In 1964, the Italian film director Sergio Leone introduced the “man with no name” trilogy. First he created “A fistful of dollars”, then in 1965, “For a Few Dollars More”, and of course in 1966, “The Good, The Bad, and The Ugly”. The spaghetti western became firmly entrenched in the annals of film history. Such stars as Clint Eastwood, Eli Wallach, and Lee Van Cleef gave credibility to a non English-speaking director’s interpretation of the old west.
In this month’s issue of MacroProfit, in which we pay a sordid tribute to trilogy member number three, we will take an in depth look at some of the headlines making news. We’ll analyze Detroit and see where it has been and how it may become the template for Chicago, L.A, Baltimore, and any of a dozen other metropolitan areas of the country. We’ll explore Detroit’s climb to glory and its fall to despair. We’ll look at a few of the men who came to symbolize the motor city, who today would be simply shaking their heads. We’ll also look at the IMF and the World Bank to understand EXACTLY what will be the inevitable solution to Detroit’s seemingly unsolvable problem.
Most recently during Ben Bernanke’s questionable Humphrey Hawkins performance, Wall Street came to assume that QE tapering was in the cards and naturally, if no one were to be the purchaser of federal debt, interest rates would have to rise until buyers surfaced. For debt holders, it was a month from hell but what emerged was the assumption that housing purchases were being completely affected by the rise in mortgage rates. We will look at the cultural shift in one demographic class, which is only a secondary influence in the theater of housing acquisitions. We’ll also look at what is first, and it is NOT mortgage rates.
J.P Morgan has announced the withdrawal of their involvement in actual physical commodities, a much-heralded fanfare that has less credibility than the announcement that the recent White House scandals were “phony”. We’ll look at both situations by taking a historical walk through J.P Morgan’s past and also update on the current situation of the so called imaginable escapades.
Egypt, though on the back pages of the world’s press, commands front page headlines from us at MacroProfit. A potential civil war is worth sparing a few lines of print over.
We’ll also throw in a few odds and ends and of course take a look at our fantasy portfolio, all for educational purposes.
So tighten that gun belt, pour a shot of your favorite saloon drink, light up a smoke, and wipe that smile off your face because here comes…
“Detroit was betrayed by a lack of political vision, torn asunder by racial conflict, and devastated by deindustrialization. Detroit’s problems peaked in the late 1960’s and the 1970’s. Since then the city has struggled to recover, to build a new economy and a new polity. However noble the goals though, these efforts have failed to reverse Detroit’s deterioration. Motown remains in the grip of the crisis that began fifty years ago.” (a scholarly consensus -2001)
How could a city that was called the “Paris of the West” fall so far from grace? A City that was a magnet for immigrants and migrants, a city that became the automobile capital of the world and the music center for an entire generation. The answer is quite simple. Anyone with a bit of foresight would have been able to predict Detroit’s inevitable demise. As a matter of fact, Detroit IS the template, with a few exceptions, for every metropolitan area in the United States today. What is most interesting will be the way the civic leaders, politicians, and more importantly the government/bankers, use the template for their advantage and gain.
During the 1800’s, due to its transportation resources of a great lake, a river, and easy rail access, Detroit became a thriving hub of commerce and industry. Its population grew at a pace that was not unusual to any other mid-western city. However, in 1910 everything changed. Henry Ford’s plant in Highland Park revolutionized the entire auto industry. His concept of an assembly line and mass production became the cornerstone of the business and made Detroit the place to be. Every aspect of automobile production from tool and dye to parts suppliers found themselves headquartered in the Detroit metropolitan area. Where there was production and manufacturing there had to be management with commercial and office buildings to go along with it, and houses, and apartments, and restaurants, and on, and on, and on.
In addition to revolutionizing production, Ford also changed labor relations as he introduced a $5 a day minimum wage in 1910, which doubled his competitors’ rates. If Detroit wasn’t the place to be before, with a wage increase like that, it certainly became that way. Between 1900 and 1930 the city’s population escalated from 265,000 to over 1.5 million. A small quaint metropolitan area became a large, robust, thriving city.
During the 1930’s Detroit was like any other city in the U.S, with one exception, it was a one-industry town and sales in that industry plunged. Detroit was devastated and gave a small inkling of what was to come 80 years later. Tax receipts plummeted and welfare spending sky rocketed. Soup kitchens dominated and “buddy could you spare a dime” was the song of the day.
Some would argue that our entry into the Second World War was not to keep the world safe for democracy but was to take us out of a never-ending depression. Detroit was the poster child for that statement. From 1942 to 1945 production of commercial automobiles came to a dead stop as factories were retooled to produce B-24 bombers, jeeps, and M5 tanks. With Ford’s assembly line process the B-24 Liberator, which normally took a day to produce, was now coming off the line at a rate of 1 per hour, 600 per month with 24 hour shifts. America and Detroit were both back in business.
