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"Red lies", "Hysteria" & "Ben bangs Munis"
Red Lies
Yesterday the GOP came out with their plan to save $2.5 trillion smakaroos. Tyler Durden did a run down of the plan. (loved the mohair) I want to focus on just one aspect. This one is a biggie. 80 “large” over ten years. From the Republican proposal:
The
legislation will further prohibit any FY 2011 funding from being used to
carry out any provision of the Democrat government takeover of health
care, or to defend the health care law against any lawsuit challenging
any provision of the act. $80 billion savings.
Ah! The savings would come from reversing Obama Care. But from no less a source than the Congressional Budget Office comes the following estimate related to reversing the health care legislation:
CBO expects that enacting H.R. 2 (through 2021) brings the projected increase in deficits to something in the vicinity of $230 billion. (Note: H.R. 2 is the repeal of Obama Care)
So there is a $310 billion difference of opinion. My point being that anyone can spin numbers to say anything they want in D.C.
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Hysteria
The Bond Buyer had this headline today:
From the article:
Muni experts say retail demand is being undermined by a steady drumbeat of fear-mongering news stories.
Well there you go. Bloggers and folks like Meredith Whitney are responsible. There is no substance to the reports that the muni market is dysfunctional.
I was looking at the Unemployment Trust Fund. This is a complicated bit
of accounting. There are some interesting rules for the States regarding
their ability to borrow money from the federal government to fund UE.
From CRE: (PDF)
Mechanism for Receiving a LoanIn
order for a loan to be made to a state account, the governor of the
state (or the governor’s designee) must apply to the Secretary of Labor
for a three-month loan.
That sounds interesting. A three-month loan? Of course the loan
can be rolled over. (Can’t everything?) In fact Uncle Sam gives the
States a no-interest loans for up to one year! There has to be a catch,
right? There is:
States still may borrow funds without interest from the FUA during the year. To receive these interest-free loans, the states must repay the loans by September 30.
So the States can borrow money at no cost provided the pay it back in less than one year. After that they pay interest. (a) Can they continue to borrow money forever and just pay the interest? (b) What is the interest cost?
(a) NO: States
with outstanding loans must repay them fully by November 10 following
the second consecutive January 1 on which the state has an outstanding
loan.
(b) Expensive for ST money! The
interest is the same rate as that paid by the federal government on
state reserves in the UTF for the quarter ending December 31. States may
not pay the interest directly or indirectly from funds in their state
account with the UTF.
Note: The States have positive balances in their Trust Funds.
They get a VERY high rate (subsidy). Now they have to borrow at that
rate. The current UTF is 4%. This is expensive ST money, even for Cali.
Is this a big deal? The States borrow money from the Feds, they pay interest and they do have to pay it back. The NY times thought it was a big deal. Their headline:
This is the outstandings for the top borrowers. Does it surprise you
that Cali is on top with $10b? Or that CA, MI, NY, IL & PA have a
total of $23b in IOUs out to their dear Uncle? Or that the total is $41b
and growing fast?
This could be fixed with the drop of a hat. Congress could just change the rules and
restructure the existing UC debt into a thirty-year debt at a low
coupon. That would solve this problem. But that would be a bailout.
Don’t count on that. What do CA, MI, NY, IL & PA have in common? They are Blue States. The last thing the Red dominated congress is going to do is make it easy on Blue states. They made that very clear last year when they nixed the BABs legislation.
If these debts of the states are not to be restructured they must be
paid back. So one can look into the future and see more supply problems
in the next few years. Is that hysterical? I don’t think so.
Possibly the Bond Buyer can explain how these 50 odd billion are going
to be flipped to the public over the next few years.
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Ben Bumps Munis?
I think there is a sub story to the move out of munis. I saw it up close and I wonder if it not a broader factor.
After the Meredith Whitney 60 Minutes deal I got a few calls from folks
who thought I may know something of this. They own Munis. And this is
the "true nut" of their savings. They don’t want this to be “at risk”. So they are not sleeping at night. This not about making money. It is about not losing money.
I always ask, “Whatta you own?” “How long have you owned it?”
The answer is (in part): “NY State GOs, I've had em forever.”
Next question, “Where are they marked?”
Answer: “What does that mean?”
