BarroMetrics Views: The Muni Bonds - A Crisis in the Making?
English Bob dropped me a fab comment. It’s so good, I have reproduced it below as my my blog for Xmas Eve.
The video to which Bob refers may be found here: http://www.cbsnews.com/video/watch/?id=7166293n&tag=contentMain;contentAux
There are two good articles for further reading;
- One is by Bob himself - see bottom of his comment: http://www.zerohedge.com/article/project-weimar-why-qe2-could-be-more-inflationary-you-think and
- (For a slightly different take) http://www.moneyandmarkets.com/is-now-the-time-for-muni-bond-etfs-42035?FIELD9=7
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English Bob’s Comments
Ray, the municipal bond market situation is a ticking time bomb here in the US. Meredith Whitney was on the popular news show, 60 Minutes, over the weekend and created quite a stir (she plays Cassandra). I see the situation as very similar to subprime–the people who say it’s no big deal have multiple arguments, but they boil down to two: (1) it will be contained (regional vs. national) and (2) the governments can still tax and increase if necessary. Risk of a tax revolt is real and historical collection rates mean as little as historical default rates meant with respect to subprime.
My view on MBS and the other “financial innovation” that was created or accelerated in the years before the panic, is that it was a gimmick simply to take advantage of Fed money printing. Hot potato securitization allowed the banks to book big profits quickly on questionable collateral (if any). Their legal protection was the complexity of the deals–multiple layers of entities and servicing agreements–all unnecessary.
Look at the ABS market. It practically doesn’t exist any more, yet consumer lending still takes place. Banks are simply lending directly to people and keeping the asset on their books(like they used to). Take away the Fed’s perma-inflation bias and there’s little use for any of these instruments.
Sure, the Bernank is a Keynesian and believes money printing will jump start the economy, but I believe the inflation targeting is a backdoor bailout of all the bad debt still held by the big banks. It also bails out the munis. It also makes GDP look good. Officially, the target is 2% annual core inflation. In reality, the 10-20% (as will be measured by ShadowStats) is the target. He needs to do this for about two years and simultaneously keep the bond vigilantes from taking long term rates into double digits.
Of course, Ben also believes that he’ll be able to turn off the spigots if things heat up too much, but this is the part of the circus act where the juggler has 10 pins in the air and one miss causes them all to fall. Personally, I give him (and us, by extension) one chance in four for pulling this off.
BTW, Treasury POMO in its current form goes back about ten years, though Mar 2009 was the first “guns blazing” implementation (detailed Fed data goes back to 2005). I wrote some history about it here: http://www.zerohedge.com/article/project-weimar-why-qe2-could-be-more-inflationary-you-think
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