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Mark's Market Blog

9-14-14: BIS - the biggest, most mysterious bank you've never heard of.

By Mark Lawrence

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Markets have been slowly sliding slightly downwards, still clinging to the S&P 2000 level. As I pointed out a couple weeks ago, we're a the top edge of a market channel, but continued money printing means the market wants to go up more. IMHO we'll spend a bit more time spinning our wheels letting the channel move upwards away from us, then continue upwards. In a few months the Fed is likely to raise rates - historically the first rate increase doesn't phase the stock market, but the second increase, perhaps a few months after the first, will likely change market sentiment.

S&P 500 March 22 2014 to September 12 2014

Jeff Gundlach, a rather notable talking head from Wall Street, says he believes the Japanese yen will go to 200 within 3 to 5 years. It's about 100 right now, so that means more or less Japanese goods like cars and motorcycles will sell for roughly half what they cost right now. I dunno if I believe this. It's pretty clear this is exactly what the Bank of Japan wants. It's far less clear that the Bundesbank and the Fed will allow it to happen - this amounts to stealing some serious jobs from Munich and Detroit, and exporting their deflation to a couple powerful countries that are having their own fight with deflation. I can say that if you wait a few years on buying that Lexus LS460 you're likely to get a better deal. Good chance it's true for that Mercedes S550 you've been looking at too. And that's pretty much the definition of deflation right there.

ISIS or ISIL, depending on who you listen to, lopped off another head, this time of a British aid worker. I prefer their self-given name, ISIL - Islamic State of Iraq and the Levant, as their very name makes clear they intend to wipe out Israel and take over Lebanon and Jordan. UK PM Cameron said, disingenuously, "They are not muslims, they are monsters." Sorry, they're muslims and they purport to represent all muslims everywhere. And they have a lot of support throughout the world - hundreds of muslim immigrants in Europe have traveled to the region to join them in their fight. Obama has ordered air strikes on ISIL, telling Assad in Syria that if he fires on American planes we will have him overthrown. Retired U.S. Air Force Gen. Michael Hayden, previously director of both the CIA and the National Security Agency, said in an interview with U.S. News & World Report on Thursday, "The reliance on air power has all of the attraction of casual sex: It seems to offer gratification but with very little commitment." US Secretary of State John Kerry and White House chief of staff Denis McDonough both said Sunday the US is "at war" with ISIL in the same way it is "at war" with al-Qaeda and other terrorist groups. "In terms of al-Qaeda, which we have used the word 'war' with, yeah... we are at war with al Queda and its affiliates. And in the same context if you want to use it, yes, we are at war with ISIL in that sense," Kerry said on CBS' Face the Nation. On July 12, 2007, President Bush said, "To begin withdrawing before our commanders tell us we are ready would be dangerous for Iraq, for the region and for the United States. It would mean that we'd be risking mass killings on a horrific scale. It would mean we'd be increasing the probability that American troops would have to return at some later date to confront an enemy that is even more dangerous." On December 14, 2011 Obama said, "We are leaving behind a sovereign, self- reliant and stable Iraq." If you have the impression that this administration is flailing about trying to reassure everyone while not doing anything truly substantive, then you share mine.

In a new NBC/Wall Street Journal poll 47% of Americans, a plurality, feel "less safe" than they did before the Sept. 11, 2001, terrorist attacks. No wonder - Al Queda used to be a handful of guys living in caves in Afghanistan, now ISIL is a country.

We hear on the news that the Great Recession is over. Yet a lot of Americans still think the economy sucks. Here's a bit of why. Salaries as a percentage of GDP have been and continue to be in long term decline. If you work on Wall Street, the economy is great. You don't actually produce anything, but you any your cronies are divvying up about three-quarters of all the profits made in our economy. And you get to golf with Obama and suggest how laws could improve things. If you're not on Wall Street, well, all you got is a vote and that no longer counts for much of anything.

Scotland votes this week on becoming independent from England. The Scots have a talent for stirring up the anthill and they're doing it again. Independence for Scotland would mean a new currency and huge debt as they take on their share of the UK debt. The Scots think after a year or three of stabilization they would join the EU; however the EU thinks this would be a mini-disaster as it would entice Catalans and Basques in Spain to seek independence and spread outward from there - the famous "domino effect." And Ken Rogoff of "This Time Is Different" fame says the vote is already a disaster before it's happened - no one will invest in Scotland now, knowing the future is so uncertain. I dunno, I have a different opinion: political lines in most of the world were drawn by a few warlords with an eye to only their own interests, and it doesn't surprise me at all that today people want their own fake democracy instead of piggy-backing on someone else's fake democracy. What's this vote really about? My generation has a slogan: follow the money. Here's Scottish bank assets as a percent of GDP compared to several other countries. Scottish banks are huge, with assets 12 times the Scottish GDP, and would clearly dominate the Scotch economy. One can't help but think the bankers are behind this, pushing for a smaller country where they can quietly buy off all the politicians behind the scenes.

