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Mark's Market Blog

6-28-15: Chief Justice John Roberts: 'Just who do we think we are?'

By Mark Lawrence

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Another week, no noteworthy moves in the S&P, either up or down. Greece will continue to be in the news all week with no bailout imminent and a Greek default and exit from the Euro now seeming inevitable. Is this the next Lehman moment? It was the failure of the government to bail out Lehman bros. that put the 2008 markets into a tailspin. I expect markets to drop quickly and fairly deeply - this could easily be the beginnings of our first 10% correction in the last three years. Right now S&P futures indicate the index will open down 1.5%. Is this it, the beginning of the next crash? Nah. The four major recession indicators - employment, industrial production, real sales, real income - are all continuing to climb. The US economy is in perfectly reasonable shape, there's no recession on the horizon, and I continue to believe markets will be further up by the end of the year.

S&P 500 December 29 2014 to June 26 2015

Greek prime minister Alexander Tsipras has announced that Greece will hold a referendum on July 5th to see if the Greek people support the EU bailout terms. The EU responded that they rejected a vote and no further credit will be extended to Greece, all but guaranteeing a default on Wednesday, July 1. The IMF will almost certainly call Greece "in arrears," as if they call it a default then creditors can force a credit event which will make several hundred billion euros change hands due to default swaps and force Greece into bankruptcy. At this point Tsipras has about 48 hours to cave in to Europe's demands; I really don't see that happening. It has already been announced that the banks will be closed all week, as will the stock market, and there will be capital controls when they reopen - limits on how much cash you can withdraw and how much you can send out of the country. Greeks have been pulling their cash out of their banks all year and the banks have been getting emergency cash from the ECB, but that's all over now. It's obvious that the EU treasures drama above all else, and the Greeks are supplying drama in unprecedented quantities. How long will Greece last in the Euro? Perhaps a year or two, but almost immediately the Greek government is going to be forced to print up IOUs, and those IOUs will effectively be their new currency. They will almost certainly come out at 1:1 with the Euro, but in a year or so they will almost certainly sink to 2:1 against the Euro, perhaps even 3:1. And the Greek banks are most likely going to be mortally wounded by the end of July. I've thought for some time that default and devaluation is Greece's only way out of their problems, so I view this as a positive for Greece in the long run, but for the next couple of years things in Greece are going to get worse. And Europe? We're seeing the limits of tolerance the unelected bureaucrats in Brussels have for democratic processes. Clearly they're more interested in sending a message to Spain, Portugal, Italy: play ball by our rules or get sent to bed without dinner.

The UK is demanding changes from the EU. In the UK they're unhappy about not having control over their immigration, being forced by EU law to accept large numbers of immigrants and put them onto welfare immediately. They're unhappy about unelected EU officials passing laws that are binding on their own elected officials. They don't like the huge corporate handouts to particular businesses in particular countries, e.g. France's farmers, given at the expense of businessmen in other countries, e.g. UK farmers. And they're unhappy about EU financial regulations. I don't have details - David Cameron is being purposely coy so as not to limit his negotiators - but all of these points resonate with various EU countries and I think things are going to have to change. I don't know what will happen - personally I think the EU bureaucrats are living in a whole new level of denial - but without question tension in the EU is rising.

Stocks continue to go nowhere, neither convincingly dropping nor pushing to new highs. That's likely to change this week. In the last two weeks institutional investors (think state retirement funds) are pulling serious money out of the markets. The rats are fleeing the ship. When the markets open on Monday, unless there's a last-second Greece bailout, I expect blood in the streets in the bond markets and I expect that will be reflected in the stock markets. This should continue for several days, perhaps a couple of weeks, as people see what happens to Greek banks, to Europe banks, to various hedge funds. Several hedge funds have bet heavily on a new Greek bailout; they're in trouble. The tide is going out and now we're going to get to see who's been swimming naked.

China is now cutting interest rates. They already have so many non-performing loans on the books of their banks that they've started trying to convert bad loans to bonds; they have so many over indebted companies that they're inflating a stock market bubble to try to change bad loans to equity; and they're lowing interest rates to spur more loans. We're in the beginnings of what appears to be a major correction in the Chinese stock market; some on Wall Street are forecasting a 30%+ drop. Apparently the Chinese central bank wants to stop this correction. I'm starting to see an end game in China and I think it's going to be really bad. I won't be surprised to see China revert to a communist police state in the next couple of years. And wars are always good for patriotism and taking people's minds off the situation at home. . .

