Fallout: When States go bankrupt...

[hakrjak]

Been trying to anticipate the next "big thing", and as I watch the news it seems like we have several states in the USA that are on the verge of bankruptcy. No State has ever gone bankrupt before, and the predicted fallout seems to be that the municipal bond market will crash. I think the result of this may be higher interest rates for everything from credit cards to ARMs to US Treasuries?

Open discusion -- Do you think it's possible that US States will be allowed to go bankrupt? How can we make money off this if it happens? Will the stock market be a good place to hide out?

- Hakrjak

 

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[Russ H]

I would love to hear Randallg99's response to this . . .

-Russ H.

 

[Rickson9]

Last week's 60 Minutes talked about this. I'll post the link later.

A state can run out of money, but can't file for bankruptcy.
Daily Herald

I don't know how one can profit from a prediction of the future because I don't believe in predicting the future. In my opinion it is a waste of my time to think about it.

I don't treat the stock market like a basket where money 'hangs out'. In my opinion, a good company is a good investment if purchased at a fair price.

Best regards.

 

[hakrjak]

I believe it's correct that under current Federal law states are not allowed to file for bankruptcy, however the new Congress has already indicated they will put forward legislation to allow this so that states can get out of their pension commitments with the unions, etc and restructure a lot of their contracts, etc.

Obama will likely Veto, and I don't know that they could get the votes together to override though.... But all of this activity has got to drive the interest rates on Muni's sky high, no? I dunno, just a thought.... Years ago people were saying that the Real Estate bubble could never burst, and banks would never go out of business over bad mortgages, but it happened! And if you look back, it was pretty obvious if you were looking for the signs...

Cheers,

- Hakrjak

 

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[bflbob]

Last week's 60 Minutes talked about this. I'll post the link later.

I saw that. It was pretty scary. Illinois is behind a long ways with everyone. It showed how the State Police were even having a hard time getting gas for their vehicles, since the state hadn't paid the gas bills.

His (the governor or comptroller?) description was that they were behind with everyone they dealt with. They are spending about double what they take in each year.

The biggest culprits from his point of view were unions that were playing hardball. The common citizen can't retire because his 401(k) or pension has fallen in value or disappeared altogether, thanks to Madoff. But the unions are holding the states to the pension payouts they negotiated during the fat years.

Our incoming governor in NY has a fun job. The consensus is that residents want taxes and governmental costs greatly reduced. But they also aren't willing to give up any services for it. "I want my cake and eat it too, and I don't expect to pay for it!"

 

[andviv]

RE owners will probably pay more in taxes to cover for the shortage....

Munis will get affected, right? How do you short them?

 

[rxcknrxll]

RE owners will probably pay more in taxes to cover for the shortage....

Munis will get affected, right? How do you short them?

I can most definitely see this happening. Bottom line, someone has to pay up, and the gov't has nothing. As far as I can tell, RE and small biz are the easiest targets. They're already going after those rich bastard small biz owners who make too much money MJ, thanks for the tweet to this thread. An important topic.

 

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[hakrjak]

I should add that I've been a vocal critic of those who have been predicting "Hyperinflation" the past 5 years, but this is finally a scenario where I could see Hyperinflation being something to be worried about. If you're sitting on ARMs & HELOCs like some of us, and rates cruise to 10% overnight, it will be a long time before rates come back down again. If Muni's go down, the US Treasury credit rating will probably drop just by association -- and the rest is history, you'll have hysteria once again -- as we move on to the "next big thing" that goes off like a bomb and wrecks our struggling economy for the 5th time in 10 years!

Maybe we should also be asking: If there is no bankruptcy allowed, what happens if States simple are faced with a reckoning, where they can't borrow anymore money and must live within their means? Is there a scenario there to profit from?
Cheers,

- Hakrjak

 

[camski]

Unfortunately I think California will be the litmus test on this. I say unfortunately because their economy is one of the largest in the world. My opinion is that federal govt will step in and bail them out, out of necessity. I think this will set off some major issues in the USA over state rights and infringement by the federal govt. Where I think the opportunity lies in in outsourcing of services currently being done by govt unionized employees.

