FX Markets Are Rigged?!?!
What causes a stock market crash - and are we heading for another?
Telegraph.co.uk Tara Cunningham
The dizzying ascent of global stocks has unnerved City analysts in recent months, as lofty valuations and the prospect of interest rate hikes threaten to spark a major sell-off.
The MSCI All-Country World Index, a gauge of global stocks, set a new peak last month.
The Dow Jones logged its third consecutive record-high close on Friday, while London’s benchmark FTSE 100 and the German DAX hit all-time highs in June.
Even disappointing macroeconomic data fails to deter the relentless drive higher in stock markets, as investors continue to pile into stocks with overstretched valuations.
Since the immediate aftermath of the Brexit vote, the FTSE 100 has rallied 24pc, rising almost 4pc so far this year, while Dow Jones has gained 20pc since Donald Trump’s US election win.
Since January, the benchmark US index has jumped almost 9pc. As stock markets scale new peaks, is a major crash around the corner?
What is a stock market crash?
Quite simply, it is a sudden dramatic drop in stock prices across a significant cross-section of a stock market. While there is no specific threshold for stock market crashes, they are typically defined as a fall of more than 10pc in a stock index over the course of a day or two.
How does a crash differ from a ‘correction’?
The speed of the decline is what differentiates a crash from a stock market correction. While a crash occurs when markets experience a sudden double-digit drop in a couple of days, a correction occurs when prices fall by 10pc or more from the index’s 52-week high.
A trip down memory lane….1929: The Great Depression
In the worst stock market crash in US history, the Dow Jones plunged 25pc in just four days, starting on October 24. It wiped out $30bn in market value. The Dow continued its descent until July 1932, when it bottomed out nearly 90pc lower from its 1929 highs.
1987: Black Monday
The Dow Jones dropped 22.6pc in a single trading session. $500bn was lost in one day.
The benchmark US index rallied by almost 45pc in the run-up to the crash, stoking fears of an asset bubble.
2000: The Tech Bubble
The tech-heavy Nasdaq surrendered 78pc of its value. The US index surged in the mid-1990s fueled by investments in internet-based companies, which investors hoped would one day turn a profit. Overconfidence, pure speculation and the failure of dotcom companies to perform caused the bubble to burst. Former Fed chair Alan Greenspan famously dismissed the stock market bubble as “irrational exuberance”.
2007/8: The Great Recession
A housing boom, rampant real estate speculation and excessive consumer spending categorised the most recent titanic moment. It came to a head on September 29, 2008 when the Dow Jones plunged 777.68 points in intraday trading after the US government rejected a $700bn financial rescue package designed to rescue the US economy and stabilize global stock markets. Two weeks earlier, the US government had allowed Lehman Brothers to go bankrupt.
What causes a stock market crash?Ask City (London) experts what causes a stock market to plunge and you’ll get a dozen different answers. A deluge of academic research also fails to deliver a conclusive answer. Taking that into account, here’s some of the contributing factors that lead to a stock market crash:
Conventional financial theory suggests market players behave rationally, failing to account for investor sentiment, which can drive stock prices higher or lower. Greed, fear and expectations all contribute to investor sentiment. Periods of strong optimism among investors can artificially inflate stock prices, which creates a ‘bubble’ and subsequently has the potential to burst, causing share prices to plummet.
A stock market crash is exacerbated by panic. Typically, investors who think the market is about to falter begin to dump stocks in an effort to avoid losing money. But as the speed of the share price slide accelerates, panic begins to grip the market causing others to follow suit. As everyone moves to offload stocks, supply exceeds demand causing prices to plunge across the entire stock market.
Research conducted by Nobel Prize-winning economist Robert Shiller on investor behaviour in the 1987 stock market crash found that there was “a great deal of investor talk and anxiety around October”.
Major world or geopolitical events can weigh heavily on investor confidence, prompting them to offload risky assets in favour of safe plays, such as gold or bonds. Unprecedented events can trigger panic-induced selling that creates a stock market crash.
The Dow Jones fell by as much as 7.52pc in intraday trading on September 17 when Wall Street reopened following the 9/11 terror attacks.
