Thursday, January 13, 2011

How Bad Will the Muni Bond Situation Get?

There is an attitude by some market observers with regard to the developing muni bond crisis that "this too shall pass."

It is exemplified by the recent retweet by Joe Weisenthal:
Agree RT @PragCapitalist: Bigger concern from muni fallout is higher taxes. Not defaults
This really comes down to guys who aren't crunching the numbers. Meredith Whitney is crunching the numbers. She is very bearish. Others, who are in a position to know details the most of us are not privy to, tell me the situation is worse than most imagine. They tell me we may have a year or two before the problems develop, but that taxes won't do it. Indeed, they tell me there is no easy solution.

The only "solutions" I see are massive money printing by the Fed, which devalues the dollar domestically by more than 50% or a default on the pension obligations owed by the states. Neither option is the type that will sit easy with those concerned.

Weisenthal is way off on this one. The numbers that are owed are staggering, especially when the pension liabilities are taken into consideration. In fact, just as Whitney has been saying, the degree of the crisis is unkown because of the poor records being kept at state and local levels. Those in the known tell me the number is obviously staggering, but just how staggering, no one knows.

Bottom line: This is not the time to buy a muni bonds even to use as scrap paper. TOTALLY AVOID THE MUNI MARKET. All munis will get crushed once the panic starts. There may be some bargains in the panic, but that's way down the road.


  1. If it was just the obscene pay of the Unionists/Public Servants and their useless "services", then Mega high taxes might do it.
    Alas there are pensions and health care expenses for these useless parasites also.

  2. Is there a way to short the US muni market? I suppose I'd watch out for bailouts, but yields have to go up right?

  3. @TanGeng, you would buy a credit default swap for the issue you wanted to short. If you want to short a bucket (not as profitable), you can short one of the muni-bond funds like NPI.

  4. People claim the sky is falling is using pure number to conclude. Don't forget state government is not like a corporation. They have a lot of leverage to increase tax and reduce service. When they do default, they do not default Bond. They default on Welfare and Healthcare service first. Once Welfare and low-income healthcare provider runs out of money, the services stops and the budgets balance itself. The sky is not falling.

  5. @Anonymous #3: I agree with your point that governments are not like corporations, but agreement ends there. No government will stop buying obedience from the underclasses. Did you not see the student riots in the UK when they were told that they would have to start paying tuition that is still a fraction of what US public universities charge? The "you owe us" crowd will beat the responsible citizen to the government feed trough every time. The underclasses are legion and they are many. They must be placated. Now, it is the small time bond holder who will get screwed. It's easy to deal with that minuscule percentage of the population; take away their assets and let them join an underclass. A guy with a retirement account with bonds to pay him income and allegedly protect his assets cannot protect himself, so why let him keep what he has? Never underestimate the viciousness of the ruling class. They will stop at nothing.

  6. The local taxtaker parasites will be bailed out by their criminal sociopath in the White House. As was said - "Taxpayers are the world's greatest fools".

  7. I am turned off to an article immediately when I see this kind of error in the first sentence.

    "...crisis that 'this to shall pass.'"

  8. @Anonymous 1-14 8:49AM

    Would this kind of typo not bother you as much in the second sentence?


  9. @BlogOwner/Robert Wenzel

    re typos. :-)

    That was to funny. Er...two funny...umm...too funny.

    Of course, "perfection is expected." With "Watson" now competing -- and winning! -- on 'Jeopardy', human dominance on this planet is drawing to a close. We should either be perfect, or be willing to be replaced by machines.

    On a more serious note...such comments (roughly, "I can discount/ignore this information because...") are increasingly common on the InterTubes. We're drowning in bits, data, information, assertions, knowledge, etc.

    What is wisdom, and what is not? What is 'right'? Right or wrong, most of us who still try to navigate this ocean of information, turn to tools like labels, authorities, filters, etc.

    Labels (right/left, red/blue, etc.) are convenient shortcuts to tag entire conversations. E.g. "In the Red states...." Oh, I guess I don't have to read that...

    Authorities (perceived) like Paul Krugman,
    {insert politician here}, or Stephen Hawkings, are used to shortcut to agreement ("Krugman is a Nobel prize winner and HE says we need more stimulus..." So, I don't need to read any more economics, I guess.

    Filters can keep a lot of junk from entering our cognitive ecosystem, but they can operate as blinders as well.

    In my experience, it's extremely hard and time-consuming to do self-directed research, read original texts, have extended solitude to think. It's fast to leverage a label, authority, or filter. It's not quality thought, of course, but it sure is fast and convenient.

    Punchline: When a Two Second Tommy writes something like "I am turned off to [sic] ..." he's simply signalling that he's got way more data than time, way more information than attention, and he, in a snarky way, is saying that the typo tripped his filter for "I can ignore this" and he is off to swim in another part of the ocean.

    Woe is us.

    (and...thanks very much for all your work on EPJ...)

  10. Silky, there is much to commend in your comments, but I have a different take on your closing statements. Such bonds are a claim against the property of involuntary tax payers and the value of everyone's honest savings extracted through violence and a fraudulent monetary system. They are not a just claim to a productive asset nor the future wealth of voluntary participants. Those bond holders are already functionally equivalent to the "you owe us" crowd, even if a lifetime of propaganda has blinded them to the truth. Their 'savings' were long ago squandered by by the criminal enterprise to which they had 'loaned' the money. They were all deceived into the trap in which they are now caught. When the system does collapse, they will suffer most. They will also be the most liberated in the end.

  11. There are municipal bond etfs like MUB that you can short, and you can also short European etfs in Spain, Italy, and misc other pig nations.

  12. well is the average person in the muni bond market without realizing it?

    or, can there be no reward given the risk?

    people willing to go in will invariably appear suicidal to somebody, but all it really means is that they have some money lying around to throw at real serious risk.

  13. Investing in the "legal" mafia's bonds is like giving your teenage daughter to a rapist.

  14. anonymous responder to my earlier post:

    You raise an excellent point and I agree with you. .

  15. All munis will get crushed once which panic starts?