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Mark's Market Blog

6-22-12: Europe is Fixed!!! (again)

By Mark Lawrence

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Stocks went up int he beginning of the week on our Greek sugar high, but plummeted Thursday on a note from Goldman: "Sell now, S&P to 1290." Friday stocks recovered just slightly. Greece has a government that wants to work with Europe; Spainish and Italian interest rates are down, no doubt on major ECB intervention. It would seem that the European fire is under control. But for how long? Italian prime minister Monte says Europe has one week to fix the Euro. Europe can't order a pepperoni pizza in a week. I dunno, I think the can has been kicked, but there are still many out there with more knowledge than me saying the end is near. All I know for sure is a banking crisis is still on the table, and those things come on like explosions. Some of you might have noticed that my graphs include a somewhat unusual 13 day moving average instead of the more normal 20 day. Notice that earlier in June there where three days in a row when the 13 day average was the support, and also the last two days of this week. When times get tough, it's the 13 day average that holds things together. Or doesn't. What's next? Goldman says the markets have to go down. Who am I to argue with the Masters of the Universe?

S&P 500 January 2 2012 to June 22 2012

Moody's downgraded 15 major international banks, several by two steps, a couple by three steps. Moody's is sending a clear signal that all is not well in banking land, that many of the world's too big to fail banks are closer to failing than is desirable. Downgrades included Citi, JPMorgan, BofA, Goldman, Morgan Stanley, Credit Suisse, RB Canada, HSBC, Barclays, RB Scotland, Soc Gen, Deutsche, Credit Agricole, UBS and BNP Paribas.

The Fed has been running "operation twist," their way of juicing the economy. This means they sell short term bonds, like 90 day t- bills, and buy longer term bonds, like 10 year t-bills. The idea is to lower long term interest rate expectations without adding to the Fed's stockpile of (nearly) worthless debt. Curiously the Fed tells us we need more inflation, and lowering long term rates signals that long term inflation expectations are low. Operation Twist was due to expire at the end of June. It's been extended for the rest of the year. The decision to move to QE3 has been postponed. In simple terms, more cocaine for the economy, but no heroin yet. This has been on- going for most of the last four years in the US, and most of the last 20 in Japan, but not to worry: there's no chance we'll get addicted to cheap money. 'Cause the Fed means well. And they're nice guys.

Europe is clearly deep in recession now. Between the Euro dropping and this recession, I haven't sold anything in mainland Europe in several months. I don't see Europe as getting out of this recession anytime soon, they simply don't have the resources to goose their economies. China seems to be flirting with a housing price crash - we know all about those. I'm not prepared to predict this will get out of control yet, as individual Chinese investors have no reason to sell and in a thin market the central government can work wonders to prop up prices. None the less the long term outlook seems grim. And in the US trucking and shipping are down, further indications that perhaps our economy is slowing and heading for recession.

There's an interesting predictor of major recessions, and it's called the Sky Scraper index. At the end of an economic cycle people seem to be invariably building sky scrapers like mad, and at the end of every major cycle the (new) world's tallest sky scraper was started. Today sky scrapers are going up all over the world. China has plans to build the world's largest, a single building which they claim will be a self contained city that can hold a 100,000 people, with room inside for luxury apartments, low income housing, shops, banks, etc. The company planning on building it has a proprietary system for making pre-fab sections and getting buildings like this up really quickly; they say they can have it up in 9 months. Science fiction authors have been saying for decades that this is the future of mankind: living in a few huge concrete and steel boxes, riding elevators to get anywhere. And remember: every one of these hundred thousand rats people is a unique individual with an interesting life and valuable perspective.

A couple weeks ago we noted that JPMorgan lost a couple billion dollars. Or perhaps three billion. Maybe four. Well, anyway, they lost it in their London branch, which is subject to London rules. It seems that the trading they were doing would have been illegal in the US. Now we have a very interesting situation: the large US banks (JPMorgan, BofA, Citi, Wells Fargo, Goldman) can bypass US banking laws by opening branches in more bank-friendly countries but still live with a too-big-to-fail implicit US bailout if things to seriously south. Some in congress think this means our rules must apply to our bank's world-wide operations. The banks are predictably whining about competitiveness - I'm not sure what competitiveness means to a bunch of companies that require trillion dollar bailouts. I've been saying for years these too-big-to-fail guys need to be broken up into pieces that are too-small-to-notice.