Like here:[video=youtube;dOI9yrKGAV4]http://www.youtube.com/watch?v=dOI9yrKGAV4[/video]

 

[GlobalWealth]

I'm not really sure the best way to short muni's, but I would certainly get out of them if its in your portfolio. I would also get out of nearly any other bond or fixed income investment since interest rates are clearly moving up.

I feel the trade of the decade will shorting treasuries. It seems we have ended a 30 year bull market in treasuries and the only was to go from here is down.

I started shorting treasuries in the spring last year which was a bit early and got stopped out with small losses, but in the last quarter I have been making money every month on my short trade.

 

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[hakrjak]

Unfortunately I think California will be the litmus test on this. I say unfortunately because their economy is one of the largest in the world. My opinion is that federal govt will step in and bail them out, out of necessity. I think this will set off some major issues in the USA over state rights and infringement by the federal govt. Where I think the opportunity lies in in outsourcing of services currently being done by govt unionized employees.

Like here:[video=youtube;dOI9yrKGAV4]http://www.youtube.com/watch?v=dOI9yrKGAV4[/video]

I see this happening also. Governments will begin outsourcing to companies like Manpower, Volt, Spherion, etc -- just like the big corporations started to do a decade ago to avoid having to pay their long time employees more money, and better benefits. They need to get people off of these "forever pensions" they are on, and outsourcing is the 1 way to get rid of the unions and make this happen. I guess you could continue to invest in these companies that provide services? I know that the company I work for already handles outsourced IT Sources for some of the largest governments in the world, so this trend has already started. We even do for the US, and many Federal agencies / enterprises.

- Hakrjak

 

[andviv]

The federal gov does this since forever....

I deal with federal contracting on a daily basis.

I have not seen the states taking that route so far...

Maybe it is time to incorporate a staffing company and start offering that services to states.... thanks for the suggestion!

 

[John Rogers]

I'm 48 years old and have never worried much about this kind of stuff. But at the rate things are snowballing now, I'm a little scared. Not bad, but a little. Scared enough that I'm seriously considering finding a little plot of land in the midwest that I can grow food on and hunker down for awhile if the shit hits the fan in a big way.

I'm hoping that the upside to this mess is that government is forced to get smaller and smarter. Not optimistic, but hoping. Unfortunately it appears that the casualties will be spread far and wide.

 

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[randallg99]

hi, a few points to consider:

as mentioned already, states are under fed mandate not allowed to file. However, the state can (and eff an A better) threaten "non-payment" for services rendered.... this will probably the tactic used when negotiating union payments and unfunded employee obligations. If there's no money, then there's no money.

another big point to consider is how do you run an economy while shafting the very people who are going to spend the most in it? retirees are pacing to outspend every other demographic today.

It's going to sting those people and the pain will generally be concentrated within those states. long story short, this kind of event where US states (Cali, NY, NJ, Ill) being largest employers has potential to move an economy's status from recession into depression.

we've already seen California print IOU's to subsidize their obligations.... can you imagine this? Can any of us simply print IOU's out of our computers and pay our bills with them? It's really unbelievable how reckless their spending has evolved. What's even more numbing is that the political branch has continued to violate the basic rules of common sense spending despite being in this horrific hole. But truth of the matter is that the budget was balanced and that they muddled through it.

right or wrong, any bailout signifies some kind of acceptance of this reckless spending pattern, no matter how irresponsible.

it's a hard gamble because we don't know how hard the Fed will treat the states.... FDIC and TARP regulators are biggest ballbusters in modern era.

So, as an investor we have to remember the rules keep changing all because the fed is acting as a safety net.

 

[Russ H]

I would love to hear Randallg99's response to this . . .

Thank you!

-Russ H.