Tightening of monetary policy
Central banks have rattled markets as they discuss withdrawing stimulus and hiking interest rates. Hawkish rhetoric from European Central Bank president Mario Draghi, Bank of England policymakers and the Fed has rocked investor sentiment in recent weeks. The ECB has confirmed it wants to taper quantitative easing - or electronic printing of money - and the US central bank wants to wind down its balance sheet.
In a recent note to clients, Bank of America Merrill Lynch investment strategist James Barty said: “Markets do not like the sound of this. The central bank 'put' is being withdrawn and the knee-jerk response is one of concern. Bund yields have spiked from under 25bp to 57bp since the comments and the European equity market has had a distinct wobble. The US and emerging markets have joined in, albeit to a lesser extent.”
But we’ve been here before: Mr Barty points to the taper tantrum of 2013, when bond and equity markets fell sharply. However, BAML believes if growth holds up in the global economy, tighter policy won’t bring markets crashing down.
US investment bank Citi earlier this week also suggested that monetary policy could pose a threat if “central banks are perceived to be ahead of the curve”, as they believe that would negatively impact investor confidence.
Market valuations are overstretched. Using the metric developed by Professor Shiller and John Campbell, the cyclically adjusted price to earnings ratio or “Cape” - which compares a share price with the earnings of the company concerned over the past 10 years, adjusted for inflation - shows today’s valuations have been surpassed only during the build-up the dotcom bubble and 1929 Wall Street crash.
Lofty valuations are a common theme before previous market crashes. Earlier research conducted by Professor Shiller found that buyers and sellers generally thought the market was overvalued before the 1929 collapse.
On another measure, the S&P 500's price-earnings ratio - which compares a company's share price with its earnings over the past 12 months - is 17.5 times forward 12 months' earnings.
Meanwhile, a record number of professional investors think that world stocks are more “overvalued” now than during the 1999 tech bubble, a Bank of America Merrill Lynch fund manager survey showed last month.
After surveying 210 global fund managers with $596bn assets under management in June, BAML found a net 44pc of investors said equities were overvalued, up from a net 37pc last month, and beating the previous record high set in 1999's dotcom bubble.
Separately, a report released by JP Morgan earlier this week revealed that analysts are concerned that second-half earnings may not be as robust as previously expected.
The US investment bank warned: “We note that in the US, the negative to positive earnings pre-announcement ratio is down to 1.9x, its lowest level in six years.”
Analysts at the bank believe price-earnings ratios are vulnerable to a slowdown in earnings growth, highlighting that world price to earnings is 26pc more expensive than it was ahead of the Fed’s QE taper in 2013.
Asset bubbles occur when prices become over-inflated, rising much faster than an asset's real underlying value. When that happens a bubble forms and can often be followed by a bust.
Last month, gripped by fears that the technology sector is in a “bubble”, tech stalwarts suffered a sharp sell-off following a bearish Goldman Sachs note on the sector.
A survey of professional investors conducted by Bank of America Merrill Lynch found that three-quarters of respondents said US and global internet stocks were either “expensive” or “bubble-like”. The tech-heavy Nasdaq was seen as the “most crowded trade”, BAML found.
Data showed that most money managers were "overweight" - or had a "buy" recommendation - on the so-called “FANG stocks” of Facebook, Amazon, Netflix, and Google.
Global economic slowdown
Signs of increased volatility across a number of risk assets and emerging markets are beginning to rattle investors. Earlier this week, Citigroup warned that stock markets could be at risk of falling if there is a global economic slowdown.
Investors should remain wary as strategists point to the potential for slower momentum in China and mixed macroeconomic data from the US.
While it has been around for a long time, algorithmic trading has taken a significant share of trading activity in recent years. Algos can often cause or at least accelerate dropping prices in markets, as there is no human input.
For example, last October’s “flash crash” in sterling was caused by a combination of inexperienced traders, algorithmic trading and complex trading positions, a report from the international banking body the Bank for International Settlements found.
Are we heading for another titanic moment?
History suggests that stock markets always rally strongly before a crash. While that it easy to recognise, other contributing factors can be harder to identify.
Last month, Fed chair Janet Yellen said she believed we will not see another major financial crisis “in our lifetime” because banks are stronger. But not everyone is in agreement.
