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Mark's Market Blog

7-1-12: Europe is Fixed!!! (again

By Mark Lawrence

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The markets fluctuated wildly this week on rumors about Europe. The week ended with news that at a conference, European leaders had agreed that the European Stability Mechanism, a $500 billion fund, could recapitalize banks. Interest rates on Spanish and Italian bonds promptly plummeted, and their stock markets shot up. The ESM works much like the Fed when they're doing a QE operation, so we can easily conclude that stock markets will go up for the rest of the year, especially European markets as they float upwards on a tide of fresh money. We can also conclude that there will be no further QE operations by the Fed this year, as the ESM money will be enough for the world for a time. The Fed has very few bullets left, they're certainly not going to waste ammo while Europe is firing. Only one minor problem: the ESM doesn't exist yet.


S&P 500 January 9 2012 to June 29 2012

Obamacare was basically upheld by the Supreme court. It's not going away this week. The court decision was that the individual mandate basically is enforced with a tax on people who don't buy insurance, and congress has the right to tax people. This is great news for hospitals and HMOs like Kaiser: the government will take over paying them. It's bad news for insurance companies, the law sucks away a bunch of their profits. At this instant it's good news for drug companies and tort lawyers, they get to keep draining the system of money. Hopefully that will change. As a small businessman I have no idea if this is good or bad for me. Since the basic premise is nearly free insurance for poor people and I'm not a poor people, I have to presume it's bad for everyone not poor. Moreso for the rich and the young; the rich because they will shoulder tax increases, and the young because although healthy they will be forced to buy insurance. My experience with Kaiser has left me more than a little cynical about insurance: if you have an unlikely catastrophe it pays off, but in your routine life medical insurance means you've joined a club that makes you a captive consumer and lets you buy medical care and drugs at inflated prices, paying your deductible plus your insurance rates each year. A couple years ago I was given a prescription by a Kaiser doctor, and the prescription and me were automatically delivered to the Kaiser pharmacy. Price at Kaiser: $349. Price for the exact same thing at Walmart: $244. Price for the exact same thing in Canada: $66. Price for the generic equivalent in Canada (generic not available in the US): $19. My insurance bought me the right to buy at inflated prices from Kaiser. The real fix for our health care system will involve drug prices, tort law reform, ending the AMA monopoly on producing doctors and keeping the supply short, getting rid of the requirement for prescriptions for many more drugs, and getting people into HMO type organizations like Kaiser and out of emergency rooms. And probably another four things I haven't thought of. Health care in the US is about doctors, lawyers, drug companies, companies making medical equipment, hospital administrators, nurses, and last and very much least patients.

The Best Selling (Legal) Drugs
Drug2011 salesPatent statusWhat it's for
Lipitor $7.7 billionexpired November, 2011.Lipitor (atorvastatin) lowers LDLs or "bad cholesterol", reducing the risk of heart attack and stroke.
Plavix $6.8 billionexpired May, 2012. Plavix (clopidogrel) is an anti platelet agent used to prevent clots, helping prevent heart attacks and strokes.
Nexium $6.2 billionexpires May, 2014. Nexium (esomeprazole) treats acid reflux disease by reducing the amount of acid in the stomach.
Abilify $5.2 billionexpires October, 2014. Abilify (apriprazole) is an antipsychotic and antidepressant.
Advair $4.6 billionexpired March, 2012. Advair is an inhaled combination of fluticasone and salmeterol for the management of chronic asthma.
Seroquel $4.6 billionexpired September, 2011Seroquel (atorvastatin) is an antipsychotic used to treat schizophrenia, bipolar disorder, and depression.
Singulair$4.6 billionexpires August, 2012. Singulair (montelukast) is used to treat asthma and seasonal allergies.
Crestor $4.4 billionexpires November, 2016.Crestor (rosuvastatin) is used to reduce cholesterol prevent heart disease.
Cymbalta $3.7 billionexpires in June, 2013 Cymbalta (duloxetine) is a drug used to treat depression and anxiety.
Humira $3.5 billionexpires December 2016. Humira (adalimumab) is an anti inflammatory used in autoimmune disorders like rheumatoid arthritis and Crohn's disease.

What can we conclude from this drug list? US citizens and governments spent $51 billion last year on drugs to keep depressed people who eat too many hamburgers from having heart attacks and upset stomachs. Many of those very expensive pills are out of patent, so there should be cheap generics, and indeed there are in other countries. Can you say Collusion boys and girls? How about, as an alternative, quit eating so many hamburgers and take an aspirin every day? Nah, that's not going to work, sorry. Smoking was a great bad habit: smokers die young, fast and cheap, relieving strain on social security and medicare. Obesity in the modern pill world brings huge money into doctors, drug companies, Walmart, McDonalds. The morbidly obese live far longer than smokers, they're a much more reliable customer set. And we've just gotten started on diabetes drugs, that's a product that will definitely make billions. With huge new markets in Arabia and Asia, where diabetes is even more prevalent than here.

