Issue time 2:03 pm, by admin
Category:Investing
Municipal Bonds vs Stocks
December 22nd, 2010A few days ago I attended a seminar about municipal bonds. What are municipal bonds?
In short, municipal bonds are certificates issued by a municipality like a city or another local government and their agencies – you buy the certificate, and your payment is considered a loan that will be paid back, with interest, according to set terms.
The basic idea of the seminar was that municipal bonds are the best investment in the long run for an investor with high income. In the US the interest income you get from municipal bonds are often exempt from federal taxes and from state income taxes in the states where they were issued. This feature makes bonds very attractive to investors whose incomes are taxed at high rates – they potentially get the most out of the tax benefit that comes with investments in bonds because these municipal bonds earn tax-free interest.
Municipal bonds have historically given investors solid returns after inflation and taxes were taking into account, especially compared to other investment options. To make this point, the seminar speaker presented a chart showing the Dow Jones Index over the last 10 years returning nothing to investors, all along bouncing up and down. He said that he could have used any 10-year period to make his point. He probably meant to make the point about the bouncing rather than about the returns, although it was implied that he could make the point about either one with any 10-year chart of this index.
Truth is, though, he cannot make both points with any 10-year chart. It is only true that you can take any 10-year period to show that stocks move erratically. But you need to show the last 10 years to make the point that stocks don’t return much to investors. In most other 10-year periods equities have performed much better, especially when you look at returns after you account for inflation. (See “S&P 500: Total and Inflation-Adjusted Historical Returns.”) Inflation tends to hurt (municipal) bond investors more than it hurts equity investors. Fortunately for municipal bond investors, inflation has not been a problem since the 1970s. But that is not to say that inflation could not be a problem in the years to come. So, it’s not always the case that (municipal) bond investments are the better way to go.
Besides inflation, there is another potential problem with municipal bonds: the current state of public finances. The worse a municipality’s finances get, they more likely it is that a municipality will default on its bonds and not pay the interest or even the principal to investors. This has not been a problem for a long time, bar a few exceptions like New York City in the 1970s and Orange County in 1994. But recent news indicates that the finances of local governments are getting pretty tight. (For news articles on this, please click on the links below!) Tight municipal finances make a default on municipal bonds more likely and ultimately costly for investors. So, caution is in order.
Bottom line: municipal bonds are one of many investment vehicles that an investor should look at. But no investment has guaranteed returns. Municipal bonds are no exception.
Please keep in mind that we are only relaying our opinion about municipal bonds. Do not use our opinion as a basis for your investment decisions. Please also keep in mind that by reading this blog you agree to the site’s User Agreement.
News articles:
Despite Wealth, Nassau County Is in Fiscal Crisis
Mounting Debts by States Stoke Fears of Crisis
U.S. state and local finances in big double-dip risk
Excessive Debt Weighs Many U.S. States, Local Governments
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Issue time 8:16 am, by admin
Category:setting up a budget
Bulldoze storage units outside of Manhattan
December 21st, 2010You have seen storage units and ads for storage units, haven’t you? You might even rent one of these units. Between the foreclosure crisis in housing, and rampant unemployment, surely more and more people have to move out of their homes and need a place where they can store their furniture and other things. So, these storage units have got to be big business even though there are so many around. And until the economy is healed, they’ll likely be good business going forward.
I can see that you might need to rent a storage unit when you are in transition like that or like moving, getting a divorce, etc., but I do not see that you need to rent one permanently. (I get it if you live in Manhattan – paying high prices to rent space for your stuff isn’t worth it, and it makes sense to pay a lower rental rate for some of that floor space.) As far as I can tell, there is one major purpose for a storage unit; that is to store stuff you don’t really need. This begs the question, “Why do you keep that stuff?”
A 5×5ft storage unit costs $44/month where I live. That comes out to $528 per year. What is the stuff worth that I could put into such a small unit? A few suitcases maybe? I can buy a pretty good set of suitcases for $200-$300 dollars which is about half the annual storage fee. Storing suitcases would not make any sense at all to me. I could buy two new sets each year and still come out ahead. (No, I am not advocating that you should look for “disposable” suitcases or that you found a business that sells disposable suitcases. I am way too eco-green t0 suggest something like that!)
Let me cut to the chase. If you rent a storage unit, the way I see it, you simply have too much stuff for this time of your life. Wouldn’t it be easier (in the long run anyway) to just get rid of the stuff that does not fit into your place? Sell it on ebay, craigslist, give it away, or donate it to charity. Others can probably use your stuff that is just gathering dust in a storage unit. Instead of paying money for having the stuff, you might even get paid for getting rid of it and then you would save on storage expenses, too!
Our post “Bubbles, bubbles, everywhere” was included in the Carnival of Personal Finance hosted by Financial Highway.
And our post “Save money in your family budget for your summer vacation now” was included in the Carnival of Money Stories hosted by PTMoney.com.
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Issue time 5:41 am, by admin
Category:Investing
Bubbles, bubbles everywhere
December 16th, 2010We recently wrote about the Black Friday mania and the similarity between shoppers’ herd behavior and the gold bubble. Then we commented on a blog that talked about investing bubbles, one of which was the gold bubble. We added one investing bubble that had not been listed in this blog post: emerging markets, foremost of which is China’s economy. The author of the post responded that it was just plain old silly to add China. So, I’m gonna be really silly and write an entire post about the emerging markets and China bubble.
Why are emerging markets bubbles? Let’s look at two major ingredients for a bubble and see whether we can apply them to the emerging markets scenario.
First major contributor to a bubble: excess liquidity. The Chinese are sitting on around two trillions in Dollar assets, mostly held in Treasury bonds. The Chinese just have too much money in their economic system. (Other so called emerging markets like Taiwan, Korea, and Brazil are also flooded with Dollars.)
What do they do with all that money? You might not be surprised that they buy things like gold and real estate. No wonder prices of these assets are rising. As prices rise, these assets become more attractive to others, who then buy and push up prices even further. This is exactly how a liquidity-induced bubble forms.
All this money sloshing around in these emerging markets has an affect on other prices too, like consumer prices. For example, The Economist looked at the Big Mac index – it is calculated to compare the prices charged in different countries for a Big Mac. Guess what? You can find one of the most expensive Big Macs in Brazil where it costs $5.26 compared to $3.71 on average in the US. It does not make sense to me that the Big Mac should be that much more expensive in a country that was practically bankrupt only some 25 years ago and that is known for its slums (favelas) around the big cities.
Second major contributor to a bubble: the belief that “this time it’s different.” Most people have the same reaction the blogger did who responded to our statement that China was in a bubble. This-time-it’s-different becomes the standard explanation why things like China are not a bubble. This-time-it’s-different is required for the motivation to pay exorbitantly higher than normal prices for an asset in the first place. So, the response to our blog comment actually gives us further evidence for our belief that China is a bubble market.
If you want a good analysis of the real estate bubble in China and why things are really not different this time around, read the article “Empty Flats” by the renowned China analyst and China bear, Andy Xie. His analysis sounds all too familiar to what happened in places like Florida until about three years ago.
Please keep in mind that we are only relaying our opinion about potential current bubbles. Do not use our opinion as a basis for your investment decisions. Please also keep in mind that by reading this blog you agree to the site’s User Agreement.
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