Addison Wiggin – October 10, 2011
- Nation’s second-wealthiest city… functionally bankrupt, cutting staff, canceling projects, raising fees…
- Then comes the “Greek scenario” — skyrocketing heroin use, HIV infections… coming to a city near you?
- Europe delivers smoke and mirrors, Wall Street goes on a tear…
- Missing gold from Fort Knox, the deutsche mark in use right now, China lowering the yuan and other eyebrow-raising tales in the mailbag…
It’s a familiar story: a city strapped for revenue cuts back on services. The library is closed three days a week. The parks are looking a little scruffy. A community center was built… but there’s no money to open it.
We know, “yawn”… stretch.
Until, well, you learn this city should be swimming in wealth. It’s in the heart of Silicon Valley.
San Jose, Calif., has the second-highest per capita income of any city in the United States, behind only New York. It’s one of the few cities to have a AAA credit rating. And it’s… functionally bankrupt.
At $245 million a year, pensions and retiree health care take up half of the city budget. The figure will likely grow to $400 million by 2014. “Legally obliged to meet these costs,” writes Michael Lewis in an eye-opening Vanity Fair piece, “the city can respond only by cutting elsewhere.”
“As a result, San Jose, once run by 7,450 city workers, was now being run by 5,400 city workers. The city was back to staffing levels of 1988, when it had a quarter of a million fewer residents.”
“It started in the 1990s with the Internet boom,” Mayor Chuck Reed tells Lewis. “We live near rich people, so we thought we were rich.” Result: Increasingly rich pay and benefits packages for the public-employee unions.
In 2002, the police secured an 18% pay increase for the next three years. Then the firefighters won a 23% increase. The cops cried foul and insisted on renegotiating. They won an additional 5%.
And that’s just wages.
“Our police and firefighters will earn more in retirement than they did when they were working,” says Reed. “The city owes so much more money to its employees than it can afford to pay,” reports Lewis, “that it could cut its debts in half and still wind up broke.”
About an hour and 15 minutes north of San Jose is… well, not a mirror image, but maybe a funhouse mirror image. In 2008, Vallejo became the largest California city ever to file for bankruptcy.
At that moment, pay and benefits for city workers ate up 80% of the budget. Now, the police and fire departments function with half the personnel they had pre-bankruptcy. There are effectively no other city services. “Do you know that some cities actually pave their streets?” city manager Phil Batchelor tells Lewis. “That’s not here.”
He has a staff of one. “When she goes out to the bathroom,” says Batchelor, “she has to lock the [office] door, because I’m in meetings, and we have no one else.”
The only real activity at city hall takes place on the steps outside, during foreclosure auctions. Supply is high in Vallejo: One in every 16 homes is in foreclosure. Between 2006-10, the average home price fell 66%.
Whether wealthy like San Jose, or destitute like Vallejo, the story is much the same. Half of U.S. cities have cut staff, canceled projects or raised fees this year to cope with shrinking revenue.
That’s according to the National League of Cities, which found a double-whammy: falling property prices cratering property tax revenue, and unemployment cratering income and sales tax revenue.
“Those two sources of revenue were moving upward together during the boom,” said survey director Christopher Hoene, “and they’re now moving downward together during the downturn.” Thus…
- Two-thirds of cities surveyed had delayed or canceled public works projects
- Two in five raised fees for city services
- One in five had cut spending on police and fire protection.
Since the September 2008 seizure of world financial markets, local governments have fired 535,000 workers.
35,000 of those cuts came last month, according to the unemployment figures released on Friday by the Bureau of Labor Statistics.
What will this picture look like another year or two down the road? We need look no further than that poster child of insolvency, Greece.
British researchers writing this month in the medical journal The Lancet warn that an already stressed Greek health care system has been brought to the breaking point…
- Hospital budgets dropped 40% between 2007-09
- But hospital admissions are up 24% between 2009-10
- Heroin use rose 20% during 2009
- HIV infections are on a pace to rise 52% this year
- Suicides rose 17% between 2007-09, 25% in 2010 and 40% in the first half of 2011
“In an effort to finance debts,” the researchers write, “ordinary people are paying the ultimate price: losing access to care and preventive services, facing higher risks of HIV and sexually transmitted diseases and, in the worst cases, losing their lives.”
