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Mark's Market Blog

8-2-15: Recession?

By Mark Lawrence

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The market continues its unprecedented range bound trading. The markets are basically flat on the year. Meanwhile China is seemingly falling apart before our eyes, world trade is at all time lows, commodities are crashing and the skyrocketing dollar has cost US businesses $250 billion in lost sales and profits so far and counting. And we're getting very very close to that anticipated moment, perhaps at the September meeting, when the fed starts to raise rates.

S&P 500 February 3 2014 to July 31 2015

In spite of the Chinese government's bold actions and Goldman Sachs pronouncement that the crash is over, Chinese stocks are back to dropping. 8.5% on Monday, the largest drop in the last eight years. 1500 of the 2247 listed companies hit their 10% limit and trading was stopped. Markets, like your wife, don't like being ordered around and have their own way of getting back. US markets are shook up about this: we've never lived through a period where the planet had two economic powers and one melted down. The fear is a sufficiently severe Chinese recession could tip the world over into recession. And remember: when the chinese restrictions on selling shares inevitably lifts, the government will have lost all trust that the markets will be allowed to function normally.

The Chinese government has just asked all brokerages to hand over all their trading records. The chinese government asking for records is like your wife asking you to take out the garbage: it's going to happen and you'll have less pain of you do it sooner. They're looking for short sellers, people who bet the market would go down, and when they find them it won't be pretty. All financial transactions require two sides, anyone who bought a short position had to pair with someone who sold one; and when the markets go down the short sellers become huge buyers of stocks, locking in their profits and helping stabilize the market. China apparently doesn't care about any of this, they just wanna know who bet against them. They're apparently especially interested in people doing naked shorting, where you sell stock you don't actually have with the idea that you can buy the stock back cheaper before anyone notices.

The Shanghai containerized freight index just hit a record low - 45% lower than it was during the bottom of the 2008 financial crisis. China's electricity growth just dropped to a 30 year low. Commodities are also crashing. A lot of oil, iron and copper has been moving into China to support their building phase, but apparently that's all over. Anyone who tells you the Chinese economy is doing great isn't watching.

Here in the US markets have stagnated at a high level; meanwhile margin accounts - borrowed money to play the markets - has hit levels associated with a crash. There will come a day when the Fed can't or won't continue to inflate this little balloon - likely sometime in the next 12 months or so - and then this could turn very ugly very fast.

Canada's economy has contracted for six of the last seven months, Canada is now officially in a recession. Their housing market has been going crazy driven by oil profits and immigrants, but the oil profits are all gone right now. World wide, Saudi Arabia's unfettered pumping and China's slow down have been very hard on commodities.

Turkey has called an emergency meeting of NATO to discuss the security threat posed by ISIL. Turkey claims that their security situation "has deteriorated dramatically," said Bruno Lete, senior officer for foreign and security policy at the German Marshall Fund. "The rise of Islamic State in northern Iraq, in northern Syria, has effectively destabilized the southern border of Turkey. But also domestically, the threat of terrorism has become very real." Unfortunately Turkey is up to their standard trick: just as they used the confusion of WW I to kill a million Armenians, they're using the confusion of the ISIL war to attack Kurds in S.Turkey and N.Iraq. Meanwhile there's growing evidence that they're helping ISIL sell oil on the black market. The Kurds represent a real threat to Turkey: although a plurality of Kurds are sunni muslim, there are strong minorities of shiite muslim, christians, zoroastrians and yazids, all living in peace and harmony. Such an example of coexistence cannot be tolerated, of course.

It turns out that there are secret side deals to Obama's Iran deal. One is between the International Atomic Eenergy Agency and Iran. The IAEA says no American official will ever read it. Apparently it includes a clause that Iran is to do their own soil sampling for the IAEA, and that Iran must be notified of all inspections in advance and can refuse. We're being sold a bill of goods. On the plus side it's calculated that Iran will be buying 90 large aircraft per year for about the next five years from Boeing and Airbus, so when Israel and Saudi Arabia go up in mushroom clouds, at least Seattle will be able to afford their new $15/hr minimum wage.

Just a few months ago I reported that Switzerland had an election to decide if their central bank should be required to own gold. The Swiss central bank just put out their results for the first six months of this year and they lost $51 billion. They had large stores of gold and the euro, and both nose dived. Most of the damage was from the euro.

Puerto Rico has defaulted on their bonds. Hedge funds - those wonderful wacky billionaire narcissists who are holding the entire country of Argentina hostage to their demands to make yet more billions - now say Puerto Rico should "raise taxes, sell public buildings, close schools and lay off teachers" to pay them back. There is a consortium of half a dozen hedge funds that specialize in buying up distressed debt for pennies on the dollar then harassing companies, cities, states, countries to get the money. Puerto Rica has massive problems and no doubt the schools are one of them - in the last decade school enrollment dropped by 25% as families fled Puerto Rico poverty to move to the US, meanwhile school spending increased by $1.4 billion. However the idea that wall street hedge fund guys are the people to help them restructure is something I think should be actionable. These are some of the same wall street money guys who will, quietly behind the scenes, use their money to substantially determine who the next presidential candidates will be.

How debt works: You (meaning Goldman Sachs and friends) get some country to issue a bunch of bonds. You don't really care if they can afford to pay them back or not, but you do keep careful track of that. You sell the bonds to a bunch of pension funds for a nice profit. The riskier the bonds the higher the interest rate and the higher the commission. Later the country can't afford the interest payments. Then you get them to issue a bunch of junk bonds to raise money to stave off default assuring them that good times are just around the corner, and you make an even nicer profit selling those. Then they default. You make money advising them on the best way to restructure their debt, meaning screw the pension funds that were your customers. While the negotiations are going on and the bonds are plummeting in price, you go to the pension funds and buy them back for pennies on the dollar. Then when the restructuring is done the bonds go up in value a bit and you sell them, making money yet again. And then you advise the new government (the old one got voted out due to their mishandling of the crisis) on how to rebuild their economy, issuing yet more bonds for the infrastructure projects that will employ their people and make them rich, making yet more money. The whole cycle of dept - crisis - negotiation - default - recovery is one long zero risk profit making opportunity for you, and default is a big part of the profitability. Begging the question, "Why is this legal?"

There are seven tech companies worth over $100 billion. IBM and Intel are not among them.

CompanyYear foundedMarket Cap
Apple 1976$703 billion
Google 1998$443 billion
Microsoft1975$368 billion
Facebook2004$269 billion
Amazon 1994$247 billion
Oracle 1977$246 billion
Cisco 1984$171 billion

A couple of weeks ago a muslim, Muhammad Youssef Abdulazeez, walked onto a military base in Chattanooga and shot and killed five servicemen. The Obama regime is pressing criminal charges against heroic Naval Officer Lt. Commander Timothy White who fired back at islamic jihadist Mohammed Abdulazeez. Lt. Cmdr White, who bravely fired back against Abdulazeez with his personal firearm and arguably drove him off the base will now face criminal charges for carrying and discharging a gun on federal property. It's illegal for our servicemen to be armed.

Bonus chart: ask any parent, they'll tell you that you get the behavior you tolerate. . . I wonder why the Chicago politicians aren't charged with negligent homicide.

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