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Emerald Isle and the Golden State
There is an eerie calm that has descended on the Irish story. IMF and EU
folks are ‘up country’ taking a look-see and kicking some bank tires.
The market for Irish debt has stabilized and the local equity index has
improved at the prospect of some sort of deal that will “fix” the
problem. Even the Euro has had its head lifted at the prospect.
I understand that a bailout of Ireland and Portugal is better for the
markets than a crash and burn, but I am surprised at the euphoric
atmosphere as we get closer to the biggest sovereign blow up in a very
long time.
Speaking of sovereign blowups there is one happening in the US Muni
market. There are a number of factors hitting Muni’s of late. Some are
technical, some yield curve related. But there is more happening than
just these things. It reminds me a bit of what happened to Ireland
before they were forced to fold. Some things hanging on the market:
-There is a large 30 day supply of ~$23b. The highest in seven years.
-Treasury long-term yields have seen a very big back up since the announcement of QE-2.
-Philadelphia and San Francisco have been downgraded. This is very “upsetting” to Muni players.
-There is uncertainty regarding what the tax brackets will be in 40
days. If you don’t know what your tax rate is it is hard to figure if
you should invest in Muni’s.
-There is uncertainty regarding the Build America Now Bond program. The
uncertainty (it also expires in 40 days) is adding to the anxiety in the
market.
-Hamtramck, Michigan has requested permission to file bankruptcy, always
upsetting. Even more upsetting is that their request has been denied.
This muni has been broke for years, but rather than go bankrupt and wipe
out the un-payable liabilities the plan if for a bailout. A dangerous
precedent as it just puts more debt pressure at the State level.
These are all good reasons for a backup. But this has been a hell of a
backup. Two listed funds in the Muni space tell a scary story. The folks
who own this just gave up two years of income.
It is not just selected issues. The whole space is getting clocked, and it is happening fast:
An argument can be made that Muni’s will stabilize as the
regulatory/taxes issues are resolved. The supply issue is somewhat
self-correcting as issuers that have no urgent financing needs are
pulling deals off the calendar. But consider the muni yield curve for
both California and a general price index:
As you can see, short-term yields are near zero but rise pretty quickly
in both graphs. The California index is much steeper than the general.
This is a measure of too much supply and credit quality concerns. It is
reasonable to expect that Cali has a steeper curve to climb. The Cali
yield curve is a barometer of where the general index is headed. It is
now probable that Cali will get steeper too. A guess where this is
headed:
The curve for all Muni paper will get steeper. Weak credits like
NY/Il/CA will see the curve steepen from two to five year maturities
versus the current ten-year peak. Should this happen Muni’s will be
forced to pay up big time to roll maturities. Some may face prohibitive
pricing. Given that the worst and biggest borrowers have the largest
populations a disruption in the financing markets for these biggies
would translate into big cutbacks in employment. It is not possible for
that to happen without it ripping a big hole in total GDP and pushing
unemployment north of 10%.
We know we have D.C. gridlock. There will be no new stimulus program
that bails out the states. A bailout that was directed to California at
the expense of Texas is not going to go over at all. I would call that a
non-starter. That being the case what is the only option left? Simple, the Fed buys Muni’s. Of course that would be the very last act before the cliff.
Ireland is being dragged and kicked into a bailout. The bond market
forced them into it. When yields screamed to peak near the two-year
(just a week ago) the jig was up. California will be no different. If
the two year cost of money rises to ~80% of the 20 year yield we will
have a crisis and a bailout.
I used to think that following muni pricing was like watching paint dry.
No action. That may change. The steepness of the muni curve may well
drive headlines and markets for a bit. I’ll be watching.
»
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A bailout of Ireland and Portugal is not "better for the markets" than a crash and burn. A bailout supplants the markets.
Just another brick in the wall...
Quoting myself: "QE2 is a stealth bailout for the states". The Fed was caught by surprise in 2008, this time it's trying to get ahead of the game. Still failing.