And what of the government workers whose pay is being cut — those who’ve managed to hang onto their jobs? They go on strike. Repeatedly.
The country’s two biggest unions staged a walkout last Wednesday that shut down the Athens airport. One protester from the government-owned power utility says, “We’re prepared — we’ve blacked out the country before.”
And some of the protests turn ugly…
How faraway is this ugly reality in Greece — routine riots and strikes, blackouts, a crumbling health care system — in your own neighborhood?
If a city like San Jose is scraping to hold everything together, how bad is it where you are?
This is a question that gets to the core of our updated forecast. “I think we’ve suffered from a series of mass delusions,” says the mayor of San Jose.
Delusions indeed. We offered 10 such delusions on Page 271 of Empire of Debt. What happens next? You may have had a chance to view this scintillating video we just made to introduce new readers to The 5 and our research project Apogee over the weekend:
Until the next wave of the crisis hits, it’s “risk on.” Markets everywhere are rallying on the following news from across the pond:
- German Chancellor Angela Merkel and French President Nicolas Sarkozy have emerged from another weekend crisis summit with a dramatic announcement: They’ll propose “important changes” to the way the eurozone operates… by the end of this month
- The Belgian government will nationalize the Belgian portion of the French-Belgian banking mongrel Dexia. The governments of France, Belgium and Luxembourg have agreed to provide a 10-year guarantee on $126 billion of Dexia borrowing over the next 10 years
- Greece’s central bank is tapping into a bank rescue fund to save Proton Bank. The announcement made no mention of what the rescue would cost.
Empty promises? Of course. Extend-and-pretend games? You bet. Spending from an empty pocket? Naturally.
But this morning, it’s good for more than 250 Dow points. Either that or it’s because Netflix is backing off its idiotic plan to split up its streaming and DVD services.
The S&P is up nearly 3%, to 1,188.
“From a technical broad market standpoint, not a whole lot has changed in the last week,” advises Penny Momentum Trader’s Jonas Elmerraji.
“The breakdown below 1,120 had the potential to be a short signal for investors, but the lack of confirmation the following day negated the bearish signal. Clearly, investors who decided to go short last Tuesday morning got shellacked when the market reversed.”
Precious metals are also a beneficiary of today’s rally. Gold is up to $1,668, the highest it’s been in over two weeks.
Silver is also rallying, to $32.09.
With hot money moving into stocks and metals, the dollar has taken a thumping today. The dollar index is down more than 1.5%, to 77.4, also a level not seen since late last month.
“This week, the U.S. dollar may lose its shine,” wrote our currency trading specialist Abe Cofnas to readers this morning.
“When risk aversion is the dominant market theme, the U.S. dollar is attractive. This has led to a large upward trend in the U.S. dollar against the Swiss franc. However, when the market is in a risk-appetite mood, capital will tend to leave the U.S. dollar to look for greater return in other baskets, and the USD/CHF is the vehicle to profit from a downward move.”
Abe recommended a trade accordingly; it has the potential for a 136% payout by Friday. Most of the trades he recommends play out in just four days in the one-of-a-kind market he follows. There’s nothing else like it… as Abe enthusiastically explains here.
The man who made English the first language of Singapore is now lamenting the fact his countrymen are losing touch with Mandarin.
As prime minister, Lee Kwan Yew declared English as the language of business, government and public schools in 1965. Now at age 88, and out of power for more than 20 years, he makes a point of speaking Mandarin to his grandchildren.
“I think it’s a mistake” for ethnic Chinese parents in Singapore to speak to their kids in English, Lee told a business gathering on Friday.
“They will learn English in school anyway and they should keep up their Mandarin at home so that the child will naturally speak Mandarin and find it easy in school.”
The price of abandoning Mandarin? Chinese Singaporeans “would also not be able to take advantage of a rising China,” sums up a CNN report, “and its attractive market of 1.3 billion people.”
