Municipal debt is a lurking time bomb and cities like Chicago -- like Detroit and NYC in the past -- are going to get a knot jerked in their tutu. They could literally fail financially and that may be the only way to reform them.
In the current interest rate environment -- meaning high interest rates -- there will be no refundings that will relieve the pressure.
Since 2017, a municipality cannot refund a tax exempt issue with a new tax exempt issue (advance refunding) but can refund with a non-tax exempt issue. This makes it even worse as, of course, non-tax exempt interest rates are higher, much higher.
There is a limit to how much a municipality can withdraw from the local economy before the impact is the dramatic contraction of the economy.
When NYC went broke, Pres Ford famously said "Drop dead" for a year until NYC (aided by Felix Rohatyn of Lazard Brothers who was the brains of the operation) figured out how to get NYC's ship in order and then the Feds lent them $2B which was real money in those days.
The dirty little secret right now is exactly as Monsieur Carter deftly reveals -- the bloody sugar high created by the massive intergovernmental transfers from the Feds directly to failing Dem cities. That money is mostly gone and the chickens are coming home to roost.
Why do financiers buy shitty muni debt? Cause they all know the Feds will not allow a default on those instruments.
You could have made a bloody fortune on Mexican Brady Bonds, cetes, and tesebonos during the difficult times in the 1980s and early 1990s in Mexico because the US gov't wasn't going to let Mexico fail. You could have collected interest rates of 65% subject solely to a currency conversion risk of 1% per month. That really happened.
States like Illinois will continue to issue muni debt until the state collapses.
I've only been friends with three guys who became nine-figure net worth individuals. (interestingly, all were CBOT members, yet all of them made the lion's share of their wealth after leaving the pits.)
But, the least probable was a younger kid I became tight with when we cleared the same firm in the late 80's. Louis was a 1 lot loser in the Bond option pit, but while timid on the floor, he was an absolute math wiz. (he'd moved to Chicago for a UC MBA and got staked to trade)
Realizing his strength was better suited for IB world, he moved to NYC and after bouncing around for a couple of years, he realized in 1992 that Brady Bonds were the new, get leveraged, get rich frontier. By 1998, he co-founded Marathon Asset Management and has never looked back.
Two things on the “specialness” of IL Muni debt and why it’s priced a scootch weaker (higher yield) vs other states’ debt in the eyes of those Inst Inv that “have to own”. One, IL specific muni funds are a waste of time because, last time I looked, only two issues receive beneficial tax benefits from IL Dept of Rev, IL General Obligation and IL Housing Finance. Kinda shrinks the availability pool, and at the same time concentrates the risk. Second, beyond the biggie of perennial default risk, is issuance risk, IMOO. IL has more layers of taxing authorities than about any other state, and ALL can issue debt. So there’s always a risk of an impending flood from the jackbooted can kickers.
Not sure that is true. Got a muni bond buddy and can ask. Sentiment is there but haven't researched it or tried to look at bond prices. If you have actual bond prices, post them and then we will know.
Of course most of the people voting for the Dems in places like Chicago and Cook County either don’t know or don’t care about their massive public debt problem — but they should, because as Jeff points out, it strips away the $ value of their real estate, which in the case of the average person, means their home. And since the biggest component of net worth for many if not most people is their home, this means their wealth is materially diminished by this fiscal madness.
It can be argued that this transfer of wealth goes largely from the middle- and upper-middle class in the private sector to the middle- and upper-middle class in the public sector. This is a result that was never discussed in public-policy debates, let alone voted on.
Part of the problem in Illinois is that the majority of residents have the same mindset as our politicians, in that as long as we can afford the monthly/quarterly nut, we're going to be okay and we'll deal with the permanent thing and the total value thing later, someday. The problem with that mindset is eventually someday becomes today and when that happens - sticker shock.
Shortsightedness and lack of vision has been the downfall of many. In my teens and twenties at least I had age and lack of experience as an excuse, but now nobody I know who's an adult, especially elected officials, should be allowed to take that kind of risk, but good luck trying to legislate against it in this state. It will probably never happen.
I did some analysis along somewhat different lines, but it all feeds into the same disease because it is all inbread, for lack of a better term, financially. I was working at a very large bank headquartered in Pittsburgh who's name I will not mention. Anyways, this was back in 2012-14 time frame, Europe was in a recession and we were not doing so hot either. I took a look at said national based bank I worked for and of course realized almost all of their credit exposure was located in some of the very worst run states in the country. Primarily northeastern/upper midwest states with huge budgetary debts, lots of bonds floating around for one thing or another, city(ies) in massive decline, an aging population that was seeing anyone 20 over leaving and heading to Texas or to the Southeastern part of the United States. I taught myself actuarial accounting because I am just that kind of guy, found actual returns as well as obligations, number of people putting in and growth/number of people taking out of the state run pension funds, which were huge for all of these states. I also found there actual returns as well as growth/decline in assets relative to obligations for a six year period. I put together state by state for every state in the country these numbers, extrapolated the next 20 years along the input/output of workers along with the six year average real return instead of that phony number they always like to discuss/give. I ended up in 2013 with a national shortfall on my spreadsheet of around $1.6 Trillion. Still have that spreadsheet in my hotmail somewhere. Thought about going back and updating the numbers. Needless to say, just this problem alone, forget the decaying/falling down infrastructure, retirees taking these payouts south of the Mason Dixon line and not in the states in these lovely Northeastern/Midwestern cities/states that are paying them out and add in a dash of massive flight of the younger workers and man you are setting yourself up for one heck of a implosion. Top this all off, most of said states have large cities that are literally 50-100 years behind in replacing infrastructure which in many cases would take them 50-100 years to get all finished. You simply don't survive this.