Swiss investor Marc Faber, the man known as “Dr Doom”, predicts that stocks will plunge by 40pc or more. Mr Faber, the editor of ‘The Gloom, Boom & Doom Report’ and a perennial bear, told CNBC recently: “We have a bubble in everything.”
Recently, Professor Shiller urged investors to tread cautiously because market valuations are at “unusual highs”. In a recent interview with CNBC, he said: “We are at a high level, and it's concerning,” highlighting that the only times valuations have been higher were in 1929 and 2000.
With fears growing of tech bubble 2.0, Bank of America Merrill Lynch attempted to assuage investors' fears. In contrast to the 2000 tech bubble, strategists at the US investment bank reckon valuations “ain't irrational yet”.
Financial Martial Law
Financial Martial Law
ZeroHedge.com Jul 15, 2017 1:35 PM
Authored by Chris Lowe via InternationalMan.com,
Already, as an American, you are not free to spend your money as you see fit.
JPMorgan Chase - the country’s biggest bank—has banned cash payments for credit card debt, mortgages, and car loans. It has also banned the storage of “any cash or coins” in safe deposit boxes.
Bank Secrecy Act Regulations Explained
By Bonner & Partners analyst Joe Withrow
The Bank Secrecy Act (BSA) requires US financial institutions to assist federal agencies in preventing money laundering. All financial institutions are required by law to keep records of all financial activity, including cash purchases of “negotiable instruments”—checks, money orders, etc.
These records are open to government inspection at any time. They are also subject to periodic audits by both federal and state governments.
All financial institutions must immediately file a Suspicious Activity Report (SAR) with the federal government whenever a customer engages in transactions the institutions deem strange or inconsistent with normal behavior. This is open to interpretation.
There are also specific BSA regulations requiring financial institutions to file government reports. They are:
Under the Bank Secrecy Act, if you withdraw $10,000 or more in a day, your bank is required to file something called a Currency Transaction Report with the Financial Crimes Enforcement Network (FinCEN). This is a special bureau within the Department of the Treasury that’s tasked with combatting money laundering, terrorist financing, and other financial crimes. And your bank is required to file something called a Suspicious Activity Report with FinCEN if it believes you are trying to avoid triggering a Currency Transaction Report by withdrawing smaller cash amounts. This puts all cash withdrawals under the microscope.
Taking out cash from the bank isn’t the only activity the government deems suspicious.
Other actions that will trigger a report being filed with the feds include: depositing $10,000 or more in cash with your bank… a foreign exchange transaction worth $10,000 or more… taking more than $10,000 in cash into or out of the US… receiving more than $10,000 in cash in a single payment as a business… or having more than $10,000 in accounts outside the US during a calendar year.
And even if you manage to get your cash out of your bank, having it on your person also makes you a target of the authorities.
Under civil asset forfeiture laws, police and federal agents can confiscate any cash you might have on you if they merely suspect it was involved in a crime. They don’t need to bring criminal charges against you or prove any wrongdoing. And they can keep any seized cash for themselves.
According to The Washington Post, since 2007, the DEA alone has seized more $3.2 billion in cash from Americans in cases where no civil or criminal charges were brought against the owners of the cash.
And forget about opening up a bank account offshore to diversify your risk of these kinds of clampdowns.
The Foreign Account Tax Compliance Act, or FATCA, became law in 2010. It imposes a lot of red tape on foreign banks with US clients. And the costs of complying with all this red tape means opening up bank accounts for Americans no longer justifies the benefits of overseas banks.
As a result, it’s now extremely difficult for Americans to open accounts overseas. It’s de facto capital control, even if the government won’t admit it.
* * *
Capital controls are a telling sign… The feds know an epic crisis is brewing. And they want to trap your money before you have time to protect it. They know the coming crisis will hit everything—your portfolio, your bank account… even the cash in your wallet. Of course, America has seen plenty of crises before. But this time is different. The source of unrest today is not the free market, race, the 1%, or President Trump. It’s a truth about America no one wants to tell you.
We Do These Things Because They're Easy: Our All-Consuming Dependence On Debt
by Tyler Durden
Jul 14, 2017 10:36 AM
Authored by Charles Hugh Smith via OfTwoMinds blog,
A world in which "we do these things because they're easy" has one end-state: collapse.
