Back in February, U.S. Treasury counselor Antonio Weiss gave a dire warning about Puerto Rico.

Weiss, speaking to the House Natural Resources Committee in a hearing about the island's fiscal crisis, outlined the scale of the problems the U.S. territory faces.
"As the cascading defaults and litigation unfold, there is real risk of another lost decade, this one more damaging than the last," Weiss said.

"Cascading defaults" is a term that really catches my attention. Especially when we are talking about the largest municipal bond default in U.S. history.
And yet the reality can be even worse than that.

As the Puerto Rican government embraces default as a way of dealing with a $422 million debt payment due Monday, a lot of investors and financial advisers might be surprised at how exposed they are to the island country's financial woes.
Even investors in single-state municipal bond funds are likely to have some exposure to the heavily indebted economy.

In other words, if you have muni bonds in your 401k, even if you never asked for Puerto Rico bonds, you are probably taking a serious losses right now.

When you count up all this, plus Atlantic City barely missing default, and Chicago's imminent default, you would be justified in thinking that the muni bond market would be in a state of panic right now. Right?

Right? Wrong.

You’d never know from looking at the $3.7 trillion municipal market that the largest restructuring in its history is unfolding in Puerto Rico.
Individuals last week poured more money into tax-exempt mutual funds than at any other time this year, just days ahead of the commonwealth’s well-anticipated default on $422 million of Government Development Bank debt. Munis have gained every month this year, only the second time that’s happened since 1999. And on the U.S. mainland, prospects are brightening: S&P Global Ratings has upgraded more localities than it has lowered for 13 straight quarters, the longest streak since 2001.

It turns out the muni market couldn't care less.

Individuals have added assets to muni funds for 30 straight weeks dating back to October, the longest stretch since March 2010, Lipper US Fund Flows data show. The $1.2 billion inflow in the week through April 27 was the largest of 2016, and came after Moody’s Investors Service warned that a Puerto Rico default was inevitable.

Much like the way the stock market keeps going up despite three quarters of falling corporate earnings...

This would mark the S&P 500’s third consecutive quarter of declining earnings—the longest streak since the financial crisis. Revenues will have declined for five quarters in a row, outstripping even the four-quarter slide in 2008 and 2009.

and rising corporate debt, and the markets have shrugged off basic fundamentals yet again.

According to Andrew Lapthorne of Société Générale, the reality is that “US corporates appear to be spending way too much (over 35 per cent more than their gross operating cash flow, the biggest deficit in over 20 years of data) and are using debt issuance to make up the difference”.

There is something else going on here that I haven't figured out yet, but for now it means there will be no overall market danger.