Summarizing The Recent Muni-Mauling, And A Look At The Challenges Ahead

Tyler Durden's picture

The main reason why in a recent Zero Hedge poll the bulk of respondents believed that the next asset class to be purchased by the Fed are municipals, is that the market appears to have finally relented to what pretty much everyone with half a working brain has realized for over almost two years: the very soon, only the Fed's endless bid will be able to withstand the state and city default onslaught. Two main catalysts over the past week, as Zero Hedge highlighted last week, were the now imminent bankruptcy of Harrisburg, and the dramatic deterioration in California's fiscal situation. However, there are other far more important considerations that suddenly have led to a massive blow out in the muni curve, that made even the highly volatile action in the UST curve seem tame in comparison. Citigroup's George Friedlander summarizes the biggest risks to the muni space, of which the number one is the least surprising: what happens when the government removes its crutches... With the entire economy now expressly reliant on constant and endless support of every branch of the US government, as more and more austerity is priced in, assorted asset classes will start feeling the wrath of this long-forgotten concept known as risk. Munis are just the beginning.

Below is a summary of the most relevant recent changes in the muni market from a curve standpoint:

As the table shows, the difference in yield between 7-YR paper and 30-YR paper increased from 211bp to 239bp over the course of a single week, an unusually rapid change.

And the reasons per Citigroup:

In our view, the factors that led to the dramatic relative weakness of the long end of the yield curve, wider credit spreads and generally reduced liquidity were fairly well foretold in the concerns we have been discussing over the past several weeks:

Growing concerns that the BAB program might not be extended beyond the 12/31/10 sunset. As we have noted, the fate of BAB  reauthorization appears to be closely tied to the likelihood that the Bush 2001/2003 tax cuts would be extended during the lame duck session. If a deal can be reached between the administration and the newly invigorated Republicans in the Senate and the House on the Bush tax cuts, then a reauthorization of BABs is likely to be part of the deal – most likely, the 1-YR extension with a 32% subsidy contained in Senator Baucus' "mini-extender" bill. However, at this point, it is very difficult to tell whether a deal regarding the tax cuts will be reached. If such an agreement is not reached, new legislation will have to be drafted during the new Congress, and it is far from clear that a Republican-dominated House Ways and Means Committee will support an extension of BABs.

Concerns regarding other muni provisions in the stimulus bill that need to be reauthorized. In addition to BABs, there are four other significant sections of the stimulus package that are included in the Baucus bill but whose fate remains unclear, either in the lame duck period or in the new Congress.

These include:

1. The exemption of private activity bonds from the alternative minimum tax on individuals and corporations,

2. The exemption of all munis issued in 2009-10 from the Adjusted Current Earnings AMT on property and casualty companies,

3. The increase in the maximum amount of bank-qualified tax-exempts per "small issuer" from $10 million per year to $30 million per year, and

4. The 2% de minimis, under which commercial banks can buy munis worth up to 2% of total assets and still write off as an expense the interest cost associated with carrying these bonds.

At this point, it appears that, in terms of market impact, because of the lack of certainty regarding extension of the sunsets, the factor among these four that is having the greatest affect on the market is the exemption from the AMT for private activity bonds. The reason is this: issuers, such as airports, recognize that their borrowing costs would increase appreciably if interest on their bonds were once again subject to the AMT, so several airport issues are being rushed into the market to avoid the 12/31/10 sunset. Since private activity bonds, such as  airports, ports and housing bonds, do not qualify for BAB treatment, these issues contain a significant amount of long-term tax-exempt supply.

An ongoing heavy new issue calendar, which is unlikely to let up. According to The Bond Buyer, the 30-day visible supply on Friday, 11/12, is $17.3 billion, only slightly below the high for 2010 of $18.7 billion, reached on September 28. It seems likely, in addition, that the new issue calendar will remain heavy right through the middle of December, when heavy supply can be particularly difficult to place. This could particularly be the case if bond fund flows continue to be weak, as noted next.

