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Mark's Market Blog

8-19-12: Food Shortages Ahead.

By Mark Lawrence

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The markets have gone up pretty much every day for the last two weeks+. On very thin volume. Note the large block of uninterrupted green in the small upper chart, the "2-day RSI." Why? This is not normal market behavior, someone is screwing with things. Bernanke and the Fed would be a standard guess, but I don't think that's it this time. Spain and Italy's markets have gone up even faster, I think someone in Europe like Super Mario is pumping money like mad and it's leaking into our markets. What's next? Without a doubt, sooner or later we're going to have a brilliant exposition of the law of gravity: it goes up, it must come down.


S&P 500 February 25 2012 to August 17 2012

Financial stocks went up even a bit more than the market as a whole, indicating someone loves banks. Facebook dropped below $20 for the first time ever, ending the week at $19, they're certainly not among the loved. Apple hit a new all-time high of about $644. Apple is not subject to the laws of gravity. Apparently their designers got into Area 51 and are now using secret alien anti-gravity circuitry in their iPhones.

There's talk around Wall Street of many billionaires including Warren Buffet and many hadge funds reducing their stock holdings. If you believe these people know better tham most where the markets are headed, then the indication is the markets are headed down in the next year.

Germany's Spiegel magazine reports that the ECB is considering buying bonds to enforce particular interest rate spreads - for example if Spain's bonds exceed Germany's bonds by more than 4%, the ECB would buy Spanish bonds to lower the rate. This is very close to the ECB deciding to fund individual countries debt, which is against the European constitution. German Finance Minister Schaeuble said, "If we start doing that, we won't stop. It's like when you start trying to solve your problems with drugs." German Chancellor Angela Merkel however voiced support on Thursday for Draghi's crisis-fighting strategy. If the markets decide that Spanish debt is very risky, which the markets have already done a couple of times this year, the ECB could easily wind up buying all of it in clear violation of their charter. The cost of buying time keeps going up. . .

We're halfway through Europe's traditional August vacation. How's September looking? Very busy. In September the report on Greece's progress and possibily release of their third injection of money is due. Germany's high court is due to rule on the ESM, the proposed European bailout fund. The Netherlands will have an election, and it's anticipated the winners will be the "Eurosceptic Socialist Party." This would mean an emerging block of the Netherlands, Finland and Austria who oppose bailouts of Portugal, Italy, Greece, Spain, Cyprus, and soon perhaps Slovenia. Since Europe operates on consensus, this means Angela Merkel will suddenly find herself moved from extremist to centrist in her negotiations with France and the rest of Europe. We're seeing new governments in the south of Europe who oppose new austerity measures and demand help, and new governments in the north that oppose new aid for the south. This can't end well.

Who really won the Euro? Conventional thinking is that Germany prospered as an exporting state while southern countries built up massive debt. Paul Donovan of UBS has put out a chart that has everyone talking, where he compares changes in real disposable income over the life of the Euro experiment. According to this chart, Austria, Belgium, Germany, Ireland and Italy were the big losers with a drop in real income; Finland, Greece, Portugal and Spain were the big winners. I don't live there so I don't have to have an opinion, but it's clear that as the crisis evolves the finger pointing is only increasing.

Many believe the world is on the edge of the worst food crisis ever. The G20 will meet with the UN's food and agricultural organization to discuss this issue. One topic which will be brought up is the UN's desire to stop biofuel production - 40% of US corn, 50% of Brazilian sugarcane and 60% of European rape seed production go to making ethanol or bio-diesel. Four years ago I noted that I had gone into a Sam's club and found a sign, "Maximum two bags of rice per customer." This shook me up, previous to this I would have been happy to assert that I would never see food rationing in the US. If we're going to start having food crises the way that Europe has banking crises, then what we really need to do is start having a UN dialog about excessive world population growth. The world population, currently right at seven billion, is apparently very near the planet's limits. The projected world population is 10 billion by 2050 and perhaps as much as 16 billion by 2100. I sincerely doubt we'll ever get there for a number of reasons; top on my list is availability of fresh water and food. It seems to me there are far less destructive ways to limit population growth than mass starvation.

France experienced substantial rioting this week by muslim diverse citizens who set seven cars on fire and shot at police forces with shotguns, wounding 17. The French responded typically, sending 250 security forces to an area normally patrolled by 30. It appears calm has been restored now with local residents returning to their daily routine of walking their dogs and praying in the morning in their mosques various churches. In France it's considered a good week when less than five cars are burned around the country. You would think their auto industry is doing quite well, but all over Europe auto sales are very thin.

China is experiencing record outflows of capital as Chinese move their assets out of China. Although the Chinese government and central bank continue to print money to goose up their economy and provide jobs growth, the outflow of capital in the last 12 months almost exactly matches their stimulus. Chinese are preparing for a major recession, and their preparations all but guarantee there will be one.