On September 12, 1962, President John F. Kennedy gave a famous speech announcing the national goal of going to the moon by the end of the decade. ( JFK's speech on going to the moon.) In a memorable line, Kennedy said we would pursue the many elements of the space program "not because they are easy, but because they are hard."
Our national philosophy now is "we do these things because they're easy"-- and relying on debt to pay today's expenses is at the top of the list. What's easier than tapping a line of credit to buy whatever you want or need? Nothing's easier than borrowing money, especially at super-low rates of interest.
We are now totally, completely dependent on expanding debt for the maintenance of our society and economy. Every sector of the economy--households, businesses and government--all borrow vast sums just to maintain the status quo for another year.
Compare buying a new car with easy, low-interest credit and saving up to buy the car with cash. How easy is it to borrow $23,000 for a new $24,000 car? You go to the dealership, announce all you have to put down is a trade-in vehicle worth $1,000. The salesperson puts a mirror under your nose to make sure you're alive, makes sure you haven't just declared bankruptcy to stiff previous lenders, and if you pass those two tests, you qualify for a 1% rate auto loan. You sign some papers and drive off in your new car. Easy-peasy!
Scrimping and saving to pay for the new car with cash is hard. You have to save $1,000 each and every month for two years to save up the $24,000, and the only way to do that is make some extra income by working longer hours, and sacrificing numerous pleasures--being a shopaholic, going out to eat frequently, $5 coffee drinks, jetting somewhere for a long weekend, etc.
The sacrifice and discipline required are hard. What's the pay-off in avoiding debt? Not much--after all, the new auto loan payment is modest. If we take a 5-year or 7-year loan, it's even less. By borrowing $23,000, we get to keep all our fun treats and spending pleasures, and we get the new car, too.
At the corporate level, it's the same story: borrow a billion dollars and use it to buy back shares. Increasing the value of the corporation's shares by increasing profit margins and actual value is hard; boosting the share price with borrowed money is easy.
It's also the same story with politicians and the government: cutting anything is politically painful, so let's just float a bond, i.e. borrow money to pay for what was once paid out of tax revenues: maintaining parks, repaving streets, funding pensions, etc.This dependence on expanding debt for maintaining the status quo is a global trend. Debt is exploding in China in every sector, and the same is true in other nations, developed and developing alike.
Borrowing more money from the future is easy, painless and requires no trade-offs, sacrifices or accountability--until the debt-addicted economy collapses under its own weight of debt service and insolvency. People keep repeating various versions of the story that "debt doesn't matter" because "future growth" will outgrow the skyrocketing debt, or inflation will make it all manageable, or that central banks will do whatever it takes to make sure everyone has enough money to service their debt burdens: negative interest rates, helicopter money, etc. etc. etc.
We want to believe in financial magic because we want things to remain easy. Borrowing from the future is easy, making sacrifices and being accountable is hard. But eventually the cost of servicing even low interest-rate debt squeezes spending, eventually capital tires of chasing negative interest-rate bonds, eventually lenders realize that leverage has skyrocketed along with the debt and risk is piled up like dry tinder in a drought-weakened forest.
Central banks realize they can't even limit the expansion of their balance sheets without triggering a panic that would collapse all the debt-based contraptions and manipulated markets they've held aloft with limitless liquidity.
If you believe that going from a total debt burden (government and personal debt) per household being 79% of median household income to debt per household being 584% of median household income doesn't matter and will have no consequences, you believe in magic. Unfortunately, thinking something will be easy forever and have no consequences is not the same as the real world of skyrocketing debt and leverage having no consequences.
BofA Lashes Out At The Fed: "Take That Punch Bowl Away" Or Face A Crash
ZeroHedge.com Jul 14, 2017 12:55 PM
In a dramatic appeal for rationality at the Fed, Bank of America's global FX strategy team today released a note titled "take that punch bowl away", which laments that while central banks backtracked from their hawkish recent rhetoric this week, it warns that "they will be sorry if they allow bubbles" and predicts that vol will increase this fall adding that the bank remains "cautious and selective in EM FX, despite the Fed-triggered rally this week."
The note comes 24 hours after BofA's chief strategist Michael Hartnett warned that "the most dangerous moment for markets" will likely come when "rising rates combine in three or four months’ time with an inflection point in corporate profits. In anticipation of this, we would use the next couple of months to buy volatility, and within fixed income slowly reduce exposure to IG, HY, and EM bonds."
