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Mark's Market Blog

9-28-14: Currency Wars?

By Mark Lawrence

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Markets are quite frothy, hanging out near the S&P 2000 level. However, money is moving out of small caps, tech, all but the bluest of blue chips. John Hussman, another Wall Street hedge fund manager / talking head says this is the preamble to a crash. I don't really believe it. The Japanese are printing money and want to cut the value of the yen in half; Germany is likely entering a recession and will likely start supporting Super Mario's attempts to cut the value of the Euro; if the market drops 20% or so I think it's obvious that Yellen will announce QE 17 or whatever we're on, both to support the markets and to keep the dollar where she wants it, which is not the strongest currency in the world.

S&P 500 April 5 2014 to September 26 2014

Goldman says the Euro will fall roughly 25% in the next three years, hitting $1 in early 2017. The Japanese also are thought to be trying to get the yen to 200/dollar over that same period. If this happens the US will be running huge trade deficits, high unemployment and no growth - exactly what the Fed says they don't want. But cars, motorcycles, electronics and washing machines will be cheap. . .

Small market cap stocks have under performed this year, perhaps signaling that we're near a market top.

China continues to slow. Industrial production is back to 2008 levels. Factory employment is at a five year low. President Xi Jinping indicates that missing growth targets is ok while they are trying to reform their economy from one based on construction to one based on consumption.

French Prime Minister Manuel Valls said on Tuesday "We are in a debt spiral that is no longer sustainable." Nice words. Now, will they cut their cradle-to-grave welfare state? I can't see it happening without an existential crisis.

Europe is sliding into recession. Mohamed El-Erian, a bond god who once ran Harvard's endowment fund, said he saw few options to de- escalate in the Ukraine and if that conflict worsens it will push Europe into recession. Especially if Russia cuts European energy supplies during the coming winter. El-Erian said markets also were placing "enormous faith" in the world's central banks, such as the U.S. Federal Reserve and the European Central Bank. Through a series of policy actions since 2008, the world's largest central banks have divorced asset valuations from fundamentals. The space between what El-Erian sees as lofty valuations and more earthly fundamentals is "an air pocket" at risk of rapid collapse if markets are confronted with a jarring catalyst, such as Ukraine.

Earlier this month I talked about how Super Mario will loan money for cheap toe european banks, who will then loan it to small businessmen, who will then hire a bunch of people that they can never fire. This week economists calculate that in order for this to achieve Draghi's inflation targets small business loans must increase at the rate of 3% per year or better. There's a few problems with this. Almost half the cheap money SuperMario has been offering has found no takers, and small business loans are contracting at a 1.6% rate. Bankers say it's because small businessmen don't want loans. I have a small business and what I want are sales, not loans and more bankers calling me.

Carmen Segarra, a lawyers and a New York Fed bank examiner, was placed inside Goldman Sachs to oversee the implementation of new regulations on big banks. She was so upset by what she saw that she started secretly taping conversations - 46 hours worth. Her tapes include, for example, a senior executive at Goldman saying, "Goldman's view was that once clients were wealthy enough, certain consumer laws didn't apply to them." Carmen's tapes illustrate something called "regulatory capture:" when the banks take control of the regulators. Carmen has been fired after seven months at Goldman and has already opened a wrongful termination suit.

The UN has revised their future world population estimates. They now project that world population will hit 11 billion by the end of this century, +/- 1 billion. The revision is primarily due to higher than expected birth rates in Africa, soon to be renamed the Bill and Melinda Gates Memorial Continent. They are projecting that Africa, which had about 230 million people in 1950, will have about 4.5 billion people at the end of the century. Asia will grow another 10% or so then start to decline. North and south America and Europe are expected to show little or no population growth. I don't believe it. There simply isn't enough food and water to support that population. As far as I'm concerned what this report really says is that my children are going to see a massive die-off in many parts of the world, especially Africa, the middle east and the Indian sub continent.

The current ebola epidemic is getting large enough that there are worries this disease will become endemic. This means that the quarter of all people who catch ebola but don't die could continue to harbor the virus at low levels in their body, then anyone who gets too close to them would be at risk for catching ebola from a person who has been symptom free for a very extended time, perhaps several years. It's possible that soon we'll have a situation where no one should travel to Guinea, Liberia and Sierra Leone. Personally, that won't be changing my plans very much. The CDC estimates there are about 14,600 people with ebola who are not in hospitals; roughly 80% of ebola cases are being cared for in their homes. The CDC says this number must drop below 30% to stop the spread of the epidemic. WHO says they need 20 times as many health workers as they currently have in order to contain this outbreak. However, 40% of their workers have contracted ebola, and half of them have died - not a very good recruiting poster: "Travel to foreign countries. Meet unusual people. 2 out of 5 of you will get ebola, 1 out of 5 will die." Absent these new resources, the CDC estimates 1.4 million ebola cases by January 20, 2015, four months from now. I don't see how this epidemic will be contained other than geographically - stop it at the borders. People infected with ebola are not contagious until they have symptoms, which takes about ten days on average. Half of symptomatic people are dead 10 days later. However, if they live they are contagious for up to seven weeks.

The Arctic ice minimum was about a week ago. How are we doing? The ice is recovering. . .

Marriage is dead, or at least dying and on life support. The fraction of never married adults keeps rising. A few simple questions gives us a very decent idea of why. Women want a guy who has a job. Young men don't have jobs.

Liberals are a lot more outspoken these days. I hear frequently that we should have no borders, anyone who wants should be able to be a US citizen. I also hear we need a $15/hour minimum wage, a living wage; frequently I hear both of these from the same person. The world GDP is about $70 trillion; there are about 7 billion people in the world. Your "fair share" is $10,000 per year, about $5/hour. If you think the US should have no borders and a fair minimum wage, then you should be prepared to live on $5/hour. I'm not. I'm strongly in favor of closed borders and a sensible immigration policy, where we give visas to people who are likely to add to our economy and culture, not to anyone who can sneak into Arizona.

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