QE2 won't work and has not work and its failure will damage the Fed by damaging the Fed's credibility.
When the Fed buys long term debt in an attempt to stimulate the economy who do they buy the debt from? Do they buy it from a working class person who will use the funds to pay for a shopping spree? Do they buy it from a retail stock market investor who rarely owns bonds? Do they buy it from an investor who holds bonds in his taxable account or who holds bonds in his retirement account?
The answer is that most bond investing is done by pensions or buy sophisticated investors who know that bonds should be held in a retirement account for tax reasons. So the sellers of these bonds will view the receipt of cash from the Fed not as a chance to go on an inflationary spending spree but rather as just another dry chapter in their story of investing conservatively by owning and occasionally selling bonds. If the Fed wanted to stimulate consumer behavior they could buy real estate in depressed areas or buy bubbly stocks that are the most talked about in the financial press and most owned by the retail public. My point is that $600 Million QE2 is not only a drop in the bucket of a $36 Trillion U.S. debt market, but the bucket that the drop fell into is in a rich man's IRA or pension and the rich man could care less about the minor increase in wealth that occurred; instead he spends time worrying about a return of 1970's inflation destroying his bond portfolio. So he reacts by exporting his dollars to Emerging Markets and buying stocks and commodities there.
The "real" rate of interest actually went up about a percent since QE2 started. Since that rate is often at 3% then that was a huge increase in proportion to typical real rates. During that time the dollar went down even though yields increased.
The bottom line is that QE does not work as intended but can lead to loss of credibility for the Fed. This loss of credibility may seem trivial, but it is not. The Fed needs to avoid a mass panic out of dollars so it needs every bit of credibility that it can possibly get. The credibility that matters is in terms of making people believe that the Fed is not impotent and the Fed won't hurt the dollar by causing inflation. In a world full of Central banks that are too easy on monetary policy, the future winner will be the country with an honest, reliable, credible Central bank, like Germany, Canada, and Switzerland. If a financial panic starts for whatever reason and the Fed has suffered a loss of credibility then an old-fashioned bank run against the Fed can start but it will occur on a 21st century scale. A fiat money system is all about establishing and maintaining credibility
The solution is for the Fed to follow the lead of Swiss, Canadian and German Central Banks.
Regarding how this affects investors, my first point is that QE2 may have created a stock market bubble. Simply ending the hopes of another QE could be reason for stocks to decline to more reasonable levels of about 900 for the SP. My second point is that since QE2 actually made interest rates higher and damaged the value of the dollar on a "real" interest rate adjusted basis, then once QE has been permanently ended the market will reward the U.S. with better interest rates.
I have discussed QE here and here.
This is an example of independent investment advice.
My fundamental rules of investing:
1. Avoid leverage whether it is using a margin loan, options, futures, etc. This avoids risk of loss due to expiration of options, risk of tracking error in futures due to backwardation-contango, risk of panic sales to meet margin calls (especially during a "Flash Crash").
2. Avoid excessive risk and / or high volatility investment because during a crash it will require a lot of appreciation to make up for the loss and you may panic and sell out during the dip.
3. Avoid investing in things that have no traditional stream of income because an income stream is the key to using credible valuation tools. This means avoiding commodities, rare art, bare land, etc. This helps to keep you from buying tech bubble stocks with no earnings or opaque companies that lack clear financial statements.
4. Be contrarian. Use independent investment advice. The way to get alpha is by having a creative, contrarian insight, not by following the herd.
5. Use risk-adjusted investment measurements (Sharpe and Information ratios) just as you should also use inflation adjusted and tax-adjusted investment measurements. See my post.
6. Never overpay for an investment; use income based methods like Shiller PE10 and try to buy only at a discount so as to have a margin of safety. This means boycotting, rather "market timing" an overpriced investment. Be tough and stubbornly refuse to buy until conditions are right. Don't be afraid to hold a lot of cash for a long time in order to fulfill your mission, even if interest rates are artificially low.
7. Treat potential investments like a ticket that you can only punch once every one or two years (imagine only 25 trades in a lifetime allowed). You must wait patiently with possibly high levels of cash or bonds until a carefully chosen opportunity becomes available.
8. If an investment is opaque, illiquid, hard to value, has significant tracking error, has bad spreads then you must assess a high risk premium hurdle rate for that during your decision making process. This probably means the forecasted profit won't be enough to overcome the hurdle rate discount, so be glad you were warned and don't buy it. If you are not adequately compensated for excess risk caused by these problems then it is better to accept the more modest rate of return from more traditional securities investments that have greater transparency.
