This page has been archived and commenting is disabled.

The Muni Bond Crisis Is Officially Here: Harrisburg Drops $3.3 Million in Muni Payments

Phoenix Capital Research's picture




 

Back in January, I outlined a general
2010 forecast for the financial markets to subscribers of my paid newsletter Private
Wealth Advisory
. All in all, I outlined ten specific items I thought
would come true.

 

They were:

 

1)    MASSIVE increases in volatility in the
markets

(CHECK)

2)   
The
Fed to continue its bailout efforts but in a more subtle “behind the scenes”
manner (less public bailouts, more non-public lending windows/ purchases of
Mortgage Backed Securities/ etc.)

(CHECK

3)   
The
market potentially struggle to a new high (potentially 1,200 on the S&P
500) sometime before March 2010 (this is negated by any major negative catalyst
e.g. a sovereign debt default, major bank going under, etc.)

(CHECK though I was off by a month+ on
the top, which occurred in April).

4)   
Once
the market peaks, a serious, VIOLENT reversal followed by a volatile roller
coaster ride downward for the first half of 2010 culminating in a Crash

(CHECK on the first part and we’re
getting there on the Second: the Crash).

5)   
Several
sovereign defaults and credit rating downgrades

(Sort of CHECK on the first part,
DEFINITE CHECK on the second)

6)   
Multiple
states to beg for bailouts or default on their debt.

(Getting there but not yet)

7)   
A
municipal bond Crisis

(Check: Harrisburg last week)

8)   
Interest
rates to rise or inflation to break loose

(Half CHECK: Negative on interest rates,
but food inflation and cost of living is breaking loose)

9)   
China’s
credit bubble to pop

(Getting there but not yet)

10) Civil unrest in the US

(Getting
there but not yet: see Atlanta riots at section 8 housing)

 

All in all,
every single one of these predictions has either come true or is in the process
of coming true as I write this. I take great pride in my work, so I’m pleased
to have provided such an accurate forecast to my subscribers. However, I get no
pleasure from the fact the financial world is heading to “you know where” in a
hand-basket.

 

Indeed, just last week my prediction #7, a
municipal bond Crisis began in earnest when the capital of Pennsylvania,
Harrisburg, dropped $3.3 million worth of municipal bond payments for the month
of September.

 

This is just
the beginning. Collectively US states continue to face massive budget
short-falls in spite of massive Federal Aid. According to the Center on Budget
and Policy Priorities, US states are
expected to run deficits of $144 billion and $119 billion in FYs 2011 and 2012
respectively,
unless they can cut spending further or raise taxes
dramatically to close these gaps.

 

 

States can
cut spending and raise taxes all they like, but the stark reality is that most
of them have debt problems. And a growing number will be forced to choose
between social programs and debt payments to make ends meet. Social programs
buy votes, debt payments buy credit ratings.

 

Which do you
think politicians are going to sacrifice?

 

I believe we
that Harrisburg, Pennsylvania’s actions represent the very tip of the iceberg
municipal bond missed payments and/or defaults. Remember, the muni bond market is $2-3 trillion in size, so we’re not
talking about a minor issue here.

 

Worst of
all, individual investors are the ones most likely to end up getting creamed.

Indeed, ever
since the 2008 Crash, investors have been generally pulling money from stocks
and putting them into bond funds. All in all they’ve put $480 billion into bond
funds since June 2008. Of this, some $88
billion or 18% has gone into municipal bond funds according to the Investment
Company Institute.

 

These folks
are in for a very rude surprise when they find out that munis, which
historically have maintained extremely low default rates, are not nearly as
risky as once thought.

 

I strongly
urge you to review any muni bond holdings you might have in your portfolio.
Below is a list of the states with the largest projected fiscal deficits for FY
12.

