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A Muni-Bond Bull Gets the Final Word, Sort of…


(Our good friend Doug B., The World’s Smartest Financial Advisor as far as we’re concerned, is still bullish as all get-out on muni bonds, notwithstanding the swipe we took at them last week in a commentary entitled “Muni Bond Yields Are Pumped for a Reason.” Doug says a perfect storm of bad news brought bond prices down to levels where an investor would have to have been crazy to pass them up. He also thinks fears of widespread defaults by strapped cities are overblown. For some outside-of-the-box thinking, read his aggressively contrarian commentary below — and then, dear forum readers, if you disagree, don’t pull your punches.  Oh, and one more thing: Before you start reading, click here to sign up for January 18’s free demonstration, “A Hidden Pivot Analysis of Two Promising Stocks for 2011.)

“I want to clarify a few things for you and your readers about my Muni Bond Buy. First, I am buying garden variety leveraged closed-end muni funds, managed mostly by Blackrock, Invesco/VanKampen and Nuveen. The funds contain mostly (85% plus) investment grade long term issues and the 7.5% yields are a function of leverage and modest (4-6%) discounts to NAV. They contain everything from GOs, Revs, Escrowed, tobacco, hospital, etc. I am placing some measure of confidence on the credit analysis capabilities of the managers. But the motivation for the purchase was not some big macro optimism on municipal balance sheet repair. It was because these funds got crushed overnight in November when it became clear that a flood of new supply was going to be crammed into year-end due to the likelihood that the Build America Bond Program would not be renewed for 2011 following the Republican landslide. The specter of huge supply ran straight into the most negative sentiment for bonds in years. Along with the price decline, the conventional wisdom that problems with Municipal Balance Sheets, previously unknown by the investing public and their advisors, suddenly appeared and were unsolvable. This is just like what happened into year-end 2008, but of lesser magnitude. In the first few months of 2009, the funds appreciated 40% – 50% as the supply/demand imbalance moderated. In late 2008, we bought them at 12% discounts and 11% yields.

Does it have to end this way for strapped cities?

“Needless to say, concerns about municipal default are not new, just popular among an angry society. I admit that I think that we have reached a secular inflection point in the great credit expansion/bubble that began in 1938 and ended in 2007. I expect that households and government alike will not drive the Thunderbird off the cliff into the Banana Republic. The behavioral and political changes have arrived with a bullet, but, to quote Bob Farrell, “in the early stages of a new secular paradigm, most market participants are playing by the old rules, while the markets are adapting to a new set of rules.” It seems clear that Municipal Government has killed the golden goose. As has the Federal Government. The new set of rules is Chris Christie and the Tea Party. Solutions will be found and they will be deflationary. Lay off government employees and normalize the compensation of the remaining ones to the private sector. Terminate defined benefit plans and replace them with 401Ks like the rest of us pay for. Impose payroll taxes and out of pocket costs for health care premiums. I pay them. Why shouldn’t the firemen who are left? We know it’s coming, but we can’t believe it will prevent Armageddon. It will. There is nothing linear in the universe.

Harvard Reallocated

“It reminds me of trying to explain in mid-2008 why oil at $140 was headed to $30. I must be an idiot. You were there. Nobody could get past the idea that “we’re not crushing any more dinosaurs, and everyone in China is going to the drive-in.” Give me a break. OPEC opened the valve, Harvard Endowment reallocated and some guys at Devon figured out directional drilling in natural gas-laden shale. We’ll see $25 per barrel before it’s over. By the way, how is oil priced in gold these days?  Back in 2000 at the lows, I think it was 10 barrels per ounce. Now it is about 14. And oil has rebounded from $33 to $90 in its “b” wave. Food for thought.

“In a recent interview on 60 Minutes, Wall Street analyst Meredith Whitney recently asserted that we will soon see hundreds of municipal defaults representing hundreds of billions of dollars. You have to buy that. Even if only for the next 12 months. How long is your investment horizon? The pension and healthcare unfunded liabilities are a long-term budget issue. The vast majority of Municipal Bonds are supported by specific revenue streams and are senior to wages, not to mention pension payments. I’ve heard all the tortured arguments about how legal constructs were made to be broken, but what’s the point? You don’t trash the ability to participate in the financial markets because you need to avoid budget agony. 7.5% tax-free from Government Bonds. What a lousy value! Gold at $1400 (with storage costs) up from $675 in 2008. Now that’s a safe way to make money! I’m not saying that to piss you guys off. Back to the investment horizon. I can see $3000 gold. But probably $1100 first. I don’t know, but it’s overbought and sentiment is wildly bullish. The recovery bulls like it because of inflation and continuing emerging market demand. The fiscal bears love it as a currency. You married your wife. Everything else trades. My friends who love gold are afraid to be out. Set yourself free. By the way, full disclosure: I was up to a whopping 15% position in gold and sold it below $1200 in November 2009. But it does look like a double top in October-November and it is losing momentum. If I was smart enough to have ALL of my money in it until today, I would sell a little and buy some Munis.”

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Please do not ask trading questions!

  • Rich January 11, 2011, 7:10 pm

    Silver hitting new intraday highs.
    Bot some BRNC under 7 also, targetingh 17.75…

    • warren January 11, 2011, 9:02 pm

      From a fellow Albertan …Hooray!

  • Robert January 11, 2011, 5:31 am


    You people want the ultimate contrarian indicator on the Municipal Bond Market?

    Here it is, straight from the mouth of Benjamin S. Bernanke just last week:

    “We have no expectation of intention to get involved in state and local finance”

    When asked if there could be a problem in muni land he responded:

    “We don’t at this point see anything of that magnitude happening.”

