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Mark's Market Blog

8-13-11: Your government in action (or was that \"inaction\")

By Mark Lawrence

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Markets did a record-setting roller coaster run this last week; there's no parallel in history. It would seem we're now going to see stock prices rise for a short time, a few days perhaps, perhaps a couple of weeks. However, the chances are still far too high that the US and Europe are headed for recession, and this at a time when Europe is having an existential crisis.

S&P 500 February 7 2011 to August 5, 2011

US births have declined for three consecutive years, and are now 7% below the peak in 2007. The number of births also started declining before the Great Depression started. By 1933 births were down by almost 23% from the early '20s levels.

Germany is pressuring Italy and Spain to sell off their gold reserves in order to stem ECB bond buying. The entirety of Italy's gold reserves would only cover 7.6% of its public debt at current prices. Europe continues to struggle with nearly bankrupt countries. The EUropean Central Bank has bought tens of billions of dollars worth of Italian and Spanish bonds and managed to get their interest rates below 6% again. The discussion is whether or not Germany and France are willing to put up the trillion or so dollars required to make this program really work, or if they will approve new "euro bonds" that are backed by all the EU countries (Italy or Greece borrows, Germans co-sign), or if they just want to keep staggering from crisis to crisis. With the ECB intervention they have managed to buy themselves another few weeks to work on the problem, however I don't believe there's a politically realistic solution available; the Euro will crash, soon. Start planning that Paris - Rome - Venice vacation you've been putting off, next summer it's likely to drop in price by 30% or more.

Singapore's finance minister complained that Europe and the US are dragging down the world economy with their recessions, crises, and excessive borrowing. It's true. It's also true that Europe and the US more or less are the world economy. Perhaps Singapore would do better trading with Martians. Singapore, Hong Kong, Taiwan, Malaysia, Thailand, Japan and S.Korea all go into recession when we do, except deeper.

Correlation SE Asian economies to the US - Singapore is right to be worried.

Obamacare unconstitutional: The divided three-judge panel of the 11th Circuit Court of Appeals concluded Congress overstepped its authority when lawmakers passed the so-called individual mandate, the requirement that Americans carry health insurance or face tax penalties. Chief Judge Joel Dubina and Circuit Judge Frank Hull found in a 207-page opinion that lawmakers cannot require residents to "enter into contracts with private insurance companies for the purchase of an expensive product from the time they are born until the time they die." This isn't over, you may expect the Supreme Court to speak on this issue at some point, but at this instant Obamacare is DOA.

Researchers at Carnegie Mellon university used commercially available face recognition software and pictures taken of students walking across campus to try to identify people. They then compared the pictures to 250,000 pictures on facebook pages, and were able to identify more than half the students. In about 10% of the cases they also found partial social security numbers.

London experienced three days of rioting. The US press is representing this as a reaction to the UK austerity budget and the cuts to social welfare. Unfortunately, although the carefully out of focus and sanitized BBC pictures shown in this country just show mobs of people, the British newspaper The Independent makes it clear that the majority of the rioters were blacks, more interested in looting electronics stores than in making any political statement. London police will be using face recognition software to identify looters and arrest them.

Chinese state-owned media have reported that as many as 24,000 industrial businesses in the Shanghai area have been told that they face mandatory power cuts. In Zhejiang province, some factories have switched to diesel powered generators, despite the fact that diesel power costs are double those of the commercial grid, adding to production costs and to pollution. China's last energy crises, in 2004, resulted in wide-spread layoffs, as companies tried to account for the rising cost of fuel. Naturally, Chinese officials are afraid that a new round of layoffs could lead to riots and unrest. Not that that means they will intervene in the market, the National Development and Reform Commission has said plainly that they have no intention of cutting fuel prices.

The cost of college tuition and fees has more than doubled since 2000. The average 2011 college graduate carries $27,200 in student debt. In the Budget Control Act of 2011, the agreement to raise the debt ceiling, subsidized federal student loans were put on the chopping block. Beginning next July, graduate and professional students - those who already have bachelor's degrees and seek masters or doctorates - would be charged interest while in school. Student loans outstanding in the US are now greater than credit card debt, as US universities continue their ponzi scheme of raising tuition by about 10% per year to get that worthless degree in "______ studies" (fill in the blank, I'm sure you can find a degree program somewhere.) In the last four years, total student loans have nearly doubled as the lack of jobs has put more kids into college. For-profit schools like the University of Phoenix have double the student loan default rate of private schools like Stanford, and triple the rate of public schools like the University of California. I'm proud to say that my son, Richard, will graduate next June from U.C.Davis with a bachelor's degree in physics (no "studies") with no debt whatsoever. He'll also be broke, but that builds character. The orange trace below is the change in all consumer loans, this is dropping as people try to pay down credit cards. The blue trace is the change in student loans, these are increasing at 10% per years. The green area is total student debt outstanding, protected from bankruptcy by law. This is what happens when the government throws money at a segment of our economy like education or health care: costs rise out of control, poorly thought out use of resources also rises out of control.

The Russian Finance Ministry is ready to inject 160 billion rubles ($5.4 billion) into the country's banks to maintain liquidity.

Much of Europe is instituting a ban on short selling of stocks. The ban would only be in place until markets calm down. It's been discovered that the problem in Europe is not governments borrowing more and more money to fulfill promises they cannot keep; it's a few speculators messing with bonds. If only the speculators would leave, then the governments could continue to borrow money that will never be repaid. Yup. Players in this game include France, Spain, Italy, Turkey, Greece, S.Korea.

The Obama administration has just announced new fuel efficiency standards for long-haul trucks. The regulations call for reductions on fuel consumption and greenhouse gas emissions by 2018 of 9 to 23 percent, depending on the type of vehicle. Trucks and other heavy vehicles make up only 4 percent of the domestic vehicle fleet, but use about 20% of all vehicle fuel. Diesel fuel is already taxed about double what gasoline is, and fuel costs are about half the total costs for long haul truckers. If a truck company announced a new truck that got 8mpg instead of the more typical 6mpg, every trucker in the world would switch over within a year or two - the competitive advantage would be crushing. But our government proposes that no progress has been made because the government hasn't been involved. Maybe next they'll propose that pregnancy be sped up from 9 months to 6 to keep our workforce more mobile. Unregulated young women are simply not motivated to get those babies out. This is a clear failure of markets where the government can play a significant role.

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