Roubini-Founded Consulting Firm Sees $100 Billion in Muni Defaults, Says Current Assumptions "Pollyannaish"; FDIC "Shock Testing" Includes Munis

A consulting firm founded by economist Nouriel Roubini said there could be close to $100 billion of municipal-bond defaults over the next five years as state and local government-debt problems damp the U.S. economic recovery.

That figure would by most estimates represent a significant increase over defaults in recent history, but it doesn't appear to be as dire as a prediction last year by analyst Meredith Whitney.

The report, by David Nowakowski and Prajakta Bhide at Roubini Global Economics and released to clients Monday, says state and local debt problems aren't "systemic" in nature, nor will they "infect the financial system." The authors of the report declined to comment.

Most of the defaults will occur among special government projects and revenue-generating entities that aren't considered viable, it says. "Defaults will continue to be isolated events."

The Roubini report says that relying on the history of low default rates in the municipal debt market is "Pollyannaish."

"Avoiding a crisis will involve real austerity that has only partially been implemented thus far," the report states.

Pollyannaish but not Systemic?

I do think there is a systemic concern in regards to pension funding. State public pension funds are $3 trillion in the hole and that is a systemic concern in and of itself. I do not have an estimate for city and county public pension plans but that could easily be another $3 trillion in underfunding.

Cities and states are without a doubt insolvent as I type. Oakland, Detroit, Miami, San Francisco, Los Angeles, Houston, Cincinnati, Newark, and countless other cities big and small are insolvent.

It is unclear if Roubini Global Economics considers those pension problems as a separate issue. I will see if I can get an answer.

Otherwise, my assessment is similar, at least for now. I do not think we see a massive wave of defaults on bondholders. The biggest defaults will affect pension plans (assuming nothing is done), not bondholders in general. Promises that cannot be met won't, and public pension plans are near the top of the list.

Nonetheless, the defaults that do occur will rattle the municipal bond market and deservedly so.

Bank Borrow-Short Lend-Long Schemes

I do have another systemic issue in mind. I discussed it in The Next Borrow-Short Lend-Long Guaranteed to Blow Up Bank Lending Scheme; Citigroup, Chase, Bank of America CD Ripoff

The issue is banks have gone straight to direct issuance of loans to municipalities, bypassing the bond market. Banks are lending straight to municipalities at rates as low as 3.85% for 21 years. Those terms are begging for trouble.

Here is my comment from the above link.

Fed or FDIC Should Stop this Fraudulent Scheme Now

The Fed or FDIC should step in right now. There is no way banks can secure cost of funds for 21 years for 3.85%. Moreover, the risk of default is hardly zero, and banks will not be first in line should default happen.

I think borrowing-short and lending-long is fraudulent. How can you lend something for 21 years when you only have the right to use it for 3, 5, or 7?

Please see my discussion for more details.

FDIC Shock Testing

In response to that post, I received an interesting Email from "ABO" a Bank Owner and CEO regarding new FDIC shock testing exams.

ABO writes ...

Hello Mish

You nailed it on the CDs. I just got done with an FDIC exam and they requested shock testing 400 basis points up and nothing down. Hard to go below zero.

In terms of 5 to 7 year CDs a 15 year GNMA is probably a better way to go. Don't buy them at a premium and look at average life of 4 to 5 years. They are zero risk based as well.

Anyway nice job I could not agree with you more.

Last week a Bloomberg columnist asked for details regarding that stress test. Unfortunately, not only are the findings confidential, but so are the questions.

However, I do have a bit more to add from a second email exchange with ABO.

Shock Testing Now Includes Munis for First Time

ABO Writes ...

The reports and content are confidential, otherwise I would be happy to help you. They also asked us to audit the Municipal bond portfolio for quality as well. That was also a first.

What I told you is 100% accurate. Previously we used a model of 300 basis points up or down. That was the threshold of the shock test. The change certainly makes sense in that not much chance of rates going down by 300 basis points.

I would like to see the US Treasury shock testing for 400 basis points! By the way we are a very high quality bank with no problems so the request was not about us. We sort of live in the good old days of banking with excess capital and a 50% loan to deposit ratio with no wholesale funding. I am a strong liquidity guy as well.

I asked ABO for a contact at the FDIC so I can raise my concerns directly. I do not have a response on that yet.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Digital painting tutorial Character design Dark Mage

Digital painting tutorial Character design Dark Mage. Here is another character design I just got done last week. I post it along with the previous post. But then I realize the post was way too long so I split them. Now she has her own home instead of rooming with those Terminators and Skynet.


