minds are reading Rich Stunned by
Recession Sell Munis for First Time by Bloomberg
columnist Joe Mysak.
the first time in decades, the rich showed no confidence in state and local
governments during a recession.
This astonishing tale is told in the new edition of the Internal Revenue
Service’s Statistics of Income Bulletin, which shows that in 2008, the
latest year for which preliminary data is available, the richest taxpayers collected
$7 billion less in tax-free interest than they did in 2007, an unprecedented
drop of 15 percent.
The IRS had no explanation for the drop. A spokesman said there was no
technical reason behind the decline, such as a change in tax treatment. So all
we have are the numbers to tell the story.
Municipal bonds, as an asset class, were screaming “buy me” in
2008. There should have been an increase in tax-exempt interest earned.
Some investors did buy -- just not those at the very top. The total number of
individuals reporting tax-exempt interest grew in 2008, to 6.4 million from
6.29 million the year before.
How do we explain that drop in the amount of tax-exempt interest reported?
It’s most likely a combination of reasons, all, again, inspired by fear:
Some investors sold munis and bought CDs and Treasuries, and some shifted to
shorter tax- exempt maturities, which pay less.
I can’t wait until next March, when the next installment of The Rich
and Their Municipal Bonds comes out.
Take Some Chips
Off The Table
I do not like Munis here. For starters, I think there will be a number of
counties in Florida that go bankrupt. Harrisburg, Pennsylvania (the state
capitol) is likely to go bankrupt as is Detroit, Michigan.
Yes, everyone is aware of those.
However, when liquidity is flowing everywhere, as it has been since March
2009, nothing seems to matter. Indeed, it is easy to be complacent because
nothing matters. The correct way of thinking about this is: nothing matters
Add in a few cities going bankrupt in California, and in a liquidity crisis I
can practically guarantee it will matter. Although there may be some good
bets out there, munis seem to be richly priced which means there are better
Liquidity is a coward. 2008 in the face of Bernanke's heroic efforts should
be proof enough. Should panic strike again, far better prices lay ahead.
What applies to munis also applies to junk bonds, corporate bonds, and the
stock market as well. Whatever you are holding, take some chips off the
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