The Swiss bank UBS has produced an interesting summary of their view of Europe, as follows:

What this all boils down to is that in the view of UBS, Europe can continue to kick the can and debate their future, the fire is currently more or less contained. German prime minister Angela Merkel certainly seems to have this view point. I note that many disagree with this viewpoint, including the outgoing president of the World Bank Robert Zoellick, George Soros, Niall Ferguson. Personally I'm not convinced either way, I'm watching. And I still have a whole mess of $20 bills in my safe, 'cause you just never know.

Last week Spain hit 7.29% on their 10 year bonds, which is panic time. After the ESM announcement the bond rate dropped to 6.4%. Europe has bought themselves another six to twelve months at a cost of perhaps $500 billion. Germany blinked, or was snookered, or finally gets it that they have to pay for bailouts. The can has been kicked once again. Right? Well. . . the ESM has previously been agreed to, but Germany also put in a new clause, that the money can't go out until there is an EU banking authority with broad powers to regulate all banks. This will have to be approved by 17 governments, and it's unconstitutional in a few of those countries. Then the ESM has to be funded, mostly apparently by countries that are nearly broke. The hope had been that China, or the IMF, or Martians would want to buy a bunch of ESM bonds so that the funding would be nearly free for a couple decades. Unfortunately China has said they want no part of this, the IMF hasn't this kind of money, and the Martians haven't returned any phone calls. It's been pointed out that it's pretty easy for Germany to agree to something that will never happen. So, will there be an ESM? Will it get funded? Will it pump out money and save everyone? Will it get approved in time, even though Europe is on vacation until September 1st? Will a new EU bureaucracy get built in record time (actually this part I believe in, the EU is spectacularly good at hiring bureaucrats)? Will the new banking authority be empowered by the 17 member governments? Will we ever learn who is the father of Martha's baby? Stay tuned for further episodes of As Europe Turns.

Cyprus, an island nation of 800,000 (about the population of San Francisco) needs a bailout. About $15,000 per resident. By June 30, or their banks go bust. Pretty impressive, given that their GDP is about $25,000 per person. Cyprus joined the Euro, saw their interest rates drop to German levels, and borrowed like crazy to fulfil their communist president's dream of prosperity and equality. Now the loans are due and it turns out the prosperity was fake, and the desired equality is equality of debt sharing with others. The part of this that's most amusing is that on July 1st, Cyprus gets hold of the EU presidency for the rest of the year - the EU presidency by constitution rotates through the member countries. German economist Kurt Lauk said, "Now we have a situation where the dog will be in charge of the sausage supply." On the plus side, an EU president supplied by a communist government should have no problem hiring bureaucrats, renting space and building a new banking authority, which then needs only wait to be empowered by 17 separate legislatures.

Egypt's newly elected president Mohammed Morsi said in his Saturday night election speech before the students at Cairo University, "The Koran is our constitution, the Prophet is our leader, jihad is our path and death in the name of Allah is our goal." I wonder how we might help speed them to their goal. If Islam is a religion of peace, why do so many of their leaders sound like this? It's not enough that Israel has a wack-job living to their east, Iran's president Ahminadjab, now perhaps they have another to their west. If I owned Israeli real estate, I'd be selling.

On Tuesday Syrian president Assad announced that his country is at war. This begs the question, "At war with whom?" He ordered his army to spare no effort to achieve victory. Victory, in this case, apparently means as many people die as necessary to keep Assad in power. It doesn't look to me like the army will succeed. Well, they're all muslims dying in battle, so they get 70 virgins. Each. Don't forget, Syria also shares a border with Israel.

Banks Behaving Badly. Remember when JPMorgan lost $2B? And I said or maybe $3B or even $4B? That was so last week. Now it's looking like $7B, or maybe even $9B, and JPMorgan shares are taking a beating. In other news, Barclays was accused of market manipulation and got fined almost half a billion dollars by the US and UK governments. Chump change compared to JPMorgan's $9B, but Barclays shares are off 17%. Don't worry about JP or Barclays, a bailout will be forth coming as necessary. Perhaps these two highly motivated banks can sell those ESM bonds to the huge untapped Jupiter and Saturn pension funds.

Paul Krugman put out an economic manifesto and is trying to get economists to sign on. It basically says that consumers have quit spending and are paying down debt, and that's the cause of the Great Recession. The fix is for governments to run huge deficits and take up the slack until the consumers come back. I think Krugman is nuts: his unspoken presumption is that the economy will go back to what it was in the 90s if only we give it a bit of time. In my mind the Great Recession is about employment: computer automation means that more and more jobs are done by robots instead of $40 / hour union workers, and many of the remaining jobs have moved to Asia where the going wage is about $300 / month. Governments can run up any deficit you can imagine, Humpty Dumpty still has a broken shell and his innards are cooking up to scrambled eggs on the hot pavement, no amount of waiting will restore him to an egg. At a time when the only jobs left in America worth having require college math-based or medical-based degrees (engineering, nursing, doctors, business, accounting), fewer and fewer of our young men are getting educations, and more and more of our children are being born to mothers who don't value educations. And that makes the wholly unsupportable assumption that all babies at birth have the same potential to get a degree in engineering, if only they were raised up right they could all be doctors or CEOs. I get some flak for talking about our economic troubles and not proposing any solutions. Here's a proposal for a solution: we need a smaller population, and we need to stop letting uneducated teenage girls have as many children as they can pop out, then give them a nice welfare life while they raise up their babies to be the next generation of gang members and unwed teenage mothers. If Africa wants to let a billion people who can't feed themselves breed two more such billion, well, I don't like it but I can't do anything about it. But there's no reason to reward such behavior here in the US.

