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Mark's Market Blog

9-7-14: The ECB Will Print Money.

By Mark Lawrence

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We broke through S&P 2000 on the second try but didn't shoot up from there - in fact we were barely able to hold the level, to my surprise. The market continues to go up but with muted enthusiasm. Right now we seem magnetically locked onto the S&P 2000 level. When will it end? I dunno.


S&P 500 March 15 2014 to September 5 2014

Consumer confidence jumped to a seven year high in August. Leading indicators are in a strong position, and the leading indicator diffusion index is quite high, meaning nearly all the leading indicators are good. Looking at these numbers in a historical context, it would appear we are several years - three or four - away from our next recession. On the other hand, the leading indicators and the leading indicator diffusion - that latter measures how in step the leading indicators are marching - are telling us something else. Unfortunately I don't speak whatever language the leading indicators do, so I can't tell you what they're saying.

Stocks keep going up. Who's buying? Households and financial institutions are net sellers the last few months. The only buyers at this point are large non-financial corporations - companies buying back their own stock to boost the price. That can't last forever.

Billionaire confidence is slipping badly. George Soros, Carl Icahn, Stan Druckenmiller and Sam Zell are all warning of an impending stock market crash and are moving into cash - except Soros, who now has $2.2 billion worth of S&P puts, a massive bet that the S&P will go down in the next couple of months. Bears are at a record low of 13.3% of investors, and some think that includes counting Marc Faber twice. It's commonly said that the bull market isn't over until the last bear throws in the towel. We're pretty close. . .

August was a record months for car companies world wide (except Volkswagen who seems somehow out of step) with light vehicle sales at a sales rate of 17.5 million units. This August sales boom can be mainly attributed to people replacing older cars, cheap credit, high manufacturer incentives, and dealers desperate to move existing inventory to make way for eagerly-awaited 2015 model-year cars. Auto loans are at an all-time high of $902 billion with 25% - 30% of that subprime. Subprime auto lending is ok 'cause people need their cars and won't default, you know like how people need a house and won't default. Sales are exceptionally high for SUVs; for example Cadillac's best seller is the Escalade, a car that pretty much requires you have your own oil well in your back yard.

France has a wildly ineffective and unpopular government lead by socialist Francois Holland. He's setting records for unpopularity. His high taxes and policies against laying off anyone have kept France's economy in the gutter with no growth, no new jobs, no new companies. So on Monday he had his entire cabinet resign, 'cause, you know, they're the problem. This was precipitated by the French economic minister assuring the French people that "France is the eurozone's second-biggest economy, the world's fifth-greatest power, and it does not intend to align itself, ladies and gentlemen, with the excessive obsessions of Germany's conservatives." Germany has been the only country in Europe with any growth at all, and they've been the fastest growing 1st world economy. Now, in large part due to the Ukraine sanctions, Germany is falling into recession too.

Europe overall has pretty close to zero inflation. Italy is actually in deflation now. This is completely unacceptable to bankers of all flavors and I think something will be done. Deflation is great for savers and consumers - things get cheaper every month. It's bad for manufacturers - no one is buying anything as it will be cheaper in a few months. And it's really bad for governments that have substantial debt - you have to pay off the debt with more valuable dollars than you borrowed. Europe unemployment is also not improving, stuck around 11.5%. The ECB has just announced their own money printing quantitative easing program, buying $650 billion of asset-backed securities and Euro-denominated covered bonds over the next year. There is some tension here as Germany loathes inflation and money printing, but as Germany seems to be headed to recession they have decided to allow something. What does this mean? The ECB will loan money to large European banks more or less for free. The banks are intended to make loans to small businesses, kickstarting the economy, 'cause, you know, what every small businessman needs most is a loan. The banks will bundle up these loans in "asset back securities" and sell them back to the ECB, letting Super Mario take all the risk while the banks take the profits. Will it work? For the banks, yes. For the economy at large? It hasn't worked anywhere else, why would Europe be different? They're going to build up a trillion or three dollars of debt and nothing will change. Except it will be one more part of the world where the young are undereducated, underemployed and saddled with massive debt. I am mortified at the crimes of my generation. We promised in the 60s to change the world. Well, we have.

The ECB also cut rates, but I think this meaningless. The ECB's main refinancing rate has been cut to 0.05%, its marginal lending facility is at 0.3% and its deposit facility remains in negative territory at -0.2%. These rates were 0.15%, 0.4% and -0.1%, respectively. This move is purely symbolic and simply serves notice that the ECB hates deflation. Meanwhile the Euro is dropping against the dollar making exports cheaper (good for employment) and imports more expensive (good for inflation). Aging and declining populations who are already overwhelmed with stuff and unemployment among those under 30 guarantee that we will be wrestling with deflation for a long time. Importing the unwashed and uneducated (latinos in the US, arabs and pakistanis in Europe) only throws kerosene on the fire. Helpful hint for progressives: people are not fungible. Some oil experts are now claiming that the fracking boom in the US is transitory, that we've already pumped up most of the low hanging fruit, and that in five years oil will be $150 / barrel. Others claim in five years oil will be at $60 / barrel. I'm not good enough at oil drilling to take a side in this, but I do know if oil hits $150 all economic growth world will come to a screeching halt.