So this next conversation takes a bit and you end up with a broker’s statement and sure enough; the bonds are all trading at a premium. 5% bonds due in two years are trading at 106+. Why? Bernanke has pushed the under five year maturities so low that even dodgy muni paper can trade at a premium.
I say, “Sell all the stuff that is in the black and take a
capital gain. Lighten up the bond funds that are underwater. If the
gains and losses are equal you can move out of munis and get back to
sleep.”
Response: “If I can do that at break even, I’ll dump the lot.”
ZIRP and QE were supposed to force people into riskier assets. But low
interest rates have created an opportunity for long-term muni holders to
now sell at a premium. It’s always easier to sell a winner after all.
Especially when it's keeping you awake.
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So, what's the kerfuffle? The States will be bailed out and bonds good.
Next? Inflation that will boggle the historical records. With unlimited printing capabilities there is nothing too big to fail. Nothing. Not even foreign countries.
The biggest health benefit they could ever realize would be to reduce military spending and to direct that prosecution to the globalist bankster pimps that manipulate them as their disposable weapons platform.
Enemies foreign and/or domestic.
What difference does it make if the fed waves the interest on monopoly money. Actually, when you start counting debt in billions and trillions you can forget printing paper... all the fed has to do is type this number into the we're f'd economy super computer ... $1,000,000,000,000,000,000,000. Hey ... if i could just hack the world financial system, with a few 1's and 0's I could pay off every one's debt and we could all start over.
Pleeeeease! The CBO has a terrible track record. It's not that the CBO is inept, necessarily, but that the process is "gamed" ... garbage in, garbage out. To start with, the CBO is required to take written legislation at face value rather than second-guess the accuracy of the estimates. Far from shedding light on the truth of any particular legislation, it seems that "non-partisan" means that the CBO allows both parties to lie about the costs. We don't have to look far from the tree to find the rotting fruit of the previous major healthcare legislation under President Bush. The CBO underestimated the cost by a full 50%. Get real!
never mind the GOP end of days Congress, the Fed will monetize the state budgets. what, you want tanks in the streets? the bonds are trading at a premium? read the tea leaves.
The Fed, as an independent agent, could of course monetize the state debts. But Congress has more or less made it clear that that is a non-starter. The old Congress did let the BABs expire. Obama has been skirting the issue. Does the Fed really want to piss off Congress. We have yet to see if Ron Paul is all bark and no bite. Defiance on the Fed's part might just bring out some bite.
Would Obama want the national level, political heat of bailing out Illinois while trying to get reelected?
>>>Response: “If I can do that at break even, I’ll dump the lot.”<<<
I never ceased to be amazed at the number of people bought into this ridiculous psychology and investment stance. Taxes nothwithstanding, one should show complete indifference to an entry point. The only thing that matters is how the economic situation evolves. If New York crumbles and Congress leaaves it to its own devices, are you going to hang onto your Illinois bonds until you "break even?"
From the great master, Bernard Baruch:
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong."
I say, “Sell all the stuff that is in the black and take a capital gain. Lighten up the bond funds that are underwater. If the gains and losses are equal you can move out of munis and get back to sleep.”
And buy what instead, Bruce, without taking a major jump in risk?
There is no good answer to this question. What do you tell a guy (gal) that says they don't sleep at night? Munis are not supposed to keep you awake. But they do.
This will pass. It might take a bit. In the mean time if those who sold have to give up a year or so of income, then that is the cost.
These are the same folks who were beat to pieces on their stocks a few years ago. The same folks who lost a big chunk of their equity in their homes. And now they read in the paper that their"Safe" munis are not so safe. Do you blame them for sticking them money in the mattress?
I see a buying opportunity in shiny right now, Rob.
Bruce on the $80 millon cut, the CBO only scored the 2700 page health care bill. The Democrats purposely left out certain things in the bill such as the administrative start up costs, increase in payments to doctors, the taking of Medicare money to pay for the program and tax increases. You are normally an objective observer so please leave politics out of this issue and lets look at the facts. This is a bad bill passed only for the sake of passing it. Please do a business plan for a business and take it to the bank, ask the bank not to read it until they have lent you the money. See how that goes.
And latest headlines on how Fed working on ideas to let States default/bankrupt. The media powers that be must really want to crush bonds (probably so they can buy them on the cheap, days before Gov announces plan for easy credit to states.
