age 12, then she can petition the courts to remove it at age 21. In that petition she has to spell her name correctly, spell her city correctly, and write a grammatical sentence about why she wants kids. Never happen: the poor will continue to breed like flies with a generation of about 16 years until overpopulation forces drastic change. We'll have 48 year old great grandmothers who have 25 grandchildren, and not one person in the family is self-supporting.

Who pays taxes? That has evolved significantly in the last 60 years. Payroll taxes - medicare and social security - are now a huge fraction of our tax revenues. Corporate taxes have declined as profits have risen. This is due to tax law: the congress passes hundreds of new tax laws every year, now filling many volumes of books. Then they're confused when corporations make use of the laws to pay less taxes, which since corporate lobbyists help write and pay for the laws, what did they expect? I'm already on record, my corporate tax would be three lines:

1) What was your total revenue last year? ______________________
2) Multiply (1) by .03: _________________________________
3) send us a check.

If we passed this large corporations would pay more taxes, tax lawyers would disappear as would huge accounting departments, and US efficiency would increase. That's why it will never pass: it makes too much sense.

A soldier, Lee Rigby, was hit by a car on the streets of London then beheaded by a pair of muslims. This was done in plain sight of Mulgrave Primary School and the murder was witnessed by many of the children. Rigby was in civilian cloths at the time, but was wearing a t-shirt with the name of a charity, Help for Heroes, that helps soldiers in need. One of the murderers, blood dripping from his hands and the cleaver he still held, looked into a witness' video phone, and said, “We swear by almighty Allah we will never stop fighting you until you leave us alone. Your people will never be safe. The only reason we have done this is because Muslims are dying by British soldiers every day. We must fight them as they fight us. An eye for an eye and a tooth for a tooth. I apologize that women had to witness this today but in our lands our women have to see the same. You people will never be safe." 20 minutes after the fact London police arrived. The two muslims rushed at the police and were shot. Several muslim clerics across the UK and the arab world later gave interviews where they said most muslims agreed with the statements in the video.

Thanks to people booking capital gains before the Bush tax cuts expire, California is due to have a budget surplus of $2 - $4 billion this year. Since California is run by Democrats with veto-proof majorities in both houses, the talk is not about paying down some of our debt that was built up when we were running $60 billion deficits, but rather how to spend it on important stuff. Very important stuff.

Think you might has Aspergers? Not anymore. The DSM-5, the latest edition of the bible of psychological diagnosis, will be coming out next month. Aspergers isn't in it. Now you have "autism-spectrum" disorder. The DSM also used to have homosexuality as a diagnosis of mental disorder. The DSM is put together by a committee and clearly follows the central law of committees: the functional IQ of the committee is lower than the lowest IQ of any individual member. "Search all the parks in all your cities: you'll find no statues of committees."

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