9. Bonds are a tool and tools should be used for the purpose for which they are intended to avoid injury. Bonds are intended to be a reasonable stable store of value during a stock crash, so avoid "B" paper bonds because they act like a risky equity during a crash, precisely when you needed them to act like an "A" paper bond. If you desire the hoped for returns of junk bonds then instead you should simply buy poor quality small cap stocks and hope for a bull market.
In the Wall Street Journal today Fed Vice Chair Yellen said long term bond yields may have risen due to QE2 because the market expected a larger amount of bond purchases. This is startling statement. If the market expected more purchases then the market was saying the economy needed a lot more stimulus in which case rates should be low. So to make rates low the fed will need to buy even more bonds. This implies that the invisible hand of the market is saying that gradually the Fed is losing credibility and that the patient is beginning to fail to respond to the medicine, resulting in a long term soft depression as in Japan. The big risk is that Fed’s actions will increasingly be disregarded by the market and then the government will loose the ability to control monetary policy. It seems that in response to QE which is intended to devalue the dollar that the market raises interest rates to compensate for loss of purchasing power and thus the goal of devaluing the dollar in negated. Thus QE2 or any QE will not work and thus a new recession may occur.
This posting is an example of independent investment advice.
The spike in oil prices will create a recession because it will dampen consumer spending on other things. Further if interest rates rise in the bond market in response to the alleged threat of inflation then those higher interest rates will pop the stock market bubble.
It is interesting that the Fed’s QE2 stimulus ended up creating food and oil inflation in Emerging Markets, which in turn created shocks to their economy resulting in riots and revolutions which in turn will lead to a flight to safety in U.S. Treasuries and also create a world recession. Despite the increase in oil prices Treasury rates are going down because the market is anticipating that this is a shock that will lead to deflation, not inflation. Recently Barron’s had an article by Michael Kahn warning that commodity stocks are topping out. Copper has been going down for a month, and agricultural commodities are easing from their highs. The price of fruits and vegetables fluctuates wildly because it is too hard to increase the supply in any one year, unlike a factory with “just in time“ manufacturing procedures.
Inflation is caused by labor shortages (like existed in the non-globalized union shop economy of the 1970’s) and must be nurtured by an increase in the money supply. No amount of money supply increase will by itself create inflation. Today multi-national corporations ruthlessly move factories from one country to another to get the lowest labor costs and tax rates; this did not occur in the 1970’s which is why we don’t have inflation. Anthony Boeckh in his book The Great Reflation said that if commodity prices go up then people will have less purchasing power and will cut back on purchases leading to a drop in prices. He said inflation tends to correlate with wars and is quite low in peacetime. My opinion is that after the end of the Cold War in 1991 the world entered a peaceful era like that of the 19th century after Waterloo where inflation (except for the U.S. Civil war) was very low.
When the mortgages owned by the Fed are due to be repaid the Fed is not going to tell the borrowers to keep the money and not repay the loan, so when the loans are repaid then money will flow back into the Fed, thus removing some of the risk of inflation. Mortgages have an average life of 12 years due to prepayments and amortizations, so eventually the public will have paid back and closed out loans that are now owned by the Fed. The commercial bank reserves from the Fed can be withdrawn easily from the banks.
The need for investors to protect themselves from overpaying for inflation protection is an example of why people need independent investment advice.
Bank Loan Funds are mutual funds that invest in corporate loans created and sold by banks. An article in Bloomberg at praised these investments, but I disagree. The loans are typically below investment grade with grades averaging “B” or even “CCC” and are thus “junk bond” credit quality. My research is that junk bonds actually provide a total return that is less than “A” paper because of permanent losses to capital that occur during crashes. I have determined that a bond or loan is a work tool and that a tool should be used for the purpose for which is intended or else an injury could occur. If you want bonds please insist on investment grade credit quality (BBB or higher) even if the yield is tiny. The purpose of bonds is to protect capital, not to risk it during a crash. The problem with junk bonds and junk loans is that they have to be market-timed and sold just before a recession begins, however, it is very hard to do such timing. If your timing is great then why not simply buy or short sell the riskiest and most leveraged type of equities?
If stocks crash then junk bonds and junk loans will decline in value at roughly the same percentage, so why take that risk?
