Muni bonds

Unlike the Federal government, states and munis do have to balance the budget and we are getting more cities bankrupt than previously predicted. We have to bite the bullet somehow otherwise we can never service our growing debts. We're running out of suckers like China to lend us more money.

As of 7/2012, most likely the following will happen.

·         States will not bankrupt, but muni bonds will lose a lot of their values. QEn will be used to rescue the state. Property and state taxes will be raised if not already been raised. A lot of foreclosures usually means less local taxes for the local government.

·         State/muni bonds together with Federal bonds will have the junk status, so in the future it is harder to raise money that is needed for any public project.

·         Cut state employees.

It is easy to cut about half of the state workers and you will not notice any loss of service (as most of them work short hours and are not motivated under the union umbrella). I just get sick of the routine 'discoveries' on how few hours they work as reported by our newspapers while we've about 18% real unemployment / under-employment rate.

However, the firemen, policemen, and teachers should be paid fairly and they should not be cut.

·         Cut their pensions and increase retirement age requirements. Most state workers have just a little less than their regular salaries and they retire at a young age. Most big companies do not have pensions now. Many of them work for the state government as they cannot find jobs in the industry, or they get the job due to their political connection.

·         Cut the entitlements/benefits that encourage folks not to work like benefits to teenage mothers. Cut the free medical care to illegal aliens. All expenditures have to be a fair percentage of our GNP not how much we can borrow and how important for buying votes.

·         We do not need large government, but lean and mean government to provide us efficient services. All those taxes are not good for the economy and businesses (how can you compete with those foreign countries with minimal taxes). Without business expanding (not government expanding), we do not have real jobs.

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Afterthoughts.

·         We need to set up a law to require the federal government to balance the budget and not to be the world policemen which we cannot afford.

·         Our experts told us to stay away from munis. They're wrong in timing – well you do not want to fight the Fed in the short term. However, their arguments are not wrong. Muni government seldom default their bonds as they cannot issue new bonds in the future if they do.

The reality is: Some municipals are just dying and they just cannot keep up paying the interest expenses and obligations. There are better places to invest.

·         As of 8/2012, the defaults of muni bonds are getting more. It should be even more as more defaults in the unrated bonds, which are not tracked by the rating agencies. As the original post written about a year ago, the advice still holds. There are better investments than muni bonds with the low interest rates and the risk of defaults.

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Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.