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Mark's Market Blog

6-2-13: The bond market continues to intimidate.

By Mark Lawrence

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The markets have gone up for 20 straight weeks, it would appear it's time for a correction. The excuse is bond rates - Japanese and US both. Neither is a very compelling excuse in my mind, so this correction should not last terrifically long.

S&P 500 December 8 2012 to May 31 2013

Consumer confidence numbers came out, and they're at a 5 year high. House prices continue to go up nationwide at a pace second only to 2006. By these accounts the economy is doing great. This is the "new" economy that's doing great, the one in which only half of everyone participates.

There's talk in Wisconsin of filing suit against Walmart, as a calculation recently released indicates that Wisconsin Walmarts cost the Wisconsin government $900 million per year giving food stamps and medical care to Walmart employees that aren't paid a "living wage." I wonder how much it would cost the Wisconsin government if Walmart pulled out and left behind huge unemployment numbers? I wonder if anyone has calculated how much the poor would have their living standards decrease if Walmart raised prices in the face of rising labor costs? Not that that matters: the government made huge money on tobacco taxes, and saved huge money on tobacco related deaths, as such people died young, quick and cheap, saving social security and medicare a bundle. None the less tobacco companies were forced to pay up for the "societal costs" of their products. It won't shock me if Walmart is one day also forced to "pay up" for the societal costs of their business model. This will be like the lottery: a tax on the lower classes, with a portion of the money returned to the lower classes in the form of a few lucky ones who get Walmart jobs. Meanwhile Walmart, no dummies, continues to automate to reduce their reliance on human labor. Amazon warehouses have robot carts with articulated arms that put away product on shelves and pull product for orders, delivering a printout of several orders and the related products to a shipping clerk. I'm waiting to see Walmart robots restocking shelves after midnight. Perhaps Wisconsin will outlaw robots. Perhaps Chicago will outlaw corrupt politicians. Perhaps Maine will outlaw the tide.

Of the 15 largest cities in the US, Chicago is the only one losing population. They used to be famous for their stockyards, butchering hogs for the US. That's all over now.

A Chinese company just bought America's largest hog company, Smithfield Foods. Expect pork prices to go up as more of the US crop is shipped to China. You might think it would make more economic sense for them to just open huge hog factories in Africa and S.America where unskilled labor is cheap and laws are easy to pay for. Not like the US, where unskilled labor is cheap and laws are easy to pay for.

Japan interest rates continue up, signaling belief that the Japanese will be able to rekindle inflation. Also producing the threat that if their economy doesn't take off quickly their government will be painted into an even deeper narrower corner as interest payments increase but tax revenues don't. Meanwhile there's more volatility in their stock market as people wonder if the government has the guts to see this thing through. They do. This is not to say I'm confident that it will work and restore Japan to a healthy growing economy, it's just to say the Japanese government isn't going to fold at the first sign of trouble.

US T-bill rates continue to rise, it would appear the long bull market / bubble in t-bills is at least deflating. This also means people are projecting inflation for the US. This is complete nonsense: We're going to be importing deflation from Asia which will hold our inflation down; and Bernanke is not going to let treasuries drop too far. But in the short run people are worried about a collapse of the bond market, and that's helping drive stock prices down. Bernanke believes that premature bond rate increases pushed us back into depression in '37 and '38, and he most certainly will not let such a thing happen on his watch.

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