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Mark's Market Blog

5-4-14: Democracy? We don't need no stinkin' democracy.

By Mark Lawrence

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While I was on vacation the markets dropped about 5% and then largely recovered. Much of the 5% drop was in just two trading days, leading many on Wall Street to start screeching the next crash is here. It's not. Historically crashes are participated by either recessions or the Fed tightening too much too soon. My take: At some point, perhaps late this year, the Fed will have gone too far in withdrawing our monetary drugs and we'll go into withdrawal, perhaps with a 10% - 15% correction; but the Fed will get cold feet and start the money flowing again. This market is on the way to S&P 2000 - 2250, another 5% to 15% gain. Then things may well get very ugly, faster than the Fed can bail. Bad case scenario: the Fed lets it go, we could easily be looking at a 50% - 65% drop in the markets. Worst case scenario: the Fed resumes QE but the markets keep dropping.


S&P 500 November 7 2013 to May 2 2014

North Korea is testing engines for an ICBM, and is making preparations for another nuclear test, all clearly with the goal of developing nuclear missiles that can reach the US. Were I president we would strike these sites now, hard, with the intent of destroying the research facilities and as many scientists as possible. This would be the "Lawrence Doctrine:" rogue states don't develop weapons of mass destruction.

Weather forecasters say perhaps a major El Nino is forming, larger than the 1997-1998 one. This would mean a very wet winter for California and the deep south, and likely drought conditions in Oregon and Washington, with very mild winter conditions across the rest of the US north.

Obamacare: huge success, or impending train wreck? Well, both. If you're a liberal you love it. Most of the 8m signups had no previous insurance, so your big goal, to get insurance for everyone, Obamacare is a big step in that direction. If you're a conservative it's a train wreck in slow motion. Almost none of the 8m signups were the youth that are supposed to be financing this. Medical expenses were up 10% in the 1st quarter this year. And insurance companies are all saying that policy prices will go next year - in some states they will double. My advice: don't get sick. Eat better. Lose weight. Walk more. This will get much worse before it gets better.

Jim Rogers, my favorite talking hobbit head on Ukraine: "We have our own diplomats on the phone talking about instigating a coup. We instigated a coup and the Russians naturally reacted. I mean, if Russia instigated a coup in Canada, I assure you the U.S. would have reacted. So Russia reacted, and now he's (Obama) gotten us into a situation where we're doing something and they're doing something; and of course this is pushing Russia and China closer together, Russia and other countries closer together, and I don't know what we're getting out of it except another embarrassment. This is certainly causing more people to worry about using the U.S. dollar. The Americans have said they are going to put all these sanctions on the Russians. Suddenly, the Russians cannot trade or clear U.S. dollars, they're going to look for something else. Many countries are already looking for something else. Let's say you put Russia and China and Iran together, those are three big players in the international financial markets, because of oil if nothing else in Iran's case. This just pushes people further away from the U.S. dollar. I don't like saying this because I am an American, but the U.S. dollar is a terribly flawed currency. We're the largest debtor nation in world history, and now we are telling people you'd better be careful if you use the US dollar. We may take it away from you. We may block you. Of course people are going to look for an alternative."

The jobs report came out and our unemployment rate fell .4% from 6.7% to 6.3%. At the same time our participation rate also fell the same .4% from 63.2% to 62.8%. No new jobs, just a new way of counting the unemployed. Some are concerned we're heading into a recession at a time when the Fed already has interest rates at zero and is already printing money like mad - there's no room for error here. And we still have 3.5 million long-term unemployed. Labor force participation rates fell for every age group from 16 to 65; however participation rates continue to climb for those over 65 as the word "retirement" continues to move towards a mythological status for all but government workers. The number of jobs is very nearly back to the same number we had before the crash; however we need to add over a million jobs a year to account for our growing population, so this ignores the 6 million or so jobs we actually needed to produce in the last 6 years to keep up with population growth. The job of America used to be business; now apparently it's food stamps, watching TV and growing obese.

Israeli prime minister Netanyahu proposed a law declaring Israel to be a Jewish state. Only a week ago US Sec.State John Kerry was internationally castigated for saying that if Israel didn't make some changes they would wind up an apartheid state - something I've been saying for a decade, as birth rates of Israeli muslims easily outstrip those of Israeli jews. In my view declaring Israel a Jewish state is the first step. Personally I don't think I have a problem with this, but I suppose the rest of the world will.

