NY Times article on the "tip of the iceberg" that is Puerto Rico

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Ari
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by Ari » Thu May 12, 2016 12:28 am

greg24 wrote:While there are "borrowing to pay bills" similarities between PR and other parts of the US, is it fair to compare a territory with 45% unemployment to states with 6% unemployment? It seems like PR was between a rock and a hard place, while the mentioned states have other revenue options.
There has been a correction in the article. Puerto Rico does NOT have 45% unemployment. Not even Greece in the midst of crisis ever reached anything close to that. Puerto Rico has 12% unemployment. Which is bad, but not apocalyptic.
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HomerJ
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by HomerJ » Thu May 12, 2016 10:13 am

larryswedroe wrote:You can be buy and hold and change your mind when receive new information.
Except how do you know the "new information" is correct? Because some economist says so?

I think you make investing way more complicated than it needs to be, but that's understandable, since investing is your career. For the rest of us, it's best to avoid seeking out "new information" which 98% of the time turns out to be false "noise".

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greg24
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by greg24 » Thu May 12, 2016 10:18 am

Ari wrote:There has been a correction in the article. Puerto Rico does NOT have 45% unemployment. Not even Greece in the midst of crisis ever reached anything close to that. Puerto Rico has 12% unemployment. Which is bad, but not apocalyptic.
Wow, the NYTimes is really accurate nowadays.

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by larryswedroe » Thu May 12, 2016 6:19 pm

no the MOody's report is fact, not NYT

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by Broken Man 1999 » Thu May 12, 2016 7:09 pm

Thanks for the discussion, Larry.

Were I in the market for munis, I would certainly find your info useful. Living in a state with no income tax, FL, means I would have many more viable choices, should I invest in munis. No plans at the moment.

I am with you, I see no reason not to incorporate available info into your AA. Things sometimes change over time, no reason to not examine your thought processes to see if you still believe your AA is still suited to your situation.

Glad I'm not in PR. Looks pretty grim to me.

Broken Man 1999
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nedsaid
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by nedsaid » Thu May 12, 2016 8:20 pm

AlohaJoe wrote:
nedsaid wrote:Somewhere in my foggy memory banks, I faintly recall somewhere that Joe Kennedy parked the family fortune in muni bonds during the Great Depression and fared very well. I can't image any better test for muni bonds than the Great Depression.
This had me curious, so I did some Googling, which lead me to Google Books which has an excerpt from The Patriarch: The Remarkable Life and Turbulent Times of Joseph P. Kennedy. It doesn't seem to support this, unfortunately.
His December 1931 balance sheets show him [...] in many regards, he was his own hedge fund. In his largest accounts [...] he balanced his short positions with investments in stocks he expected to rise over time and/or pay healthy dividends. [...] His end-of-year balance sheet for 1931 listed assets of $2.1 million; for 1932, his assets were listed as $4.2 million.
This stock market speculation is a big reason he was picked to run the SEC when it was founded. I couldn't find anyone talking about him investing in municipal bonds :(
Did some checking around via Bing and the 1930's was good to Joe Kennedy. Made big money in movie studios, booze, and real estate. I saw no references to municipal bonds. I stand corrected.

I did see this referenced somewhere but perhaps the article was just wrong.
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ClevrChico
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by ClevrChico » Thu May 12, 2016 9:18 pm

94.5% of the bonds VWIUX have a >= A rating.

In 7/2014 Puerto Rico general obligation bonds had a Ba2 rating. It's unlikely VWIUX would hold any/many bonds of a municipality in similar condition.

I'll stay the course.
Last edited by ClevrChico on Thu May 12, 2016 10:01 pm, edited 1 time in total.

AlohaJoe
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by AlohaJoe » Thu May 12, 2016 9:37 pm

nedsaid wrote:Did some checking around via Bing and the 1930's was good to Joe Kennedy. Made big money in movie studios, booze, and real estate. I saw no references to municipal bonds. I stand corrected.

I did see this referenced somewhere but perhaps the article was just wrong.
For the record I didn't intend my comment as a "haha, you're so wrong and dumb". I just thought your comment was a potentially interesting bit of trivia which led me on a fun 15 or 30 minutes or googling (so thanks for that!) and I felt like sharing the results of. (I had no idea Joe Kennedy was the first head of the SEC, for instance.)

