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Mark's Market Blog

3-31-13: Korea?

By Mark Lawrence

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Progress, in the form of the Fed printing a bit over a trillion dollars per year, marches on. The markets shrugged off Cyprus and closed out the Easter shortened week at all time highs. Will the markets ever go down again? Maybe not. Stay tuned to this blog for further news on the market that grows and grows and grows and grows. . .

S&P 500 October 1 2012 to March 29 2013

Consumer confidence slipped rather dramatically last month. New home sales did too. A snapshot seems to show our economy is slowing.

This time of year the US and S.Korea traditionally hold joint war games. Traditionally N.Korea complains that this is a step towards war and threatens consequences. Sometimes they follow through - sinking a S.Korean submarine, shelling a S.Korean island. One can never tell if the rhetoric is for external or internal consumption. N.Korea has a new, young inexperienced leader and you have to believe he's struggling to maintain power. All that said, this year the rhetoric has reached new heights. A N.Korean TV broadcast "accidentally" showed a map on the wall behind the Great Leader which seemed to indicate missile strikes on Honolulu, Austin, LA, and Washington DC. N.Korea has no rockets capable of reaching these targets. However, in such an insular country, we must allow for the possibility that these guys really think they have a chance against us. Unfortunately they could likely wipe out Seoul before we could put them down, which would completely devastate the S.Korean economy for decades. We must also consider the idea that this is a failed state in the making and their government won't last much longer. The US played war games in the Pentagon recently about this precise idea and found we don't have assets in place that could secure the nukes and establish peace in a timely fashion - in the games it took us seven weeks to get sufficient troops in place. Meanwhile, we've moved a couple B2 stealth bombers to S.Korea, a rather strongly provocative action. UN and US sanctions since their nuclear tests have resulted in near-starvation for perhaps a third of N.Korean people - they're under strong pressure. What's next? I've no clue, but the idea of a breakout of hostilities does not seem anything like impossible. In Washington the idea of a N.Korean strike is being dismissed as unrealistic, but I don't see the N.Korean military as operating in what we consider a rational fashion.

Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem said Monday that the Cyprus bank bailout deal agreed to last night - which includes a big hit on uninsured depositors at the two biggest Cypriot banks - will serve as a template for euro-area bank restructurings going forward. In other words, choose the wrong bank in the wrong country and lose your money. How will savers know which banks to avoid? 17 months ago the EU did stress tests on their banks, and the Cyprus banks passed with flying colours. Here's a hint: Tuesday all the Cyprus banks except the two largest will reopen. So, 1) keep your deposits under the insured limit of $100k and 2) use small community banks that don't indulge in high finance. You can already smell Europe's next crisis brewing, as large depositors move their money out of Spanish and Italian banks leaving behind a capital shortage.

Jim Rogers, an extremely knowledgeable, wealthy and outspoken talking head, says the Cyprus thing has him seriously spooked. He says "I, for one, am making sure I don't have too much money in any one specific bank account anywhere in the world, because now there is a precedent. The IMF has said 'sure, loot the bank accounts' the EU has said 'loot the bank accounts' so you can be sure that other countries when problems come are going to say, 'well, it's condoned by the EU, it's condoned by the IMF, so let's do it too.' If you're going to listen to government, you're going to go bankrupt very quickly."

Canada says its top six banks are large enough to represent a systemic threat to their system, so they're requiring them to keep 1% more reserves on hand than the smaller banks.

Iceland put "temporary" currency controls in place five years ago and they're still there today. Cyprus now also has "temporary" currency controls. Cypriots are currently limited to withdrawing €300 per day or spending €5000 per month on a Visa outside of Cyprus. One young Cypriot says his father has €400,000 in a trading account at Laiki bank which he uses to import shoes for sale in Cyprus. His money is locked up, he's likely to lose &euro250,000 to &euro300,000 of his balance, he can't pay for imported shoes anymore and he's now basically out of business. This is the Eastern Mediterranean, you can expect smuggling to begin immediately if the Cypriots can figure out some way to pay the smugglers. EU economists estimate the Cyprus GDP will fall by 20% in the next 18 to 24 months - this is depression territory. No one has a clue how long before Cypriots will be able to access their bank balances. Looking to buy a retirement home? Consider Cyprus. Maybe you find a nice little house near the beach that was worth $200k in 2012. In 2014, maybe it's worth $100k. You go up to the owner and offer $50k deposited in a UK bank account in his name. You get an inexpensive Middle Earth Mediterranean house, he gets his money out of Cyprus.

