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Mark's Market Blog

2-8-15: Deflation and Syriza.

By Mark Lawrence

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Stocks continue to trade in what seems to be a sideways range.

S&P 500 August 20 2014 to February 6 2015

As the dollar goes up in value and the Euro and Yen drop, unsurprisingly the US trade deficit is increasing - from $40b in November to $47b in December. This will continue, of course, until and unless we enter the currency war. Right now we're importing lots of cheap crap and, soon, we'll be exporting cheap jobs.

What happens when the Fed has to start selling off those $5 trillion in bonds in their vaults? Won't interest rates leap to economy-choking levels? Yes, and they're very aware of that. Here's a bold prediction: the bonds held by the Fed and the Bank of Japan and soon to be bought by the ECB will never be sold. Never. Those bonds will rot in deep dark vaults for all eternity. This means the respective governments got to borrow money that they never have to pay back. This is called monetizing the debt and is considered highly inflationary - exactly the policy desired in this time when deflation seems to be rearing its ugly head. What's so bad about deflation? Food prices, gasoline, rents all decrease and consumers have more money in their pockets, so what's the bad news? In Econ 101 you were told that consumers don't spend in a deflationary environment preferring to hold their money for a better deal next week, and businessmen don't invest as sales are slow and equipment prices are declining. Nonsense. Statistics from history show that it takes pretty massive deflation coupled with huge unemployment before people stop buying. Your average lower to middle class guy is going to spring for that cheap 60" TV or new 0% interest 0 Down 2015 Mustang regardless of his future price expectations - one of the primary reasons they're lower class is that they have essentially no sense of delayed gratification. Here's the real reason deflation is scary: we've seen what happens to banks when real estate prices decline below mortgage amounts or car values decline below loan amounts. Borrowers walk, leaving the bank with an almost worthless asset. Current 30 and 40 year bond prices indicate the markets are pricing in mild deflation for the next several decades. Banks, all too aware of this, are mostly refusing to write new mortgages to any but the most credit worthy. Deflation fears are about banks: the last seven years have been all about banks. I'm getting really sick of our entire lifestyle being subservient to bankers; I'm ready to have the Fed buy some of those huge Caterpillar bulldozers and simply push Wall Street into the ocean.

Last week I noted that I expect Iran will have nukes before Obama leaves office. I'm not the only one who thinks so. Today Iran's Foreign Minister Mohammad Javad Zarif told Kerry and other officials, "I do not believe another extension is in the interests of anybody as I did not believe this extension was either necessary or useful." Looks like the talks are about over - Obama has already agree to release Iran's frozen money by the end of the talks in July, Obama has vowed to veto any new sanctions proposed by congress, so we have nothing else Iran wants. Saudi Arabia has just renewed an accord with Pakistan to buy nukes if they wish. Saudi Arabia already has Chinese CSS-2 missiles which were designed to hold precisely the Chinese designed warhead Pakistan makes. Pakistan also has nuclear armed cruise missiles. I've also previously noted that the US anti-nuke treaty with the UAE says they won't have nukes unless another gulf state does. Obama's legacy will almost certainly include a nuclear armed gulf. We all know he doesn't like Israel, but this brings "doesn't like" to a whole new level.

We've all been trained in the last 40 years by women's lib that biology is not destiny, but apparently geography is destiny. Yemen fell this week to Iran-backed rebels. This has put Saudi Arabia in a very uncomfortable position - they're now almost completely ringed by Iran backed states. Last year Shi'ite rebels nearly overthrew the Sunni minority in Bahrain; Saudi Arabia intervened and put down the poorly armed and unorganized rebellion. Last year the Saudis tried a similar stunt in Yemen, but a couple weeks later with 200 of their men dead they retreated from Yemen with their tails tucked. Iraq's government is Iran backed; Assad in Syria would have fallen years ago but for his help from Iran. Lebanon also is largely governed by Hezbollah, which is backed by Iran, as is much of Palestine / Hamas. Kuwait is very friendly to Saudi Arabia but we've already seen how long they can hold up to an invasion - a couple days. Embarrassingly, Saudi Arabia's best friend in the middle east is now Israel: the one middle east state that will never come under Iranian influence. Without question, Iran is slowly consuming the middle east. If their oil revenues allowed it they would next attempt to turn Egypt into a client state; at that point the Shia would have all but triumphed over the Sunni.

Why the sudden change in Europe, where Germany, which has been adamantly against QE for the last six years now allows a massive dose? Greece. QE will allow Germany and Super Mario to bribe Spain, Italy, Portugal and Ireland with ultra low bond rates to ignore Greece and that little separatist man behind the curtain. That's the carrot; the stick is that at the same time Greece has been informed that their debt is no longer acceptable as collateral at the ECB, shutting their banks out of any hope for rescue and effectively telling them no birthday cake and ice cream for you. The big fear in Brussels right now is the voters in southern Europe following Greece's example and electing a bunch of far left or far right parties that promise a better deal - with 25% unemployment and rampant corruption, those promises are going to sound quite compelling. Even France has a problem: their far right anti-immigration and anti-euro party Nation Front currently leads the polls, and their socialist president Hollande is setting new records for low approval ratings. Greece says they don't want to leave the Euro; the EU says Greece is welcome and encouraged to stay. That's the words. The actions on both sides say "Happy Trails to you." I think Greece would be far better off with their own currency; I also think as others see this it could easily spell the end of the Euro experiment.