This character is conceptualize around the idea of the dark side magic user or Mage.  The first time I heard about a Mage was probably way back when I was still play Final Fantasy on Playstation.  Final Fantasy 7 is probably my most favorite.
The Black Mage is the offensive magic caster. While the Black Mage has weak physical combat skills and has lower strength out of any character class, she is capable of inflicting negative status effects and causing great damage to the enemy with his Black Magic.


In this piece, I use a lot of custom brushes and hardly use any default Photoshop brushes.  Though the principle remains the same, focus on the correct shape or form and value (light and dark).  One great advantage that most custom brushes has over the default round in Photoshop or Gimp is the way they can create edges.  Most custom brushes has texture which makes it easier for us to paint cooler looking edges.


Other than this step by step digital painting process tutorial, you might also want to check out values tonal study female figure, and more basic how to draw video and step by step go watch How to draw lesson girl face, How to draw person head basic. Anddigital painting tutorial rogue samurai female.


If you are looking for portrait rendering and/or painting instruction go to Draw girl's face how to lesson video and step by step and learn how to draw face, woman.  Or simply click on the thumbnails on the very top of this blog.  A lot of people ask me about female character sheet or proportion sheet. You can check out female model sheet or female figure study woman body proportion sheet.  

Here is  Dark Mage character design

Also step by step digital painting process below

Below is what I listen to  while I was painting this, and one of them FREE download from Amazon. Click fast forward for the next song. 










Here is a final version:

Here is a bigger image download: Fantasy Art Dark Mage 


CHECK OUT our full length PREMIUM video tutorials

USA Incorporated - a Look at the Grim Financial Situation of the USA

Inquiring minds are digging deep into a 266 page PDF called USA Inc. a basic summary of America's financial statements.

It is loaded with stunning graphs and charts on Social Security, Medicare, Medicaid, TARP Bailouts, Fannie Mae and Freddie Mac, military spending, tax revenues, and various projections. Here are a few images, but please give the document a closer look when you have a few moments.

Click on any chart to see a sharper image.

Cash Flow



Expenses at a Glance



Unfunded Liabilities



Federal Spending as Percent of GDP

Note this mess started with the creation of the Fed



Growth in Entitlement Spending



Take a step back, and imagine what the founding fathers would think if they saw how our country�s finances have changed. From 1790 to 1930, government spending on average accounted for just 3% of American GDP. Today, government spending absorbs closer to 24% of GDP.

Spending + Interest vs. Revenues



By 2025, entitlements plus net interest payments will absorb all � yes, all � of USA Inc.'s revenue, per CBO.

Less than 15 years from now, in other words, USA Inc. � based on current forecasts for revenue and expenses - would have nothing left over to spend on defense, education, infrastructure, and R&D, which today account for only 32% of USA Inc. spending, down from 69% forty years ago.

This critical juncture is getting ever closer. Just ten years ago, the CBO thought federal revenue would support entitlement spending and interest payments until 2060 � 35 years beyond its current projection.

To 25 Countries in Defense Spending



Entitlement Spending by Household



Medicaid Underfunding



When Medicaid was created in 1965 to provide health insurance to low income Americans, 1 in 50 Americans received Medicaid, now 1 in 6 Americans receives Medicaid.

Healthcare Spending



Social Security Workers vs. Retirees



Social Security Dependents



GSE, Fannie Mae, Freddie Mac Expansion



If that is not a shocking state of affairs, what is? There are lot more charts and graphs in the PDF.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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The day of terminator is near?

The day of terminator is near? I love robots, even more so giant robots since I was a little kid. Too bad I didn't end up being a Robotics engineer. Well, just the thought of that would be really weird. Anyway, I end up design characters and creatures for video games instead of a real robot.  I read WSJ about US military is ordering more robots this morning.  So I thought, we might very close to the day of "Skynet" if we put all of these together.  Or are we there?


Anyway, this post is not about me. It is about us and where we are heading with our robotic technology. Recently there is "Watson", a super computer from IBM on Jeopardy. Watson seems to represent a giant leap forward in the field of natural-language processing�the ability to understand and respond to everyday English. It's not a surprise to me that IBM's Watson super computer beat 2 of the greatest Jeopardy champs (humans) in three rounds of head to head action. What do we expect? Humans will win in memory contest over a computer? But anyway, that was impressive.

Here is WATSON

Other than  the awesomeness of Watson, there are others.  They might not be as smart, but they are the stepping stone to the T-days.  Meet BIG DOG, BigDog is the alpha male of the Boston Dynamics robots. It is a rough-terrain robot that walks, runs, climbs and carries heavy loads. BigDog is powered by an engine that drives a hydraulic actuation system.
Below is the Big Dog video:


Other than big dog, now US military also commission Boston Dynamics, to develop two new robots: one will be a super fast quadruped called Cheetah, the other is a beautifully intricate, freakishly scary full-size humanoid called Atlas.   Having seen all these, I am hopeful that I will get to see a fully function giant robot in my life time.  Images are below.