Most large depositors in Cyprus will lose significant amounts of money in this "bailout." Perhaps you're thinking that it's good this can't happen in the US. Sorry, it already is. With inflation running at 2% to 3.5% - depending on who you believe - and bank accounts paying .1% interest due to the Fed printing money, you're losing money at nearly the inflation rate on any bank deposits. Since the crash you have lost 10% to 12% of any savings you might have. In Japan unnaturally low interest rates have been ongoing for 20 years, since their crash in 1990. You can expect it will be a long, long time before the Fed allows interest rates to approach a more normal level of 4% to 5%. In the meantime, your savings are effectively being confiscated and redistributed to the banks.

House prices in the US are recovering. The overhang of foreclosed homes is starting to dry up, and investors are returning to the market. It's unclear that this is a solid recovery - another recession will stop it in its tracks - but it does seem the worst of the housing crisis is behind us.

Last week I reported that 6000 dead pigs were found floating in the river near Shanghai. It's now 16,000 dead pigs. It's illegal in China to sell pigs that die of natural causes into the food supply, but there's a black market that accounts for about 10% of China's pork that does just that. China has been cracking down, and apparently this is the black marketeers way of laying low for a while. One more reason to avoid processed food in China. And this just in, Friday 1,000 dead ducks were found floating in a river. China is becoming famous for their air and water pollution and dangerous food supply. I guess when you have 1.2 billion people it's not considered such a huge problem if a few thousand die from pollution or bad food.

For several years honeybee hives have been dying off. It's now thought we understand the cause - a Monsanto / Bayer pesticide used to protect corn, the neurotoxin Clothianidin, seems to be fatal to bee hives. This pesticide is both applied externally and also present in the Monsanto MON810 genetically modified (GM) corn. Poland has recently banned the Monsanto GM corn. This year we've lost 50% of our bee hives in the US. A quarter of the American diet is dependent on bee pollination, including apples, cherries, watermelons, onions and almonds. Apple pie and cherry pie are at risk, this must stop. In a few weeks I'll have some scathing things to say about GM wheat. Although I'm a pretty strong proponent of science, this GM frankenfood stuff is getting completely out of hand.

Cisco laid off 500 workers this week. The Chicago PMI (Purchase Managers Index) came out and showed a large drop towards a recession in manufacturing. The Kansas City fed put out their manufacturing index, and it continues to indicate we're in a manufacturing recession. Comments submitted to the KC Fed frequently included references to uncertainty in Obamacare costs and concerns about high energy and raw material costs.

How's France doing? As I've said repeatedly, when France goes Europe goes. France has some of the highest paid lowest productivity workers in the world, leading Europe into a worker's paradise where jobs are forever, pay always goes up, and you don't have to actually do anything. France's labor costs are rising four times as fast as productivity. In addition, in France when you pay a worker $100 you have to send another $50 to the government to cover retirements and medical. Will it last? Sure, why not, just like our stock market will always go up from here.

Global Warming: there isn't any lately. The Earth's temperature hasn't really changed in the last 15 years, and now we're at a point where we're falling outside of the confidence levels of the models. Last year's temperatures were at the 5% confidence level, right at the edge of the believable range. Ocean temperatures aren't going up much either. Could it be the models are crap?

Culture: A Spanish bank, Sabadell, sponsored a really quite beautiful flash crowd

Cars: Ever lust after a Lotus? Consider buying one soon. They're down to selling about a few hundred cars per year total worldwide, and it's likely the brand will disappear soon. The Lotus is a British made car which is basically a street legal go-cart powered by a Toyota engine. It sacrifices nothing for cornering performance, so the interior is nice but minimalist, the suspension a bit harsh for the street, and you sit incredibly low. Lotus builds the frames for Tesla, so this could be a problem for them too. Before you buy a Lotus I advise you to get a chiropractor on retainer.

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