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Mark's Market Blog

12-16-12: Still the Fiscal Cliff...

By Mark Lawrence

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Markets went up briefly this week on news of the Fed printing like crazy, then dropped back down almost as quickly as people concluded the Fed is out of bullets. We're still in a holding pattern, almost certainly for the coming week. Things will start to heat up after Christmas, nine days from now. Traditionally the week after Christmas shows gains for the stock market, the "Santa Clause Rally." This year maybe not so much as the reality of our dysfunctional government rears its ugly head.

S&P 500 June 23 2012 to December 14 2012

As fiscal cliff negotiations continue behind closed doors, where we hear almost nothing, we still find a couple noteworthy facts. The electorate is clear, people on balance want higher taxes on the rich and few budget cuts. Meanwhile the NYT reports, "Billionaires Warn Higher Taxes Could Prevent Them From Buying Politicians." Boehner reportedly has offered the White house a package with increased taxes, but less than Obama wants, coupled with an increase in the debt ceiling. There are serious questions if Boehner can actually deliver any republican votes on such a deal; there are also serious questions if Pelosi can deliver near-complete democratic votes on a compromise like this. Boehmer and Obama may find some common ground - they're not there yet, but it could happen - but even if they work out a deal there's little evidence it will pass the house or the senate.

How's Greece doing? Very poorly. That last bailout I reported a couple weeks ago, like previous bailouts, was all money earmarked to go to foreign banks and a bit of debt relief; none of that money goes to the plight of the Greek people. Greek unemployment continues to rise, now over 25%. Hospitals are operating on a bare-bones level - many doctors haven't been paid in months; if you need to be admitted you have to bring your own sheets and food; drugs, latex gloves, if it's a consumable they're out. Pregnant women with unemployed husbands are sent home to have their babies the way they did 3,000 years ago - perhaps with the help of a somewhat experienced older neighborhood woman. Angry unemployed men walk the streets looking for food, jobs, or failing that trouble. Gang violence against minorities is everywhere. Georg Pieper, a German psychotherapist who specializes in treating PTSD, traveled to Greece to give local psychiatrists a free course in trauma therapy, reports that Greece is a society on the verge of civil war. Things in Greece will get worse, not better in the coming year, so the chances of some sort of rebellion or military take-over are all too real. This hypothetical new Greek government is not likely to be as accommodating to the Europeans as the current government. Causing the destruction of a few German or French banks is going to look rather appealing, I think. Ironically it was the Germans who invented the word schadenfreude - taking joy in the suffering of others. Don't worry - a government that lives on debt, makes promises for entitlements that it can't keep, and eventually goes bankrupt leading to a breakdown in civil society - This Can't Happen Here.

How's California doing? Poorly. Working people are moving out of California at increasing rates - 58,000 to Texas last year, for example. A recent survey of businessmen had California ranked #50 for a state to do business - we've held this record for eight straight years. California now has the highest personal income taxes in the US, the highest gasoline taxes in the US and the eighth highest corporate taxes, but is still running a budget deficit. California's unemployment rate is 20% above the national average, behind only Nevada and Rhode Island in unemployment. Only Illinois has a lower bond rating than California. With 12% of the US population, California manages to pay out 33% of the US Temporary Assistance for Needy Families, and 60% of our school children receive lunch assistance - we're exporting businessmen and importing poor people. California is #50 in the US in emergency rooms per person; due to unpaid bills from illegals, more emergency rooms are shutting down every year. And we pay a third more for electricity than the national average. And we will soon have democratic super-majorities in our senate and house, immune to fillibusters from evil heartless republicans. They have a saying in AA, "Being a drunk is like riding an elevator with the cables cut: you can't get off until you hit the bottom. And everyone has their own personal bottom." California is on the way down, but we're not close to the bottom yet. Michigan had a good thing going with the auto industry; 50 years ago Detroit had the second highest average income of any city in the US, after only New York. Democrats took over, and now cars are built in Kansas, Tennessee, Alabama, Georgia, the Carolinas - anywhere but Michigan. California had a good thing going with the chip and software industries, but already chip production lines are moving to Arizona, Texas and New Mexico, and software companies really only need an internet connection and a Starbucks.