Japan also seems to be headed for recession with unemployment ticking up and consumer spending dropping rather dreadfully - down 6% last quarter. The Bank of Japan is already printing money like mad and it's already not working there - Japan, as usual, is ahead of the curve.

3D printing continues to only get better. As labor costs rise in China and fall in the US, you're going to see more and more manufacturers adopt this technology. Blue collar machinists will be replaced by white collar drafting workers. And China's dream of moving another several hundred workers off the farm and into assembly is looking more and more speculative. Below is a tiny jet engine that GE printed up.

The UK went on a severe terrorist alert due to ISIS, or ISIL if you listen to Obama. ISIS, the Islamic State of Iraq and Syria as we call them, calls itself ISIL, the Islamic State of Iraq and the Levant, meaning they consider Israel to be part of their natural territory. When Obama calls them ISIL he is implicitly calling Israel an illegal state. From the death of Mohammed in 632 to somewhere around 1450 Muslims ruled much of the world in what they called a Caliphate. ISIS or ISIL means to restore that in a state often called Islamistan, proclaiming themselves the only rightful government of muslims all over the world. ISIS is considered here in the west to be the successor organization to Al Queda; Israel says Hamas and ISIL are two branches of the same poisonous tree. Will it work? I can't see the future very clearly, but based solely on muslim reproduction rates in Europe inevitably it will. The map below shows what they controlled several hundred years ago; they want that back, and then add on France, Germany, Belgium and the Netherlands. Note that they would expect to also take over much of the southern ex-USSR and western China. I expect there will be other factors which will call into question the viability of muslims in particular and much of the world economy in general, like lack of fresh water, food and energy shortages, world wide over population, oligarchic governments and unimaginable debt.

When you drive around Canada, you quickly notice something: every little village has a beautiful 200 year old brick Catholic church, a Petro Canada gas station and a Tim Horton's doughnut / coffee shop. Burger King just bought Tim Horton's for $11 billion. The new company will be based in Canada, because Canada corporate taxes are 24% while US corporate taxes are 40%. Europe, the land of free medical care and never ending unemployment insurance averages a corporate tax rate of 20.5%. And Canada and Europe only tax you on money made there, the US taxes you on your world-wide revenue. This must change, but it won't while we have a liberal administration. Curiously, Warren Buffet, who has spoken out several times in support of Obama and for higher taxes and against tax inversions like this, is funding this deal. With 9% bonds as I understand it.

The US Geological Survey just finished a survey of the mineral deposits in Afghanistan. Afghanistan may hold 60 million tons of copper, 2.2 billion tons of iron ore, 1.4 million tons of rare earth elements such as lanthanum, cerium and neodymium, and lodes of aluminum, gold, silver, zinc, mercury and lithium. Jack Medlin, program manager of the USGS's Afghanistan project, said, "These resources provide the potential for Afghanistan to develop its economy, to create jobs and build infrastructure, as it goes into the future." Apparently he's unfamiliar with the recent history of nearby muslim countries like Pakistan, Iran and Saudi Arabia, who all found different uses for their money. Mining in Afghanistan has several problems - there is no one government who can issue permits; there are terrorists everywhere; there's little or no water - most mines require a lot; and to get the minerals out you have to cross a lot of land, some controlled, some not.

There are a couple dams which are gathering interest. The Kariba dam shared by Zambia and Zimbabwe; and the Mosul dam in Iraq. The Mosul dam has been in the news lately - ISIS conquered the area including the dam, but the US and Iraq took it back. If you were to blow up the Mosul dam you would flood Baghdad and likely kill several hundred thousand people along the way. However, apparently it's not necessary to blow it up. These two dams appear to be coming down on their own. The 55 year old Kariba dam in Africa is predicted to fail within three years without massive repair. If it fails the wall of water ripping down the Zambezi river would almost certainly take out the Cahora Bassa dam in Mozambique. Loss of both dams could kill as many as 3.5 million and destroy 40% of south central Africa's electricity. They can't even open the sluice gates and lower the water level, as this would almost certainly be enough to undermine the dams foundation and take it out. The WOrld Bank, EU and African Development bank say they will provide $250 million to save the dam; now if only Zambia and Zimbabwe can agree on contracts. The Mosul dam was a rush job built by Saddam in the 1980s and is anchored in gypsum, which dissolves in water. Every day new leaks are plugged with a mixture of sand and cement. The US Army corps of engineers says this is fundamentally the wrong dam for this location and calls it the more dangerous dam in the world. This dam looks unsalvageable; instead someone must take charge and lower the water level permanently. This in a country where there's a civil war going on and there's no evidence that anyone is in charge.