The borrowers try to refinance into a better rate so there is risk that the portfolio yield won’t remain the same. I have commented on the risk of risky bonds here http://tinyurl.com/47sjj3w and here http://tinyurl.com/4c6h5tr
My concern is that mutual funds could lure an unadvised investor into investing in Bank Loan Funds without the consumer being aware of the hidden risks. Sure, the disclosures are available in the back of a 300 page prospectus written in dry, vague words, but those are hard for investors to spot. Another technique used by mutual funds is to own a blend of bonds with low and moderate levels of credit quality and then hope the investor only reads the average credit quality of the fund’s holdings. This is important, because if 20% of the fund is in high risk bonds then this component could lead to significant losses even if the average bond was only moderately hurt by a crash.
This why consumers need independent investment advice.
The housing market will not repeat its previous patterns over the last 45 years. Using underwriting standards and looking at the inflation adjusted cost of money, we are in a new era in which the eras from 1965 to 2008 are not comparable.
From 1965 to 1982 there was a lot of inflation and it kept increasing until 1982 when the Fed tightened the money supply with Prime rate at 22%. During this era the real rate (inflation adjusted rate) of interest was sometimes negative so that borrowers were willing to borrow to buy a house even if the rate was 12%.
Then a new era of low and declining inflation started in July, 1982 when the Fed’s tightening was so radical that it ended inflation and thus made interest rates come down to reasonable levels. In 1984 the first “Easy Qualifier” home loans started becoming available. These allowed borrowers to get a loan without proper income documentation which led to abusive behavior by some borrowers and excessive, unaffordable borrowing which led to a housing bubble. Also at this time the Shadow Banking industry of non-bank lenders began to offer loans using securitized lending. These acts set the stage for a massive housing bubble that lasted until the crash of 2007-2008 at which time a new era in housing has started.
Now Easy Qualifier (no income verification) loans are outlawed and loan securitization by non-bank lenders has been greatly reduced. So the new era has much harder rules that greatly restrict how much consumers can borrow. Since most homes are financed with a mortgage then this reduction in mortgage lending means that consumers will simply have to buy a lower priced home than what they were used to. So this will put downward pressure on home prices. Basically in a normal lending environment (that did not exist during the time of Easy Qualifiers) what drives mortgage approvals is personal income, not interest rates. So housing could only go up in proportion to the average person’s personal income which grows slowly and steadily, so this why before the Great Bubble of 1983-2008, nationwide home prices did not go up faster than inflation, after adjusting for quality.
The era of inflation for 1965-1982 was an era of cheap money on an inflation adjusted basis, which explains appreciation then. It was an era when people tried to protect themselves from inflation by buying real estate. The era from 1982-2008 was a credit bubble era where loans were granted increasingly with less restriction each year so that in the final years of the bubble the loan underwriting rules were a meaningless joke for those willing to pay the fees charged for “Easy Qualifiers”. During 2001-2006 it was possible to buy a $1,000,000 house with no down payment and no verification of income and no lender’s recourse if the borrower decided to go into foreclosure! No wonder prices appreciated excessively. My point is that financing and inflation conditions since 1965 until 2008 were an unusual situation that won’t be repeated and thus one can’t use the data of the past 45 years to look for patterns that would indicate if another housing boom will start. The best forecast should be based on the fact that mortgage lending is tied to income and income will be growing very close to zero on an inflation adjusted basis. Also there is a huge overhang of shadow inventory that will produce a surplus of housing inventory until 2017-2018. Also, baby boomers need to downsize their homes to free up equity. Also personal incomes will be stagnant or slow growing for a long time, and what little growth of incomes occurs will need to be spent on rising medical costs. As a rule of thumb, when a bubble is busted it remains busted and new bubbles form elsewhere. Remember the Tech stock crash of 2000 and how long those stocks stayed down at low prices. The NASDAQ is still about half of its high water mark of 11 years ago. See my post http://tinyurl.com/46n6u4n
This type of blog post is an example of independent investment advice.
Today there was a lot of bearish news. After the stock market had been going up with minimal dips for six month it finalled dipped with the SP decling 2%, Nkkei down 1.8%, Shanghai down 2.6%.
Robert Shiller forecasted continued price declines in housing of up to 25% in some cases. CoreLogic said NAR had overestimated the number of home sold since 2007 by 20%. Oil exploded upwards with some gas stations charging $4 a gallon for Regular gas in California.
Last week week Bloomerg article comemnted that is is unusuall to have a rally for so long with no dips-well now we have a dip! Does that mean it is time to buy on a dip? No. When the PE ratio goes to 8, or 9, or 10 then it is time to buy. This would be about 600 or less for the SP.