Continued weak flows into tax-exempt bond funds. For the week ending 10/3/10, tax-exempt bond fund flows were extremely weak, according to Lipper/AMG Data, with weekly reporting funds having less than $1 million in total inflows and long-term funds showing outflows of $178 million. This week's reported flows were only very slightly better, with all weekly reporting funds showing inflows of $42 million and long-term funds showing outflows of $33 million. With monthly reporting fund flows included, the four-week moving average of all funds is at $392 million, still down very sharply from the $1 billion range reported in most of July and August. Our greater concern is that next week's flows will probably be worse still. As we have noted, flows tend to weaken after a significant increase in muni market yields. As noted above, the increase in long-term yields in the muni market from 10/3 to 10/10 was quite substantial. And, indeed, a large proportion of the increase occurred during the last two days of the period, which does not bode well for flows over the next week.

In terms of pricing patterns, we note that stronger, more liquid BABs have held up well relative both to tax-exempts and to similarly rated corporates. We do not find this at all surprising. In the event that BABs are not reauthorized, we expect the best, most liquid BAB issues already in the market place will continue to outperform as supply dwindles. Initially, other less liquid BABs may weaken under these circumstances, but even in these cases, we expect the supply of outstanding BAB paper to dry up, with most of that paper absorbed by individual investors in the secondary market.

Another topic that has gotten little attention is Ambac's bankruptcy w/r/t muni exposure:

On Monday, November 8, the holding company parent of Ambac Assurance Corporation, Ambac Financial Group, filed for bankruptcy. In our view, this move was not unexpected, given the firms inability to write new policies or maintain minimum capital requirements. Nevertheless, we do not believe that this move gives the insurance subsidiary the ability to continue to make payments on insured municipal obligations at this point. The company has initiated a "rehabilitation proceeding" in order to protect the majority of policies related to municipal debt.

Back in March, the Office of the Commissioner of Insurance of the State of Wisconsin (OCI) approved the establishment by AAC of a segregated account containing certain non-performing policies, primarily consisting of structured products transactions, including Residential Mortgage-Backed Securities. The Las Vegas Monorail was also placed in the segregated account. The rehabilitation of the structured book is intended to shield policyholders of AAC from ongoing losses in the structured book. While the proceeding is subject to court approval as well as ongoing litigation, in our view, the insurer currently has the capacity to continue to make payments on policies for defaulted municipal issues not included in the segregated account, which includes nearly all municipal bonds.

We note that the muni market continues to give very little extra pricing value on Ambac-insured munis over what they would be worth as uninsured issues. Nevertheless, particularly on Ambac-insured muni credits with very weak underlying credit strength, we believe that the existence of the insurance policy significantly enhances the value of the bonds.

Lastly, a topic that has gotten much attention recently, and which is what lead the mainstream to realize that muni spreads and the MCDX were surging, has to do with ETFs. Of course, using the recent plunge in assorted synthetics, Citi uses the opportunity to present this as an ETF buying signal. We, on the other hand would recommend a convergence pair trade, as as sell off in intrinsics is just as likely, as in our extremely correlated markets, ETFs traditionally are the primary negative convexity catalyst, after which all other asset classes follow. For the past two years this has been to the upside. It can just as easily happen in the opposite direction...

In the last several days, we have seen an unusual move in muni ETFs. Prices of several dropped by more than 2% in the last several days – an unusually large move for this ETF product. Given where several of the ETFs are trading at the moment, their NAVs are at the largest discounts to the current prices in a long time. In our view, the move of the ETFs was too abrupt and strong to account for the weaker price action of  long-dated muni tax-exempt market. Keep in mind that the average life of some ETFs is just 15 years, so they should have been partially insulated from the large move of the 30-YR munis. In our view, this selloff is technical in nature and should be taken advantage of.

