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Mark's Market Blog

7-22-12: Food prices skyrocket.

By Mark Lawrence

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US markets continued moving up for most of the week. Friday our markets opened down about a half percent as an echo of Europe's markets which were down 4% to 5% on the day. I expect the overall trend in the US is still up.

S&P 500 January 25 2012 to July 20 2012

In a shocking, shocking development, Super Mario Draghi, the head of the European Central Bank, says there's a new policy where future bank bailouts will include losses by bank investors. Imagine: you invest in a poorly run company that makes bad decisions, and you could possibly lose money. Bankers will be held responsible for their bad loans. Shocking. Hasn't happened in this country since, well, since we created the Fed to make sure such insanity couldn't happen anymore. Bank bondholders losing money. Inconceivable.

Europe markets cratered on Friday as Spain's $120B bailout was announced. The hope was that all of Europe would stand behind the $121B, but rather predictably the EU decided that Spain's government is on the hook for the money. Spain has 25% unemployment and they're cutting government spending to meet EU requirements. Their young men are advertising in South American newspapers that they'll pay a local girl to marry them so they can get a work permit. The Spanish government has announced an increase in the VAT (national sales tax) from 18% to 21% and a possible tax on short term financial transactions of 56%. Spanish businesses are threatening to leave the country. The problem? The few Spanish that still have jobs mostly work for the government, and the government is reluctant to lay them off and increase the unemployment rate. So instead they're raising taxes on a dying economy. The muslims may get Spain back by default: perhaps all the Spanish will simply move away.

Greece's unemployment is up to 23%. Their government has made about 60% of the cuts required by the IMF and is now asking for more time before making the rest of the cuts; The IMF and EU are frightened that the cuts will never be made and Greece will continue to require support indefinitely. Bill Clinton, visiting Greece, criticized Greece's lenders for focusing excessively on austerity, saying Athens will be more likely to repay its debt if its manages economic recovery first. "People need something to look forward to when they get up in the morning -- young Greeks need something to believe in so they can stake their future out here," Clinton said. I don't understand this at all: exactly what does Clinton think the Greek government can do to invent a couple million new private sector jobs? What Greek businessmen are so successful that they can suddenly employ such numbers if only the government would... I don't even know how to finish that sentence. For that matter, are there any Greek businessmen left? Some years ago Ireland managed rather impressive growth by lowering business taxes to near zero and heavily recruiting large American corporations like Intel, HP, IBM, promising them an inexpensive and well educated workforce. Which companies would Greece lure in? Who will hire their retired 50 year old hairdressers?

Fighting in Syria has only increased. It's hard to see how Assad can maintain control over the country much longer. The Syrian government is being supplied by Russia and Iran; the Syrian rebels are supplied by the US, Europe, Turkey. This is effectively a proxy war where outsiders put up a bit of money and Syrians die by the thousands. Other arab countries are mortified; they want Assad gone, but the last thing they want in their back yards is more instability, more news to their people about other Arabs throwing off unwanted dictators. Of course, one wonders if the overweight and diabetic Saudi and Kuwaiti populace can even march, much less fight.

Obesity rates world wide: the US, Venezuela, South Africa and the Arab countries are fat right now.

For several weeks people have been watching China as their growth continues to slow, with many calling this a "hard landing." I dunno. There will obviously be a hard landing in China - a recession which brings growth to zero, perhaps lower - but a communist government in charge of its currency and banks can do remarkable things to put this off. There will come a day when continuing to pay people to build huge useless things out of concrete will only result in bizarre monuments and inflation, but we're not there today. China is obviously in their version of recession right now; their banks are dropping interest rates to stimulate the economy. But I'm not prepared personally to call this the beginning of the end. In the longer run, I agree with Jim Rogers: in the 1800s the US had several currency failures, several banking crises, periods of little or questionable rule of law, and a civil war that 160 years later remains the bloodiest war we've ever been in, but we came out of it the world's strongest economy. China will prosper in the long run, but there will be periods of banking and currency crisis, civil unrest, perhaps a civil war. But they're 1.2 billion people determined to get educated and join the 1st world, and I consider it inevitable that they will.

The Euro continues to drop towards parity with the dollar, starting the week just under $1.23, finishing around $1.21. This is good news for the southern countries that need to export more, and will be even better news if the Euro drops to or even below $1. It's short-term good news for Germany who will export even more cars and kitchen appliances to the US and China; but in the long run if Germany tries to make up their collapse in exports to southern Europe at the expense of the US and China, this will fuel trade war talk. It's getting easier each day to understand how the Great Depression happened.

Consumer spending in the US has turned down significantly in the last couple of weeks. This is often a precursor to a recession, and is a bit of bad news for Obama.

In the map below we see unemployment by country. Many of these numbers are a bit cooked, it's clear that things are somewhat more dire than even this map shows. In any case, any country with a non-green color is already experiencing something as bad or worse than the Great Depression.

Unemployment by country: anything not green is seriously bad.

The Postal Service is set to default for the first time ever, failing to make a $5.5 billion retiree health fund payment due August 1. Another payment worth about $5 billion is due in September. The mail will continue to get through, for now, but if this was an actual company lawsuits would be flying fast and furious and talk would be of bankruptcy.

Ron Paul's bill to audit the Fed now has more than half the house's members as co-sponsors, rather strongly indicating it will pass a house vote. Far less likely is that it will pass the Senate. After the election? We'll see. . .