Would’ve loved to map that data to muni pricing. Hedging the underwriting at that time was all so skewed from Bernanke’s ZIRP, too. All the risks were mispriced then, and now they’ve repriced themselves into a corner.
I really do need to go back and plug in numbers from the last five plus years, apply a more appropriate yearly inflation rate and see where we are currently with inputs/outputs- I suspect it has gotten even worse and see how much more the national shortfall is and which states are really, truly up a creek without a paddle. When it comes to purchasing muni's and or lending to states and or state run ventures this should be the first step of understanding from a budgetary perspective just how solvent they truly are.
Within a decade, the upper Midwest and New England states could look like third world communist Nations of the past four decades. The deterioration is already evident in many places.
Mitch, it all ready does in most places. So very sad considering what those parts of our country have contributed to our becoming the nation we are. My grandfather was head of IBEW local 125- I have some very unreal and very scary stories of what he dealt with while head of that very powerful union at the time. All that said, he used to refer to the AFL-CIO and UAW as thugs.
The problem with all government debt is no one in government views it as their "personal debt." This lack of ownership is what drives deficit spending. They are dealing with someone else's money and doing things they would never do with their own finances because they don't have a stake in it.
All these crazy covenants need to be ruled as unconscionable if a municipality goes bankrupt. The bankers and the pols who make these deals are not doing business in the people’s interest. Similar to public employee union issues.
Municipal debt is a lurking time bomb and cities like Chicago -- like Detroit and NYC in the past -- are going to get a knot jerked in their tutu. They could literally fail financially and that may be the only way to reform them.
In the current interest rate environment -- meaning high interest rates -- there will be no refundings that will relieve the pressure.
Since 2017, a municipality cannot refund a tax exempt issue with a new tax exempt issue (advance refunding) but can refund with a non-tax exempt issue. This makes it even worse as, of course, non-tax exempt interest rates are higher, much higher.
There is a limit to how much a municipality can withdraw from the local economy before the impact is the dramatic contraction of the economy.
When NYC went broke, Pres Ford famously said "Drop dead" for a year until NYC (aided by Felix Rohatyn of Lazard Brothers who was the brains of the operation) figured out how to get NYC's ship in order and then the Feds lent them $2B which was real money in those days.
The dirty little secret right now is exactly as Monsieur Carter deftly reveals -- the bloody sugar high created by the massive intergovernmental transfers from the Feds directly to failing Dem cities. That money is mostly gone and the chickens are coming home to roost.
Why do financiers buy shitty muni debt? Cause they all know the Feds will not allow a default on those instruments.
You could have made a bloody fortune on Mexican Brady Bonds, cetes, and tesebonos during the difficult times in the 1980s and early 1990s in Mexico because the US gov't wasn't going to let Mexico fail. You could have collected interest rates of 65% subject solely to a currency conversion risk of 1% per month. That really happened.
States like Illinois will continue to issue muni debt until the state collapses.
JLM
www.themusingsofthebigredcar.com
I've only been friends with three guys who became nine-figure net worth individuals. (interestingly, all were CBOT members, yet all of them made the lion's share of their wealth after leaving the pits.)
But, the least probable was a younger kid I became tight with when we cleared the same firm in the late 80's. Louis was a 1 lot loser in the Bond option pit, but while timid on the floor, he was an absolute math wiz. (he'd moved to Chicago for a UC MBA and got staked to trade)
Realizing his strength was better suited for IB world, he moved to NYC and after bouncing around for a couple of years, he realized in 1992 that Brady Bonds were the new, get leveraged, get rich frontier. By 1998, he co-founded Marathon Asset Management and has never looked back.
Timely post, sir.
Two things on the “specialness” of IL Muni debt and why it’s priced a scootch weaker (higher yield) vs other states’ debt in the eyes of those Inst Inv that “have to own”. One, IL specific muni funds are a waste of time because, last time I looked, only two issues receive beneficial tax benefits from IL Dept of Rev, IL General Obligation and IL Housing Finance. Kinda shrinks the availability pool, and at the same time concentrates the risk. Second, beyond the biggie of perennial default risk, is issuance risk, IMOO. IL has more layers of taxing authorities than about any other state, and ALL can issue debt. So there’s always a risk of an impending flood from the jackbooted can kickers.
And we’re stuck here, for the duration.
