Published on 27 Feb 2017
The classic narrative of the outbreak of World War 1 is that everyone saw it coming and was awaiting it with patriotic fervor. But studying the people that profited most from a war, the bankers, that idea is definitely challenged.
February 28, 2017
February 24, 2017
Hey guys! I just bought marijuana for the very first time!
A thousand shares of a legal marijuana grower called Aphria, Inc. I am so conflicted — I don’t know whether I should feel counter-cultural or conformist…
I sold my last remaining Blackberry shares to cover most of the cost of the purchase, which (given Blackberry’s shrinking technological niche) was a bit of a relief.
Legal notice: Nothing in the above post should be considered in any way to be professional financial investment advice.
December 12, 2016
Tim Worstall points out that Thomas Piketty has mis-diagnosed the “problem” of rising capital:
The report shows that there were 13 OECD countries in which assets in funded pensions represented more than 50% of GDP in 2015, up from 10 in the early 2000s. Over the same period, the number of OECD countries where assets in funded private pension arrangements represent more than 100% of GDP increased from 4 to 7 countries.
We’re living longer lives these days, we’re working for fewer decades of them and thus people are rationally saving for their expected golden years. Thus capital as a percentage of GDP rises – not to produce inheritances, but to produces incomes in retirement. And rises by potentially at least more than 100% of GDP.
We can’t see that this is a problem and we most certainly cannot see that this is an argument for greater taxation of capital. Quite the reverse in fact, people saving for their old age should be encouraged, not specifically taxed.
So much for the most recent French call for revolution then, eh?
November 24, 2016
When considering the major failures of recent American governance – the 2008-09 financial crisis, the catastrophe that is U.S. policy in the Mideast – the one thing that any honest-minded person must conclude is: Nobody meant for things to turn out this way. It is impossible to make precise predictions about the effects of government policy; that is the nature of systems characterized by high levels of complexity. It’s one thing to predict that it’ll be colder during the winter, but another thing to predict down to the millimeter how much snow will fall on a particular acre in rural Maine on the third Wednesday in February, which is really what we expect from our public policy.
Classic cowboy movies, in contrast, are not complex at all: The good guys wear white hats, the bad guys wear black hats, all hats remain firmly affixed to all heads at all times, and that’s that. You can pretty much always predict how an old Western is going to turn out.
But that isn’t how the real world works.
On Tuesday, I had a conversation about Elizabeth Warren and Wall Street, pointing out that the popular version of that story – Senator Warren vs. Wall Street – is so oversimplified as to be not merely useless but misleading. The reality is that there are people working on Wall Street who dislike Senator Warren – investors and bankers, mainly – and people who adore her – notably Wall Street lawyers, who are reliable donors to her campaign and to those of other Democrats. My naïve interlocutor said: “Hopefully, it’s the lawyers that fight against Wall Street,” as though there were such a thing, as though there weren’t nice progressive lawyers in Manhattan who jokingly refer to their yachts as the SS Dodd-Frank.
Spend any time writing about this sort of thing and you’ll hear angry and panicked denunciations of derivatives-trading from people who pretty clearly do not know what a derivative is, just as you’ll hear paeans to Glass-Steagall sung by people who don’t understand the difference between a commercial bank and an investment bank, who don’t know how Goldman-Sachs makes its money or what it is that Standard & Poor’s does.
But they’re quite sure they know who is wearing the black hats.
Kevin Williamson, “Black Hats and White Hats”, National Review, 2015-04-15.
September 15, 2015
At Marginal Revolution Tyler Cowen pulls together the key economic points you need to know to understand what is happening in China’s economic downturn:
1. You can’t invest 45-50 percent of your GDP very well forever. It’s amazing how long China’s run has been, but it is over. The quality of their marginal investments is now low and that means their growth rate will be much lower too. The low hanging fruit is gone, at least for the time being. They might later on resurrect some new low-hanging fruit through institutional reform, we’ll see if they end up stuck in the middle income trap but right now they are at a sharp discontinuity.
2. There is no simple way to switch to a “consumption-driven” economy without the growth rate both falling and staying permanently lower. Structural reforms are absolutely called for, but in this context they represent a surrender to a lower rate of growth and thus they are especially difficult to pull off in a politically sustainable manner.
3. The Chinese have been growing at ten percent or nearly ten percent for about thirty-five years. More than a generation of Chinese is used to treating the risk premium as if they don’t have to worry about it. I shudder to think what economic and also political decisions have been made on that basis.
