Monday, April 25, 2011
The Underappreciated Municipal Bond
Social Security won't be there for many of us -- so here's how to build a "replacement retirement" with safe municipal bonds.
Last week, readers nearly sunk me with their heated responses to my call for the end of Social Security. (Thank you for your replies.) Today, we'll focus on buying tax-exempt bonds to replace that coveted Social Security check once the program implodes.
Meredith Whitney, the analyst who correctly predicted the fall of Citibank and the other megabanks, more recently pounded the table about a coming wave of municipal bond defaults.
Nouriel Roubini discussed the same not long after, and while his numbers were substantially less painful than Whitney's, they were still triple the historical default trends.
Even if Roubini is correct, municipal bonds are still remarkably safe. Using his numbers, the default rate could climb to 3.7%. (That's not 37%, but three point seven.) This number also includes ALL bonds... even bonds that should never have been sold, for things that nobody wanted.
Adding to municipal bond woes, on Friday [April 7] we were greeted with this front-page news in The Bond Buyer:
"Fitch Ratings Friday downgraded $4.6 billion of Detroit water and sewer revenue bonds, citing weak financial performance and future challenges, including looming capital needs and risks associated with derivatives."
So why do I think it's time to consider municipal bonds?
Forget the fact that I've been working with every size municipal borrower across the United States. The reason I like bonds now is because they are currently out of favor, and the prices have dropped. They are also talking about eliminating tax-exempt bonds all together -- making any tax-exempt bonds I currently hold worth that much more.
It is unlikely Social Security will be there for anyone under the age of 40 -- or at least not in its present form. If you agree, then along with playing around in the stock market, you had better start considering creating your own safety net. I would suggest that municipal bonds offer a perfect replacement for our government's Ponzi scheme.
However, like any investment, you better understand what you're buying. Which is the point of today's piece.
As much as I'd like to impress you with advanced knowledge, my side of the investment banking business doesn't require an advanced degree. If you can read and do a little math, you'll understand bonds just fine. In a few short paragraphs, I'll provide you with a few keys that will help you more confidently invest in municipal bonds and increase your returns over what a broker would try to sell you.