If you think Congress will authorize multi trillion bailouts to profligate states, with municipal unions getting enormous pensions, then you have lost any clue.
The GOP's plan to "save" $2.5 trillion over 10 years amounts to $250 billion per year. But we are running deficits of $1 trillion per year. So this doesn't really help that much. It is as if we are driving towards a cliff at 100 mph. The GOP proposes reducing speed to 75 mph. Great!
Everyone just seems to assume that the US government will be able to borrow however much it wants at miniscule interest rates forever. So of course, Uncle Sam can bail out the banks, the states, the EU and anyone else deemed TBTF with no downside. And the funny thing is that most people seem to know at some level that we are headed for bigtime trouble, but they don't seem willing to take any action to try to prevent it.
The sort of action that would be required to prevent it is inconceivable to most people, especially people who work and earn incomes from the markets. Maybe, just maybe, if everyone's morning cup of water, milk, juice, coffee, or kool aid was doped with entheogens and-or ecstasy and it kicked in soon after they started their day at work... maybe then we might be able to break out of the mental paradigms that keep us working for our own misery on this prison planet headed for cataclysm. So it's essentially un-preventable.
Although I like to tell myself that it could be preventable if everyone would only realize that they don't actually have to be lying to themselves and the people they know and they don't actually have to keep working at jobs that contribute to the suicide of the world, the country, and themselves.
They are Blue States. The last thing the Red dominated congress is going to do is make it easy on Blue states
and what pray tell did the blue dominated congress do to make it easy for the blue states?
Answer? Nothing. The Blues spent the last two years bailing out financial institutions. They succeeded. The private sector is now pretty much okay. But now it is time for the towns, cities, counties and states. This was/is inevitable...
They promoted the "reward our team in government", excuse me, Build America Bond program.
But from no less a source than the Congressional Budget Office
run by a political appointee who used to work with Timmay in the Clinton years
It's a story because the state and local govt's leaders in newspapers and television have came out and said that their state or municipality is going broke and this in turn made people to research (which didn't take much) and found out that most of these if not all have millions in bond debt that need to be serviced and not the money to do it. Just look at Vallejo and it's 5 yo 20 percent on the dollar proposals for unsecured bond holders.
It's not a debt problem...it's a budget deficit problem. There is a difference, right?
@muniguy: Allow me to slightly alter your note, to look like comments I recall from late 2007 and early 2008:
"Another day another dire subprime commentary. Nothing new just a regurgitation of the same talking points. At some point it all seems a bit coordinated. Two years ago nobody cared about the subprime market. But today it is all the rage...why?"
The question remains why? What is the point? Is it simply a matter of providing enlightenment for the masses or something more nefarious...promotion of a trade? Thanks for the input but it all seems a bit tiresome.
The CBO has a perfect record--they are always wrong. They show Obamacare saving money for a while because of 10 years of revenues and 6 years of expenditures. And they double count the Doc savings cuts. Ludicrous. You do accounting Bruce, right?
I'm not defending anyone on this. Just pointing out the numbers being bandied about are just smoke. We have no clue what the bill for any of this is.
Nice review of the UE-borrowing situation, Bruce. This issue is under the radar of most of the MSM. Here in CA, the LA Times ran a story late last Fall about how much the state was going into hock, the figure was $40M per day. (I sent the link to ZH, they were all over it, as you might expect).
Fast-forward a few months...as far as I know CA is still borrowing away, because the unemployment rate remains sky-high. But you wouldn't know about it from the coverage of the state budget. I also don't recall our new/old Gov. Brown mentioning the looming September repayment or anything along the lines of "we cannot keep borrowing over $10 billion per year to cover unemployment". (If someone heard him mention it anywhere, please provide a link).
Another day another dire muni commentary. Nothing new just a regurgitation of the same talking points. At some point it all seems a bit coordinated. Two years ago nobody cared about the muni market. But today it is all the rage...why?
two years ago the muni insurance companies were all but belly up and many credits were trading at considerably higher yields, especially the lower rated ones. it was just that other things like the s&p moving toward 666 and the gathering insolvency of the are they really too big to fail garnered more attention
I will be picking through that trash one day. Just like the pig's, the states - TBTF.