Since the near-term outlook for tax-exempts is somewhat cloudy, investors should take advantage of the ETF selloff by averaging down into the weakening market. Alternatively, they could hedge their exposure by shorting MMD against their ETF positions. To match maturity exactly, one could either use 15- YR MMD or, consistent with our steepener recommendation, one should short the 30-YR MMD.

When all is said and done, it would seem that the bulk of the risk in the muni space is not one of monetary intervention requirements, despite various markets going bidless, but of regulatory concern. And since Congress will not allow states to go bankrupt, now that Citi has raised the strawman that it will the House's fault should there be no improvement, it is only a mater of time before the whole BAB issue is resolved. That said, with every successive can kicking, the time to the inevitable market test approaches. However, unlike our readership, we believe that the Fed will actually preserve its last bit of backstop purchasing dry powder for something much more important: the securitized markets, which are materially greater than the muni markets by, and whose fate will have an immediate impact not so much on assorted municipalities, than on the core of Bernanke's electoral constituency itself: Wall Street's TBTFs. After all, recall that QE works only to address a liquidity crunch (as the Fed become a buyer of only resort, and nothing more), which is why it will do nothing to ameliorate the current increasing solvency problems. Only when solvency risks metastasize into the realm of liquidity once again, that is when the time to panic will be nigh.

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truont's picture

assorted asset classes will start feeling the wrath of this long-forgotten concept known as rish.

Long forgotten?!  I've never even heard of rish before.  :)

Rich_Lather's picture

Rish is drinking half a fifth of vodka and thinking you can drive home without being caught.

I watch IQI pretty regularly, and from all appearances it seemed to run up to a peak around election time and then start to decline. Perhaps investors are voting with their wallets as far as tax avoidance returns are concerned.

Miss Expectations's picture

Sir, have you been drinking?

Well, I had a glash of chablis with dinner.

steelhead23's picture

Rish = vigorish, the juice, what a bookie demands for his servicing of bets.

ebworthen's picture

rish = reality intervenes; shit hits

(it's a guess, but it would work)

No political climate for public stimulus, so look for stealth pork barrel spending in grants and Department spending (Department of Education, EPA, etc.).  I heard on local radio today that $10 billion was being given to my state for Education from the Federal Government - new stimulus - not old.

Purchase of Muni's by the FED will be stealth as well; anyone auditing their books?  Nah.

OutLookingIn's picture


 Too many of the Muni Bs have become part of the securitization process, churned, sliced, diced into various forms of CDOs & CDSs which "The Bernank" will back stop with every tax dollar and QE until the only thing left standing is the only surviving TBTF.

Popo's picture

When the threat of muni defaults leads to a spike in state taxes... people and businesses will just leave the state.

When muni defaults lead to a spike in Federal taxes... people and businesses will first move their money out of the country... and then eventually they themselves will leave.

(Unless of course they're unfortunate enough to own real estate. In which case, they're fucked and can't leave. Poor sods).

nodhannum's picture

It's already happening Popo.  I have one friend and two acquaintances that are well on the way to emigrating, two to Chile and one to Singapore.  They sent the money overseas first and now are well on their way to leaving themselves.  They sold all their real estate first.  It will be as in France where anyone that can make a high income becomes a citizen of Monaco.

Mitchman's picture

While the results of the extension of the various tax incentives are important drivers of what happens in the muni markets, I think what we saw this week is that the markets may actually be waking up to fundamentals.  

On more than one occasion, Merkel said that the bondholders are going to have to take a haircut and she has now been supported by Legarde in France.  I think this has started to wake people up.

Who knows?  Maybe people have started to focus on fundamentals again and concluded that most of these munis are crap regardless of whether BAB gets extended.

hedgeless_horseman's picture


Eureka Springs's picture

"However, unlike our readership, we believe that the Fed will actually preserve its last bit of backstop purchasing dry powder for something much more important: the securitized markets"


The black hole at the center of the galaxy.

nmewn's picture

"what happens when the government removes its crutches... With the entire economy now expressly reliant on constant and endless support of every branch of the US government, as more and more austerity is priced in, assorted asset classes will start feeling the wrath of this long-forgotten concept known as risk."

