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Mark's Market Blog

1-1-13: Mark's Bold Predictions.

By Mark Lawrence

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A bill was passed to raise taxes on people making over $400k. No spending cuts. The sequestration cuts were postponed for two months, lining up nicely with the next time we're going to need to raise the debt limit. The tax increases will have almost no effect on the deficit or the debt, the democrats wanted them for increased "fairness." The economy is otherwise doing well, so expect the market to go up for most of January. Then February will be hard on the markets as posturing for the end of the month fight over spending and the debt limit gets out of hand.

S&P 500 July 1 2012 to December 31 2012

What's going to happen to the national debt? Sooner or later, inflation. The Congressional Budget Office keeps putting out 25 year projections on social security, and they seem to indicate that SS is in ok shape. The CBO assumes that work force participation will return to pre-crash levels, with 62% - 65% of our population working at decent paying jobs. This ignores a decade long trend where fewer people work and workers make lower wages. What if you factor that in? SS is in trouble, just like you already knew. This is another area of bi-partisan agreement, there will be no acknowledgement of this problem. When it gets serious, everyone will be surprised.

Retired Germans, finding long-term care costs in Germany prohibitive, are starting to take their benefits elsewhere - eastern Europe, Thailand, the Philippines - where costs are far lower. The trend is so well established - over 50,000 - that the German legislature is now looking into it to decide what they think. In the next 10 years as retiring boomers overwhelm the systems of the west, this will become the new normal: export your retirees to low cost countries, and save hugely on medical, nursing and housing costs. Under 60? Consider how you feel about retiring in Costa Rica, Peru, Thailand, Slovakia. Under 50? You might not get much of a choice. Consider taking a language class at your local Jr. college.

Egypt's new constitution was approved by almost 2/3 of the voters. Unfortunately only a bit less than 1/3 of the voters turned out, but almost 2/3 of them approved it. Egypt is now a democracy with equal rights for women, minorities, and people of different religions, "in so far as those rights are consistent with islamic law." In other words, islamic priests now decide if rights are reasonable. Many Egyptian businessmen started withdrawing their money from banks. It's now illegal to enter or leave Egypt with more than $10,000 in cash. Egypt is mostly uninhabitable desert, and fits their population of 83m, a quarter of the US population, into an area the size of New Mexico.

Last week the Fed announced they would keep interest rates low until unemployment hit 6.5% or inflation hit 2.5%. It's been estimated that the Fed's artificially low rates are costing pensioners and pension funds $465b per year. When will they quit? We've seen that the unemployment rate is skewed by the millions of people who have given up looking for work, and the yet more millions that have been moved onto social security disability. What does 6.5% mean in this environment? And inflation? Who measures that? Inflation is a weighted number, and the weightings used might not apply so well to you. Food and energy are under weighted in the government numbers which helps keep the official inflation rate down, but the average Walmart shopper spends a quarter of their income on food - tell them food inflation isn't important. My take-away - the Fed will raise interest rates when Bernanke is damned good and ready to raise them. Meanwhile, TIPS yields, the federal bonds indexed for inflation, are going up at record rates - Wall Street is banking heavily on inflation.

Southern Europe desperately needs the Euro down at about $1 if they're to have any hope of economic recovery. Meanwhile the Euro has moved up in the last six months from about $1.25 to a bit over $1.30, and I think it's on its way to $1.40, perhaps even $1.50. This will prove devastating for European economies, making it even harder for their companies to export their way out of their unemployment problem.

China is flying planes provocatively close to Japanese territory. China wishes to assert more control over the pacific, and wishes to challenge the American navy to see how they will respond. A war between China and Japan / America nominally over a few uninhabited rocks, the Senkaku Islands, is all too possible. The US fought several wars with the Soviet Union, in Viet Nam, Afghanistan, etc, but these were proxy wars: only one side was publicly engaged, there was always plausible deniability for the other side. If Chinese and American planes and ships actually shoot directly at each other, this will be a level of engagement not previously seen between nuclear powers.

Mark's Bold Predictions for 2013.

First, a review of how I did last year:

  1. Tiger will win a major. No.
  2. Obama will win the election, we'll have split government, the deficit will continue to go up. Yes.
  3. Unemployment start heading up a bit as recession spreads across the world. We won't see 7% unemployment this year. Half right.
  4. We'll have another debt crisis. Yes
  5. Debate about entitlement programs will start. Yes, this was a major theme of the election.
  6. Government retirement and healthcare benefits will hit the radar screens. I was early on this one.
  7. Europe won't quite topple over. They will successfully kick the can down the road for one more year. Spain, Portugal and Italy will fall into severe recession. The rest of Europe and the UK will be in just a normal to deep recession. Greece will leave the Euro between March and July. The Greek economy will be all but completely destroyed. Several European banks will be nationalized as a result. Greece didn't leave the Euro, no big banks got nationalized. I got the rest right
  8. Iran will heat up, missiles will be tested, naval vessels moved. I don't think it's time for war this year, but it will look real close a couple of times. Yes
  9. India and China will fall into what they will consider a recession - growth below 4%. Food inflation will continue. Yes
  10. The Occupy / Arab Spring / Jasmine Revolution / Anti-European Austerity protests will continue to grow and spread. Yes
  11. The Syrian government will fall. Unrest will continue to spread across the middle east. More governments will be seen as vulnerable. No. Syria hasn't fallen. Yet.

Generally speaking I now expect us to muddle through 2013 much like we muddled through 2012. This is not the year when Europe, the US, China or Australia crashes.

  1. Greece will fall apart and there will be a military take-over.

  2. Europe will fall even further into depression. Their unemployment numbers will only get worse, especially as the southern disease spreads into France. They will have at least one crisis with Spain, and likely another with Italy, and very possibly another with France. These will be resolved by Super Mario and the European central bank, but each time there will be panic and stock market drops. These can't be contained forever, but they will be contained this year.

  3. The Arab Spring will continue to spread. Chaos will continue to rule in Libya, Iraq and Lebanon, and spread into Syria and possibly Yemen or another country we can't even find on a map. Tensions will only grow, seemingly stable regimes like Saudi Arabia will become ever more paranoid.

  4. The Syrian government will fall.

  5. Israel will not be given US support for an attack on Iran, and therefore won't attack. This administration is not very friendly towards Israel, and will not choose to destabilize Iran to support a country, Israel, which they see as becoming non-viable in the next decade. The world is going to have to find a way to accommodate a nuclear Iran. Iran will not announce a bomb this year.

  6. As Japan devalues the yen and Bernanke devalues the dollar, world trade tensions will only increase. We will see some saber rattling this year on the topic of trade and alleged dumping.

  7. China will return to growth, talk of a Chinese recession will die down.

  8. Severe food inflation will be a big story this summer. Several countries will appear to be unstable.

  9. The US will have reasonable growth - 1.5% to 2.5% - and the stock market will end the year a bit higher than it started. Unemployment will continue to creep downwards, ending the year around 6.5%. Bernanke will not raise interest rates this year.

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