Is Detroit Following The Cyprus Template?

by: James P. Montes

In a recent announcement made on July 18 2013, the city of Detroit officially filed for bankruptcy under Chapter 9. At $18 billion, this is the largest municipal bankruptcy in U.S. history. 1, According to the current "proposal to creditors." 2, The city's pension plans have been chronically underfunded and the gap between the plan's assets and liabilities now stands at approximately $3.5 billion. Additionally, the value of unfunded "other post-employment benefits" (OPEB) such as life insurance, health care, etc., now reaches $5.7 billion. There is thus a $9.2 billion gap between the total assets and the liabilities of Detroit's pension and benefits system (Table 1 below).

According to the restructuring plan, the city intends to write off the entirety of the $3.5 billion pension deficit and give the OPEB liabilities (which are basically not funded at all) the same treatment as bondholders - a 90% haircut. The net result is that pensioners could lose $8.6 billion of future benefits, or 41% of the value of all the benefits (pension plus OPEB) they were entitled to before the city's bankruptcy filing. Obviously, such a large clawback will have a profound effect on the livelihoods of the pensioners. Doubtless, this will have repercussions that will also affect the economic activity of the communities in which they live. What still puzzles us is how predictable Detroit's problems were and how little was done to fix them before it was too late.


Source: City of Detroit - Proposal to Creditors, June 14 2013

Is Detroit following the Cyprus Template?

In a recent article published in Seeking Alpha regarding Cyprus, the article examines the case of banks in Cyprus painting a dark picture for depositors who believe their money is safe in any city, state or country in the world. Eric Sprott, CEO of Sprott Asset Management, warned that when banks run into problems with capital, central banks now make depositors take the first hit.

The same scenario seems to be waiting for Detroit pension fund and municipal bond investors as indicated in table 1 above. In an interview with KWN, Eric Sprott expressed his concerns regarding Detroit and the future template for other municipalities.

"My greatest fear is that governments are broke. Governments have overspent and there is nothing they can do about it. They are going to fail on their obligations, and when they fail the economic impact will be so dire.

Imagine what the outlook for Detroit must be as all of these pensioners finally figure out they are going to get 16 cents on the dollar. How is it going to work in Detroit when there is no spending power? What if it moves on to Chicago, or the US government? Oh my God, there are so many governments, cities and states which are in trouble that have to face the music.

And once they face the music, the guy who thought he was going to get something is not going to get it. What does that do to the economy? It's not a pleasant outlook. So that's what I worry about. I worry about the final recognition that we've overspent, we've borrowed from the future, massively borrowed from the future, and when you massively borrow from the future, the present gets impacted someday."

Will the FED taper sooner than later?

Dr. Marc Faber, publisher, "The Gloom Boom & Doom Report" in a recent exclusive interview with Equity Management Academy made the following comments regarding the possibilities of the FED's tapering, he said... "Well basically I've been arguing for a long time that the US monetary policies are a disaster because you cannot deliberately create bubbles in order to push sustainable economic growth. You can create a bubble that creates an artificial boom so - called cracka boom. But that is followed by a collapse like NASDAQ off 2000 or the bubble that led to the housing bubble that collapsed in 2007/08. Then the damage on the economy is far greater than the earlier benefits and the FED's never realized. Now the FED, their media friends and the academics of course, they will all come forward and say Mr. Bernanke saved the world in 2008/09, when in fact Greenspan and Bernanke almost destroyed the world. That is not mentioned properly in the media and that is a fact. And we have artificially low interest rates post 2001 when the FED fund rate dropped lowered to 1% until June 2004. We are now in the fourth year of an economic recovery, as I mentioned earlier, almost after 5th year anniversary of the bull market and we still have a FED fund rate around 0%. It will lead to a colossal misallocation of capital. It punishes savers that have saved of all their lives for retirement that have some money in the bank, they get no interest on that money anymore. So they're forced to essentially speculate and it will end very badly. But will it end very badly tomorrow or in 3 years from higher levels… who knows? I've seen money printing exercises that have lasted a very long time until they finally came to an end in a catastrophe.

Is the US economy strong enough to require such a change in monetary policy?

He said, "Basically we have the same things since November 2008 when QE was introduced the first time. At that time they were talking about an exit strategy. You will never hear about an exit strategy today. They talk about maybe tapering. When they started in 2008, my argument was, believe me we are going to go to QE 99. We are never going to stop the program because when governments introduce new programs under the excuse of urgency to fix something usually these programs stay in place for a very long time. And all this talk about tapering, maybe they'll do a kind of cosmetic tapering at some point, like actually I have to say as of today this year alone, the FED's have bought more than $1 tn worth of treasuries and mortgage backed securities because they not only have this $85 bn of asset programs but they also have the accruing interest to invest. So they bought much more than they have made public. Now, can they go down from a purchase of $85 bn?… Yes, it's going to be cosmetic. As soon as the economy weakens again, as soon as there is an economic crisis, they will go to $150 bn a month or more.

How does Gold and Silver play a part in all this?

When you take into account the fundamental arguments made by some of the biggest names in the business, one tends to question what is the price of gold and silver doing at these extremely suppressed price levels.

If we take a look at the commitment of traders report, the commercials (central banks) seem to have positioned themselves on the long side of the market, while the large hedge funds (large speculators) have the largest short position on record at historically low prices. This combination is another strong indication that potentially a bottoming formation is taking shape.

Let's examine the gold and silver markets technically and see how we can identify trading opportunities for next week.


The December gold futures contract closed at 1230 . The market closing below the 9 MA (1284) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral.

With the market closing below the VC Weekly Price Momentum Indicator of 1231, it confirms that the price momentum is bearish. Cover short on corrections at the 1209 to 1.189 levels and go long on a weekly reversal stop. If long, use the 1272 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1251 to 1272 to levels during the week.


In an article published in SA recently I said, "When you interpret conventional wisdom of EW analysis and the fundamental picture, in simple language, the patterns seem to be indicating a major bottom completion in silver is taking place at current price levels between the 20.50 - 20.00 area. It seems that a close below 20.50 could trigger a final washout correction into the low to mid 18 to 18.50 price range. A close below 18.00 will invalidate this pattern completely. I personally believe if this was to be the case, this level or price range might be what major-long term buyers are waiting for to add to their long-term holdings. Any push down to these levels would create a pronounced bottom that will attract major long-term physical buying as values down here would be tremendously oversold and below the cost of production. If the lower price levels are tested I don't expect them to stay there for very long."

We made a new low on silver at 18.89 on December 4, 2013, and major physical buying developed that pushed the market up to a high of 19.89 during the same trading session. The market needs a close above 20 to confirm that a major bottom is in place.

This type of volatility historically is a sign that a shift of pattern is taking place that could be identified as a bottoming formation.

The December Silver futures contract closed at 19.52. The market closing below the 9 day MA (21.08) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral.

With the market closing above the VC Weekly Price Momentum Indicator of 19.47, it confirms that the price momentum is bullish. Cover short on corrections at the 18.94 to 18.53 levels and go long on a weekly reversal stop. If long, use the 18.53 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 20.07 to 20.59 levels during the week.

The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts

Trading Derivatives, Financial Instruments And Precious Metals Involves Significant Risk Of Loss And Is Not Suitable For Everyone. Past Performance Is Not Necessarily Indicative Of Future Results.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD, SLV, PSLV, PHYS, SPY, AGQ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.