Statists of the world rejoice...form your conga line behind Krugman.

RobotTrader's picture

Heh, anybody remember this?


Mitchman's picture

Coming soon to a municipality near you!

Spalding_Smailes's picture
Wall Street Collects $4 Billion From Taxpayers as Swaps Backfire

The subprime mortgage crisis isn’t the only calamity Wall Street created that’s upending the finances of U.S. states and cities.

For more than a decade, banks and insurance companies convinced governments and nonprofits that financial engineering would lower interest rates on bonds sold for public projects such as roads, bridges and schools. That failed promise has cost more than $4 billion, according to data compiled by Bloomberg, as hundreds of borrowers from the Bay Area Toll Authority in Oakland, California, to Cornell University in Ithaca, New York, quietly paid Wall Street to end agreements since 2008.

California’s water resources department this year spent $305 million unwinding interest-rate bets that backfired, handing over the money to banks led by New York-based Morgan Stanley. North Carolina paid $59.8 million in August, enough to cover the annual salaries of about 1,400 full-time state employees. Reading, Pennsylvania, which sought protection in the state’s fiscally distressed communities program, got caught on the wrong end of the deals, costing it $21 million, equal to more than a year’s worth of real-estate taxes.

“It was brilliant, and it all blew up on me,” said Brian Mayhew, chief financial officer of the Bay Area Toll Authority, the state agency that gave Ambac Financial Group Inc., the New York-based bond insurer that filed for bankruptcy this week, $105 million to end $1.1 billion of interest-rate agreements. The payments equal more than two months of revenue on seven bridges the authority oversees around San Francisco.

trav7777's picture

how the fuck did we get to a situation where elected representatives can even enter into deals such as this?

And we have NO RECOURSE against them as citizens.  At least you could sue an agent for a shitty deal, but a government moron?  Nothing.

Spalding_Smailes's picture

In many cases, firms getting payments aren’t explicitly identified and government officials often don’t call attention to payments made to cancel contracts. Many of the telephone calls and e-mails from Bloomberg News to dozens of government and nonprofit officials over the last eight months seeking comment on derivative transactions went unanswered.

‘No Reason’

“Money that should be invested in students, classrooms and fixing infrastructure in Pennsylvania is instead lining the pockets of Wall Street,” Jack Wagner, the state’s auditor general, said in a statement in April after calling on lawmakers to ban swaps. “State and local governments must stop gambling with public money,” he said.

“The swap relied upon an orderly functioning variable-rate market,” said Shapiro, who has advised borrowers such as the California Housing Finance Agency, which has more than $4 billion of the derivatives. “There hasn’t been an orderly functioning variable-rate market for two-and-a-half years.”

nedwardkelly's picture

“The swap relied upon an orderly functioning variable-rate market,”


What these idiots seem to have forgotten is that 'Wall Street' isn't a charity. Whatever it is they're doing, they're in it to make money. So when they come knocking on your city, municipality, county, whatever it is door, you can bet your ass it's with the hope that they can get you to do something that will MAKE THEM MONEY. For these clowns to be shocked when the end result was that wall street MADE MONEY from them is idiocy.

It's like inviting goldilocks over and then being shocked and outraged when you notice your porrige has been eaten.

