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.