{"id":21208,"date":"2013-07-29T09:08:24","date_gmt":"2013-07-29T13:08:24","guid":{"rendered":"http:\/\/www.technologyinvestor.com\/?p=21208"},"modified":"2013-07-29T09:08:24","modified_gmt":"2013-07-29T13:08:24","slug":"startups-explode-as-muni-bonds-implode-we-live-in-interesting-times","status":"publish","type":"post","link":"https:\/\/www.technologyinvestor.com\/?p=21208","title":{"rendered":"Startups explode as muni bonds implode. We live in interesting times."},"content":{"rendered":"
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Wonderful weekend. News of an avalanche of exciting startups. Children are seeing startups as more fun than school. A 12-year old taught himself software and has an idea that could change the world.<\/p>\n

Software is easy to learn. The cloud puts infinite processing and storage at every one’s fingertips. Investors are hankering to finance your shiny new thing, believing it will become the next Facebook, LinkedIn or Google. Personally I’ve never seen so many new companies. Talk to your kids.Talk to yourself. It’s a wonderful world out there.<\/p>\n

Weekend readin<\/strong>g.<\/span><\/p>\n

+ The Psychology of an Irish Meltdown.<\/strong><\/p>\n

It\u2019s not the bankers\u2019 actions that have outraged people \u2014 pretty much everyone had a fair idea that this was what had gone down. It\u2019s the overpowering sense of amorality revealed on the recordings, which were released by the Irish Independent newspaper. The bankers have a great laugh about the situation. It genuinely never seems to mean anything to them that the taxpayer is going to be forced to pay their bills, to the tune of tens of billions. More than that: it never seems to occur to them that their actions might harm people. — the New York Times. Click here.<\/strong><\/a><\/p>\n

+ When giants slow down.<\/strong><\/p>\n

THIS year will be the first in which emerging markets account for more than half of world GDP on the basis of purchasing power, according to the International Monetary Fund (IMF). In 1990 they accounted for less than a third of a much smaller total. From 2003 to 2011 the share of world output provided by the emerging economies grew at more than a percentage point a year (see chart 1). The remarkably rapid growth the world has seen in these two decades marks the biggest economic transformation in modern history. Its like will probably never be seen again. — the Economist. Click here.<\/strong><\/a><\/p>\n

The pall falling rapidly (too rapidly) over muni bonds. <\/strong>For residents of states with high income tax (like New York and California), muni bonds have long had a huge appeal. Buy the right bonds and your dividends are free of federal, state and city taxes. In New York City, that means a 5% yield can easily be worth a handsome 7.25% pre-tax. <\/span>
\n<\/strong><\/span><\/p>\n

Over the years, defaults among muni bond issuers has been remarkably low. Suddenly things are changing, causing all of us with significant muni bond holdings to re-assess what we own and why. I dumped my Puerto Rico general obligation (GO) bonds last week after consulting with a new friend, who listed four problems for PR:<\/p>\n

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1) Massive pension issues<\/b><\/div>\n
a. PR\u2019s main pension fund is severely underfunded at ~7%. For context, the worst US state is IL at ~40%.<\/div>\n
b. In the past PR (and Detroit, IL,etc, etc) could issue debt to invest towards pension payments. This approach relies on PR being able to efficiently (i.e cheaply) access the markets and then provide profitable returns based on unrealistic assumptions (i.e. bogus 8% growth in a low-rate environment)<\/div>\n
c. My understanding is that short of significant structural reform (i.e. more than the recent reform) it is a question of “when” not “if” PR will be unable to pay pension obligations associated with its pension funds (some rating agencies speculated the pension funds would go insolvent in 2013-2014 had the recent reform not happened). If the pensions can no longer pay, the money comes out of the general fund – obviously a big negative for GO holders.<\/div>\n
\u00a0<\/b><\/div>\n
2) Poor economy<\/b><\/div>\n
a. PR economy has contracted the past 5 years. All sorts of figures available on high unemployment (15%ish i think) as well as very high debt per capita and budget deficit.<\/div>\n
\u00a0<\/b><\/div>\n
3) Downward ratings risk<\/b><\/div>\n
a. PR was downgraded to Baa3 from Baa1 back in December 2012. It\u2019s debt is currently rated Baa3\/BBB- with negative outlook. This is only one level about \u201cjunk\u201d. Were PR to get downgraded you could see forced selling from funds who can\u2019t hold any paper that\u2019s below investment grade.<\/div>\n
\u00a0<\/b><\/div>\n
4) Ability to issue debt moving forward<\/b><\/div>\n
a. This goes back to (1). Additionally if PR issues more debt it will very likely cheapen all their outstanding debt.<\/div>\n
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Puerto Rico does not stand along. Detroit has declared bankruptcy — caused by the auto industry decline, gross mayoral corruption and huge unfunded pension liabilities. The Economist took up the pension issue with a cover story this weekend:<\/div>\n
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\"UnsteadyStates\"<\/a><\/div>\n
Here’s the Economist’s leader:<\/div>\n<\/div>\n

