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Mark's Market Blog

9-3-12: Divorce American Style.

By Mark Lawrence

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Markets slid down a bit on very thin volume, making the August 21 high of 1418 look like it will be the high for a while. September looks to be a month filled with excitement, fear, disappointment - all the things markets hate. My assessment is the downside potential for this market easily exceeds the upside potential.

S&P 500 March 4 2012 to August 31 2012

China has bought themselves a lot of employment and growth in the last five years by funding massive construction. Have they also bought themselves a working infrastructure? There are serious problems in China with construction quality, with engineering standards, and with materials quality. Below is a montage of 8 Chinese bridges that have collapsed in the last five years. This is unimaginable in the US or Europe. The instant causes of the collapses was in many cases accidents - ships or trucks hitting bridge supports, or trucks being overloaded. In the US trucks may not weigh more than 40 tons; in China they frequently weigh 100 tons. (Helpful hint: don't hit your brakes in front of a Chinese truck, the truck needs approximately the state of Delaware to stop.) I only casually recall three bridge collapses in the US in the last 20 years - two in California due to earthquakes, one in Minnesota due to age.

Eight collapsed Chinese bridges in five years.

Another price of Chinese growth is air pollution in major cities. Beijing is shown below. Perhaps the worst air in US history was in LA in the '70s; I was there. It was nothing like this.

Last week I noted there were many anecdotal stories about commerce in Greece screeching to a halt - empty squares, boarded up shops, empty shelves, few cars on the highways. Now the same stories are appearing about Italy and Spain. These are not recession stories. Europe is on the brink of, or in, a real full-blown depression. And it got there with loose money, unfunded entitlements, trade deficits and out of control government debt. Any of that sound familiar?

Unilever, the third largest consumer products company in the world, is changing their marketing in Europe. Laundry detergent is now being sold in much smaller boxes, good for five washes; shampoo sometimes in individual shower packets for a few cents. According to Unilevers European president Jan Zijderveld, who runs Unilever's European unit, said that "poverty is returning to Europe. If a consumer spends in Spain only 17 euro when they go shopping, then I'm not going to be able to sell them for washing powder half of their budget."

Although the Greek government is trying to slash expenditures, they have made almost no cuts to the military. Greece's military spending is second only to the US as a percent of GDP. Nearly 1% of Greece's population is employed as soldiers. "What do you do with young men with a military training? Itís not a good idea making them unemployed." This is why I've been forecasting that the world is going to become a more dangerous place in the next couple of years. Do you suppose the Greek government would rather fall to an armed insurrection or declare war on a neighbor?

Unemployment in Europe continues to rise everywhere but Germany. The Europe-wide unemployment rate is 11.3% - higher than the peak we saw in this country a couple years ago - and for youth is roughly double that. Perhaps more than anything else this is why I'm so skeptical of a recovery in Europe: how can they stop growing levels of government debt when no one is working, when 20-somethings can't even establish a career? The UN's International Labor Organization says if Greece leaves the Euro, unemployment in the rest of Europe will rise further to over 13%.

As China approaches a recession and turns their focus inwards, Australia is starting to take a big hit. Australia has made a lot of money selling iron ore, coal and copper to China, but now there's a glut of that stuff. Australia has arguably had a housing bubble due to all the quick money being made, but now it's looking like perhaps Australian houses do not in fact always go up in value. It's starting on the high end homes in Western Australia, the mining province, where multi-million dollar homes languishing on the market are having their prices slashed by 25% - 40%.

