This is the start of the end game of Credit Ponzinomics. When government entities which were thought to be nearly risk free for the past 50 years begin to default or “restructure” en masse, that is going to frighten the herd out of all sorts of markets. From an economics standpoint, the repudiation of debt is highly deflationary just as the assumption of the debt was originally inflationary. The money supply expanded when all that credit was offered/accepted and the money supply will contract when the associated debt either defaults or is paid back (more likely to be default because there is no means to pay back the debt).
What I sense from the big cities is that they already know they will go bankrupt. All they are worried about at this point is saving face. They don’t want to be the poster child for government bankruptcy which is what is going to happen to the first big guy who defaults. So Miami is just hoping LA will crash first and LA is hoping that Houston or New York City or any other big city will lead the way down. Once a couple of the big guys make the plunge then everyone will pile on. In fact, at that point only a fool would not pile on. Why? Because states won’t lose anything for doing it except their credit ratings which is like saying a homeless bum cares about his credit rating. The cities and states that are the first to wipe away their debt will be the first to recover.
You don’t want to be in any sort of municipal bonds right now IMO. Even if your city does not eventually go bankrupt the value on existing bonds will plummet as the risk premium – the interest rate – soars simply because another city in your state defaulted. Investors don’t know what the real books look like so they will sell first and ask questions later. The same is true for corporate bonds. Equities will meet the same fate. Anything with perceived risk, real or imaginary, is likely to be dumped. Cash is king (short term tbills are still considered cash for now). If you have the time right now might be a good time to re-read Conquer The Crash as it clearly explains all of these things that are playing out right now.