America’s public finances
\n The Unsteady States of America<\/strong>
\n It is not just Detroit. American cities and states must promise less or face disaster<\/strong><\/p>\n

WHEN Greece ran into financial trouble three years ago, the problem soon spread. Many observers were mystified. How could such a little country set off a continental crisis? The Greeks were stereotyped as a nation of tax-dodgers who had been living high on borrowed money for years. The Portuguese, Italians and Spanish insisted that their finances were fundamentally sound. The Germans wondered what it had to do with them at all. But the contagion was powerful, and Europe’s economy has yet to recover.<\/p>\n

America seems in a similar state of denial about Detroit filing for bankruptcy (see article). Many people think Motown is such an exceptional case that it holds few lessons for other places. What was once the country’s fourth-most-populous city grew rich thanks largely to a single industry. General Motors, Ford and Chrysler once made nearly all the cars sold in America; now, thanks to competition from foreign brands built in non-union states, they sell less than half. Detroit’s population has fallen by 60% since 1950. The murder rate is 11 times the national average. The previous mayor is in prison. Shrubs, weeds and raccoons have reclaimed empty neighbourhoods. The debts racked up when Detroit was big and rich are unpayable now that it is smaller and poor.<\/p>\n

Other states and cities should pay heed, not because they might end up like Detroit next year, but because the city is a flashing warning light on America’s fiscal dashboard. Though some of its woes are unique, a crucial one is not. Many other state and city governments across America have made impossible-to-keep promises to do with pensions and health care. Detroit shows what can happen when leaders put off reforming the public sector for too long.<\/p>\n

Inner-city blues<\/strong><\/p>\n

Nearly half of Detroit’s liabilities stem from promises of pensions and health care to its workers when they retire. American states and cities typically offer their employees defined-benefit pensions based on years of service and final salary. These are supposed to be covered by funds set aside for the purpose. By the states’ own estimates, their pension pots are only 73% funded. That is bad enough, but nearly all states apply an optimistic discount rate to their obligations, making the liabilities seem smaller than they are. If a more sober one is applied, the true ratio is a terrifying 48% (see article). And many states are much worse. The hole in Illinois’s pension pot is equivalent to 241% of its annual tax revenues: for Connecticut, the figure is 190%; for Kentucky, 141%; for New Jersey, 137%.<\/p>\n

\"PensionGap\"<\/a><\/p>\n

By one recent estimate, the total pension gap for the states is $2.7 trillion, or 17% of GDP. That understates the mess, because it omits both the unfunded pension figure for cities and the health-care promises made to retired government workers of all sorts. In Detroit’s case, the bill for their medical benefits ($5.7 billion) was even larger than its pension hole ($3.5 billion).<\/p>\n

Some of this is the unfortunate side-effect of a happy trend: Americans are living longer, even in Detroit, so promises to pensioners are costlier to keep. But the problem is also political. Governors and mayors have long offered fat pensions to public servants, thus buying votes today and sending the bill to future taxpayers. They have also allowed some startling abuses. Some bureaucrats are promoted just before retirement or allowed to rack up lots of overtime, raising their final-salary pension for the rest of their lives. Or their unions win annual cost-of-living adjustments far above inflation. A watchdog in Rhode Island calculated that a retired local fire chief would be pulling in $800,000 a year if he lived to 100, for example. More than 20,000 retired public servants in California receive pensions of over $100,000.<\/p>\n

Money (That’s what I want)<\/strong><\/p>\n

Cleaning up the mess in local and state government will take time. Circumstances vary widely from place to place, but a good starting-point would be to abandon the accounting tricks. Only when the scale of the problem is made clear can politicians persuade voters of the need for sacrifice.<\/p>\n

