Posts Tagged Municipal Bonds

I’ve been in Miami all week for a seminar, “Beyond Asset Protection” sponsored by my brother, Doug Lodmell, the managing partner of the number one asset protection law firm in the USA. We talked a lot about financial markets and we talked about the dilemma so many of his clients face. They are sitting on portfolios of municipal bonds and are confused. The backdrop of our discussions was the ever present question: Is the global economy going to dip back into recession or was this long summer just an insecure blip within a genuine economic expansion. I explained to him that I believe a lot of the pessimism being aired out in the US media and political discourse is not shared by the whole world. The US may or may not get back into solid growth and low unemployment quickly but Asia, Latin America, and the Sub Asian continent are quite optimistic indeed. I just spoke with a Private Banker colleague who returned from Colombia and he said he has never seen such a dramatic reversal of a countries fortunes. The streets were “bubbling” with optimism and economic activity. Brazil continues to shock the world with fast growth, controlled inflation while their capital markets have truly grown up in just a few years. China, well, China bulls are the great majority among those whom are actually applying capital. Every single day that stable macroeconomic data rolls out and every day that corporate earnings stay in the black, we are one step closer to a recovered global economy. That is that. What does this all mean for munis? It means that muni holders should slowly and methodically head for the exit. And what about emerging market equities? The same is true, slowly and methodically enter them. Buttonwoods just wrote in the Economist that we are entering the beginning of an emerging market bubble because those markets are “The Last Great Hope”. I’ll be watching valuations. Meanwhile, let’s take some exposure to the asset class that will likely evaluate over the next several years.
Private Banking

I just got off the phone with a client and the muni bond issue was front and center. It´s simple. “Credit Risk” in munis can only get worse (and it could indeed get much worse). “Interest rate risk” can only increase as rates eventually rise since they at zero now. Both scenarios push muni bond prices down. I know a lot of you are clipping coupons for 4 and 5 percent which is above the market return for other fixed income, BUT that means the prices are higher now. Bonds have prices just like stocks and “market risk” for those prices is no different than stocks.  They fluctuate.   I know your bond brokers are buddies and they are telling you a different story. I know many of you engaged an almost messianic belief in munis. It´s just time to get honest about the reality of the muni market. It was a prudent play ten years ago. It is not, now.

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