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Mark's Market Blog

8-16-15: China Employment.

By Mark Lawrence

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The 50 day moving average on the Dow is now below the 200 day moving average - the so-called "death cross." This is a predictor of bad times ahead in the stock market. Gold has temporarily bottomed and is heading higher, a sign of discomfort with markets. Junk bonds are imploding, a sign that people want less risk.


S&P 500 February 20 2014 to August 14 2015

For fifteen years we had a deal with China: they shipped us crap to sell at Walmart, and we shipped them crap bonds. That deal is over. China is now net sellers of US treasury bills. They're starting to unload some of their nearly $4 trillion in foreign reserves, built up when they were on their way to dominating the world. Their reserves are down 16% in the last year due in part to capital flight. Now they have their nose just out of water and they need to keep it that way. Any Chinese recession must be shallow and short lived or the government will be in question. Right now the Chinese government finds themselves with no good options: do nothing and jobs disappear, or devalue the currency and capital flees. These are communists at heart, so jobs always win. They devalued their currency this week a total of about 3%, so we may expect their capital flight problem to increase. The Bank of China says they will "severely punish" anyone involved in taking capital out of China. The luster is off this economy.

There are growing fears that China's devaluation will lead to a currency war. They have just made imports from their majos trading partners like Japan, Korea, SE Asia, Europe and the US more expensive and their own goods cheaper. The US will not react to this - we seem happy to ship them jobs in return for their crap - but other countries more likely will react. If will be completely unsurprising to find other countries lowering their currencies in response. Here in the US I expect the Fed will go ahead and raise rates next month, but the point of this is to fight inflation and if everyone else in the world is making their stuff cheaper for us we'll have deflation, not inflation. The Fed may find there is no normal world economy into which they can normalize our interest rates.

Last week I noted that Foxconn, the maker of Apple phones among other parts, is opening a major factory in India. This week we learn that Xiaomi, who has 14% of China's smart phone market, is also opening a factory in India. Xiaomi is driving the price of smart phones down so fast that HTC is nearly bankrupt and Samsung is losing money on every phone it sells. The first Xiaomi smart phone to sell in India will be the Redmi 2, for about $100. Xiaomi doesn't currently sell phones in the US and Europe, but that will change soon enough. If they open a factory in Mexico or the US that will be extremely telling.

China has yet another problem - their population is aging. The one child policy is not only showing up in unmarriageable men - China has more 20-something men with no corresponding female they might marry than California has people - but also in a shortage of young workers. Starting this year China's working population goes into long-term decline as they find themselves with a growing number of old people retiring and a shrinking number of young working people to support the society.

It seems every single company in Europe is gearing up for a massive sales effort into Iran. With their oil exports freed and access to their money, Iran looks like a massive profit opportunity. Of course the more these companies gear up, the less likely we can stop the Iran deal and the less likely we can continue sanctions or snap them back into place if there's non-compliance. There will be a lot of noise about congress voting and democrats abandoning Obama and a veto and the potential for a veto over-ride, but this is all a side show: if the sanctions come down, the deal is done.

"I really regret that all of a sudden copy-paste is coming up again," Jaguar Land Rover CEO Ralph Speth told the press at the Shanghai Auto Show. "That will not help the reputation of China, of Chinese industry at all." However, JLR believes China's intellectual-property laws won't be able to provide the company with sufficient legal recourse. "There are no laws to protect us, so we have to take it as it is," Speth told reporters in April. "In Europe, we can be protected against this kind of copy-paste in the design language, in the features but also the technology." "You can't be protected in China," Speth added.

We're all aware that Greece has too much debt - even the IMF says it's unsustainable and they won't participate in any further bailouts until there is discussion of debt relief. And as a result of this debt Greece is now imploding, their businesses are shutting down, unemployment is rising, social cohesion is failing. How much debt did this? About 185% of GDP. For most countries debt hovers about 100% of GDP. Who else besides Greece has out of control debt? Here's the list: Japan, S.Korea, Spain, France, China, in order of increasing debt. Japan's debt is mostly owed to Japanese; intelligently the Japanese never went big for trying to attract foreign money. Those other countries, not so much. China's debt is now over 200% of GDP and a lot of it is owed to foreigners. The Fed is about to raise interest rates, and they will likely raise them several times. In time this will attract money from other countries to the US. Debt is a good idea when the economy is expanding and there is inflation, meaning you pay the debt back with cheaper dollars. Now China, France, Spain, N.Korea find themselves on the edge of recession or actually in recession and in a deflationary environment where debt is repaid with more expensive money. China's producer prices have been falling for 41 months. Will this all end spectacularly, with fire, not ice? Many assure us no, because "this time it's different."

