Detroit

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. 

The Case-Shiller Home Price Index is unique among other economic data indicators for recommending that analysts focus solely on its Non-seasonal adjusted data series, as this is what the report uses in its own headline figures. It adds that "for analytical purposes, S&P Dow Jones Indices publishes a seasonally adjusted data set covered in the headline indices" - a far cry from the BLS, whose Arima X 12 models are the basis of the data "moves" on a monthly basis: moves which are based not so much in the underlying data but on the seasonal adjustment and fudging the government employees apply to it. And it is the unadjusted Case Shiller data that showed that in November, the 20 City Composite index posted its second consecutive monthly price decline in a row. Yes: on a year over year basis home prices did rise some 5.5%, but on the other hand, "average home prices across the United States are back to their autumn 2003 levels for both the 10-City and 20-City Composites." And while the price decline into the year end is somewhat seasonal, it certainly does not fit with all the other economic data released by the government showing a housing picture so bright not even the tiniest drops in prices were allowed.

We thought it useful to succinctly summarize the words that have been spewed forth from The Capitol today (and in the past). There is plenty to consider; from Reagan's "freedom" and "government" to Schumer's unfortunate random use of the words: "America", "Today", "Finished", "People" and finally Obama's somewhat ironic punchline that "we have never relinquished our skepticism of central authority, nor have we succumbed to the fiction that all society’s ills can be cured through government alone. Our celebration of initiative and enterprise; our insistence on hard work and personal responsibility, are constants in our character." Maybe the invisible hand of wordclouds was right when it suggested from today's 2,078 word address that "America Must Believe."

• Obama's Gun Curbs Face a Slog in Congress (BBG)
• Euro Area Seen Stalling as Draghi’s Pessimism Shared (BBG)
• China Begins to Lose Edge as World's Factory Floor (WSJ)
• EU Car Sales Slump (WSJ)
• Fed Concerned About Overheated Markets Amid Record Bond-Buying (BBG)
• Australia Posts Worst Back-to-Back Job Growth Since ’97 (BBG)
• Abe Currency Policy Stokes Gaffe Risk as Amari Roils Yen (BBG)
• Japan Opposition Party Won’t Back BOJ Officials for Governor (BBG)
• Fed Reports Point to Subdued Economic Growth (WSJ)
• China Set to Exit Slowdown by Boosting Infrastructure (BBG)
• Greece not out of woods, must stick to reforms: finance minister (Reuters)
• Russian Rate Debate Flares Up as Cabinet Seeks Growth (BBG)

• White House delays 2014 budget after "fiscal cliff" standoff (Reuters) - And Senate will pass this... never?
• Amari Signals Limits to Abe’s Campaign to Weaken Yen (BBG)
• Draghi’s Bond Rally Masks Debt Doom Loop Trapping Spain (BBG)
• Obama backs gun limits, concedes tough fight ahead (AP)
• Bernanke to Weigh QE Costs as Fed Assets Approach Record (BBG)
• Japan to Sell Debt Worth 7.8 Trillion Yen to Pay for Stimulus (BBG)
• France more than doubles forces in Mali (FT) and yet...
• Malian Rebels Take Town and Vow to Avenge French Attack (NYT)
• China’s Li Calls for Patience as Government Works to Reduce Smog (BBG)
• EU berates China over steel subsidies (BBG)
• Number of working poor families grows as wealth gap widens (Reuters)

Every nation-state has a body of laws woven into the fabric of society. As Peruvian economist Hernando de Soto has commented on extensively, the stronger the rule of law, the stronger the economy. And by "stronger" laws, I mean laws that are impervious to tampering for personal or political gains. The connection between a sound judiciary and economic health is readily comprehensible, except maybe to a politician... businesses and individuals are far more likely to invest capital in a country with understandable laws that are impartially and universally enforced than if the opposite condition exists. That's because the lack of a consistent body of law breeds uncertainty and adds a huge element of risk for entrepreneurs. Which brings us back to the matter at hand – American justice on a slippery slope.

• A Bold Dissenter at the Fed, Hoping His Doubts Are Wrong (NYT)
• China and Japan step up drone race as tension builds over disputed islands (Guardian)
• How Mario Draghi is reshaping Europe's central bank (Reuters)
• Merkel Economy Shows Neglect as Sick Man Concern Returns (BBG)
• US oil imports to fall to 25-year low (FT)
• China Loan Share at Record Low Shows Financing Risks (BBG)
• Dimon Says Some JPMorgan Execs ‘Acted Like Children’ on Loss (BBG) - children that reveleased who 'excess reserves' are truly used
• Fed injects new sell-off risk into Treasuries (FT) - really? So the Fed will stop monetizing the US deficit some time soon?
• Obama aide presses Republicans to accept more tax revenues (Reuters)
• Ex-SAC analyst named 20 alleged insider traders (FT)
• BOJ easing bets help dollar regain ground vs yen (Reuters)
• Goldman Sachs Said to Be Part of Fed-Led Foreclosure Settlement (BBG)
• Venezuela postpones inauguration for cancer-stricken Chavez (Reuters)

