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Mark's Market Blog

6-22-14: Iraq back in the news.

By Mark Lawrence

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A mild correction in the previous week led to a mild recovery last week. It seems to be quite safe to bet on this market continuing up. Volatility is low, corrections are mild, the Fed gives every indication of continuing accommodating policy.

S&P 500 December 24 2013 to June 20 2014

The Fed continues to ramp QE down, and should have it turned off by the end of the summer. What about interest rates? Will they raise them? Bernanke is on record that low interest rates will persist for the rest of his life. Yellen shows no signs of being any more hawkish than Bernanke; if anything the Fed is currently a bunch of doves that never met a low interest rate they didn't like. A similar set of doves under Greenspan are now thought to have inflated the housing market in the early 2000s leading to the Great Recession. The Fed says they're looking at unemployment rates and inflation - they'd like to see unemployment hit the NAIRU - the non-accelerating inflation rate of unemployment - and inflation hit 2% - 2.5%. As far as inflation, I think we're already there, perhaps even at more like 3%-3.5%, but I'm just some guy who buys food, gas, supplies for my company, what do I know? Anyway, if you believe the Fed will tighten further when they hit their goals, perhaps even by raising interest rates above the inflation rate, here are a couple of chilling graphs. The Fed is very close to their stated goals. Personally, I think when the goals are hit they'll find some other excuse to keep easing - I believe their #1 goal is make sure there's no recession that can be blamed on them, and #2 is to keep cheap money flowing to the investment banks.

China has a huge "shadow banking" segment - loans made by groups of individual investors pooled together by non-banks. Think corporate loan sharks. These loans are considered poorly thought out and the entire segment is thought to be a risk for China. Chinese companies are getting better about using the global corporate bond market, and now Chinese companies have more corporate bonds outstanding than US companies, $14.2 trillion to $13.1 trillion. It's projected by S&P that Chinese corporate debt will increase to $45 trillion by 2018. If many of these companies are indeed unprofitable and living on the Chinese construction boom, this could represent a serious threat to the world economy in the case of a Chinese property bubble collapse.

Argentina has been in and out of courts for several years. They're looking for a decision that they don't have to pay off their bonds. The reasoning is that the original bond holders were worried that they would quickly be worthless, so they sold them off cheap to hedge funds. Cristina Kirchner thinks she shouldn't have to pay the hedge funds 'cause they're evil vultures. It's true they're evil, but evil isn't actually a part of international law. Curious that she should call them vultures, as that implies Argentina is dying. Monday she was denied an appearance before the Supreme Court, which means her fight is over, she lost. The Argentine stock market promptly dropped about 7%, down about 11% from its high this year. However, their stock market is still up 43% on the year and 200% compared to their pre-crash level, so I think they still have a long ways down to go. Ms.Kirchner now says regardless of her loss in the supreme court, she will not pay the hedge funds. Argentina just isn't Argentina without a good financial / government drama.

India has 2% of the world's land and 17% of the world's population. There's essentially no clean water in India due to poor sanitation and poor cultural habits - you cannot stand and watch the Ganges river without seeing a couple dead bodies float by each minute. And now the Indian government has announced that due to over grazing, excessive planting without rest and poor water access70% of India's land is dry and 32% of India's land is turning into desert.

Cars are selling like hot cakes in the US, meaning a lot of money is floating around in leases and loans. US banks would love a piece of this action which totals $811 billion, but the major car companies already have finance arms that provide the loans, bunch them up, and sell them as bonds. So banks are now trying to get a piece of the used car loan market for the first time. Wells Fargo partners with GM and says for every new car subsidized loan they write, they also write three used car loans. US Bancorp estimates soon used car loans will be 40% of their auto loans, with a third of those used car loans sub-prime. New car loans are advertised at Fed-induced rates frequently under 1% - this is a normal car sale incentive. What happens if interest rates suddenly rise? What happens if used car prices suddenly decline? Car sales dipped during the recession to just over 10m per year, but now they're running at nearly 17m per year. Used car prices reflect the shortage of cars that have been coming off leases written during the recession, but what happens in a year or three when there's suddenly a glut of cars coming off leases?

