Monday, July 22, 2013 - One Can At a Time

One Can At a Time

by Sinclair Noe

DOW + 1 = 15,545
SPX + 3 = 1695
NAS + 12 = 3600
10 YR YLD un = 2.48%
OIL – 1.05 = 107.00
GOLD + 38.50 = 1336.20
SILV + 1.01 = 20.64

Sometimes great wealth is built slowly, just a little at a time. If you can make a small, consistent, repeatable profit – it adds up over time. For example, Americans consume 90 billion aluminum cans each year. If you could get a small profit from each can sold, say one-tenth of one cent on each can, why you could rack up about $5 billion in profits per year. What would you have to do? Well, some companies mine the aluminum, some companies fabricate the actual cans, some companies transport the cans; and then there's Goldman Sachs, which hoards the aluminum, keeping it off the market to influence the available supply.

You didn't know that Goldman Sachs was in the aluminum can business? Well, they aren't. They are in the aluminum warehousing business. Three years ago, Goldman bought Metro International, a warehousing firm in Detroit. Before Goldman bought Metro, aluminum customers would order aluminum and it would be retrieved and shipped to its destination within about six weeks. Now, Goldman makes that same delivery in about 16 months. The delays push up the price.

Longer waits might be written off as an aggravation, but they also make aluminum more expensive nearly everywhere in the country because of the arcane formula used to determine the cost of the metal on the spot market. The delays are so acute that Coca-Cola and many other manufacturers avoid buying aluminum stored here. Nonetheless, they still pay the higher price.

Metro International holds nearly 1.5 million tons of aluminum in its Detroit facilities, but industry rules require that all that metal cannot simply sit in a warehouse forever. At least 3,000 tons of that metal must be moved out each day. But nearly all of the metal that Metro moves is not delivered to customers, it is shuttled from one warehouse to another. Goldman doesn't actually do anything with the aluminum, they just hoard it until the price goes up. And in the 3 years since they purchased Metro, the price has almost doubled. (An article in the NYTimes over the weekend explained the scam in great detail.)

For much of the last century, Congress tried to keep a wall between banking and commerce. Banks were forbidden from owning nonfinancial businesses (and vice versa) to minimize the risks they take and, ultimately, to protect depositors. Congress strengthened those regulations in the 1950s, but by the 1980s, a wave of deregulation began to build and banks have in some cases been transformed into merchants, or warehousers. Over the past decade, a handful of bank holding companies have sought and received approval from the Federal Reserve to buy physical commodity trading assets.

Of course, controlling the physical flow of a commodity into and out of a warehouse, provides a tremendous information advantage when it comes to trading that commodity. And it's not just aluminum; the banks are also involved in storing other commodities such as copper, and oil, and almost anything.

In 2010, JPMorgan quietly embarked on a huge buying spree in the copper market. Within weeks — by the time it had been identified as the mystery buyer — the bank had amassed $1.5 billion in copper, more than half of the available amount held in all of the warehouses on the exchange. Copper prices spiked in response.

In 2011, an internal Goldman memo suggested that speculation by investors accounted for about a third of the price of a barrel of oil. A commissioner at the Commodity Futures Trading Commission, the federal regulator, subsequently used that estimate to calculate that speculation added about $10 per fill-up for the average American driver. Other experts have put the total, combined cost at $200 billion a year. What does the average American receive for the additional prices we pay? What do we get for that nearly $700 a year we all pay on average? Not a damn thing.

Every time Goldman CEO Lloyd Blankfein and JP Morgan CEO Jamie Dimon testify before Congress they offer up boilerplate about how their companies' "market making" helps to "allocate capital," spark "innovation," and "hedge against risk." But it's all a pack of lies. They increase risk by putting traffic jams in the supply chain; they stifle innovation by artificially inflating prices; and the only allocation of capital is the money they skim going right into their own wallets.

The Commodities Futures Trading Commission has put Wall Street banks and other big traders on notice for a possible investigation of their metals warehousing businesses following years of complaints about inflated prices. I'm not holding my breath that anything will actually get done, still..., gold prices rose by more than 3 percent today, their biggest gain of the year.

The U.S. Commodity Futures Trading Commission (CFTC) last week sent a letter to firms ordering them to preserve emails, documents and instant messages from the past three years

When it comes to aluminum, cotton, coffee, oil, wheat, and copper the big banksters have been charging all manner of rents and premiums for doing nothing other than controlling supply through creating artificial delays to drive up prices then reap the windfall of their own manipulation. Goldman Sachs is doing to aluminum exactly what Enron did to energy in the late 1990s and early 2000s. The price of everything is now rigged; from your morning cup of coffee to the gas in your car's tank to interest rates based on Libor, to everything. The question is: How long are the American people going to allow themselves to be fleeced by these fat cats?

Detroit may be alone among the nation’s biggest cities in terms of filing for bankruptcy, but it is far from the only city being crushed by a roiling mountain of long-term debt. From Baltimore to Los Angeles, and many points in between, municipalities are increasingly confronted with how to pay for these massive promises. The Pew Center for the States, in Washington, estimated states’ public pension plans across the U.S. were underfunded by a whopping $1.4 trillion in 2010.

Chicago recently saw its credit rating downgraded because of a $19-billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. And Los Angeles could be facing a liability of more than $30 billion, by some estimates.

