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Shim sham and rot – Detroit’s End Game

I’m sort of half-heartedly watching the city of Detroit going through the motions of deciding to give up its self-governance to the state of Michigan.  It’s amusing, but in that “pulling my hair out” sort of way.  In a recent last ditch effort to buy more time, the city is trying to raise something like $130 million in a bond offering.

You’d have to be an idiot to buy them for anything less than pennies on the $10,000.  There’s about zero chance of ever getting your money back from this sink hole.

Basic projections have Detroit running out of money sometime next Thursday, which means they’re already out of money and busy raiding pension funds, charity institutions, etc.  Anything with standing cash they can spend is most likely flying out the door.

So naturally all the local poltical contenders are busy putting on a show; claiming the state is robbing them, threatening to take to the streets in civil uprising, contending that they’re owed bailout money from the rest of the state, refusing to accept any responsibility or oversight as an affront to Democracy,….

My favorite is a few of the “less sentient” of the city council who seem to think they can hardball the state into better terms by refusing to vote for the current aid package, which would avoid a direct takeover and resort instead to a series of checks and reviews.  Money with no strings attached; that’s the only acceptable outcome for them.

Ha, they really are just clueless on how leverage works!  They have zero bargaining chips; they’re holding a 2 of hearts, and 7 of clubs, a Draw Four card from an Uno deck, and a parking validation ticket…in five card stud.  And they’re trying to bluff Snyder, who’s holding a suited straight and already has all the chips.

What a mess.  I await the Emergency Financial Manager with glee.  Hail Caesar!

In other news, the EU is going to up their firewall/bailout to 1.1 trillion euros.  Let’s go back through the last six months.  This is including the 400 billion euros they appropriated last Fall.  Plus the LTRO which brings the total “euros from nowhere in particular” to 2.1 trillion.

This is to keep governments running, because tax receipts are caving.  But more, the EU governments need to keep rolling their debt over.  So every one of those euros (plus at least another trillion if my predictions hold) is committed.

And what is all this money buying?

Nothing.  The answer is: this is what they need to sustain their current economic activity, which is contracting at almost double digit rates.  All these trillions in dilutive currency get them no economic stimulus whatsoever.

So I will say it again.  The euro and the dollar are going to par, and when they do, we’ll see what you think of the US and emerging market economies then, now won’t we?

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Sometimes, Money Printing Sets The Stage For Lower Prices

Not all printing is inflationary.

I know, what I have just said must resonate as nothing short of heresy amongst most of your ranks.  You’ve been worshipping at the altar of currency devaluation for so long now you probably can’t even begin to fathom life without the dogma.  What would you do, if separated from your ceaseless chanting and repetitious arguments?

But I’ll say it again; not all money printing inevitably leads to higher prices.  Sometimes, money printing sets the stage for much, much lower prices.

For instance, look no further than the U.S.’s own banking system.  There is to be witnessed the very contact point for where all this currency is going.  It is the direct beneficiary of free money.  Yet, how are things faring for them?

Revolving credit, the kind you usually find most prevalent with business, is dropping consistently.  While perhaps the numbers of U.S. dollars in circulation is forming a record apogee, the velocity of money continues to drop.  Banks have fewer and fewer outlets to invest all that free money into.

I say this to remind you that the issues of the day are never as straightforward as they initially appear.

Now, the oil/energy market has for months been going on a run of epic proportions.  And if you think our run has been impressive, you should look to Europe to see true calamity.  In anticipation of the great devaluation at hand, it seems there is no price too great to secure escape.  Gasoline prices in particular have been soaring, while Europe’s economy contracts daily.

How’s that for the worst of all possible outcomes?

But that sort of thing doesn’t last forever.  You can’t have economic contraction and soaring prices for long.  Eventually, this sort of contradiction forces the reluctant choice: let the obligations sort themselves out and take the hit.

Especially with prices where they are right now, and the unwillingness of employee salaries to rise equitably, I would not be surprised to find that current price levels are a temporary phenomenon.  If governments attempt to subject their citizens to these prices, then demand will continue to collapse (as it has to this point).  

At that point, it will become a fairly clear choice of allowing the main players to take their lumps, or allowing a double dip recession and having the main players fail anyway.