From 2005-2010 the EPA mandated pollution standards that reduced ozone by 20%. Nearly half of that gain is gone now. We've a new import: Chinese ozone is blowing across the ocean to the west coast. Ozone in the upper atmosphere helps block ultra-violet light, but this is ozone in the lower atmosphere which is a main component of smog and has significant human health hazards. LA is looking smoggy again. UC Berkeley physicists calculate that China's air pollution kills 1.6 million each year from heart, lung and stroke problems; most of their deadly pollution is linked to burning coal. The worst air in the US is in the city of Madera, CA; 99.9% of the air in the eastern half China is worse. For those who believe in global warming, China is #1 at carbon emissions by a large margin. We cleaned up our air with a combination of tough EPA regulations and moving our heavy industry out of the US - Pittsburgh could not have cleaned up without losing their steel industry, for example. How will China clean up? Perhaps in part by moving electricity generation from coal to solar, but what about their steel and manufacturing industries? Will those move to India, who already has the world's most polutted air?

Last week I noted that Turkey was using the ISIL war as cover to move against the Kurds. This week the US Air Force has come to the same conclusion: they calculate that in the last three weeks Turkey has conducted 300 raids against the Kurds and 9 raids against ISIL. Meanwhile, Obama is hoping to improve relations with Turkey so there's no administration response to this.

The US has lost 48 million chickens and turkeys to bird flu. Iowa, the #1 egg producing state, has no more chickens. Zero. Panda Express is now putting corn in their fried rice instead of eggs as the price of eggs has more than doubled. It will take the chicken industry two years to recover.

Oil continues to drop, into the mid 40s this week. Many are projecting that as China continues to move towards recession and Iran comes on line with their production, oil could drop all the way to $30 per barrel. And Americans are respondign to cheaper gas by seeing the USA in their Chevrolet.

LEDs - those fantastic lights that color match the sun or are even bluer and are nearly free to operate - are being used by cities for street lights now. Photos from the International Space Station show two things clearly: cities switching to LEDs are noticeably brighter and noticeably bluer. More light pollution is the bane of astronomers everywhere, and bluer lights at night keep people awake longer and tend to disrupt sleep patterns. You can get LEDs with any color temperature you wish - imho, street lights should use the cooler colors like 2500°; instead it appears cities are going for the hotter colors like 5000°. Below we see Milan in 2006 and in 2013, after they switched the city over to LED lights.

The number of Americans living in slums - places where 40% or more of the people are below the federal poverty line - has doubled since 2000 to 13.8 million. From 1990 to 2000 that number fell 25% from 9.6 million to 7 million. Obama has presided over a huge increase in slum living - likely this is why Jesse Jackson says Obama has "failed black people." In Obama's defense, so long as the government has minorities addicted to free handouts and single parenthood, for just so long will minorities fail to thrive.

Meanwhile here in the US states have been on a borrowing / spending / taxing spree, with all three components raising at double the rate of inflation. Personal wages, salaries and consumption has only barely kept up with inflation, real household incomes are down 8.5% since 2000. This has to lead to a downward spiral where state and local governments will have to raise taxes to maintain their trend of higher spending. Higher taxes reduce household spending, which reduces income and sales tax revenues. In response, state and local governments raise taxes again. This further suppresses disposable income and consumption. In other words, soon raising taxes will have diminishing returns. Eventually state and local spending will have to be cut in a crisis "no one saw coming."

You know how your insurance company told you they would lower your rates if you plugged in a little thingy in your car that let them see what a great driver you are? Well, those thingies have been hacked. If you have a driving tracker, hackers can now remotely control your windshield wipers and your brakes, turning your brakes off and on.

There's a new process for making opioids using baker's yeast instead of poppies. The yeast was genetically engineered to generate hydrocodone and thebaine from sugar, which takes the yeast about three days. Stanford has patented the process. It's not yet commercially viable - it takes 4400 gallons of yeast to make one dose of heroin substitute. If research continues on this we can expect the collapse of the Afghanistan economy and even more people in the world getting addicted to demerol, vicodin, oxycontin, heroin, etc.

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