The Greek stock market is up 25% in the last week. Nothing as really changed in Greece - they still have no jobs, a rapidly disappearing economy, and German European taskmasters making politically impossible demands. How in this environment are Greek stocks suddenly worth 25% more? Markets are, imho, nuts right now. Meanwhile Greek banks are continuing to hemorrhage deposits. The new Greek government wants a 2 year moritorium on laying off government workers, which violates their deal with the EU. The EU cannot afford to allow this, as it sets a horrible precident for the rest of the PIIGS.

Greece has several small parties, some on the far right, some on the far left, and Syriza, all of whom oppose austerity. If you add up all the votes that they collected, it's almost exactly 50%. A few more months of austerity and that number should climb to over 50%. Then we should expect the current government to fall, new elections, and Syriza gets their chance. That's when Greece blows up.

In another election over the last weekend, France overwhelmingly elected socialists to their parliament to go along with their new socialist president. They immediately vowed to raise taxes on companies, make it all but impossible to lay any workers off, raise the minimum wage and hire more government workers. And cut the deficit. The thinking is that these policies will lead to economic growth. When you talk about economic growth, I think of new businesses forming, offering new products and hiring people to new jobs to make, distribute and sell those new products. Hollande, the new French president, apparently thinks of people working for old inefficient industries making outmoded overpriced products but paid well to do it. Well, I don't suppose it sounds so great the way I put it. Hollande is also seemingly trying to form a "southern coalition" with France, Spain and Italy to bludgeon Germany into more bailouts for Europe. Good luck with that, the history of trying to bludgeon Germany is rather negative.

What is the future of the EU? Germany is the strongest member of the Donner party -- Jerry Lichtblau, shipping analyst from True North. It took the US about a century and a civil was to finally get our federal system working, and we all speak the same language and think of ourselves as Americans. Can the EU form something similar in the next few months that guarantees bank deposits, puts all banks under EU control, moves major budget and taxing decisions from each country to Brussels, and puts Germans and Scandinavia on the hook for a couple trillion Euros already spent in the South? There are solid reasons to doubt this can happen in time. Certainly the Germans, who just paid about a trillion Euros to rescue East Germany are in no hurry to do it again for Greece, Spain, Italy. Would you work extra years and pay higher taxes so that firemen and policemen Greeks could retire at age 50? The alternatives? 1) Several southern countries exit and default; or 2) Germany and Scandinavia leave and perhaps form a northern union, leaving France and the rest to devalue the Euro and try to recover. If I were a European I would prefer (2), toss Germany and Finland and then try to sort out what's left.

We're on several collision courses with China involving trade, military presence, and now accounting standards. The Securities and Exchange Commission routinely audits firms that are listed on our stock exchanges. Several large Chinese companies are. When the SEC asks to review their books, they get told that the companies books fall under the Chinese state secrets act and cannot be released. Most of these companies are believed to have severely cooked books. It will take many months to get this resolved, but many think the resolution will be that all Chinese companies get delisted from our stock exchanges. I would have done that a few months ago, it's clear the Chinese are just engaging in stock scams.

Spanish and Italian interest rates are dropping. Spain was 6.95% last week and hit 7.25% on Monday. They ended the week at 6.4%. Italy peaked at about 6.25%, but ended the week at 5.8%. Word on the streets is that the ECB is now taking junk as collateral for loans to banks. No big surprise there: only a major central bank can produce results like these in such a short period of time. The Germans hate this due to "moral hazard:" the idea that bad behavior gets bailed out, so why improve? But for now the crisis is over. The governments can go back to making noise about austerity, growth and balanced budgets while doing not much of anything. The people can go back to 25% unemployment and falling house prices. Isn't stability wonderful? For as long as it lasts, anyway.

