Showing you the world that has been pulled over your eyes to blind you from the truth - one post at a time

State and Local Bondholders - A Word of Warning

Bonds of state and local governments used to be a slam dunk.  You park your investment and receive a regular semiannual interest payment.  Of course, the big advantage is that the interest was tax exempt from federal taxes and from state if you held the bond in the same state of your residence.  In fact, I've heard that many baby boomers have fled equities for the perceived safety of all sorts of bonds.

The only problem is that the economic downturn has hit state and local governments quite hard.  For instance, the City of Vallejo, CA filed for bankruptcy protection due to their inability to renegotiate salaries and benfits for union workers.  Of course, the state of California is not doing that well either.  However, states are not allowed to file for bankruptcy due the their sovereign status granted by the Constitution

So what signs are there that a bond you hold might have credit issues.  First of all, you should identify what type of bond do you have.  General obligation bonds are ones that are collateralized by a tax of some form.  Revenue bonds are ones that are secured by the excess revenues of the government.

1.    Read the latest audit report.  Auditors are required to disclose if they have determined that there might be substantial doubt about the entity continuing as a going concern.

2.    Pension obligations.  Many governments have their own retirement system which can become underfunded resulting in a net liability.  Other governments participate in state plans which are subject to increases in rates due to poor investment returns.

3.    Other Post Employment Benefits - These are liabilities for the present value of future retiree benefits.  Of course, the cost of healthcare is ever increasing and retirees are living longer and longer.

4.    Union shop - Does the government have substantial number of union workers who may have contracts that could limit a government's ability to make budget cuts.  Think of Wisconsin.

5.    Declining revenues - What the states cut to balance their budgets is passed down to local governments.  Most local governments rely on state funding for large % of their budget.

Their is a wealth of information at www.msrb.org.   Should you have concerns and would like some assistance, please email me at jmurray@laporte.com or call me at (985) 892-5850.  

 

Bill Gates, Warren Buffet, George Soros, etc. or Effective Tax Rate

Well, it happened again. I broke my news fast and watched about 20 minutes of MSNBC and caught Chris Matthews discussing the tax cut. Chris was flabbergasted ( as he often is) that the President and Congress were going to give billionaires such as Buffet and Gates this huge tax cut and hell, they don’t even want it. "In fact, they think they are not paying enough in taxes"

 

Of course this is maddening. Bill, George, and Warren don’t pay the same effective tax rate that most middle to upper middle class citizens pays. Their effective tax rate is much lower.

 

How can this be? First, let’s define the effective tax rate. It’s a simple equation - Total tax paid (including what is stolen from your check every week) divided by income. Currently, the highest income tax bracket is 35%. These billionaires don’t pay that. Most only draw a marginal salary from their Companies. Their income is measured in the increase in their wealth. For instance, Warren’s company, Berkshire Hathaway is currently trading at $120,658 a share whereas it was $99,600 on 1/1/2010. As stocks are taxed on a capital gain basis, Warren pays no income taxes on that increase if he does not sell his shares. Even if he was to sell, he would only pay a rate of 15%. George has structured most of his income so that it is oversees and not subject to US taxes. That’s not even considering all the sales taxes, gas taxes, etc. that we pay that is a much higher % of our income then it is for these billionaires. .

 

Let’s compare the threesome to your average cardiologist. All of his earnings are earned income which is subject o federal income tax. His highest rate would be 35%. In addition he is subject to FICA and Medicare taxes up to the maximums. So, the Republicans have the right of it in this instance. It’s the upper income small businesses who are actually generating jobs that are subject to the highest tax burden.

 

Of course it’s not really a tax cut. If I think about stealing your wallet with $100 in it, but decide not to. You don’t gain $100; you just have what you had to start with.

Its the end of the Dollar as we know it?

I just finished reading "Requiem for the Dollar" an article by James Grant. See

http://online.wsj.com/article/SB10001424052748704342404574575761660481996.html

As you may know, I’ve been doing quite a bit of research related to U.S. currency and whether it will collapse. Mr. Grant takes the reader through a brief history of monetary policy, particularly the transition off the gold standard. During the depression, the dollar was devaluated by reducing the pay out per gold ounce in half. Later, the standard was amended so that only foreign governments and central banks were allowed to switch dollars for gold. Finally, in 1971, Nixon took the Dollar completely off the gold standard.

Economists have proposed that the changing interest rates would regulate the Dollar. For many years, the Fed raised or lowered interest rates to manage inflation or deflation. However now, the author says that interest rate policy is used solely to stimulate the economy. The author further states that the life span of a currency is 30 – 40 years. Could we be in for the successor of the dollar as it presently stands? Sounds likely.