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Mark's Market Blog

7-12-15: China, Greece, Puerto Rico

By Mark Lawrence

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It's been an interesting week. Banks in Greece have been closed for two weeks. Greek merchants are refusing credit card sales because they don't want their money going into banks. The Greeks proposed a three year bailout with terms nearly identical to the last EU proposal, but the EU doesn't like it. China got their stock market to stop its free fall, at least for now. The US markets flirted with the 200 day moving average but never took up residence below: fed, plunge protection team, collusion, whatever you may prefer, we're not allowed to have a real stock market correction. My guess is that 'way too many banks and billionaires are swimming naked so the tide is being held in.

S&P 500 January 12 2014 to July 10 2015

The Iran talks missed their most important deadline: July 9th. Had Obama submitted an agreement to congress by the 9th, congress had agreed to take only 30 days to review it and vote only yes or no. That's all over now, congress has no limits at picking on any such agreement. Kerry said that he would not be rushed into a deal but at the same time that he would not negotiate "forever". "If the tough decisions don't get made, we are absolutely prepared to call an end to this process." At the time of this writing, rumor is that an agreement has been reached and will be announced on Monday. I feel confident it will be an awful agreement with porous inspection protocalls, it will never be approved by congress, but the sanctions coalition will fall apart quickly - Iran is going to come out of this a huge winner. Obama is well aware that the agreement has huge holes in it. His position is that signing such an agreement will bolster Iranian moderates who will, in time, pull their nation back towards the center and away from genocidal religious madness. Right. That process should take well under 400 years. Russia and China agree with Iran, that sanctions should be lifted as soon as possible. Both have large muslim populations and large problems with unrest in those populations. A muslim war with a well armed and funded Iran at the center does not, imho, suit their interests. They obviously disagree.

What brought down Puerto Rico? A significant factor was Congress raising Puerto Rico's minimum wage to match the US standard in 1983. Since they did that there has been mass migration of unskilled Puerto Ricans to the mainland, and the labor participation rate is under 40% - according to the IMF over 60% of working age adults are not employed. Even at the minimum wage, full-time work in Puerto Rico pays less than the combined package of welfare, Medicaid and food stamp benefits for which a family of three might qualify. Can you imagine? You pay people to stop working, and they stop working.

The ECB announced that Greece's banks will not be getting any more cash unless there's a bailout. Greece's banks have been closed for two weeks now, with a €60 limit on ATM withdrawals per day. Something has to give - either the ECB gives the banks cash, or the banks close their doors for a long, long time. Greece says they want a deal - €60 billion in more loans over the next three years to a country that obviously can't pay off their current debt. And Greek banks appear to need €25 billion right now - almost half of the total bailout in the first week. Others estimate Greece needs more like €90 billion, half again what the deal calls for. Even if there's a deal Greek officials have announced that currency controls will continue for at least two months. France desperately wants to use Germany's money to save Greece and the Euro; Germany is less sanguine. Chancellor Merkel of Germany is under great domestic pressure to stop the loans; Germany is openly pushing the idea that Greece needs a five year time out from the Euro, then rejoin at a lower exchange rate, effectively giving everyone in the country a pay cut. Paul De Grauwe, a Belgian economist at the London School of Economics, said, "Temporary Grexit is like temporary divorce. Most if not all end up being permanent." Jeff Gundlach, a Wall Street hedge fund guy, says, "When one leaves, others will leave. There is never one cockroach." Finland and Slovakia are also opposed to further loans, sensing, correctly I think, that they'll never be paid back. The EU met on Sunday to discuss Greece's latest proposal; they said Greece must pass laws to change its value added tax and pension systems, reform bankruptcy rules and strengthen the independence of its statistics office before bailout talks can even begin. The IMF says clearly the debt is unsustainable and Greece needs debt forgiveness (illegal under EU rules) and their loans increased from 30 years to 60 years - dumping the debt not just on children and grandchildren, but now great- grandchildren. Sometimes I'm embarrassed to be a part of this greedy, narcissistic generation. Banks made the loans, banks are supposedly big experts in risk, banks can take the losses. Make no mistake, 90% of the €240 billion already given to Greece went straight to pay down European creditor banks, effectively moving the risky debt from the commercial banks to the EUropean citizens. And most of the proposed €60 billion will also go to banks, not to the Greek people. Personally, I'm disgusted by this entire situation, where unelected officials shill for the banks at the cost of generations of Greeks. And don't for an instant think it can't happen here: how do you think the Fed took on $5 trillion in new debt in the last seven years? They moved risky and defaulted debt from Wall Street into their vaults, to be paid off by our children and grandchildren. Meanwhile Wall Street is making better than a billionaire a month as they get the profits and we get the risk. What's going to happen? A deal, I presume, sometime in the next week or two, which will screw European taxpayers everywhere and Greeks in particular for the next four generations. And the crisis will not be resolved, but merely postponed for three years.

