Cumberland’s Mousseau: Munis Look Pricey
While many cities and states are still figuring out how to reconcile their assets and liabilities, Cumberland Advisors’ John Mousseau doesn’t see that struggle morphing into a widespread collapse of the public sector that will pollute the world of muni bonds. Tax receipts may be down, but the prospect of a wave of muni defaults is slim.
To the contrary, Mousseau, who manages more than $1 billion in muni portfolios, told IndexUniverse Correspondent Cinthia Murphy that while muni bonds are certainly more attractive than ultra-low-yielding Treasurys, they actually look a bit pricey at the moment, though that could change if investors start getting spooked by the growing wave of bankruptcies in places like California.
Murphy: Banking analyst Meredith Whitney has been warning that defaults in municipal bonds would unleash the next wave of the U.S. economic crisis. We now have at least four cities in California alone that have already declared bankruptcy. Is this the beginning of the next chapter?
Mousseau: She scared the heck out of everybody last year. That municipalities are under distress was true then and it’s true now. Still, I would not call what’s going on as the next wave of the crisis. What were poor decisions made years ago are really catching up with reality, especially with pension funds and employee raises and all that. It’s realism in economics meeting bad contracts.
Murphy: Is that what’s happening in communities in California?
Mousseau: California, for instance, had government employee raises guaranteed at 3 to 4 percent ahead of the inflation rate. And property taxes are down there, not up. In a low inflation, or deflation, environment, those numbers just don’t work.
Murphy: Are unfunded pension liabilities the biggest financial threat to the public sector?
Mousseau: Pretty much. But the problem isn’t only the fault of bad contracts with unions. The pension funds need to take some of the blame. When we were coming off the great stock market rally in the late 1990s, pension funds were either fully funded or overfunded, but instead of taking the conservative route and investing in some fixed income, pension funds sold pension-obligation bonds, leveraging themselves into the stock market after the run was over. They are still paying for that 12 years later.
Murphy: Has the stigma of the government filing for bankruptcy lessened? How bad is it for a city or a state to declare itself bankrupt?
Mousseau: That’s a very good question. Has the stigma lowered enough to create an environment where someone might say, well, my neighbor has declared bankruptcy, so maybe I could do it too? Maybe, but we don’t think that’s happening because when you come out of bankruptcy, the capital markets will be harsh on you. Take states like Rhode Island, for example. They’ve passed a law that requires you to continue paying debt holders even if declaring bankruptcy. Pennsylvania is considering the same thing. They are trying to stop any spillover effect that would cheapen the debt of surrounding areas.
If CalPERS is taking hedgies out, ETFs may be coming back in.
As valuations grow uncomfortably high, ‘quality’ ETFs makes more sense—if you can figure out just what quality means.
‘Smart beta’ almost surely means loss of more market share for active managers.
Be careful of your assumptions (and headlines!) about volatility ETFs.