Early this year, the Pew Center released a survey showing that 61 of the nation’s largest cities — limiting the survey to the largest city in each state and all other cities with more than 500,000 people — had a gap of more than $217 billion in unfunded pension and health care liabilities. While cities had long promised health care, life insurance and other benefits to retirees, “few ... started saving to cover the long-term costs.”

No one really expects a rush on the bankruptcy courts nationwide, however — the unfunded pensions and health care liabilities notwithstanding. In a sense, that’s why the Detroit bankruptcy filing, at $18 billion or more the largest municipal bankruptcy ever, is so unique. Are Detroit’s woes the leading edge of a national public pensions crisis? No. State and local pensions are indeed underfunded, but the funding is becoming a bit more realistic.

So was Detroit just uniquely irresponsible? Again, no. Detroit does seem to have had especially bad governance, but for the most part the city was just an innocent victim of market forces.

What? Market forces have victims? Of course they do. After all, free-market enthusiasts love to quote Joseph Schumpeter about the inevitability of “creative destruction” — but they and their audiences invariably picture themselves as being the creative destroyers, not the creatively destroyed.

Sometimes the losers from economic change are individuals whose skills have become redundant; sometimes they’re companies, serving a market niche that no longer exists; and sometimes they’re whole cities that lose their place in the economic ecosystem. Decline happens.

One reason municipal bankruptcies are rare is because they don't really solve the underlying problems. And the Emergency financial manager of Detroit is now going to face this problem. One of the first acts of the Emergency financial manager is to order the destruction of abandoned buildings. Some 78,000 buildings stand abandoned, including fire stations and hospitals and many private houses. Once grand apartment blocks, complete with decorative Art Deco cornices,lie empty, just the occasional ricochet of kids through them, then left to the wind. One of these has the word "Zombieland" emblazoned above its glassless windows, an apt description of a bleak cityscape.

The pictures are like stills from one of those end-of-the-world disaster epics – you half expect to see a zombie emerging from the dust. The cost to demolish what's left of Detroit is pegged at about $100 million. They don't have enough money to do the job.

And even if they could, they would still have to build something. Or maybe they could just turn the whole city, and all those empty buildings into warehouses for Goldman Sachs.

New research from economists at Harvard and Berkeley finds big differences in income mobility in different parts of the US, with most of the Southeast offering fewer opportunities to climb the income ladder, and places like New York, Los Angeles and San Francisco offering more.

So what accounts for these geographic differences? A mix of different incomes in the neighborhood works to provide greater opportunity for advancement; also,  tax expenditures aimed at low-income taxpayers can have significant impacts on economic opportunity.

Of course, the easiest way to strike it rich in America is still to win the genetic lottery and be born into a rich family: Children of the 1 percent are at least eight times more likely to make $100,000 or more by the time they're 30 years old than children with parents in the lower 50 percent of incomes.

We've talked on several occasions about the high costs of income inequality. If you hear that it plays an important role in health, your first thought might be that there is a strong relationship between income and health within any country. In any nation you will find that people on high incomes tend to live longer and have fewer chronic illnesses than people on low incomes. For instance, rich Americans are healthier on average than poor Americans.

Yet if you look for differences between countries, the relationship between income and health fades away. For instance, the US is much richer than Greece, for example, yet Americans on average have a lower life expectancy than Greeks. More income gives you a health advantage with respect to your fellow citizens in your own country, but not with respect to people living in other countries.

Once a floor standard of living is attained, people tend to be healthier when three conditions hold: they are valued and respected by others; they feel ‘in control’ in their work and home lives; and they enjoy a dense network of social contacts. Economically unequal societies tend to do poorly in all three respects: they tend to be characterized by big status differences, by big differences in people’s sense of control and by low levels of civic participation. Unequal societies, in other words, will remain unhealthy societies – and also unhappy societies – no matter how wealthy they become.

Back in 1990, the Journal of the American Medical Association reported the United States ranked 20^th on life expectancy among the world's 34 industrialized nations. The US now ranks 27^th, despite spending more on health care than any other nation. It seems Americans are losing ground globally by every health measure. According to a report on The State of US Health, in the US, males and females are living longer than in the past, but their progress lagged behind that of their peers in other wealthy countries. 

To really understand America’s poor health standing globally we need to look at “the social determinants of health,” those social and economic realities that define our daily lives.

None of these determinants matter more, these researchers contend, than the level of a society’s economic inequality, the divide between the affluent and everyone else. Over 170 studies worldwide, as reviewed by the Journal Social Science and Medicine, have so far linked income inequality to health outcomes. The more unequal a society, the studies show, the more unhealthy most everyone in it — and not the poor alone.

Researchers sometimes disagree about the pathways leading from inequality to worse population health. The most consistent interpretation of all the evidence is that the main route hinges on the way inequality makes life more stressful. Chronic stress is known to affect the cardiovascular and immune systems and to lead to more rapid aging; it wears down our immune system and leads to more disease. This same stress drives people to seek relief in unhealthy habits. They may do drugs or smoke — or eat more “comfort foods” packed with sugar and fat. Inequality makes social relations more stressful, by increasing status differences and status competition. These effects are important: Americans living in more equal states live around 4 years longer than those living in more unequal states.

Inequality has an equally potent impact on policy decisions around health. And as the US has now become the world's most unequal major nation, our health outcomes have deteriorated. There is no question that the US is the largest economy but these new findings raise some questions about how advanced we are.