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Mark's Market Blog

9-9-12: Jobs? We don't need no stinkin' jobs!

By Mark Lawrence

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Markets shot up on the last two days of this week, hitting new four-year highs. The announcement that the European Central Bank will backstop interest rates with "unlimited" bond purchases has convinced everyone that the European crisis is well on the road to being solved. Well, almost everyone.

S&P 500 March 14 2012 to September 7 2012

China has announced a $160 billion stimulus plan of building more subways, highways, and airports. Their stock market, in the middle of a two year long decline, promptly surged upwards 4%. China, Europe, the US: everyone is living on stimulus heroin. The biggest beneficent of this? Australia, who should see mining and exports recover quickly, and their housing bubble go back to inflating.

World food prices seem to have stabilized, but at levels near the peak of the 2008 food crisis. Both the US and Russia are experiencing poor crops. UN directors say they are hopeful prices will not rise further and a repeat of 2008's food riots will not recur. However there will be a large draw-down on global grain stocks, and a second year of US drought would cause serious problems.

The ECB is going to mess with short term interest rates - rates on bonds that come due in 3 years or less - maybe. They're going to lower short term rates in Spain, Italy, Portugal by buying lots of short term bonds. If all they did was buy bonds, they would be violating their charter by taking on enormous debt that all of Europe had to pay off. So they're going to "Sterilize" their purchases. This means every time they buy a $1000 Spanish bond, they'll sell a $1000 German or French or Dutch or Austrian or US bond. This will cause German and French rates to go up, and Spanish and Italian rates to go down. Their reasoning is that they are allowed to effect monetary policy, and this is just monetary policy - convergence of interest rates in Europe. There will be "conditionality" on these purchases - before the ECB will intercede in the markets on behalf of a country, that country will have to show the EFSF and the IMF that they are meeting various criteria for reforming and balancing their budget. Will Spain or Italy agree to be monitored and judged quarterly by the IMF? Very unobvious. Will it work? The ECB is going to make a two-tiered market. Thirty years ago there was a two-tiered market for the Russian Ruple, the official exchange rate at banks and airports of $1.65 and the black market rate of about 17¢. Draghi & Co are going to produce a two-tiered market for Spanish debt - 2 year debt at perhaps 1.5%, and 10 tear debt at perhaps 10% - 15%. Bond sharks are going to have a feeding frenzy. This new policy will lower interest rates for some, raise interest rates for others, and promote more unemployment in a Europe that's already in a depression. It might go down in history like the Smoot-Hawley tariff act, something that makes the depression worse. It might be forgotten by history as largely irrelevant. I can't see how it's more than a tourniquet and a shot of morphine - something to buy a bit of time until a proper doctor gets there, but not a solution.

Germany is once again prospering from the crisis in Europe. Unemployed engineers from Spain and Italy are moving to Germany, solving a major employment problem of Germany. One could ask how Spanish and Italian economies are to grow when many of their best young engineers and designers are leaving their countries. This is one reason I'm so skeptical of the European solution. Here in the US almost all college trained engineers and scientists live in just a few states - Massachusetts, New York, Virginia, North Carolina, Illinois, Minnesota, Texas, California, Washington. Other states like Oklahoma, Iowa, West Virginia simply don't have engineers, scientists, or the universities that produce them or the companies that hire them. Can this work in Europe, where there are different languages, cultures, expectations, and sovereign governments? Very unobvious that it can.

