Before I get into my rant today about the troubled municipal bond market, first I have to say that I just couldn’t believe it when I saw this cross the newswire yesterday:
On Wednesday, January 23, 2013, Congress voted to “temporarily” do away with the U.S. government’s debt ceiling. Once the Senate passes the measure and the President signs it, there will be no limit on the amount of money the government can borrow.
At this point, I’m thinking everyone in Washington has gone mad. How can you give the government unlimited borrowing power? The race to a $20.0-trillion national debt and a debt-to-GDP multiple of 125%—we’ll get there a lot quicker now!
Back to today’s story…
Municipal bonds investors beware!
Gone are the days when municipal bonds were the “best investment.” Some may still argue that they provide tax breaks, but today the risks of holding them are piling up.
Cities across the U.S. are experiencing budget deficit problems. As budget deficits increase, the ability of cities and municipalities to pay their creditors decreases. A number of municipalities filed for bankruptcy last year, because they accumulated too much debt under their budget deficits—and defaulted on the payment of the municipal bonds they issued.
As we enter 2013, the epidemic of increasing budget deficits could make 2012 look like the tip of the iceberg!
Syracuse, New York, is estimated to have a budget deficit of $25.0 million this year. The city’s pension costs have increased 40% in one year and healthcare costs are rising at nine percent on a per-year basis. (Source: The Post-Standard, January 17, 2013.)
Cities and towns in Rhode Island have added a significant amount of debt with their budget deficits skyrocketing. The City of Woonsocket made the list of cities with the most debt load in the state. The city increased its deficit by borrowing $90.0 million about 10 years ago for its pension liability, $74.0 million to construct two new middle schools four years ago, and another $11.5 million to manage the deficit in the city and school budgets. (Source: Golocal Prov, January 18, 2013.)
When the housing market in the U.S. economy collapsed, cities lost their main source of revenue: property taxes. Now with home prices stagnant and millions of people still living in their homes with negative equity, I really don’t expect the budget deficits of municipalities to become any smaller, unless severe cuts are made to local government payroll and to promised pension benefits.
What I do see coming: municipal governments asking for bailouts from state governments as they buckle under their budget deficits. Eventually, all these requests for money will make their way to the federal government.
That U.S. government debt ceiling limit that comes up every so often…no wonder Congress decided yesterday to “temporarily” suspend it! The government is on a borrowing spree. And if the Federal Reserve is the one buying most of the bonds the government has to issue to fund its over-the-top borrowing needs, it will just be printing money to infinity and beyond.
Michael’s Personal Notes:
While the eurozone crisis is not front-page news like it used to be about a year ago, I see economic conditions in the eurozone actually getting worse. The economic slowdown in the region is becoming more severe as the days pass—even with the European Central Bank announcing it will do “whatever it takes” to save the eurozone.
In a recent review; the International Monetary Fund (IMF) said it expects Greece to require more help from its eurozone peers. It believes that all the measures taken by the eurozone nations since the troubles in Greece began aren’t enough to bring its debt to a sustainable level. The IMF predicts Greece will require another 5.5 billion euros to 9.5 billion euros from 2015 to 2016 to bring down its debt to a sustainable level. (Source: Wall Street Journal, January 18, 2013.)
I don’t really have to go into much detail about how bad the economic slowdown in Greece really is. Greece is in a depression.
To add to the misery, Spain, the fourth biggest economy in the eurozone, isn’t taking a break from its credit crisis, as its economic slowdown is deepening. The default rate on loans made to Spanish companies increased to 17% in the third quarter of 2012. Spain’s economy is expected to contract another 1.5% this year after shrinking 1.4% in 2012. (Source: Bloomberg, January 21, 2013.)
Meanwhile, Portugal and Ireland are pleading with their eurozone peers to extend their debt repayment schedule to the longest terms available. My take on the request? These two countries are probably running out of money again. The Bank of Portugal expects its economic slowdown to get deeper, with this economy expected to contract 1.9% in 2013 compared to a previously estimated 1.6% contraction. (Source: Wall Street Journal, January 15, 2013.)
This isn’t rocket science. The economic slowdown in the eurozone will continue and become deeper. As I wrote just this Monday, 2013 growth prospects for Germany are nose-diving (see: “Surprise: German Economic Growth Turns Bleak for 2013”).
The eurozone slowdown has already taken a big toll on the global economy, threatening to send the global economy into another recession.
Don’t forget: a significant percentage of U.S. companies (about 40% of the S&P 500 firms) do business in the eurozone, and they will continue to be affected by all of this.
Where the Market Stands; Where it’s Headed:
The investor love affair with Apple Inc. (NASDAQ/AAPL) came to an end last night when the company reported that it isn’t growing like it used to. Investors are bailing out of Apple and that’s putting pressure on the tech-heavy NASDAQ this morning.
But it’s not just Apple. The days of double-digit earnings and revenue growth are gone for most of corporate America—a reality the stock market will soon adjust to.
What He Said:
“A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on over-extended consumers.” Michael Lombardi in Profit Confidential, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.