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Affluent Christian Investor | December 14, 2017

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Detroit is the Canary in the Coal Mine for Munies

Photo: New York Times

Photo: New York Times

I have pleasant memories of Detroit.  For almost fifty years, I have been making the summer drive to the Mackinaw City area of Michigan near the Upper Peninsula.  Until I was a teenager, we used to pass through Detroit on the way and see my great uncle Oliver.  He was one of those guys who built the city, and rebuilt antique cars in his garage.  He was a man who could do anything with his hands.  I don’t think there are people like him in Detroit anymore.

While Detroit is worse than most, many of our cities are dying.  They are suffocating under a wet blanket of anti-business and tax-and-spend policies that are driving revenue producing entrepreneurs away in droves.  What is left is a cadre of public employee unions that have lived high on the hog for decades and will do and say anything to keep the gravy flowing.

I have written extensively about the coming interest rate shock due to our overwhelming sovereign debt as a nation.  Detroit is the canary in the coal mine for another mountain of crushing debt: the debt of our cities.  Meredith Whitney was spot on, just a couple years early.

While it is bad enough that progressive policies bought votes and other bags of goodies until the lights went out, what is worse is the destruction of the education system and the creation of a lost generation.  Forty percent of Detroit’s residents can’t read.  Even if a business wanted to move there, where would they find a sufficient workforce?

And now, let’s get to the point.  Do you own any municipal bonds?  If you do, then dig out the prospectus and start reading.  Don’t assume they’re perfectly safe: do your homework. Scrutinize them like any other investment. What is the revenue source behind the bond?  Is it a revenue or a general obligation bond?  Are there loopholes so that the covenants can be broken?  What is the reputation of the government entity issuing the bond?  Does it look like they have the political will to pay back the principal?  Or are they like Detroit, kicking the can down the road and constantly looking for another pot of money to loot?

Here’s my rule of thumb.  If the bond is issued by a city run by a progressive administration, sell it.  Insurance doesn’t matter, it won’t be worth anything when hundreds of municipalities default.  If you need tax free income, buy bonds that are issued by responsible entities with a track record of good governance. It shouldn’t be too hard to distinguish between the two.

Oh, and here’s another tip.  If you are looking for cheap farmland, look in Detroit.  Call it reverse creative destruction, I predict Detroit will go back to where it came from.

Born in Georgia and raised in Savannah, Todd spent his early summers in Carp Lake, Michigan listening to the vivid stories of his grandparents recalling their youth in the northern wilderness. Ever since his earliest days, he loved story telling. Todd left Savannah in 1982 to attend the U.S. Air Force Academy in Colorado Springs, CO where he studied aeronautical engineering. Upon graduation in 1986, he immediately left the Academy for flight school. His initial assignment was flying Combat Search and Rescue helicopters at Elmendorf Air Force Base in Anchorage, Alaska. In the UHAE (Unique Harsh Arctic Environment-pronounced "Yoo Hay" by Alaskans) he flew local rescue missions and was also deployed throughout Asia. During this time he was credited with saving many lives and even more assists. In addition to flying exciting missions, Todd also managed to graduate from the University of Alaska Anchorage with an M.S. in Engineering Management. In 1990 he volunteered for Special Operations and went back to flight school. In 1991 he was assigned to the 20th Special Operations Squadron at Hurlburt Field, FL, flying MH-53J Pave Low helicopters. Immediately he was deployed to Kuwait. Over the next three years he was active in classified missions in support of counterterrorism under the control of the National Command Authority and deployed throughout the world. His customers included SEAL Team Six and Delta Force. He left the Air Force as a Captain in 1994. During this hectic period in his life he found time to write his first novel, The Ultimate Solution which was never published. He did publish an article in the Armed Force's Journal in 1994 on Special Operations Aviation. 1994 found Todd joining an investment bank and earning a chance to expand his knowledge of his other passion, Finance. During this second career he became highly knowledgeable in Emerging Markets Fixed Income and traveled a great deal internationally with a focus on the Caribbean. He has conducted business in over forty different countries. He became acutely aware of the consequences of economic decisions and their effect on national and economic security. However, Todd.'s love of storytelling was uncontrollable. He left the financial business in 2011 to write. Currency was published in December of that year. Once he began typing, he never stopped. Todd lives on a three-hundred year old farm in Connecticut deeded by King George of England with his children.

 

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