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Mark's Market Blog

9-20-15: The Fed flounders.

By Mark Lawrence

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The market broke out of its flag formation upwards, and also broke through the 1990 level on its fourth try. Very bullish. Then the very next day it dropped back down. Not at all bullish. Apparently the market is just as uncertain about what to do next as Yellen is. In most ways this has been a very slow week.

S&P 500 March 28 2014 to September 18 2015

She didn't. Ms.Janet decided a rate increase will wait until the labor market is better, inflation is closer to 2% and the global economy isn't falling apart. Said Ms.Janet, "The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced, but is monitoring developments abroad ... This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments." So we're going to continue to have artificially low interest rates driving up asset prices and profits on Wall Street until, well, until we don't. There are Fed meetings in October and December, but few expect the Fed to raise rates at those meetings, not after this week. The Fed was conceived in a set of secret meetings at Jekyll Island to allow banks to manipulate the money supply and guarantee their profits; the resulting FrankenFed was ushered through congress by Preston Bush. Now, 102 year later, apparently the Fed is redefining their job to include the entire world economy. Excellent. In this country it's considered axiomatic on Wall Street, "Never fight the Fed." The Fed has apparently taken this to heart and will now be, as it deems necessary or even desirable, fighting the Chinese, Japanese and European central banks. 'Cause, you know, our guys are smarter. Meanwhile many here in the US are losing confidence in the Fed, thinking they're wishy-washy and aren't dependable.

Greece voted today. A few months ago they stunned the world by electing a far-left party, Syriza. This time the votes were close to split between Syriza and a conservative party New Democracy, but election rules give Syriza a large advantage. Syriza is expected to find a partner and form a government quickly. The Greek people just want an end to their seven year long economic nightmare and will vote for pretty much anyone who promises them a solution. Bad news Greek dudes: no one has a solution.

A couple weeks ago I talked about the coming dollar short squeeze. This year Mexico sold €1.5 billion worth of 100 year euro denominated loans for 4.2%. Who buys garbage like this? Will there even be a Mexico in 100 years? Petrobras, Brazil's state oil company, sold $2.5 billion in 100 year dollar denominated debt at 6.85%. Just a few months later S&P and Moody's had both cut both Brazil and Petrobras to junk; now those same bonds are trading under 70¢ on the dollar. Those greedy or dumb enough to buy them are in the middle of taking a quick icy-cold bath, and by no means do I think the damage is mostly done. Of course Wall Street vulture funds will step in at some point and buy up these bonds for 10¢ on the dollar, then their great-grandchildren will be haunting these countries in the courts for, well, 100 years. Or more. According to the Bank for International Settlements $9.6 trillion in US dollar denominated debt had been issued by non-bank borrowers by the end of the 1st quarter, reaching a record 17% of world GDP. This number is even higher if you include euro denominated debt. Nothing is happening right now, but this is like the ubiquitous picture of the burning fuse in 60s cowboy movies - there's a big explosion coming.

China seemingly stopped supporting their stock market this week and it promptly renewed it's journey downwards. One highly regarded chinese analyst calculates that China has spend $239 billion propping up their markets in the last 45 days - the cost of buying share by share, spent on a complete waste of money trying to overcome the law of gravity, or, as they say on Wall Street, catch a falling knife. This represents roughly 5% of their foreign reserves, blown in 45 days. That $3.6 trillion in rainy day savings could evaporate stunningly quickly if they're going to burn through it like this. And, make no mistake, if there's a threat to the communist party or the political stability of china, they won't hesitate to burn through it, start wars, round up dissidents en mass, clamp down on markets and news, whatever it takes.

73 house democrats sent a letter to Obama telling him we need to take in 100,000 syrian refugees. Wow. I so disagree. Arabs had six children per woman for several generations; now they're so over populated they're constantly at war over oil, economics, religion, and a couple other things I don't think I understand. Europe's solution to this is to take in a million of the violent uneducated breeders - this religion has as it's very recognizable logo a crescent moon with a star visible in the middle, showing a profound lack of understanding of basic shapes like spheres. I think it highly noteworthy that in February of this year ISIL announced their plan to flood Europe with syrian and iraqi refugees. Germany says they will take in 800,000 this year, and 500,000 immigrants a year for the next 20. That's because Germany already has a shortage of labor and is projected to lose 12 million people in the next 20 years. The idea that you can take in random immigrants and convert them into hard working Germans is, imho, speculative at best. Brussels says all of Europe must take in huge numbers of refugees and is working on a quota system. Of course most of the rest of Europe has very high and persistent unemployment and a bunch of unskilled people is precisely what they don't want or need. One of the most important points of Europe is no borders, but fences are going up now at record rates. Europe is in trouble.

For the record, the little arab kid who brought a clock to school, was brought to the police station for questioning, and then invited to the White House (at no time was he arrested): he took a 70's era Radio Shack alarm clock, pulled out the guts and put them into a cheap chinese pencil case sold on ebay. In the pictures you can see the "M" on the circuit board meaning "Micronta," radio shack's house brand. The idea that this means the kid is a great inventor / scientist and needs to go to MIT is not even wrong.

Interesting product: Eagle eyes sunglasses are made of the same stuff NASA uses in space suit visors - polarized, blue blockers, water repellent and anti-fogging, hard to scratch. They're very strange to wear: blue is almost gone from your world. The sky is blue-green-grey, white gets replaced by a yellowish egg shell, plants are yellow green. On the other hand you feel like you can count blades of grass at 30 feet - your vision gets extremely sharp. People have three color cones, we'll call them red green and blue. The blue light scatters most easily because of water in the atmosphere - that's why the sky is blue, scattered blue light, and that's why sunsets are red, only the red light can make it through that much atmosphere. Eliminating the blue light eliminates most of the scattering. Curiously eagles have four kinds of cones, including one that sees into near ultra violet, so eagle eyes are kind of the opposite of these glasses. I'm slowly getting used to the color aberrations and coming to appreciate the sharpened vision.

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