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Mark's Market Blog

8-25-13: Windows 8: a little NSA dude in your living room.

By Mark Lawrence

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There's growing tension on Wall Street between those who say the US market is poised to take off in 2014 and reach "escape velocity," and those who say the market is over bought and over valued and due for a major correction of perhaps 50% or more. Worldwide, 2/3 of emerging markets are now in bear territory, off 20% or more from their peaks. What does this mean for the US? Will we follow into a world-wide recession? Or perhaps the money leaving the emerging markets will come to the US, the last remaining safe investment. It's too easy to make powerful arguments on either side of this question, and imho too difficult to see the future. I don't see the US economy hitting "escape velocity" next year: exports will be down and fully half our population is still not participating in our economy in any meaningful way. I also don't see a 50%+ crash in the markets, our companies are too innovative and profitable and holding far too much cash to see the Fortune 100 do a belly flop. For example, if Apple or Google stock were to cut in half, the boards of these companies are sitting on enough cash that they would have to discuss taking the companies private. I do think that as the Fed weans us off their QE drugs over the coming year we will inevitably have a drawn out hangover that will be reflected in raising bond interest rates and stock prices trending downwards.

S&P 500 March 1 2012 to August 23 2013

Europe's PMI came out, and evidence continues to build that their latest recession is over, meaning not so much that they're recovering as that they're no longer dropping. We saw last week that their overall economy is taking steps downwards. It's widely believed by economists and politicians that to have a growing economy you need a growing population - this is why the big push to admit huge numbers of immigrants. What happens when the immigrants breed but don't get educated or work? We're watching that happen in Europe and to a lessor but important extent here. So long as there is huge youth unemployment as in Europe their economy will continue to step downwards. So long as there is no growth in youth jobs, as here, our economy will stagnate - half of that ugly 70's word stagflation. The Fed is working hard to supply the other half, inflation. Pretty sad when apparently our policy makers think stagflation would be a step up.

In anticipation of the Fed scaling back QE, people are dumping stocks and treasury bonds. It's expected that treasury interest rates will continue to climb from the current 2.8% 2.9% to perhaps 4%; as this happens the price of the treasury bonds will drop significantly. A 30 year bond with no coupons will drop in value by roughly half. Bonds have been sold to my generation as a riskless investment, meaning the government will certainly pay them off; however, riskless doesn't mean you can't lose money. If you intend to own your bonds to maturity this won't effect you, but if you have any bonds you might sell before maturity, now is a good time to get out of them.

As treasury rates increase, money is pulling out of the BRICS - Brazil, Russia, India, China - at a record rate. The latest to have trouble is Indonesia, the largest economy in SE Asia. All these countries are seeing their currencies rise quickly against the dollar, which means no one will buy their exports and imports are getting very expensive. A couple years ago I noted that US policy would result in the US being the Last Man Standing; we're starting to see that now take effect. These countries will really struggle with their exchange rates, and some might even find their governments destabilized from the resulting inflation and unemployment. Meanwhile here in the US inflation will drop due to lower priced imports - the rest of the world is going to be heavily competing to sell cheap stuff to US consumers. This is great news for our lower classes, the ones who live on Walmart and food stamps, and great news for the democrats who can claim to be taking great care of them. Of course separately the democrats will claim to be very worried about 3rd world wages and living conditions and thrilled to welcome millions of these unskilled workers when they come to the US illegally to live on food stamps and Walmart instead of sewing t-shirts for a dollar a day.

Americans continue to drive less and less. In June total miles driven was down by almost a billion miles, about ½% of the 250 billion miles Americans drive in June, and about 3% down from the peak in 2007.

In California Tesla now outsells Buick, Fiat, Land Rover, Lincoln, Mitsubishi, Cadillac, Chrysler, and Porsche, delivering 4714 cars in the first six months of 2013 - 30 per day. Tesla has only one model, the model S, while all these other guys have multiple models. Tesla has recently won the highest rating ever given a car by Consumer Reports, who traditionally hates US cars. They've taken some heat over their mileage claims from some reviewers who run out of battery sooner than expected. The Model S is powered by 7000 batteries each about the size of an A battery. Tesla claims their battery design is less expensive than a custom design like other electric cars use, and if individual batteries fail they can be isolated and eventually replaced. Is the Tesla the latest California fad, or are they really here to stay and slug it out with Mercedes and Lexus? Can they achieve these levels of popularity in a state with winter, where the cold weather means the batteries don't do as well? Will they sell to businessmen, or just movie stars and Silicon Valley millionaires? GM thinks this car is a fad, but then GM has a history of really screwing the pooch on such assessments.

Desperate for something, anything to make him relevant, Obama has announced a new higher education program. The main points:

  1. Schools will be scored by the Department of Education on affordability, a school's outreach to disadvantaged students, graduation rates and the real-world earnings of graduates once they enter the job market.
  2. Pell grants and other aid would be tied to a school's score.
  3. Extra money for schools who "innovate" with 3 year programs, on-line courses, things that cut costs for students.
  4. Student debt payment capped at 10% of wages.
  5. No congressional debate required, this can be established by executive order.
Perhaps Dollar Tree will open a university and offer courses, a dollar per unit per day? An entire 3-year degree should be under $5000. That should be extraordinarily efficient. I've every confidence that liberal-leaning Silicon Valley will quickly jump in to support this program and start preferentially hiring engineers from DTU. The real cost savings will happen when Walmart gets involved, of course, offering on-line courses from China with free in-store shipping. I can't wait to be operated on by a disadvantaged surgeon with an efficient medical degree from Wossa Motta U Wal Mart U. Apparently no one can find a single student from Columbia who remembers ever taking a course with Obama; obviously this is the guy to rebuild from scratch our world- leading 250 year old university system.

Google is in talks with the NFL to buy the Sunday Ticket package. DirecTV has had a monopoly for over a decade, but their contract runs out after this year and it's not obvious they can afford the estimated $1.3 billion per year price tag. Google says they want to broadcast games on Youtube. There's a major strategy here to take power from cable and satellite companies and move it to the internet - Google is a media company that sells ad time, and wants more control over more media. The NFL games consistently rank among the most watched and therefore most profitable for advertising of all TV shows. If this NFL deal happens, it will be the start of a long term decline for cable and satellite TV. This makes sense to me: it's all just bits of information, why are you paying your cable company for some bits and your internet provider for others?

All Windows 8 machines come with an extra chip which handles digital rights and security - the Trusted Platform Module. TPM 2, released with Windows 8, decides which software can and cannot run on your computer. It cannot be disabled by you. The list of allowed and disallowed software can be updated by Microsoft any time without your knowledge, or, for that matter, by anyone who has the key. At the last TPM 2 specification conference a voice vote was taken and one thing heard was "The NSA agrees." Since many chips are now made in China, it's considered clear that China also has backdoor keys to many Windows 8 machines. The German government has warned that Windows 8 machines are unacceptable for government use and "operators of critical infrastructure." Yet another reason to have a Chromebook or Mac.

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