 


State

Projected FY12 Shortfall

Shortfall as % of FY 11 Budget

California

$21.3 billion

25%

Connecticut

$3.8 billion

21%

Illinois

$17.0 billion

52%

Louisiana

$1.7 billion

21%

Minnesota

$3.8 billion

25%

Mississippi

$1.2 billion

27%

Nevada

$1.3 billion

36%

New York

$14.6 billion

27%

South Carolina

$1.3 billion

26%

Source: http://www.cbpp.org/cms/index.cfm?fa=view&id=711

 

However, as
the case of Harrisburg, Pennsylvania proves, the muni bond crisis is going to
be a state, city, and town affair, so examine EVERY muni bond you own,
regardless of where it is located.

 

Good
Investing!

 

Graham
Summers

 

PS. If
you’re worried about the future of the stock market and have yet to take steps
to prepare for the Second Round of the Financial Crisis… I highly suggest you
download my FREE Special Report specifying exactly how to prepare for what’s to
come.

 

I call it The Financial Crisis “Round Two” Survival
Kit
. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).

 

Again, this
is all 100% FREE. To pick up your copy today, www.gainspainscapital.com and click
on FREE REPORTS.

 

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 09/08/2010 - 13:17 | 569798 RockyRacoon
RockyRacoon's picture

 

10) Civil unrest in the US

(Getting there but not yet: see Atlanta riots at section 8 housing)

Hyperbole is unnecessary.  Lots of people milling about is not a riot.  I'm with you on the entire premise of the article, but there's no need to exaggerate.

Wed, 09/08/2010 - 12:09 | 569618 Gromit
Gromit's picture

The first of many silly alternative energy programs has been exposed by the Harrisburg failure.

Wed, 09/08/2010 - 11:39 | 569546 LooseLee
LooseLee's picture

Not to worry. Uncle Benny will paper it over. Problem solved! Buy Gold & Silver!

Wed, 09/08/2010 - 11:21 | 569503 bugs_
bugs_'s picture

The dreaded Harrisburg IOU

Wed, 09/08/2010 - 10:43 | 569388 papaswamp
papaswamp's picture

And the market rallies on paying no attention....

Wed, 09/08/2010 - 09:54 | 569246 Mad Mad Woman
Mad Mad Woman's picture

Harrisburg went to the bondholders and asked for a deal to lower the payments and interest rate & bondholders said no. I would have told them they either work with the city & still get a return OR don't work with the city, city files for bankruptcy & you get nothing. Which do you want, still getting a return or nothing?

Harrisburg is now 83 days away from a $34 million debt payment. If they couldn't make the $3.3 million payment they sure as hell aren't going to be able to come up with $34 million. The new mayor still hasn't come up with any plan for the debt, she just hired a consultant to come up with options for the city, and she refuses to answer questions about a plan, any plan for the debt.

The city controller is advocating bankruptcy because he sees no other way out. He has studied all the options and that is his conclusion. I agree with him. The only question now is which bankruptcy does the city file for?

The city can't raise taxes because the tax rates are already too high in the city, and the state has reduced it's share of money it gives the city in return for city services for the Capital. The Capital got away too cheap in the past, the city never really addressed that. The state should have paid the city a lot more money for the city services they receive.

The city is in a bind because of the previous mayor and numerous city councils over the last 25 years couldn't come to agreement about things, and then the previous mayor went rogue and started spending money that wasn't the city's for western artifacts for a western musuem idea that he had. So now the city is stuck with artifacts that originally cost about $31 million and is now worth a lot less. It's all top-shelf, excellent quality artifacts. The city did sell some of the items but didn't get what they wanted price-wise because of a down antiques market.

Can I interest anyone in some western artifacts? You can buy these top shelf items for a song now. If interested please contact the City of Harrisburg.

Wed, 09/08/2010 - 12:09 | 569619 NotApplicable
NotApplicable's picture

Well, it might've been worse, you know. The mayor and the city council could've reached agreement!

Then they all go rogue together.

In my town, they sold $27M in taxable Bankrupt America Bonds in the last year alone.

Good times, good times.

Wed, 09/08/2010 - 09:16 | 569192 tony bonn
tony bonn's picture

debt proves how wealthy you are - this is not like personal finance....so unless governments pile on more debt, everyone will think that they are poor....just ask any mba congressman....