Independent investment advice is needed now to protect for being mislead by sell-side brokers.
I recently saw the video of The Russia Forum 2011. Their website has been updated with a recording of session “Global Investment Outlook: Where is the Money & What are the Risks?” of Feb. 4, 2011 at http://tinyurl.com/62ofp4o
Editor and Publisher of "The Gloom, Boom & Doom Report"
* Maria Gordon
Executive Vice President and Emerging Markets Equity Portfolio Manager, PIMCO
* Hugh Hendry
Partner, CEO, CIO, Eclectica Asset Management
* Scott Minerd
CIO, Guggenheim Partners
* Russell Napier
* Nouriel Roubini
Professor of Economics, NYU's Stern School of Business
The forum panelists mostly were inflation-phobic, except for Nouriel Roubini and Hugh Hendry. The majority of the panelists felt the dollar would continue to fall against EM currencies and that U.S. Treasuries were a bad investment. Faber and Minerd were bullish on gold. Faber suggested buying rare art because it has been confiscated in the past, unlike gold.
My opinion is that inflation won’t be a problem for several years and that investors can hurt themselves by overpaying for allegedly inflation-protected investments. Remember the French Maginot Line that was designed to protect them from a German invasion? It was never used because the invasion came in on a different route. Therefore one should be careful about overpaying for inflation hedges. They should be seen as simply another investment where it is important to wait to buy only when the price is low enough, instead of buying in a panic without regard to valuation metrics.
Most of the panelists could be described as people who provide independent investment advice, although two were managers of large investment companies. All of them were very intelligent and thoughtful.
Book review: Capitalism 4.0 The Birth of a New Economy in the Aftermath of a Crisis by Anatole Kaletsky. The author is Chief Economist with GaveKal investment company in London.
This is a very intriguing and inspiring book, even though I disagree with some of the author’s points. The author says that in economics sometimes there really are new paradigms. He believes we are in a brave new world where finally, after centuries, people have learned to trust and use fiat (paper) money with out any backing by precious metals, and this new behavior will make the world more efficient and prosperous.
His big point is that we are in the middle of a multi-decade process of globalization and technological revolution which will greatly increase prosperity and, by contrast, the Crash of 2007-2008 was merely a petty distraction. The book is loaded with stunningly optimistic explanations about the solutions to the economies problems.
He cities four megatrends: lots of new 3rd world consumers, globalization, the Great Moderation (where recessions become rarer and interest rates lower), and financial revolution where ordinary consumers can get loans against assets that previously only rich people could get.
Regarding economic worries he says: regarding inflation, relax, the increase in the money supply doesn’t by itself create inflation, in addition labor must gain power and there must be shortages of labor and this won’t happen so there won’t be inflation. Regarding excessive government debt he maintains that as long as it is issued in the nation’s currency and is mostly owned domestically and if interest rates remain low then all will be well. He forecasts interest rates will be low for many years. He believes the dollar won’t collapse. He feels the increased consumer debts are legitimate and affordable because of current and future growth of the economy. He says the increase in house prices before the crash of 2008 were partially justified due to growth in the economy. I disagree with that, my previous career in real estate lending gave me some insights in that area that he may not have. I think the severe lack of income based “full-doc” loan underwriting from 1997-2007 was responsible for the ridiculous once in a century real estate bubble. During 2000 to 2010 incomes were stagnating. Since income is the key determinant of ability to get a housing loan, even more so than interest rates, then I believe that house prices in 2000-2008 should have remained stagnant in parallel with personal incomes. He claims that "mark to market" rules for banks helped create the Crash of 2007-08 but I think it was a cold, hard fact that banks had loans that needed to be permanently marked down and that the markdown was not a temporary panic but a permanent write-down of junk quality loans that were falsely labeled as “A” paper quality. But that is part of the past. What is important now are his observations about things other than and more lofty than the U.S. real estate/mortgage crash. And those observations are wonderfully cheerful and sound. I agree with him that the world economy has a bright future. By, contrast my caution is that I recommend that investors be careful not to overpay for equities, and to use the Shiller PE10 ratio to avoid investing when the market is overpriced.
Kaletsky makes excellent points that the economics profession tries inappropriately be a mathematically based science like physics and that it incorrectly assumes that consumers and investors are rational economic actors. The book is very well written with language that is easy to read yet intellectually stimulating.