Public employees should retire later. States should accelerate the shift to defined-contribution pension schemes, where what you get out depends on what you put in. (These are the norm in the private sector.) Benefits already accrued should be honoured, but future accruals should be curtailed, where legally possible. The earlier you grapple with the problem, the easier it will be to fix. Nebraska, which stopped offering final-salary pensions to new hires in 1967, is sitting pretty.<\/p>\n

Yet sooner or later, some of these problems will end up in Washington, DC. In Detroit, a judge ruled this week that federal bankruptcy law trumps a state law that makes it impossible to reduce pensions. But the issue will arise again, and will not be truly settled until it reaches the Supreme Court. Many places like Detroit will surely have to break some past promises-and rightly so. And given the size of many of the black holes, the state or federal government may have to help out. Taxpayers should not bail out feckless local governments or investors who should have known the risks. But they should help pensioners left stranded through no fault of their own. Some state and municipal workers do not qualify for the federal Social Security system; they get only the pensions promised by their employer. If these do not materialise, there should be a backstop to ensure that they receive at least a basic pension.<\/p>\n

Americans in virtuous states and cities will be just as furious about their tax dollars flowing to Detroit and other distressed places as Germans are about euros going to southern Europe. But the truth is that America’s whole public sector still operates in a financial never-never land. Uncle Sam offers an array of “entitlements” that there is no real plan to pay for. Barack Obama is on his way to joining George W. Bush as a president who did nothing about that, while Republicans in Congress imagine they can balance the books without raising taxes. The government spends more on health care than many rich countries and still does not cover everyone. America’s dynamic private sector is carrying on its back an unreformed Leviathan. Detroit is merely a symptom of that.<\/p>\n

The good and the bad news about LED bulbs.<\/strong><\/span> I replaced my hot 50-WATT halogen MR-16 bulbs with 50 -WATT equivalent LED MR-16 bulb. The good news is that the temperature in my office dropped. LED bulbs burn cool. You can touch them when they’re on. You can’t with halogen MR-16s.<\/div>\n
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\"Mr-16<\/a> \"XE-CREE<\/a>
\nFirst, Halogen MR-16. Second LED MR-16.<\/em><\/div>\n
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The bad news: They’re not as bright. The LED bulbs I bought from Amazon say they’re 50 WATT equivalent. But they’re not. I’ll add another fixture to the track. That should solve the problem. There’s always a “gotcha.”<\/div>\n

Our mayoral race.<\/strong> Anthony Weiner had to resign from Congress after sending photos of his penis to random women. After an abject apology and a a sojourn in rebab, and promises he’d reformed,\u00a0 he did it again….This week’s New Yorker<\/em> celebrated his obsession with photography with this week’s cover:<\/span><\/span><\/p>\n

\"TonyWienerCover\"<\/a><\/p>\n

And this wonderful cartoon:<\/p>\n

\"Morerevlations\"<\/a><\/p>\n

Comedian Jimmy Fallon commented:<\/p>\n

It was revealed that Anthony Weiner sent nude pictures of himself to a woman using a “Carlos Danger” Yahoo email address.<\/p>\n

His wife was shocked. She said, “You still use Yahoo?”<\/p>\n

\"HarryNewton\"<\/a>
\nHarry Newton who is a total idiot, dropped his cell phone from\u00a0 his car outside the local farmers market. Good news: Apple iCloud web site gives you two options after it finds your phone — put a “Lost Mode” message on the screen that says “please call this number..” and “wipe my phone.” What’s best is it tells you where your phone is:<\/p>\n

\"wheresmyphone\"<\/a><\/p>\n

Pretty amazing technology?<\/p>\n

As interest rates have plummeted in recent years, muni bonds have been huge performers, among the best of any asset class. Now interest rates are rising, muni bonds are falling in price. That’s fine if you plan on holding yours to maturity, but not fine if you may need their principal to live on. I believe recent wholesale selling of muni bonds has caused much of the flow of funds into the equity market, causing the recent boom we’ve seen there. If more cities and a state or two go belly-up, we could see even more money flowing into equities. I need to re-assess my remaining muni portfolio. Life is interesting.<\/p>\n

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