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Mark's Market Blog

6-10-12: Spain Is Fixed! (for today)

By Mark Lawrence

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Stocks leaped up on rumors of an impending EU bailout of Spanish banks. I expect they'll keep going up a few days next week as the proposed "bailout" seems to get fleshed out. How will this end? Greek elections are still coming, and based on past performance I feel confident predicting the EU actions will be too little too late. But it's all about perceptions right now - if the EU can wave their red cape and get everyone looking away from Spanish and Italian banks, they might make it through this crisis. If a run starts on Spanish and Italian banks, hold onto your butt: we're going for Mr.Toad's Wild Ride.


S&P 500 December 15 2011 to June 8 2012

Last year 50 year old Pete Nowicki made $186,000 as fire chief for the Northern California cities of Orinda and Moraga. On January 3rd this year, Mr. Nowicki asked department trustees to buy back his unused vacation days and sick leave from as far back as 2008, a total of about 32 weeks, for a bit over $100,000. Firemen with 20 years experience get 8 1/2 weeks vacation per year, and another 15 sick leave days per year. That boosted his salary for the previous 12 months to over $286,000, and his annual pension to $241,000. He filed his retirement papers on January 6th. Such last-minute salary increases are called "spiking," and are legal under Calpers rules. The Pacific Research Institute, a San Francisco-based conservative think tank, estimates that pension spiking costs California taxpayers $100 million a year. In addition to drawing his pension, Mr. Nowicki currently is working for the fire department as a consultant at an annual salary of $176,400 while the department searches for his replacement, bringing his total pay from last year's $186,000 to about $519,000 this year - his pension plus the $100,000 payout + the contract. Assuming an average life span for Mr. Nowicki his total retirement payments including health care are about $8.5M, which amounts to about a $340,000 bonus for each year he worked for the city. Why is California going broke? In a recent interview, Mr.Nowicki said his pension costs would likely force the city to lay off firemen and cut back on services, and one of his assignments this year was to help find a way that no one could do this again. Calpers has turned into a Ponzi scheme, and in my opinion should be put into bankruptcy now and reorganized before they bankrupt us all. The pensions should be retroactively cut back to a maximum of $100,000 per year.

In elections this week, San Jose and San Diego voters approved city measures that would cut back on pension costs. In San Diego there would be a six year freeze on pay levels used to determine pensions, and new hires go into a 402(k) plan. In San Jose workers contributions would increase up to 16% of pay and new hires would get smaller benefits. Both cities have had their pension costs soar by a factor of 6 or more in the last decade. Lawsuits are certain to follow, as are more cities joining in the battle. Wisconsin's recent recall election of governor Scott Walker was primarily on this issue. My prediction: within five years we will see a decent sized city lay off their entire work force and contract the jobs out to private industry. Perhaps one of San Diego or San Jose if a court invalidates the voters' decision. If I were the union the thought of this would terrify me: it's clear to me from my trips to various city halls that the work force could be cut in half and no one would notice, save for the union members.

Greek elections are next Sunday. Greek law forbids taking or publishing polls for the two weeks running up to the election, so no one knows what's happening. The hot topic in Greece this week? The health of their banks? What will happen to pensions and public employee pay? Should we stay in the Euro or leave? Nah, it's all about a debate on Greek TV between the leaders of the seven top parties which resulted in the far-right Nazi party leader throwing a glass of water at the Socialist party leader, then repeatedly slapping the Communist party leader in the face. The Greek economy is all but destroyed, culture and society are breaking down, and the hot topic is a local version of the Jerry Springer show. Panem et circenses.

Apparently Spain and the EU have "agreed" to a $125b bailout of Spain's banks. Spain wishes to emphasize this is a bailout of their banks, not their country or government. The EU wishes to emphasize all loans must be guaranteed by the Spanish government. There are still a few details to work out, this is not a done deal and it's not obvious it will be done in time if the Greek election results in Spanish and Italian bank runs. The fat (Greek) lady has not sung, the opera is not over yet, and we still don't know if it's comedy or tragedy. Or farce. Late Breaking: Ireland says they should get a bank bailout on the same terms as Spain. The EU is still learning something that every parent in the world already knows: you got 3 kids, you buy 3 ice creams.

Some banks are canceling employees' vacations this summer as they want everyone around for a "Lehman type event," the bankruptcy that resulted in the stock market crash of 2008. I predicted that this year we would muddle through, but the top guys at the World Bank, JPMorgan and Pimco disagree with me. Things don't look too healthy out there right now: Europe is in recession with unemployment at an all-time high; Britain, Brazil, India and China all appear to be entering recessions; US data looks flaky at best; Japan's stock market just hit a 28 year low. It's estimated that Spanish banks are holding $273B of bad real estate loans, so the talk this week about a $125B Spanish bailout is not a fix, it's a punt. In the last two months about $150B in deposits have been withdrawn from Spanish banks and moved out of the country, so a $125B bailout doesn't even compensate for the deposit withdrawals. Italy is just a half step behind Spain. Switzerland is talking about currency controls as too much money is entering their country and it's starting to mess with their economy - to keep the value of the Swiss franc down and keep their exporters working, the Swiss central bank is buying $7 million worth of Euros every minute, $66B total in the month of May. This is one of the reasons the Euro is in free fall. We live in interesting times.