Here's the difference. The Irish will drink their sorrows away. The Californians will just light a spliff and smoke their sorrows away.
yes yes yes...but don't you see? it's all alright really.
munis will just go through the same as this:
http://portal.hud.gov/portal/page/portal/HUD/documents/november_scorecard.pdf
see it's easy! first you create the fuck up with federal agencies like fraudie and funnie, then correct the fuck up with another tHUD. same will go for munis, wait for a MUD to evolve!
the all powerful federal government agency machine will take taxes away from people in the 50 states and give somewhat less back to the same poor people in the same 50 states and the around 30,000 incorporated munis/town and cities (hmmm, in 2002, the National League of Cities put the total at 19,429 municipal governments in the US).
Yeah, it'll have to be the Fed that buys them, our unelected 4th branch of government.
No way a state bailout ever goes up for a vote... this would be political suicide. Imagine Texas or South Carolina given a vote on a bailout for California or Illinois state pensioners. I predict it'll all happen backdoor, through Medicare transfer payments, loans (like the state UE commissions) or QE3.
I do find it amusing that bond coupons which would've been considered a gift from heaven only a decade ago are now viewed as a catalyst for the apocalypse.
The market cap on these funds are 223M and 2B - Ben just need to roll them up with the 600B - that way everyone will be happy.
CA cities have also been gorging on lease revenue certificates for years......basically, these are mortgages secured by city development projects paid out of general operating funds to the banking trustee. Only God knows the total of it all. It was a very popular financing trick for local city councils and development commissions, avoiding pesky disclosures required by municipal bonding and debt ceilings.
The illustrious City of Bell recently defaulted on one for $ 35 million....secured by a vacant lot.
For goodness sake, it's simply MUNIS or Munis.
Apostrophes are for POSSESSION (as in "Fred's car" or "Ben's Fed").
Do NOT use an apostrophe unless indicating possession.
There is NO APOSTROPHE when you are talking about plural munis.
Silly stuff. Apostrophe mistakes look truly stupid in print.
You should get your own punctuation in order if you are planning to criticise others!
should be "for goodness' sake" (for the sake of goodness ... ie. goodness owns the sake).
Fat Head.
I admit that I am overly dependant on spell check and that is the origin of these errors. The buck stops here. That said, these glaring and significant punctuation gaffes are not fully my responsibility. Not too long ago I outsourced the editorial side to an online outfit.
I get maybe 3-4 dollars a day for this so I tried to cut costs and ended up with some bucket shop outfit out of (get this) N. (fucking) Korea. I didn't look, I just liked the price.
I learn from my mistakes, so I have severed all ties with NK and have as of today hired an absolute knockout who is "visiting" from Lithuania. She speaks almost no English but has many other admirable attributes. Her name is Zusane.
It is possible that this could backfire and there might be EVEN MORE errors in the immediate future as the "transition" is made. So I ask for your forgiveness for today's sins and, in addition, your forbearance should something as significant as this take place in the future.
Short of that you could just skip it. I don't give a damn.
PP=Punctuation Police. Possibly that would suit better than Fat Ass?
b
Bruce, this was really great article and is well constructed and original.
If Municipal finance locks up, this country is going to suffer because these bureacrates will close down all the parks, streets, police etc~etc to have their way.
I know a guy who put most of his retirement into municpals last winter (63 years old) just because he's tied of not making money in the stock market. These people just have no clue that a half million can go a long way if invested properly, or alternatively, their savings canjust continue to wither away in the squid ponzi.
the safest savings is in gold, but J-Q-Public has been conditioned to think just opposite
I think the public is going to go very hard on these local and state governments, and the attitude will be to let them burn and OBammy the paper tiger will not get personally involved
the FED will buy MUNIS from the money center banks, but that is all
I don't see it giving a loan/gift to California.
OMG, here we go again.
Not my responsibility, I just outsourced it to a buncha fuckin' (that's OK isn't it, as well as that that's and the fuckin' immediately preceding, right?) North Koreans. North Koreans can't spell. They can't even fucking eat right. Like it's (That's OK, too, isn't it? Jus' checkin', 'K?) not even their own fault. Well, maybe, isn't, or no, isn't it, I mean like they didn't (OK?) elect that Cammelildong or who ever it is with the pompadour haircut. Be cool for a Halloweiner mask, wouldn't it? So, maybe it's their fault, or isn't it because they didn't (first time, every time) all defect at the Olympics. Isn't it? So how many North Koreans does it take to punctuate? Or don't they?