The book is an example of high quality independent investment advice, even though the author is an employee of a mutual fund company. He does not try to sell the reader any of his company’s services.
I have previously cited Kaletsky on my website as a reason to be fundamentally bullish at http://tinyurl.com/4c7cusr
Book Review: Wall Street Revalued: Imperfect Markets and Inept Central Bankers, written by Andrew Smithers. The author is mentioned by Jeremy Grantham as one of only five intellectuals in the investment advisory industry. The book’s theme is that the stock market is not efficient; instead the author has developed his “Imperfectly Efficient Hypothesis”. The author demonstrates that the Random Walk Hypothesis is wrong and clearly shows the market is not efficient. My own experience with the tech bubble of 2000 and the real estate bubble crash of 2007 shows that the market is incredibly inefficient. The author assures the reader that eventually the market comes to its senses and adjusts to fair value. However, the author only cities the great bubble tops of 1929 and 2000 as being clearly a bubble top. This is because a bubble can get even bigger over many years and it is not possible to predict when it will break or how big it will get. Smithers shows how Tobin’s Q, a measure of stocks replication cost, and Shiller’s PE10, a measure of the ten year average of price/earnings ratio, move closely together, thus confirming each other. These models can’t be used to time the market but they can show that the market is under or over-priced. The author debunks popular theories that interest rates determine stock prices, and debunks the “Fed Model” theory that the Fed determines stock prices. He shows leverage is usually bad. He discusses the Equity Risk Premium (the extra return that stocks earn over bonds) and shows that it varies widely and unpredictably over many decades.
The book demonstrates its commitment to professional analysis by frequently referring to “real” (inflation adjusted) rates of return, instead of nominal. What a refreshing sense it is see numbers being displayed properly, instead of being like most investment books that do a superficial job of show “real” data. The book is filled with pages of crisp, clear high quality color charts to make it easier to read the data. The book explains that return on equity for the market is not the same as return on equity for an individual portfolio because an individual can spend instead of reinvest dividends and bond interest, also the reinvestment rate may be lower than the rate of return on portfolio assets. The book shows that corporate profits are overstated by 10 to 20% due to failure to take proper depreciation charges.
The book is truly refreshing to read. As a person who earned a finance degree over 30 years ago, I had to put up with the academic experts mistakenly telling me for the past 30 years that the market was efficient when it clearly was not. And those experts tried to imply that their doubters were uneducated, unprofessional types. But now we have an intellectual who has written a well-documented book shows that the Efficient Markets Hypothesis is wrong.
The book advocates concepts similar to my own philosophy at www.mayflowercapital.com/inv-phil and here http://tinyurl.com/2efezae
The book’s author, Mr. Smithers, operates an independent investment consultancy in London and is a prime example of why independent investment advice is best.
Please download my free Special Report: Avoid these investment mistakes at http://www.mayflowercapital.com/Avoid-These-Investment-Mistakes/
The report gives a quick read of ways to reduce investment risk, avoid problems, and prepare for the goal of a safer future.
This is independent investment advice from a fee-only investment advisor.
According an article in the Economist today at http://www.economist.com/node/18175493 inflation may actually be good for emerging market countries. They quoted Arthur Kroeber of Dragonomics, a Beijing-based research firm. This is usually only if inflation is caused by faster wage growth.
Emerging markets need a higher inflation rate than developed countries because faster productivity growth raises wages, which in turns leads to more domestic consumption, which reduces the desperate need for an EM country to have an aggressive export policy with artificially low currency rates, because now they have a domestic market to sell goods to. So their currency will go up in value, which will make it easier for them to import needed food, which, after a currency upvaluation is not so expensive and thus EM inflation cools down and the economy goes to equilibrium. For information on forex investing please see www.mayflowercapital.com/emerging-market-currency-investing and http://www.mayflowercapital.com/fx
This is my independent investment advice.
Sharpe ratio versus Information ratio: what is the difference?
The Sharpe ratio compares the profit in excess of the T-Bill rate of return, divided by standard deviation. By contrast, the Information ratio uses a more relevant benchmark than Treasuries. For the Information ratio is calculated by taking the excess return of an investment over a similar index and then divides the result by the investment's standard deviation. So the IR is more sophisticated and relevant than the Sharpe, especially when T-Bills are at artificially low rate. Both ratios are attempting measure the ratio of risk to return. This is just as important as measuring the inflation adjusted or tax-adjusted rate of return.
