Stench from Chicago so Bad, Fitch Finally Smells It At long last, the stench from Chicago is so strong that Fitch can finally smell it. Fitch just now downgraded Chicago Board of Education General Obligation bonds to junk status. Fitch and the S&P were holdouts because there's money to be made by purposely pretending a manure factory is a rose garden. MarketWatch reports Fitch Downgrades Chicago Board of Ed (IL) ULTGOs to 'BB+'. Fitch Ratings has downgraded the Chicago Board of Education, IL's (the board) approximately $6.1 billion of unlimited tax general obligation (ULTGO) bonds to 'BB+' from 'BBB-'. The rating has been placed on Negative Watch. Rating Drivers Continued financial stress Dependency on borrowing Cash flow drain Pension liability weakness Poor labor history Unfavorable debt position Structural imbalances Mounting fixed costs Limited options to address large budgetary gaps Growing gap for fiscal year 2016 Liquidity concerns Negative cash balances Swap termination triggers Fitch can finally smell enough stench from the above rating drivers to label the bonds as junk. The "J" Word The downgrade from BBB- to BB+ is a downgrade to a "non-investment" rating, commonly labeled "junk". Curiously, MarketWatch just could not bear the say the "J-Word". MarketWatch reports "Fitch would downgrade the rating further if there is not clear and meaningful progress over the next several months in reducing the large structural imbalance." I think we can count on that. Deep Into Junk On May 20, I spoke with Sean Egan at the rating agency Egan-Jones how he would rate these bonds. His reply was "Deep Into Junk". For details, please see CNBC's Santelli and Mish Discuss Municipal Bonds; Egan-Jones on Chicago; S&P Blames Moody's; Message to Bondholders. Rate Shop Whores S&P noses are still immune to the stench. On July 2, the S&P cut Chicago Board of Education's GO rating to 'BBB', still investment grade. And on July 8, the S&P Lowered Chicago GO Bonds one notch to "BBB-Plus", also investment grade. When the smell hits the collective noses at the S&P remains to be seen, but I suspect quickly. Rate shop whores simply can never be first with downgrades. For a discussion of how the SEC is to blame for the current environment of Fantsayland bond ratings please see Rate Shopping Whores and Chicago's Bond Rating. Solutions Instead of tackling the underlying problems, Chicago Mayor Rahm Emanuel nickels and dimes businesses to death, further makes Chicago an uncompetitive place to do business, and threatens massive property tax hikes. Emanuel also expects $500 million from the state even though the state budget (which Governor Bruce Rauner correctly refuses to sign) is $4 billion in the hole. For details and recommended solutions, please see Santelli Exchange with Mish: Public Debt, Taxation, Legacy Issues. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
These things reverse fast with a real estate recovery. We have very high RE taxes and most people are still hurting from the crash.
Actually, Things are doing well in the City. Several neighborhoods that were ethnic ghettos are becoming gentrified. I recently moved into a Mexican part of town, Pilsen neighborhood. I have an affinity for their culture and never hesitated to roll with my chollo friends in the 90s. Everyday, I see these suburban "white folk" walking around like they are touring Europe or looking to buy the place up. It's going to happen. Wicker park is already Yuppieville and that place has a horrible location in terms of public transportation and road logistics. What more for an area that has 50ms ping times (Comcast) to 350 E Cermak and a Major University? City planners have made some masterstrokes, imho. Suburbs...nothing changes much. It will be a slow process.
We're in the seventh year of ZIRP..."moderate" price increases at record low rates does not portend well for growth going forward...
No contesting the business cycle. I am actually expecting an echo-crash. Nonetheless, direct investment in real estate should be viewed over a much longer cycle. You start talking about the Kondratieff cycle, maybe I will be worried.