Friday, October 26, 2012

In January of this year I predicted that Barack Obama would be reelected in a close race with Mitt Romney based on the fact that the US economy would be in some form of OK. I still believe that and we will find out in two weeks. Most people I know have already decided who they will vote for and cannot wait for the election to be over so we can get on with our lives. I have said before that who ever wins will be facing difficult choices and the decisions made will have significant impact on the economy in the next few years.

One of the markets I follow closely is the municipal bond market. There have been a number of municipalities that have filed for Chapter 9 bankruptcy protection in the last year and the resolution of these filings will have a huge impact on municipal finance. So far there has not been a clear pattern emerge concerning the discharge of debt, union contracts, employee benefits and a host of other issues. Once these issues start to be decided, municipal bond holders will be forced to reevaluate their holdings and look more closely at their standing in the court process. There are important differences between Chapter 9 and commercial bankruptcies (Chapter 11 etc.). This link outlines some of the considerations and criteria necessary for a filing for Chapter 9 protection.

Since the 1970's the use of the bankruptcy code by US businesses has been on the rise. If you are a bondholder in a bankruptcy you have seen your investment wiped out with the stroke of a pen. Sometimes in a large bankruptcy like GM 35 billion in debt is replaced with a very small amount of stock in the new company. Jack got a better deal than that for his cow when he swapped it for magic beans. If municipalities can successfully void interest and principal payment the politicians will drive a truck through that loophole rather than correct the long term problems of employee benefits and wasteful spending. Stay tuned.

Thursday, October 11, 2012

In today's economy we have to take our victories in small doses. Last Friday the unemployment number was down as a result of more people working. The hook in the number was that many of the people had to take part time jobs. This is how the system works, first you look for a comparable job to the one you lost but eventually you must face reality and start to rebuild your career somewhere even if it is part time, seasonal or temporary. I believe most people like to work and feel productive and they would rather be doing something than sitting idle. It never made any sense to me when politicians talk about how people are living this wonderful life on food stamps and unemployment checks.

The housing market is showing signs of not being completely dormant. The foreclosure rate is dropping. Again a small victory. The Federal Reserve has been throwing low interest rates at the real estate market for four years now and if we didn't see some signs of life by now there would be no hope for the economy.

In 2009 I said that if you believe the current slump should be dated from 2007 we as a country would be fortunate to emerge from it in 10 years. I still believe that to be true. We have made some progress, the fact that we opted for stimulus initially gives us a better chance than Europe to correct our macro imbalances in the future, but I think we still have a ways to go. The next administration will be faced with a difficult set of choices comparable to the ones the current administration faced their first day in office. I hope that whoever is elected decides to play in the real world and not some gated community of economy fantasy that seems to be a large part of campaign rhetoric.