Wed, 09/08/2010 - 08:29 | 569112 ncontrol
ncontrol's picture

Wow, those were some pretty wide-open predictions.

How about being a little more specific?

Civil unrest? Oh, a fight broke out in a bar.. Check!

Wed, 09/08/2010 - 11:30 | 569525 DaveyJones
DaveyJones's picture

it's the reason the fight broke out that counts

Wed, 09/08/2010 - 02:14 | 568926 Bearster
Bearster's picture

I am short MUNI, and even today on a 1% down day, it was up 2 cents.  I would say the municipal bond crisis hasn't broken yet.  Obviously we all agree it will at some point...

Wed, 09/08/2010 - 01:42 | 568904 pitz
pitz's picture

Why on earth does the muni bond market even exist?  Creditors can't seize municipal assets (for the most part) because of sovereign immunity.   And politicians can't be trusted to be fiscally responsible.

This junk is even worse than US treasuries.

Wed, 09/08/2010 - 02:24 | 568932 Sequitur
Sequitur's picture

You can go after the underwriters. Also, you can purchase insured muni bonds. While most states are broke, insurers are doing reasonably well, and some of them are sitting on enormous reserves.

Wed, 09/08/2010 - 03:58 | 568982 jeff montanye
jeff montanye's picture

insured muni bonds sure didn't trade in 2008 like the insurers were doing reasonably well.  at least with the treasury backed ones (escrowed to maturity, pre-refunded, new public housing) you know the credit risk better.

Wed, 09/08/2010 - 09:58 | 569257 MarkS
MarkS's picture

The history of Muni Bond Insurance isn't about insurance.  It was a way to take 55,000 municipalities and come up with a credit rating system that would allow ease of distribution. 

For a small sum, you as a municpality could buy 'insurance' which made your bonds AAA.  There was never a question of actually using the insurance.  Heck, the rate of municipal default from before the Civil War is close to zero considering the millions of of bonds issued (I'm talking CUSIPs, not $).  "Selling" muni insurance was abouit the safest business around - why do you think Buffet got in the game?

Then the credit crisis hit and there was fear that insurers would default due to their MBS obligations and pending legal disputes and legislation.  The Muni market got crushed for the wrong reason, we are three years into this and the muni market has been fine so far.  There has never been a major default where the bondholders did not get back there principal (par) at a minimum.

Now, I think that there are big problems to face in Munis going forward but, given the FEDs hate that munis are federal tax exempt I could se that some point down the road the FEDs step in with a deal to backstop munis with a loss of tax free status...

 

Wed, 09/08/2010 - 11:27 | 569522 DaveyJones
DaveyJones's picture

good point. that's one way to force more folks to quit buying local crap and start buying federal.  

Wed, 09/08/2010 - 02:06 | 568919 Millennial
Millennial's picture

I called my ex worthless one day. A week later she blew me. So unless Treasuries end up blowing me I agree they are worthless.

Wed, 09/08/2010 - 01:41 | 568899 IslandMan
IslandMan's picture

Suggested correction:

The word "risky" in the para beginning "These folks..." should be "riskless".  It kinda makes a difference to the meaning.

Wed, 09/08/2010 - 01:33 | 568893 JuicedGamma
JuicedGamma's picture

If Harrisburg gets away with this the potential for a massive risk repricing is frightening.

Wed, 09/08/2010 - 09:34 | 569218 Mad Mad Woman
Mad Mad Woman's picture

Gets away with what?  Harrisburg is not getting away from anything here. I live in Harrisburg. Harrisburg is broke, busted, kaput. The only question now is which bankruptcy is Harrisburg going to file for?

Wed, 09/08/2010 - 01:01 | 568871 I am a Man I am...
I am a Man I am Forty's picture

Right, the muni bond market is 2 to 3 trillion in size and 3.3M in defaults is a crises???  Why didn't you go with Jefferson County in Alabama, you could have been right a long time ago?

Wed, 09/08/2010 - 05:56 | 569018 A Man without Q...
A Man without Qualities's picture

All crises have a starting point, just like all traffic jams start with one vehicle breaking sharply...

