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Mark's Market Blog

7-8-12: Is Europe Fixed?

By Mark Lawrence

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The markets dropped Friday on news that (hold on to your chairs) very few jobs are being created these days. Meanwhile, on the other side of the pond, it's apparently occurring to people that Merkel didn't actually agree to anything: Spanish 10 year bonds, about 7.4% a couple weeks ago, had dropped to 6.4% last week on news that Merkel had agreed the ESM could bail out Spain, right after a unicorn was spotted. Friday the rate had climbed back up to 6.95%. Similarly Italian bond rates are back over 6%. Nothing is solved, and few are convinced the can will even roll far after this last half-hearted kick. The Euro dropped below $1.23, which had been an important support level - we can expect it to drop further from here. Expect to see more Europe in the news in the coming weeks. For right now it's telling that the financial index dropped less than the Dow or the S&P. There's not a lot of fear of banks right now, which means the easy direction for markets is sideways to up.

S&P 500 January 15 2012 to July 6 2012

Last week we all heard about Europe agreeing to the ESM, the European Stability Mechanism, which would use a mythical $500 billion to solve Europe's $2T banking problems. It was all holding hands, singing Kumbaya and eating smoors around the campfire. This week reality is starting to set in. The German high court will rule, possibly this coming week, on if they find the ESM violates the German constitution (it does). A likely outcome is they put a stay on German participation while they consider the matter further. That would delay the ESM by several months in the best case, sink it entirely in the worst. Finland is threatening to block the ESM entirely, they have no intention of paying for other country's mistakes. Finland's finance minister, Jutta Urpilainen, declared that Finland was a dedicated member of the Eurozone eager to solve the crisis, but "not at any price;" it wouldn't agree to take on "collective responsibility for debts and risks of other countries" via a banking union. She said, "We are prepared for all scenarios, including abandoning the Euro." The Netherlands is talking about backing Finland's play. In short we're back to politics as usual - we all agree there's a big mess, but we don't agree how big it is, how critical it is, and we especially don't agree on who's to pay to clean it up.

Meanwhile, Europe continues to slide into recession with a near-complete collapse of consumer spending and rapidly growing unemployment. Remember, in most of Europe it's basically illegal to lay people off, so growing unemployment like this means the wheels are really coming off.

Banks are continuing to look sleazy. Questions are being asked of JPMorgan: if they lost $7B or whatever it was, who was on the other side of those trades? Who made the $7B? Barclays admitted to illegally manipulating LIBOR interest rates, but there's now talk that this was just the tip of the iceberg, that many other banks were complicit, apparently with the knowledge and tacit approval of a few central banks. It's starting to look like this LIBOR manipulation stuff might turn out to be seriously ugly. LIBOR - the London InterBank Offered Rate - is the benchmark interest rate that most loans reference. A typical loan might be LIBOR + 2.5%, for example. So scamming LIBOR means scamming borrowers the world over. I doubt it will blow up, though - it looks like too many people had their hands in this cookie jar, I'm expecting a cover-up. This is not the decade for justice for bankers. In the 1930s bankers jumped out of windows. This decade I'm starting to think some should be thrown out.

Congress has passed a bill directing the FAA to allow drones to fly in US skies. The FAA says they anticipate 30,000 drones by 2020. The Department of Homeland Security (remember: translate into Russian, you get KGB) wants to fly a lot of them. So do local police and sheriffs, the people who brought you "retire at 50 on $100,000/year." Think you have no privacy now? Every time you use a Visa card the NSA knows about it in seconds. Soon cell phones will all have face recognition software, and we all know from the Hollywood movies that if your battery is in your cell phone, other people can take over the microphone and camera. And now we'll be watched from the friendly skies. In 1984 George Orwell imagined a world where many rooms had cameras. He would be appalled at how far behind he was. The combination of ubiquitous phone cameras, flying drones and the internet will soon illuminate every corner of the earth 24/7.

The FDIC required nine of the largest banks in the US to produce plans to break themselves up in a crisis or bankruptcy. BofA, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and UBS all submitted plans (I don't understand how Wells Fargo didn't.) I dunno, to me this feels like asking a group of 7 year olds to produce a plan to ration out a birthday cake over four days: you just know it's not going to happen like that.

Britain's police force has unveiled a new app titled "Facewatch" that aims to empower anyone with a smart phone to identify criminals and file a police report soon after a crime happens. The app comes loaded with nearly 5,000 pictures of suspects. Once users enter a zip-code, the app narrows down images of suspected criminals for that particular region. Facewatch users can then browse images and submit names of suspects they recognize. "My hope is that the two-thirds of Londoners who own smart phones will download this App, and help us identify people we still need to speak to," assistant commissioner Mark Rowley of Scotland Yard's specialist crime and operations division told The Independent. "We need Londoners to browse through the App every week or so as new images will appear regularly. This is a fantastic way for Londoners to help us to fight crime." Some previous UK crime innovations include traffic cameras on highways that photograph your license plate, and if you get to the next camera too soon mail you a ticket. These were sold to the voters as a way to track down kidnappers and escaped criminals, like men behind on their child support. The UK has 1,853,681 security cameras, one camera for every 32 citizens.