    “State and local governments have the tools to deal with their fiscal problems and debt”

    “The municipal bond market currently seems to be functioning reasonably well”

    – So there you have it- The Municipal Bond Market is is SERIOUS trouble according to the Federal Reserve Chairman.


  • Benjamin January 11, 2011, 4:56 am

    Ah, the hailstorm of comments when I decided to call it a day. But I _knew_ they would come! Thanks for weighing in, folks.

    Some of these I’m going to have read more closely, but so far Mercurious has the most telling outlook. A community doing okay, it seems, but they don’t have the taxes to cover all their obligations. Well. ‘Nuff said. On the other hand…

    One story I heard about today was the city of Chicago’s plan to add some 200 more police to their already considerable force. This they’ve been doing since the whole recession began, even though crime hasn’t been this low in 60 years, according to another story I heard a couple weeks ago. Go figure. I’ve no idea where they’ll be getting the money for that. Certainly not through liquor and tobacco taxes, as many Chicagoans head down here to NW Indiana to buy those things in bulk, what with our lower sales tax and all. They want to know they always have budget problems, but the answer is right in front of them… TOO MUCH! Too much government, too many taxes, too many people who don’t really want to pay for it.

    Anyway, I’m wondering if the simple fact that taxes can be raised ad infinitum in word, if many cities and states don’t figure they can afford to borrow more just because they can raise taxes, regardless of their ability to collect them all.

    So with that, I’ve a hunch that this won’t be a clear plummet down. Lies have to be discovered and admited, which cities like Chicago, being what they are, holding out until the very last possible minute. It’s just that some municipalities are more honest than others, like the one Mercurious lives in. But in the end… Cut, cut, cut, the same old Indian-giving it’s always been.

    This is all so very telling. As many of you know if you read my posts here at Rick’s, I believe that taxation itself is the problem, and that individuals ultimately decide what they do and don’t want, and pay for it or not. Government is in reality the product of the individual, not laws and other top-down nonsense. Any other way is brute force and/or lies that cannot stand the test of time, and so I think what we’re seeing here is the invisible hand proving that reality.

    Anyway, seems to me that Doug made a call that, while largely unpopular here, may not be so foolish (in and of itself). I think he’s right about the pension to 401k shift, for example. And that implies the possibilities I mentioned earlier. Taxes slashes, obligations cut, investment and employment pick up.

    Though I still can’t say for certain, I think he’s picked up on the fact that money (rather than credit) will pretty much be handed out in increasing amounts. If he just hadn’t sold his gold… Ouch. It’s like the time Gordon Brown sold half of England’s gold, at the bottom!

  • ricecake January 11, 2011, 2:11 am

    The big Crash: “Does it have to end this way the strapped cities?”

    Some people must have and want to have the big loud crashing and smashing because they are betting on that and they want to get filthy rich over that.

    The vultures.

    I have receiving tones of apocalyptic news letters daily. These letters are warning about how the Fed, the U.S. government, Wall Street destroying us all. But the writers themselves have the solution to save me if I subscribe their letters. They promise to make me a millionaire out of the impending meltdown depression if I following their advices.

    You can draw your own conclusion.

    I suspect the many rich Republican insiders are already betting on the crash side. The Congress will do that.

    • SDavid January 11, 2011, 3:20 am

      And each day there are letters teling us how to get rich off the “impending doom.”

      Every day, without failure, I log in and see on the left-hand side of the “Rick’s Pick’s” column …..”Market Crash on such-and-such a date ….. Technical indicators suggest market collapse may begin by the end of the month.”

      In March last year, the crash was going to happen by the end of March. Technical indicators told these guys so.

      That didn’t work, so in April, the crash was going to happen by the end of April. Technical indicators told these guys so.

      In May ….. June … July ….. August …. all the way to present day.

      Either these guys are brutal technical analysts or are trying to make money off any and all who take their advice, or both.

      Time will tell how right or wrong Doug B is …. all I know is he’s put it all out there for you.

      And you’d likely have made a whole lot more money in the last year listening to Doug B than some site that preaches the same updated gloom and doom market crash “analysis” each and every month. They couldn’t hit a bull in the arse with a handful of wheat.


      Let me note for the record that those pronouncements of doom you look for each day are paid advertisements that have been accepted by the site but which have nothing to do with my forecasts or trading recommendations. RA

    • Larry D January 11, 2011, 5:20 pm


      which way do you think George Soros is betting these days?

  • C.C. January 11, 2011, 12:29 am

    “The new set of rules is Chris Christie and the Tea Party. Solutions will be found and they will be deflationary. Lay off government employees and normalize the compensation of the remaining ones to the private sector.”

    You could put a little caveat in there that reads:

    ‘Until special interest political pain sets in’

    To see how party-hearty the Tea-pot party is (I’m referring of course, to the Co-opted tea party, not the original article), look no further than to the upcoming debt-ceiling limit decision, or the cutesy photos of Boner and Pelosi upon the gavel changing hands.

    Any tea-partying by the new Congress will be a pick & choose, smorgasbord affair – piss off a few, placate a few others, business as usual.

  • alfonso landa January 10, 2011, 10:36 pm

    We don’t need any more guest articles from Doug. What we need are many more from both Bozzy and Bc. They are both geniuses. I am going to read and re-read their posts until it sinks into my head why all of Doug’s thinking is specious.

    • Rick Ackerman January 10, 2011, 11:29 pm

      I have yet to meet another financial advisor who has been right as often as Doug or who has done nearly as well making money consistently for his clients in good times and bad, in the most challenging investment climate since the 1930s.

      That said, I am not exactly rushing to sell my Maple Leafs to buy muni bonds. RA

  • jeff kahn January 10, 2011, 9:23 pm

    In fact, if I were to guess at the short term impetus for some sort of major collapse it would be a high profile muni default.