"The swap relied on being able to part a fool with his money. It worked fantastically and cost these cities truckloads of money. I dunno why they're shocked, did they really think wall street was going to lose out on these deals? Hahahahah!" - said Shapiro, who has advised borrowers such as the California Housing Finance Agency, which has more than $4 billion of the derivatives.

ebworthen's picture

So this was the dry run for the big one in 2008 to the present, eh?

doolittlegeorge's picture

it's too late.  the corruption of "the center" runs so deep and wide they don't have the wherewithal to even attempt a rescue.  Only now am I beginning to understand that this is the lesson of the so called "nobodies" of Greece and Ireland (and soon to be Spain.)  You can throw a trillion at them and "if your late to the party Mr. Market will simply eat you alive."  Here in the USA "they've been poundin' the snot out of the dragon, kickin' his cock and pissin on his tail" like the drunken' fucktards they are--but somebody said "hey, take my picture" and suddenly--"it's alive."  Where this dragon decides to start roastin' is beyond me--I'm just glad not only that I'm not in that cave--and that I wasn't the one who woke him up.  Now excuse me while I crank up a little "Jumpin Jack Flash."

Eternal Student's picture

Thanks for posting that clip, RT. Yes, I had forgotten about it. And oddly, it now looks futuristic.

louisash's picture

Jim Sinclair has been predicting this for years now.  QE to infinity.  Gold Bitches!

unum mountaineer's picture

it's always been about the PD's. People are now realizing housing debacle may be a little more than deadbeats not paying their mortgage. All the while this is going down in a very open and public forum. FBRNY has to assist and do whatever it can to help PD's save face. god forbid the status quo be exposed as large scale fraud..nay, ponzi. Let the munis fail..see smailes cut and paste above, these boys could give a flyin''s amazing they do it every know, put their self interests first and ONLY! piss on my back, tell me its raining..shit in my shoes..tell me its toenail conditioner..fuck a bank!

I do think though that fed will purchase all asset classes before it's really over..."jay favorite line, all in due time!"

unum mountaineer's picture

TD, maybe redo poll in terms of win, place, show. Perhaps make a call on order..RMBS, CMBS, munis, etc. winner gets a (fill in the blank)..

DollarDive's picture

How about the fact that muni's are priced off the grid.  Wait till sellers really decide to start selling and the bids evaporate.  We'll have a real calamity.  The prices that the muni bonds are priced at in these mutual funds have no bearing to reality.  We won't know what the real prices are until the sellers come out in force.  If we get follow through next week, then I'd expect a serious selloff.

Spalding_Smailes's picture

We won't know what the real prices

Kind of like rmbs/cmbs/cdo's/squared ....

Hulk's picture

Need to get that bull out of the gene pool quick, otherwise bullfighting is toast!

AccreditedEYE's picture

Guess GO's aren't so sexy when you have an ever decreasing tax base.I'm looking forward to muni yields going over 10% again... hopefully municipalities still exist at that point.

TBT or not TBT's picture

Bartertown in the MadMax sequel probably issued bonds to build the Thunderdome.

Oh regional Indian's picture

Interesting anecdote. When I first came to the US, even at the ripe young age of 29, I was completely fooled by everything.

I congratulated my cousin when the Publishers clearing house envelope came in the mail. :-) Also watched hours of Carlton Sheets and other such hucksters, thinking surely this was the way to the American Dream.


But, at the time (late nineties) I also remember people pushing Muni Auction's as the sure fire way to get and stay rich, on late night TeeVee.

I wonder how much Muni-debt is in the hands of regular folk, who had no real understanding of what was up. Plus, they offered such good rates..


johngaltfla's picture

You ain't seen nothing yet....

knukles's picture

One of the tenants of the demise of muni land manyana doesn't hold water and is in part, directly responsible for the recent rise in muni rates, credit conditions aside.  (Not making a statement about credit deterioration , etc.  It is what it is, but this is separate and citing such, erroneous)

The possible demise of the BAB program. 
BAB shifted issuance out from the muni marketplace (tax exempt buyers) into the taxable marketplace, thus relieving the traditional tax free market of supply at the margin, allowing rates to fall.
The buyers of tax exempt munis and BAB's are not the same folk.  There is a significant separation of the types of buyers which is referred to as market segmentation.  For example, a non-taxable pools of funds such as pension funds, usually does not generally buy traditional tax free minis.  They're just plain too rich for the nontaxable entity, the yields are too low.  But, BAB's priced as taxable debt, began to make sense from a pure return perspective.
Likewise, the muni funds don't buy BAB's

Citing of the demise of the BAB program as a material negative municipal credit event, is fallacious.  While no BAB issuance will undoubtedly redirect issuance back into the tax free muni space, such will drive tax free rates higher, but it is not a credit event.