Not that Lee thinks he was wrong. He explains all, we’re told, in a book coming out next month. Of course he does.
“My apology for being quite unfair to you,” writes the reader who took us to task Friday for our alleged failure to hold the Federal Reserve to account. “I have no knowledge of your books or movie. My prejudice is showing, and I hate prejudice.
“I await the day when the masses awaken to the fact that they are slave to the very few and their awakening to the power of the individual to a level where they start exercising their power to their own advantage.
“Yes, I have confidence in the rising consciousness of the individual.”
The 5: Welcome.
“Regarding the unemployment chart in Friday’s issue,” writes another reader offering a more pointed critique, “It can be a study in the use of Federal Reserve interest rate management. In the early years, the rates were high, so when the Fed lowered them, it stimulated the economy and produced faster rebounds.
“Now rates are near zero already, and that can’t be used to stimulate, thus the slower rebound. Because rates are so low, the Fed invented QE1 and QE2. The results of that are unknown because it hasn’t been done before. We are in different times.”
The 5: Indeed, this is no ordinary “business cycle” recession. It’s a “balance sheet” recession — or depression, take your pick. Any recovery will likely be difficult until a host of debts are either paid off or liquidated.
“I’m sure you read it the same way I do,” writes a reader of our passing mention that Rep. Ron Paul can’t line up a co-sponsor for his bill to audit the gold in Fort Knox. “They are scared it is not there. Just look the other way and ignore the scam. What a great Black Swan event: No gold. And the next conspiracy theory: Where did it go?
“I’d sure like to know for sure, just for the fun of the fallout.”
The 5: Over the weekend we got around to watching the History Channel’s installment of Decoded, all about Fort Knox, that a reader brought to our attention Friday. The most striking fact in the documentary is how in nearby Elizabethtown, “everybody knows” the gold isn’t there. The show did little to explore what might’ve happened to it.
“For several years now,” another reader writes about Europeans already reverting to national currencies, “the usage of deutsche marks has been increasing in southeast Germany.”
“Just back from teaching in China (to which I’ll return),” a reader writes, “I have to admit to you that the Chinese authorities are fed up with America’s inaction on its deficit problem and are considering not raising the value of the yuan against the dollar, but, in fact, lowering it.
“I know that you understand enough about the global crisis to understand that if that happened, America would be facing disaster.
“I wonder how many of your readers have asked themselves the following question: China has long linked its yuan to the dollar; what is the likelihood that, in the foreseeable future, and in panic, America decides to link the dollar to the yuan? Yoohoo!!! Everything will be reversed. It reminds me of the ancient Chinese saying: ‘Man who lie on stomach have crack-up.’ Figure it out!
“Your 5 Min. Forecast is a treasure! Whoever invented it is a genius!”
“I enjoy reading the 5 Min. Forecast in spite of the doom and gloom,” writes a reader who manages to get the compliment… and the inevitable “yes, but” part into the same sentence.
“I have a question, or rather a comment: Why do almost all of the Agora-sponsored investment presentations end with the suggestion that you spend $99.00 to subscribe to a newsletter with ‘all the answers’ to your investment problems?”
The 5: Um… well… that’s how we stay in business. To maintain our editorial independence, with two exceptions, we don’t accept advertising. So you — our paying subscribers — are our most important source of revenue.
“U.S. Customs at Dallas/Fort Worth International told me,” writes a reader weighing in on face value versus bullion value of U.S. Gold Eagles, “that they value $50 Eagles at face value since they are U.S. currency.”
The 5: You’re a brave individual to even ask…
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. “In a grim sign of the enduring nature of the economic slump,” The New York Times reports this morning, “household income declined more in the two years after the recession ended than it did during the recession itself…”
During the “official” recession between December 2007-June 2009, household income fell 3.2%. In the two years that followed, it fell 6.7%.
If income is down, that spells even less revenue for the states and cities that are already slashing services. The “Greek scenario” described above might be even closer than you think as the mother of all asset bubbles begins to implode.