Be very careful of those knockout Eastern women....trust me on this, I know.
Zsusane? Well, Bruce...
What can I say? I am sure she is beautiful, too. ;) Maybe there is some hope left for you in this world, hmm?
If she speaks no English and she is checking your punctuation...? Ha!
Who can blame you? Treat her like the lady she is and, who knows...?
_____________
Keep us informed. Inquiring minds want to know...
"It is possible that this could backfire and there might be EVEN MORE errors in the immediate future..."
I suppose it means you have to check your work more closely? ;)
ditto
LOL. Zusane, eh? Sounds like the answer to all your "back office" problems . . .
damn good thing we ain't talkin 'bout CDS's
...or CDS's squared's...
How many FatAsses does it take to recognise that this is a finanaial site and not a site for grammar comprehension?
We have many, many ESL posters here. I would hate to scare them off with a little...
"No soup for you!"
Please, try to understand the content and not criticise the delivery.
:D
And, by the way, possession demonstration is only one-third of their use. They may also be employed to demonstrate a contraction of the verb, "is," such as "it's (it is...) Thursday," or to replace a letter in the formal word that is not pronounced in the expressive, as in, "Blazin' Saddles," or, "friggin' madness, yo!"
So glad we got that cleared up. So you know...
How many fat ass's does it take to pass high school english?
Or is it elementary school english?
Don't you have a sock drawer to straighten out or screws to sort or something?
I would say that muni's is a contraction of municipals and therefore an apostrophe is ok
Anyone else think we saw an inverted yield curve when 30 year mortgages had a lower yield than 30 year treasuries last week.
the irish fell for the latest scam? AMAZING! the irish always seemed smarter than that.
http://covert2.wordpress.com
+1m for the av! oh..and the link isnt bad either :)
Nice summary, Bruce, and well developed. This is where the action is. Not that laws matter any more, but isn't the Fed limited to treasury guaranteed paper without specific Congressional authority, or am I a fraud or two behind, as usual?
The Fed bought 1.4T of dodgy mortgage paper and no one blinked. If they bid for state paper who would complain? State eats state? What congressperson would do that?
Then there goes the Constitution and the Tenth Amendment, that's all.
Hah! Municipal bonds are losing value against mortgage paper (as long as it's the good Fed mortgage paper).
But if holders of state paper redeem they will get mortgage paper, which will then not be Fed mortgage paper but ordinary sewage variety.
Makes sense.
There may be some new sheriffs in town. We'll find out soon.
What appalls me is that there is no pretense of an end to this, either in Europe or in the States/Munis. Moral hazard up the wazoo, and once you start down this road, absolutely no place to stop. If they bail one muni, they will have to buy them all.
"If the two year cost of money rises to ~80% of the 20 year yield we will have a crisis and a bailout."
In such a scenario, we are destined for a self fulfiilling prophecy. In other words, bank on a bailout outcome as this is a strange attractor that will not be denied. As Jim Sinclair says, "QE to infinity." I'd amend that slightly to "QE to infinity or bust, whichever comes first." I feel certain bust does.
Too true. And then there's all the lies they tell about the California economy. In truth, it's a Ponzi scheme. If people only knew....
All current debt-financed economies are ponzi schemes!!
The people don't know. Heck, some who participate here still don't know!
All but we few think that some "fix" or "bailout" or "default" will somehow fix the system. Extend and pretend ... it's not only the Ber-nank and Barry that are indulging in it ... every single voter is indulging in it.
We need a jubilee (to fix the current situation) and a new paradigm (to avoid ending in the same place again).
Statism is dead!
its like a bad movie. hey, it is california.
its not exactly a rainbow bridge from the Emerald Isle to the golden, pot, land but I see there is a connection.
And none of this was forseeable?
No one should be surprised, the only question is who gives the bailout, when, and how much but munis were dead a long time ago.