  • jeff kahn January 10, 2011, 9:17 pm

    If you get one big muni default you’ll see a stampede out of munis regardless of guaranteed revenue streams.

  • market Ace January 10, 2011, 8:56 pm

    This guy is either long a lot of munis he needs to dump or dillusional. If I start selling my gold and buying munis I hope someone has me committed.

  • Susannah January 10, 2011, 8:36 pm

    For munis, one has to check out property tax payments as mentioned above. They are falling all across the country. People are walking away from homes where banks will not moderate the loans. Almost 25% of home mortgages are under water as of this moment.

    Banks can not moderate because their Pooling and Servicing Agreements for the loan pools prohibit any changes. Courts in the country are finally waking up to the fact that most foreclosures are and have been done by Servcing Companies who do not own the loans. See the Mass Supreme Court recent ruling against Wells Fargo as Servicer and USB as Trustee for a loan pool. B of A has been sued by the Nevada Attorney General for unlawful foreclosures etc. Entire neighborhoods are in disrepair due to the fact that once a bank forecloses, they do not keep up the property.

    Billions of dollars in county recording fees have been skirted by banks using Mortgage Electronic Registration Systems, a declared a nominee on over 60 million mortgages, to skirt the recording of sales of home loans. The idea conceived by large banks was that putting MERS on the loans kept them in ownership and so no county recordings were necessary. Court cases in CA and Nevada are pending on this. Investors in the loan pools are starting to sue the banks.

    Bottom line: The securitization of home loans is about to become a huge issue. Banks have cheated investors, governments and homeowners. There will be lawsuits breeding like rabbits by local governments, homeowners and investors against the banks that hold and service the mortgages in loan pools. We are talking $trillions here.

    In response, the US Treasury will continue to devalue the dollar. Some major banks will go under. I believe we are watching the beginning of the end of the banking/investment sector as we know it now. I am neither a gold bug nor a doomsday sayer. I am a Realtor and have been for 25 years. The situation out here in the real world is much worse than investment analysts care to believe. It’s “in,” to walk away from your home, a “take this house and shove it attitude.” Pretty soon it will be “in,” to be homeless and camping out with the best of equipment.

    Munis may be good for up to a year; after that, I believe it’s a whole new ball game.

  • Cam Fitzgerald January 10, 2011, 7:37 pm

    Thanks Doug,

    I have a much better idea now of what your Bond strategy is and what you are trying to achieve. I can see the opportunity in that light and from your perspective.

    I have been wondering about the future values of precious metals too incidentally. A pullback is long overdue. While I have been pumped up about PM’s this last year there is always that corner of worry in the back of mind that it has been too much, too fast.

    That does not usually bode well until a healthy correction materializes and settles the market back down and we get to see if the fundamentals are right or not. Silver in particular has had such a tremendous run that I took profits in anticipation of a near term reversal. The speculative nature of the explosive price increases to the upside surprised even me.

    Someone I know well said to me just a few days ago “you gotta get more silver,…it was up 70% this year”!!!

    My answer. Time to take cover, it was up 70% this year!!!

    • Jim N January 10, 2011, 9:19 pm

      Cam….i think in normal times with normal markets i would really agree with you on the “time to take Cover ” comment.

      In a normal market, speculators certainly enter, and then when the trade is done, or an exit is signalled they get out. What i am seeing in the Gold/Silver market run up is not that. Certainly there are some speculators that jump in and get out, but as far as i can see, more and more folks are getting on board and holding as they really see that our global economic situation is not “normal” . What is happening on the physical/paper G&S front is also an indication that this is not a normal market. I am intruigued to see even those directing the COMEX are starting to get it that all hell may break lose if they don’t do something about the games that have been played on their exhchange. How long have they been ignoring all this stuff till now?

      So i guess if G&S were just a speculative investment to get more Fiat in your wallet, then you could sell. Even then i wouldn’t as there seems to be no evidence of any kind of top to me.
      For me, i will quietly keep buying the dips and putting the physical away.

    • Cam Fitzgerald January 11, 2011, 2:39 am

      Great point Jim,

      I do incidentally think that the long term trend will stay intact, I am just concerned that we might see a sharp pullback at any time now. I am not much of a technical trader either,…it is just instincts and past experience. I have no doubts though that in the longer run that we are headed for both a Dow and Gold near 2500. That has been my contention for over a year now. Time will tell if I am right or not.

    • Rich January 11, 2011, 4:53 pm

      Silver opened strong today.
      We shall see if she follows through with SLW.
      AAPL also, despite selling on VZ news, now targeting 436:

  • Larry D January 10, 2011, 7:21 pm

    He’s got: High hopes.
    Pie in the sky hopes.

    “….Solutions will be found and they will be deflationary. Lay off government employees….Terminate defined benefit plans and replace them with 401Ks… Impose payroll taxes and out of pocket costs for health care premiums.”

    Layoffs of government workers will occur? Termination of defined benefit plans and replacement with 401K? Impose payroll taxes on health care premiums?

    Hell…have you not paid attention – that the tax deal that the President just signed REDUCES the social security tax on employees? And strikes occur when 401K plans are seriously considered to replace existing defined benefit plans.

    Solutions, if they are found, will be implemented AFTER the roof collapses, not while it is snowing.

    And we will see $25 gold before we ever see $25 oil.

  • Bc January 10, 2011, 6:55 pm

    There are two ways we can face the fact that we are not as wealthy as we thought we were.
    1. Everyone loaded with cash and no goods on the shelves. Aka hyperinflation.
    2. Everyone with zero cash and goods for sale at severe distress prices. This is debt deflation.
    Either way, in case 1. Munis pay off in monopoly money, and in case 2. they default big time. There is no paper investment that will escape this reality.

