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Mark's Market Blog

6-21-15: It's still all Greece.

By Mark Lawrence

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The S&P and Dow continue to flirt with support lines and the 200 day moving average. They won't cross over into bearish territory, but they won't go on a sustained bullish drive either. Money is fleeing bonds at a near record rate, and that will be reflected in stocks in a short time. It appears to be far from time to be seriously bullish. Uncertainty over Greece and Europe bonds continue to be the main driving force in this market, but if Korea and China start looking like they're heading into recession that's going to have a big affect.

S&P 500 December 22 2014 to June 19 2015

IMF chief economist Olivier Blanchard wrote about Greece in his blog, "We believe that even the lower new target cannot be credibly achieved without a comprehensive reform of the VAT — involving a widening of its base — and a further adjustment of pensions. Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP." German lawmakers are now for the first time ever openly talking about a grexit. It's clear that EU bureaucrats want to build a political union including cross border payments, and before that can happen Germany wants to make clear that no one is going to get paid by German workers to retire 13 years earlier than the Germans do. Mostly my sympathies lie with Greece, which, as I see it, has been seduced by the EU and the ECB to live beyond their means; however I must admit that allowing most citizens to retire on government guaranteed pensions in their 50s is what Warren Buffet is talking about when he says "You can't vote yourself rich." And it's what Margaret Thatcher was talking about when she said, "They always run out of other people's money."

The Greek central bank warned this week that "Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country's exit from the euro area and – most likely – from the European Union. A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring. All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South."

Is this the month Greece becomes a failed state? I don't know. There's still time for some emergency deal to punt the major issues out a month or two. But all that's being talked about right now is enough money to keep Greece going for couple more months of negotiation. It's just believable that somehow a settlement to the current impasse will be found in the next ten days. I don't find it believable that a long term accommodation can be reached. Sometime this year, maybe this week, maybe in five months, Greece's banks are going to implode and then things are going to get really messy.

The world is floating in oil. Saudi Arabia and Russia are pumping at record levels; the US has not really cut back since prices fell. Surpluses are building up all over. If Obama and Iran sign a treaty (understanding? letter? napkin?) and Iran regains access to world oil markets, it's hard to see how oil prices can hold up. Saudi Arabia means to drive the US and Canada out of the oil business. This will be very hard on Canada - they're experiencing a bubble in real estate and worker pay from their oil, and this looks to end badly. That said, I'm for it: let's burn up Saudi oil at cheap prices and leave ours in the ground, so that our grandchildren inherit something besides just $15 trillion in debt.

Container shipping, the canary in the coal mine for trade, is in serious trouble. Carriers are currently losing about $50 per container and are expecting heavy losses for the rest of the year. Is China heading for a recession? It's very hard to tell from official statistics, which almost no one believes, but container prices and volume tell a clear story that's easy to read: China is in trouble. It's been estimated that China has had $6.9 trillion in wasted debt / investment in the last five years; no one overcomes that easily.

Canada, living with what really looks like a serious real estate bubble and growing unemployment due to the drop in oil prices, now seems to also be entering a recession. Manufacturing has been dropping for about a year and inventories are building up to unsustainable levels, meaning orders will drop and manufacturing has further to fall. I think Canada is in for some rough times in the immediate future.

Auto insurance is a $33 billion per year business, but the Bank of England says that may all be over soon. Driverless cars don't make the stupid mistakes people do

Since Fukushima Japan has cut back severely on their use of nuclear energy. This is becoming a problem for the world. Japan had based their nuclear power on burning left over plutonium from other countries, thereby helping clean up the waste from other countries nuclear reactors and getting cheap nuclear fuel for themselves. Now that they're no longer doing so much of that plutonium is building up in the world. There is 16 tons of plutonium sitting in France waiting to be purchased by Japanese who no longer want it. There was an additional 20 tons sitting in the UK but the UK offered to take the plutonium back and use it themselves. This stuff would be great for making all sorts of nasty bombs and really is not the sort of thing you want laying around.

Texas is creating their own Fort Knox. The Texan government owns about a billion dollars worth of gold, and they've decided they no longer trust the New York fed and various Wall Street banks to look after it for them. The new depository will not just be a well- guarded warehouse for their bullion. The law Gov. Abbott signed calls for the creation of an electronic payments system that will allow gold, silver, platinum, palladium, and rhodium depositors to write checks against their accounts, making the depository into a bank – one that will create a metal-backed money supply intended to challenge the paper currency issued by the Federal Reserve. And in case the Fed or Obama wants to confiscate Texas's gold, the new law also explicitly declares that no "governmental or quasi- governmental authority other than an authority of [Texas]" will be allowed to confiscate or freeze an account inside the depository. Gold that's entrusted to Texas will stay in Texas.

Boeing has had a great week, taking orders at the Paris air show for 172 737s worth about $18 billion, and 20 747s worth about $7 billion. There are only about 55 747 orders on book right now and the future of the 747 is uncertain.