Iran's Supreme Leader Ayatollah Ali Khamenei accused the United States and its allies of lying about the threat of a nuclear Iran to cover up their own economic problems. "What Americans and Westerners do is idiotic. They magnify the nuclear issue to cover up their own problems. They are deceitfully using the term nuclear weapons." Khamenei said Israeli talk of military strikes showed it felt vulnerable after the fall of former Egyptian President Hosni Mubarak last year, a U.S. and Western ally. "If they take any miscalculated action, they will receive a thunderous blow." On Saturday a senior Iranian military commander said their missiles could reach all parts of Israel and threatened U.S. bases in the region if Iran was attacked. I agree with the Iranians' statements. Talk of Iran is magnified by our politicians to take our minds off their stupid handling of the banks and the economy. Israel obviously feels threatened. And an Israeli strike against Iran without major US air support would almost certainly result in a devastating Iranian strike against Israel. None of these truths change the fact that if Iran doesn't open up to international inspections and quit refining uranium, we're going to bomb them back into the stone age. A nuclear armed Iran is completely unacceptable to Israel, Saudi Arabia, Kuwait, Bahrain, Iraq, Europe, and the US. In fact the UAE is just finishing up a pipeline through their mountains to bypass the Strait of Hormuz so that in the event of war they can continue to pump and sell oil.

Speaking of Mubarak, an Egyptian court has just sentenced him to life in prison over the killing of protesters in the uprising that ended his three-decade rule. Gaddafi and his sons are dead. Saddam Hussein and his sons are dead. And now Mubarak is in prison for life. These Arab rulers don't get much of a retirement package. I'd rather be Bill Clinton with his $12M book deal, $150,000 speaking engagements, and a new girlfriend at every stop.

The Department of Defense has decided that chips made by Chinese company Huawei are unacceptable in DOD hardware. They say Huawei chips often have "back doors" that let the Chinese take remote control of circuitry and devices. Huawei makes the iPhone, which is now believed to be completely insecure to Chinese attacks. Got an iPhone? Work at a high-tech company? Best pull the battery when you're at work, or learn that the Chinese have cloned your new product weeks after you introduced it.

I already said this last week, but the Euro continues to drop and China's exports went up 15% in May. The rest of the world expects us to be the consumer of last resort. Of course this job has already cost us about 10,000,000 jobs. If the Euro continues to drop (I expect it will) and our trade deficit with China continues to increase (I expect it will) you're going to start hearing some really nasty talk out of Washington about unfair trade practices. Economists will talk about how they believe the Smoot-Hawley anti-trade act during the Great Depression made things worse and we can't do that again. I think they live in a dream world where everyone plays fair, like in a pro golf tournament. In the real world, we need to engage in trade when it's in our interests. Buying Chinese built iPhones with built-in bugs and losing jobs to China as a result is not in our interests. Buying BMWs from a country that buys almost nothing from us is not in our interest. Buying oil from Venezuela and Arabia is not particularly in our interests either, but thanks to our brilliant Department of Energy, formed 36 years ago to get us off foreign oil dependency, we don't have much alternative to that.

No doubt you've heard of micro-finance, the noble-prize winning idea of loaning very small amounts to 3rd world people to improve their lives. Now you can play. At Kiva.org you can make your own loans to the person of your choice. $25 to start.

Science? Mysticism? Religion? Six years ago 40 year old Derek Amato was at a friend's house screwing around playing football by a swimming pool. He fell in, hit his head rather hard on the bottom, and wound up in the hospital for three days with a serious concussion. When he got out of the hospital he found that he could play the piano and compose music at a professional level. Derek and friends assert he never touched a piano before; indeed an ex-girlfriend says he only played guitar, and that quite poorly. Neurologists at the Mayo clinic have examined Derek and pronounced that during a concussion there is a huge release in the brain of neurotransmitters, amino acids and glucose; these must have rewired Derek's brain in some way to give him this skill. I've spent a couple thousand hours playing piano, and Derek is much better than me with zero practice (this lifetime). I'm making a new offer to friends: come to my house and I'll sit you down at my piano and hit you on the head repeatedly with a tire iron until you can play. No charge. You've read it here before and likely will again: memories are not stored in the brain. We all laugh at Christians who assert that God created the world 6,500 years ago and planted dinosaur bones for our confusion and His amusement. Biologists' and medical doctors' attempts to sweep things like this under the rug are, imho, becoming equally inane.

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