The beginning of the year has traditionally been a time of optimism when we all look forward to the exciting things that are going to happen over the next 12 months. Unfortunately, there are a whole bunch of things about 2013 that we already know are going to stink. Taxes are going to go up, good paying jobs will continue to leave the country, small businesses will continue to be destroyed, the number of Americans living in poverty will continue to soar, our infrastructure will continue to decay, global food supplies will likely continue to dwindle and the U.S. national debt will continue to explode. Our politicians continue to pursue the same policies that got us into this mess, and yet they continue to expect things to magically turn around. But that is not the way that things work in the real world. Bad decisions lead to bad outcomes. Sticking our heads in the sand and pretending that everything will be “okay” somehow is not going to help anyone.

As was expected, the October Case Shiller data showed that the recent transitory pick up in the housing sector, now that both REO-to-Rent and Foreclosure Stuffing, not to mention unparalleled debt forgiveness by virtually every bank has been thrown at the housing problem, continues with a ninth consecutive month in Top 20 Composite Index increases, rising 4.3% in October. On the other hand, based on the NSA data, the 4th consecutive dead cat bounce may be coming to a much expected end with October NSA data posting the first sequential decline since March. What drove the pick up in Seasonally Adjusted data? Nothing short of yet another housing bubble in the much beloved speculative areas such as Phoenix and Detroit, where home prices rose by 21.8% and... 9.9%. Yes: apparently one can pay for mortgages with foodstamps now. Other places such as Chicago and New York were not quite so lucky, with the average price declining by 1.3% and 1.2% in the past 12 months. What remains unsaid - very much on purpose - is that the shadow inventory problem is only getting worse, as we reported a week ago, when we showed that nearly half the market cap of Bank of America is in 6 month + delinquent mortgages, or mortgages that are not yet in foreclosure but virtually certainly will be, and will also be discharged.

What a year 2012 has been!  The mainstream media continues to tell us what a “great job” the Obama administration and the Federal Reserve are doing of managing the economy, but meanwhile things just continue to get even worse for the poor and the middle class. Right now we are living in a bubble of debt-fueled false prosperity that allows us to continue to consume far more wealth than we produce, but when that bubble bursts we are going to experience the most painful economic “adjustment” that America has ever gone through.  We need to be able to explain to our fellow Americans what is coming, why it is coming and what needs to be done.  Hopefully the crazy economic numbers that we have included in this article will be shocking enough to wake some people up.

1984 Is HERE

Tim Geithner's time is almost done, but the former NY Fed head is only one of very many whose position is expected to be replaced in Obama's second term (just so there is a non-continuous chain of command if and when the time comes for the people to demand an explanation for the state of the US economy from the talented Mr. Geithner). Who else is out and who is expected to be in? The following list attempts to cover all upcoming rotations at the top of the US cabinet. What is not attempted is a prediction of where in the private sector people such as Geithner will end up: that is considered largely self-explanatory.

Yet another story we have been following for nearly two years (and here) has finally migrated over to the Mainstream Media as attempts to hush it down before it become painfully obvious and problematic, have failed miserably. The WSJ writes that "Detroit auto makers are piling up big stocks of passenger cars at dealers despite brisk new-vehicle sales in the U.S.—a problem that executives vowed to avoid since their painful downturn three years ago."

• LA port workers to return Wednesday (AP)
• Iran says extracts data from U.S. spy drone (Reuters)
• Obama to stress need to raise debt limit "without drama" (Reuters)
• Big Lots Chief Probed by SEC (WSJ)
• NATO missiles to be sent to Turkey, Syria clashes rage (Reuters)
• GOP Deficit Plan Irks Conservatives (WSJ)
• Japan Can End Deflation in Months, Shirakawa Professor Says (BBG) ... almost as good as Bernanke ending inflation in 15 minutes.
• Osborne Prepares to Breach Fiscal Rules Amid U.K. Growth Slump (BBG)
• Global Banking Under Siege as Regulators Guard National Interest (BBG)
• Freeport plans return to energy (FT)
• Serbian NATO envoy jumps to death at Brussels airport (Reuters)
• Tide Turns After a Flood of Chinese Listings (WSJ)
• Australian economy loses steam (FT)
• Euro Crisis Feeds Corruption as Greece Slides in Rankings (BBG)

With REO-to-Rent now yesterday's trade, the Baltic Dry Index stumbling along near its lows (along with a glut of containers), and a 'recovery' in US housing, what better than to leverage all of these themes; to wit, as ABC News reports, the first U.S. multi-family condo built of used shipping containers is slated to break ground in Detroit early next year. So forget Trailer Parks, now the increasingly mothballed ports of America will be wonderful waterfront property courtesy of your very own (slightly used) cargo container. One proponent of this 'cargotecture' warns that although containers can be bought for as little as $2,500, they should not be thought of as a low-cost housing solution. Tempted? We are sure; below are several current developments.