Iran, correctly sensing that Obama wants a deal more than they do, have changed their stance. Iran passed a law stating: 1) Nothing gets signed until the sanctions are first lifted. 2) No freeze on nuclear research. 3) No international access to military sites or scientists. As low as my opinion is of Obama, if he signs up for this my opinion will sink further.

Russia announced they have plans to overhaul their nuclear forces, including upgrading many ICBMs. Last week Putin said Russia would put 40 new nuclear-armed intercontinental ballistic missiles into service this year. This looks a lot like a return to the cold war - something Obama is particularly ill-equipped to handle imho. China has tested a hypersonic missile obviously intended to sink a US aircraft carrier. Now Russia has tested something similar - a 7,000 mile per hour missile. Except it appears the Russian hypersonic missile could also be used against targets in the US mainland. We're also working on one. Apparently we're about to enter a new period of expensive arms races.I find this confusing: the last time we had a cold war it bankrupt the USSR and led to their breakup. Russia's economy is already on its knees. George Friedman of Stratfor is predicting a complete collapse of Russia within ten years, and that the US will be required to enter Russia militarily to secure their nukes. Obviously Putin disagrees with this assessment.

Sweden Defense Minister Peter Hultqvist said Sweden, which is not part of NATO and has a tradition of not joining military alliances, will take part in NATO exercises in Spain in September due to concerns about Russia. Although Sweden's defense budget has been cut continuously since the end of the Cold War, Hultqvist proposed increasing the county's defense budget "to prepare Sweden for war." Russian Ambassador Viktor Tatarintsev warned a Swedish newspaper that such a decision would bring Russian counter measures against Stockholm. Tatarintsev also said Russia would reorientate troops and missiles, adding that "the country that joins NATO needs to be aware of the risks it is exposing itself to."

The air pollution that kills you is small particles in the air, frequently put their by badly running diesel engines. Who's the worst in world? As bad as Beijing is, China doesn't even make the top 25 list. Here's the places in the world where you most don't want to hang out and breath. Living in New Delhi is a bit worse than a half pack a day cigarette habit - New Delhi air will cut about 8 years off your life expectancy.

It appears that the republicans are going to let the import-export bank die. This is a WW II relic that gives low interest loans to countries buying Boeing aircraft and GE turbine engines. It's supporters claim it also helps lots of small businesses that export. I'm a small business that exports and no one in Washington ever helped me in the slightest. So far as I'm concerned, good riddance to this cute little piece of corporate welfare. Curiously, we find the nominally anti-business democrats now rallying to the bank's support.

Are we in a another tech bubble? There are 114 privately held tech companies with valuations over $1 billion - so-called unicorns. Facebook, a small advertising agency that turns your pictures into rainbows and helps you post funny photos of dogs and cats, is now worth more than Walmart, the world's largest private employer with nearly as many employees as the Chinese army. Apple, who makes phones and accessories for phones, will be the first trillion dollar company before this current bull market is over. And Tesla, who makes about 40,000 really kewl cars each year for rich people, is worth more than Fiat-Chrysler and just slightly less than GM, Ford, Mercedes or BMW, each of whom makes about 10 million cars per year.

In the 1940s servicemen returned home from the war. In the 1950s with massive bank loans we built houses and cars for everyone, employing tens of millions who joined unions and saw their families move into the middle class. Now the unions are all but gone and the middle class looks to follow them into history books. It used to be said, "What's good for GM is good for America." Well, if that's still true then what's good for America is industrial robots, the new auto industry favorite worker. Here's an enlightening video from Tesla.

Fiat - Chrysler is in trouble. Their U.S. model lineup that ranks last in fuel economy among major automakers, performs poorly in measures of quality, and has a higher than average dependence on consumers who rely on subprime loans. Their profit margin on sales is half that of Ford or GM. And they just announced a one or two year delay in the introduction of their new Jeep Grand Cherokee, easily their most profitable vehicle. Fiat has reached out to GM to propose a merger, but GM thinks Fiat has nothing to offer. I agree. I think GM would rather see them fold up and take a third of their sales than merge with them and take 100% of both their sales and problems. I've always been skeptical of Chrysler and I never though Fiat was a real company with real products. Their combination is proving to be unimpressive at best and dying at worst.