Nearly a million union workers have had their pensions cut this week by the Obama administration. The Teamsters plan was running out of money, and the government preferred a negotiated cut in benefits to having the plan go bankrupt and dumped on the Federal Pension Guarantee program. Illinois, Connecticut, New Jersey and Kentucky should take note. And if the tech bubble collapses, California should too.

Fifty years ago we were told that poverty was simply caused by lack of money, especially for young children, so if we just gave money to mothers everything would be better. Now 73% of black children are born out of wedlock and there are basically no black fathers. Forty years ago we were told that the problem for blacks was substandard schooling, so we got busing and forced school integration. Didn't work. Sorry, liberals, bad guess. Twenty five years ago we were told the problem was home ownership and racist policies by banks, so we got zero-down mortgages based on unchecked income. Didn't work, almost brought down the entire economy. Another bad guess. Now we have a new guess: it's a lack of access to good jobs. Baltimore is considering a $2.9 billion light rail project to help inner city residents gain access to other parts of the city so that they can get good jobs outside their burned and devastated neighborhoods. 'Cause the rioters only need access to Woodlawn's Medicare and Social Security offices and Bayview's Johns Hopkins medical center, then they'll all be making $80,000, join the middle class, and quit rioting 'cause they're too busy mowing their lawns and inviting neighbor kids over for pool parties. Meanwhile, it was the Maryland NAACP that found three years ago that every welfare dollar that entered Maryland resulted in $2.34 of crime, and a 50% increase in AFDC led to a 43% increase in out of wedlock births, but that report is being profoundly ignored. Milton Friedman, the Nobel prize winning economist who invented monetarism said, "One of the great mistakes is to judge policies and programs by their intentions rather than their results." In my experience liberals are profoundly disinterested in results, and blacks are oblivious to the damage done to their families, children and communities by well-intentioned liberals.

Retail is dying - Sears, JC Penney, Gap, Macy's and others are all shrinking. What's replacing them? Technology stores like Verizon, Apple, Microsoft, Tesla. Small medical clinics. Gyms. That's what occupies the mall of the future. And I believe as long as there's women there will be shoe stores.

We live in a world that's growing more and more statistically unlikely. The are about 1850 billionaires in the world who jointly control about $5 trillion. If money was votes, each one of these guys, on average, counts as 100,000 people. Obviously these guys have unprecedented power in political circles and with the media - they own most of the politicians and media companies. This is not surprising to good economists - it's well known that capitalism is unstable and a few wind up with almost all the wealth. Another failing of modern capitalism is the destruction of the planet, as there's rarely a price put on ecological destruction. Half of all the wild animals on Earth have disappeared since 1970, according to a major WWF study. On our current trajectory, within the next three or four decades most of what remains of the natural world will quite literally have been wiped off the face of the planet. This generation of humans is both living through and the driving force behind the greatest global mass extinction event in at least the last 50 million years. This week Pope Francis spoke out against capitalism, saying that the trickle down theory is a failed theory. The Pope wrote, "The attitudes hindering the path towards a solution. . . go from negating the problem to indifference, to an easy resignation, or to blind faith in technical solutions." He also dismissed 'market fixes' such as carbon credits, pointing out that these most likely "give rise to new forms of speculation." I'm a conservative and I'm not a big fan of government handouts, but imho the rise of unchecked influence of a handful of billionaires is the biggest social, political and economic threat in the world today.

Bonus picture, offered without comment:

There's a new talking Barbie. Your child (grandchild?) can talk to the Barbie and she answers back. Sample conversation: child: "Welcome to New York, Barbie." Hello Barbie responded: "I love New York! Don't you? Tell me, what's your favorite part about the city? The food, fashion, or the sights?" How does it work? Like the microphone button on your smart phone. The child's speech is recorded and sent out over the internet for analysis. A response is generated and sent back to the doll, who speaks it. Your child's speech is kept in memory on a server somewhere - the excuse is so that the servers can get better at recognizing your child's speech. ToyTalk, the company that makes this all happen, says keeping these recordings will also make future toys better. These policies violate the surveillance holy trinity: 1) They're pervasive, starting to appear in all aspects of our lives. 2) They're persistent, capable of keeping records of what we've said indefinitely. 3) They process the data they collect, seeking to understand what people are saying and acting on what they're able to understand. What if you buy a Hello Barbie. If it overhears spousal or child abuse, should it call the police? If it catches one of your kids smoking dope, should you get a phone call? Who owns the Barbie, you or your kid? Are the records available to police? Will they need a warrant? Will they have to notify you if they get a warrant? What if your employer gets some talking barbies circuit boards and hides them inside everyone's computer? What if these recordings work their way into your credit score? I'm not happy about speech recognition going into toys. But then perhaps I'm just a fossil. Perhaps our phones have already been doing this for a couple of years without us noticing. It's the new normal.

Scientists in Britain looked at data from nearly 21,000 people who had their health monitored for more than 11 years. The top fifth of chocolate-eaters were 12 percent less likely to develop heart disease and 23 percent less likely to suffer a stroke compared to the bottom fifth of chocolate consumers.

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