The Economy

Moody’s had the deposits at Silicon Valley Bank rated A1 until 2 days ago. Just saying.

There WILL be an increase in defaults in the muni market this year. One that takes people who looked at Moody's ratings and made "doubt it" conclusions by surprise. It's ALREADY happening.

The question is how many and where. The 500 basis point move in rates in a relatively short period of time is already causing stress. Payment defaults spiked higher the first two months of this year, and the Fed is still at it (for the time being).

FWIW, the riskiest sectors of the muni market ARE nursing homes and hospitals. ... the reasons I could write about, but I will get over myself.

None of that is a prediction of any sort that your muni portfolio is going to get hammered by widespread defaults imminently. I actually expect the Fed to pivot soon in a panic. They are going to need to prop the debt bomb up as the cracks they are causing get bigger. But I will state with certainty that if interest rates were anywhere near the natural rate they would be in an overly indebted society that can't grow further without a price-fixing czar mispricing the debt markets, you'd see 1) massive defaults (munis have gorged and have no way to pay back what they have borrowed), and 2) The ability of those states and local governments to borrow the way they have been able to for too long would dry up overnight.

 

We have a fractional reserve banking system. Putting aside my posts about WHY highly regulated banks that have portfolios of very "safe" assets (what they do with your deposits) are now way under water if they had to sell those assets to meet depositor redemptions. ... your understanding of how our banking system is set up is very flawed. Things are no different today than they were when It's a Wonderful Life was made. "Fractional Reserve" means that they only have a PORTION of their deposits liquid to meet redemptions.

 

Runs on banks are a confidence thing. But right now there SHOULD be real cause for concern. Banks loaded up on supposedly "safe" bonds to earn something on their deposits. ... while the Fed was creating a massive bubble in the markets for those bonds. ... driving up the prices (because they wanted to drive down yields and keep a debt binge going).

The Fed is now on a rate hiking cycle (consumer price inflation got in the way of the fantasy) that is popping that bubble, and duh, the prices of those bonds have declined precipitously. EVERY bank in America is sitting on a portfolio that has unrealized losses because of the stupidity that led us to where we are today. I can actually understand people who don't want to wait around to find out how much of a problem it is for THEIR bank. I personally wouldn't trust anyone except the money center banks, and even there, the other shoe to drop on higher lending costs is all of the malinvestment it spurred. ... and then we find out what kinds of 2008ish types of leveraged gambling was going on, and who is to say those money center banks haven't been in the thick of THAT?