4. The Chinese economic response to the dwindling of their low-hanging fruit is sharp rather than smooth because there is a sudden revision of expectations, as people realize the risk premium isn’t zero after all. And seeing the others see that causes the new set of beliefs to spread pretty quickly. That is a very painful process for a macroeconomy, and it is not well captured by simple AD-AS analysis, although of course it has implications for both AD and AS.
5. I would not so quickly infer that the Chinese government is stupid when it comes to economics. It is true their actions do not correspond to what professional economists would recommend. But they are painted into a very unpleasant corner and have lots of interest groups to feed. Their observed response is possibly explained by some kind of public choice-constrained, nested game, internal conflict-driven seventh-best response. They were smart a few years ago, and they are still smart now. That doesn’t mean they will end up doing a good job.
6. Avoid mood affiliation! You can be a pessimist about the Chinese recession now without being a) a pessimist about China in the longer run, or b) a pessimist about Chinese political stability. Those are separate albeit related questions, and you are not forced to have the same mood response to all of them.
May 25, 2015
Deflation occurs when there is not enough currency in circulation to meet the needs of the economy. Here again, the classical definition focuses on falling prices rather than an insufficient currency stock, but deflation is primarily a monetary phenomenon.
It is the economic version of anemia: too little blood is reaching the body. Each unit of the currency goes up in value relative to the goods and services available, but because the stock of currency isn’t growing fast enough, it starves the economy of investment capital. There isn’t enough money to build out existing business, to create new ones, or to hire new workers. (This is in part what happened during the Great Depression of the 1930’s.) Inventories shrink, but new goods aren’t being produced due to the lack of investment capital. Eventually the economy grinds to a halt as production withers away.
Specie currencies are more prone to deflation than fiat currencies for the simple reason that fiat currencies are not based on scarce (and thus valuable) resources like gold, silver, or what have you. There’s only so much gold and silver to go around, and sometimes the supply of bullion can be interrupted for long periods. (Sometimes this is even done deliberately by rival nations or speculators.) Also, because the value of gold and silver is set outside the control of government or authority issuing the currency, it limits the kinds of monetary policy the sovereign can conduct, especially during times of crisis.
Monty, “Inflation, Deflation, and Monetary Policy”, Ace of Spades HQ, 2014-07-11.
May 13, 2015
One of the factors in the financial crisis of 2007-2009 that is mentioned too infrequently is the role of banking capital sufficiency standards and exactly how they were written. Folks have said that capital requirements were somehow deregulated or reduced. But in fact the intention had been to tighten them with the Basle II standards and US equivalents. The problem was not some notional deregulation, but in exactly how the regulation was written.
In effect, capital sufficiency standards declared that mortgage-backed securities and government bonds were “risk-free” in the sense that they were counted 100% of their book value in assessing capital sufficiency. Most other sorts of financial instruments and assets had to be discounted in making these calculations. This created a land rush by banks for mortgage-backed securities, since they tended to have better returns than government bonds and still counted as 100% safe.
Without the regulation, one might imagine banks to have a risk-reward tradeoff in a portfolio of more and less risky assets. But the capital standards created a new decision rule: find the highest returning assets that could still count for 100%. They also helped create what in biology we might call a mono-culture. One might expect banks to have varied investment choices and favorites, such that a problem in one class of asset would affect some but not all banks. Regulations helped create a mono-culture where all banks had essentially the same portfolio stuffed with the same one or two types of assets. When just one class of asset sank, the whole industry went into the tank,
Well, we found out that mortgage-backed securities were not in fact risk-free, and many banks and other financial institutions found they had a huge hole blown in their capital.
Warren Meyer, “When Regulation Makes Things Worse — Banking Edition”, Coyote Blog, 2014-07-07.
January 30, 2015
Over at Ace of Spades H.Q., Monty takes us back to Philosophy 101 to show the economic version of Plato’s famous story:
If you had occasion to take a Philosophy 101 course in college, you may remember the allegory of Plato’s cave. Plato meant it as a discussion of what “reality” is — whether it is an absolute thing, and whether humans can experience “reality” in its totality or if we are limited only to what we can experience and measure. The idea is that what we can sense and measure is only a subset of a larger reality that we cannot perceive directly.
I’ve long thought that this allegory works quite well for economics in many ways, especially as it pertains to concepts of money and wealth.