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by dmcmahon » Thu May 12, 2016 9:40 pm

Thanks for raising awareness Larry. I've been following this disturbing trend for 10+ years now, and I avoid munis entirely due to this overhang. I recall Meridith Whitney getting trashed here for raising an alarm about this issue too early. Other than to move to a state that's less exposed than California it's unclear I can do more to avoid the consequences. Sadly my fellow citizens seem to prefer to remain in denial about the situation, even as the road ahead is illuminated by Detroit, Chicago, Illinois, and even Greece.

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wshang
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by wshang » Thu May 12, 2016 10:22 pm

I'm not quite understanding the handwringing. The insurers have largely said they have more than enough reserves to cover ongoing interest payments and interest for PR. The hedge funds have purchased some of these bonds are greatly depressed prices. At worst, the politicians will either make up the difference as a rounding error in the Federal budget, bring back the Navy bombing test sites, something similar, such as create tax bennies for big pharma. I see it as a tussle between these entities. Of course, it is sad to see mismanagement lead to this situation. But then again, Plato warned about this danger in his criticism of democracy. Now where is that link . . . . .

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by Tier1Capital » Fri May 13, 2016 6:32 am

Avoid the borrowers with credit concerns and problem solved. There are something close to 90,000 municipalities in the USA so plenty of alternatives beyond the "dozens of cities" NYT article mentions. Stay the course.

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by carolinaman » Fri May 13, 2016 8:26 am

dmcmahon wrote:Thanks for raising awareness Larry. I've been following this disturbing trend for 10+ years now, and I avoid munis entirely due to this overhang. I recall Meridith Whitney getting trashed here for raising an alarm about this issue too early. Other than to move to a state that's less exposed than California it's unclear I can do more to avoid the consequences. Sadly my fellow citizens seem to prefer to remain in denial about the situation, even as the road ahead is illuminated by Detroit, Chicago, Illinois, and even Greece.
I agree the pension underfunding/muni issue is one to be concerned about and to pay attention to. Kudos to Larry for bringing to our attention. Each investor has to decide for themselves whether or not investing in munis makes sense for their situation. Larry has made it clear there are only 9 states he avoids munis in due to their financial condition and underfunded pensions. Most states are in much better shape. For example, I get a NC public pension which is fully funded. Also, due to the recent increases in longevity tables (people are living on average 2 years longer) and other factors, NC participating employers contribution rate will gradually increase by 27% over the next 5 years. This kind of responsible pension administration should assure the soundness of our pension system for many years to come.

To say all munis are bad and to be avoided is equivalent to saying all corporate bonds are to be avoided. There are high quality investment grade corporates that have very low probability of problems. The same is true in the muni space. The point is that people should be judicious in selecting what munis or funds to own.

I really appreciate what Meredith Whitney did. I made a lot more money off my muni funds because of that.

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nedsaid
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by nedsaid » Fri May 13, 2016 5:51 pm

AlohaJoe wrote:
nedsaid wrote:Did some checking around via Bing and the 1930's was good to Joe Kennedy. Made big money in movie studios, booze, and real estate. I saw no references to municipal bonds. I stand corrected.

I did see this referenced somewhere but perhaps the article was just wrong.
For the record I didn't intend my comment as a "haha, you're so wrong and dumb". I just thought your comment was a potentially interesting bit of trivia which led me on a fun 15 or 30 minutes or googling (so thanks for that!) and I felt like sharing the results of. (I had no idea Joe Kennedy was the first head of the SEC, for instance.)
No offense taken. I saw an article about Joe Kennedy that must have been inaccurate, I googled and couldn't find it again. The back and forth is how we learn on this forum.

Best wishes,

Ned
A fool and his money are good for business.

malabargold
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by malabargold » Fri May 13, 2016 8:32 pm

The flip side of this is don't count on pension funds
when calculating retirement assets

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SeeMoe
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by SeeMoe » Fri May 13, 2016 8:41 pm

HomoLudens wrote:This is an excellent article that outlines the economic cost of the politics of "instant gratification": politicians make unsustainable promises, voters are pleased at an instant, the same voters will have to pay the price after the music stops. Opportunistic politicians and financially illiterate voters are the two components of this recipe ( BHs who write in the this forum are outliers especially in terms of financial literacy, but this doesn't give them a numerical advantage at the polls). I don't see any of these components changing anytime soon. Therefore, Total Bond it is.
Interesting assumption, but scary! Other day two former Secretaries of Defense were on the CNBC early show. Both agreed that taxes must be raised while entitlements are reduced while DoD spending is increased a tad. Nothing mentioned about the old infrastructure which needs major repairs. It will happen though, and bonds will be the answer.
SeeMoe.. :annoyed
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

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magellan
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by magellan » Sat May 14, 2016 7:43 am

As others have mentioned, sometimes taxable bonds can be a better bet than risky munis, even in taxable. One twist on this idea is to use asset location to minimize taxes. This is accomplished by holding only the lowest yielding part of your bond portfolio in taxable.

