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Mark's Market Blog

6-30-13: Markets are starting to look a bit grim.

By Mark Lawrence

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70% of world markets are now in bear territory, having dropped 20% or more from their recent peaks. Emerging markets are taking the biggest hit. Wealthy Chinese are spreading all over SE Asia getting visas and buying property, hedging their China bets. Bond prices continue to fall and interest rates rise as people pull their money back to the US and Europe. US stocks remain volatile as 81% of companies issuing earnings guidance are issuing a warning of lower earnings.

S&P 500 January 4 2012 to June 28 2013

A couple months ago I noted that margin debt was nearing an all-time high, a very bad sign for the stock market. Margin debt is now quickly decreasing as major players liquidate anything not nailed down. Many think this is an even worse sign. Have a look at the chart below of margin debt and the S&P average and decide for yourself. Me, I think my brief flirtation with being a bull is quickly coming to a halt.

South Korean trade data came out - S.Korea is generally considered the canary in the global economic coal mine. Their exports unexpectedly fell 1% year over year.

House prices rose in May by the largest amount in the history of the Case-Shiller index - 12% in the last year. This is only improving consumer confidence as for most consumers their house is their largest asset. Home sales rose 2.1% on the month. Will it last, or will rising interest rates choke off the housing recovery? June's numbers will give us some idea. Stay tuned. . .

Gold briefly fell below $1200 per ounce and is now hovering around $1200, making this the worst quarter for gold ever - 24% down. At this price many existing gold mines are not viable - mining gold means processing anywhere from 2 tons of dirt to 92 tons of dirt to get an ounce of gold. Gold production requires a lot of oil, so with oil high and gold dropping a lot of mines are shutting down. Gold has been over $1200 for three years, and a lot of mines have been producing with costs in the $1000+ range. Those mines will be shutting down soon if prices don't turn around. Gold may well have further to fall, but the declining supply of gold makes it all the more likely that at some point demand will cause a rebound in gold prices. Some are projecting that gold will bottom out at $850 - its level before QE started and inflation fears took off. Gold is dropping in large part because, for the first time in a few years, interest rates are above inflation. Personally, I think gold around $1000 is a pretty decent buy. It's likely that the US will have little to no inflation for an extended period, but at some point in the more distant future the cost of entitlements is going to make the government print serious money and then inflation and gold will likely both go up. Of course as noted previously in this blog, modern data seems to indicate you can't have inflation with an aging population so perhaps the start of inflation is decades out, perhaps more. Alternatively, if the Fed decides the US is moving towards recession and inflation starts significantly dropping towards and perhaps beyond zero - deflation, that is - the QE stuff will resume, interest rates will drop towards zero, and gold will start moving upwards again.

Obama announced he will direct the EPA to regulate carbon emissions from US power plants. We're already paying a 2.3% "medical device tax" on coal thanks to Obamacare, now we're going to see electric rates rise faster, further as carbon dioxide emissions get regulated. Nasa has produced several studies showing that Mars, Jupiter and Pluto are also warming; I wonder if Obama has a plan for them too.

The EU agreed this week that in starting in 2018 bank failures will first hit shareholders, bondholders and depositors with more than €100,000. European banks are already having trouble maintaining capital - this means large depositors will flee, and bond interest rates will go up. If you have significant money in an EU bank, perhaps you should re-think that. . .

Somaliland, a break away province from Somalia, leads the world in one regard: nearly all payments are by cell phone. Their largest cell phone payment company is Zaad. Coca-cola's local bottler handles 80% of their sales to distributors by Zaad, and pays their employees the same way. The local hotels pay their employees and suppliers the same way. Street vendors, shoe shine boys, bus stations, even drug dealers all accept Zaad. Africa has almost no land lines, poor banking facilities, a populace where 90% don't even remotely qualify for a credit card or checking account, copper wire gets stolen as quickly as it gets laid, fiber optics don't exist. Cash robberies are disappearing as quickly as cash. The rest of Africa is barely behind, this is how the economy works in Africa - cell phone payments. You deposit money with your carrier, they disperse it. Like paypal, the sender pays nothing, the receiver a couple percent which is simply figured into prices. No credit risk, no questions of checks bouncing, no stolen credit card numbers. And nearly all payments filter through one device: a dream system for governments that love surveillance. Coming soon to a 1st world country near you. You may wake up one day and find that no one will accept all that cash you have hidden under your mattress.

The Annie E Casey Foundation puts out a yearly report on the state of children. Their findings: children living in poverty, with single parents who are unemployed have increased by 5%. Teen births are down by 5%. Two thirds of our 4th graders are not proficient in reading, 2/3 of our 8th graders aren't proficient in math, a quarter of our kids don't graduate high school on time. These numbers are all highly correlated with race: 40% of black and hispanic children live in poverty, 14% of asian or white kids do. 85% of black or hispanic 4th graders aren't proficient in reading, 50% of asian or white; similar statistics for 8th grade math. Single parents raise 2/3 of our black or hispanic children, 1/5 of our asian or white children (Thanks to President Johnson and his Great Society). The worst 10 states for children: California, Texas, Georgia, Alabama, S.Carolina, Louisiana, Arizona, Mississippi, New Mexico - the black and hispanic states, of course.

