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Monday, December 20, 2010

What do Korea and Municipal Bonds Have in common? This Post Mentions Both...

I guess it is time for a recap of events that I had commented on over the past few weeks.  It is now coming out after the whirlwind of threats made by North Korea this past weekend that they no longer intend to react to the South Korean military drills. Over Thanksgiving I had commented that I believed that the North Korean belligerence was both overblown and a ploy to boost the image of the relatively unknown Kim Jong Un. A few days later I reported in my blog that a South Korean paper concurred that that the North’s rhetoric and pronouncements were empty threats to boost the new leader’s image.  Today what appears to be a underreported news story is that the North says it will not react to the South’s drills, thereby diffusing the situation to a great extent; although there are many remarks quoted saying that the situation is tense.

It does beg the question what did the North achieve by doing what they did? Did this boost Kim Jong Un’s stature? It may have boosted his appearance internally in North Korea, but on the world stage it made the North Korean’s seem like the boy who cries wolf. The question is why the change in tone? What did the North get from the temper tantrum resembling that of a petulant 4 year old after being told they could not get an item randomly pulled off the supermarket shelf. As for what the North got, nothing has been reported in the media other than New Mexico Governor Richardson’s preliminary deal with Pyongyang to allow IEA nuclear inspectors to inspect a site and also an agreement to negotiate the sale of some 12,000 nuclear reactor fuel rods. The true details are obviously hidden from the media, where is Wikileaks when you need them?

Dear reader, please understand I am glad that nothing has come of the situation in the Korea’s. It seems to me, however, that the North did not gain anything from this situation but instead actually weakened their position in the eyes of the world. Who is going to take them seriously after this series of events that took place? They huffed and they puffed but they did not blow any houses down nor did they publicly get any consideration.

If Kim Jong Un wanted to boost his country’s image as a military power he might tried a different tact to achieve the goal. Kim Jong Un has a vast army of about 1 million and plenty of military hardware at his disposal yet he did nothing with them instead he made hollow sounding threats. A better and more effective tactic would have been to hold a massive set of military drills of his own, far enough away from the South as not to accidentally cause a real conflict. As the North's massive display of force was visible to the world they could have then turned up the saber rattling for effect. A move such as holding their own drills combined with the rhetoric would have had the media and politico’s undies in such a bunch the North probably could have gotten to the bargaining table and received concessions. The risk also would have been minimal of any true escalation as the South would not engage the North first and at the same time the diplomatic corps of many countries would have been working feverishly to prevent any uptick in the threat level.

The bottom line is that North Korea has lost stature as a real threat and the markets will increasingly begin to ignore all the bluster and sword waving by Kim Jong Un leaving him even more of an impotent leader than his father.

On to the situation I have been writing about off and on for the past couple months. The Municipal Bond market is a mess and a real threat to your wealth if you invest in that arena, for that matter it is also a threat to a good portion of the US economy.

You can view a nice piece on 60 Minutes that supports what I have been writing about in my prior pieces including “Municipal Jenga”, “Whats in an unemployment number?”,  and “Houses of Pain”. The municipal situation is bad at present and is going to get worse and the choices to be made are going to lead to battles of epic proportions between government, unions and citizens. It remains to be seen what the Federal government will do or the FED for that matter, but the reality is that this train wreck is reaching terminal velocity.

I personally have advised moving out of most municipal bonds especially in the troubled or deadbeat states like California and Illinois. The situation that is taking place with the States of Europe under the EU and ECB are a preview of sorts for what will more than likely transpire in the US.  Just like the States of Europe the US states can’t print money and there is a limit to taxation. It seems to me, just as in Europe, the US Federal Government and or the Federal Reserve are going to have a “Sophie’s Choice” of sorts, whether to bail out the states by going in to more debt and the FED being forced to yet another QE for a bailout or to let them die on the vine so to speak.  Could the Federal Government bailout certain states and not others? I tend to believe that if they decide to go for the bailouts as the path of least resistance then they will be forced to bail out all states.

In the meantime I find it interesting that the investor sentiment in the stock market is running very high and the VIX (and the volatility index) shows low levels indicating complacency. The current sentiment indicators generally indicate a market at a top, however, at the same time there are multitudes of newsletter writers and CNBC type pundits predicting a strong decline. So who is right? I guess time will tell but I still feel that at least going in to Q1 of 2011 that the market will gyrate and move higher just because things have moved from “real bad” to “just plain bad” for now. I personally believe that we are still in the eye of the hurricane due to the massive stimulus and FED printing as well as markets around the world struggling for their own reasons. The net result is that US stocks and currency appear to be good parking places for the immediate future. In other words all the bailouts and QE kicked the can down the road, but at what price? That is the real question.

The precious metals have been correcting and the bull has thrown many off at this point, but I believe we are more than likely stabilizing around the current levels. It is possible for the metals to dip further but the majority of precious metal pundits are forecasting further declines and weakness and in the past this has been a good contrary indicator.  I have added some to my positions on this last dip and if we do get a more substantial decline I will add more as I believe the bull has further to run. I would argue that the bull market in the metals is dependent on the bull markets in FIAT money printing, government regulation, and government stupidity all of which are proving to be endless.

Until tomorrow.. good investing.


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