Buffett on Municipal Bonds

Warren Buffett is making news today with comments describing his worry for the muni-bond market:

Buffett, Berkshire’s chairman and chief executive, has previously warned about the risks of insuring municipal bonds. In his annual letter to shareholders in 2009, he said public officials may be tempted to default on bonds whose payments are guaranteed by insurance companies rather than push through needed tax increases. He said guaranteeing municipal bonds against default “has the look today of a dangerous business.”

Local governments rely on the $2.8 trillion municipal bond market to raise money for construction projects and fund other budget items. The financial crisis and recession battered governments across the U.S. by cutting into tax collections and causing pension-fund losses. Some governments failed to set aside enough money to cover retirement benefits promised to employees, which may place increasing strain on public finance.

The Case for Deflation Described and Challenged

Curious George has offered another post for me to assemble. It is so interesting that I want to frame it as a debate between the primary author, Gary Schilling, and the debater, Curious George. Gary Schilling has posted a very good description of deflation that you can link to. The title of his post is 2010 Investment Strategies: Six Areas To Buy, 11 Areas To Sell. For anyone who wants to see what a deflationist outlook is, this is the spot. Curious George introduces Schilling and then challenges his beliefs. I'll use colors to distinguish the two, Schilling's beliefs in orange, Curious George's challenges in green.

Gary Shilling is a long-time Forbes prominent investment advisor and economist. He is mostly a stock market bear and deflationist. While there is much to agree with in his 2010 forecast, there is plenty to debate. Shilling is far more experienced and credentialed than I but he is not beyond questioning.

We see the 2010 investment climate dominated by weak economic growth here and abroad, led by U.S. consumer retrenchment. More government fiscal stimulus and continuing Fed policy ease are likely in this setting. So is low inflation or deflation.

2010 is going to be one miserable year for nearly everyone

Today, Mish is writing about the steepening yield curve . He points out it has reached its steepest slope since 1980! He does not stop there and by the end, Mish has made a sweeping prediction for investors in 2010. Please be seated.

"In the absence of a war outbreak in the Middle East or Pakistan -- and/or Congress going completely insane with more stimulus efforts -- I think oil prices are likely to drop, the dollar will strengthen or at least hold its own, and the best opportunities are likely to be on the short side," he writes. "2010 is highly likely to retrace most if not all of the ‘reflation' efforts of 2009. If things play out as I suspect, 2010 will be the year of the great retrace as the economic recovery disappoints."

If his outlook plays out, I expect to use short equity strategies and high grade corporate bonds with durations on the 1-2 year range. Commodities will get some time off, and gold may take on a new purpose. Jurrien Timmer, a market strategist and portfolio manager at Fidelity has said that if we are in a deflationary market environment, he would move to just money markets, treasuries and gold. Might it come to that? Stay tuned, it's not time to rest. Scanner