The misunderstanding of this is similar to the Bull-Shit that Wall Street tried to sell everybody after many disparate countries joined the EU and adopted the Euro.  They called it convergence; that all euro members debt should trade even yield just because it was all denominated in Euros.  Bullshit. 
In fact, there was another large global market that proved that concept totally bankrupt (pun).  US state muni issuance.  All denominated in dollars, but different credit quality and thus different yields.

BAB and credit spreads are not dependent relationships.  Don't bite at the argument.  It's separate and distinct from the real problem of state and local deficits.

Catullus's picture

Agreed. I'd like to see numbers around the "regulatory uncertainty" above. They may be in the report, but I doubt the impact when it's disaggregated.

Slim's picture

This was a nice post particularly the Euro - Muni analogy.  Hell, given a single Federal Government and all that it entails, state/muni credit spreads should be significantly tighter than Euro sov spreads by definition. 


Those lending to Greece or others with a rate remotely similar to lending to Germany were a perfect example of greedy ignorant fools.  Far too much discretionary money, authority, and therefore risk has been placed in the hands of what largely amount to a collection of entitled, inexperienced, snot nosed brats.  I would say that as long as you keep feeding this type into the system, train them up with similar, the risk trade will do fine, as you create the bigger fool population.  That is, right up until it hits the limit and people realize that, just maybe, a bit of experience and an ability to think for oneself might have been a better choice.  We're now 30 years into this game, the limit is here. 


The problem is not Wall Street, politicians, right/left wing, or any other single group.  The problem is that people have let themselves be herded and led down a path they did not understand and rather than ask questions or apply their brains, they took the path of least resistance and went with the flow.  The fact that this happened is what in my mind incriminates our educational system.  We are obviously not teaching responsibility, inquisitiveness, or developing any real capacity to think independently whether it comes to the value of one's vote, one's own financial decisions, or one's ultimate moral compass and sense of self.  Self reliance and responsibility are the ultimate sources of freedom in society.  We have the framework, what we need to instill is the skillset and values to properly utilize it. 


Perfect example - no one walks off the street and gets a business loan without a documented business plan and estimated financials.  Apparently the leader of the most powerful nation on Earth can run by spouting some party rhetoric.  Requiring a basic business plan (under 80 pages total) should be required of all candidates.  Yet no one thinks to ask...

nmewn's picture


Might sanity become the new norm? can only hope.

EvlTheCat's picture

"The problem is that people have let themselves be herded and led down a path they did not understand and rather than ask questions or apply their brains, they took the path of least resistance and went with the flow.  The fact that this happened is what in my mind incriminates our educational system.  We are obviously not teaching responsibility, inquisitiveness, or developing any real capacity to think independently whether it comes to the value of one's vote, one's own financial decisions, or one's ultimate moral compass and sense of self. "

What I find funny about statements like the one you made, is they sound like those made by "out of touch" and arrogant politicians.  Most of the families I grew up with in the 80's and 90's had no concept of what the stock market was let alone how to dabbled in said market.  Second, most families, like mine, lived paycheck to paycheck even when both parents were working.  As an older child I spent a lot of my time raising my brother and sister, getting a sub-par education, and working a part time job as I got older.  Our family was not abnormal.  My point is we did not choose to close our eyes to the truth, open our ears to false promises, or kept our mouth shut because of intentional ignorance, we were to Goddamned busy trying to survive.  I had no hope of going to college except by joining the military.  I did so, and only after I reaped the educational benefits and experiences did my eyes open.  Have my sister and brother been as fortunate?  No, but I have tried to take the time again to educate them.  Most people spend lots of time pointing fingers at shortcomings and who is to blame for all the current problems, but the stark reality is it will not fix the future!  Stop criticizing and start teaching!