Before Europeans came to sub-saharan Africa, Africa did not have the wheel, two story buildings, or arithmetic that went past fifty. Apparently islamic Africans are now becoming tired of all that stuff. A Nigerian islamist terror group called Boko Haram, which literally translates as "Western education is blasphemy," is making Nigeria nearly unlivable. They routinely blow up bombs in schools and churches. They kidnapped 230 girls, apparently to serve as good islamic wives. They wish an islamic government and western ways gone. Unfortunate, as I have met some very bright Nigerians - tax lawyers and mathematicians. Meanwhile perhaps as much of a third of Nigerian oil has gone missing. Nigeria's central bank governor Lamido Sanusi said there was $20 billion missing in the Nigeria's oil account. For announcing this discovery, he was suspended and had his travel rights revoked. Additionally oil pipelines are routinely tapped and oil stolen directly. Maybe in all the confusion they'll forget to pay their internet bill and Nigerian princes / generals / officials will no longer be able to ask for American help in getting $50,000,000 out of their country.

Winston Churchill in 1899: "How dreadful are the curses which Mohammedanism lays on its votaries! Besides the fanatical frenzy, which is as dangerous in a man as hydrophobia in a dog, there is this fearful fatalistic apathy. The effects are apparent in many countries, improvident habits, slovenly systems of agriculture, sluggish methods of commerce and insecurity of property exist wherever the followers of the Prophet rule or live. A degraded sensualist deprives this life of its grace and refinement, the next of its dignity and sanctity. The fact that in Mohammedan law every woman must belong to some man as his absolute property, either as a child, a wife, or a concubine, must delay the final extinction of slavery until the faith of Islam has ceased to be a great power among men. Individual Muslims may show splendid qualities, but the influence of the religion paralyses the social development of those who follow it. No stronger retrograde force exists in the world. Far from being moribund, Mohammedanism is a militant and proselytizing faith. It has already spread throughout Central Africa, raising fearless warriors at every step; and were it not that Christianity is sheltered in the strong arms of science, the science against which it had vainly struggled, the civilization of modern Europe might fall, as fell the civilization of ancient Rome."

Bill Gates, the Worlds Richest Human (unless it's secretly Putin), has been selling Microsoft stock for a decade and making money on his other investments. After this week's sale he's no longer Microsoft's biggest shareholder - that's now Steve Ballmer. Bill is on track to own zero microsoft stock in four more years. There's a big hint for you.

Where do people like living? Texas, Oregon, Maine, New Hampshire and Montana. People really want to leave the People's Republics of Illinois and Maryland. They're reasonably happy in the PR of California, but I claim that's because of the climate, not the government.

It seems final numbers are in and the GM bailout cost us $11.2 billion, $100 per taxpayer, and about $20,000 per retained job. GM is looking pretty strong right now, but the history of companies owned by their unions makes us think another bailout will be coming in the future. In the face of good sales and profits we would expect the union to vote themselves big raises that can't be sustained in leaner times.

Is the US a democracy? We love to talk about how everyone else should be; we love to send soldiers abroad to overthrow governments and help people learn to vote (at gun point). Russia and China are evil because we say their government is run by a few hundred industrialists, not by the representatives of the people. So, are we democratic choir boys? No. According to a new study published by Martin Gilens of Princeton and Benjamin Page of Northwestern, the US is also an oligarchy. They looked at 1779 policy issues and found in nearly every case the political results were in line with the wishes of rich industrialists or bankers, not with the voters. A simple example: polls routinely find a huge majority of Americans, 70% or more, are in favor of closing the borders to illegal immigration, but all the talk in Washington is about the details of the amnesty program - a result favored by the meat packing and hotel industries, a result that's good for Walmart, but something few of us want. So politics - the entertainment industry currently consumed with the Obama reality show - is just a circus with no deeper meaning. The authors concluded "the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy." This has been clear for some time, as under both Bush and Obama handouts for the poor increased - the drug benefit under Bush, ObamaCare and widely increased disability under Obama - but meanwhile we have genetically modified foods and unhealthy food stamp programs that benefit the huge farming conglomerates; trillion dollar wars in countries we can't even spell that keep the defense contractors rich; and a near complete lack of regulation of Wall street. By any reasonably measure there is almost no difference between these two guys. Washington policy consists of deciding how to tax the upper 49% to pay for benefits for the lower 50%, while not touching the top 1%. Something that could also be said of China and Russia.

Amazon negotiated a deal with several states to start collecting sales tax. What happened? In those states Amazon's sales dropped by 10%, other on-line retailers who don't charge tax had their sales increase by 20%, and brick and mortar stores sales increased by 2%. A big hit on Amazon, a nice increase in revenue for the politicians, but not much help for the mom and pop stores we were told would benefit.

A new study has found that 60% of China's ground water is too polluted to drink. The Chinese bottled water industry is thriving. My father told me a story once: vacationing in his motor home in Mexico he was awoken at midnight by some strange noises. Looking out his window he saw a bunch of mexicans in a parking lot next door filling up hundreds of 5 gallon water bottles from a couple garden hoses. Wrapping plastic around your water does not necessarily mean it's safe.

