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Mark's Market Blog

9-27-15: Don't fight the gays.

By Mark Lawrence

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Everyone is now saying the markets are setting up for a serious correction. If everyone knows, how can it be true? I think we're down some more this coming week. I think we re-test the recent low at about 1855, then bounce upwards from there. I write this stuff so you can see how reliably wrong I am.


S&P 500 April 5 2014 to September 25 2015

China's Shanghai index continues to hover between 3000 and 3200. This looks impossibly artificial to me. Analysts now say the Chinese government has spent over $240 billion propping up their markets - more than the value of Amazon. How long will they continue to throw good money after bad? Certainly not forever. Meanwhile the Chinese market has lost $2.6 trillion of total value in the last couple of months - this is the entire GDP of the UK. And like many, I think the chinese market has another 30% drop left in it. These Chinese, they do love to gamble. Meanwhile the Chinese PMI continues to drop deeply into recession territory. It's getting hard to see how china avoids a serious recession.

Brazil's currency hit an all-time low of 4 reals to the dollar, dropping in half so far this year. 20 years ago the real was worth more than a dollar. Venezuela and Argentina are already in severe crisis but no one outside those countries has noticed. When Brazil implodes we're going to notice. Especially because they'll be doing it in the middle of hosting the Olympics. The new kind of summer Olympics where many of the competitors wind up in the hospital.

Volkswagen had software in their cars that detected when they were taking a smog test and then put the engine into a low smog mode. During normal operation it was found their small diesel engines emitted as much as 40 times the EPA smog limits. This has been going on since 2009 and affected some 500,000 US cars, 11 million world wide. Volkswagen faces a potential fine of $37,500 per car - $18 billion. In addition Volkswagen's CEO and board members may be found personally liable with fines as high as $3,750 per car - $1.8 billion. This was found by a West Virginia U team who wanted to show how clean US diesels were, so they loaded some smog gear in the trunk and drove around. A BMW diesel passed easily, but two Volkswagens failed rather miserably. By defeating the smog software Volkswagen was able to offer customers more horsepower and better gas mileage. The fix will almost certainly reduce both and likely expose them to US lawsuits. Volkswagen's stock dropped 17% the day the news was released, and has continued to drop. Closer examinations in the last week indicate that the European diesel test is extremely arbitrary and almost no European diesel cars meet the standards during normal driving, with the average CO2 emissions about twice the limit and the average NOx emissions several times the limit. We may be watching the end of diesel engines in cars.

Caterpillar says there's a convergence of bad news and they will lay off 10,000. Mining and energy losses have hit them particularly hard.

Fitch warns that there's a commercial property boom that's starting to look more than a little frothy. Commercial real estate has considerably more than recovered since the great recession, and average loan to value ratios are over 110%.

Canada is not only headed for a recession due to drops in oil and commodity prices; and they've not just facing a housing bubble that looks ripe to collapse; now they're also facing heavy inflation at the same time. Consumer prices are rising at a 6% rate. When it's time for their central bank to drop interest rates to help the economy recover they're going to be faced with the potential of a firestorm of inflation as a result.

This is what the next series of recessions in the world will look like: central banks will have almost no available tools or credibility to fight them. If our current historically low rates haven't fixed the economy in the last six years, then cutting rates another fraction of a percent certainly won't be enough to counter some negative shock. When governments are already running deficits and can't spend, and central banks are already at zero interest rates and can't lower, that leaves only one tool to fight a world wide recession, the tool used to get us out of the Great Depression: world war. In the face of such a "national emergency" central banks will be happy to announce they're going to be willing to buy up huge amounts of government debt and do their part to help preserve our treasured way of life. China is getting ready. Russia is getting ready. Japan is getting ready. We've been ready for decades. Personally, I'll be shocked, shocked when it happens. I don't yet see what the nominal fight will be about or who will be on which side, but I'm pretty sure we're going to lose an aircraft carrier or three and Japan is going to take more than a few shots at China.

A new study was run looking at 9,000 elderly people spread across 30 medical centers in the US. The study was terminated early. It was found that lowering blood pressure from 140 to 120 decreases risk of heart attack and stroke by 30%. So everyone in the study was told to get serious about getting their blood pressure down. Want to control your blood pressure? Step 1 is a low fat diet - no more red meat or fast food or milk products. Step 2 is exercise - walk a couple miles every day. And if that doesn't work, be a good american and pop some pills.

A 32 year old sociopathic monster, Martin Shkreli, made billion dollars running a hedge fund, used the money to buy a drug company, and then bought the rights to the drug Daraprim and raised the price from $13.50 per pill to $750 per pill. Of course everyone immediately thought he should go to jail and this behavior should be illegal; I did too. However, a few seconds later I thought, "People don't buy pills; insurance companies buy pills. This is a fight between a bunch of evil people, like a war between rival drug gangs. We should pull up a lawn chair and beer and watch." Then I read some AIDs activist said, "He's going to kill more gays than AIDs did." I thought "what is daraprim and why haven't I heard of it?" I looked into it. It's a 62 year old drug that fell out of favor until it they started using it again about 15 years ago for people with highly compromised immune systems who are fighting off opportunistic infections - that is, gays with aids fighting off weird diseases. Then I had my third thought. Gays are currently feeling quite powerful, what with even the Mormons now required to issue marriage licenses and county clerks who refuse being sent to jail. I thought, "This is going to be really fun, watching this little jerk take on the insurance industries, the health care conglomerates, and the gays all at once. Apparently he never heard of Hitler or fighting on two fronts." Turns out perhaps he has. A couple days later he gave in and lowered the price. Lawn chair back in garage, show over.

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