"Cheetah" 

"Atlas" or T-800?

Whao!

Today's archidose #479

016 sm, originally uploaded by synecdoche desgn studio.

"Wood Edges" installation by Lisa Sauve and Adam Smith, of Synecdoche, and Brad Cooper. The installation is from the Fall 2010 Material Fringe class at the A. Alfred Taubman College of Architecture and Urban Planning, University of Michigan, done under lecturers Adam Fure and Ellie Abrons. Many more photos can be found in synecdoche design studio's flickr set on the project, and more information can be found at Architizer.

To contribute your Flickr images for consideration, just:

:: Join and add photos to the archidose pool, and/or
:: Tag your photos archidose

Oil Prices are Double-Edged Sword; Peak Everything?

Jeff Rubin, former Chief Economist at CIBC World Markets for twenty years, explains Soaring Oil Prices A Double-Edged Sword in the Middle East.

Why is the Arab world convulsing with social and political unrest when triple digit oil prices should be bringing enormous wealth to the region? The answer may be that the link between energy inputs and food prices suddenly makes soaring oil prices a double-edged sword in the world�s largest food importing region.

Egyptians are about to find out that it is a lot easier to eradicate your local dictator than feeding your population. The crush of poverty is felt under the weight of a population of 80 million people who live in a country where average annual rainfall is less than two inches and where only 3% of the land is arable. Aside from a narrow strip along the life-sustaining Nile River, Egypt is basically an inhospitable desert.

Yet the population of Egypt has tripled to 80 million today from 27 million in the early 1960s. While the birth rate for an average Egyptian woman has fallen from six children to just over three, it still fuels more than 2% annual growth in the population. At this pace, Egypt�s population will double to 160 million by 2050.

But the country is already importing 40% of its food supply and 60% of its grain. Even a brutally repressive regime like Hosni Mubarak�s still spent 7% of the country�s GDP on food and energy subsidies. Can a replacement regime afford to spend more?

Not likely, particularly when the country�s oil production peaked in 1996 and has subsequently declined by 30%. Oil exports are down 50% thanks to strong demand for its subsidized fuel.

The problem facing Arab countries today is higher oil prices feed directly into higher food prices. While oil may be massively subsidized in the Middle East, it�s not in major grain exporting countries such as Canada, Russia and Australia that Arab nations increasingly count on for their food supply.

From the diesel fuel that runs tractors and combines to the power needed to pump water through irrigation systems, modern agriculture is one of the most energy intensive industries. And the Middle East is the largest food importing region of the world. As the price of oil goes up, so does the price of food imports.

Egypt�s problems feeding runaway population growth is not unique to the region.. They are in evidence throughout the Middle East given the masses now out in the streets in Libya, Algeria, Yemen, Jordan and Bahrain demanding regime change. Could Saudi Arabia be next?

Population growth in the Middle East is rapidly outstripping the carrying capacity of the land. Democratic reform may be what is on the protestors� lips but demographic reform is at the heart of the region�s problems.

Oil and the End of Globalization

Jeff Rubin left his position at CIBC World Markets to write a book and promote his ideas.

I have not yet read Why Your World Is About To Get A Whole Lot Smaller , so I cannot specifically endorse it.

However, I can say that understanding the implications of peak oil and booming population growth in the Mid-East, India, and Asia, in conjunction with aging demographics in the Western economies and Japan are crucial to understanding major investment themes and world economic growth assumptions.

I have long held the position that perpetual 7 -10% growth assumptions for China are impossible because of peak oil constraints.

Yet China bulls persist. They see the growth, but not the fraud or the malinvestment it takes for China to achieve those growth estimates.
I talked about fraud in China as well as unsustainable growth on a number of occasions.

Here are a few links.

• Speculation, Investment Scandals, Fraud, and China's Hard Landing; Miracle of Chinese High-Speed Rail will be Reduced to Dust; Peak Oil Doomsday Clock


• Implosion of the China "Fabric City" Frenzy


• 10 Signs of Speculative Mania in China


• Email from a Chinese on China's Real Estate Bubble

Peak Everything?

My friend BC writes ...

If one wants to identify a single underlying causal factor for "Peak Everything" and the global intractable structural effects flowing from it, population overshoot is it. However, population growth is the last taboo subject no one dares discuss because, frankly, there is only one highly unpalatable solution.

