Fundmastery Blog

Kurt Brouwer April 11th, 2009

I thought I would pass on this heartwarming tale from CNN of ingenuity by ordinary folks on the beautiful island of Kaua’i. This prosaic photo shows a bridge that was washed out in flooding last year. The Hawai’i Parks Department said it would cost $4 million to fix, so it just stayed closed. Unfortunately, that also meant a gorgeous state park would remain closed indefinitely.

Fortunately, local surfers and kayak tour operators decided that just wasn’t good enough. So they fixed it themselves.

Source: CNN / Devlin

This is an important story. One that I believe we will see more and more as people take steps to fix things that government can’t seem to get around to fixing [emphasis added below]:

Island DIY: Kauai residents don’t wait for state to repair road (CNN, April 9, 2009, Mallory Simon)

Polihale State Park has been closed since severe flooding destroyed an access road to the park and damaged facilities in December.

The state Department of Land and Natural Resources had estimated that the damage would cost $4 million to fix, money the agency doesn’t have, according to a news release from department Chairwoman Laura Thielen.

“It would not have been open this summer, and it probably wouldn’t be open next summer,” said Bruce Pleas, a local surfer who helped organize the volunteers. “They said it would probably take two years. And with the way they are cutting funds, we felt like they’d never get the money to fix it.”

And if the repairs weren’t made, some business owners faced the possibility of having to shut down.

Ivan Slack, co-owner of Napali Kayak, said his company relies solely on revenue from kayak tours and needs the state park to be open to operate. The company jumped in and donated resources because it knew that without the repairs, Napali Kayak would be in financial trouble.

…So Slack, other business owners and residents made the decision not to sit on their hands and wait for state money that many expected would never come. Instead, they pulled together machinery and manpower and hit the ground running March 23.

And after only eight days, all of the repairs were done, Pleas said. It was a shockingly quick fix to a problem that may have taken much longer if they waited for state money to funnel in.

“We can wait around for the state or federal government to make this move, or we can go out and do our part,” Slack said. “Just like everyone’s sitting around waiting for a stimulus check, we were waiting for this but decided we couldn’t wait anymore.”…

• Business , Economy , Geopolitics , Money , income taxes
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Kurt Brouwer April 8th, 2009

It is not exactly news that municipalities are hurting these days. But, this move by Moody’s is a bit surprising. This New York Times’ piece spells out the surprising news that Moody’s just downgraded all local governments [emphasis added]:

Muni Bonds May Face Downgrade (New York Times, April 7, 2009, Mary Williams Walsh)

Moody’s Investors Service assigned a negative outlook to the creditworthiness of all local governments in the United States, the agency said Tuesday, the first time it had ever issued such a blanket report on municipalities.

The report signaled how severely the economic downturn was affecting towns, counties and school districts across the nation.

…The report suggests that the ratings of many governments could be downgraded in the coming months, something that would make it more expensive for them to borrow money to finance their operations.

In the most extreme cases, municipalities might default on some of their obligations, as Jefferson County, Ala., has been threatening to do for a number of months.

Vallejo, Calif., declared bankruptcy last year and is being closely watched to see if it will set a legal precedent that other towns could follow. (see California City On Verge Of Bankruptcy)

…In a special report made public on Tuesday, the agency cited revenues that are falling almost everywhere as a result of the economic downturn. But it also discussed the problems some municipalities had created for themselves by using complex financial products that seemed to be saving money at first, only to send costs soaring during the credit crisis see (New York Times–Risky Deals).

…The report suggested conflicts ahead between taxpayers struggling to keep their own households afloat and elected officials charged with balancing budgets, making their payrolls and protecting their credit ratings.

“Taxpayers, worried about their own financial condition, are more resistant than ever to increasing property or other local taxes,” the report observed.

The report’s publication coincided with the downgrading by Moody’s of the credit of the State of Illinois to the A level from double-A. Moody’s said Illinois was having difficulty managing its cash, and in recent weeks had been trying to push its scheduled pension contributions into the future. The state pension fund is already seriously underfunded.

…The bond markets took the Moody’s report in stride on Tuesday, apparently because institutional investors were already familiar with the problems described. New York City brought bonds to market on Tuesday and ended up selling much more than initially planned.

“New York City is potentially a poster child for economic woe, but that didn’t seem to bother investors,” said Thomas G. Doe, president of Municipal Market Advisors…

There really is not any hard news behind Moody’s report, just a general trend toward rising costs and lower tax revenues for cities and towns across the land.

