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Is Chicago The Next Detroit?

Chicago is considering one last throw of the dice.

By Murray Gunn


August 28, 2018 ( Newswire) “Now this could only happen to a guy like me,” sang Frank Sinatra in the opening line of his tribute to Chicago, My Kind of Town. Perhaps Mayor Rahm Emmanuel wakes up every morning thinking the same thing but, rather, in a cloud of melancholy given the dire straits that the city finds itself. City of Chicago pension plans face massive deficits and are only 27% funded. To anyone with half an inkling as to how financial market growth works, that situation is simply unsustainable. Yet city officials continue to kick the can down the (pot-holed) road. The latest proposed scheme is to borrow $10 billion via a pension obligation bond in order to plug some of the $28 billion shortfall. If the issuance is endorsed (a decision is pending), it will be the biggest pension obligation bond ever issued by a U.S. city. The proposal involves linking the bond specifically to sales tax revenues in order to achieve a higher rating and subsequently lower borrowing cost than with general obligation bonds. This, critics say, locks Chicago residents into debt more deeply.

However, it is one of the main reasons touted by the scheme's supporters that raised our eyebrows as socionomists. The thinking is that, by borrowing at around an expected 5.25%, the city will be able to reap a substantial margin by investing the funds (presumably in the stock market). Notwithstanding the fact that borrowing to speculate in the market is a rather risky (or desperate) strategy, the inherent belief that stock market returns seen over the past nine years will linearly continue is classically symptomatic of a peak in social mood.

The state of Illinois as a whole remains at risk of downgrade to junk bond status and it, too, is planning fresh borrowing. As the chart below shows, the 5-year interest rate spread over the highest quality municipal bonds is far below the crisis levels of 2017, but finding solid support at the 2016 reaction low is a sign that structural weakness in finance remains.

The Wall Street Journal notes that previous cities to issue pension obligation bonds include Detroit, Stockton and San Bernardino. They all subsequently declared bankruptcy. Chicago is, Sinatra sang, “one town that won't let you down.” Investors in its bonds will be praying that is true.

About Murray Gunn

Murray Gunn is Head of Research for Elliott Wave International's Global Market Perspective ( After earning his Master of Arts (Honors) degree in Economics from the University of Dundee in Scotland in 1991, Gunn went into fund management. He quickly realized that textbook descriptions don't apply to real-world markets, which in turn led him to technical analysis and the Elliott Wave Principle. He worked as a fund manager in global bonds, currencies and stocks, including long posts at Standard Life Investments and a five-year stint in the Middle East at the Abu Dhabi Investment Authority. Gunn then joined HSBC as Head of Technical Analysis. He has served on the board of the Society of Technical Analysts and delivered lectures on the Elliott Wave Principle to students at The London School of Economics, Queen Mary University and Kings College London. You can read Gunn's commentary in Elliott Wave International's Global Market Perspective, Interest Rates and Currency Pro Services, and on

About Elliott Wave International

Elliott Wave International is the largest independent technical analysis firm in the world. Its award-winning publications provide useful insights and engaging commentary on all major financial asset classes and indexes around the globe. EWI's unique perspective on market behaviour and cultural trends sets it apart from other financial publications.

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