Monday, November 21, 2011

Insider: The US is Defaulting on its Debt, But There's Money in the Sewage

More from the ultimate insider, Pippa Malmgren:
I have argued for some time that the US would default through haircuts at the local level (municipal defaults) and through inflation at the national level. In addition, austerity is making its way into the US debt picture but through local, not national, initiatives. The most important news about the Jefferson County default is not that it is bigger than Orange County, making it the largest municipal bankruptcy in U.S. history, or that it happened without much notice or market impact. The most important aspect is that someone bought the sewer assets of the county, which had been the principal source of the debt burden, according to Bloomberg “Less than an hour after Jefferson County’s late-afternoon filing, an investor bought more than $1 million of its sewer debt for 58 cents on the dollar, down from about 74 cents a month earlier, according to Municipal Securities Rulemaking Board trade data.” In other words, the default process in America will be met by increased new investment. The new owner is doing exactly what I have recommended all investors do in this new environment: Buy genuine unimpaired cash flows. It would hard to name something that has more genuine demand than sewage services in the US. Now that the debt is defaulted on the entity is no longer impaired by debt. And, the cash flows, though not certain, are likely to be manageable. Prices for sewage services in that county will rise but probably not by as much as the previous debt-laden owners were demanding. Thus the public ability and willingness to pay is likely to be high.
As I have been reporting for some time, the only significant area where unemployment is increasing is at the state and local government levels. This falls in line with Malmgren's thinking here.

My one caution with her scenario is that if price inflation gets strong enough, and I think it will, this will eliminate much of the financial pressures, short-term, at the state and local government levels as these governments will be able to pay off their debts in cheaper dollars. As for buying sewage services, I think it's positively genius. The economy would really have to be in total long-term free fall before sewage service is turned off.


  1. There's more stink to the Jefferson County sewage situation:

    The question is whether The Carlyle Group bought sewage bonds for 58 cents on the dollar. Carlyle's Synagro Technologies, a sewage contractor, got into its own bribery troubles in Michigan. Their bribes involved a Congressman Conyer's wife.