Of course, Hartnett's report is based on the assumption that the Fed will do what Yellen has threatened to do and hike at least once more in 2017, i.e. the "right thing."
But what if the Fed once again backs away from its plans to burst the asset bubble as all of the top FOMC members were loudly warning they would do just three weeks ago? Well, things will get much worse, as BofA's unexpectedly objective analysis of the bubble the Fed has blown in recent years, details:
The global crisis shifted debt from the private to the public sector, which now encourages high savings and leads to low interest rates. Population is aging in many countries, also supporting saving. And technology is a positive supply shock, leading to lower prices. High savings and low inflation keep central bank policies loose. Loose monetary policies in turn support risk assets. Equities are at historic highs and vol at historic lows, even more this week following a dovish tone by Yellen in her Congress testimony.
Here Vamvakidis echoes Hartnett and says that in his, and his bank's view, "we do not believe that this is sustainable, and we have been arguing that we will see the beginning of the end of this new not-so-normal market this fall."
For those who have missed our coverage of Hartnett's weekly laments, BofA's FX team recap the bank's thinking of why the Fed and its central bank peers have been so aggressive in following a hawkish tone, despite economic data which continues to disappoint:
Central banks getting more concerned that they are fuelling asset price bubbles. We got a taste of this in recent weeks, with a number of central banks talking about loose financial conditions despite low inflation and the need to normalize monetary policies, but there was some backtracking this week. Our global investment strategists believe that central banks will act to pop the bubble later this year.
The unwinding of central bank balance sheets itself will gradually reduce their role in global markets. This role has been a distortion, as it represents strong demand for assets that is inelastic to fundamentals. The Fed is about to announce plans to start unwinding its balance sheet and the ECB is about to announce plans to first taper and then end its QE program. We believe both will help bring back some normality in fixed income markets.
Amen... only that may not happen if history is any guide. In which case what is an already bad situation will only get much worse. BofA explains:
If we are wrong and central banks do not take away the punch bowl, things will get much messier eventually. “Bubbles” may form that will eventually burst, leading to much higher volatility than necessary. Keeping rates low in response to persistent positive supply shocks that keep inflation low could lead to imbalances, with a painful eventual correction. Central banks did this mistake before the global crisis and kept monetary policies too loose as inflation was low, ignoring very easy financial conditions, excessive and sometimes irresponsible credit expansion and a housing price bubble. We do not believe, or at least we hope, they will not repeat the same mistake twice.
Unfortunately, with $15+ trillion in DM central bank liquidity backstopping the market, the threat of a crash is all too real - just ask Jamie Dimon - once the unwind begins. Which is why Janet Yellen, concerned about her legacy, may get cold feet in the last moment and to precisely that: "repeat the same mistake twice."
That said, all hope is not yet lost: recall that the catalyst the spurred the hawkish Fed was the assumption that monetary policy would be able to hand off risk asset support to fiscal policy. However, with Trump now mired in Russian collusion scandals, the possibility of some fiscal boost deal emerging is virtually nil.
There is still hope for tax reform in the US. Everyone agrees that the US badly needs it. Our corporate survey suggests that US corporates remain hopeful. However, our Global Fund Manager Survey and our Rates and FX Sentiment survey suggest that investors have given up. If it does happen this fall, many of the so-called Trump trades will come back. Our corporate survey also suggests that the share of non-USD assets that US companies keep abroad is much higher than consensus estimates, which could lead to a much stronger USD from repatriation following tax reform.
Finally, there are other risks:
... there are always potential shocks from unknown unknowns. Our survey data suggests that cash balances are not low, but we believe investors are waiting for market dips to buy. We believe that the market is not hedged for unexpected shocks, or implied volatility would not have been so low. The VIX index is reaching levels again from which the risks are mostly to the upside based on its history.
Oh well, at least there is a new generation of traders preparing actively for this worst case scenario, right? Well, not really.
Amid what has emerged as one of the most boring markets in history, Bloomberg reported this week that with nothing to do, traders spend their time on... tinder.
