The basis of all investment bonds is a covenant of trust between the uderwriter (buyer) and the issuer (cities). “DM Intl.” In the case of muni bonds, the trust value between these parties is based on the power of municipal taxation and revenue creation – as in you can’t fight city hall so pay your bill or else. Historically this market has been a very good bet and that is why muni bonds make up the largest concentration in mutual funds and have been considered very safe investments for generations.
The muni bond market totals a whopping $3 trillion dollars. There is only one obvious problem – the vast majority of cities and states (and the federal government for that matter) are mathematically bankrupt with no hope of getting out of the insolvency hole. Meredith Whitney, one of the most respected financial analyst in the country, said recently on the television show 60 minutes:
“It has tentacles as wide as anything I’ve seen. I think next to housing this is the single most important issue in the United States and certainly the largest threat to the U.S. economy.”
She is forecasting 50 to 100 significant municipal bond defaults 2011 and 2012, totaling hundreds of billions of dollars. If Ms. Whitney is even partially correct, that would mean muni bond investors would take a huge hit.
Naturally, cities are responding to this evolving crisis by the resorting to the only strategy they know: raising taxes, creating income by strictly and aggressively enforcing parking and driving violations, and hiking fees through the roof. That’s because, unlike the federal government, state and local governments cannot just ask the Federal Reserve to print up endless amounts of cash. If state and local governments want to spend more than they bring in they must tax, fine, and bill their populations or borrow it from investors.
We have entered into a perfect storm of financial crisis whereby virtually every entity of city, state, and federal government is in need of your money, either through compulsion or through enticement. Which would be fine and necessary if there were sensible and responsible fiscal management and budgetary planning and discipline in place. But there isn’t and there won’t be because the entire dollar financial system is completely and utterly out of control.
If you hold a large percentage of bonds in your portfolio, either directly or through mutual funds, you are advised to prudently hedge against this evolving and growing risk. In fact, because this problem is ultimately traced back to the spending power of the dollar and its fiscal management by the US government you are further strongly advised to hedge against the entire dollar financial system. Every aspect of basic financial structural vitality has eroded to the breaking point at every level of government and only the most committed ideologue, propagandist, or government apparatchik is capable of ignoring this gathering storm or explaining away the emerging crisis with double-speak babble.
In classical economics this is known as the start of the Winter part of the business cycle. The analogy is simple: in the Winter cycle paper assets wither and die (from over leverage and debt) and you must retreat into what are called hard assets. This means commodities in general, producing land, energy products (gas, oil), precious metals (also known as hard-asset money), and vital industrial metals (copper, zinc). This is a simple strategy to understand because you are positioning yourself into real things that everyone needs.
Bottom line: Tomorrow is not going to be like yesterday and you need to start right now and develop your own knowledge base of what is really going on and begin to take action. Do it for yourself, do it for your family, and do it for your country.
Or not, but be prepared to face the consequences.
Aaron Kutchinsky is a writer, lecturer, and committed financial activist.
In 2010 Aaron created and founded Guardian Gold & Silver as a definitive and groundbreaking alternative to the gold industry norm, a mission-oriented and revolutionary precious metals company with 3 specific goals in mind:
• Do the right thing.
• Lead others to understanding.
• Get as many into the boat as possible.