China is trying desperately to save their stock market. New rule: no major shareholder with more then 5% of a company's stock may sell for the next six months. Whoever made that rule doesn't know what an option is. Another new rule: when a stock drops 10%, trading is done for the day. Wednesday 1300 stocks hit the limit. And another: a moratorium on new stock issues. And another: all stock transactions must now clearly identify the people involved, their home country and tax id number - no more corporations anonymously moving stocks. New graduates of Tsinghau university will, according to their graduation ceremony program, spend a minute "chanting loudly, 'revive the A shares, benefit the people; revive the A shares, benefit the people'." What does this mean? A shares are stocks unavailable to foreigners, and this week the Chinese government ordered brokerages and funds to purchase $19 billion worth of shares up to support prices. There are rumors that the government has quietly purchased $10 billion worth directly. President Xi is obviously worried about social backlash against the $3 trillion lost by investors in the last month - turn up the heat a bit and he runs home to mama communism. Oil, copper and iron are also crashing as Chinese demand dries up. They're blaming the crash on short sellers, insiders, foreigners and little green men. The 150% run up in one year, that apparently was normal. Xi's program is working, at least right now: markets have taken back about 20% of their recent losses to close out the week. Is this recovery or a dead cat bounce? I don't really care which, 'cause in the long run they're in for a surprise: markets, like the tide, do what they do. And this market wants to go down.

China has passed a new national security law which defined any threat to the state's power, sovereignty, or the sustainable growth of the economy as a threat to national security. Many companies and several countries are asking for clarification on these points, but it seems none is coming: China just loves vague laws that can be interpreted on the fly. Beijing is also deliberating at least three other related, but more detailed, laws on foreign investment, cyber security and foreign NGOs. Foreign companies fear the laws might be used to keep competitors out of the chinese market because the definition of national security was so broad and vague that any business activity could be subject to it. I see this as the Chinese version of the Smoot-Hawley act.

Oil is dropping. Expect that to turn into lower gas prices in a week or three. I've seen predictions that oil will hit $10 / barrel later this year, and predictions that oil will hit $70 / barrel this year. I'm not the only person out there who's bad at forecasting the future. . .

IBM has announced a new computer chip made with 7 nanometer gates, a new record for tiny transistors. An individual atom is about .1 nanometer across, so the new transistors have gates that are about 70 atoms across. You have to believe we're getting close to the smallest possible transistor - a transistor gate is certainly going to have to be at least a couple dozen atoms across.

Ford has announced that their small cars - the focus and c-max - will no longer be built in the US in 2018. They have to make and sell small cars for their fleet gas mileage ratings and to keep young customers, but when they're built in UAW plants Ford loses money on each car. The UAW thinks that Ford pickups will continue to be built in the US forever and that's where they'll get their jobs. I dunno - forever is a pretty big word. Expect production to start moving over to non- union shops in Mexico. GM probably can't match this because Obama gave two-thirds of their stock to the UAW, so as soon as gas prices rise and people stop buying Escalades and Suburbans GM is going to get into trouble quickly.

Oregon has a new law: a 15 year old can have a sex change operation, paid for by medicaid, without parental notification. So can a 25 year old, of course - but I find it absolutely fascinating that a teenager in the middle of puberty, before their neocortex and emotional control has developed, can make this decision and be supported by the state in keeping surgery decisions from their parents. Fascinating the same way a car crash is fascinating.

Colorado did an experiment. Teenagers and poor women were offered free long-term contraceptives - IUDs and implants. In six years of running this program, teen births and births to women under 25 with no high school diploma dropped 40% and abortions dropped 42%. Before the program started half of all first births to poor women happened before they turned 21. Now that number is up to 24. It turns out the best way to have fewer abortions, bring women out of poverty, and have infants raised by women who are more mature and financially more sound is to make it easy and free for the women to avoid unplanned pregnancy.

The Donald says our prisons are full of illegals; that Mexico is dumping their worst people on us. Statistics seem to back him up: about 30% of the prisoners in our federal prisons are illegal immigrants, and illegals are certainly nothing like 30% of our population. We need these guys 'cause they pick fruit, change diapers, mow lawns, clean bathrooms, right? Maybe not. Watch this video.

Bonus picture of the week:

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