Over the past six months, the municipal bond market has melted like a snow cone in the Sahara desert. According to recent data, 35 muni bond issues totaling $1.5 billion have defaulted since January 2010, three times the average annualized rate going back to 1983.
That's not to mention across-the-board "Greek-style deficits" in California, Florida, Illinois, and New Jersey alongside Draconian budget cuts, job furloughs, suspensions of city services, a 90% plunge in the value of monoline insurers (58% of which cover muni bonds), and the growing "rent-a-cop" trend of firing city workers and then hiring outside contractors to fill those positions.
Still, as bad as things get in Muniland, the mainstream demand for tax-exempt general obligations has held firm. While Warren Buffett and Bill Gross (the King of Bonds himself) have both "sounded the [muni] alarm bells" recently, they also agree the siren is more a call-to-arms than a cause for panic. Reason being: The federal government can always step in to save the day. Here, Gross offers this reassuring thought:
"There is an immediate crisis and ultimately, the question becomes whether Uncle Sam is willing to write a check. My sense is that they will."
Forget Sam the Man for a second. What about the two-years-too-late sounding of the muni alarm? In 2008, with the worst of the financial crisis just ahead, many experts also extolled the municipal bonds market for its "safe-haven resistance to recession."
“One of the most vulnerable sectors of the debt markets is the municipal bond market. Instead of being a source of state and local funding, many residents will become a cost. Default could hit at any moment after times get difficult… Yields on tax-exempt municipal bonds are above yields on US Treasuries for the first time in as long as anyone can remember, another sign of how limited the supply of quality bonds will become.”
Following close behind, these EWFF publications filled out the story:
February 2009 EWFFpresented a special section titled “Out of the Frying Pan and into Munis.” The segment showed the continued rise in muni yields ABOVE Treasury yields, and cautioned against the idea that tax-exempt debt was a “safe bet.”
Okay, now let's talk about Uncle Sam and the far-reaching faith in federal moolah to rescue municipalities from bankruptcy. Three words: Build America Bonds. BAB's debuted in April 2009 as taxable muni bonds with a handsome 35% government subsidy. They too were widely expected to stabilize the muni market and "stimulate the economy." (Time Magazine, Nov. 2009.)
As of June 2010, a total of $115 billion in BABs have been issued, and the only thing these bonds have "BUILT" in America is more and more piles of debt.
In the end, the government can write all the blank checks it wants, but unless those states can pay the money back, said checks may as well be printed in rubber. And, in the November 2009
Elliott Wave Financial Forecast, our analysts presented the following chart of year-over-year percentage in real estate taxes and local taxes since Quarter 1, 2004.
We said it then: "The basis of states ability to pay interest -- tax receipts -- is evaporating. The goose -- the poor overdriven taxpayer -- is dying and the production of golden eggs is falling."