Detroit

This fall, the US government might go the very same way as Detroit and end up filing for chapter-11 help. In other words, it will end up asking itself to bail itself out.

When Standard & Poors is not engaged in "Puffery" (a defense which admits "our entire business model is worthless") it pretends to analyze credits and assign ratings, usually with both humorous and systematically catastrophic results. Just as it has done in the chart below. In the aftermath of the Detroit filing, one may be interested to see just how the rating agency, which had Greece rated at "A" months before the Eurozone's bananaest-republic member had its first bailout, evaluated America's various states since the start of the 21st century through 2012. Among the best: Florida. Worst: California. Michigan, whose main city just went bankrupt: AA-. And with countless cross-default provisions and collateral waterfalls upon a multi-notch downgrade, one can be certain that as reality finally comes to the muni space with roughly a 3 years delay, that this too will have a happy ending.

Succinctly summarizing the positive and negative news, data, and market events of the week...

We've discussed Jiangsu before (dead pigs, TBTF Solar companies, and bird flu) but the Chinese province (that is big enough to be a Top 20 global economy with GDP greater than that of G-20 member Turkey and 79 million people) is on the brink of collapse under the weight of its own debt (cough Detroit cough). As China's leaders attempt to rein in over-capacity industries, tamp-down residential real-estate bubbles, and generally unwind "...the greatest misallocation of capital the world has ever seen, which was China’s 2009 stimulus," Jiangsu stands head-and-shoulders. With debt far higher than its peers, its mainstay industries (shipbuilding and solar panel manufacture) drowning in over-capacity, and massive 'empty' property developments now starved of funding, Jiangsu "can potentially pose a systemic and macro economic risk to the country."

‘Vote For Gold’
"You have to choose, as a voter, between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."

There appear to be three critical aspects playing out behind the scenes in markets that are little discussed as potentially catalyzing events. With all eyes focused on FOMC next week (and Kuroda Sunday), the ABCs (Angela Merkel's election, Bankrupt Detroit's fallout, and Corrupt Cohen's potential contagion) make few strategists' notes but could quickly ascend to public enemy number one for the secular bull case. Little Red Riding Hood thought it a lovely day to walk to Grandma’s house. Then look what happened.

The raw economic truths from the Street. What's the difference between your common street thug or hustler and the K Street/Wall Steet/Central Banker? Read this to find out...

• The Citadel-SAC connection (BBG) - just wait until the Citadel-FRBNY connection emerges
• Letter backs Yellen for Federal Reserve role (FT) - or said otherwise, the Democrats would like the Fed to rule (and monetize deficits) for ever
• Obama, Republicans gear up for bruising U.S. budget fight (Reuters)
• Up for Debate at Fed: A Sharper Easy-Money Message (WSJ)
• UBS to Pay $885 Million to Settle U.S. Mortgage Suit (BBG), Banks shiver as UBS swallows $885 million U.S. fine (Reuters)
• Japan finmin Aso: CPI shows gradual shift to inflation from deflation (Reuters)
• Japan's PM calls for high-level talks with China (Reuters)
• Holder Targets Texas in New Voting-Rights Push (WSJ)
• Another Nightmareliner incident: Probe opened as Air India Boeing Dreamliner oven overheats midair (Reuters)
• Samsung Boosts Capital Spending as High-End Phone Demand Slows (BBG)

Municipal finance is in sharp focus after Detroit filed the largest municipal bankruptcy in history. Detroit’s filing is arguably an isolated case and its fiscal problems are not indicative of the broader municipal credit landscape; but, the outcome of the bankruptcy process will dictate whether the value of the full faith and credit pledge backing GO bonds will be diminished going forward. The global hunt for yield has probably chased new investors into the Muni market who may not fully understand that in recent years it has become an ‘ownership not rental’ market.  In other words, it is unlikely holders of Munis can sell what they own, as liquidity in the secondary market is almost non-existent.

In a brief but perfectly succinct interview on CNBC yesterday, Ron Paul shared his opinion on the need to own gold (and the physical demand for the manipulated metal) and the Detroit bankruptcy ("we're going to see more Detroits"). He concludes that "long term, you can expect governments not to change" and that they’ll keep taking on more debt and printing more money until people lose confidence in both the U.S. dollar and the U.S. military, both of which will be shake the foundation of a fiat/dollar system.

At precisely 4 am Eastern two opposite things happened: the German IFO Business Climate for July printed at a better than expected 106.2 vs 105.9 in June and higher than the 106.1 consensus: news which would have been EURUSD positive. And yet the EUR tumbled. Why? Because at the same time the ECB provided an update to the chart that "keeps Mario Draghi up at night" as we reminded readers yesterday - the ECB's all important credit creation update in the form of the M3, which not only missed expectations (of +3%) but declined from 2.9% to 2.3%. But more importantly, ECB lending to private sector shrank for the 14th consecutive month in June, and slid to a new record low 1.6% in June, down from a 1.1% in May.

The judge has decided to over-rule both objections and that nothing with regard the Chapter 9 process is held up.

• *DETROIT JUDGE OVERRULES OBJECTIONS CLAIMING BANKRUPTCY INVALID
• *DETROIT JUDGE SAYS HE HAS POWER TO GRANT GOVERNOR SUIT IMMUNITY
• *DETROIT BANKRUPTCY FILING IS VALID, FEDERAL JUDGE RULES
• *DETROIT BANKRUPTCY ELIGIBILITY TO BE DECIDED IN FEDERAL COURT

Now, we proceed to the Federal eligibility hearing (whether the city is eligible to proceed with Chapter 9). Remember this took almost a year with Stockton, CA. For now, Unions 0 - Orr 1 but it seems like neither side will be a winner when this is all over (which makes sense as while there is the law and the Obama-law, there is simply no money). The current plan (for now rejected by creditors) means a 90% loss for muni-worker retirees, 81% loss for unsecured creditors, and a 75% loss for secured creditors.

With the Detroit bankruptcy hearing under way (constitutional crises notwithstanding), we thought it useful to cut through the rhetoric, break-down the mutally-assured-destruction barriers, and peer into the cold-hard facts as the city looks to restructure its $18 billion in debt.

With yet another promise about to go up in smoke (that of PM Rajoy's claim that Spain will be out of recession this quarter), we thought it worth a brief reflection on just what a disaster the nation is and how much it is weighing on the entire EU. Spain has been in recession for seven quarters in a row and survey indicators suggest it will extend to eight. House prices continue to collapse. Government revenue to GDP is among the worst in the union. But unemployment is where Spain has its peers beat - at 6.2 million unemployed, Spain accounts for almost one-third of the entire unemployed population of Europe. With expectations that the unemployment rate will break above 28% next year and a government embroiled in scandal, Rajoy's planned address to discuss the politicial and economic situation to his nation in August may just be the catalyst for the social unrest that has laid relatively dormant for so long. Is Spain the new Detroit?

When the city of Detroit filed for bankruptcy last week, it became the largest such filing in United States history. Detroit’s population has dropped from 1.8 million in 1950, when it was America’s fifth-largest city, to less than 700,000 today. Its industrial base lies shattered. And yet we live in a world where cities have never had it so good. More than half of the world’s population is urban, for the first time in history, and urban hubs generate an estimated 80% of global GDP. These proportions will rise even higher as emerging-market countries urbanize rapidly. So, what can the world learn from Detroit’s plight? Stories like Detroit’s have played out several times in developed countries during the last half-century. And, as the fate of Mexico’s northern towns suggests, emerging economies are not immune from this process. Detroit’s fate should serve as a warning, not only for China, but for the next generation of urbanizing countries (for example, India) as well.