The internet threat evaluation company Recorded Future just released a report saying that login ids and passwords for 47 government agencies have been available on hackers servers like Pastebin for several years. Further investigations into the 18 million employee records lost by the government strongly suggest that Chinese and other hackers have been quietly living in several government computer systems for over a year.

A busy week for the Supreme Court. They found Obamacare subsidies legal. One theory about this, proposed by justice Kennedy, is that if the subsidies were found illegal then Obamacare would amount to an unconstitutional coercion of the states to build their own web pages. Attorneys General all over the US are today considering how the government might be unconstitutionally coercing their state with medicare or educational mandates. The Supreme Court found that the 14th amendment requires all states to perform gay marriages. I'm considering marrying my dog for the tax exemption - as long as I keep bacon bits around he'll never divorce me. Obama was apparently extremely happy about this ruling. And the Supreme Court found that the FHA could declare housing practices racist even if there was no racist intent. The instant case was about the Texas Department of Housing and Community Affairs who had contributed to "segregated housing patterns by allocating too many tax credits to housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods." The 5-4 ruling endorses the notion of citing disparate impact in housing cases, meaning that statistics and other evidence can be used to show decisions and practices have discriminatory effects, without proving that they're the result of discriminatory intentions.

Louisiana Attorney General Buddy Caldwell will not immediately enforce the Supreme Court's decision to legalize same-sex marriage, stating Friday that his office "has found nothing in today's decision that makes the Court's order effective immediately." Caldwell cited a 2004 vote to ban same-sex marriage in Louisiana's state constitution that passed "overwhelmingly" with 78% in favor as being in direct conflict with the court's ruling on Obergefell vs. Hodges: "This Supreme Court decision overturns the will of the people of Louisiana, and it takes away a right that should have been left to the states. Louisiana voters decided overwhelmingly to place in our constitution an amendment that defines marriage as between one man and one woman. I fought to uphold Louisiana's definition of traditional marriage, and I was the first attorney general in the nation to be successful at the federal court level." Texas governor Greg Abbott issued a statement stressing that the "religious liberty" of Texans would be upheld no matter what. Mississippi will not yet honor the court's decision either. Has the Bible belt had enough? Stay tuned. . .

Is Obama popular? Not with me or pretty much anyone I know. Apparently what this means is I'm quite isolated, because world wide Obama is extremely popular, the few exceptions being Russia, Pakistan, Palestine, Jordan, Venezuela. World wide 65% of respondents to a Pew poll said they trust Obama to "do the right thing regarding world affairs." 58% of Americans agreed; 76% of Canadians. Who are these 58% of Americans who are so free with their trust? I know almost none of them.

Obama is certainly popular with Obama. On Marc Maron's podcast he said, "I can answer unequivocally, 'Are you better off now than you were four years ago?' And the answer is on just about every economic measure, you are." Apparently everyone he knows works on Wall Street and vacations on Martha's Vineyard, 'cause a lot of the people I know don't think they're better off. Obama then listed his accomplishments:

Having trouble sleeping? A new survey by identifies the top 5 sources of worry:

Retirement savings 34%40%40%
Health care/insurance bills 28%35%29%
Mortgage/rent 20%28%27%
Education expenses 31%27%31%
Credit card debt 17%23%21%
Matt Schulz, senior industry analyst for said, "They say money can't buy you love or happiness, but according to our survey money can buy you a pretty good night's sleep."

The UK has released a study saying the sun is cooling to the point where the UK faces another "little ice age." During previous lows in sunspot activity from 1645 and 1715 and again from 1790 to 1830 the Thames river froze over with ice getting as thick as 10" and crop yields were low. The UK Met office warns that the amount of light and warmth emitted by the Sun would drop to levels "not seen for centuries." They hasten to add there will still be global warming, except the planet will be cooling during this time. They expect continued cooling from now until 2100. But there's still global warming. George Orwell couldn't have said it better.

Photo / slogan of the week: (left to right that's Sultan, Charlie and Trigger on our morning walk.)

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