The BIS - the Bank for International Settlements - is the central banker's central bank. Is there a more mysterious company in the world? The BIS was originally formed after WWI to managed the payment of German war reparations. In the mid-30s when the Nazis stopped making those payments, the BIS went in search of a new mission. They became dominated by Germans and Nazis and spend most of the war years helping Germans smuggle jewish gold and other assets out of Germany, frequently to Switzerland, sometimes to Argentina and such places. They also managed huge behind-the-scenes loans from American banks to the Nazi regime - there was no lack of Nazi sympathizers on Wall Street. After WWII they transformed again and became the conduit for the McArthur plan, managing the dispersal of American money to Europe. Today, transformed yet again, they're an exclusive club where the world's central bankers and top people from the IMF and World Bank meet to have lunch in their exclusive members-only top-floor five star restaurant and exchange views on how the world economy should be managed. Can't find Volker, Greenspan, Bernanke, Yellen? They're either in their office, testifying before congress, being paid $150,000 to have lunch on Wall Street, or on the top floor of the BIS building having a lunch you and I can only fantasize about and hanging out with the heads of the UK, EU, Japanese, Brazilian and Chinese central banks. They make secretive loans to banks and were the guiding force in the recent IMF / World Bank / ECB bailout of Greece. The BIS by international treaty is not subject to the laws of any country, cannot be sued in any court including the World Court, and pays no taxes on their billion+ dollar a year profits. They have a beautiful building in Basel Switzerland and employ a sizable fraction of Basil's residents - who pay no taxes on their BIS paychecks, 'cause the BIS is not a Swiss institution and is not subject to Swiss laws on withholding or reporting. You've perhaps heard of the Basil Accord establishing exchange rates around the world to be used as targets by the various central banks? Or Basil II, modifying those rates and setting international standards for banking reserves? Those would more properly have been called BIS and BIS II - a bank that most don't even know exists, that is subject to no democratic process on earth sets our exchange rates and banking rules. They have a secretive economic data collection center that apparently tracks every dollar, euro, won or yen that ever crosses any border. Many believe the BIS is the organization that secretly runs the world, choosing new presidents and prime ministers as required to fit their needs - the modern embodiment of Nathan Rothschild's famous quote, "Give me control of a nation's money and I care not who makes it's laws." In any case, they put out a quarterly report that's must-read if you care about world economics. Whatever you think of the BIS - and for most of us this paragraph is likely the first time you've ever heard of it - their financial reports are excellent, perhaps the best in the world. Their new report is just out. They say financial asset prices are at "elevated" levels and market volatility remains "exceptionally subdued" thanks to ultra-loose monetary policies being implemented by central banks around the world. "By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility." There were several references in the report to the "extraordinarily" and "exceptionally" low levels of volatility, suggesting the BIS feels markets may be getting too complacent and therefore vulnerable and ill-equipped to handle a shock.

Are central banks having an impact? Dutch interest rates are at a 500 year low. Can the ECB drive those rates lower? Yah, a little bit perhaps, but at some point you're paying the government to hang on to your money. Things have to get pretty bad before paying the government is better than stuffing money under your mattress.

Deutsche Bank just released a 104 page report where they claim there have been many financial bubbles in history, but never has there been a 20 year period of bubble following bubble like we are in now. Their claim is the we're now in the bubble of last resort - government bonds - where the market is made by governments and central banks. This bubble cannot be allowed to burst, as it will take the world economy down with it. What happens next? Hard to predict, but governments are now addicted to cheap money, and sooner or later addictions always end badly. Central bankers believe in a "soft landing" where they generate inflation and the government debt gets eaten away in time, along with everyone's savings. Unfortunately none of the major debtor nations has managed to generate any inflation - in fact most are living on the edge of deflation.

China has the largest shale gas reserves in the world - 1100 trillion cubic feet according to a new report by the World Resources Institute. But most of that is in desert areas and there's simply no water available to extract shale gas. I think there's a strong likelihood that sometime in the next few years China is going to have a serious banking crisis that will stop all economic expansion and likely result in layoffs. The Chinese government thinks this will lead to instability. When that occurs, what's the chance that they start looking at diverting the Brahmaputra river, leaving several hundred million Indians and Bangladeshi high and dry so that they can have cheap energy? China doesn't have law schools, their government is run by engineers. They see this much more clearly than I do.

Lotsa news in cars this week. Ford is changing the 2015 F-150, the best selling vehicle in the US with 500,000 sold year to date, to almost completely made of aluminum. The frame will still be steel - they haven't figured out aluminum frames like Chevy did for the Corvette. The aluminum truck weighs 700 pounds less than the steel version, resulting in significant gains in gas mileage and towing power. Analysts are projecting that the F-150 could get up to 27 or 28 miles per gallon on the highway, a significant increase from the 21 or 22 miles per gallon that 2014 F-150s get. This is a huge change - for 100 years cars have been made out of steel, stamped, sheared, welded. All of these processes are completely different for aluminum. Plus when you're talking about selling 700,000 trucks per year, you need a lot of aluminum - more than was available even a couple years ago. GM announced that some 2016 Cadillacs will come with "super-cruise," a hands-free cruise control that follows lanes and traffic, maintaining safe distances and speed, controlling steering, braking and throttle. In 2017 they will introduce a Cadillac with car-to-car communication built in. This won't mean much when there's only a few thousand such cars in the US, but in 10 or 15 years most cars will have this capability, meaning that cars can anticipate traffic patterns and conditions far in advance, all but eliminating stop and go freeway conditions. Will this change things? Here's a hint: a couple decades ago a poll in California found that 80% of drivers ranked themselves at above average, and 50% ranked themselves in the top 10%. A recent study conducted by Columbia University said that replacing New York's fleet of 13,000 yellow cabs with 9,000 driverless cars could cut costs per mile by nearly 88% and wait times down from 5 minutes to just 36 seconds during rush hour. Morgan Stanley estimates that interconnected autonomous cars will use 20%-30% less gas than humans who hit the brakes and throttle constantly. They also estimate that 90% of accidents are caused by human error, suggesting a huge decrease in the accident rate. When they add up fuel savings, savings on accidents, savings on lost productivity due to traffic jams and accidents, they believe autonomous cars will save the US $1.3 trillion per year, 10% of our GDP.

Who has the internet? Here's a world map with every internet device represented by a little blip of light. Mostly white Europeans and some Asians.

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