After the war the Beat never stopped. With no need for war equipment (though they should probably have stayed in that business) automobiles quickly came back into vogue. Everyone had to have one. From 1945 to 1970 Motown quickly emerged as THE melting pot of production and everything focused around the New Interstate Highway System made Detroit THE central hub. During this period, perhaps the most active organization was not the auto companies but the auto unions. The CIO grew in strength and power along with GM, Chrysler, and Ford, which laid the groundwork for the inevitable.
Chapters could be written on the political graft, the civil actions (M.L.K’s “I have a dream” speech was auditioned in Detroit two months prior to Washington), the ethnic riots, the crime, and the dwindling tax base. Chapters could be written and have been. For our purpose, however, only two statistics are dominant. The city’s population which plunged from 1.9 million in 1950 to 710,000 in 2010 and the non-Hispanic white element falling from 816,000 to 56,000. Obviously the face of the city had changed but unfortunately the financial demands had not.
In the 90’s, “Revival” became the Bill Clinton metropolitan theme song rolling across the country and Detroit was no exception. Casinos, stadiums, historic restorations and city centers saw a flurry of activity sink the city farther into debt. The city limits signs read “Welcome to Detroit, the Renaissance city founded in 1701.”
Names such as Ford, of course, but also Mitchell, Iacocca, and even DeLorean became synonymous with Detroit not to mention a group of young girls called The Supremes. But perhaps the man who was most synonymous with the blue-collar lunch box crowd was the guy everyone loved to hate but Detroit called their own, Bill Laimbeer.
The irony is that the current mayor is also a basketball legend, named Dave Bing, who currently is presiding over the inevitable city Bankruptcy. You see the math just doesn’t work. Renaissance or no Renaissance. As the world found other auto producing centers and the migration of workers continued to escalate, the legacy costs of pension and health care continued to mount. $18.5 billion in long-term debt, a decaying infrastructure, and the potential of a 90% loss for muni workers, an 81% loss for unsecured creditors (general obligation bond holders) and a 75% loss for secured creditors has made the actions over the remaining moneys and assets reminiscent of Piranha on a feeding frenzy.
A great city, based on an uncompetitive product, a dwindling tax base, and an infrastructure out of a Tim Burton film, would have you believe there is no solution. BUT YOU WOULD BE WRONG!
One man’s wants is another man’s needs and one man’s junk is another man’s treasure so here come the Banksters! (Sounds like a previous MacroProfit issue).
For the past several years the financial sector has been creating and proclaiming a dramatically improving, and in some instances, record breaking bottom line. By simply moving reserves from loan loss to the balance sheet, they have watched profits soar without any real impact to the top line. Unfortunately, the banks are running out of reserves to be able to continue this practice. Secondly, due to the Federal Accounting Standards Board (FASB) rules on assets for sale, bonds, which are carried on the books much like real estate, are allowed to be carried at model, in other words, par or purchase price and not market. This fantasy bottom line tactic is also coming to an end. It’s time for a new game or perhaps an old one. Thus replicating the strategies of the IMF and World Bank (Front organizations for the US treasury) the major US banks (TBTF) will be the saviors of Detroit and as such, every other metropolitan area.
Here’s how it will work, first they will buy all the general obligation bonds at a decidedly deep discount. The GO holders will get a better deal than holding for bankruptcy from $0.19 to as much as $0.60 on the dollar because of the FASB rules the moment the bonds are put on the books of the TBTF they are valued at $1, resulting in a handsome $0.40 or 66.66% gain (got to love accounting).
Next the bank will buy new Detroit bonds so both infrastructure and retirement payout can continue to everyone’s satisfaction.
Finally the bank will lend the city of Detroit enough money to service the debt, interest on all of the outstanding bond positions. In other words, the moment the Detroit city fathers get fresh new capital from the TBTF’s they will immediately start a payback program, which is counted as interest. Detroit is saved and all the new lending will have been placed on the bank’s balance sheet as a receivable a brand new asset, which will allow them to lend again, and so the cycle continues. In addition, the interest flow creates a new revenue stream for the bank, profits galore for the TBTF’s.
Why would the bank do this, knowing that the revenues, taxes, are not enough to support current government services etc. let alone to be able to pay back principle? The answer is simple and is taken from the IMF/World Bank playbook. The Federal Reserve will guarantee the future maturity and consequent payback of Detroit’s indebtedness or should I more accurately say, the US tax payer.
Detroit will attempt a Renaissance again; the TBTF’s will show dramatic profits and appear to be the cavalry riding to the rescue. The NFL Lions will still be lousy and somewhere down the line YOU will be the unsung hero for Motown. Wondering,
The World According to Alexis
“Beware of those who seek to take care of you, lest your caretakers become your jailers.” — Jim Rohn
In the world of Political Science, perhaps one of the greatest examinations and subsequent four volume sets of America’s strengths and weaknesses was written in 1831 by a young Frenchmen named Alexis de Tocqueville. He was ostensibly touring the United States in order to prepare a report for his government regarding the American prison system. His real motive, however, was….