China has a new export - ghost towns. You've all read here about their malls where no one shops, airports where no on lands, cities where no one lives. Now China has build one for Angola, Nova Cidade de Kilamba, a residential development of 750 eight-story apartment buildings, a dozen schools, and more than 100 retail units designed to house 500,000 people. We're told that this is "one of several satellite cities being constructed by Chinese firms around Angola." Apartments will sell for $120,000 to $250,000 - this in a country where the per capita GDP is about $5100. And that's substantially oil money, and we've all seen how equitably that gets shared in 3rd world countries. This is a fantastic deal for China - they get oil for little or no cash outlay, and they get to ship huge numbers of unemployed workers out of their country. What will happen next? I imagine these streets being patrolled by insurgents with (Chinese) AK-47s as they claim them "for the people." It's hard to imagine this ends up housing 125,000 Angolan versions of Ward and June Cleaver.

Why is Europe in crisis? Have a look at the chart below of unit labor costs across Europe. Germans wages have risen 5% in the last ten years; Austria about 15%. Other countries in the south have had their average wages go up by25% to 45%, with Greece leading the way. The answer to this is simple: people don't take wage cuts, governments don't like unemployment, so you devalue your money bringing your wages in line with world averages. In this case the Euro would have to devalue about 25% - 30% to fix this, with a final value around 95¢. But Germany wants no part of that, and Finland, the Netherlands and Austria are perhaps even more adamant. Of course such a devaluation means Europe wants to export more and import less - a direct threat to the Chinese and US economies which would not go unnoticed.

In Saudi Arabia, 90% of the working population works for the government. They go to muslim college, get some sort of muslim degree, then get a job at the ministry of muslim anecdotes or something like that. The Saudi royal family is troubled by the Arab Spring, as it leaves them the sole large monarchy and undermines the idea that they rule by divine right. They're also watching long-time US allies like Mubarak get taken down. Some time ago China started ranking world universities. There's not a single Arab university in the Chinese rankings of the world's top 500, and Saudi royal family is very aware of that. But their political survival depends on accommodating the Imams, and the Imams insist that all useful knowledge is in the Koran. Remember, it was the muslims that eventually burned down the library at Alexandria, the world's oldest and greatest at the time. Muslims and knowledge have a long and ambiguous history, some really positive (algebra, architecture), some not so much. Anyway, when reform eventually comes to Saudi Arabia, no one there will have any clue how form a company or work at what we consider an actual job. One day they're going to fall hard and fast. Arabia does lead the world in two areas: oil production, obviously, and diabetes. Of the top ten countries in the world for diabetes, six are arab; the other four are pacific islands. It's estimated that 20% of arabs have diabetes. "Food is delivered, kids play sitting down at their computers... even physical education is a written exam," says one Kuwaiti.

Iran said this week that if they're attacked, within minutes they will destroy all the US bases in the middle east and also target "the occupied lands" (Israel). Yah, and if Mike Tyson comes after me I'll deck him and Ali and Frasier, all within minutes.

Volkswagen, which already owns 49.9% of Porsche, has reached a deal to buy out the remaining 50.1%. Porsche spent years trying to take over Volkswagen; in 2009 they thought they had their chance and massively shorted Volkswagen stock, driving the price to ridiculously low levels. However, the Porsche shorts were naked shorts - they didn't actually have access to the stock they sold. Volkswagen, which is substantially family owned like Ford, called a family meeting and the family agreed not to loan any stock to Porsche to cover their shorts. As the shorts expired Volkswagen's stock price skyrocketed, Porsche neared bankruptcy and wound up in this state, with an agreement that Volkswagen could buy them out. Volkswagen is also buying Italian motorcycle manufacturer Ducati - no one has any clue what this is about outside of BMW envy. Their stated goal is to be the world's biggest car company, bigger than Toyota or GM. Last year Volkswagen's luxury division Audi passed up Mercedes Benz in units, and they vow to pass up BMW this decade. If the Euro crisis persists (it will), and Germany opts to stay in the Euro (plausible), the required printing of Euros to stabilize the southern banks will drive the Euro below $1 and Volkswagens will suddenly be a lot more price competitive.

As the lower classes in the US continue to breed, with the bulk of our kids being born to unwed mothers who don't value education, how is this affecting the upper classes? There's a growing trend - it's very small, but growing fast. US Citizens giving up their citizenship. I'm not prepared to give up mu US citizenship yet, but I do anticipate leaving California in the next few years. It won't be me working until I'm 70 to pay for all these 50-something retired cops and firemen.

Science: Most animals have two types of color receptors in their eyes, Red and Blue. Each color receptor can detect about 100 colors, so two color animals can see about 100*100 = 10,000 colors. Humans and apes have three, Red, Green, Blue, so we can see 100*100*100 = 1 million colors. It turns out some women have four types of color receptors and can see 100 million colors. Don't ask me what colors those would be, I can't get clear on Periwinkle and Forget-Me-Not blue. Such women would most likely have color blind fathers or sons. It's unknown how many women are like this - 2%? 5%? - and it's also unknown what these women do with their enhanced vision. The first such woman identified was able to see differences in computer generated color patterns that no man can see, leading at least one researcher to speculate Jack Nicholson style, "Men can't handle it."

Almost Science: George Takei, "Sulu" in the original Star Trek, has announced that there will be another Star Trek movie and once again he will appear as the Captain of the Excelsior. (Notice that "Captain" of an imaginary star ship gets capitalized, but "president" rarely does in my blog. Not a typo. I have more respect for George.)

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