Detroit

Anyone that thinks that the U.S. economy can keep going along like this is delusional.  We are in the terminal phase of an unprecedented debt spiral which has allowed us to live far, far beyond our means for the last several decades.  Unfortunately, all debt spirals eventually end, and they usually do so in a very disorderly manner. 

Day after day 'positive' anecdotal data points are latched on to by a self-confirming media (and plethora of talking heads and asset-gatherers) unable to see anything but their 'it's all good in the long-term' thesis. The truth is, as Bloomberg's Rich Yamarone notes, there’s no way to assess last week’s economic data as anything other than poor. Chinese GDP continued to deteriorate, U.S. core retail sales and the index of leading economic indicators for June were flat, industrial production was at the same level as in March, and housing, the lone oasis of prosperity, slowed as new starts plunged nearly 10 percent from the previous month. Toss in the city of Detroit filing the largest municipal bankruptcy in U.S. history and the tone of America’s economic outlook took a decisive turn for the worse. Of course, this is all good for stocks is our new (ab)normal reality of single-factor Fed-liquidity-driven mass hypnosis.

There is more to this Ponzi than meets the eye...

The Innovator’s Dilemma strikes again, this time with the news that the city of Detroit has filed for bankruptcy protection.  As a business term, ConvergEx's Nick Colas reminds us that the “Dilemma” describes how successful companies fall from grace because they ignore new competition with disruptive technologies at the low end of their markets.  In a world that increasingly revolves around intellectual capital (a.k.a. people), government at all levels needs to think about how they do not fall prey to the same error.  As for Detroit, any lasting solution likely needs far more government intervention than is currently possible. And so to where Detroit goes from here, we’ll borrow from another business paradigm that parses all solutions to troubled operations into three buckets: "Fix, Close or Sell." In summary, Detroit’s failures are certainly of its own making. The way forward will need leadership that is unavailable locally.

Back in June 2011 we first reported how "Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly" in an article that explained, with great detail, how Goldman et al engage in artificial commodity traffic bottlenecking (thanks to owning all the key choke points in the commodity logistics chain) in order to generate higher end prices, rental income and numerous additional top and bottom-line externalities and have become the defacto commodity warehouse monopolists. Specifically, we compared this activity to similar cartelling practices used by other vertically integrated commodity cartels such as De Beers: "the obvious purpose of "warehousing" is nothing short of artificially bottlenecking primary supply." Over the weekend, with a 25 month delay, the NYT "discovered" just this, reporting that the abovementioned practice was nothing but "pure gold" to the banks. It sure is, and will continue to be. And while we are happy that the mainstream media finally woke up to this practice which had been known to our readers for over two years, the question is why now? The answer is simple - tomorrow, July 23, the Senate Committee on Banking will hold a hearing titled "Should Banks Control Power Plants, Warehouses, And Oil Refiners."

• Earthquake Sends Kiwis Screaming From Wellington Buildings (BBG)
• China quake death toll more than doubles to 54, hundreds hurt (Reuters)
• In 2011, Michigan Gov. Snyder said bankruptcy wasn't an option for Detroit. Two years later, he changed his mind (WSJ)
• GlaxoSmithKline says Chinese laws might have been violated (FT)
• SEC Tries Last Ditch Move to Put SAC’s Cohen Out of Business (BBG)
• Detroit’s Bankruptcy Reveals Dysfunction Common in Cities (BBG)
• Obama to start new offensive on economy (FT)
• As WTI and Brent reunite, Gulf of Mexico faces squeeze, not glut (Reuters)
• Extended Stay Files for Public Offering (WSJ)
• Apple Developer Website Hacked: Developer Names, Addresses May Have Been Taken (MacRumors)
• Treasuries Not Safe Enough as Foreign Purchase Pace Slows (BBG)

Detroit will be followed by many cities, and this was not hard to see coming, not at all - as exemplified by the ample warnings given not just by me but by at least one other pundit who was derided for her candidness.