    • Rick Ackerman January 10, 2011, 11:59 pm

      Well stated, Bc — as succinct an argument as I could have hoped for in this thread.

  • dan January 10, 2011, 6:43 pm

    No new job creation, crushing DEBT, and all investments tilted to the financials,banksters etc..does not paint a very stable and pretty picture for the next ….you pick the time frame. All opinions seem valid till you enter in the DEBT of all the players…Fed, treasury,states,citizens, and all to be repaid with FIAT to who will accept shit paper…
    Greed and cunning are the criteria for the Wall street crowd and we know where this story ends….. the picture speaks louder than any words I may utter…..Gold and silver and hang tight….the Fat lady is warming up

  • Martin C January 10, 2011, 6:30 pm

    Oil is way over priced, should be around $40

    Gold will go parabolic and reach $5k+ before coming down to earth hard, as it has and probably always will, but the world will be a much different place by this time (3 to 5 years)

    Don’t know much about bonds so I steer clear, can’t see how to get rich off them, can see how you could get poor

  • Rich January 10, 2011, 6:28 pm

    Aloha All
    As another person who sold gold in 2009 and watched it go $200 bucks higher while Rick et al were correctly long and strong, can admire Doug’s guts and honesty.
    Was all prepared to cite the shortcomings of bond funds: early bond calls reducing yields, lumping the bad with the good, particularly projects, and willing to point out buying dips in contrary fashion does not always work.
    Was even going to cite BEN as a good short to at least 94 with all their California Muni Funds:
    Then actually looked at the charts of some of the 200 funds BLK, the largest money manager in the world, having bought out the competition, runs ($3.5 T), and about fell off the chair.
    Not only is parent company BLK, the largest shareholder of AAPL, targeting +37% higher, Blackrock Muni Funds target higher also.
    Guess Sovereign Funds worth $3.6 T knew something when they bought BLK.
    BBK sells at 4.4 times earnings, a 7.6% tax exempt yield, with a +46% higher target.
    Good enough for government work.
    And gold, having broken down through it’s 50 day moving average for the first time since July, now targets $1290 after targeting $1590.
    Nice trades Doug…

  • Robert January 10, 2011, 5:45 pm

    Ok, even though I can’t force myself to agree with the conclusion of Doug’s contrarian premise on Muni Bonds, I was giving him the benefit of the doubt and was ready to applaud his logical dilligence until the last line of his analysis re: Gold-

    “it does look like a double top in October-November and it is losing momentum. If I was smart enough to have ALL of my money in it until today, I would sell a little and buy some Munis.”

    Ummm…. I need to see those momentum numbers, Doug. RSI is in the oversold range on the COMEX March contract, the $Gold daily and weekly index, GLD, and on just about every major Precious metal ETF.

    Beyond that, there is only MACD projecting an intermediate term reversal, and Gold and Silver prices have snapped downward MACD bias within one std deviation of the 50DMA at least 10 times in the past 3 years.

    Bottom line (to me) is that Gold and Silver are being sold down by people who are trying to manage sentiment, not by people who are trying to make profits.

    Open interest on the COMEX and the LBMA is ratcheting up as the price has been falling- seems there are very few weak hands in this trade, regardless of preceived bullishness.

    When I balance these indicators against your argument for Muni bonds based on a sudden yield spike in November, the less risky play is still hard money for me.

    The bond market is simply too big – It’s like a bunch of kids bouncing around in a giant inflatable jumphouse that has way too much air in it. At some point, the seams are going to rupture, and the kids are going to be pouring out screaming trying to get out from underneath it as it deflates.

    Governments have no choice in the bond market but to continue to issue (increase supply) if they have ANY plans of maintaining solvency, but muni’s rely too heavily on sales tax revenue, and in my travels around the country, I still see more “going out of business” signs than I do “Grand Opening” signs.

    Your analysis above has a “buy the dip” flavor to me, but buying dips in the bond market just smells like the ultimate bear-trap to me.

    Let me give you another contrarian spin on this analysis:

    If you had been a bond holder (as opposed to a buyer) – what would the November price move have inspired you to do? I would have probably held the dive, and then pray vigorously for the dead-cat bounce.

    Bully for you for taking a quick 15% in Gold and cashing out in 2009, but I must ask- is your re-buy price really $1100? Could be a long wait, IMO…

  • RamseySte January 10, 2011, 5:22 pm

    Mercurious has it right about Munis.
    Property tax receipts are going down or flat.
    And sales tax revenue is not compensating plus previous commitments like pensions continue to mount.
    Hey look at Illinois. There they are trying to get out of debt by raising taxes rather than cutting.

    Folks are not doing the math.
    Until property prices start back up from the QE2,3,4,,,, inflation, life is not going to be pretty. And then only for a short while BEFORE the inflation gets out of control, and the Fed stops priming the pump and deflation hits big time AND THEN MUNIS will really be hit.

    So pick your timing and take your chances.

    But we have had this dsicussion before.

  • Anthony F January 10, 2011, 5:17 pm

    Additional information on municipal crisis to be considered


  • bozzy January 10, 2011, 5:04 pm

    A fine and ballsy piece, with some great analysis and extrapolation from the much abler commentators who have preceded me here.

    Problem is, I don’t believe that the landscape is going to remain the same. I am not an American, so I defer to those who live there, but unless you have found some magic dust, that which will bring muni’s to become your worst nightmare is a change in the landscape – the law. These bills cannot be paid, and the preferential ranking in repayment will mean nothing in the context of catastrophic financial failure in a municipality or a state.