Mortgage Rates vs. Employment
Most recently, since Bernanke’s poor Humphrey Hawkins performance, mortgage rates have moved up almost one full percentage point. This increase is being called the culprit from stopping the so-called housing recovery in its tracks.
Considering that I obtained my first mortgage in the early 1980s when the interest rates were double-digit, I found it quite remarkable that a 4% interest rate was considered to be a buyer’s stumbling block. Therefore, I decided to put on my Sherlock Holmes hat and investigate this recent mysterious curiosity.
Amy Hoak, a columnist for Wall Street Journal’s MarketWatch, recently described a woman who closed on a one-bedroom Chicago condo with a 30-year mortgage. Unfortunately, after the delays of all the paperwork, the interest rate had risen from below 4% to 4.23%. The difference was an increase of $45 per month, and the woman almost backed out of the deal.
Yet, I thought her reaction was quite strange. Considering that my first mortgage was double-digit, it was approximately 20% to 25% of my total net income. In those days, any higher percentage would have neither been a good bank risk, nor a smart loan on my part. The bigger the mortgage, the bigger the house. If the Chicago woman had adhered to that rule, perhaps $45 wouldn’t have been such an impact.
Perhaps it’s not the increased interest rate, it’s the fact that housing prices have once again gotten out of the range that people can truly afford.
Continuing with my Sherlock Holmes search for truth, the next situation to investigate was Household Formations, which have been traditionally influenced by the Generation Y group. Right now HF is declining rapidly and the 18-to-34-year-olds account for more than half of the missing households. Prior to the great recession of 2008, the average new household (new or used) was 1.1 million per year. Since the great recession of 2008, that number has plummeted to 450,000 per year. So, where are the unemployed or underemployed actually living? You’ll only have to look at mom and dad or at any other roommate who is paying rent (dorm style) in order to find the answer. In the good old days, the normal sequence went something like this: Graduate from college, get married, get a job, buy a house, have two kids, sell the house, buy a bigger house, and remain in the same town or city.
Today, however, there have been dramatic shifts in culture. The Y-geners need to be mobile and go wherever the job takes them. Having conversed with many, I’ve discovered that a spouse, kids, and a white picket fence are the last things on their minds. In addition, most of this group has watched as their parent’s major investment — their home — became a collapsing financial nightmare. In most instances, when the Y-geners are pressed, they’ll firmly declare that they don’t want to make the same financial mistake.
Eliminating perhaps the most historic and significant purchaser of houses from the equation is far more important than rising interest rates.
Since I continue to mull over my first double-digit mortgage, I feel that we may have overlooked the obvious, namely employment — considering that the Y Generation’s unemployment rate, according to the calculations performed by Generation Opportunity (based on government data) is 16.1%. This additional clue says that the former big buyers simply have no money. Accordingly, this led me to analyze the statistics from the 1970s until now, in order to figure out the correlation between mortgage rates, the S&P 500, unemployment, and houses sold.
|Time Period||Mortgage Rates(avg)||S&P 500 Growth Rate(avg)||Unemployment Rate(avg)||Houses Sold in 000’s(avg)|
Perhaps we should discount 2000 to 2010, since from 2008 until present-day, there were such bipolar facts. Remember, pre-2008, the house was an ATM machine. So, for our purposes, we’ll compare current times to my first mortgage from the early 1980s. Homes sold almost twice as much as right now, with mortgage rates more than three times higher when compared to contemporary times.
Back in the old days, you bought the house that you could afford and budgeted accordingly. Indeed, the house was much more important than the next iPod, the next SUV, or the next restaurant meal. We knew that we couldn’t have it all, thus we acted and spent accordingly. Consequently, interest rates were important, but they were not a deal breaker.
When it comes to the purchase of a house, although mortgage rates are important, the stock market is grand, and new households contribute mightily, the most significant factor is (and always will be) a job and job security — the facts prove it. How does Holmes know this? (Hint: Press Play below)
I guess we all can recall when President George Bush spoke and proclaimed “MISSION ACCOMPLISHED”
George said, “Securing and reconstructing the country” “fought for the cause of liberty” and “for the peace of the world” Ten years later we discover all of that simply meant control over one of world’s biggest oil supplies. The sign if erected today would say, “MISSION FAILED”.
Now history repeats itself in a slightly different way, however, once again we could proclaim “democracy”, “stability”, and “liberty” are our objectives with “peace of the world” thrown in for good measure.
As oil was the Iraqi objective, control….
Trading Places in Real Life
Imagine if you will, that you were trading a commodity, now imagine that you could tell when there would be backlogs in getting that commodity to market or the converse, when the market would be flooded. In both instances, with a shortage or a glut, you pretty much know how to make your trade. And this is a business that J.P Morgan wants to get out of? (Suuuuure)….
The downgrade of IBM exposes where analysts want people to be and when those people do get there, they will find the MacroProfit portfolio already sitting there waiting for them.
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Til next time,