China, as has been noted here before, is betting heavily on coal fired electric generation plants. About 70% of China's power comes from coal; their coal consumption has doubled in the last decade. Coal is second only to hydro-electric dams in terms of energy cost, so at a simplistic level China should be building dams and coal fired plants. It takes about 500 tons of coal per hour to run a typical 1GW electric plant; it takes about 4,000 tons of water to produce that 500 tons of coal, and another 20,000 tons of water to cool the plant. In the US half of our fresh water use goes to electric generation. China simply doesn't have that much water, and that's neglecting that they need to feed their 1.2 billion people. In several ways, China is running full speed into a crippling water shortage. The modern US economy was built on cheap oil and coal and widely available fresh water. China will have none of those advantages as they try to build a modern economy that's four times as big as the US.

Here's a list of every country in the world where you can enter the country with or without a visa, have a baby, and that baby is automatically a citizen:

How's the US economy doing? You hear from me and other sources that things are a bit dicey and we're perhaps slipping into recession, and after four years of growth this is unsurprising. You hear from other sources that this is a vicious lie and we're doing great. Here's one completely objective look at US economic growth: electricity usage growth. Save for a brief spike in June, US electricity usage has been contracting all year.

The US government is a stool with three legs: taxes, entitlements and defense. President Johnson raised spending on defense and entitlements - guns and butter, Vietnam and his Great Society - without raising taxes, and the result was the economically disastrous '70s. President Reagan raised defense spending, grew government and cut taxes and the nation prospered for two decades. President Bush cut taxes, raised entitlements and defense - the medicare drug benefit and the Iraq II - and again we had disastrous results. What's the difference? Oil prices rose dramatically in the '70s and '00s, but were low and stable for the '80s and '90s. Although there is some question about this, I believe growing economies in China, India, Russia, Brazil and Indonesia guarantee that oil prices will only grow from here. The days of being able to cut taxes and spend more money without disaster following are behind us forever - Reagan and Clinton got the last available free lunch. Some believe that shale oils in the US and Canada, undersea oils in the Arctic and South China Sea and natural gas reserves in Siberia will flood the markets in the next ten years and drop oil prices dramatically, then the party may resume. Certainly some of this will come to pass and will mitigate oil price increases to some extent, but the days of $20 / barrel oil are gone forever, imho. Today we're in an era of high entitlement and defense spending, low taxes and high oil prices. Something has to give.

The US Treasury raised its estimate of the net cost to US taxpayers of rescuing the country's auto industry by $3.3 billion to $25 billion. GM and Chrysler took in $80 billion total and are making profits now, but the Treasury continues to prop up GM's former financing arm, now dubbed Ally Financial, which lost $898 million in the second quarter mainly due to the bankruptcy of its home mortgage arm, forced by its huge book of defaulted home loans. A year ago, when hopes were that the economy was solidly recovering and the housing market might turn around, the Treasury was projecting losses on the industry bailout of just $14.3 billion. Treasury spokesman Matt Anderson defended the bailout saying, "The auto industry rescue helped save more than one million jobs throughout our nation's industrial heartland and is expected to cost far less than many had feared during the height of the crisis."

Romney got a nice bounce out of his VP announcement, and will get another nice bounce out of the republican convention. However, when I count up electoral votes and project the bounce as continuing, I still max Romney out at 260 electoral votes - 10 less than needed, a major state away from victory. I really can't see how Romney wins this.

A couple weeks ago I noted that the drought was forcing ranchers to bring excessive livestock to slaughter, and I predicted that meat prices would go down. They've gone up non-stop since. Am I stupid? Well, sort of. I presumed that market forces would set prices: supply goes up suddenly, demand doesn't change, prices go down. Econ 1. Yah. Except Obama felt sorry for the poor farmers and spent $157 million of our money to buy beef, pork, lamb, chicken and catfish (don't ask me how catfish got in there, I have no clue). So the national debt goes up yet another notch so that I can pay more for meat now and more in taxes later. It would have been cheaper and more effective to just write the farmers a check, but "that would be wrong."

The long running experiment in 401(k)'s - defined contribution v. defined benefit - has failed. Almost no one has saved enough to fund their own retirement, with 75% of Americans over age 50 having less than $30,000 saved up. With interest rates near zero and stock market returns uncertain at best, this equates to less than $200 per month in addition to social security. Meanwhile as the national debt soars, congressmen on both sides of the isle are looking at reducing medicare and social security benefits. Those between 40 and 55 today are looking at uncertain to poor retirement prospects, with some estimating the average person's retirement food budget will be no more than $5 per day. The solution? Our trade deficit, federal deficit and lack of savings all point to the idea that we need a hybrid scheme where social security continues to provide for the least well off, and workers are compelled to fund their private retirement accounts with a percentage of income. Mandatory savings would go a long way to relieving the various deficits and providing capital for increased jobs. Expect some kind of mandatory semi-private retirement savings plan to emerge from Washington in the coming years as the reality of the government's inability to keep their various entitlement promises sinks in. Just as there was a cohort of workers when social security started up who received benefits without ever having paid much into the system, there will be a cohort who pays in to fund the retirement of their elders and also must save to fund their own retirements. This cohort, likely people born between about 1965 and 1990, will find themselves with increased taxes and forced savings to fund the retirements of both the baby boomers and themselves. Their expanded payments and reduced retirement benefits will offset the low payments and higher benefits offered to old people during the first 60 years of social security. The increase in life expectancy and the end of exponential population and economic growth guarantees that this day must come, it's just a question of when.

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