The Detroit Bankruptcy Trial Balloon

~All photos from the Great White Hurricane of 1913 which hit Detroit and rest of Great Lakes region with 18" of snow in less than 24 hours on November 9th

2014 is coming upon us shortly..

And as always people feel varying levels of hopefulness and optimism that our economy is turning the corner;  that the "recovery" PR slogan that was beaten into our heads back in '09..'10..'11.. etc will Finally true in '14

We say honestly not to expect it.

We are not Negative Nellies..  No pessimism porn here..

Its just we're pragmatists; realists..   To stimulate the economy, the populace needs to continue consumption and do to that, they need cash (credit card debt only goes so far) 

And money is acquired pretty much through working..  Fewer the jobs, the fewer the employed; the worse the pay, the harder to make ends meet..

All basic stuff here..

No economy can grow outside of an artificial, fixed, manipulated one without the above mentioned occurring

Interestingly, we saw two Reuters headlines at the same time which really say a lot about how awful the situation is if you're part of the 99%:

"History Favors Another Good Year for Stocks in 2014"

"Can the U.S. Economy Recover Without Asset Bubbles?"

Stocks rise specifically because asset bubbles are created and all bubbles ultimately go 'Pop!'.. ALL of them i.e. 2000 dot.com, 2008 real estate and currently the QE bubble..

So will stocks be strong in 2014?  We hope not..  We do know that this can't last..  

Many metaphors and analogies can be used..  After a while it just becomes cute n' quaint n' trite so we're going to take the path less traveled and address things with candor..

If we had to predict what the big story for 2014 will be..  The thing that will be affecting Americans the most economically adversely, it would be that in '14, you will see the beginning stages of the War on Pensioners.

The trial balloon is Detroit.

Before we address that situation, understand there's been other towns prior which have had to declare bankruptcy and in the process, free themselves of the burden of paying their retirees the pensions deserved..

Its just its been small towns with low populations make it easy for the greater nation to ignore and the media can get away with mostly ignoring.

Take the small Alabama town of Prichard, pop. 36,600..

Back in 2009, they became the first city in US history to completely default on pension obligations.

The following is from a NY Times article written back in 2011 entitled "Alabama Town's Failed Pension is a Warning':

"This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.

Then Prichard did something that pension experts say they have never seen before: It stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full...

“Prichard is the future,” said Michael Aguirre, the former San Diego city attorney, who has called for San Diego to declare bankruptcy and restructure its own outsize pension obligations. “We’re all on the same conveyor belt. Prichard is just a little further down the road.”

There are many, many US cities large and small that would like to do what Prichard did but up to this point have not due mostly to vanity, pride and municipal ego..  Someone Else needs to be the first..

Enter Detroit..

Detroit owes a lot of money to its creditors.  It also has large pension obligations.  And because the city is deteriorating all around itself drying up taxable revenue streams, it can't pay its bills..

So it filed for a municipality bankruptcy..

It could have done so in Michigan courts but that would have protected the pensioners and forced the city to keep its financial obligation to them..

So obviously Detroit filed in Federal court...

And yesterday a judge granted the Chapter 9 so now its all just a matter of what gets chopped and who gets what.  

In 2005 alone, Detroit had to borrow $1.4 billion to cover its unfunded pensions liability..  The city's current debts total $18 Billion  (That is a little less than 1 week of Federal Reserve QE spending but since so few know of this hypocrisy, it continues quietly and openly)

As we wrote on Detroit a few months ago, derivative traders and other Wall St investors get first slice of the pie which means the biggest slice i.e. possibly recouping all losses.

The pension funds wait in line to see what's available to cover retirees..   We guarantee it won't be 100 cents on the dollar..

Realistically, we predict the very best case scenario is the pensioners get 50 cents on the dollar which would mean in real terms that $1200/month check would be $600 ($14,440 annually would be $7,200)

Then there's a worse case scenario...

From GuardianUK:  "The city’s workers are owed $3.5bn in pension payments and another $6bn in healthcare costs. Under one proposal floated before the bankruptcy was approved creditors would receive just 16¢ on the dollar for the pensions they are owed. 

The average Detroit pensioner gets $19,000 a year – the cut would leave them with $3,040.

Think about the national chain reaction if that scenario occurred as part of the Bankruptcy ruling...

Detroit is the trial balloon.. Make no mistake about it..

If Detroit exits bankruptcy successfully with its debts in manageable order and did so mostly through the pillaging of retirees' monthly checks, you better believe other cities would follow suit and file for Chapter 9..

The stigma of being the first would be gone and once it was observed the elderly didn't have the physical means or mobilization to put up any kind of fight, there'd be no reason not to..

As the NY Times article referenced previously explained:

"Many cities and states are struggling to keep their pension plans adequately funded, with varying success. New York City plans to put $8.3 billion into its pension fund next year (2012), twice what it paid five years ago. 

Maryland is considering a proposal to raise the retirement age to 62 for all public workers with fewer than five years of service.

Illinois keeps borrowing money to invest in its pension funds, gambling that the funds’ investments will earn enough to pay back the debt with interest. New Jersey simply decided not to pay the $3.1 billion that was due its pension plan this year (2011).

Colorado, Minnesota, and South Dakota have all taken the unusual step of reducing the benefits they pay their current retirees by cutting cost-of-living increases; retirees in all three states are suing."

We know people are all excited for Christmas which is only three weeks away and all the faux sales seem real tempting, but remember there is life on Dec 26th and beyond

And 2014 could potentially be a hellish year for many and because so many are blissfully unaware, the smack will feel triple hard.

Be smart and prudent with your money this shopping season..

And don't allow yourself to sit smug.. be as prepared as you can be for a most turbulent and unsettling 2014..

Lastly set upon a New Years' Resolution that you will motivate yourself to stay even more informed of the reality of things than you are even presently..