So say you want your bond portfolio to roughly mimick the US bond market. In taxable you could use a 5-year CD ladder yielding 2-3%. Sure, you'll pay taxes on that income, but even after taxes, the risk/reward ratio is pretty darn good compared to all the other alternatives. Next, in tax deferred, blend in intermediate corporates and maybe even a small dose of high yield to round out the risk profile of your overall bond holdings.

This approach, especially with the high yield, might not perfectly match something like total bond market, but you can get it to be pretty close. Plus, it's much more tax efficient than just holding total bond in both taxable and tax deferred.

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iceport
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by iceport » Sat May 14, 2016 2:35 pm

Whakamole wrote:
iceport wrote:I am just adamantly opposed to framing this subject an a way that, it appears to me, is not impartial and is politically motivated.
I may well be alone but I don't see this concern as being politically motivated at all, and (as always) the proper thing to do when seeing a political topic is to report it.
Hi Whakamole,

I will admit to being extremely sensitive to the possibility. Where I'm from, the only people who report decades-long pension liabilities as a single, humongous lump sum are those seeking to magnify (exaggerate?) the severity of the problem with the specific intent of garnering widespread political support for abolishing pensions altogether. This is true, even though most of those same pension opponents are fully aware that doing so would accomplish absolutely nothing to reduce the very unfunded liabilities they cite. (Where I'm from, aside from the unfunded liabilities from a long-closed plan, our state's pension costs are below the national average, and sustainable.) They realize the public won't figure that out, and the numbers sound super-alarming.

This, and the fact that Larry freely admits that he opposes all pensions, raises my suspicions.
larryswedroe wrote:no the MOody's report is fact, not NYT
You know, Bogleheads are normally such a discerning group. I wonder why it is, then, that such a widely discredited firm such as Moody's is still afforded so much credibility. It is by now common knowledge that Moody's has sold influence over their analyses. Reports of that influence have mostly focused on customers paying for higher ratings to steer investors towards their products. But is it such a stretch to expect Moody's would also accept compensation from certain customers to influence analyses in a negative direction, to steer investors away from other competing products?
"Discipline matters more than allocation.” ─William Bernstein

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by larryswedroe » Sat May 14, 2016 2:45 pm

iceport
totally mischaracterize my statements. I am against, as should everyone, guaranteed payment pensions, since there is no way to guarantee them, unless you annuitize, which I would be okay with. But of course you cannot promise the kind of benefits being promised based on fixed income rates. So the alternative is to have contributory plans and not guaranteed payment plans. So that way the taxpayer doesn't bear the risks

Larry

cks
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by cks » Sat May 14, 2016 2:57 pm

When I started buying muni bond funds, the yields were on par with treasury funds adjusted for taxes -e.g. Long term (insured) munis yielded around 3.5% and long term treasuries around 4.5%). Now tax free munis yield More BEFORE tax deductions are taken into account. This tells me that a lot of smart people whose jobs are to figure out the risk/reward aspect of munis think that risks are substantially higher than treasuries.

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iceport
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by iceport » Sat May 14, 2016 3:57 pm

larryswedroe wrote:iceport
totally mischaracterize my statements. I am against, as should everyone, guaranteed payment pensions, since there is no way to guarantee them, unless you annuitize, which I would be okay with. But of course you cannot promise the kind of benefits being promised based on fixed income rates. So the alternative is to have contributory plans and not guaranteed payment plans. So that way the taxpayer doesn't bear the risks

Larry
This is just semantics. I suppose the formal definition of "pension" might include defined contribution plans (which I actually did not know until I looked it up just now!), but they're not considered pensions in the vernacular use of the term, and I certainly did not intend to include defined contribution plans when I referred to "pensions." I'll have to be more precise from now on.
"Discipline matters more than allocation.” ─William Bernstein

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by Kalo » Sat May 14, 2016 4:15 pm

nedsaid wrote:...

Somewhere in my foggy memory banks, I faintly recall somewhere that Joe Kennedy parked the family fortune in muni bonds during the Great Depression and fared very well. I can't image any better test for muni bonds than the Great Depression.
Even if this is true, it's only anecdotal evidence that muni bonds are a good idea.