Like taking your kids to the beach? That may all be over soon - there's a growing sand shortage across N.America due to the demand for sand for fracking. So if you see trucks hauling sand north from Pensacola, remember we need the oil to supply the trucks. The trucks hauling the sand.

Notes from the People's Republic of California: While introducing Mexican President Enrique Peña Nieto, who said America is "the other Mexico," Governor Jerry Brown nodded to the immigrants in the room, saying it didn't matter if they had permission to be in the United States: "You're all welcome in California." Brown has made California a sanctuary state by signing the Trust Act giving driver's licenses to illegal immigrants. He has also expanded financial aid to illegal immigrants by signing the California DREAM Act. Peña Nieto reportedly "thanked state officials for embracing foreigners, citing measures that extend state benefits to immigrants." Even during the border crisis, Brown reportedly vowed "to find ways to shorten long waits at the Tijuana-San Diego international border crossing," saying, "If we can put a man on the moon, we can put a man from Mexico to California in 20 minutes." And just to put the cherry on his sundae, on Friday Jerry outlawed all plastic bags from all grocery stores in the state. I've got two mothers, the one that birthed me and an extra in Sacramento.

When Nick Olivas was 14 he was raped - statutory rape - by a 20 year old woman. Unknown to him she became pregnant. He learned he had a child when he was 22 and the child was 7. Now the state of Arizona has found that he owes back child support, medical bills and interest. You cannot get married when you're 14, you can't consent to sex when you're 14, you can't sign a contract or be held accountable to a contract when you're 14, but you can owe child support. Olives' case is not the first of its kind. The Kansas Supreme Court ruled unanimously in 1993 that 13-year-old Shane Seyer who impregnated his 17-year-old babysitter Colleen Hermesmann was responsible for paying child support even though he was under 16, the age of sexual consent. In that decision, the court ruled that the state's interest in ensuring parental support for the young child — "the only truly innocent party" — outweighed its interest in protecting juveniles like Seyer. "This state's interest in requiring minor parents to support their children overrides the state's competing interest in protecting juveniles from improvident acts, even when such acts may include criminal activity on the part of the other parent."

A new study by the Fed says the top 3% are making more and more money each year and own more and more wealth each year; the next 7% are just holding onto what they have, and the bottom 90% are losing ground. I claim this is substantially due to Fed policies - giving several trillion dollars worth of free loans to the richest - and due to congress letting the bankers go nuts with bets on derivatives and taxing them at capital gains rates. Obama says he wasn't elected to be president of "fat cats," but he spends his vacations golfing with them and they've done remarkably well under him.

Obesity continues to get worse as our world wide addiction to sugar, carbohydrates and processed foods only increases. The CDC released a new obesity map: the leanest states now have an obesity rate of 20%; Mississippi and West Virginia are leading us into the promised land with obesity rates of over 35% - better than a third of all adults in those states have BMIs over 30. Survival of the fittest? Not anymore.

Science stuff: Astronomers at the university of Hawaii have mapped nearly 10,000 galaxies with both position and velocity data, and have learned something spectacular. Our galaxy, the Milky Way had been thought to be a part of a super cluster called the Virgo Group. Now we see we're a part of something much, much bigger, a super cluster they call Laniakea. Since a typical galaxy has perhaps 200 billion stars, Laniakea contains perhaps as many as 2,000 trillion stars. Laniakea is only a tiny part of our entire universe - it contains several thousand galaxies, but with our telescopes we can see a couple hundred billion galaxies so there are perhaps millions of structures much like Laniakea. Or perhaps further studies will find that Laniakea is itself part of something even larger. As Carl Sagan used to say, if we're the only intelligent life out there, it seems like an awful waste of space. Here's a four minute video that explains in better detail. It's gorgeous. And remember when you're watching this, there is no God. All this is just hydrogen, collapsing under the force of gravity and spontaneously inventing far ultra-violet lithography, performing the ballet Swan Lake and writing all the books in the British Museum. Yup. Gravity. Hydrogen. Evolution. And the interstellar hydrogen cloud grows up and writes a ballet and performs it. That's how it all works. By the way, notice how Laniakea looks a bit like a leaf? Gravity can't do that alone, that's not how gravity organizes things. To my eyes this is also evidence for some other forces - ionized hydrogen focusing magnetic field lines, or perhaps something even more exotic, I don't know. There are more things in heaven and earth than are dreamt of in our philosophy. Why am I sarcastic? As I get older I'm getting very intolerant of scientism - science as a religion. The universe is a beautiful place filled with enormous mysteries waiting for us to find; Laniakea is just one more. If humanity survives and prospers quantum field theory will one day be seen as barely more advanced than 2nd grade addition problems.

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