Super Mario is now the almost-emperor of Europe it seems. A few months ago he sent some secret letters to Ireland (since made public) threatening to pull emergency funding from Irish banks if the state did not apply for a bailout, in what many saw as an overreach into the sovereign affairs of the country. The ECB later pretended that Ireland had applied for its bailout voluntarily. Now he's sent the same letters to Greece. Were I european I would be appalled and incensed about an unelected bureaucrat living across the street from a whorehouse and pushing around my elected government. Greek PM Tsipras is quickly being put in the position of toeing the line that helped produce 25% unemployment for his country or watching his entire banking system fail. Everyone knows if your banking systems fails then your life is over, but it seems to me it's always bankers and their paid political puppets who tell us this. I'm going to be watching Greece with great interest: what if they let all their banks fail and no one starves in the street? What if it turns out they can do better without banks?

Greece's new Finance Minister Yanis Varoufakis says he's "the finance minister of a bankrupt country." He was recruited from the University of Texas where as an economics professor he taught game theory. He's been traveling around Europe talking about a new deal for Greece. His comments have been provocative - in Germany he said in an interview, "Germany should understand the most what it's like to be stuck in a gruesome deflation and debt crisis. When I go home today, I will go home to a country where the third-biggest party is not a neo-Nazi but a Nazi party. Germany can be proud of our fight against Nazis. We now need the German help." Friday we got an official response: The ECB will no longer allow banks to use Greek dept as collateral. In the absence of a new deal or Greece knuckling under to the current bank-breaking deal, this means they're a few weeks from running out of cash and defaulting. Apparently Super Mario has his own game theorists. Anyway, this little game is getting very exciting and very dangerous very fast. Greece is adamant that they want half their debt forgiven; Germany and the ECB are adamant that this will not happen. There is a rumor that there's an offer on the table to convert a large fraction of Greek debt to 40+ year zero interest loans, but it's not clear Greece will accept that. Tsipras got elected with a mandate to stop the austerity and he can't be seen as folding to the EU in his first month. Greek markets are going wild, down 50% in the ten days since Syriza was elected.

Germany's Merkle and France's Hollande went to Moscow to chat with Putin. They proposed a cease fire based on the current line dividing the country, and a 40 mile wide demilitarized zone - a new version of the Korean solution. Hollande said the stakes could not be higher, warning that the renewed peace plan was "one of the last chances" to halt the 10-month-old conflict. "If we fail to find a lasting peace agreement, we know the scenario perfectly well - it has a name, it is called war." In their press release they said NATO sending arms to Ukraine was a mistake and would not solve the problems there. Joe Biden immediately announced that we were going to send military aid to Kiev. I'm on record: Russia's security makes a NATO / EU Ukraine completely unacceptable, just as our security makes a soviet Mexico unacceptable. Here's a question you can ask yourself: do you have more faith in the foreign policy of Angela Merkle, born and raised in East Germany under communism, now the leading proponent of free markets in Europe, with a PhD in physics; or do you have more faith in the profoundly deep international understandings of our community organizer in chief and disbarred constitutional lawyer Barack Obama?

Last week I noted that commodities are not selling well. This is especially problematic for Australia, which bases a significant portion of their economy on mining. The Oz central bank just lowered their discount rate from 2.5% to 2.25%. The Aussie dollar immediately dropped 3%. This isn't over, folks - this is just the early shots in the world wide race to the currency bottom.

Alaska gets most of their money from taxing oil. They just saw their tax revenues drop by 50%. Everyone else in the US (well, except Texas and N.Dakota) is loving the low gas prices; the oil states, not so much.

Radio Shack is bankrupt. They're closing 1784 of their stores. The rest - about 2200 - will apparently become Sprint stores, also selling Radio Shack stuff. And the 1784? Rumors fly that Amazon is considering picking them up. Store pickup would put Amazon in position to offer more free shipping, as Walmart does, with an instant huge presence. Store pickup would allow Amazon to showcase their particular products, like the Kindle reader and FireTV. It worked for Apple. Perhaps Amazon will be coming soon to a mini-mall near you.

Thinking of dating? American Community Survey gathered info on 3,712,827 people. Select for those between 18 and 40. Now see which of those are single, have a university degree, have a job, don't live with their parents. You're left with 29,875. 3.1% of Americans are worth dating. 50% of US adults are single. There's a hint about what it's like out there dating.

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