    I think we shall see and come to welcome both, as opportunities to finally “deleverage”, that catcall of the 2008 collapse which came to provoke mirth amongst our friends in the bond dealing community.

    Doug – you stick your head in the oven if you wish, but I decline to do so, despite this wonderful exposition. It was great but dangerous reading, in that it could potentially threaten something far more important – my dinner, were I too follow suit.

  • John Jay January 10, 2011, 3:47 pm

    He is probably right about Munis right now.
    However, the parabolic rise in the national debt is ominous, and the reaction of Congress is scary.
    They have not reacted at all except to talk tough and “promise” to cut back the military in the “future”.
    As a rough estimate, I will say that for every trillion dollars the national debt increases from now on, the point where the average interest rate on all that debt will eat up 100% of tax revenue will fall one percentage rate.
    I guessed before that 11% is the drop dead rate.
    If the national debt goes up another trillion, and it will, that drop dead number goes to 10%, etc.
    Someone out there in Rick’s audience with better number skills than I have could easily check my math and refine my model.

    • Cam Fitzgerald January 11, 2011, 8:49 am

      Do you recall the old Soviet Union?

      Speaking of military cutbacks….well those did not easily materialize for the Soviets as many might have anticipated in the day (And yes I do recall how the submarine fleets rotted in the northern harbours while fears spread that nuclear tipped missiles were possibly being stripped out and sold surreptiously to other countries).

      Instead though, the whole financial house of cards there virtually collapsed while the military threat prevailed. Pensions for seniors in some regions dropped to little more than 12 or 15 dollars per month in those dark days. Food and energy were both rationed. Long lines of people stood outside bakeries each morning only to be dissapointed and turned away as supplies ran thin each day. Riots broke out.

      In the West we gloated over the sudden turn of events. We had been proven right. Democracy and free markets were indeed the salvation of all people. The Russians had just made so many mistakes!!! What were they thinking? That socialism or communism or collective farms might actually work as a system?

      And yet the failed system there just kept on functioning, albeit in a crippled way. It was really miserable for quite a number of years until the powers of the day decided to start cooperating with Western European interests and began selling oil, gas and other resources of interest into neighboring markets.

      The apparatus carried on to the chagrin of many. The Cold War had not yet truly ended of course. Security of the state still trumped individual needs though and we all felt uncertainty and a vague threat even as we watched that empire collapse.

      So why do any of you really believe that the military in America will be dismantled at a time like this? Shake your heads!! (I mean that in serious sense). It is much more likely that the rights and desires of individuals in this country will take a back seat to the demands and needs of the state. Exactly as it occurred in the old Soviet Union.

      The whole system can be gutted before the military is ever in ruins. Even if that means embracing an alternate political system. Look to the Third World or look through history for a dozen examples of what I am talking about here.

      The Soviets, despite all naysayers and doubters continued to function at a high level for many bitter years without concerns over who would lend them real money. They carried on as a threat to world peace and security despite the trials that were blowing across the lands there.

      The apparatus that was developed and evolving, while less sturdy than inventions here and by Western technological standards, was still sufficient to warrant cause for significant alarm based on the massive nuclear arsenal and delivery systems alone. They maintained and even expanded a space program for example that lives on to this very day.

      So keep in mind that even a dead broke and bankrupted American Empire, even in this day and age, would still be the most formidable and dangerous of nations on the planet should her back be put to the wall.

      Not at all unlike the Soviet Union of its day as its political system was in the process of being reinvented.

      America is not the old USSR of course. There are a million miles of differences between the two, and yet there are so many similarities and paralells that can be drawn between the two nation states too. Economies can and do fail sometimes.

      But if the ability to continue to project power therefore is not a currency unto itself then I don’t know what power really is. With or without funding from abroad, this nation is still a contender.

      Asia may want gold, uranium, oil and other resources to grow but at the end of the day it is food that trumps all and North America still provides that in spades, exporting much more than it consumes every year.

      That will be one of the keys to keeping the peace and balancing the differential in the balance of trade in the future. We need to understand what our competitors needs are in order to keep our own system in balance.

      We still punch above our weight when it comes to food supplies and we cannot ever take that key resource for granted. It may be one of the most important of resources that assists us in buying our way out of hock to our creditors in the future.

  • Mercurious January 10, 2011, 3:16 pm

    I can’t speak for the macro muni bond world but I can give you an accurate reading on one city that is in better shape than most I hear of. This is a top-15 population municipality in a top four state, so I’m not talking about Podunk. I work there and deal with the Finance folks every day.

    Managed in a fiscally conservative manner for decades, it has less than five percent debt to revenue ratio. Employment, while a bit crimped, is still growing with new businesses coming in all the time. We enjoy a property tax/sales tax/industrial district revenue mix. Our commercial sector has some of the highest grossing locations that the entire multi-state region has. We still have a multi-million fund reserve that remains untapped. We have pared expenditures substantially and they are now at approximately what they were a decade ago.

    We should be in good shape, right? That’s why I was surprised to hear from the city controller that, even with our reasonably strong employment picture and near-double digit sales tax growth in the last six months or so, we “can’t sustain ourselves”…his words. The problem is property tax receipts. We did not see a huge bubble in our real estate markets so we’re not coming down from Olympus on this.

    Over the last two years, home owners began going to the mat on property valuations that they felt were much higher than the market reflected. That process is now in place and we’re seeing tiny growth in pricing and units sold, but the number of foreclosures as a percentage of total sales really going up…the pig is moving through the boa, apparently.