It is so sad to watch one of America's greatest cities die a horrible death.  Once upon a time, the city of Detroit was a teeming metropolis of 1.8 million people and it had the highest per capita income in the United States.  Now it is a rotting, decaying hellhole of about 700,000 people that the rest of the world makes jokes about. Detroit is only just the beginning.  When the next major financial crisis strikes, we are going to see a wave of municipal bankruptcies unlike anything we have ever seen before. All over the nation, our economic infrastructure is being gutted, debt levels are exploding and poverty is spreading.  We are consuming far more wealth than we are producing, and our share of global GDP has been declining dramatically. We have been living way above our means for so long that we think it is "normal", but an extremely painful "adjustment" is coming and most Americans are not going to know how to handle it. So don't laugh at Detroit.  The economic pain that Detroit is experiencing will be coming to your area of the country soon enough.

The following brief video created by TheRules.org, using data sourced from this website, is the latest vivid demonstration of the most adverse (and dangerous) side effect of nearly five years, and counting, of global monetary intervention by central banks: a world in which the poor get poorer, the rich get richer, and the middle class disappears. The video's punchline "The richest 300 people on earth have as much wealth as the poorest 3 billion" is not exactly correct: in truth the situation is even worse: the richest 200 people have about $2.7 trillion, which is more than the poorest 3.5 billion people, who have only $2.2 trillion combined.

Amid the furore of Sunday morning political programming, Detroit Mayor Bing and Michigan Governor Snyder have been quite vocal. Bing made it clear that "a lot of negotiations will go into fixing our city," and when asked whether he will seek a Federal bailout, he responded, "not yet." The decisions following this huge bankruptcy are likely to be precedent-setting as Bing noted that more than 100 urban US cities "are having the same  problems we're having." As the WSJ reports, Bing warned, "We may be one of the first. We are the largest. But we absolutely will not be the last. And so we have got to set a benchmark in terms how to fix our cities." Snyder was a little more hopeful that salvation will come from above as he stated that while "I don't view that as the right answer... if the federal government wants to [bail us out], that’s their option."

Detroit’s bankruptcy filing is one depressing read. Poverty, crime, blight – you name the malady and there’s plenty of data to back it up. And unfortunately, Detroit’s not alone. You may be wondering which city hits the wall next...

Detroit just made the news as it filed for bankruptcy.  A model city in the century-old upsurge of American industrial enterprise, it has now become the prophet-messenger of its decline – over 70,000 decaying structures and pension-promises which won’t be kept in this city being an albatross for what’s to be new America.  At the end of the day, a productive society must create an efficient combination of building products and needed services… its GDP hardly to be represented by a ridiculous measurement of over-consumption and unneeded services. There’s little, however, that can be done to keep the curtain down in Oz.  It’s slowly going up… and soon the world will see us with our pants down.  And as the curtain goes up there won’t be a place for us to hide, and we’ll have no other choice than to return to the reality which is Kansas.

Sovereign debt is the bonds that are issued by national governments in foreign currencies with the intent to finance a country’s growth. The risk involved is determined by whether that country is a developed or a developing country, whether that country has a stable government or not and the sovereign-credit ratings that are attributed by agencies to that country’s economy.

The secret is the world is more indebted now than it was at the height of the financial bubble in 2007. And big changes are needed to avoid further trouble.

It's good to see that as more of the US spirals into chaos, someone still has a sarcastic sense of humor. For those who missed it, in the Kevyn Odd statement listing the primary reason for the bankruptcy of Detroit, this was the punchline: "For years, the City has spent more than it takes in and has borrowed and deferred paying certain obligations to make ends meet. The City is insolvent." In other words, a pure pyramid scheme whose final can kicking day has finally come. Which perhaps explains why the just appointed Judge to preside over the largest municipal bankruptcy in US history is none other than Judge Steven Rhodes, 64, who just happens to be the co-author of "The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes." In other words, if there is anyone qualified to oversee the biggest Ponzi scheme collapse to date in US public sector history, it would be Judge Rhodes. We can only hope, however, that he leaves some time in his busy schedule over the next several years, for that other, biggest of all Ponzi schemes, the United States of America.