I don't think muni bonds are safe, just my opinion. But I also believe that the safety of Treasuries is generally overestimated. Treasuries are great for shallow risk, but I don't see how one is compensated for the deep risk.

I prefer to take my risk on the equity side, and use short-term treasuries for safety. I admit to mixing in a little high quality corporate debt, but only because I want a little yield to go with the safety. But frankly, I don't think of quality corporate debt as all that much riskier than government debt in general. It probably is, but the kinds of catastrophes that tend to bring down a large majority of quality corporations, tend to have a similar negative effect on governments.

No worries, be happy. But if you are worried, diversification is probably your only true friend.

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by Tier1Capital » Sat May 14, 2016 4:38 pm

Kalo wrote:Even if this is true, it's only anecdotal evidence that muni bonds are a good idea.

I don't think muni bonds are safe, just my opinion. But I also believe that the safety of Treasuries is generally overestimated. Treasuries are great for shallow risk, but I don't see how one is compensated for the deep risk.

I prefer to take my risk on the equity side, and use short-term treasuries for safety. I admit to mixing in a little high quality corporate debt, but only because I want a little yield to go with the safety. But frankly, I don't think of quality corporate debt as all that much riskier than government debt in general. It probably is, but the kinds of catastrophes that tend to bring down a large majority of quality corporations, tend to have a similar negative effect on governments.

No worries, be happy. But if you are worried, diversification is probably your only true friend.

Kalo
Comparing equivalent credit ratings, corporate bonds have substantially higher historical default rates than state/local government municipal bonds. The Moody's data looks at 10 year cumulative default rates from 1970 through current day. It's not anecdotal and it's not even close.

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Kalo
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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by Kalo » Sat May 14, 2016 4:51 pm

larryswedroe wrote:http://www.nytimes.com/2016/05/11/busin ... iness&_r=0

This isn't a Black Swan that you cannot see coming.

Larry
I have to comment on your phrasing Larry.

My initial mental translation was: This is a Black Swan that you can see coming. Which is interesting in and of itself because, are not black swans things that you can't see coming? I apologize if your intention was this exactly and you were intentionally making a play on words. I think you probably were.

But then I tried to analyze the exact meaning of your phrase, and I eventually came up with this:

It's either a black swan that you can see coming, or it's not a black swan at all. You are really only telling us that it's not one type of black swan (the type you cannot see coming).

Am I a dork or what? I just love words and logic puzzles and I actually had to think about this for quite a while. I tried a decision box and wound up more confused than ever.

Not pouncing on you for the double negative, just found this interesting.

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by Kalo » Sat May 14, 2016 5:01 pm

Tier1Capital wrote:
Kalo wrote:Even if this is true, it's only anecdotal evidence that muni bonds are a good idea.

I don't think muni bonds are safe, just my opinion. But I also believe that the safety of Treasuries is generally overestimated. Treasuries are great for shallow risk, but I don't see how one is compensated for the deep risk.

I prefer to take my risk on the equity side, and use short-term treasuries for safety. I admit to mixing in a little high quality corporate debt, but only because I want a little yield to go with the safety. But frankly, I don't think of quality corporate debt as all that much riskier than government debt in general. It probably is, but the kinds of catastrophes that tend to bring down a large majority of quality corporations, tend to have a similar negative effect on governments.

No worries, be happy. But if you are worried, diversification is probably your only true friend.

Kalo
Comparing equivalent credit ratings, corporate bonds have substantially higher historical default rates than state/local government municipal bonds. The Moody's data looks at 10 year cumulative default rates from 1970 through current day. It's not anecdotal and it's not even close.
I didn't use the term anecdotal in reference to the study you are citing. I was referring to Nedsaid's anecdote about Joe Kenedy. It's kind of odd that you could even think that I did, since at the time I made my post, you had not even posted your reference.

And regarding risk, I was referring to deep risk. There have been instances where governments failed, and some of the corporations that existed at the time in the country where the government failed, continued to exist.

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by larryswedroe » Sat May 14, 2016 5:36 pm

Kalo
Seriously, nothing better to do with time? You cannot see a Black Swan coming, as you said. And this isn't a black swan. So you can see it coming. Simple
Larry

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by LadyGeek » Sat May 14, 2016 5:59 pm

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Re: NY Times article on the "tip of the iceberg" that is Puerto Rico

Post by LadyGeek » Sat May 14, 2016 8:04 pm

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