Stockton CA became the largest ever US city to declare bankruptcy. How did it happen? A rapid collapse in property taxes due to foreclosures, out of control employee medical and pension benefits, payments on huge bonds sold to build a massive waterfront project that no one needs and will never be finished. For example retired Stockton city employees have a health care plan with no required co-pay and $417 million in current liabilities. Auditors of Stockton's finances have called them a "cesspool." Sounds like Greece, Spain, China, doesn't it? Stockton has already laid off a quarter of their police, a third of their firemen, and 40% of their other workers. It's not enough. The big question: will they buck the CA state constitution and throw their pension liabilities into federal bankruptcy court, which is not bound by state law? Stay tuned, this could get exciting. I will make this prediction: if the state pension funds continue to be unwilling to sit down at the bargaining table and talk of caps on some of these ridiculous pensions, you're going to start seeing cities lay off essentially all of their workers and contract the jobs out to private industry. How is Stockton doing? As they've laid off police, their murder and crime rate have nearly doubled. Stockton is in the top 2% of all US cities for crime, 98% of all US cities have lower crime rates. But it will all be fixed now, right? Not so obvious, actually. The CA city of Vallejo declared bankruptcy a couple years ago; since then they have cut back to a skeletal staff and canceled most services. However their unfunded pension liabilities continue to grow - if there's any kind of downturn in the CA economy, it would not be surprising to see Vallejo right back in bankruptcy court. Stockton is in the same position but bigger. This bankruptcy might not be a fix so much as the first major battle in an ongoing conflict.

What's the world coming to? There are massive over population problems in most of the world, as we all agree. Too many babies? Actually, except for a few spots in Africa, Arabia and India, not so much. The world-wide problem is actually longevity - too many people living far too long, popping too many cholesterol pills. As you can see in the graph below, the ratio of 65+ year olds to under age 5 year olds will cross over in a couple years, then simply explode. Perhaps Kurt Vonnegut was right so many years ago: we need to convert Howard Johnson's into Kevorkian clinics.

Perhaps you recall the story a couple months ago of the young girl who had her lunch seized, because her mother had packed her a tuna sandwich, an apple and a banana. The illegal non-nutritious lunch was missing a vegetable, so she had to eat the school lunch of mystery meat hamburger, fries and limp vegetables. We have a new case, several school districts including Tacoma WA have made rule, no sunscreen without a doctor's prescription and a nurse applying it. This is being challenged in court by a mother who sent her fair-skinned daughters to a field trip with sun screen, the sun screen was seized, and the daughters came back with 1st and 2nd degree sun burns (actual Tacoma kid shown at right). The excuse? Sunscreen is a drug, like aspirin or meth. Another concern is if the teachers or other children help apply it, that's inappropriate touching. No hats allowed either, that's a sign of gang membership. I dunno, I used to drink out of a garden hose so my brain is probably completely fried. 350 years ago Ieyasu Tokugawa, the Shogun of Japan, said The law may upset reason, but reason may not upset the law. Apparently in the US now civil servants take that to mean bureaucrats may upset reason, but reason may not upset bureaucrats. Well, you know what I think: lay them all off and contract their jobs out. As for gangs, I'd have a dress code and I'd send anyone showing underwear, excessive skin or sideways hats home.

Science: In 2008 scientists sent the suitcase-sized Expose-E experiment package to the Space Station filled with organic compounds and living organisms to test their reaction to outer space. Our atmosphere does a wonderful job of protecting life on Earth by absorbing harmful UV rays and keeping temperatures relatively stable. In contrast, the space samples endured the full power of the Sun's rays. The samples had to cope with temperatures changing from -12c to +40c over 200 times as they orbited Earth. The samples returned to Earth in 2009 and the results have now been published. Lichen have proven to be tough cookies - back on Earth, some samples resumed normal growth. The lichen go into a dormant state waiting for better conditions to arrive. Living organisms surviving in open space supports the idea of 'panspermia' - life spreading from one planet to another, or even between solar systems. If you freeze animal or plant cells, the water in the cells forms crystals and eventually bursts the cell walls - "freezer burn." So here's an interesting question for those who believe live evolved on Earth: how did Earth cells evolve the ability to survive a freezing cold high-radiation vacuum environment?

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