Syria is hosting a proxy war between Salafism (militant Sunnis) and Shi'ites. What's the difference? Think Protestants and Catholics. Much like Christians in 1000ad, your average muslim is not very educated, they're very poor by our standards, and working them up into a fervor to go free the holy land from infidel oppressors is depressingly easy. Iran is the home of Shi'ites and is trying to establish themselves as the central power of Islam. Iraq under Hussein was Sunni; the new Iraqi government is Shi'ite and heavily influenced by Iran. Iran couldn't conquer Iraq in a decade of war, but we handed Iraq over to them. Now the battle has moved eastwards to Syria where Assad's government is likely to be replaced soon by either a Sunni or Shi'ite version. Saudi Arabia, Qatar and the UAE are heavily funding one side of this battle, and building Salafi mosques all over Arabia. Salafism is a militant form of Sunni managed by the same Wahabi Imams who have brought terrorism to almost every corner of the globe. Like all religious wars this one is black and white - you're either on God's side or against God. The Sunni and Shi'ite populations are mixed all through the entire region, and the likelihood of growing instability and ongoing civil war spreading throughout the Islamic states is becoming quite scary. These are all foreign words and concepts to us, it's difficult to keep track of who's who. Expect these battles to increase in size and violence for the next few years as we see the results of Saudi money v. Iranian populism. We can easily be talking about instability spreading throughout a region that's home to almost three billion people as muslims attempt to realize their dream of uniting in one huge country from the Atlantic Ocean all the way through India to the western quarter China; all under one islamic government. Uniting Islam is the first step towards converting the entire world, the expressed goal of politicized muslims everywhere. We have already effectively taken sides by opposing Iran and their nuclear ambitions; but by letting Iraq switch to Shi'ite we have proven a highly unreliable ally for Saudi Arabia. Our strong ties to Israel also make us anathema to many muslims, who consider us "The Great Satan."

Imagine the green area as one huge country, Islamistan. Imagine the wars over who gets to lead this new country.

After, I dunno, probably 70 years or something, Sears is getting booted off the S&P 500 - they haven't actually qualified for a couple years to be in the index due to stock price and number of available shares. Instead we have companies like Google, Intel, Apple. Try to imagine explaining to someone in the 1950s that Sears was out, and Google was in. "Google handles searches on the internet, which is a collection of laptop computers and pocket video telephones, many made by Apple, which are built of Intel chips."

A couple years ago Calpers faced their first major test when Vallejo went bankrupt; Calpers was able to bully them into paying off their pension backlog completely. Now they're facing their second major test in the bankruptcies of Stockton and San Bernardino. San Bernardino filed for bankruptcy on August 1 and listed Calpers as its largest creditor, with unfunded pension obligations totaling $143.3 million. But Calpers says the debt is $319.5 million. The only thing the two agree on is that this number itself is headed for litigation. Calpers says that by state constitution they must be paid in full, first, before anyone else gets a penny. But Wall Street also has hundreds of millions in bonds at stake in the two bankruptcies, and they say federal law trumps the California constitution and everyone gets equal treatment. That will no doubt lead to yet more litigation. There's real money at stake here, and serious legal fees will be spent by both sides to protect their interests. Wall Street will be siding with San Bernardino in their calculation of the Calpers debt, and will be taking on Calpers directly against the claim that Calpers gets paid in full before anyone else sees a penny. I'm on record, it's just a matter of time until Calpers loses one and that will prove the first crack in the dam. It happened to the cigarette companies, it's gonna happen to these morbidly obese pension funds.

Election Watch: The republican convention was last week, and Romney got his bounce. More or less he's now tied with Obama in the popular vote, but it's not the popular vote that determines the president. In electoral votes Obama still has a substantial lead. This week the democrats throw their big party, and Obama should get a bounce out of that. I expect Obama will get re-elected with a republican house and a split senate that won't cooperate with him, and we'll get four more years of fighting and finger pointing and no progress on anything meaningful. Perhaps Romney will get elected with a republican house and a split senate, and we'll get different arguments but the same result. And I'm coming to think we deserve this and no better: my conservative friends think democrats are stupid and wasteful; my liberal friends think republicans are evil and selfish. More than any time I can recall there's no middle ground, and those who attempt to speak for any semblance of middle ground are vilified by both sides. I don't personally claim to speak for the middle: my sympathies lie more with the conservatives. None the less no one is listening to anyone on the other side, we haven't slept in the same bed for years, and no divorce is possible. The liberals keep promising to pack up and move to Canada, the conservatives to die with their twitching hands holding their bible and their gun, but every morning we wake up in the same house arguing and name calling.

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