Succinct, to the point observations Mr Carter. Ho Lee Fook, what a mess IL is in!!
I’m hearing that smart money is dumping ny muni debt
Why
Destroying the rule of law in NY
Not sure that is true. Got a muni bond buddy and can ask. Sentiment is there but haven't researched it or tried to look at bond prices. If you have actual bond prices, post them and then we will know.
Might be easier to track net value of NY Muni funds over the week to see if there's any withdrawal effect. Also, I won't rent a BBerg terminal.
Some effect to this one at Fidelity. Down $0.25 on a $12.00 NAV is a pretty good move:: https://finance.yahoo.com/quote/FNYCX/
An excellent explanation of the debt problem!
Of course most of the people voting for the Dems in places like Chicago and Cook County either don’t know or don’t care about their massive public debt problem — but they should, because as Jeff points out, it strips away the $ value of their real estate, which in the case of the average person, means their home. And since the biggest component of net worth for many if not most people is their home, this means their wealth is materially diminished by this fiscal madness.
It can be argued that this transfer of wealth goes largely from the middle- and upper-middle class in the private sector to the middle- and upper-middle class in the public sector. This is a result that was never discussed in public-policy debates, let alone voted on.
Part of the problem in Illinois is that the majority of residents have the same mindset as our politicians, in that as long as we can afford the monthly/quarterly nut, we're going to be okay and we'll deal with the permanent thing and the total value thing later, someday. The problem with that mindset is eventually someday becomes today and when that happens - sticker shock.
Shortsightedness and lack of vision has been the downfall of many. In my teens and twenties at least I had age and lack of experience as an excuse, but now nobody I know who's an adult, especially elected officials, should be allowed to take that kind of risk, but good luck trying to legislate against it in this state. It will probably never happen.
I did some analysis along somewhat different lines, but it all feeds into the same disease because it is all inbread, for lack of a better term, financially. I was working at a very large bank headquartered in Pittsburgh who's name I will not mention. Anyways, this was back in 2012-14 time frame, Europe was in a recession and we were not doing so hot either. I took a look at said national based bank I worked for and of course realized almost all of their credit exposure was located in some of the very worst run states in the country. Primarily northeastern/upper midwest states with huge budgetary debts, lots of bonds floating around for one thing or another, city(ies) in massive decline, an aging population that was seeing anyone 20 over leaving and heading to Texas or to the Southeastern part of the United States. I taught myself actuarial accounting because I am just that kind of guy, found actual returns as well as obligations, number of people putting in and growth/number of people taking out of the state run pension funds, which were huge for all of these states. I also found there actual returns as well as growth/decline in assets relative to obligations for a six year period. I put together state by state for every state in the country these numbers, extrapolated the next 20 years along the input/output of workers along with the six year average real return instead of that phony number they always like to discuss/give. I ended up in 2013 with a national shortfall on my spreadsheet of around $1.6 Trillion. Still have that spreadsheet in my hotmail somewhere. Thought about going back and updating the numbers. Needless to say, just this problem alone, forget the decaying/falling down infrastructure, retirees taking these payouts south of the Mason Dixon line and not in the states in these lovely Northeastern/Midwestern cities/states that are paying them out and add in a dash of massive flight of the younger workers and man you are setting yourself up for one heck of a implosion. Top this all off, most of said states have large cities that are literally 50-100 years behind in replacing infrastructure which in many cases would take them 50-100 years to get all finished. You simply don't survive this.
Would’ve loved to map that data to muni pricing. Hedging the underwriting at that time was all so skewed from Bernanke’s ZIRP, too. All the risks were mispriced then, and now they’ve repriced themselves into a corner.
I really do need to go back and plug in numbers from the last five plus years, apply a more appropriate yearly inflation rate and see where we are currently with inputs/outputs- I suspect it has gotten even worse and see how much more the national shortfall is and which states are really, truly up a creek without a paddle. When it comes to purchasing muni's and or lending to states and or state run ventures this should be the first step of understanding from a budgetary perspective just how solvent they truly are.
Within a decade, the upper Midwest and New England states could look like third world communist Nations of the past four decades. The deterioration is already evident in many places.
Mitch, it all ready does in most places. So very sad considering what those parts of our country have contributed to our becoming the nation we are. My grandfather was head of IBEW local 125- I have some very unreal and very scary stories of what he dealt with while head of that very powerful union at the time. All that said, he used to refer to the AFL-CIO and UAW as thugs.
The problem with all government debt is no one in government views it as their "personal debt." This lack of ownership is what drives deficit spending. They are dealing with someone else's money and doing things they would never do with their own finances because they don't have a stake in it.
A good article about big bets in Detroit. https://www.bloomberg.com/news/features/2024-06-03/detroit-real-estate-rebounds-after-dan-gilbert-ford-buy-up-offices
All these crazy covenants need to be ruled as unconscionable if a municipality goes bankrupt. The bankers and the pols who make these deals are not doing business in the people’s interest. Similar to public employee union issues.
Not to worry! MMT will lead us all to the promised Utopia, comrade!