October 3, 2008


Word has reached my ear that Municipal Bond defaults will be the next "bloodbath" in the ongoing financial crisis.

Many investors bought Municipal bonds because they are usually "triple-tax-free" meaning they are not subject to local, state or federal taxes.

Investors also thought - wrongly - that municipal bonds were protected by a municipality's right to tax. The right to tax does NOT protect municipal bonds, only the full faith and credit of the municipality backs such bonds and that is where the trouble is going to come from.

With the economy heading into Depression, consumers aren't out buying things and cannot get credit to buy things. This means sales tax revenues are falling fast.

In addition, with housing values plummeting, homeowners are demanding - and getting - revaluations of their properties to reduce the local and county property taxes.

These items translate into big revenue losses for municipalities and those losses are going to impact municipal bonds.

If you hold municipal bonds, I suggest you seriously consider dumping them before they become totally worthless.

For the record, I was proved right when I forecast in 2006 that the U.S. economy would virtually collapse in 2008. In March of 2008, I specified September as the month that huge economic troubles would hit; I was right again. I warned that Lehman Brothers would follow Bear Stearns and collapse; it did. I warned consumers two weeks in advance that Washington Mutual would fail; it did. I warned consumers 5 days in advance that Wachovia would fail; it did.

My track record so far has been pretty much on target, so when I suggest you dump municipal bonds, it may be a very good thing for you to do.