For investors, the good news is that paying interest on municipal bonds is generally one of the highest obligations a municipality has. And, recent fully-subscribed bond issuances by the State of California and New York City suggest that investors believe the money is good and thus are happy to get the high tax-exempt yields. The NYC offering was for $883 million in bonds, the longest of which mature in 2036 and carry 5.5% yields.

Nonetheless, this is a trend well worth watching. It also suggests that it pays to be diversified in your tax-exempt bond holdings. Investing in a municipal bond fund is probably the best way to go for most people.

• Economy , Geopolitics , Investing , Money , Mutual Funds , income taxes
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Kurt Brouwer April 6th, 2009

My older son, Elijah, needed information on government spending for a project on which he was working. So, like a good Dad, I’ve had my eye out for a nice chart that lays this out.

This information is from a comprehensive report — Citizens’ Guide 2009 — on government spending and debt put out by the Peter G. Peterson Foundation. It is well worth reading.

These pie charts demonstrate the change in Federal government spending over the past 40 years.

Source: Peter G. Peterson Foundation

The report makes this point in terms of this chart:

Since the 1960s, the decline in defense spending as a share of the budget and as a share of GDP has been offset by the growth in the major entitlements (Social Security, Medicare and Medicaid) and other mandatory spending (agriculture subsidies, unemployment benefits, student loans, and civilian and military pensions and health benefits). In 2008, defense was 21 percent of the budget including the cost of operations in Iraq and Afghanistan and the war on terrorism…

I think reasonable people can agree or disagree with the changed nature of government spending over the past few decades. However, no matter what position we take, we need to think how about what these changes mean for us today as well as for our country in another 40 years.

Some spending is locked in once you make the commitment. For example, if we decide to increase Social Security benefits, then that will get locked in and future budgets will have that much less wiggle room to deal with future revenue shortfalls.

The reason it gets locked in is that no politicians wants to be the one to campaign on a pledge to cut Social Security. That does not mean we should not make such a commitment, but rather it means we have limited means and money locked in to one program is unavailable for another. It also means that government spending programs are easy to start and very hard to stop.

Hat tip: Willisms Blog

• Economy , Geopolitics , Money , income taxes
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Kurt Brouwer April 6th, 2009

Sources: IMF, UN and Financial Times

The International Monetary Fund tracks demographic trends around the world. One troubling trend is the rapid aging of populations in many countries. This Financial Times piece with numerous charts such as the one above points out that [emphasis added below]:

…[sidebar] Japan is suffering the effects of 30 years of consistently declining birth rates. That and remarkable longevity have made Japan the oldest country in the world. It was already saddled with a large fiscal burden before the crisis hit. Since then the position has worsened, with national debt now forecast to be well over double GDP in 2012…

As you can see, Japan is leading the pack in terms of the number of elderly folks (65+) compared to younger people. Given the demographic trend in Japan, which had fewer births than deaths last year, that is unlikely to change.

The main body of the article looks at other aspects of this trend, which is the number of working people compared to the number of those who are already drawing retirement benefits:

…According to the United Nations , the number of working-age adults for each person aged over 65 in advanced economies will decrease in the next 10 years by as much as they have in the previous 30 years. The number of workers per pension claimant will fall from 4.3 to 3.4 in the next decade alone.

Some countries are already much further down this road. It will take another 20 years of greying for Europe to become as elderly as Japan’s population is today. The rest of east Asia is in a race to get rich before its people get too old to work. South Korea is currently well placed, with six citizens of working age for every pensioner. Yet thanks to a collapse in its birth rate, it will be one of the greyest countries on earth by 2050…

If you follow the lines on the chart above, all of the countries shown are projected to age over time. However, some countries — such as Japan and Spain — are projected to age at a very rapid rate. The U.S. rate has been level for some time. It is projected to go up as well, but not nearly as rapidly as Japan, China or Spain.

It is important to point out though that a big part of our economic growth over the past 200 + years has been due to our climate of welcoming people from other countries as well as our ability to keep our population growing — the old fashioned way.

Also, it’s important to remember that population growth and economic vitality are two sides of the same coin. Those who predict enormous economic growth and increasing geopolitical power for a given country should consider the implications of these statistics because, in many ways, demographic trends create their own destiny.

Hat tip: Tigerhawk

See also:

The Pension Time Bomb

Japan’s Economy Fades Fast

As Boomers Retire, Is A New Baby Boom Starting?

Population Growth By State

• Economy , Geopolitics , Personal Finance , Retirement
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Kurt Brouwer April 2nd, 2009

Interesting chart from the Trim Tabs folks, found on the Zero Hedge blog. At least until very recently, investors were pulling cash out of equity mutual funds:

Source: Trim Tabs and Zero Hedge

• Investing , Mutual Funds
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