San Bernardino, the southern CA city that just declared bankruptcy in part due to falling property taxes, is exploring a novel idea: use eminent domain to seize distressed properties. There are two clear paths for this: seize properties where no payments have been made for a long time, then condemn them or resell them at a much lower price. The other idea would be to seize properties where the owners are current on their payments, pay off the mortgage at current prices forcing a large loss on the lenders, get a new mortgage based on the current price, then sell it back to the owner at the lower price with the lower mortgage payment. San Bernardino is favoring the second approach, giving help to the people who have played by the rules; banks of course favor the first approach, take their problems off their hands. San Bernardino houses have lost almost 60% of their value in the last four years.

What is consciousness? Rocks don't have any, and therefore live strictly in the "now." A pair of asteroids about to collide have no sense of impending doom; asteroids colliding have no sense of surprise; after the collision they have no sense of pain or disappointment or change or anything being different. It takes consciousness - emotion plus memory - to give a sense of time to the universe: the ideas of past, present, future; the ability to learn from the past or to project into the future. Stockton Mayor Ann Johnston said that when she voted for the expensive pension increases that helped put her city into bankruptcy, "We didn't have projections into the future what the costs might be - I learned that you don't make decisions without looking into the future." Said Mr. Deis, the Stockton city manager, "Nobody gave thought to how it was eventually going to be paid for." So we see that Stockton city officials aren't actually conscious creatures and could have been replaced with a bunch of rocks with little difference. I doubt there is anything unusual or atypical about Stockton politicians or bureaucrats in this regard.

Next on the list to declare bankruptcy? It looks to be Compton, a city buried in south central LA. Compton's bonds are already rated as junk. But it's likely they'll survive the month of August, so perhaps another city will overtake them. Also very close is Victorville and Montebello. In Victorville not only is a bankruptcy looming, but some city officials may be facing jail time - the SEC is investigating them for fraud.

Early reviews of Microsoft's Windows 8 are in, the Windows answer to the IPad, Chrome and Android. It's slick, pretty, and unusable. No start button, so forget tracking down your programs if you don't have an icon. No one can figure out how to turn it off, that button is gone too. You just sit and stare at it and think "This is very pretty, what do I do next?" MSFT shares are starting to be dumped by Wall Street types. Steve Jobs used to take prototypes home for a day or two and live with them - this was how the smaller "girl-sized" iPod got stopped, he didn't like it. Who takes Windows home and tries to use it? John Dvorak said, "The real problem is that it is both unusable and annoying. It makes your teeth itch as you keep asking, 'Why are they doing this!?'"

Corn prices continue to skyrocket, making new all-time highs. Corn prices have doubled in the last twelve months from $4/bu to $8/bu and are rising fast, heading for solid double digits. Why do you care? Here's why: Americans consume one-third of all corn produced in the world In France corn is never eaten by people, they think it's just an animal feed crop. In the US total corn crop acreage would cover all of Germany.

Soybeans also set a new all-time high price, and wheat is not far behind and soaring upwards. The last time grains were this expensive, 2008, we had food riots in 30 countries. The world is getting just a bit more dangerous each day it seems.

Have a kindle? Don't forget to get a library card, most libraries now loan out ebooks. Don't have a kindle? Hello, it's 2012. Paper is like so 1999.

We spend about $25B per year on the war on drugs - that's about $250 per taxpayer. $1 trillion n the last 40 years. What have we bought for our money? Drug use has continued to steadily increase in the US, certainly the war has not been won. Drug use in the US is comparable to other European countries, one cannot say for certain we have even curtailed the use of drugs. We have over 500,000 people in jail, most for using drugs as opposed to manufacturing or large-scale selling. As states budgets get more an more strained, those people are being set free early. Coffee, a legal drug, sells for about 4 times the price of the coffee beans. Heroin sells for about 150 times the basic farm cost - the war has made for huge illegal profits. There are ancillary costs to drug use, including crime to pay for the expensive drugs and hospitalization due to the highly inconsistent quality and safety of illegal drugs. Illegal drugs are often cut with strychnine and rat poison to increase the perceived high. Drug cartels in 3rd world countries stockpile assault weapons and use them all too frequently, destabilizing entire governments and killing thousands - it's estimated that 50,000 Mexican children have lost a parent to drug killings. Trying to attract tourism or business investment into such environments is a severely losing battle, thus forcing even more poor people into the drug production trade just to survive. It would be far better for everyone if they were making Nike shoes. When the US gets involved in countries with drug farms, the aerial spraying is devastating to forests and the environment in general. When the US isn't involved, the chemical byproducts of the drug processing are often as bad or worse for the local ground water and soils. A 2003 study by the UK estimated that 56% of all crimes are committed by drug users, including 70-80% of all burglaries and 85% of all shoplifting. In 3rd world countries addicted women almost inevitably wind up in the sex trade to fund their habit. My 3-part solution for the US: 1) Legalize most recreational drugs; 2) Tax them like cigarettes and liqueur; 3) Mix them with contraceptives. I really don't care what you do to yourself so long as you don't do it to children. There are exceptions, in my mind: probably the most destructive drug in the US is meth. One year on meth and you have irreversible brain damage. As far as I'm concerned, people with meth labs should be locked in, then toss in a molotov cocktail.

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