We’ve reached the point where every dollar printed goes straight to commodities or stock prices.  That’s the end of the game, folks.

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Global Growth Is Dead

Let’s just simplify this conversation, shall we?  Was there an EU country that didn’t contract last quarter?

I’m seeing France, Spain, Ireland, and even Germany experiencing “significant” drawdowns in their manufacturing bases.  This builds on top of continuous, quarter-over-quarter drops across the entire continent.

On top of that, I’m seeing retail sales misses in Canada, Brazilian unemployment shot back up, and China is spiraling the toilette bowl.  I’m hearing talk of turmoil in India.  All of these countries happen to be huge trade partners with the EU.

So what’s not going on an idiot run lower?  Well, the U.S. seems to be doing alright.  But the U.S. is not exactly what I’d call a “global growth” story.

So the big question for those of us here at home is: can the U.S. shake off any EU slowdown?  At what point does having our trading partners self-immolating start to impact us negatively, as a country?

My guess, for months now, is that the EU would witness spectacular contraction, which would effectively negate any growth here in the U.S.  We would go to 0 – “static”, if you will.

Will I be right?  So far, it looks like the data is disagreeing with me.  The U.S. does seem to be pushing ahead.  Is this from the expansion of the North Dakota energy revolution?  It very well may be the case that the U.S. is about to “Saudi Arabia” its way to self-reliance.

Sweet.  You will not see me complain about that.  If the U.S. is about to become a global “island continent” sheltering ourselves from the rest of the loons that occupy this planet, you won’t hear a peep from me.

But outside of the U.S., things are accelerating downward.

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A Humorous STU Story

For those of you who were not following me in my Peanut Gallery days, you may not be familiar with the shameful tale of STU – which is not dissimilar in its construct to the very appalling losses of last year from my oil and energy trade.

The stories begin on a tangent; a quiet Cain Hammond Thaler working on a lead. Suddenly, a grand conclusion is reached. A short position is entered upon. And finally – losses.

Terrible, blood-chilling, massive losses.

In late 2010, an acquaintance put me onto the state of student debt. After doing some digging of my own, I almost swallowed my tongue upon seeing the glib assumptions attached to some of these loans, compared to the number of them which were becoming distressed.

At that time, I compiled a quick search for the worst student loan companies – aided by a good many of my same readers today.

One The_Real_Hmmm (who has informally promised us that he will one day write in the Blogger Network, I would remind him), found the worm in the tequila, as it were…STU.

After running some analysis on their books, it became obvious that STU had a gargantuan problem on their hands. The short explanation is that their loan reserves were a black hole…under-cushioned by at least half. They had assumed that their loans would default at an average rate of about 8-10%, depending on the batch and issuance time.

Looking at how much cash they were losing in their loan reserves, they had to be defaulting at north of 20%.

So myself and some others; we shorted STU with great vigor and tenacity. Based on this information, STU was destined to trade to $0.00.

We got up more than 20% in a hurry – it was less than two weeks of a trade, as I recall. The others booked their gains and moved on.

I was not so altruistic.

I wanted the glory. I confess that. I wanted to ride that piece of garbage company into bankruptcy, while mocking their shareholders.

And then, it happened.

Albert Lord, the idiot CEO of Sally Mae, likely working through the orders of his leash holders, purchased the entire company…for a 50% premium to current share price.

If you have never woken to find 10% of your portfolio gone overnight, let me break down the sequence of events that will likely follow closely.

The first step is disbelief. You will refresh your webpage ten or twelve times, trying to shake the bug.

The second step is anger. You will pick up the nearest thing to you, once you realize how and why you lost that much, and hurl it across the room.

The third step is detachment. You will get up and storm around the house. If a one and a half year old golden retriever should be so unfortunate to get between you and your skulking, you will shout yourself horse at it, until it squats and pisses itself. This will not lighten your mood, as then you will be forced to clean up the urine.

At any rate, the point of this story is to let those of you who were involved in the event know that STU’s board is presently getting their brains sued out in a class action lawsuit for criminally understating the default rate on their loan portfolios.

Couldn’t have happened to a nicer bunch of people.

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