Take a dollar out out of your pocket and look at it. What is it? It’s many things, actually: it is money, so it must be a store of wealth, a unit of account, and a medium of exchange; it is a manufactured good, intended by its manufacturer to be used as currency; it is a work of engravers’ art; it is a complex piece of technology (especially modern bills with the various anti-counterfeiting countermeasures); it is a carrier for the oils, dirt, and germs of the people who have handled it; and so on.
You can think of money as a special kind of battery, only instead of storing electricity, it stores up economic value which can be expended at a later time. And just as a battery can store energy but not create it, money can store value but not create it.
It turns out that this dollar bill is a pretty complex object, all things considered. And yet it isn’t a “real” thing in the sense Plato was speaking of. Whatever else it may be, a dollar is not in itself valuable; it is rather a signifier of a real thing we cannot see directly. A unit of money — whether a dollar, a franc, a pound, or a quatloo — is only “real” insofar as it signifies some existing value in the economy. (We can think of some value as being latent as opposed to realized, as it often is with investments. We invest in expectation of value being created and providing some kind of return on the investment. No value appears spontaneously out of the void. The invested capital is based on already-existing assets; a return is only realized if the endeavor creates additional value. Interest income or dividends don’t just magically materialize — interest income is your share of the value added and payment for the time-value of the money you invested. Nothing comes from nothing, as Parmenides reminds us.)
That dollar you hold in your hand is the shadow cast by something of value in the world of real things.*
* One way in which the Plato’s Cave allegory doesn’t work well in the monetary sense is when considering an essential property of money: fungibility. For money to be money, it must be fungible — that is, a dollar bill is exactly like any other dollar bill in terms of how it behaves in a monetary sense. I can buy a candy bar with any dollar, not just one specific dollar. The Plato’s Cave allegory draws a 1-to-1 linkage between the “real” object we cannot perceive and the shadow we can perceive, but with money it is more like a probabilistic wavefront that only collapses when you spend the dollar.
This means that, in the economic sense, our “shadow” of a real world good or service is not a particular dollar but any dollar.
January 16, 2015
When oil prices are high there is a rush of investment into oil based enterprises from multi-nationals to frackers. No bad thing but there is always a real danger of over investment leading to the exploitation of very marginal resources. A lower oil price will strand some of that investment and, just as importantly, postpone a great deal of it. Which frees up investment for other, potentially more useful, purposes.
The second thing which happens is that governments become addicted to the joys of relatively painless oil royalties. This looks like revenue but, because it is drawn from a diminishing resource, is actually a rather dangerous drawing down of capital. A lot of oil “revenue” is seen as general revenue and is spent on non-capital expenditures. With a booming oil sector governments are tempted to think the exaggerated revenues are available for general expenses and will continue to be. Which means that government budgets are set based on a purely extractive draw down of a province’s or nation’s capital. This is a poor idea.
Not to take anything away from the bright guys who are fracking and mining their way to oil fortunes, the reality is that extracting oil does not leave much in the way of useful, secondary industry, much less innovation. Which, in turn, means that when the oil is no longer profitable to extract there is no residual, non-oil, economy left behind. If a government spends the oil revenue as it comes in, or worse uses it to secure loans, when the oil revenue dries up there is nothing to cover the spending or the debt.
The golden lining of additional pressures on nasty states like Russia, Iran and Venezuela is likely not as significant as the prevention of malinvestment and governmental squander. In time, as various emerging economies continue to grow, demand will drive the price of oil upwards again. With luck investors and governments will not make the same mistakes twice.
(One unalloyed good arising from the collapse of the price of oil is that so called clean energy renewables like wind and solar look even sillier with their present technology. I suspect wind will always make zero economic sense; I have more hope for photo voltaic solar as new materials promise significantly higher efficiency. And those same materials in a different configuration promise radical gains in battery efficiency for that daily occurrence known as darkness. Again, a low oil price will dampen the insane over investment in these marginal technologies.)
Jay Currie, “Oil Wars”, Jay Currie, 2014-01-03
January 7, 2015
At Coyote Blog, Warren Meyer explains how what must have seemed to be a simple, common-sense regulation change led almost inevitably to a housing market melt-down:
… a redefinition by governments in the Basel accords of how capital levels at banks should be calculated when determining capital sufficiency. I will oversimplify here, but basically it categorized some assets as “safe” and some as “risky”. Those that were risky had their value cut in half for purposes of capital calculations, while those that were “safe” had their value counted at 100%. So if a bank invested a million dollars in safe assets, that would count as a million dollar towards its capital requirements, but would count only $500,000 towards those requirements if it were invested in risky assets. As a result, a bank that needed a billion dollars in capital would need a billion of safe assets or two billion of risky assets.
