Sept 24. Illinois/Greece
–Slight drop in yields Friday. Eurodollar calendar spreads are threatening new lows, though in compressed ranges. For example, EDH14/EDH15 settled 19.5, down 0.5 bp, but has only been in a range of 18.5 to 25 for the past month.
–Chicago Fed Natl activity Index today. Has been negative for the past 5 months, last 2 readings -0.13 and -0.34. Dallas Fed expected to improve to +0.5 from -1.6.
–The epic battle between fiscal austerity and monetary stimulus continues around the world. In the US it is shaping up as the “Fiscal Cliff” vs “QE MBS”. In the local example, it is the City of Chicago, State of Illinois. Chicago teachers just rec’d a raise of 16-17% over 4 years. The mayor of Chicago doesn’t know how to fund the pay raise. A couple of years ago the State raised the income tax from 3% to 5%. The state continues to run awash in red ink with unpaid bills of $8 billion. But here’s an interesting strategy the State may pursue (zerohedge quoting Wall St Journal): “Governor Pat Quinn’s 2012 budget proposal already floated the idea of a federal guarantee of its pension debt. …Illinois now has some $8 billion in current debts outstanding and taxpayers are on the hook for more than $200 billion in unfunded retirement costs for government workers.” Is the national government going to guarantee the pensions of a “rogue state”? Will new taxes and fees simply drive more people to neighboring states? Additionally, The Illinois Teachers Pension Fund has cut its investment target to 8% from 8.5% (necessitating more taxes). There is simply no way this fund can make 8% in a world of 1.75% ten yr yield, though I have read several accounts that they have moved far out onto the risk spectrum to boost yields. It’s not just Europe…
