Watchman Newsletter

New Debt Crisis Striking RIGHT NOW!

Money And Markets (Link) - Martin D. Weiss Ph.D. (January 17, 2011)

Martin here with an urgent update on the new debt crisis we�ve been warning you about so persistently day after day � the collapse of the tax-free bond market.

This crisis is no longer something you hear about strictly from us and a handful of others; it has now burst into the headlines with the sweeping force of a giant tsunami.

This crisis is no longer just a forecast. It�s happening right now � and it�s accelerating.

And even if you�ve never owned muni bonds in your life, their demise is absolutely not something you can ignore. Here�s why �

FIRST and foremost, every state and local government in the United States is directly impacted, whether financially weak or strong.

Look at the chart above. That�s the muni bond ETF � the S&P National AMT-Free Municipal Bond Fund (MUB). It holds major bellwether tax-free issues, such as the State of California, the North Texas Thruway Authority, and the Puerto Rico Sale Tax Financing Corporation. Nevertheless, it is suffering one of the worst price crashes in the history of municipal bonds.

Lesser municipal bonds, especially the tens of thousands that are issued by unrated local authorities, are not only sinking more dramatically � they�re almost impossible to sell due to the sheer lack of buyers.

And regardless of ratings, ALL state and local governments are now being forced to pay sharply higher borrowing costs. As the Wall Street Journal explained late last week �

�With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress. �

�[Last week] A New Jersey agency was forced to cut the size of a bond issue by about 40 percent because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citing market turmoil.�

SECOND, other government bonds are also vulnerable to the fear contagion!

Investors are naturally asking: If America�s biggest cities and states are in such deep trouble, what about Fannie Mae and Freddie Mac? What about the U.S. Treasury?

Indeed, if you map out the world of government debts � both local and federal � you�ll see, quite vividly, how vulnerable they are to contagion �

The muni bond market is $2.9 trillion and already collapsing.

The market for U.S. government agencies � including Fannie Mae and Freddie Mac � is $7.6 trillion � and more than half of it would already be dead if not for massive bailouts with taxpayer funds.

Foreign sovereign debts outstanding are over $25 trillion, with a growing list of countries either on the brink of bankruptcy or on a collision course with future financial ruin.

Even the fundamental quality of U.S. Treasury debts, totaling $9 trillion, is now being openly questioned.

In the past, this was something you heard exclusively from long-time Jeremiahs and deficit hawks. Now, however, you�re hearing louder warnings from many more voices � even Pollyanna rating agencies like Standard & Poor�s and Moody�s, which just issued a whole new round of warnings about the U.S. government�s triple-A rating.

Needless to say, not all local and federal government debts are shaky. But you�d be very hard-pressed to argue that municipal bonds are an �isolated disaster zone.�

Quite the contrary, as I�ve just shown, every other major category of government debt is vulnerable to the fear contagion.

Nor would it be accurate to say that this new debt disaster is just �a canary in the coal mine that may or may not explode someday.�

We�re already far beyond that preliminary stage, with up to 100 major cities and states that could default on their debts this year. Thousands of smaller issuers are in even worse shape.

THIRD, the crisis is already impacting the U.S. economy.

Despite pockets of strength, the Main Street recovery is bogged down in most major regions � because of massive cutbacks by state and local governments.

Similarly, on the unemployment front, despite widespread predictions of improvement, the most recent jobs data has also been disappointing � again, because of the massive layoffs by state and local governments.

Already �

In California, Gov. Jerry Brown is set to propose that local redevelopment agencies be eliminated; that social service benefits, shrunk; parks, shuttered; Medi-Cal plans, greatly reduced.

In Indiana, Gov. Mitch Daniels will slash higher education spending and eliminate some Medicaid services.

New Mexico is so desperate for cash, it�s finding a way to grab money from its untouchable �Permanent Fund� � money the state�s constitution requires NEVER be spent.

In Idaho, after two years of painful spending cuts, officials are now saying they�ve run out of debt solutions. There are simply no more savings or stimulus funds to rely on.

Nevada is already delinquent on millions in payments to school districts, and nobody has any idea when � or if �those payments will ever be made. School superintendents are now warning that the entire educational system is in danger of collapse.

Illinois is cutting massively, but is still up to six months behind on its payments to contractors and service providers � a de-facto default of another kind.

Texas legislators are making plans to cancel road projects � drastically reduce health services for the indigent � revamp county and municipal jail standards � eliminate red-light cameras � and much more.

In New York, Gov. Andrew Cuomo declared the state in crisis last Wednesday, proposing to freeze state workers� wages for one year and trim 600 state agencies, including Medicaid.

The list goes on and on. In sum �

The Day of Reckoning is here, NOW! �

America ~ Economic Crisis