Did you see this recent story appear on any national television newscasts?
"Michigan Treasurer says Detroit to run out of money by May." -- Reuters (1/10)
Or how about this one?
"The soaring national debt has reached a symbolic tipping point: It's now as big as the entire U.S. economy." -- USAToday (1/9)
These are significant economic stories, yet the mainstream media largely ignores them.
From what I've seen, even the national financial press does not give government debt and default stories headline status.
There's a complacent attitude toward the financial troubles of municipalities. This excerpt is from the December Financial Forecast:
"...the Kroll Bond Rating agency stated that U.S. municipals are 'Safe from Default Risk'...a Bloomberg headline offered the following assessment:
Cheapest Tax-Free Debt Since 2009 Sends Buy Signal
We find this complacency stunning."
The issue goes on to say that "...investors still believe munis are safe, but...the evidence continues to mount that a change for the worse is underway."
That evidence includes underfunded pension liabilities, bloated labor costs and dwindling municipal revenue.
"[Governor] Jerry Brown proposes deep cuts to schools if voters reject tax plan," reports the Los Angeles Times (1/5). In November 2011, Jefferson County, Alabama filed for the largest municipal bankruptcy in history. In fact, through early December, there were twelve municipal bankruptcies in 2011.
Many of the nation's states and cities are suffering from revenue shortfalls, yet the demand for munis appears strong. Morningstar reports that investors put nearly $5-billion into municipal bond funds in December, which is the highest in sixteen months. And fund tracker Lipper says $1.1 billion went into municipal bond funds the week ending January 11 alone.
So it appears that the media are not the only ones ignoring the financial plight faced by states and cities -- many investors seem to be too. Is this wise?
Well, one has to ask: If municipalities are experiencing extreme financial duress now, what will happen if the economy becomes even worse?
"In the Great Depression, bonds of many companies, municipalities and foreign governments were crushed. They became wallpaper as their issuers went bankrupt and defaulted. Bonds of suspect issuers also went way down, at least for a time. Understand that in a crash, no one knows its depth, and almost everyone becomes afraid. That makes investors sell bonds of any issuers that they fear could default."
Conquer the Crash, second edition, (p. 143)
What is our analysis of municipal bond risk? You can read about it in the December Financial Forecast, and in the January issue you'll find our analysis of U.S. Treasuries.
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