The unemployment rate is down to 8.1%! Big win for Obama, right? Well, yes and no. Yes because the average American can just barely understand that the unemployment rate is down, so to them this sounds like a win. Also yes because it's pretty clear that it's Obama's policies that are driving this number down. No because almost all of the improvement is due to people dropping out of the work force - about 367,000 in the last month. A lot of this is the minorities that Obama swore to help, and another large chunk is discouraged recent college grads and 20-somethings - the future of our nation, bludgeoned into giving up and going back home to Mom. What jobs were created last month were almost completely in food services and drinking places, so-called "McJobs." There was a drop in manufacturing and government employment, and a very small rise in retail trade. Obama's policies are to move people from unemployment insurance to long-term disability. In 1992 we had one disabled worked for every 35 workers. Now it's one in 16. Apparently work has gotten very dangerous. I've a step son on long-term disability, and this program is crushing his soul. Below are four graphs: our ongoing favorite employment graph that shows clearly that we continue to creep out of this recession, at least absent a new recession; a graph showing that the percentage of working age people in the work force has been set back by 30 years, back to the time when half or more of all women were not employed outside the house; and a comparison of Obama's promises from four years ago with what he actually delivered. On the basis of this deeply disappointing jobs report, many now think the Fed will announce another round of QE - Quantitative Easing, a shot of economic heroin - in the next few weeks. That will goose up the stock markets just in time for the election.

Percentage of working age adults in the US that are employed

Obama's projects of unemployment with and without his stimulus, and the actual results

Percentage of GDP going to labor. Working to achieve the American Dream is failing for more and more people.

Black Saturday is coming. On September 15th will start collecting California sales tax, effectively raising their prices by 7.75% to me. California expects to raise $83M per year from Amazon, $317M total from all the companies they shook down. The money will be spent on pensions for CHP and prison guards, and social benefits for illegals. Personally I don't wanna buy any of that stuff. There are businesses near the Canadian border that receive packages and hold them for Canadians, cutting shipping prices in half and avoiding GST - the Canadian Goods and Services Tax. Perhaps I'll open a small business in Reno receiving packages for Californians then sending them on. $15 or $20 in extra shipping on a Mac Airbook beats $140 in sales tax quite handily.

CalSTRS, the California State Teacher's Retirement System, a sister to Calpers, is in the news. The CA state auditor says CalSTRS is not doing enough to detect and prevent pension spiking - getting large raises in the last year, then having your pension based on the final salary. In an audit it was found that some school administrators and superintendents (almost never teachers) got raises of up to 26% in their last year. CalSTRS only performs 40 audits a year, and 40% of them find spiking. Governor Moonbean has sent a proposal to the legislature that pensions be based on the last three years of salaries; CalSTRS officials say they support this proposal.

Amazon has introduced a couple new Kindles, and Google is shipping their Nexus 7 pad now. Apple iPad profits are going to get seriously eroded - Amazon and Google are perfectly happy to sell hardware at or perhaps below cost, and make their money on content. What happens when Amazon announces a smart phone? Apple, the world's most valuable company, is just starting to look vulnerable.

It's fall, and a politician's thoughts turn to God, Motherhood, Apple Pie, and Jerusalem. Obama started off his convention by removing all references to God from the democratic platform, to the thrill of the anti-religion portion of the democrats and the stunned silence of much of the rest of the country. Estimates of the number of Christians in the US run as high as 95% of the population - this is very much a Christian county. Then to my personal astonishment, he removed the word "Jerusalem." For 50+ years every party platform in the US reaffirms that Jerusalem is and forever will be the capital of Israel. Obama believes that affirming this means the Arabs don't accept that we're bargaining from a neutral position. However, failing to affirm it is a slap in the face to all US Jewish voters. For decades the core of the democratic party has a been a coalition between Jewish intellectuals and Black voters. Jews have been concerned for 20 years now that Blacks seem to be growing more and more distant every year, although they've had little understanding of why. Now it seems this growing rift is hanging outdoors with the laundry. By Thursday Obama had realized the depths of his mistake, and to loud boos from the democratic floor representatives "God" and "Jerusalem" were restored to the democratic platform. Has the damage been undone? Israel's prime minister Netanyahu says a lack of clarity from the US on Iran is tempting Iran to continue to make bombs, and pushing Israel towards a first strike.

Science: Eating egg yolks is 2/3 as bad for your heart as smoking. A new study just released shows arterial wall damage in people over 40 that seems to depend mostly on smoking and/or eating whole eggs. Based on this the recommendation is no more than four whole eggs per week, including those in baked goods. Time to start ordering your omelets with egg whites only.

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