Faith Doesn't Trump Math, Dickheads

It's amazing how this is being noted as "faith questioned." I mean, unless you are an imbecile. 

From Bloomberg:
"Detroit’s record municipal bankruptcy may set precedents for how retirees and bondholders are prioritized when a locality falls into distress. It’s poised to test the assumption in the municipal-debt market that states and cities will raise taxes as high as necessary to make full payments on bonds backed by their full faith and credit."

As high as necessary eh?

So a city or other municipality can raise taxes to 100% of residents income if necessary to pay bondholders, and should? Bondholders should assume that such a premise exists?

There are plenty of people who are spending too much time in Denver smoking bong hits among these so-called "investors" and ratings agencies.  I say this because there is plenty of evidence that raising taxes provides a disincentive to behavior and, what's worse, people CAN and DO move to lawfully avoid paying said taxes.

The premise of "full faith and credit" is therefore at the outset a lie to the extent that anyone believes it means that a government can raise taxes "as high as are necessary" to make bond payments.  They can certainly try but rates are immaterial; what matters is how much you collect.

If you have a 100% tax rate but the response is that the population all quits working and sits on their ass, collecting from the public dole instead, you get zero from that tax in actual revenue.

Isn't it funny how nobody wants to talk about that little problem, even when we have Detroit as a shining example of the consequences of failing to do so?

Brace yourself. Or, as we used to say in the Army, BOHICA...

The market has selling off substantially for over 24 hours now, with no visible signs of stopping.  

The real story is in the FX markets which are utterly going apeshit, along with the Treasury Curve which is blowing wildly higher (rates); the TNX is now +5.9% on the day (10 year).  The odd part of this is that the 30 year is only up 2.4% -- but the FVX (5 year) is up a stunning 15% -- straight up. Mortgage backed securities have fallen over 200 basis points in the last 36 hours. Gold is plummeting as well.

Reduce risk folks—the FX moves alone are going to generate some very interesting margin activity over the next couple of days, and coming right into the maw of a Quad Expiration along with the bond market moves..... oh boy.

What we have here is a massive clusterfuck.  "QE" has been a disaster, irrespective of what you think about Bernanke's "crisis management."  The fact of the matter is that the "crisis" was in 2007 and 2008, The Fed caused it with its policies back in 2001-2004 and through willful and intentional failures in supervision of the banks and non-banks through 2007 and Bernanke was both there and then running the show during that time; in point of fact he was one of the chief cheerleaders for Greenspan's policies during that time period!

You can always trust the guy who blew it to blow it again and that's exactly what has happened.  Not necessarily hyperinflation; what we've done is grossly inflate fast-money asset prices while the rest of the economy does not merit those prices.

Any sort of dispassionate analysis must arrive at the same end-point--the gross and outrageous distortion of borrowing costs and "easy money" have massively diluted the currency while at the same time has led corporations to make radically uneconomic decisions that only work due to those distortions, but during the time they're in place they are the only reasonable way to satisfy investors.

That is a recipe for a massive reversion back to value and what's worse is that the costs, particularly the rollover risks that have now become embedded through the economy, are going to screw people up, down and sideways.

You and I don't see these risks because rollover risk is something that most consumers never deal with (except for those who were in Option ARMs during the bubble, of course—they got a lesson in it first-hand and most of them went ka-boom because they were stupid.)  But for corporations and governments this risk is a daily issue that never goes away.  Schools, roads, capital equipment in business and even operating expenses are often rolled up into various financing packages none of which are typically amortized to completion and retired--they are instead rolled over continually because this makes your operating results look much better than they otherwise would.

The problem is that this "picture" of the health of your enterprise is dangerously distorted.  The fact of the matter is that debt, when taken to increase production, can be beneficial provided you can and do retire it at a rate that exceeds the economic service life of whatever it buys.  When it is rolled over on a continual basis it is not beneficial; it simply adds leverage to your enterprise, whether a company or a government.

The reality of leverage is that it amplifies results, both on the upside and the downside. It's a math thing, and since we refused to learn this in 2007 we will get taught the lesson again—soon.

Brace.