Harvard sociologist Rupert Russell reports that Japan's youth have "celibacy syndrome… a third of under-30s have never been on a date, and a quarter of men and half of women say that sex just isn't for them. Over the next 30 years the population is projected to plummet by a third."

When I was a kid the big worry was we would either be nuked by the communists or we would ourselves become communist. Well, none of that happened. Actually the America of my grandchildren will look more like Brazil: heavily hispanic with a big dose of black, whites a minority, the rich living in gated enclaves to keep them safe from the unwashed masses. Heck, except for the racial makeup of the voters, we're already pretty much there: the rich live in places you can only see in helicopter shots and secretly run our government. It used to be "As goes Ohio, so goes the nation." Now it's looking more like "as goes the Southwest, so goes the nation."

Harley was on top of the world from about 1992 to 2007. Sales rose every year, there was a waiting list for new bikes, everything they built sold. Then the crash and their sales cut in half. They've been slowly rebounding since, but there's nothing like a waiting list - you walk into a dealership, you ride out on your bike that day, likely in your choice of color. Is Harley in trouble? It would seem they have the same problem as Cadillac did - their average buyer is mid-50s and only getting older. But not all is lost. In 2012 Harley sold nearly twice as many bikes to people under 35 as their nearest competitor; they sold nearly half of all bikes going to blacks and hispanics, the real future of the US; and they sold more than half of all bikes going to women. In 2014 they've releasing several new models with touch screen / voice activated infotainment systems and (gasp) water cooling; shortly they will release the Harley Street models as their new entry level bikes priced at $7500. Their marketing for the new models includes showcasing them in the new Captain America movie - Captain America was born in 1920, so I'm not sure this 94 year old is their best choice for 20-somethings to identify with, but they obviously think so.

For my vacation I flew to Detroit and bought a new Harley. I rode 5700 miles through 22 states in 14 days. High point: 11,580 feet at the Continental Divide with snow on both sides of me. Very cold. I got a room about 90 minutes later, spent 20 minutes under a hot shower. I took about a half step out of the shower, and my body said "Noooooo!" 20 more minutes under the shower and I was merely a bit cold and allowed to get out. I meant to go to Key West, but God had other plans involving a 6 state wide 3 day long thunderstorm. I skedaddled west instead avoiding much but by no means all of it. What did I see? Perhaps "the South will rise again," but it doesn't look that way to me: all the small towns I went through had half or more of their downtowns boarded up. For every Walmart I saw, I saw 5 dollar stores. These are popping up everywhere in 5,000 square foot metal buildings, and it's the only place for much of our population to shop - forget grocery stores, forget fresh fruits, vegetables, meats. In every Walmart I entered, in Ohio, Virginia, South Carolina, Alabama, Texas, I heard spanish. Obesity is much worse than I thought - California doesn't have it nearly as bad as the midwest or the south. Fast food is ubiquitous, you're never far from a McDonalds. It seemed clear to me in the context of the Princeton oligarchy paper that those on high have decided half our population has no future whatsoever besides being dependent on the government for handouts and being consumers for Big Food. And getting very, very fat. And dying young of diabetes or heart attacks, thereby relieving the strain on medicare and social security. Diabetes is a bit expensive to manage; perhaps that will be re-defined as a life style choice (you choose to get fat), not a disease, and care thereby minimized. Heart attacks are very cheap - people just fall over dead, you send an ambulance, a doctor says, "yup, dead," and you're done with them.

While I was riding I also read Fat Chance: Beating the Odds Against Sugar, Processed Food, Obesity, and Disease by Robert H. Lustig. I just love my Kindle - I carry several hundred books with me in a package smaller than an iPad. Anyway, Fat Chance is a lengthy book with a lot of information. However, it can be summarized quickly:

If fructose kills our liver, why do we like it so much? Because in nature there is not one single food that has fructose and is poisonous. If you're in the woods and it's sweet, then it's ok to eat.

I can tell you this: I'm a major sugar addict. For the last three weeks I've been living on nuts, salads, fish, a bit of chicken. No bread. No wheat. Almost no carbs. No sweet anything. Very little cheating. I almost never feel hungry - nuts and oils are very filling - and I've lost 15 pounds. I'm not counting calories, if I'm hungry I eat until I'm not. On the road you can get a decent seafood salad at Walmart, or a decent chicken salad at McDonalds or Wendys. At home I'm making my own - blackened ahi or salmon with shrimp and crab on a salad of greens, lettuce, peppers, cucumbers, avocado and tomatoes with Newman's Own raspberry-walnut salad dressing. Eating real food is a bit time consuming and expensive - it's a lot cheaper and easier to eat McCrap or pizza, so that's what most of our population does.

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