Governor Chafee invokes the phrase of "common sense" in criticizing those who question his analysis, thus suggesting hes made no rigorous analysis himself. His advisers report is lacking connection to the real world.
The real world is the open market place.The real world has a habit of making prognosticators humble.The Chafee/Licht SJ Advisor report and the authors know that the assumptions used and predictions in the report will likely turn out to be totally wrong and/or foolish. As is often the case, in Counter-factual theorizing, or "What if" analysis multiple assumptions compound to produce a nearly worthless conclusion. We may never know just how bad this analysis is, because the only way to know for sure is for us to default on 38 studio bonds and then have the rating agencies rate RI General obligation debt "junk" with the 8 to 12 notch downgrades predicted.I f just those two things happen 1) default 2) 12 notch downgrade , I believe their assumptions will be proven inaccurate within 30 to 60 days.The market will once again humble the authors and the ratings agencies. For the ratings agencies it will not be the first time . Their history is littered with bad callls and bad analysis. After all they rated 38 studios bonds AA and the company went bankrupt in 15 months.
The reason I find the report speculative and unconvincing is for their analysis and warnings to be accurate the market has to actually price Rhode Island debt as junk and persist for a long period of time. As I've said many times "rating RI General Obligation Debt" is a very speculative assumption that the markets will in their own way make S&P and Moody's and Mr Chafee and the this paid for report look foolish.
Want some real world evidence of the market listen to agencies downgrades? The market ignores ratings fairly regularly. As a real time example lets look at New Jersey recently.Below is chart reflecting the performance in the real market of an Eaton Vance fund composed only of New Jersey municipal Bonds. Does this look like there were
There has been a significant amount of ratings activity lately in New Jersey. Yesterday Moodys cut New Jerseys ratings to A1 matching downgrades in April by both Fitch and S &P. Chafees hand picked report from SJ advisors suggest that yields go up when ratings go down. Thats often true but not always. In this case "yields went down" the SJ Advisors report doesn't even allow for such a possibility. It doesnt't attempt to quantify it. Instead it applies academia and models that are not altogther crazy to provide "scary" predictions but certainly there are enough flaws in methodolgy and a real lack of Market experience , to allow me to reject their findings as unconvincing.
You can see from the "real world " above, NJ bond prices have completely ignored the ratings agencies cuts and yields have gone down. They have done exactly the opposite of what the authors of this report would have predicted. So really how can we take this report seriously?
New Jersey Rating Cut by Moody’s as Christie Pledges FixMay 13, 2014 11:24 PM ET