What has the world economy looked like for the last two thousand years? Here's a chart I like. For most of history, the world economy was dominated by India and China - the Roman Empire never really amounted to much economically. Then with the renaissance and the industrial revolution, a small number of European upstarts managed to take control of the world economy for a couple hundred years. Now Asia is attempting a comeback. The US is perhaps holding up, perhaps not, but mainland Europe is in clear decline. Note the timeline is compressed, just as European history is.

Egypt had elections and their new president is in favor of Sharia - Islamic law, cut off hands of thiefs, stone adultresses to death. However Egypt has been being ruled by a temporary military government, and a few days ago they tore up the constitution and replaced it with one that weakens the president. The people are voting to give up their democratic rights to a Sharia government, and the military junta is refusing to let them. Kindof a new twist.

In every democracy, votes are exchanged for favors. As the democracy matures and as the prize of political office becomes ever more seductive, the promises become ever more extravagant. By this process the democratic bribe must result in government that becomes increasingly socialist. -- Rex van Schalkwyk

How's your state doing? Pretty well, actually. Unless you live in California, New Jersey, Illinois, Massachusetts or Connecticut. Notably all liberal states.

You've all heard that there's face recognition software that can recognize you in a crowd and alert authorities. Now it's coming to a phone near you. The newest Android phones like the Galaxy S III have this software. If you take a picture, the phone will highlight a face and ask you who it is. After you tell it, from then on the phone knows who that person is in all photos, and you can set the phone to automatically share such photos with that person. There are a couple billion phones out there, privacy is seriously dead. Soon you won't even be able to hide in the jungle. I can't wait for the app that lets states broadcast to all residents an amber alert - a father has run off with his kids, take lots of crowd pictures and help us arrest him.

Science 1: Four new studies are out on fathers (a declining occupation in the US). One found that teenage daughters of available and supportive fathers engaged in far less risky sex, defined as sex without condoms, multiple partners, or teenage pregnancy. The next study found that fathers who blend love, high expectations and respect for the child's autonomy produce the highest achieving adults, and maintain the closest relationships with their children. The third found that the father's intelligence and education were better predictors of the children's income than the father's income was. The fourth found that children learn persistence from their fathers, not from their mothers. Involved fathers produce children that are more engaged in school and have lower rates of delinquency. Too bad we've pretty much decided to do away with fathers, they're starting to sound like kinda good things. Don't it always seem to go, That you don't know what you've got 'til its gone.

Science 2: Perhaps the Higgs particle (aka "The God Particle" thanks to Leon Lederman) has been found. I'm not a big fan of Peter Higg's 1963 math, it's seriously ugly. However, it does explain to a small extent how particles get mass, and it's almost necessary for our understanding of the weak force, the force that produces radioactivity and that stars use to cook up all the elements in our universe besides hydrogen and helium. Theorists have separated themselves into two groups: half predicted the mass would be in the 115 to 120 GEV range, based on their model; the other half predicted 130 to 140 GEV. There is a desert from 120 to 130 GEV between the two groups that no one can account for. The Higgs particle being seen at Cern has a mass of 125 GEV, smack in the middle of the theoretical desert. Currently the observations are at the one chance in a thousand level that they're experimental error; further analysis is going on for the rest of this month with the hope of nailing down mass and error before an important July 4th physics conference. We'll know more then. Why's it so hard to find? The Higgs is invisible and only lives for about a billionth of a billionth of a second. We try to identify them by what's left over after they break up. It's a bit like looking for an invisible car after a car crash: you crash billions of cars into each other, then you think maybe you saw the right one if after the crash you find a Toyota motor, a Chevy starter, a Ford battery and a Honda radio, all flying out in precisely the correct directions, among billions of flying car parts. Suppose this is the Higgs, are we done with physics now? Nah, high energy physics is a mess with dozens of open questions that are central to our understanding. Pretty much everyone believes we're working on a low energy approximation to something unimagined that's far more beautiful. For a couple decades we were all told that string theory was that more beautiful model, but no one believes in string theory anymore.

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