The U.S. Supreme Court gave a thumbs-up to municipal bond exemptions today, in a 7-2 decision that supported Kentucky's right to make its municipal bonds exempt from state taxes. A Louisville couple had sued the state in a class-action suit, saying that it was unconstitutional to exempt state taxes for in-state muni bounds but not out-of-state muni bonds.
So, did you hear the big sigh of relief wafting over the land? Bloomberg included this reaction in its report today: "'This is one of the few things in the municipal bond that has gone as expected this year,' said Matt Fabian, managing director at Concord, Massachusetts-based Municipal Market Advisors, a research firm. 'Now we can all go back to normal.'"
Get a new perspective on financial markets and cultural trends via Elliott wave analysis. The latest Elliott Wave Financial Forecast explains how the bear market is beginning to show itself in items as disparate as GE's stock chart and the VIX. Read more here.
The Wall Street Journal reporter got this reaction: "'This decision keeps the status quo in the municipal bond market,' said Michael Pietronico, chief executive of Miller Tabak's municipal asset-management division."
Back to normal, status quo … Well, that may sound good to those who deal in municipal bonds, particularly since it's a $2.6 trillion market. But our analysts at Elliott Wave International see the future for the muni bond market as anything but normal. Here's a chart from the most recent Elliott Wave Financial Forecast along with our forecast for a muni bond bear market.
[Excerpted from The Elliott Wave Financial Forecast, May 2008]
A Bear Hug For States and Cities
Last month we covered the unfolding bear market in muni bonds. This long-term chart shows muni bond yields smashing through three key long-term trendlines. One of the reasons that munis are such a bad investment now is that they, by their very nature, are dependent on government, and government’s specialty is compounding the effects of a bear market by taking actions that rely on the prior uptrend. A new law passed by the state of Wisconsin is a good example. It will allow its largest county to borrow $270 million to cover unfunded pension liabilities. The debt will carry an interest rate of 6%, but issuers figure they can “wind up making money on the deal” if they can match their long-term investment return of 8%. These kinds of assumptions will backfire badly in a bear market.
There’s plenty more where that came from; The Wall Street Journal says that unfunded liabilities now exceed $1 trillion nationally.
The crisis should arrive in a hurry. One reason is that taxpayers are already operating under the influence of an emerging bear market. They are in no mood for a bigger tax bite; the battle lines for a fight are already forming. In Virginia, commuters are choosing long commutes over higher taxes to pay for more roads. When New Jersey tried to fund a “gold-plated” pension scheme with years and years of rising highway tolls, the plan was shot down by a series of protest rallies and a plunge in the governor’s approval rating from 47% to 34%.
As the contracting economy squeezes budgets tighter, local governments will threaten to cut back on parks, libraries, fire, police and trash hauling to excite the people and the press. Then they’ll try to raise money any way they can. Golf course and parking fees and taxes of all kinds will increase. Costs for services like fire, ambulance, police and trash hauling will be converted to a pay-as-you-go basis. Other services will be outsourced, and prisons, stadiums and toll roads sold to raise funds. As things get really tight, some cities will borrow for current expenses, which is the last step before bankruptcy. Before the bear market is over, even the most entrenched politicians will lose their jobs, and outsiders will get into office by promising to cut out the dead wood.
Get a new perspective on financial markets and cultural trends via Elliott wave analysis. The latest Elliott Wave Financial Forecast explains how the bear market is beginning to show itself in items as disparate as GE's stock chart and the VIX. Read more here.