... one bond trader who spoke with Bloomberg said he’s been slipping out early to watch his kids play sports. A fund manager says his office just staged a golf retreat. And a trading supervisor at another bank confided that he’s spending more time swiping through potential romantic partners on the dating app Tinder.
And speaking of tinder, if BofA is correct, that's precisely what "markets" have become, now just lying in wait for the next lit match.
Death of the Middle Class
Death Of The Middle Class: The Suburbs Have Absorbed Half Of America's Poverty Growth
ZeroHedge.com Jul 11, 2017 6:30 PM
Authored by Mac Slavo via SHTFplan.com,
For decades suburbia was home to the highest concentration of wealth in America, and perhaps even the entire world. It was the seat of our nation’s thriving middle class and a beacon of economic mobility. The streets were clean and safe, the schools were highly regarded, and there were plenty of middle class jobs to be had.
But something has changed in suburbia. While offshoring and automation have destroyed millions of jobs across the country, the decimation of brick and mortar stores by online retailers has pounded the wealth base of suburbia. So much so, that there are more people living in poverty in suburbia than any other place in America.
According to a new book, “Places in Need: The Changing Geography of Poverty,” by University of Washington professor Scott Allard, American suburbs are facing economic hardship on a massive, if poorly understood, scale.As of 2014, urban areas in the US had 13 million people living in poverty. Meanwhile, the suburbs had just shy of 17 million.
The Great Recession of 2008 helped accelerate much of the poverty that emerged in the early 2000s, Allard’s research has found. But another disrupting factor was the technological shift that enabled — and continues to enable — online retailers like Amazon and other e-commerce sites to replace shopping malls and big-box stores.This ongoing demise has hollowed out many of the jobs suburban Americans once turned to as a means of supporting themselves.
So where did the wealth go? It appears to have fled suburbia, and made its way back to the cities.
The kinds of jobs that do entice younger people — mostly higher-skill, white-collar work — are increasingly found in cities. Suburban office parks are becoming a thing of the past as millennials flock to nearby metropolitan areas for work, accelerating the speed at which the suburban workforce hollows out overall.
Allard said it’s a reversal of several decades ago, when businesses moved to the suburbs to attract people who had recently vacated the city in search of a safer, greener place to live. Of course there are many factors that have killed jobs and wealth creation in suburbia, and those factors are contributing to poverty across the board. When you look at the data, you’ll find that the number of people living under the poverty line has skyrocketed in the suburbs, the cities, and rural areas. It’s happening everywhere. But suburbia is being hit the hardest.
Between 2000 and 2015, the poor population in smaller metropolitan areas grew at double the pace of the urban and rural poor populations, outstripped only by poverty’s growth in the nation’s suburbs. Suburbs in the country’s largest metro areas saw the number of residents living below the poverty line grow by 57 percent between 2000 and 2015. All together, suburbs accounted for nearly half (48 percent) of the total national increase in the poor population over that time period.
The truth is this is emblematic of a much wider trend. The middle class in America is clearly dying, and the suburbs are where the middle class used to be concentrated. But like I said, it’s happening all over the place.
It used to be that you could escape poverty by moving from one place to another. During the industrial revolution, millions fled the subsistence living conditions in the countryside for factory jobs in the city. After World War Two, millions more left the cities for the suburbs.
But where can people run to now for economic opportunity? The middle class jobs in the suburbs have been hollowed out by the digital age. Offshoring, automation, environmental regulations, and illegal immigration have driven down wages and killed many of the highest paying jobs in rural areas. For most people, the only good paying jobs are in the cities, where the cost of living is so high that you can barely raise a family on a six figure income, which of course negates any of the benefits of having a high paying urban job.
If trends like this continue, then someday we’re going to wake up in a country that is like many that came before, where a few coastal elites are incredibly wealthy, and poverty is the norm for everyone else.
How Screwed Up Is Your State???