Peak Oil is increasingly a hot topic of late (the point of mass-social recognition is nearing, or here). Yet, peak oil exports from oil-producing countries is the next milestone to await, as these countries now face exploding populations of hungry young men in need of employment from domestic investment and efforts to prevent per capita output from collapsing.

Net energy returns per capita are already collapsing for many or most of these countries at or near peak oil production, with the oil they produce needed to supply not only the US and EU but the runaway growth of demand in China-Asia and increasingly their own populations.

In Egypt, per capita oil production has collapsed nearly 50% since '96, and 33% since 2000. A similar situation occurred in the US, except it took 25 years in the US compared to Egypt's 14.

At the current trend, assuming no increasing rate of deceleration, by '16-'22 Egypt's per capita oil production will have fallen 60-70%, which puts the country on course for certain collapse.

What we are seeing today with the uprising and overthrow of the Egyptian government is just the first phase of a collapse that will likely be replicated throughout North Africa, the Mid-East, Central Asia, and eventually to parts of India, China, Indonesia, and elsewhere in the world where population overshoot is now extreme and net energy per capita is falling or collapsing.

A little known fact is that Mexico's oil production is down 25-30% from the peak in '03-'04, which is an average rate of decline of 5.4%/yr. and 6.5%/yr. per capita. This translates into a 33% per capita decline in oil production in just 6 years, a rate of decline that actually exceeds Egypt's per capita rate of decline of oil production.

This rate of decline of production has cut Mexico's exports roughly by 35% since the export peak. At the trend rate of oil production and domestic consumption, Mexico could become a net oil importer as soon as '15-'18. And Mexico is the second-largest supplier of imported oil to the US behind Canada.

Consider, then, where per capita oil production, net energy, and GDP are headed in Mexico, and what it implies for countries of Central and parts of South America, as well as potential increasing immigration to the US from Mexico.

This is grim information to ponder, which should be no surprise why few want to address it.

Those are sobering thoughts indeed. History suggests massive conflicts if the above analysis is anywhere close to being correct.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Collective Bargaining Bill Heads for Passage in Ohio

A collective bargaining bill is headed for vote today in Ohio. Unlike the bill in Wisconsin, the Ohio proposal will cover police and fire workers. Unfortunately it has been watered down a bit to gain needed support from several Republicans.

The New York Times reports Ohio Set to Vote on Ending Public Union Rights

The Ohio Senate is expected to consider a revised version of a bill to end collective bargaining on Tuesday, and union members gathering outside the Statehouse here Tuesday morning said they were bracing for the worst.

Unlike similar legislation in Wisconsin, which exempts police officers and firefighters, the Ohio bill includes them � and is controversial for that reason.

But Republicans say the legislation that seeks to eliminate long-held union prerogatives are part of broader austerity measures intended to reduce crippling budget deficits, of which public employee pensions have played a growing role.

In Wisconsin, the political divide was expected to only widen on Tuesday as Gov. Scott Walker prepared to announce his budget proposal, which is expected to cut $1 billion in aid to local government over two years.

By early Tuesday, critics of Mr. Walker were already gathering, as they have for two weeks, outside the Capitol. Security was tight, and only some people were allowed to enter. Mr. Walker, a Republican whose proposal to cut collective bargaining rights for public workers and increase their pension and health care contributions has set off a firestorm here, will present his budget in the state Assembly chambers. Some Democrats were already predicting that the cuts in his new budget might lead to still more protests, more disagreement, more of a split in this state�s Republican-dominated Capitol.

In his two-week-long standoff with Democrats and state employee unions, Mr. Walker has pressured 14 Democratic state senators, who have fled the state, to return to deal with what he says are important fiscal deadlines that would otherwise pass this week and harm the state.

But the Democrats are staying put, in Illinois, to avoid a quorum and thus stall a proposal by Mr. Walker that would strip public employee unions of nearly all their collective bargaining powers, allow publicly owned power plants to be sold with what critics say is little guarantee of fair value, and give the governor�s appointees what public health advocates describe as expansive new powers to limit health care coverage for lower-income residents.

The NYT article failed to point out the details or recent compromises that have watered down the bill.

As originally proposed the bill effectively ended all collective bargaining rights for all public unions. Unfortunately that will not pass. A recent revision to gain key votes will allow bargaining for wages only, not benefits. It also places a no-strike clause.

This is not perfect. Perfect is getting rid of public unions entirely. However, it is a good start.

In Wisconsin, Governor Walker will begin laying off workers unless legislators playing hooky in Illinois return to Wisconsin to vote. It is good to see governor Walker hold firm.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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