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Mark's Market Blog

6-26-10: Double dip, anyone?

By Mark Lawrence

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China released the peg on their currency, the Yuan. Markets shot up, expecting that the Yuan would rise in value, increasing Chinese imports and decreasing exports. The Yuan promptly went down, and markets fell like rocks tossed off half-dome, dropping back below the 200 day moving average. My prediction, that the S&P would hit 1150, is DOA. It hit 1130, and I don't expect it back up there for some time. While everyone at the party was watching the Yuan, someone stole Bernanke's guacamole. Friday, congress settled on a financial reform bill. Here's all you need to know: in a week where markets were down about 4%, financial stocks went up 2.7% the day after it passed.

S&P 500 December 26 2009 to June 25 2010

Story circulating in New Orleans: BP contracted Schlumberger to run the final test on the plug. SLB gets out to the Deepwater Horizon to run the test and they find the well still kicking heavily, which it should not be that late in the operation. SLB orders BP to dump kill fluid down the well and shut it down. BP refuses. SLB then asks for a helo to take all SLB personnel back to shore. BP says there are no more helo’s scheduled for the rest of the week (translation: you're here to do a job, now do it). SLB calls SLB’s corporate HQ, and gets a helo flown out there at SLB’s expense and takes all SLB personnel to shore. 6 hours later, the platform explodes.

Although there is no mention of it anywhere in the western press that I can find, the Arab press is reporting that a US aircraft carrier and 10 other US navy ships, accompanied by an Israeli navy ship, went through the Suez Canal from the Mediterranean to the Red Sea. The reports continue that the canal was closed for all other traffic for several hours; bridges over the canal were closed; and much of the canal was protected by Egyptian troops. Previously we have heard that Saudi Arabia has an understanding in place for Israeli aircraft to fly through towards Iran (since repeatedly denied by S.A.), and that Israel has stationed a nuclear submarine off the coast of Iran. Perhaps this is nothing; Aircraft carriers traverse the Suez from time to time and travel with large battle groups. But it bears watching.

There are 39M more Chinese men than women - more than the entire population of California. Chen Xiaomin, director of the Women's Studies Center at the Shanghai University of Political Science and Law, says "A man is not a man if he doesn't own a house. No matter how confident a woman is, she will lose face if her boyfriend or husband doesn't have a house." Chinese dating websites are now awash with women stipulating that hopefuls must come with a residence and car. "I'm 25 years old, looking for a boyfriend.... I want you to have an apartment and a car.... The apartment has to be built after 2000 and the car has to be better than a minivan," read one post on the popular Chinese Web portal Baidu.

California is considering switching to digital license plates for cars, and selling advertising on the plates. The plates would display adds when the car is stopped, e.g. at red lights. I can't wait to see these hacked.

Illinois raised its retirement age to 67, the highest of any state, and capped public pensions at $106,800 a year. For newly hired workers. Arizona, New York, Missouri and Mississippi will make people work more years to earn pensions. Virginia is requiring employees to pay into the state pension fund for the first time. New Jersey will not give anyone pension credit unless they work at least 32 hours a week. But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect.

Lawmakers wanted to avoid legal battles or fights with unions, whose members can be influential voters. So they are allowing most public workers across the country to keep building up their pensions at the same rate as ever. The tens of thousands of workers now on Illinois's payrolls, for instance, will still get to retire at 60 -- and some will as young as 55. "We're within a few years of having some of the pension funds run out of money," said R. Eden Martin, president of the Commercial Club of Chicago. "Funding for the schools is going to be cut radically. Funding for Medicaid. As these things all mount up, there's going to be a lot of outrage." Lawyers are raising the possibility that those laws are being misinterpreted. "It makes no sense to suggest that an employee who works for the state for a single day has acquired a right to have future pension benefits calculated for the next 20 to 40 years under whatever method was in effect on that single first day of service. An employer is free to move from one legal plan to another legal plan, provided that it does not diminish vested interests," or the benefits workers have already earned, wrote Chief Judge Frank H. Easterbrook of the Seventh Circuit Court of Appeals in Chicago.

Approximately 57 percent of Barack Obama's 3.8 trillion dollar budget for 2011 consists of direct payments to individual Americans or is money that is spent on their behalf. Nearly 51 million Americans received $672 billion in Social Security benefits in 2009. That number is projected to grow substantially in years ahead as waves of Baby Boomers begin to retire. Over 40 million Americans are now on food stamps and the U.S. Department of Agriculture is projecting that more than 43 million Americans will be on food stamps by the end of 2011.

Double Dip, anyone?

A projected double dip is a hot topic in the news. Is one coming? A popular graph on Wall Street shows that commercial lending by banks is continuing to decline at an historic rate.

Business Loans, 2005 to 2010

Ok, that looks pretty scary. But, lets look at the same graph dating back to 1947. It turns out a contraction in business loans at this stage in a recover is pretty normal.

Business Loans, 1947 to 2010

Have a look a the above graph - the Fed indicates recessions with gray bands. See any double dips? Perhaps one might argue that Volker's designed and calculated recession of '81-'82 was a double dip.

People talk about the money supply contracting, which leads to deflation and recession. Indeed, M2 growth is flat.

M2 Money Supply 2005 to 2010

But again we take a longer view and see if this is abnormal. It's not.

M2 Money Supply 2005 to 2010

Some say the European austerity budgets will push the world into a new recession. I have argued previously that these budget cuts are more likely to cut European imports than European employment.

Finally, some say the coming Chinese real estate crash and possible resulting political turmoil will push the world over the edge. I'm not certain I believe in a coming Chinese crash, and I don't consider it at all obvious that China, with a GDP that's just over twice the size of California's, has the economic power to push the world over the edge.

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