Wednesday, June 23, 2010

Muni League

All we do
Crumbles to the ground
Though we refuse to see
--Kansas

If you're a hammer, then the whole world looks like a nail. If you're bearish on the economy/markets, then you're prone to see all info as supporting your bearish case. Confirmation bias, personified.

Of the many shoes that can drop to further the case of those banging with Boo, few loom larger than the funding crisis facing nearly every government on the planet. The world is drowning in debt--so much so that sources are waning that are willing or capable of extending more credit. The sovereign debt crises, led off by Iceland last yr and now the EU this yr, frames the situation well.

At home, it is becoming more apparent that the US will face municipal funding problems before the country-level Treasury bond problem. Widening bond spreads currently lay odds of about 25% for outright default for California and Illinois. In addition to states, of course, we have local municipalities whose coffers are empty as well.

Should these municipalities default, then well over $1 trillion in muni bond value is at risk.

Personally, it's hard for me to see how this doesn't happen in dramatic fashion. Then again, such a vision supports my view...

In any event, I want to try to stay as far away from the muni bond market as possible in case of a big time implosion.

no positions

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