    Without some significant uptick in sales numbers AND property valuations, we are in the position of slipping quietly under the waves over time, or we can pare further. If you want to see a politician in real pain, take a look at those who are having to decide if they’re going to tell employees they’re fired or tell the public that taxes are going up. The only problem with firing employees is that as services decline, the citizens are STILL on your back. To me, this is a recipe for paralysis mixed with a longing for someone/anyone to help out.

    I think Doug’s analysis is very long on solid, insightful market psychology and somewhat short on real-world political understanding. If he thinks there is going to be a bloodbath like you’ve seen in some industries as expenditures and revenues are aligned–BEFORE there are many examples of defaulted munis–I need to introduce him to the real world. Please note, this is not to say that public employees should be exempt from the same forces at work in the private sector, just that the reality of the situation is that is not the case, at least at this point.

    My suggestion would be to focus on the residential and commercial real estate markets as the fulcrum upon which this riddle balances. If you think we are in for a protracted period of low property tax revenue vis a vis previous years and their built-in expectations for available taxes to work with, you may want to rethink a “munis won’t default in droves” position. Unless you feel your municipal water bill returns will pull you out of the ditch, many American cities have a very unhappy future ahead of them.

    • jazzmaniac January 10, 2011, 6:22 pm


      You’ve hit the nail on the head. Our state budget situation is disastrous, city is bad but not yet a disaster; county? no problems yet. Answer is simple: property valuations have not come down much yet due to asessments being in arrears. When the delayed reaction hits starting next year there will be no safe jurisdiction and no safe munis.

  • Fred January 10, 2011, 2:02 pm

    There are plenty of people who do lots of jobs ‘for a living’. Not many are excellent, but average. This analysis is ‘average’, and misses key points…there will be no State/Local bailout. Without a big backstop, the risk premiums will soar, and effectively price issuers out of the market.

    I dont doubt there will be some sort of ‘restructuring’, long overdue, of State/local govts. As a former state employee, I can tell you the writer misjudges the power of the AFSME union. They will rather see the entire govt shut down, and all employees laid off, than reduce pension payments for retirees. Pensions will not be restructured in Govt as much as we might like the idea, until State bankruptcies occur.

    Between no bailout and no restructuring of pensions, combined with deficits as far as the eye can see, that means massively higher taxes, like Illinois. This will create a feedback loop of lower tax revenue, as jobs and people leave, not to mention the idea that being unable to perpetually borrow against declining revenue streams will cause interest rates to rise so high no state can afford to pay the interest.

    The inevitable result is State bankruptcy, and bond repudiation. You would need to be utterly insane to buy into the muni market now.

    • Robert January 10, 2011, 6:53 pm

      Fred’s outlook makes pretty good sense to me…

      I know that logic and rationale means nothing in near term market moves, but all trends move within the construct of even larger megatrends.

      Increasing taxes during periods of stagnating growth rates, or during periods of outright debt deleveraging and declining real incomes, has never elicited a very warm and fuzzy response from citizens/voters. I doubt this time will be any different, especially since today we are seeing all these indicators (economic growth rates dead as a doornail, personal debt declining, and real incomes declining) acting as the trifecta that should keep tax increases about as popular as a fur coat at a PETA meeting…

    • Benjamin January 10, 2011, 8:08 pm

      It’s a dead-end. The only way to ensure people can pay higher taxes is to cut/eliminate them or accept the inevitable default on them. States, or any debt for that matter, can repay through the magic machine, just like pensions.

      However, in the name of protecting the “dollar”, thin as the armor would be, I do believe one or the other would be unceremoniously dumped into the wild to fend for themselves. Saving pensions would keep up consumer spending, to a degree, but that’s not nearly enough, soon enough, for the current employees to find work elsewhere because of that spending (if it would even be as much as expected).

      So it’ll be bondholders that won’t be dumped, I think. Give them money through high yeilds, slash taxes that can’t be collected anyway, and they at least buy some time, as, totally free of obligations, the private sector can dead-cat before HI obliterates all.

      And pensioners wouldn’t be TOTALLY screwed, at least on the shorter term. Those 401ks being mentioned, especially in a dead-cat recovery/boom would at least give them something. For a while. And heck, who knows. Maybe the pensioners would get fed up at last, and demand a certain commodity instead?

      One never knows…

    • Steve January 10, 2011, 8:19 pm

      Seems to me that the point has been missed on state bailouts. It (the bailout) has already been ongoing for the past two years with funds to keep the UNION police, fire, and government workers in place, and getting their grand pensions based upon accounting scams of past market performace. California is just one BIG accounting lie as far as budgets go. Guess where the majority of states are.

      The issue is that the state bailouts may not continue which will causes layoffs. The matter of fact here is that the states have already been bailed out and the money is running out quickly. I must leave the bond trading to the experts. I can however state that ‘state’ bailouts have been ongoing and the only threat is that they will not continue.

    • Jill January 11, 2011, 3:28 am

      It will be interesting to see how this plays out. No matter what the AFSME Union wants as far as not reducing pensions payments for retirees, the math just doesn’t add up. So it would be impossible for state pensions to continue at current levels, given the low amount of money in the tax base they are drawn from, and the fact that you can not squeeze blood out of a stone by taxing people at a higher rate than it is possible for even the most frugal people to pay. I will be looking to see what happens to Gingrich’s proposal on this, and any other ideas anyone seriously proposes for making the math come out right.

  • Benjamin January 10, 2011, 8:15 am

    I’m expecting a hailstorm of comments over this article, so I’ll try to keep this shorter and quieter while the professional and more knowledgeable do their best to “let Doug have it” (or not), as per Rick’s request.