"Self reliance and responsibility are the ultimate sources of freedom in society.  We have the framework, what we need to instill is the skillset and values to properly utilize it. "

No shit.  So my suggestion is that when everyone reaches the age of 18 they are required to do 2 years of either military service, peace corps service, or farm coop service within our country.  During which time they will be deprogrammed of the cultural entitlement syndrome, removed from the entertainment sports and media complex, forced to balance a budget between their wants and needs, and educated with a skill.  After that your life is yours to do what you want, succeed or fail.  Why does it have to be this way?  Because life lessons have to be taught by parents who have a vested interest in their children's future, and also parents who have been educated with the tools to provide this service.  In my time most of our parents never went to college, or were never educated in wall street economics, subsequently all generations there after missed the bus.

Two final points.  First, I don't ever remember needing to know economics while I was studying to get my degrees in computer science and electrical engineering.  I am sure to those who lives revolve the economic circus can see the absolute importance.  At one time most Americans tried to hire public servants who had the necessary skills and qualities to provide oversight of the institutions of government.  Obviously, I should have preoccupied my daily life with politics because that was a mistake.  I will add babysitter to my resume ASAP.

Second point, with the advent, and availability of the Internet, a tool of "enlightenment".  One of which was not available to the general populus 30 years ago, has herald an age of information at ones finger tips.  What did we do before it??

Ivory towers are for assholes.  Knock yours down before its to late!

trav7777's picture

the coolest part is we have states utterly ADDICTED to spending and financing that spending through bond ponzis.

An austerity bent Congress?  Hah.  Look at the calculus...give us our tax breaks (deficit negative) and you can have your state bailouts (deficit negative).

The only chance of deficit positive action would seem to be political revenge on blue or red states by a blue or red party.

One must marvel that we were ever able to survive without state budgets being so swollen.  These fucks got drunk off the tax revenue wave in the 90s and have never cut back.  Now they intend to sell the streets out from under our feet for another year's worth.

we are going to have to default at every level.  Only dictators come in and revoke this type of shit by force.

AccreditedEYE's picture

we are going to have to default at every level. 

That's the medicine right there... and the very thing that the Fed fights tooth and nail against. Balance sheet resets (across sovereigns and banks) are the only thing that will move us forward but it isn't going to happen before the Fed blows itself up and money is reset. Global currency is on the way to save the day! lol 

plocequ1's picture

This is what Max Keiser was saying. He states the transition to the new global currency will be painless. We give up our sovereignty for the NWO global government.

MachoMan's picture

The G20/Copenhagen/etc. meetings have shown that the torch from the dollar to the world/global currency has not and will not be passed.  Everyone is all in on the dollar.  Once it goes, that's it...  there will be no world government...  there will be isolationism and pain as communication and trade break down.  There will be liquidation of goods and people.  Ultimately, pockets of control will arise...  the sphere of influence being largely determined by land owned and spoils of the wealth gap cleverly converted out of the ether.  The largest money will stay on the sidelines in a foreign locale until the coast is clear.  However, this will still leave a large number of neo robber barons.  They will be our sole employers...  and also our defense against the mobs/gangs that will rove much of rural america.  We will all feel the crack of the whip.  However, it will come at the hand of a yocal and not some magical world government... 

that was their plan, but the best laid plans...

max2205's picture

+100. States need to half employment. +1pt to UE

Lucius Cornelius Sulla's picture

Its a slippery slope because once they start bailing them out then all the States will start issuing new ones like mad due to the implied put.  Especially States that have managed their debt well up to now.  Bailing out CA and the other losers will cause a lot of resentment from other States.  This is moral hazard to then Nth degree (well, at least on factorial greater than we are now).

RockyRacoon's picture

Bubble shifting?  From one bond category to another?  A muni bond blow up would be the last hurrah, but it would kick a few cans farther down the economic road. 

