« US Municipal Bonds »: The inevitable major shock of the second half of 2010

- Excerpt Recommendations GEAB N°46 (June 16, 2010) -

« US Municipal Bonds »: The inevitable major shock of the second half of 2010
The US municipal bond market (« Munis ») which supplies the finance for the local infrastructure for transport, health, education, sewage,…. is on the edge of imploding as a consequence of the growing inability of US local authorities to handle their indebtedness.

It is originally a very « subprime » (or very « Greek ») case, because information on the actual financial health of US local authorities is largely defective and the credit rating agencies have rated these bonds in a completely arbitrary fashion, therefore well adapted to all the disappointments possible for those who own them. The crisis is indeed in the course of ruining a number of these authorities who don’t have the means to raise taxes much (when they simply can despite the opposition of their fellow citizens). The end of Federal stimulus (1) and exhaustion of financing facilities related to « Build America Bonds » (benefitting from Federal aid to reduce their cost), presages a very dangerous second half of 2010 for this particular financial market as a consequence of the relapse of the US economy (so, a worsening fiscal shortfall), the new international trend towards budgetary austerity and the fear of public over- indebtedness.

For LEAP/E2020, there is no doubt that we will soon see the « monoline insurers », like Ambac which specializes in « Munis », in the financial media headlines again. Since November 2007, our team has been one of the first internationally (GEAB N°19) to flag Ambac’s, MBIA’s, and other monoline insurers’ upcoming problems which were also first in line over the « subprime crisis » (2). One can count on them being first in line at the next crisis of « Munis ». The size of this particular financial market implies that such a crisis would be as destructive at international level as the « subprime » one.

That said, an insurer warned being worth two, as the proverb says, one must take note that the proportion of insured US municipal bonds has gone from an average of 60% for the last fifteen years to 8.5% in 2009, which speaks volumes on the state of the insurers and probably too on the degree of risk of the « Munis » themselves (3). In short, get away from US municipal bond markets… and expect a new financial explosion particularly devastating for the US. It will drag along itself a large part of US banks and pension funds into the debacle.

US municipal bond issuance - Source: BondInvestor, 05/2010
US municipal bond issuance - Source: BondInvestor, 05/2010

(1) The US states have a cumulative fiscal deficit of almost 130 billion USD for the fiscal year beginning 01/07/2010. The end of the stimulus is going to oblige them to reduce their expenditure even more and resort to even riskier contrivances to enable them to continue operating. The re-imbursement of their debts on the terms foreseen in the auspicious years of 2000/2006 risks trailing far behind other priorities which are more profitable electorally. In any event, considering the weakness of actual issuance, they don’t even envisage refinancing, which will rapidly pose problems. Source: Bloomberg, 06/13/2010

(2) It was even the third factor of the four mentioned in GEAB N°19 leading to the « black hole » of the US financial crisis … which materialized less than a year later in September2008.

(3) Source: GoldmanSachs, 02/2010

Mercredi 1 Décembre 2010
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GEAB N°90 - Contents

- Published on December 15, 2014 -

Global systemic crisis 2015 – Oil, currencies, finance, societies, the Middle East : Massive storm in the Western port!

. « Global systemic crisis: the end of the West we have known since 1945 »
. The oil crisis is systemic because it is linked to the end of the all-oil era
. The US in one hell of a state
. Europe post-Ukraine: lots of questions
. Three missions for the new Europe: resolve the Ukrainian crisis, put Euro-Russian relations back on the right path, avoid a European QE
. Middle East: traditional alliances’ big waltz
. Saudi Arabia, Iran: the allies change sides
. And Western « values » in all this
Read the public announcement

2015 – new phase of the crisis: the oil systemic crisis

. The impact of speculation
. Price War
. Systemic oil crisis and finance
. Systemic oil crisis and geopolitics

Investments, trends and recommendations

. Oil: beware!
. Energy intensive industries like airline companies
. Renewable energy: the good and the bad
. 2015: Euro & Yen rebound
. Gold: still safe

Evaluation of our anticipations for 2014
(from GEAB N° 81 in January 2014): a 69% success rate