Bailouts and Defaults Coming to a City Near You
Hockey Arena Construction Halted in Allentown, PA
Greece, Spain, Bailouts, Default, Housing Crisis, Unemployment, Italy, Fannie Mae, Quantitative Easing, Unfunded Pensions, Portugal ...every day it seems these ugly words beat up the market. Where does it all end?
Here in the US we’re still dealing with the Housing Crisis, the “worst recession since the depression” that led to “the worst recovery in US history.” If that isn’t depressing enough, we are not out of the woods with the student loan crisis that I think is coming.
On top of all this, I recently read in this NY Times article scary tales of how local governments have left unknowing taxpayers on the hook for bonds issued by various “authorities” by backing or guaranteeing the issues with the “full faith and taxing power” of its citizens. Here is the shell game in, well, a nutshell:
A city named, umm, let’s call it “Broketon” has a great idea to revive the economy. Broketon thinks it can revitalize its downtrodden downtown district. A minor league hockey team, the Moochers, is looking for a new city to play in. The arena where they currently play is old and lacks the retail space to sell merchandise to their lukewarm fan base. Either Broketon contacted the Moochers, or vice versa, it doesn’t matter. They find each other and agree that they could mutually benefit from the Moochers moving to Broketon. Broketon thinks a new team would revive the community spirit, attract constituents to the long neglected downtown area and generate new tax revenue from local merchants and, maybe even the Moochers themselves! The Moochers, in return for moving to Broketon, would get a new arena to play in that they have to pay little or nothing for. One of those new facilities with plenty of vending areas and gift shops!
There is one slight problem. Broketon is well...broke. The local factory that employed many Broketon residents closed down a generation ago. Faced with lowered tax revenues, Broketon raised taxes on citizens and the remaining surviving businesses. Many of the people and businesses targeted for the tax increases, in turn, moved out. Broketon is already in debt just maintaining the local streets, bridges, water department, etc. They can’t borrow money at a decent rate to build a hockey arena. The solution? Create an “authority” that would be in charge of the new project!
The new authority, let’s call it the Downtown Urban Magistrature of Broketon (DUMB) is established and issues bonds to pay for the new arena, parking garages, local road improvements and a monorail (to be built by Lyle Lanley). The plan is for the bonds to pay interest to its creditors a few years down the road. This way, the project can be completed and generating revenue to pay the debt payments when they come due.
As often happens to such initiatives, something goes wrong. The construction fell behind schedule, which resulted in budget overruns in labor costs. The monorail was built with shoddy materials and Lyle Lanley fled town. The Moochers’ owner, Anita McCambridge, inherited the team, doesn’t much care for hockey and has an accountant advising her to fold the team and take a tax write off. Anything can happen to the best laid plans or intentions.
Once the debt payments come due, DUMB does not have the money to pay the bondholders. Which, in turn, leaves Broketon and its taxpayers with bills it cannot afford. Broketon’s citizens are already overtaxed and outraged that they were committed to back this project without any say from them. Finally, the Broketon government can’t cut anything else to pay off this debt.
Does Broketown declare bankruptcy like Stockton, California announced it will recently? Or does it stop the arena project like Allentown, Pennsylvania did due to lawsuits? Or, does it pray for a miracle and find a buyer like Hoboken, New Jersey did for the hospital that taxpayers were liable for $52 million?
In the end, there are tough times for Broketon and many other non-fictitious cities in the United States. Is this the beginning of yet another crisis? I am generally optimistic that we will turn things around in the long term. This country has seen many tough times and still managed to come out on top in the end. However, I am feeling the bearish vibes from a lot of TradeKingers, industry peers and talking heads on CNBC, Fox Business and Bloomberg.
If this is a bear market, there are plenty of investment strategies bears use to weather the storm or even come out ahead! I am making the call to the Bears out there. Why are you bearish? What are your investment plans? Are buying up high-dividend stocks? Precious metal investments? Energy companies? Puts? Or, are you perhaps buying into the classic defensive stocks like food companies? Have you checked out the Bearish Section in our Education Center? Let the Bears be heard!
TradeKing Bigdog, Chairman and CEO
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[Image taken from Harry Fisher, THE MORNING CALL]
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