Denver Direct: More Bond Talk (Elevated from the Comments)

Sunday, November 11, 2007

More Bond Talk (Elevated from the Comments)

It’s not every day that I get a comment from an esteemed blogger such as Andrew Oh’Willeke at Wash Park Prophet, plus a mention by another of my favorites, George in Denver. So I’ll take this opportunity to elevate the discussion from the comments to the posts.

First let me thank Andrew Oh’Willeke for the comment in the post below. It is always reassuring to know that at least we bloggers are giving thoughtful consideration to each other’s posts.

But Andrew, I must take exception to your rejection of the premise that municipal bonds might be affected by the global credit freeze up. Complaints about the ordinate on the graph strike me as complaining about the alignment of the infamous deck chairs on the Titanic. As you know, changes in the dollar index are normally quite small, as vast amounts of currency are involved, thus the increments on the ordinate are small. The graph I included is just as it comes from the NYBOT site. Perhaps a more recent condensed version would convince you that the dollar is in serious decline.

As to your not being worried about the possible ramifications of this decline on the insurers of these muni bonds, I must confess I know only what I read. The day following my post the U.K. Telegraph published another article speaking specifically to your point about the possibility of AAA ratings (like Denver’s current ratings) being affected. I quote:

The potential damage from any downgrade could stretch far beyond the companies themselves by lowering the credit ratings of the AAA bonds that they insure. This could force pension funds, mutual funds, and institutions to liquidate holdings on a vast scale, causing the credit crisis to spread into areas that have remained unscathed until now.

Matt Fabian, managing director of Municipal Market Advisors, said any downgrades would be a “crushing blow” to the municipal bond market. “I have never seen a crisis of confidence in insurers like this before,” he said.

And from the broader world of financial commentary:

America is finished, washed up, kaput. Foreign investors and central banks around the world have lost confidence in US markets and are headed for the exits. The dollar is sinking, the country is insolvent, and its leaders are barking mad. That’s bad for business. Investors are voting with their feet. They’ve had enough. Capital is flowing to China and the Far East in a torrent.It’s “sayonara” Manhattan and “Hello” Tiananmen Square.

As to the “assurance of repayment being high because of the way property taxes are structured”, would that be because the interest gets paid first? Even if the tax revenues fall because of foreclosure and default? Will Ritter’s property tax freeze protect us or kill us?

Foreclosures in Denver per 1000 homes:

2nd quarter – 2006 – 5.92
3rd quarter – 2006 – 11.11
1st quarter – 2007 – 21.28

And another worrisome thought, what if there is a 40% cost overrun on these projects as there was on the previous bond projects?

I really don’t think these bonds won’t be sold, but at what price? I’ve seen the prime rate at 18% and house prices fall by 50%, right here in good old Denver (during the ’80s recession). The current triple whammy of elevated real estate appraisals, property tax freeze, increasing foreclosure and default, and inflation (real) running at 12% (oh wait, that’s a quadruple whammy), will have me squealing like a stuck pig on a fixed income.

Ah, time will tell. But right now I’ve got to get back to more pressing concerns. The leaves in my back yard are nearly a foot deep, and it’s a beautiful day in Denver.