 

[randallg99]

ah, kids deleted my message before i saved it... here it goes again:

i wanted to reiterate something very important... what the Fed gov't chooses to do will be determined what's best for the "masses" and to have politicians looking their best before their constiuents. If I was president of USA and I see Cali or NY or NJ or Ill about to run out of money, I would want to look like the savior without upsetting supporters

(keep in mind, treasury auctions on national level continue to be strong and I think the strength can spill over into muni activity... so fed may not have to intervene if states can raise enough funds)

also some data points- the US national debt is owned primarily by the US (gov't, companies, investors, individuals).... and this is important to recognize because fear and public perception has driven the markets and media. but more importantly, we are not at risk of a bond flight from the outside.

relative to GDP, the USA is in the middle in terms of debt owed:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

2011's bloated spending is not reflected yet so that might push USA up a notch or two....

so is the state budget problem bad? well, kinda. As an isolated event, it's a very managable situation. As an example: Fed spots Arnold some cash and then Arnold and Obama take pics together and then everyone's happy. But Fed won't let California go spending like it did before..... BUT, there's other major problems facing state economies: social programs. The economy has forced more people to rely on state support - food stamps, living expenses, unemployment, etc and if inflation sets in then we're approaching the end game faster.

The Fed will make it challeging and tedious to the point that other states may want to avoid borrowing from Fed. (remember that a few banks refused to use TARP funds for this very reason)

Fed will be scrutinzed to monitor any states bailout funds that aligns with Fed's best interests perhaps in form of conservatorship/receivership.... which can be both good and bad. Remember what happens when banks don't perform to regulations? it gets ugly... .but private managers and operators can be removed. Public officials cannot. And the public unions are poweful enough to keep politicos elected, and voted out. It's a touchy area.

FDIC: Failed Bank List


the state budgets will be resolved, but it's going to be harsh for certain groups of people. Public union workers and teachers make up large percentages of population so it's hard to go against them but it's going to have to be done for the states to remain solvent. Christie of my home state NJ is doing an excellent job using the media to get this very point across.

saw earlier the mention of raising taxes which happens to be a terrible solution as seen in recent news Oregon saw a large tax base pick up and move after higher taxes were imposed. The after effects? well, Oregon is collecting LESS than they did prior to their budget crisis!

as RE investors, we need the states to balance budgets so they can pay police, keep streets lit, keep taxes low....

as equity investors, we need the states to reign in spending to avoid the fear of adding new taxes on corporations.

have a good day.

 

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[GlobalWealth]

Thanks for the great analysis Randall. Speed+++. Glad to have you back.

 

[Russ H]

ah, kids deleted my message before i saved it... here it goes again:
As an example: Fed spots Arnold some cash and then Arnold and Obama take pics together and then everyone's happy. But Fed won't let California go spending like it did before.....

Good to see you back here, RandallG. I missed your perspective. A lot.

Just a small thing: If Obama gives Arnold a whole lotta cash, CA ain't gonna be very happy about it . . .

. . . 'cause Arnold isn't the governor here any more. We just re-voted Jerry Brown back into office (he was CA's gov from '75-83).

The more things change . . . :coffee:

Otherwise, great posts. Thank you!

-Russ H.

 

[randallg99]

Good to see you back here, RandallG. I missed your perspective. A lot.

Just a small thing: If Obama gives Arnold a whole lotta cash, CA ain't gonna be very happy about it . . .

. . . 'cause Arnold isn't the governor here any more. We just re-voted Jerry Brown back into office (he was CA's gov from '75-83).

The more things change . . . :coffee:

Otherwise, great posts. Thank you!

-Russ H.

oops! forgot that Jerry Brown is back... maybe terminator movies are coming back?


a few news stories recently dealing with the states trying to collect more revenue. laws buried somewhere under thousands of volumes are surfacing so that state treasury departments can start collecting unfounded streams of revenue:
N.Y. Tax Ruling Could Cost Second-Home Owners | The Daily Easton

and there's another issue recently surfacing that shows the Fed will be less likely to support state budget bailouts unless there's a strong payback...
Geithner Quietly Tells Obama Debt Expense to Increase to Record - Bloomberg

so, what to expect? A whole lot more state audits among: corporate payrolls; high income individuals and their residencies; corporate sales tax revenues; etc... the states will do whatever they need to get budgets balanced, and I don't personally think bailouts are going to be in the picture however that said I think states are going to use more invasive tactics and enforce tougher procedures in collecting revenues.

JMHO. have a good night.

 

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