Why does the Sharpe ratio show lower results than the Information ratio? This is because currently bonds have been doing better than stocks on a risk adjusted basis over the past 3, 5, 10 years. Sharpe ratio uses T-Bills as a benchmark. IR uses stocks as a benchmark for stocks, so if all stocks go down together this camouflages the damage done. Of course, when T-Bills are artificially low then that creates some statistical anomalies. Basically, never rely on just a few quantitative tools; use many different types of tools and try to understand the qualitative reasoning as to what they are trying to tell you and then ask yourself if this current environment has made some of the models disfunctional - always do your thinking for yourself - never let a machine, formula or another person do your thinking for you.
This is independent investment advice. Remember to not only be independent of commission driven "sell-side" advisors, but also be independent of non-thinking machine-driven formulas, and independent of group-think mass hysteria, etc.
Inflation is not coming back for several years. The unemployment statistics are inaccurate because they show a huge drop in unemployed people in the past two months but this is due to discouraged job seekers dropping off the radar. The U-6 meaure of unemployment continues to be about 16% Recent reports of wholesale price increases of 0.5% a month, which is 6% annualized are a concern but if the Chinese economy cools down then commodities should cool off and that will take the steam of out of the wholesale price increases. For two years U.S. wages have dropepd and that is key determinant of inflation. With high unemployment that is not improving there is very litle risk of inflation, which means that bond proces are not too high.
Assuming the Shiller PE 10 reading of 24 is a reliable gauge of equities then the market is overpriced and due for a correction, with the SP headed to 900. Further, if hedge funds suffer sudden margin calls during another "flash crash" then this could make matters worse as they would be forced to sell off good high quality very liquid stocks in order to meet margin calls, which would in turn raise the cost of Put options used by hedge funds so that they could not afford to be highly leveraged, whch would lead them to do more selling of equitiies. The VIX is very low and eventually it will go up, which would make it harder for leverged speculators to go long on equities. This would cool off the economy and help bond prices and help reduce the risk of inflation.
This is my independent investment advice about inflation.
Excellent article by Bob Carney at CNBC today about Muni bonds. See www.cnbc.com/id/41604499 He basically is holding the same viewpoint as I do, saying that Muni bonds are riskier than they seem. The article mentioned the huge increase in Muni debt. It did not mention that there is also a huge amount of unfunded contingent public employee retiree pension and health care liabilities. For example, California has $500 billion of unfunded pension liabilities that do not show up as debt, which is one-sixth of the nation’s total Muni debt. My philosophy about bond investing is that bonds should be what economist Andrew Smithers called a “sanctuary asset”. This means that bond investors should avoid risk and thus shun junk bonds, including any type of high yield bond. Since Munis in some cases now yield 9after adjusting for taxes) about the same as junk bonds then those Munis are, according to the market, junk bonds. The purpose of bonds is that they are a tool that must be used properly, just as a construction worker must use a work tool for the purpose that it is intended so that an accident does not occur because the tool was used incorrectly. We know what happened when subprime loans were deceptively bundled into MBS and falsely labeled as AAA paper. That was an example of a tool which was used incorrectly that resulted in injury to the investor. So avoid investment injuries and avoid risk by refusing to buy junk bonds. The whole reason to own bonds is to have a sanctuary asset that will not loose value during a crash, but corporate junk and high risk Munis will loose value during a crash. The reason you need bonds is to be able to stabilize your stock portfolio with a low-risk investment and to have a source of funds to use to buy stocks during a crash. The rationale that Munis won’t fail is based on some cliff-hanging scenario where the issuer will just barely avoid default by taking desperate measures to make the minimum debt payment, but that is not the safe and correct scenario for investing in bonds, instead you need to own high quality bonds which have a comfortable margin of safety in terms of the issuer’s ability to make payments. This is my independent investment advice about Muni bonds.
My investment outlook remains unchanged during the past three weeks. I was on vacation in Argentina from 1-22-2011 to 2-11-2011 and having reviewed the market after my return, my opinion remains the same. The market continues to be a gigantic bear market rally with the fundamental value of the SP at 900. There is risk of loss in the equity markets and minimal reason to believe they have upside potential. With bonds at least you get the coupon. EM stocks especially China continue to be at risk due to erratic, unpredictable regulation, montrary polciy, corrpution, etc. Also there is the risk that eventually China's rapid growth rate will be too big to sustain and will come down to that of the developed world while still bearing the downside risk of the EM markets.
This is my independent investment advice.