Wed, 09/08/2010 - 10:33 | 569142 I am a Man I am...
I am a Man I am Forty's picture

I follow the muni bond market very closely, Harrisburg is nothing new and has had financial problems for a long time now.  The muni bond market has no clue there is a crises.  Got prices yesterday and bonds are through the roof.  Do I think some states and locals are going to have some major problems?  YES.  Illinois is a financial disaster, sold all of our muni bonds in IL, NJ, NV, and CA into this STRENGTH.  But crisis it is not, not yet anyway.

Wed, 09/08/2010 - 12:29 | 569658 Almost Solvent
Almost Solvent's picture

Not NY?

Wait, our saviours in Albany can just raise taxes (again):

Cigarettes

Real Estate

Water

Soda

Sugar

Fat

Gas

Online Retail Purchases

Et al!

Wed, 09/08/2010 - 03:53 | 568979 jeff montanye
jeff montanye's picture

nice reference.  see where the al default was helped by jp morgan, later penalized some $75 million.

Wed, 09/08/2010 - 08:44 | 569131 I am a Man I am...
I am a Man I am Forty's picture

And I believe JPM paid Goldman going away money so they could take advantage/financially destroy the county all by themselves, you of course need some greedy politicians and corrupt businessmen to do the tremendous job they did in AL.

Wed, 09/08/2010 - 11:30 | 569504 DaveyJones
DaveyJones's picture

.

Wed, 09/08/2010 - 01:00 | 568869 doolittlegeorge
doolittlegeorge's picture

talking "Harrisburg" makes me think of the first "Dr Evil" demand for "one MILLION dollars."  (insert global money laughter here.)  There "is an end" i agree. I just can't comprehend "where we're at right now" so it's hard for me to see it.

Wed, 09/08/2010 - 12:15 | 569628 Zero Debt
Zero Debt's picture

Dr Evil wouldn't be so stupid to demand one million in fiat currency. He's gonna ask for exclusive use of the printing press.

All my IOU are belong to you!

 

 

Tue, 09/07/2010 - 23:51 | 568789 robert_paulson
robert_paulson's picture

Pretty good forecast overall but you were clearly wrong on #8.  Interest rates have fallen and inflation has not "broken loose".  There has been some food inflation but that's due to the wheat situation; it's not general.  And moderate inflation in a few food categories is not inflation "breaking loose" by any stretch of the imagination, especially when everything else is deflating.

Also, China's credit bubble has not popped.  It might (I think it will), but it hasn't.  That one is still TBD.

You strain your credibility by claiming accuracy when you were clearly wrong.  Better just to say that so far you've been wrong on that but you still think it will happen down the road.

 

 

Wed, 09/08/2010 - 12:01 | 569595 traderjoe
traderjoe's picture

Local university boosted tuition 14% two years in a row. Local health insurance up 15% this year. 

Wed, 09/08/2010 - 11:19 | 569464 DaveyJones
DaveyJones's picture

food inflation is not limited to the "wheat situation." It will continue to rise due to multiple factors not the least of which is the entire production delivery system which can not support the cost of oil and is breaking down. And throw in a little Monsanto seed market control and destructive soil and water practices for spicing.   

Wed, 09/08/2010 - 08:53 | 569148 breezer1
Wed, 09/08/2010 - 06:49 | 569036 pachanguero
pachanguero's picture

Robert,  I was just working in S. America, Colombia to be exact.  Run awat food costs.  It has started in the EM's.

Tue, 09/07/2010 - 23:32 | 568772 web bot
web bot's picture

So what's the problem? Just add it to the #uckin pile like we've done with everything else. That's the new normal.

I'm starting to get sick thinking of what's lurking around the corner. There is absolutely no end in sight. If current projections of economic growth are to be believed, we're looking at deficits into the next decade and paying out upwards of 40% of all revenues collected in the form of taxes as interest to debt holders within a handful of years. This is not going to end well.

A good article. Nice work.

Do NOT follow this link or you will be banned from the site!