    Doug’s profressionalism shows much more clearly in this article than from the last, and so I realize that I’m certainly not one in such a qualified postion to criticize. He does this for a living, while I’m just a disabled, former trucker. However, I do have some points to raise (also bearing in mind Rick’s outlook that a muni default would lead to H-inflation)…

    Lower rates mean less return on higher face value, while higher rates mean greater returns on smaller face value. Cut the rates (roll over the debt?) in half, and you effectively double the debt burden while reducing the repayments. Double the rates, and, I assume, you relieve the debt burden while increasing the repayments.

    Sounds nice, until one considers what all this means. Years of draining the productive sector to practically nil while government on all levels has been feasting off the (so-called) gains has bled the productive sector too empty to employ so many workers (and to fund so many govt retirees) that would be displaced.

    Bondholders, though, would be getting their money back faster than if rates had continued to fall. However…

    With so much lost services and workers, and no sector able to take up the excess, government is going to have to raise taxes in order to keep even a moth-balled version of the previous, perverse and excessive malinvestment. There is no way this won’t happen, because total pain in a short time is going to be SO voted against, and there aren’t near enough republicans in Congress (that would keep their word) to accomplish that. So I would expect muni bondholders to get nailed by our government that is reknowned for Indian-giving.
    Heck, all investment, for that matter. Sales and property taxes would also increase, too, which people aren’t in any position to keep paying as it were, let alone more of. So the giveth/taketh away would be even worse.

    All of this has the sound of hissing delfation. No, scracth that. A big, bursting pop. And we all know how our Congress reacts to stuff like that (too big to fail). So one might expect they won’t go that route. Keep rolling over debt, then, so that means falling rates, not rising.

    Or, they can skip raising taxes and just directly print to pay back debt at higher interest. But without a tax rate to keep things balanced out, we can probably expect asset and commodity prices to rise.

    Might this be the hyper-inflation Rick was talking about? But even if they don’t do that, we still get a ballooning of credit/debt (invisble HI). But if it were to happen, yes, I think that is how it would begin, and if so… Hyper, even as bond rates suggest deflation. Who would’ve thought?!

    So muni bondholders would have a head start, wouldn’t they? If that is what your friend Doug sees, then I can hardly call him the fool. Rather, just doing what any person with a survival instinct would do, who is in a position to do it. Not that I approve of the Whole Thing, but Doug nor any other muni debtholder started the fire. As I said, The Whole Thing is wrong.

    Anyway, I’m anywhere in the ballpark? Anyone?

    On a “side-note”, though, let’s look at another possibility here. Tax-free. I started writing my response before I read the whole thing through, and what did I come across?

    “7.5% tax-free from Government Bonds. What a lousy value!”

    If that be sarcasm I detect, then I’m at least on the dartboard, if not on the bullseye. Okay, so 7.5% in untaxed returns. It has to go somehwere. And with government obligations cut, one might imagine that private sector begins to return to health. They’re free(er) to go at it.

    But I’m not one to stop on a nice note. Lets not forget the rest of the world has and wants to continue rising. So is 7.5% taxless enough to keep up with rising prices? I don’t think so. I have no numbers handy to dis/prove it, as it’s just my pessimitic hunch. It just doesn’t sound like nearly enough in a printing war. Okay, so the rates will have to go higher, which means more printing.

    And that’s just it… we’re in the same old printing wars as we’ve always been. This will certainly take us into trade war with a China-lead Asia and, if one bought Cameron Fitzgerald’s recent article on Ethiopia, an increase in competition with more and more of Africa, whom, as we all know, wants OUT of that poverty caused them by the last tremendous wealth-redidtribution shift in the world wars and post wars era.

    So, Doug and those who agree… I would like to differ to your greater knowledge and experience. Yes, BUT there’s too many buts. And there never was a way in hell I was ever dropping my gold and silver anyway. It’s money, it’s everyone’s personal power, the only way to avoid playng these kinds of senseless games. But not especially when there is going to be hyper-inflation.

    And if you dropped your gold to buy munis that can’t keep up, then you shot yourself in the foot. Just tell me where, and I’ll send the flowers to your hospital room or, and I do sincerely hope not, your funerals.

    • Benjamin January 10, 2011, 10:33 am

      After taking a breather and re-reading what I wrote, I think some clarification is most needed…

      Basically what I’m seeing is that delfating bond prices will BLOW OUT out tax-free (or lesser taxed) yeilds that will be printed up and given to bondholders rather than collected from the general population that simply doesn’t have it.

      The money will need to go somewhere, and it’ll go into other assets and commodities. Left free of any obligation of supporting Big Government (it will be cut), I think we might get what Rick has from time to time mentioned… a tax-cut driven fiasco for a couple of years. Employment would increase, people would bring home more. Investors would have more to invest, as said above.

      It will not be all that it’s cracked up to be, though, as rising prices would clash with tax levels as they are. Those would have to drop. Similarly or even alternatively, interest on bonds would have to keep rising to print up the money not collected by taxes to fuel this insanity. It is either that, or taxation either defeats or more than defeats the stimulus. Since Congress will have to yeild at some point, though, if even they allow it in the first place, that means what I wrote above.

      So the money and seemingly improving times would combine with growing world-wide demand. And folks, we’d have hyper-inflation. It’s either that or depression much deeper than the last one. And no one in their right mind wants that, even Congress. They know full well what that would mean and know what voters are now, apparently, out shooting at them for. Dropping taxes and raising yields to drive printing and investment seems the only easy-breezy to acheive survival for any length of time (to get out of Dodge?) (short as it will turn out to be, but a rat will run into fire to avoid a more immediate drowning).

      But it won’t be a disaster? Well, how is it that it won’t? Because no one wants it to be? Because innovation in this sudden jolt of change will somehow outpace hyper-inflation? Because the Fed has a few cards left to play?

