Municipal Bonds: Safe Haven No More

Many times just using logic an investor can steer away from problems. It seemed forever municipal bonds were considered one of the safest investments. One did not get rich by investing in municipal bonds, however they were consistent and the default possibility was almost not a possibility. Fast forward to 2009 - municipal bonds have to be one of the scariest investment choices. All one has to do is to look at State by State finances to be aware. California faces a $60 billion deficit, New York faces a $3.2 billion deficit and New Jersey faces an $8 billion structural deficit next year. If States run deficits like thi,s why would one want to lend them money? I surely would not. One could argue if a State defaulted…then the FED would bail them out. Who needs that aggravation and worry? We are in some extremely uncertain times. I hear day in and day out:
What do I do with my money?
Where is a safe place to put my money?

The answer is to diversify. Do not have more than 5% of your assets in any idea. Even leaving money in the bank is risky due to potential inflation. Now more than ever one should consider at least a 5% allocation to trend-following a basket of commodities. Trend-following strategies are liquid and transparent. When one trades commodities, one is dealing in real assets. At the end of the day, if the crisis worsens (unemployment now at 10.2% in the US), trend-following shines. People still need to eat. People still need heat in their homes. People still need to put gas in their cars. The world will not end but it stands the chance of changing very much from what we have taken for granted.

Comments

[DRIx:]

You show little to no understanding of state and local government credits. Deficits alone are extremely misleading. Credits which have the ability and the clear legal obligation to unilaterally raise revenue to pay debt service, particularly credits where debt service is 10% or less of total outlays are as creditworthy as US Treasuries as a practical matter. Your conclusions are not well founded.

Nov 11 02:53 PM