Today, we take a break from the European sovereign debt crisis to return our focus to the U.S. debt crisis. No, we're not talking about our federal government's mammoth debts or its absurdly large annual deficits. These federal obligations can always be financed by the printing press... as they have been for the last three years. But what about the states and the municipalities, which don't have access to a printing press?
According to a study from public policy research organization the Pew Center on the States, state and local governments will need at least another $1 trillion to finance their obligations over the next few years. Total outstanding state and local debt is currently around $3 trillion. Who would lend to these states without the explicit guarantee of the U.S. Treasury? No thinking man. And soon... not even nonthinking men.
The realization that a municipality can – and would – default came last September when Harrisburg, Pennsylvania refused to pay the $3.29 million it owed on bonds sold to finance a $288 million incinerator it bought...
"To disrupt our services because we can't make a bond payment would just be unconscionable. And as a leader I couldn't do it," Harrisburg Mayor Linda Thompson said at the time. We outlined the situation in detail in the September 10, 2010 Digest.
While a Pennsylvania city missing a small debt payment may seem inconsequential, it has larger implications. At the time, we wrote...
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We were also struck by the logic of the mayor... who clearly views paying the city's debts as optional. She knows the state of Pennsylvania will be forced to bail out her city. (If the state doesn't intervene, it will be impossible for any other city in Pennsylvania to issue bonds.) |
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And even if the state refuses, the bonds are insured by Ambac, which means, in the eyes of the mayor, it's likely that no one will get hurt by her decision. That's how a $288 million loss can become irrelevant to an elected local official. Like a subprime borrower living in a house without paying his mortgage, the mayor of Harrisburg thinks paying for its debts is someone else's problem. She's bringing Obamanomics to city finance. |
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When our elected officials no longer care about repaying hundreds of millions of dollars, the entire system of municipal finance is going to collapse. |
As we predicted, days later, Pennsylvania Governor Ed Rendell announced a $4.3 million bailout for Harrisburg. (If the city missed a payment, no other municipality in Pennsylvania could issue debt.) But it was a temporary solution...
In January, Thompson said bankruptcy would be "a last option" for the city. She considered signing a long-term lease for a city parking garage (which would provide immediate cash, but eliminate future revenue). She also tried to refinance the city's debt... unlikely, considering the incinerator bill is larger than the city's entire general fund budget.
At 2:11 a.m. today, Bloomberg reported, "The city of Harrisburg, Pennsylvania, facing a state takeover of its finances, filed for bankruptcy protection following a vote by the City Council, according to a lawyer for the council." From the article...
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While bankruptcy would mean the loss of state aid under a law passed in June, it's preferable to a proposed recovery plan, said Councilwoman Susan Brown-Wilson. |
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"We're not incompetent," Brown-Wilson said. "We're just not going to let you run us over with the train anymore," she said, referring to state officials. |
We respectfully disagree, Ms. Brown-Wilson. Your city's financial situation is the epitome of government incompetence. And your willingness to disregard your city's debts – which you stupidly assumed in the first place – sets a dangerous precedent. With one major city bankruptcy under way, we can expect many more.
Perhaps you're asking yourself, "How do I profit from this mess?" In the January 2011 issue of Stansberry's Investment Advisory, Porter recommended shorting Assured Guaranty (AGO), the last remaining muni-bond insurer.
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All the other companies in [the muni bond insurance] space have either gone out of business or stopped writing new insurance because the risks have become too large. When knowledgeable insurers like Warren Buffett completely step away from a market... you're wise to follow. But that's not what Assured has done. Instead, it has written 98% of the municipal policies for the last year. It even boasts in its annual report it has no real competition. Look out below... |
Who do you think was responsible for floating Harrisburg when it couldn't pay its debts? Assured Guaranty, of course... According to the Bloomberg article, Harrisburg needs $310 million to make bond payments, restructure debt, and repay Assured Guaranty. We doubt AGO will see that money. Already, Mark Schwartz, the city attorney who filed bankruptcy, chastised AGO, asking, "Why should they be first in line?"
And in an op-ed in a local paper yesterday, the four council members who voted for bankruptcy said AGO and bondholders should forgive at least $100 million in debt.