      Inquiring minds have got to know! 🙂

      And PLEASE don’t anyone (ahem_Mario!_ahem lol) give me the BS about how China is going to save the day. Bull! Santa Claus has a better chance of succeeding in saving the West. In order for China to do ANYTHING for us, the West is going to have to sink and break into little peices (also known as disintegartion), which means China can only save China. The only other alternative is to get thrown into hyper-inflation as well, like everyone else will.

      It’s the end of the world, and I feel fine, so no, I’m not being Mr. Doomsday. Heck, I just finished filing my nails and playing with the cat in my HOME here in the urbanized city of Gary, Indiana, not in my bunker in the hills, surrounded by a stack of bibles and racks of guns and canned food. I’m 100% sane and living reality, so THERE!

      My gold and silver might mean something only if the world learns a lot fast. All one can do is wait and remember that good times are possible again even if unlikely at this point. Don’t worry. Be happy. It’s all wrong and all of it will end 🙂

    • Robert January 10, 2011, 6:34 pm

      Benjamin’s first statement was:

      “I’ll try to keep this shorter and quieter while” …

      Ummm, yeah. Sure, Benjamin. 🙂

    • Benjamin January 10, 2011, 7:31 pm


      Hey, I said I would _try_ (and we were, after all, told to pull no punches) 🙂

      But I could’ve put it like this (this WILL be short)…

      Perhaps what there is to dread about high interest is not deflation but, with price lowering for higher yeilds, money being on sale. Or something like that.

      On the opposite side, when interest lowers, credit is on sale. So it matters not how HI would come about, I guess. It can be through way too much credit or too much in yields. Or so my reasoning suggests.

      If so, we’re fooling ourselves that cutting back credit ever would’ve done any good or will do any good. The problem is that governments, in a sane world, cannot SELL bonds, as bonds are just supposed to be contracts. You know between whom, since you read my other “short” comment the other day.

      So, there’s either going to be credit or ever-cheapening cash give-aways that can only end in HI. The only reason credit dried up, I think, was to avoid that for as long as possible. They knew then, and now it’s do or die time, apparently. Whatever direction it will go in, who can say? All I know is that dumping gold is certain death!

    • warren January 10, 2011, 8:04 pm

      B Even your short is long….Pun intended.

  • PhotoRadarScam January 10, 2011, 7:31 am

    I do agree that we’ll see $1100 gold before we see $3000 gold, but these cities and states are in TERRIBLE shape. There are no options other than government bailout to fix them. They can *try* to cut wages and pensions, but they won’t be successful. The unions have got their grip on these cities and states and they won’t let any such thing happen.

    • Benjamin January 10, 2011, 8:19 am

      Agreed on the shape of things, but I do see the possibility for big cuts. I think that will happen, though, but it won’t be all pretty and rosy! Ask for anything of this psychotic genie of a system, and it’s bound to me nightmarishly more than anyone would like to imagine. Even good things like tax cuts and hacking off of cancerous levels of government. Blood flows through the giant tumors, and we will bleed to death because of them.

    • Robert January 10, 2011, 6:30 pm

      In a scenario where Gold retraces back to $1100, I think I’d be much more likely to take a position in energy and grains than I would in printed digits on government paper.

      For Gold to trace back that far would imply another “Lehman/Merril weekend” taking place somewhere. But, even in that regard; ever since Lehman/Merril we’ve seen Iceland melt down, we’ve seen Dubai fail to make their monthly nut, we’ve seen Greece do what Greece does best (hit the streets with the Molotov cocktails), and we’ve seen Ireland come and go… all with the Libor barely registering a blip and the NYSE VIX acting positively comatose.

      Nothing to see here… just go buy more Krugerrands, and don’t worry, the big Bullion Banks will be more than happy to leverage that Krug up 100:1 for ya…

    • Rick Ackerman January 10, 2011, 11:35 pm

      In today’s news was a story describing Newt Gingrich’s efforts to make it legal for states to jettison their pension obligations via bankruptcy. The purpose of the law would be to avoid a federal “bailout.” I put quotes around that word because any such bailout would be so severely inflationary as to render the dollars pledged all but worthless.

    • Benjamin January 11, 2011, 10:57 am

      Rick said: “In today’s news was a story describing Newt Gingrich’s efforts to make it legal for states to jettison their pension obligations via bankruptcy. ”

      I get newsletters from Newt’s organization (Gingirch for America, or somehting like that), despite repeated attempts to unsubscribe. That was probably in the one I deleted recently. Maybe I should’ve read that one.

      Anyway, _when_ that happens, whether by Gingrich’s efforts or not, we’re gonna see sparks fly. As it were, the recent attempt on Gifford’s life is being blammed on the Tea Party. Just imagine what legalized defaulting on pensions would do to ignite fury between government employees, who will blame the TP and Palin for that.

      Robert reminded us: “we’ve seen Greece do what Greece does best (hit the streets with the Molotov cocktails)”

      The one thing I can say about fire is that I’m pretty sure that black ninja suits and riot gear aren’t heat resistant, even if they might be flame retardant. My best guess for no is that if they were, firefighters would be wearing them. I’m not making threats, btw, just an observation (another one being that, lucky nation we are, the firemen would be on strike).

      But that would only be a problem when markets succumb to HI, rendering the 401ks become worthless. Unless they start paying out in gold/silver.

  • Mike January 10, 2011, 7:15 am

    I second that. Never sell your Gold unless you have to. As far as Muni’s go…Diversified portfolio basic investing 101.

  • Terry S January 10, 2011, 6:08 am

    There is one thing that I have learned in a life span of over 60 years, from paperboy to millionaire: NEVER trade your gold for paper (unless you must).

    • Benjamin January 10, 2011, 8:22 am

      Yeah. What Terry said!

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