Municipal Bond Defaults Doubling;
Bailout Options Diminishing

inflation rateWhile the U.S. economy is apparently improving (at least that’s what the media has been telling us), there are more municipalities defaulting on bond payments and facing widening budget deficits.

Moody’s Investors Services just released a study on the municipal bond market that showed that, for all of the municipal bonds it covers, there were only 71 bond defaults between 1970 and 2009. Moody’s rates over 17,000 municipal bonds.

The world has changed since the financial crisis hit in 2008. The pressure has been on the municipalities and their widening budget deficits since 2008, because the cities and states no longer have the revenue to cover their expenses.

From 1970-2009, Moody’s cited 2.7 annual municipal bond defaults per year on average. In 2010 and 2011, there were 5.5 average annual defaults per year—a more than 100% increase in the annual rate of municipal bond defaults. Clearly, there is a shift here in the wrong direction. Of course, no sooner does Moody’s release these results than we hear of more budget deficit trouble with municipalities.

Harrisburg, Pennsylvania, is back in the news saying that, for the first time in its history, it will default on its municipal bond payments today, March 15, 2012.

In 2009, when Harrisburg first got into trouble, it was able to lease municipal land to the state to receive the funds to cover its municipal bond payments. In 2010, the state simply sent aid over to meet the city’s debt service obligations.

This year, the government is split between defaulting on payments and selling more of its assets to cover its debt and municipal bond payments. The state is carrying a budget deficit that is five times its revenue!

The State of New York has been very busy of late. One of the largest counties outside of New York City, Suffolk County, declared a financial emergency after staring a budget deficit of $530 million in the face. Nassau County has thrown its arms in the air concerning its budget deficit, which has forced a state oversight board to seize control of its finances. Rockland Country has sent a delegation to Albany to ask for money to address its widening budget deficit.

Falling property values mean less property tax collections for the municipalities. Since the stock market collapse of 2008, pension fund investments dropped in value and, because interest rates are so low, returns cannot be made up to repair the losses.

As a result, municipalities are attempting to increase taxes on citizens to help reduce budget deficits, but with income growth nonexistent, how can the citizens pay the extra taxes?

So the burden is falling on the states to issue debt to make up for the budget deficit shortfalls with their municipalities. If New York State is a reflection of what the demands from the other states are going to be, America is witnessing a troubling decline.

New York has asked its municipalities to reduce pension benefits for future public workers, cut the number of policemen, firefighters and ambulance technicians per citizen, and increase the number of students per classroom.

When the state budget deficit burdens become too large, naturally they’ll visit the Federal government to ask for a bailout. If the Federal government, which already has an annual budget deficit of over $1.3 trillion, doesn’t have the money, it will have to print to plug the enormous black holes in the state budget deficits.

The vicious circle continues to play itself out, dear reader. Debt piled on top of more debt each passing day. The U.S.debt crisis will not end well.

Michael Personal Notes:

Thank you to the thousands of our readers who participated in last week’s inflation survey. Here are the results with my comments.

On the first question, as to which index best reflected the inflation rate in this country, the Everyday Price Index at eight or the Consumer Price Index (CPI) at 3.1%, 94% of our readers believe that eight percent is better reflection of the true inflation rate in America:

This is a landslide victory for the Everyday Price Index. This result was further confirmed by the second question in which I asked what the true inflation rate is in this country.

The winner of the true inflation rate by a wide margin was 10%. The great majority of Profit Confidential readers believe that inflation is running at 10% per annum.

Of course, not everyone who responded to the survey left comments, but I can tell you that, out of the hundreds of comments that were left, less than one percent of readers believe that inflation is NOT a problem. Everyone was very, very worried that the inflation rate was worsening.

Below are survey respondent comments that reflected what the majority had to say:

“Yes, we’re worried about inflation big time. Although our house is losing value, we still need to pay for the fixed amount on our mortgage. Without wage inflation, the inflation rate (food, gas, child care) in everyday items really eats up our budget. We’re worried we can’t even save for retirement if the inflation rate keeps up at this pace, no matter how we try to save money.”

“I’m on a fixed income and unfortunately, the dividends from fixed income funds are going down and my cost of living is going up! Not a good combination.”

“Seems like every visit to the store (fuel/food/household goods/meds) costs more, and yes these things do have an effect on the monthly budget” And then one expects a person to save for retirement?”

“My wife used to do extra shopping for things we really didn’t need and I would put my extra dollars in an HAS and IRA … we haven’t done any of that in the last few years.”

Yes, any index that attempts to capture the true inflation rate will have its shortcomings, because it is such a massive undertaking. However, the CPI falls very short on what the average American is experiencing.

Ben Bernanke was asked multiple times over the last few months if inflation or the inflation rate was a problem, to which he always responded with a no, saying that any inflation currently in the system was transitory or temporary.

The readers of Profit Confidential would passionately disagree.

Where the Market Stands; Where it’s Headed:

While my readers might find this hard to believe, the stock market rally that has lasted about three years and which brought the Dow Jones Industrial Average decisively above the 13,000 level has more room on the upside?

Yes, many warning signs are flashing: corporate insider selling is negative, so are the Baltic Dry Index and the Dow Theory. But there has been a sharp pullback on the number of bullish stock advisers, which is very positive—the majority of stock advisors do not believe that stocks can continue to ride the “wall of worry” higher. The stock market has always done the opposite of what stock advisers as a group expect.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S.will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in Profit Confidential, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.