The Mercatus Center at George Mason University (GMU) has recently compiled a fairly comprehensive study, based on a number of objective financial metrics, ranking the 50 U.S. states according to their overall fiscal condition. Among other things, GMU analyzed the following metrics:
Connecticut Capital Hartford Downgraded To Junk By S&P
ZeroHedge.com Jul 11, 2017 7:16 PM
One week ago, Illinois passed its three year-overdue budget in hopes of avoiding a downgrade to junk status, however in an unexpected twist, Moody's said that it may still downgrade the near-insolvent state, regardless of the so-called budget "deal." In fact, a downgrade of Illinois may come at any moment, making it the first U.S. state whose bond ratings tip into junk, although as of yesterday, credit rating agencies said they were still reviewing the state's newly enacted budget and tax package. The most likely outcome is, unfortunately for Illinois, adverse: "I think Moody's has been pretty clear that they view the state's political dysfunction combined with continued unaddressed long-term liabilities, and unfavorable baseline revenue performance as casting some degree of skepticism on the state's ability to manage out of the very fragile financial situation they are in," said John Humphrey, co-head of credit research at Gurtin Municipal Bond Management.
And yet, while Illinois squirms in the agony of the unknown, another municipality that as recently as a month ago was rumored to be looking at a bankruptcy filing, the state capital of Connecticut, Hartford, no longer has to dread the unknown: on Tuesday afternoon, S&P pulled off the band-aid, and downgraded the city's bond rating by two notches to BB from BBB-, also known as junk, citing "growing liquidity pressures" and "weaker market access prospects", while keeping the city's General Obligation bonds on Creditwatch negative meaning more downgrades are likely imminent.
"The downgrade to 'BB' reflects our opinion of very weak diminished liquidity, including uncertain access to external liquidity and very weak management conditions as multiple city officials have publicly indicated they are actively considering bankruptcy," said S&P Global Ratings credit analyst Victor Medeiros. Hartford has engaged an outside law firm with expertise in financial restructuring. Officials also mentioned that the city would initiate discussions with bondholders for concessions to implement a debt restructuring if it didn't receive the necessary support in the state's 2019 biennial budget. S&P also said that Hartford may be downgraded again if the state passage of a budget is significantly delayed, or if the city were not to receive sufficient support in a timely manner that would enable it to manage liquidity and allow it to meet obligations in a timely manner. In short: the capital of America's richest state (on a per capita basis), will - according to S&P - be one of the first to default in the coming months.
Full S&P note below.
Hartford, CT GO Debt Rating Lowered Two Notches To 'BB' On Growing Liquidity Pressures, Weaker Market Access Prospects
S&P Global Ratings has lowered its rating on Hartford, Conn.'s general obligation (GO) bonds two notches to 'BB' from 'BBB-' and its rating on the Hartford Stadium Authority's lease revenue bonds to 'BB-' from 'BB+'. The ratings remain on CreditWatch with negative implications, where they were placed on May 15, 2017.
"The downgrade to 'BB' reflects our opinion of very weak diminished liquidity, including uncertain access to external liquidity and very weak management conditions as multiple city officials have publicly indicated they are actively considering bankruptcy," said S&P Global Ratings credit analyst Victor Medeiros. Hartford has engaged an outside law firm with expertise in financial restructuring. Officials also mentioned that the city would initiate discussions with bondholders for concessions to implement a debt restructuring if it didn't receive the necessary support in the state's 2019 biennial budget.
"Maintaining the CreditWatch with negative implication reflects our opinion of continued liquidity pressures related to whether the state will provide timely extraordinary aid to the city as outlined in the governor's proposed biennial budget and included in the city's adopted budget," said Mr. Medeiros. Connecticut is facing its own fiscal challenges, and there has been very little indication by the legislature on how it intends to address local government aid and specifically the level of budgetary support it would provide the city of Hartford. The city's full faith and credit GO pledge secures the bonds and notes outstanding. The 'BB-' rating on the lease-revenue bonds issued by The Hartford Stadium Authority reflects the appropriation risk of the city of Hartford.
"We expect to resolve the CreditWatch on the long-term rating with the enactment of a state budget that will provide additional information and allow us to evaluate the level of state support and the city's overall liquidity," added Mr. Medeiros. At the moment, we believe there is a one-in-two likelihood of a negative rating action, potentially by multiple notches. Factors that could lead to a downgrade would be if the state passage of a budget is significantly delayed, or if the city were not to receive sufficient support in a timely manner that would enable it to manage liquidity and allow it to meet obligations in a timely manner. Alternatively, if timely budget adoption translates into stabilized liquidity, and provides long-term structural support, we could remove the ratings from CreditWatch.