This November, the whole world tuned in as the greater part of the U.S.A.’s 50 states turned red — and no, I don’t mean the political shift to a republican majority during the November 2 mid-term elections. I mean “in the red” — as in, financially fercockt, overdrawn, up to their eyeballs in debt.
Here are the latest stats: California, Florida, Illinois, and New Jersey now suffer “Greek-like deficits,” alongside draconian budget cuts, job furloughs, suspensions of city services, and the growing “rent-a-cop” trend of firing city workers and then hiring outside contractors to fill those positions.
Next is the fact that the municipal bond market has been melting 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. Also, in the week ending November 19, investors withdrew a record $3.1 billion from mutual and exchange-traded funds specializing in municipal debt, triggering the largest one-day rise in yields since the panic of ’08.
In the words of a recent LA Times article “It’s a cold, cold world in the municipal bond market right now.”
And for those who never saw the muni bond crisis coming, it’s a lot colder.
Since at least 2008, the mainstream experts extolled munis for their “safe haven resistance to recession.” And while muni bond woes are only now making headlines, one of the few sources that foresaw the depth and degree of the crisis coming ahead of time was Elliott Wave International’s team of analysts. Here’s an excerpt from the April 2008 Elliott Wave Financial Forecast (EWFF):
“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.”
EWI continued to warn subscribers ever since:
February 2009 EWFF: Special section “Out of the Frying Pan and into Munis” showed the continued rise in muni yields ABOVE Treasury yields and cautioned against the idea that tax-exempt debt was a “safe bet.”
September 2010 Elliott Wave Theorist: “The Next Disaster: The public has withdrawn some money from stock mutual funds… But most investors … are shunning treasuries for high-yield money market funds and bond funds, which hold less-than-pristine corporate and municipal debt.”
And now, in the just-published November 19 Elliott Wave Theorist, EWI president Robert Prechter captures the full extent of the unfolding muni crisis via the following chart:
Read more about Robert Prechter’s warnings for holders of municipals and other bonds in his free report: The Next Major Disaster Developing for Bond Holders. Access your free 10-page report now.
This article was syndicated by Elliott Wave International and was originally published under the headline United STRAITS of America: The Muni Bond Crisis Is Here. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.