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Mark's Market Blog

6-18-10: Obama Proposes State Pension Bailouts

By Mark Lawrence

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On news that Spain is all but bankrupt, East Europe is on the edge of default, and the European banking system has all but completely stopped working, markets shot up 7% in the last two weeks. Bernanke has returned to the party with a large bowls of chips and guacamole. Party on, Dudes! My forecast: up a bit more in the next week or two, very likely hitting an S&P of 1150, and perhaps surpassing that.

S&P 500 December 19 2009 to June 18 2010

Moodys cut Greece's bond rating from A3 to Ba1, the highest junk rating. Why do we care? Many investment houses are not allowed to own junk bonds, so this change in the ratings is forcing a lot of selling, price goes down, Greek interest rates go up.

Last week I put out a table of reasons the stock market is going up/down, trying to illustrate the reining confusion. Sorry, it now appears I left out the single biggest reason: breakdowns in the European banking system means the Fed and friends are flooding the world with money again. Last time this happened, March, the markets went up almost uninterrupted for 28 days. Spain is on the edge, mid term elections are coming, Obama is under siege. It's time for the Lone Bernanke to ride to the rescue. Rule #1 of investing: don't fight the Fed.

European banks, threatened by the default of various countries on several hundred billion dollars worth of debt, have now undergone "stress tests." Results of these tests are starting to leak out, everyone looks ok. However, it turns out the rules of the "stress tests" didn't include default by countries. The tests are a complete joke, they evade the only serious problem.

Deficit monetisation is when your government runs a big deficit, and your central bank prints more money to cover it. It's difficult to exaggerate just how dirty the phrase deficit monetisation is: loaded with evil images of political irresponsibility and short-sightedness, it evoked the haunting spectre of catastrophic and ruinous hyperinflation. It's what they did in Weimar Germany; it helped cause WW2; to say it had an image problem would be a grotesque understatement. No wonder it's been rebranded as quantitative easing.

Who's threatening to default? Credit default prices tell us what the markets think: Latvia 22%, California 23%, Portugal 23%, Iraq 25%, Dubai 27%, Ukraine 34%, Pakistan 40%, Greece 48%, Argentina 50%, Venezuela 59%. However, in the face of the stock market this week, I think it obvious that no one will be allowed to default before the election. It's clear to me that Bernanke wants no next Lehman.

Science 1: A new team analyzed the satellite data about cosmic background radiation, and they claim that Dark Matter and Dark Energy, substances which Only Astronomers Can See, probably doesn't exist. The team that did the original analysis, which concluded there were these dark thingies, claim the second group is wrong, wrong, wrong, and must be sent to bed with no cookies.

Science 2: The sun is moving into the maximum portion in its 11 year solar sunspot cycle, and this one is starting to look to be about half as big as previous cycles. This is likely bad news for Algore and the global warming crowd, temperatures should continue to moderate. In preparation they've already rebranded their product from "Global Warming" to "Climate Change." The conservatives think nothing is changing, and the liberals are against all change. Get ready to be disappointed.

Obama tells us we need to head towards a new green economy. How will that work out? Spain has been trying it for several years. Socialist leaders promised that implementing hardcore restrictions on carbon emissions and forcing the nation over to a "green economy" would result in a flood of "green jobs". In fact, a leaked internal assessment produced by the government of Spain reveals that the "green economy" has been an absolute economic nightmare for that nation. Energy prices have skyrocketed in Spain and the new "green economy" in that nation has actually lost more than two jobs for every job that it has created. Spain has 20% unemployment and six times as many unsold houses per capita as here in the US. But Spain so far seems unwilling to undo all of the crazy regulations that they have implemented.

How are millionaires doing? Below is the top ten countries for millionaires. A millionaire is someone with $1M or more in investable assets; houses and small businesses don't count. We see in the table below that some countries are far more egalitarian, others go in for more unshackled capitalism. In France millionaires own 19% of everything; in Hong Kong they own 73%. In Japan millionaires did the worse, their number increased by 6% in the last 12 months; in China the number of millionaires increased by 31%. The number of millionaires increased by a far greater percentage than the number of employed people did. I've been rich and I've been poor; Believe me, honey, rich is better. -- Sophie Tucker

Millionaires in the World
CountryPopulation# Millionaires% Population% increase YOY% Wealth
France 62.6m 280,000 0.45% 11.2% 19%
Japan 127.6m 1,230,000 0.96% 5.9% 21%
Germany 82m 430,000 0.52% 23.1% 22%
United Kingdom 61.8m 485,000 0.78% 11.5% 23%
Italy 60.3m 300,000 0.50% 7.6% 27%
Taiwan 23.1m 230,000 1.00% 21.1% 37%
Switzerland 7.8m 283,000 3.63% 8.4% 44%
China 1,331m 670,000 0.05% 30.7% 50%
United States 306.8m 4,715,000 1.54% 15.1% 56%
Hong Kong 7m 205,000 2.93% 16.2% 73%

Unemployment is persistently high. So, this means this recession is different, right? Nope. A Goldman Sachs analysis produced the following chart, averaging all the recessions since 1956. We're right on track. On track means a lot of unemployment in the US for the next 8 years or so.

Employment and Recessions

Obama is quietly urging congress to pass a $50B "state bailout," meaning bail out the state employee retirement funds. Your federal taxes will soon be used to help pay for the retirements of public employee union snakes and snails all over the country. Obama spent $52B guaranteeing the retirements of UAW slime molds, why should the state union members be shorted? Curious how bailouts are always mis-named - "Greece bailout?" the Greeks are bleeding real economic blood. That bailout is of French and German bankers. Mostly French, the Germans bankers are starting to talk invasion again. Why do the states need a bailout? Below is a tiny little snapshot of the Illinois school system. The top 100 employees are owed $887M in pensions, an average of $8.87m per employee. One guy, Neil Codell, is projected to be paid $1.3M in his last year of retirement. Imagine what kind of administrator he is if they're willing to pay him $1.3M per year to stay away. I'd say away for $100k per year, a huge cost savings. More to the point, how on earth do the democrats think they can justify bailing out these government fat cats at the expense of Joe Plumber? How did the insane decisions of the Illinois school system (and California prison system and New York Metro, etc) turn into a US liability? This is the year public employee pay and retirement benefits hit the radar screen. Next year is when the wound opens up, 2012 will be when the blood really starts to flow.

Top 100 School Administrators Salaries and Pensions - Illinois 2007

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