According to Kenneth Pollack of the Brookings Institution, the Iraq civil war will lead to a partitioned country dominated by sunnis in the north and a more sectarian shi'ite dominated government in the south. The sunnis are advancing southwards, killing shi'ites as they go. If you believe islam is fundamentally a religion of peace, ask yourself if you think you would be treated better than a shi'ite muslim. He further projects that once the country is divided up, the war will continue for years with hundreds of thousands dying. Remember, Iraq and Iran were at war with each other, muslim against muslim, and several million died. The northern sunnis would, for all intents and purposes, join with the Syrian sunnis, effectively moving the Syrian / Iraq border to the east and south. Unnoticed in all this are the Kurds who live in an area that crosses Turkey and Iran borders - they're going to wind up yet again politically dominated. At least they're mostly sunnis, so I don't expect to hear of mass killings. The US is in talks with Iran to perhaps supply the shi'ites in the south with military assistance and provide drone strikes against "extremists" - it's the south that has all the oil and ports and needs to keep working. The sunnis in the north are aligned with Saudi Arabia, of course - we're talking with the enemy of our former ally, and preparing to desert the Saudis. Why would the sunni arab world view Obama's foreign policy with suspicion? It's been claimed by Israeli intelligence people and by US conservatives that Obama is a Saudi creation, educated at Columbia and Harvard at their expense, our first muslim president. Perhaps this is so, but if it is right now the Saudis are thinking their lap dog has rabies. By the time this guy finishes his second term I think his only remaining friend is going to be his mother-in-law. It's very interesting to me to see Sec.State Kerry, who spent his youth protesting the bombing in the Vietnam war, now preparing to drop hell fire from the skies on Iraqis. Apparently things change when it's no longer president Johnson looking at the maps and determining who to bomb, now it's you who look at the maps and send out the orders.

A side affect of the Iraqi war is increased oil prices. We're in a time when a glut of oil is expected to drive prices down, but uncertainty in the world's #7 producer is driving prices up in the short term. Oil hit $115 over the weekend. Iraq produces a bit under 4% of the world's oil supply, so this gives you a good idea of how tight supply is.

The Polish news magazine Wprost said on Sunday it had obtained a recording of Foreign Minister Radoslaw Sikorski saying "You know that the Polish-US alliance isn't worth anything. It is downright harmful, because it creates a false sense of security ... Complete bullshit. We'll get in conflict with the Germans, Russians and we'll think that everything is super, because we gave the Americans a blow job. Losers. Complete losers." Sikorski said Warsaw's attitude towards the United States was "murzynskosc" which derives from slave.

We're six months into Obamacare and statistics are becoming available. 87% of Obamacare signups receive subsidies. The total cost of the subsidies is projected by the CBO to be $12 billion. The average Obamacare policy is costing the person $82 and costing the government $264, so the policy subsidy is a bit over three-quarters of the total price.

Harley has announced an electric motorcycle. They're making 22 of them to show around the country to gauge customer reactions. Perhaps they'll be manufactured with Tesla's batteries.

50 years ago Norman Borlaug invented dwarf wheat, the genetically modified wheat that has all but eradicated world hunger but is now considered complicit in the world's obesity and diabetes epidemic. He was duly awarded the nobel peace prize. Monsanto invented genetically modified corn that produces more and cheaper HFCS - High Fructose Corn Syrup - that's also been implicated in our obesity and diabetes epidemics, and has apparently also all but killed off the north american honey bee population. Now we have a new scientific breakthrough: genetically modified bananas almost ready for export to Africa. They're going to improve vitamin and iron levels across the african continent, where bananas are a staple food to many. According to Frankenstein the lead geneticist, the new banana will save the lives of 700,000 children and prevent 300,000 cases of blindness. The Gates foundation will be funding much of this. My prediction: higher levels of iron in the blood are linked with increased rates of heart disease. In the next 20 years you're going to see an epidemic of heart disease in eastern africa, but no one is going to understand why. The genetically modified bananas have a somewhat orange interior color instead of the cream color you're used to. My advice: don't eat orange bananas. Of course the orange color will be fixed before these are brought in to Walmart, where bananas are the #1 selling item.

The Continuing War on Men I: Gabby Giffords, the US representative that was shot a few years ago, gave a rare public speech saying we need new laws to protect women from gun violence. "Dangerous people with guns are a threat to women," Giffords told a crowd at the Corcoran Gallery of Art in Washington, D.C. "Criminals with guns. Stalkers with guns. Abusers with guns. That makes gun violence a women's issue." Here's the peace-loving Gabby at a shooting range, proudly holding an AR-15 assault rifle and showing off how she shot to shit a teenage boy. Stalker. Abuser. Criminal. Male.

The Continuing War on Men II: Matthew Hindes was awarded custody of his daughter Kaylee in 2010 after she was removed from the home of her mother, Angela, by child protective services. Friday Michigan judge Margaret Noe issued an order to Matthew: Appear in court Monday or face arrest and the possibility of losing custody. Hindes is currently serving on the submarine USS Michigan so there is no way he can appear in court. Judge Noe says Hindes is not allowed to attend by Skype or phone, only in person. Because Hindes left his daughter in the care of his wife instead of leaving her with her drugged-out mother, the judge has refused to issue a stay under the Service Members Civil Relief Act, which allows courts to "grant a stay of proceedings for a minimum period of 90 days to defendants serving their country." Judge Noe said, "If the child is not in the care and custody of the father, the child should be in the care and custody of the mother." Clearly the thinking of CPS does not enter into her logic, nor does producing a consistent environment for a young child.

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