How is Syria doing? We're nearing the end game, consensus seems to be Assad cannot possibly hang on indefinitely. The key is that Russia is no longer unconditionally backing Assad, they're helping look for a solution, meaning Assad somehow steps down. Assad has already indicated he'll die on Syrian soil; perhaps that will happen in a few months.

The Egyptian president, who last week made himself and his constitutional committee immune to court challenges, this week gave his army broad powers to arrest civilians during the upcoming constitutional referendum. Democracy is sweeping through the region, as you can see...

Japan just had elections, and elected a conservative. Abe, the new prime minister, promised that he would have his central bank print money until inflation started up - Japan has been in a deflationary recession for 23 years. The yen immediately started falling in world markets.

China's incoming prime minister has also announced that there will be no recession in China, he will print and spend money as required to guarantee it.

The Fed announced this week that they would keep rates low until unemployment dropped under 6.5% or inflation was above 2.5%. That's going to be a while. The also announced they're raising their purchases from $40b per month to $85b per month. Markets immediately shot up, then by the end of the day were back where they started as we all asked the questions, "Why now?" and, "Will this change anything?" We can only speculate on why now, but remember the Fed see broader, deeper and more timely data than anyone else. It looks to me like the Fed sees a recession coming and wants to head it off. Will it change anything? Unlikely, in my opinion, except for the amount of cash held in the vaults of the top eight banks. We started with zero interest rates in 2008 - perhaps that saved our banking industry. That was followed by QE1, then QE2, then Operation Twist, then "unlimited QE3" (still ongoing) and now doubling down for QE4. It's completely unobvious to me that the various QEs have done much of anything except make it easier for the government to fund their jaw-dropping deficits by keeping treasury bond interest rates near zero. How long will it last? We're not going to see 6.5% unemployment in 2013, and I doubt we'll see it in 2014.

For me, the interesting question is how is the Fed planning to mop up all this money that's sitting around in bank vaults looking for a new home? When inflation does start up I think it's going to hit pretty fast and furious. And when they do raise interest rates, payment on our national debt will soar, leading to the government selling more debt to pay the interest on existing debt. When this starts, it will be very late in the game and one of your best investments, gold, will already have shot up in price. Japan has gone over 20 years with no economic growth, massive deficits, and interest rates near zero - perhaps we can too? Or perhaps Japan has already drawn down significantly on the world's economic well, and we will find the well going dry at the same time as Japan, France, Italy, Spain, the UK. . . I don't think this world-wide economic train-wreck, the demise of fiat money, the end of the world-wide government Ponzi schemes is close right now, but like all conservatives I'm deeply concerned for my children.

The US economy is recovering, right? Well, that depends. If you're one of the half of our nation that pays taxes, then yes, things are slowly picking up. For the rest, job openings that match their skills are in very short supply, pay for such jobs is very low, and the ranks of the poor continues to increase. Here's a strong indicator, the number of people receiving food stamps and the total value of those food stamps, which keeps increasing even as the "unemployment rate" continues to drop.

Apple cut their component orders for production of iPhones in the 1st quarter next year. As Apple makes most of their money on the iPhone, their stock immediately tanked.

Unilever CEO Paul Polman said in an interview this week that the US is facing "the rise of an 'emerging poor' class dependent on government benefits. With 46 million people relying on government benefits to buy food, people scrape by until the end of the month." Between the people in Asia who are willing to work hard for a few dollars a day, the rise of robots, the failure of the american lower classes to get educated, and our government's assertions that income inequality is due to unfairness and greed, I see this problem only growing and the US turning into a variant on a 3rd world country with a wealthy political / business class, widespread poverty, and the politics of class tension.

Like beef? These days you're taking your chances. For several years now beef producers have been tenderizing beef by mechanical pounding, penetrating it with needles, and injecting extra "flavor." What's the problem? This can push bacteria inside the beef where typical cooking (medium rare) doesn't kill it. There have been several recalls to date over beef contaminated in this fashion, and a few people killed or permanently disabled by eating rare or medium beef.

Charity begins at Home: Thinking of making a holiday donation? Donate to somewhere where your money will do some good. This is the time of year when we all get emails with naughty and nice lists of charities. Unfortunately those emails tend to be out of date and inaccurate. Look up your favorite charity at before you sign that check. Don't contribute to some fat cat's million dollar a year salary, put your money somewhere where it will do some good.

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