Lucius Cornelius Sulla's picture

I don't think the FED will put anything on their balance sheet unless Treasury first guarantees it.  That is why Geithner pledged unlimited support for GSE paper.  After all, the FED is a bank so they are going to look after their interests first.  So before buying muni debt, I think they will wait until they have the explicit backing of Congress to cover any losses.  That would be a highly controversial political move and one that would face stiff resistance from States that have their budgets in good condition (relative to the CA, IL, and NYs of the country).  IMO, it would never pass the Senate.

Die Weiße Rose's picture

I don't really know what the wtf FED will do next...

and frankly my dear, I don't give a flying fox.

Just looking at the US Treasury yield curve and how smooth it is, I would say that the FED will just keep it in a tight range,moving it up and down a few notches right across the curve and keeping it from getting inverted (with inflating yields short term and deflated long Yields),as happened in July 2007 just before the GFC.

My guess is that the FED will use the Auctions on one hand and QE2 POMO on the other to move Bond yields up or down and I suspect that the Primary Dealers will have given the FED their Master-plan list,as happened with the AIG bailout and yes I agree that a US Muni-Bond bailout is on that list, to get rid of all the CDS swaps that are now another murky toxic problem.

Check out this beautiful and smooth US Treasury Bond yield curve:

with FED holding Rates at zero... ( what financial crisis ?)

and now take a look how the US FED QE and all that stimulation money

flows into emerging Markets and blows up the short term Yield higher,

creating inflation of Commodities and the CPI and basic cost of living,

and now check out this ugly Australian Treasury yield curve

notice the official RBA cash rate of Australia(4.75%)

going ever higher and creating all sort of Problems in Oz.

add the strong AUD,with already 10 billion wiped of OZ exports

since the aussie reached parity with the USD.

I have no Idea of what the FED is going to do,but I know one thing:

The FED will do exactly what the PD and Credit-holders tell him to do because with all the toxic swaps of Muni-Bonds and other time-bombs still floating around,the FED will have no other choice that submit to the eternal bailout time-warp that was started with Bear Stern,Fanny and Freddy AIG but not Lehman (why not?) perhaps the PD of GS told the FED to save the money for AIG and the Credit Default Swaps US 14 billion that was to come straight into Goldman's covers ! who knows ?

I don't think the FED has got any other choice than to listen to the PD and the credit holders and the Credit Default Swaps turned Junk Bond Dealers. It is all very confusing.

Also then there is the China syndrome:

All warfare is based on deception. Hence, when able to attack, we must seem unable; when using our forces, we must seem inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near. Hold out baits to entice the enemy. Feign disorder, and crush him.

- Sun Tzu, the Art of War

Lucius Cornelius Sulla's picture

IMO, the FED is out of options and its QE is one last desperate attempt at controlling the yield curve.  It won't work.  The global bond market is too big to control.  Too much debasement and they will lose control, too little debasement and they will lose control.  It is all about confidence.  Control is an illusion.  IMHO.

tahoebumsmith's picture

What people seem to forget is California is the 7th largest economy in the WORLD! So forget about the PIIGS and all the rest of the side show because this is going down in your own backyard. Better yet, put California into a petri dish and study it hard under a microscope. It will look the same as the dollar loses power and other countries decide they don't need us any longer.. Revenue is coming in short and spending just continues to rise no matter how many ways they cut the budget. They got in bed with Wall St. and now we are screwed. Weirdness in the air, It's like you can feel it everwhere. I went to an upscale mall today at about 1:00 pm in Northern, CA ...I was pretty much alone, It was really spooky. I looked around and there were Christmas wreaths and pointsettas everywhere,palm trees lit up, fountains shooting high,outdoor fire pits glaring and nobody. It really shed some light on how America depends on consumption and with 68% of our foundation built on this model, I truly realized how bad bad situation we have got ourselves in and how crucial it is to keep the sheeple shopping.