Stansberry's Investment Advisory subscribers stopped out of AGO in April for a small gain. It's continued to fall. And as more and more municipalities declare bankruptcy, we believe it will fall farther...
If you don't want to short munis, China remains a good candidate, according to billionaire short seller Jim Chanos. Following the Chinese government's bailout of its banks yesterday, Chanos said on Bloomberg television, "The fact that people are even talking about the government stepping in to shore up the banks, when two months ago people thought there was nothing wrong with the Chinese banks, should tell you just how seriously this situation is deteriorating."
Last month, Chanos said he was shorting "virtually all of the large banks in China." Yesterday, he said the country's real estate market is in the "first part of a very serious pullback." Chanos recommends shorting giant commodity producers, like Brazil's Vale (VALE), as Chinese demand slows.
We wrote it, did you not buy it?...
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Vitamin E in high doses can be deadly. If you take much more, you can experience fatigue, muscle weakness, headaches, and excessive bleeding. Some people are taking 1,000-2,000 IU a day at great risk to their health. |
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Vitamin zealots claim E is the fountain of youth. Again, it isn't. And no amount of name-calling or anecdotal claims should convince you otherwise. – Dr. David Eifrig, May 2011, Retirement Millionaire |
In his February and May issues of Retirement Millionaire, editor Dr. David Eifrig warned readers not to blindly trust the health claims cast about by people peddling "natural" dietary supplements. In the unregulated world of "nutriceuticals," nothing compels marketers and manufacturers to run their pills through rigorous (and expensive) scientific studies – as long as they stick to combinations of vitamins, minerals, herbs, botanicals, or amino acids. "Now, the marketers (and many doctors) are touting pills with clear health risks, making scientifically shaky (at best) claims," he wrote.
This was not a popular opinion... One doctor who writes an advisory on "natural" therapies called Dr. Eifrig, a former Goldman Sachs trader, a "Wall Street lackey" and questioned his medical background. (Doc graduated with honors from the University of North Carolina at Chapel Hill medical school and is a board-eligible eye surgeon.)
Today, a front-page headline in the Washington Post declared, "Vitamin E boosts prostate cancer risk." The article reports a new study of 35,000 healthy men showed that those who took vitamin E in large daily doses (the size commonly available in supplements) increased their risks of prostate cancer 17%. The Post quoted Eric Klein, a Cleveland Clinic prostate cancer expert who led the study: "You really have to question now how taking vitamin E will help someone... Not only is it unlikely to help them, it apparently could hurt them."
Doc's unique advisory combines his skeptical, common-sense approach to health and wellness with his time-tested strategies for building wealth. Retirement Millionaire is focused on helping people take control of their health and finances, so they can retire like a millionaire. To learn more about Dr. Eifrig and his service, click here...
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New 52-week highs (as of 10/11/11): None.
We appreciate it when our subscribers stick up for us, though as you'll see below, we're also capable on our own. Send your feedback to feedback@stansberryresearch.com.
"Regarding what this guy, Joseph Paysse, said about you putting ads for your newsletters in the Digest. Just ignore this clown and keep it coming Porter. I came across your 'end of america' ad in another newsletter last year and have been a subscriber ever since. I even bought a Private Wealth Alliance membership recently and the advice and education that you have provided so far has been invaluable. I believe you guys provide the best value in the financial newsletter publishing business." – Paid-up subscriber Dr. Paul Dhillon
"Did I miss something? Has the debt crisis been resolved? I thought the recommendation was to stick with shorting stocks and plowing your money into gold and cash until the U.S. and Europeans can get their act together. Now your saying get ready to get back into the stock market. I don't want to get caught into a short term market correction. What has changed?" – Paid-up subscriber Michael Klimkewicz
Porter comment: I would like you to show me where I said that... Please... just send over the quote.
Regards,
Sean Goldsmith
New York, New York
October 12, 2011
What happens to states that can't print money?... Remember Harrisburg... Assured Guaranty gets slammed... Chanos still short China... Kudos to Eifrig... 'Occupy Wall St.' moves uptown... Reader support in the mailbag...