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Mark's Market Blog

9-24-10: The Market that Won't Die.

By Mark Lawrence

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Well, it's all about politics now. Obama says republican policy would be a disaster. This is most likely true. Republicans say the democrats policy already is a disaster. This is also true. When I was at college, "no" was always a legal vote for an office. If "no" won three elections in a row, the office was abolished. Doesn't that sound marvelous? Bernanke is now flooding the markets with money, as is the long standing tradition of the Fed when coming up on elections. This looks a lot like last April to me, when Bernanke flooded the markets with cheap cash and they went up uninterrupted for a month. Followed almost immediately by the flash crash. Ireland is near an Iceland-style country wide bankruptcy; Greece is completely locked up in protests and marches; Spain, which built a bit more than half of all new houses in Europe this decade insists that their crisis is over. Unemployment is creeping up in the US, foreclosures are leaping up, banks are being closed down at a consistent rate of 3-4 per week. So, of course the markets are shooting up. This will not end well, but I expect Bernanke will be able to keep the party going through early November.

S&P 500 April 7 2010 to September 24 2010

China pledged not to repeat Japanís mistake and allow its currency to rise in response to foreign pressure, countering criticism from US lawmakers that the Yuan is undervalued. "China will not go down the path that Japan did and give in to foreign pressure on the Yuanís exchange rate," said Li Daokui, an economist and member of the monetary policy committee of the Peopleís Bank of China.

A Chinese fisherman collided with a couple Japanese coast guard boats while fishing illegally in Japanese waters. Japan arrested the entire crew, but later released all but the captain. The captain was be tried, and possibly sentenced to 3 years jail. China recalled their diplomats and demanded the immediate release of the captain. What's really going on here? China and Japan are on a collision course on several fronts. China is getting set to drill for oil 800 miles south of Japan, near Taiwan, also near some uninhabited islands that are claimed by Japan. China doesn't recognize the Japanese claim, as the claim began during the 1930s Japanese occupation of China. China has been allowing Chinese workers to strike for higher wages, but only Japanese factories, not US, Korean, German or Chinese factories. Japan's central bank recently sold a bunch of Yen and bought other currencies, dropping the value of the Yen and making Japanese exports cheaper. China announced they would not cut off Japan's source of rare earths, while meanwhile apparently cutting them off (no clever electric motors, no flat screens, no tiny automotive sensors - this shuts down Japan Inc). Basically they're seriously mad at each other about economics and exports, and the arrested captain is a symbol. Japan backed down on Friday and released the captain. China no doubt is starting to feel invincible (cue Greek chorus. . .)

The National Bureau of Economic Research, the organization that calls recessions, says this recession ended in June. Oh, sorry, that's June a year ago, 2009. If you hadn't noticed, you're in good company.

The Congressional Budget Office is basically projecting $1-trillion dollar annual Federal budget deficits for as far as the eye can see. We will nearly double our existing $13.5 trillion debt by 2020. The CBO estimates Federal spending will increase by about $2 Trillion a year over the next 10 years. Where's that money going? It's basically going to three things:

  1. Entitlement programs (Social Security, Medicare, Medicaid): $1.2 Trillion, or 60% of the increase
  2. Interest on our debt: $750 billion, or 37.5% of the increase
  3. Everything else: $50 billion, or 2.5% of the increase

Source Of Deficits 2010 to 2020

Republicans say they will freeze discretionary spending, thereby solving 2.5% of the problem with a stroke of a pen. The other 97.5%? Well, that's something where there's broad bi-partisan consensus: no one wants to talk about it. What is clear is that the government is growing, taking an ever-increasing portion of US GDP, basically to pay for medical care, wars, and interest on the national debt. I'm lukewarm at best on the free medical care for seemingly everyone in the US but us working folks, and I'm downright negative on shooting unusual people in exotic lands and making huge interest payments on borrowed money.

Federal Spending v. Household Income 1967 to 2009

How are the PIGS doing? Spain has declared that their debt crisis is over. Mind you, they still have 20% unemployment and a huge stock of unsold and unfinished houses, but the debt crisis is over. Ireland and Portugal just sold a bunch of bonds and had a slightly better experience than predicted. Apparently it's believed that their banks will be bailed out somehow, by someone. Meanwhile, interest rates tell a somewhat different story: we're quickly approaching the levels we saw six months ago when the PIIGS first became a crisis. Ireland's ruling coalition just lost another member, their government could fall any day. The rug is getting quite lumpy. . .

Interest rates for the last year

Microsoft issued $6B of new bonds, buying back shares, and raising their dividend. Their interest rate cost on the bonds was slightly lower than the 1 year CD rate offered by banks - from Microsoft's point of view, this money is nearly free. Based on their actions they no longer think of themselves as a competitive high-tech company; now it seems they want to be a utility. This is part of a trend where companies that want to raise money, either for growth or to buy back shares, are issuing junk corporate bonds like mad. The rates are very low, and it's thought the Fed is committed to keeping them low for a long time. If the rates ever raised to proper junk bond levels, the value of the bonds would drop and the investors would get screwed. Sounds like a new bubble to me, but what do I know? Alan Greenspan has assured us numerous times that the 2004-2007 real estate bubble had nothing to do with the Fed keeping rates artificially low.

Bell's ex-city manager Frank Rizzo was arrested on 53 counts of fraud. Also arrested were Mayor Hernandez, five council members, and assistant city manager Angela Spaccia. Rizzo was rumored to have been offered the role of the Penguin in the next Batman movie; this arrest will cut short what was likely to be a very successful and lucrative Hollywood career. (ok, I made that last part up.) Bell and neighboring cities Vernon and Maywood are likely to declare bankruptcy soon, due to illegal pay outs, loans, and taxes. Rizzo & friends are still in jail on bail amounts set at $250,000 to $1,250,000. The DA convinced the judge that bail cannot be made with "ill-gotten gains." This sounds to me like the DA is assuming Rizzo is guilty, and the judge is going along with it. So much for my poster boy. He's getting a free new wardrobe, all in LADC faded orange. I think he looks a lot better in the tux in front of his Washington horse ranch, but then you would never hire me as a wardrobe consultant.

I hired an office manager (Yippee!!! I get a vacation soon!!! 1st in 4 years!!!). I needed a new computer for her. This is the latest thing: the Lenova Q150, it's basically a netbook without the display. 6" x 6" x 3/4", it mounts to the back of the monitor. $227 delivered from TigerDirect. Then I bought a 23" full-HD monitor for $140 at Frys. When it's set up all you'll see is monitor, keyboard, mouse. The Q150 is all set up for wireless internet, has 1G memory and 160G hard drive. No CD. Several USB ports so you can add more stuff if needed - external CD, extra hard drive - I don't need it. This is all she'll need to enter orders, print invoices and shipping labels, order supplies over the internet. And play background music - I also got her some very nice speakers for $40.

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