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Mark's Market Blog

6-13-11: Running out of Oil, Water, Food, Government

By Mark Lawrence

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China's Shanghai stock market is solidly below their 200 day moving average and dropping. Europe continues to look very shaky. The dollar and gold are going up, as people move their money into safe havens. US stocks continue to drop. Give or take a few blips along the way, I expect this bear market to continue for an extended period.

S&P 500 December 20 2010 to June 13 2011

Stocks are pretty clearly on a down trend. This trend started two months earlier than I anticipated. I expect stocks to continue down this coming week; however it's likely there will be a pause at S&P 1250 or so, the 200 day average. I expect this market to stagger and lurch downwards for an extended period, very likely to an S&P of 1000, perhaps even lower than that. Now that Bernanke is about done and being ignored, we're going to find out what the market is really worth. Will there be a QE3? There's an election year coming, I consider it a foregone conclusion.

China's major bond rating agency says the US has already defaulted on our bonds, due to Bernanke's actions to devalue the dollar which has cost foreign bond holders some of their principle. They should not be concerned: as unrest and inflation grow in China, and financial breakdown gets closer each day in Europe, the value of the dollar will rise. Money has to live somewhere, and the US as the last man standing is looking more and more solid with each passing day.

The Stans - Kazakhstan, Tajikistan, Turkmenistan, etc - are getting very touchy. Border guards are increasing and getting twitchy fingers. Many villages have effectively seceded from their country and declared Sharia (Islamic law) as their community law.

Meanwhile in China, riots over food inflation and lack of jobs continue to grow and spread. I'd like to say more about this, but the news that comes out of the middle kingdom is so filtered and sanitized that it's difficult to say much more than that. However, it's noteworthy that there's riots and strikes and demonstrations at all: in a centrally controlled country, such things are not allowed. It's looking more and more like the Chinese government is losing control of their country.

These two points illustrate my new thesis, which you'll be reading about many times in the coming months. The world is bifurcating into two regions: a 3rd-world region where population growth is out of control, where there is a huge excess of unemployed and uneducated youth, and where countries are quickly getting ungovernable due to 20-somethings running wild; and a 1st world where there is a surplus of old people requiring expensive medical care and pensions, and a shortage of educated young people to pay the taxes required to provide them. There's only one common thread, no one under 30 is getting educated. The ungovernable countries are looking to be a wide swatch starting in north west Africa, cutting through North Africa, Arabia, the middle east, all the way through India. The countries who can't provide for their elderly will be Europe, North America, Japan, Korea, China. And against this backdrop of ungovernable 3rd world 20-somethings and bankrupt 1st world countries, we're going to see continued shortages of oil, water, fertilizer, arable land, and food. Thinking of taking a trip to see the Pyramids? Go soon. . .

The BP review of energy reports that last year oil consumption exceeded oil production by 5 million barrels per day. It's not completely clear what this means - some nations under-report their production to mask cheating on quotas, China's numbers as always as suspect. Some bio-fuel production is being under-counted. However, when analysts make reasonable looking assumptions about those numbers, you still come away that the world has been drawing down on reserves rather dramatically. Absent a recession like 2008-2009, which drove consumption numbers down, expect this trend to continue and oil prices to continue to rise.

A Saudi oil minister warned that if Saudi's don't stop using massive amounts of oil themselves for air conditioning, water desalinization and driving big cars, Saudi Arabia could run out of oil by 2030. There has been some controversy lately about the true level of Saudi oil reserves, however the number 2030 seems a bit unrealistic to me. However it is clear that a day will come when Saudi oil production will not keep up with Saudi oil consumption, and at that time Saudi Arabia will have about 1 more year before they turn into Egypt or even Libya. Given that Saudi Wahabi priests are the source of much of the world's unrest among Muslims, I look forward to this day. However, when it happens, gasoline in the US will be so expensive that everyone will drive a plug-in hybrid like the Nissan Leaf or the Chevy Volt.

As Russia heats up and dries out, they are having worse fires than last year. Wheat crops catch fire, which then light up nearby peat bogs and product a completely uncontrollable wild fire. Last year Russia stopped all exporting of wheat, resulting in major food supply problems for many nations. This year looks to be worse, as already three regions in Siberia have been declared emergency situations. Food inflation in India is already nearly at 10% and rising; expect a repeat of last year's food price demonstrations.

Europe looks to be headed into a drought / heat wave this summer. March to May 2011 was the driest in 50 years and the warmest since 1910. England is the driest it's been since 1910 and the warmest since 1659. Germany is drier than it's been since they started measuring in 1893. Europe will not be making up for any shortfall in Russian wheat production. Jim Rogers famously predicted that soon a time would come when food was not available in some parts of the world at any price. That prediction is only looking more solid each day.

In 1978 Venezuela borrowed a bunch of money and built a really enormous dam, the Guri Dam. The plan was that this dam would provide nearly free electricity to most of the northern countries in South America. It turned out there was a problem: when clouds move over forests and jungles, the trees give off moisture, raising the humidity and often causing rain. When you dam up big rivers many forests disappear under the resulting man-made lake, and rainfall in the area decreases. The Guri Dam produces about 20% less electricity than planned for substantially due to this affect. China has recently finished the Three Gorges dam, the largest dam ever built. The reservoir behind the dam is over 1,000 sq. km. Turns out this is enough flooded forests that the rainfall behind the Three Gorges dam is also being affected. China, which is facing massive water shortages due to depletion of aquifers and pollution of rivers, is now starting to make things even worse for themselves.

S&P dropped Greece's bond rating to CCC, which is a junk rating. Soon the ECB will not be allowed to own Greek bonds, as the central bank is not allowed to own junk. This is very big.

New Jersey leaders have reached a deal to cut pensions and benefits for current public employees. The deal would require workers to pay more of their salaries into the pension system, give up annual cost-of-living increases and pay a percentage of their health care premiums in a tiered system based on their salary. Under the deal, teachers and state workers will immediately increase their contributions to the pension system from 5.5% of their salary to 6.5%, with an additional 1% contribution phased in over seven years. State police, municipal police and firefighters will increase their contributions immediately from 8.5% of salary to 10%. Judges will need to increase contributions from 3% to 12%.

Automatic cost-of-living adjustments will be eliminated. New employees would have to work longer to get full pension benefits. As for health care, employees would have to pay up to 30% of the cost of the premiums, depending on their salaries. The contribution would be phased in over four years. The goal is to make the pension system 80% funded in 30 years - a target that is seen as healthy. Pension systems, which take in money as itís paid out, are not seen as needing to be 100% funded. This is because populations always grow, right? So there's always more young people in the next generation to chip in for retirements, right?

Alabama passed a new illegal immigration law that requires public schools to determine students' immigration status and makes it a crime to knowingly give an illegal immigrant a ride. The bill also allows police to arrest anyone suspected of being an illegal immigrant if they're stopped for any other reason. Alabama employers also are now required to use a federal system called E-Verify to determine if new workers are in the country legally. Gov. Robert Bentley said the law is the nation's toughest, and groups including the American Civil Liberties Union and the Montgomery-based Southern Poverty Law Center agree. The groups say they plan to challenge it. It appears immigration problems will be addressed at the state level far before Washington can agree on anything.

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