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Muni-Bond Market’s Descent into Hell
Just when it looked like the alleged economic recovery couldn’t get any weaker without extinguishing itself entirely, the municipal bond market has gone to hell. And just like in hell, there is no exit – at least none that we can imagine. Here’s why: Municipal and state borrowers who are on the ropes must pay a premium to continue borrowing; this drives their budgets deeper into the red, causing ratings downgrades that in turn raise borrowing costs even more. A vicious cycle, for sure, and it sounds just like much of Europe’s predicament doesn’t it? Except that, for strapped U.S. cities and states, there is no IMF to pretend to bail them out. And while Europe’s erstwhile deadbeats, the PIIGS, get plenty of time to work on balancing their budgets through measures of “austerity” (Merriam-Webster’s Word of the Year, by the way), U.S. cities and states must bring their budgets into at least a fleeting semblance of rectitude before the beginning of each new fiscal year.
We shouldn’t get our hopes too high that this recurring dog-and-pony show will work without eventually causing a taxpayer revolt. If you’ve been following the sordid bookkeeping tactics of such fiscal n’er-do-wells as California, Illinois and New Jersey, you’ll already know that austerity measures that would have been unimaginable just a few years ago have done little to eliminate structural deficits that keep returning like the slasher in a Wes Craven film. The big question is whether the lenders will continue to distinguish “good” borrowers from “bad.” At present they are doing so, charging, for one, the State of Illinois — the riskiest borrower of them all, with an A1-negative rating — 1.9 percentage points more than the broader muni market charges for 10-year bonds. For comparison, the borrowing spread for Nevada, which has been blighted by a real estate crash and severely depressed gaming revenues, is 0.80 percentage points, up from 0.50 in early November.
Although we’d like to believe that some miracle awaits to save the municipal bond market from disaster, it only gets worse. According to a report recently issued by the Congressional Budget Office, the revenue side of the equation – i.e., property taxes – is poised to decline because of downward reassessments across the length and breadth of America. Because homes are not reassessed every year, local property-tax revenues tend to lag behind falling home prices by about three years. “Even small declines in collections could cause fiscal stress when the cost of providing public services is growing,” the report said. What this implies is more than mere belt-tightening in the years ahead. Since states and municipalities won’t be able to raise taxes much to cover the shortfall, we would predict either a hyperinflationary federal bailout with Funny Money; or, more likely, a deflationary wallow that will make the 1930s Depression look like Mardi Gras.
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All the current publicity about the muni market may be a self fulfilling proficy in the short term, but this will just create some buying opportunities. When a municipality does it's budget every year, the first line item it will look at is debt service, and everything else follows including salaries, pensions, etc. Deals are still getting done at historically low yields and I don't see that changing anytime soon. Our problems will not be made worse by the muni market, I contend it will be the last to fall.
Saw in the news this morning 57% of people wouldn't think much of the fed goobs shutting down for lack of funding for a week or so. I wouldn't mind the whole lot of them going home for the foreseeable future. Imagine the money we could save.
The muni market is where QE 3.0 will be directed, specifically so the citizenry doesn't get any say in it. You'd have to be nuts to think something like this would ever come up for a vote.
It's not going to work, but that won't stop them from trying it.
I guess I will need to turn the volume down.
That ad is obnoxious and irritating.
Zerohedge, please find some other way to build revenue
On the inflation/deflation meme, I noticed something this morning on the shitter; the plush toilet paper I was using was not perforated! I thought this odd at first. It may have been a manufacturing defect, but then I realized there might be another reason.
If you were at the TP factory and were tasked with "shorting" customers to hide cost increases, would you not pitch in the occasional short roll that wasn't perforated so folks couldnt count the sheets in the roll?
The sceptic in me thinks I got the shitty end of this deal ... oh wait ...
Cooter
Look in the package. Are all the rolls not perforated? This could just be a cost cutting measure: no more cutting. Which leaves me to beleive we should be seeing uncut sheets of $20 bills at the banks....
'PM complex equities' PM stands for what?
Precious metals.
Ben has the answer.. a four letter word.. POMO.
Problem is too many leaks in the dike and only so many fingers.
Helicopter Ben can print only so much Funny Money before folks call BS. When that point occurs, our deflationary debt spiral will start.
+100%
Hey mister...... throw me some beads!
Look, Congress isn't doing anything about this (muni-crisis). It is taking them forever. Which can only mean one thing, they don't want to do anything about it. Could someone kindly please ask this to the next congressional representative they meet.
Congress does not act until they have to. They are reactive, not proactive. They want it to be a front page issue before they start generating their hot air.
Good morning Zero-Hedger's. I am new to commenting and I wanted to introduce myself.
I have noticed something about the POMO's since QE2 has kicked off. During QE-lite, I saw regular (nearly every POMO) spikes in SPY volume on the buy side (3-7 million) and AAPL but now I have only seen one and it was low, like 2 million on SPY. Where is this POMO revenue going, bonds? Any thoughts? Thanks in advance and Merry Christmas.
Annoited any kings lately, plans to?
Welcome Zadok
PM complex equities. Crazy? Just think about it.
I believe that the impending municipal finance crisis will cause a case of shared pain: municipal workers and retirees will have to accept income cuts, bond holders will have to accept a haircut and property owners will have to accept tax increases. The question is what will the unintentional consequences of all the "have to accept" have on the economy, politics and will it be a successful long-tern solution?
Sure glad I don´t waste my money on this guys newsletter.....................deflation my ass, deflation is Assets sure, deflation in Consumer Staples, food and Energy, not in this lifetime buddy!!! LMAO
That is certainly my guess as well. But is the current POMO enough to support the states and the muni's as both need a prop-up? And what will happen to the PD's when they lose there daily fixes? Will they actually have to make money the old fashioned way?
I'll actually say something good about Detroit, of all places. They are recognizing that they are well-neigh firetrucked, and have responded by exerting operational control (police, fire and rescue, et al.) over what they can afford to control. They are also demolishing the buildings and houses that no longer have a purpose. It must stink for Mayor Bing to acknowledge that he has to take these steps, but he is facing reality. Expect many other municipalities to take similar measures.
For banks to make money the old fashioned way, I believe they would have to lend. And if that does become the case, then I'd say the velocity of money (which is effectively zero right now as it sits on balance sheets) would pick up too fast for Bennie to control..........unless he was telling the truth to us on 60 minutes lol.
Nobody has to lose their fix because " the U.S. government has a technology, called a printing press . . ."
This will increasingly become where the POMO $$ have to go. Bernanke Claus will buy the muni-bonds that most rational investors wouldn't screw with Erkle's dick.
I would go with "hyperinflationary federal bailout with Funny Money". They will do all they can to stop state employees from rioting.
Of course, and why not also make the states just a little more subservient to our central government masters in the process?
This money will come with strings attached.The central planners will let there be some pain in the states/munis first. This way, the state will be begging for the debt cash needed to put them out of their own misery.
Apparently Rick, you didn't hear Arthur Levitt this morning saying that there is no muni-crisis and that Meredith Whitney is wrong. You should get with the program... <sarc>