Marriage is changing. The Supreme Court struck down a provision of the Defense of Marriage Act; gay marriages immediately resumed in California. Meanwhile, an Indian high court announced there is no such thing as sex outside of marriage, so a one night stand means you're legally married. You can get sued for support. If you break up with a sleep-over girlfriend who then claims you promised marriage, you will be arrested and charged with rape.

Where to buy cheap real estate (American cities in severe decline):

CityPeak YearPeak Population2010 PopulationDecline
New Orleans, LA1960627,525343,82945.2%
Dayton, OH1960262,332141,52746.1%
Scranton, PA1930143,33376,08946.9%
Niagara Falls, NY1960102,39450,19451%
Buffalo, NY1950580,132270,24053.4%
Pittsburgh, PA1950676,806305,70454.8%
Gary, IN1960178,32080,29455%
Cleveland, OH1950914,808396,81556.6%
Youngstown, OH1930170,00266,98260.6%
Detroit, MI19501,849,568713,77761.4%
St. Louis, MO1950856,796319,29462.7%

For the first time in America, more people live in cities than in the countryside. Associated with such urbanization are crime, higher energy use, higher transportation costs and a more liberal populace as the city dwellers become every more dependent on government services. The US has 9 cities with a population of over a million; San Jose is likely to become the 10th this year. New York is the largest with a population of 8m. China now has 120 cities with a population of over a million, and continues to move 10 million people each year from the countryside to a city. China has 13 cities with a population over 10 million; New York would be city #24 in China - it would be China's Nashville TN. India has 46 cities with a population of over a million, two of which have a population of over 10 million; their urbanization is just getting going.

Starting Monday, July 1, federal student Stafford loans will have their interest rates double from 3.4% to 6.8%. The government has been throwing money at universities for decades, with the result that we now have this bloated system where professors teach one class and costs escalate much faster than inflation; now having broken the economics of the system, the feds propose to make young students pay for it.

Farmers use a bunch of fertilizers, chemicals that never appeared in those quantities in nature, to grow crops at far higher rates than could ever happen without modern science. Then it rains and the excess fertilizer runs off into streams, rivers, oceans. What happens next? The fertilizer makes the algae grow like crazy. Then the algae gets old and dies, and the dead algae uses up all the oxygen in the water decomposing. Then the water has no oxygen and it's a dead zone. Where are there dead zones in the world? Who would be ecologically stupid enough to allow this to happen near their country? Gotta be third world money and growth hungry despots, right?

Health: No one talks about aids anymore: it's just not interesting. But we still study it. Here's a map of the US by county with the per capita rate of aids infection. Red states are safer.

Culture 1: In the newly released movie White House Down we have a new theme: a black president is in the white house when it's attacked by right-wing sociopaths and white supremacists who seem intent on starting WW III. According to Hollywood, republicans are now the problem and the proximate threat. I expect this will be the first of many movies taking this tack. I've been on the wrong side of things in family court, where men are simply wrong, wrong, wrong. If you're white and conservative and live in a blue state, it's time to consider if this is your best choice.

Culture 2: Torn on the quickest way to morbid obesity and heart disease? Can't decide between the deep-fried sugar and wheat snack, a donut, or a baked wheat and animal fat snack, a croissant (little know fact: she said "let them eat croissant," not cake). Fear not, your choice is made simple by a new New York invention: the Cronut, all the deep fried fat and sugar of the donut, all the butter of the croissant, merged into one irresistible little guided cardiac drone.

Science: Plant cells have chloroplasts, little internal organs that convert light into chemical energy and enable large plants to evolve. Animal cells similarly contain mitochondria, little internal organs that convert glucose + ADP into ATP, the basic power cycle for the cell. Mitochondria are clearly something that was once an independent bacteria - they even have their own DNA. They now live symbiotically within our cells - we gather glucose and other nutrients for them and supply them with amino acids, they give us power. Chloroplasts are much the same thing. For some years now biologists have hypothesized that some early plant cell ate a cyano-bacteria, but the bacteria somehow got through the plant cell stomach wall into the inside of the plant cell where it made a deal. Last month we found the smoking gun. There's an algae cell that has chloroplasts and one of these little throat / stomach structures. When the algae is in an environment with a lot of light, it prefers to just do the photosynthesis thing. However, biologists Shinichiro Maruyama and Eunsoo Kim thought to deprive the algae of light. After a time it got hungry, and they were able to get photographs of the algae eating the cyano-bacteria. In the photo below, "d" is the digestive duct, the mouth/throat; "v" is the digestive vacuole, the stomach; and the arrows point to bacteria that have been "swallowed" and are being "digested." The black bar in the lower right is 2μm.

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