Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What You Need to Know If You’re Exposed to Muni Bonds

Interest-Rates / US Bonds Aug 02, 2016 - 04:37 PM GMT

By: Rodney_Johnson


The housing bust was awful, particularly in Florida and other “sand states.” As the economy slowed, consumers lost their jobs, and when they couldn’t pay their mortgages, they then lost their homes.

Even though that wrenching period happened almost a decade ago, it will live in our memories for years to come. I can recall much of the pain, but also other aspects of the moment. Some people were desperate for the relief that came their way; others were using it as cover to game the system.

We’re about to see the same thing happen again, but this time on a much larger scale. And the sucker on the other end of the line won’t be a bank or faceless mortgage company, it will be individual investors, and once again they’ll have government “help” to blame.

During the housing disaster, the government took a series of steps to ease the pain, including mortgage modification and relief from taxes on forgiven debt. At the time, government officials were looking for any tool that would stop the financial bleeding, and almost forcing the banks to write down loans seemed like a good way to do it.

Struggling homeowners able to modify their loans and stay in their homes were thrilled. Those that just wanted out of the trap went the short sale route and were also glad for a way forward. But another homeowner category rose to prominence, those looking to accrue ill-gotten gains.

These people simply stopped paying their mortgages, daring their lenders to foreclose and become stuck with the property.

At one point, foreclosure courts in Florida were running 600 days behind. Homeowners that chose not to pay knew that their lender couldn’t move on the property for almost two years. I know of people who stayed in their homes without paying for over four years, pocketing the cash that would have gone to the lender.

This wasn’t what the government had in mind, of course. Officials had a nice, happy plan where everyone plays by the amended rules and things come out well in the end.

It never happens that way, as we’re seeing today.

Puerto Rico is out of money. The Commonwealth begged Washington for debt relief, since the territorial laws of the U.S. and the island’s own constitution don’t allow for paying creditors less than they are owed.

The day before Puerto Rico owed $2 billion in principal and interest, Congress and the President approved a restructuring plan, called Promesa, that allows the Commonwealth to pay back less than it owes, as long as it agrees to a federal financial oversight board and follows certain rules.

The move was hailed as a great step forward for the struggling territory, and showed that the federal government wasn’t deaf to the fiscal woes of Puerto Ricans. Bondholders were furious. The Puerto Rican constitution demands bond principal and interest be paid first.

First, as in before any other expenses.

Instead, the federal government is allowing Puerto Rican officials to keep the lights on, paying civil salaries and meeting other essential obligations, even though they aren’t making good on their debts.

But it didn’t stop there.

Before the ink was dry on Promesa, Puerto Rican Governor Padilla unveiled his budget for fiscal 2017, which runs from July 1, 2016 through June 30, 2017. The document is a vivid example of putting politics ahead of contracts.

The governor approved the payment of half the debt service due in July, but not on the most senior, secured bonds. Instead, he authorized payment of junior bonds issued for the convention center and local roads that are more widely held by Puerto Ricans.

Beyond that, he authorized almost no debt service whatsoever for the entire year. He also approved moving $800 million to the public employee pension fund, which is $170 million more than would have been required during the year. Beyond the big-ticket items, the budget allocates $2.5 million for the Office of the First Lady to spend on incidentals, and money for the development of professional Puerto Rican athletes.

Investors went crazy when the governor presented the budget, and eventually filed a lawsuit to stop the Puerto Rican government from sucking all the money out of the system before any restructuring could happen.

Puerto Rican supporters claim investor fears aren’t justified. If the oversight board deems the payments unnecessary, they can just claw them back. Really?

How do you claw back money paid out as principal and interest on junior bonds? How do you unwind payments by the Office of the First Lady for daily expenses? What sort of legal fight would start if the Puerto Rican government tried to reclaim cash from its woefully underfunded pension system?

Those dollars are gone forever, and the investors know it.

Take this as an example of things to come. When states in dire financial straits, like Illinois, Kentucky, and Connecticut, start scraping the bottom of their financial barrels, they will look for someone to sacrifice.

They’ll eventually identify bondholders, claiming they couldn’t possibly cut expenses in their own state, even if that’s what the law requires. Eventually, the federal government will devise a plan for restructuring debt, but like Puerto Rico, there won’t be any good faith effort to send bondholders everything they are due.

Instead, state politicians will gobble up any lingering grace period, and any leeway they can find, shoveling money to the most expediential political places – like underfunded pensions.

Municipal bond investors should view this as a wake-up call. No one wants to wake up owning bonds issued by the next Detroit or Puerto Rico.

Now is the time to review your portfolio and identify the potential investment landmines, then dump them in an orderly fashion.

If you don’t, it’s possible the government will have a hand in deciding how much of your money you get back, and it’s a good bet you won’t be happy.


Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

Copyright © 2016 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in