Well, this obviously created a strong incentive for banks to invest in assets deemed by the government as “safe”. Which of course was the whole point — if we are going to have taxpayer-backed deposit insurance and bank bailouts, the prices of that is getting into banks’ shorts about the risks they are taking with their investments. This is the attempted tightening of regulation to which Kling refers. Regulators were trying for tougher, not weaker standards.
Anyway, what assets did the regulators choose as “safe”? Again, we will simplify, but basically sovereign debt and mortgages (including the least risky tranches of mortgage-backed debt). So you are a bank president in this new regime. You only have enough capital to meet government requirements if you get 100% credit for your investments, so it must be invested in “safe” assets. What do you tell your investment staff? You tell them to go invest the money in the “safe” asset that has the highest return.
And for most banks, this was mortgage-backed securities. So, using the word Brad DeLong applied to deregulation, there was an “orgy” of buying of mortgage-backed securities. There was simply enormous demand. You hear stories about fraud and people cooking up all kinds of crazy mortgage products and trying to shove as many people as possible into mortgages, and here is one reason — banks needed these things. For the average investor, most of us stayed out. In the 1980’s, mortgage-backed securities were a pretty good investment for individuals looking for a bit more yield, but these changing regulations meant that banks needed these things, so the prices got bid up (and thus yields bid down) until they only made sense for the financial institutions that had to have them.
It was like suddenly passing a law saying that the only food people on government assistance could buy with their food stamps was oranges and orange derivatives (e.g. orange juice). Grocery stores would instantly be out of oranges and orange juice. People around the world would be scrambling to find ways to get more oranges to market. Fortunes would be made by clever people who could find more oranges. Fraud would likely occur as people watered down their orange derivatives or slipped in some Tang. Those of us not on government assistance would stay away from oranges and eat other things, since oranges were now incredibly expensive and would only be bought at their current prices by folks forced to do so. Eventually, things would settle down as everyone who could do so started to grow oranges. And all would be fine again, that is until there was a bad freeze and the orange crop failed.
Government regulation — completely well-intentioned — had created a mono-culture. The diversity of investment choices that might be present when every bank was making its own asset risk decisions was replaced by a regime where just a few regulators picked and chose the assets. And like any biological mono-culture, the ecosystem might be stronger for a while if those choices were good ones, but it made the whole system vulnerable to anything that might undermine mortgages. When the housing market got sick (and as Kling says government regulation had some blame there as well), the system was suddenly incredibly vulnerable because it was over-invested in this one type of asset. The US banking industry was a mono-culture through which a new disease ravaged the population.
June 22, 2014
Environmentalists seem to all feel that capitalism is the enemy of sustainability, but in fact capitalism is the greatest system to promote sustainability that has ever been devised. Every single resource has a price that reflects its relative scarcity as compared to demand. Scarcer resources have higher prices that automatically promote conservation and seeking of substitutes. So an analysis of an investment’s ability to return its cost is in effect a sustainability analysis. What environmentalists don’t like is that wind does not cover the cost of its resources, in other words it does not produce enough power to justify the scarce resources it uses. Screwing around with that to only look at some of the resources is just dishonest.
I did not critique the analysis of energy payback per se, but if I were to dig into it, I would want to look at two common fallacies with many wind analyses. 1) They typically miss the cost of standby power needed to cover wind’s unpredictability, which has a substantial energy cost. In Germany, during their big wind push, they had to have 80-90% of wind power backed up with hot fossil fuel backup. 2) They typically look at nameplate capacity and not real capacities in the field. In fact, real capacities should further be discounted for when wind power produces electricity that the grid cannot take (ie when there is negative pricing in the wholesale market, which actually occurs).
Warren Meyer, “Bizarre Payback Analysis Being Used for Alternate Energy”, Coyote Blog, 2014-06-16.
March 25, 2014
Noam Scheiber examines the fanatic devotion to youth in (some parts of) the high tech culture:
Silicon Valley has become one of the most ageist places in America. Tech luminaries who otherwise pride themselves on their dedication to meritocracy don’t think twice about deriding the not-actually-old. “Young people are just smarter,” Facebook CEO Mark Zuckerberg told an audience at Stanford back in 2007. As I write, the website of ServiceNow, a large Santa Clara–based I.T. services company, features the following advisory in large letters atop its “careers” page: “We Want People Who Have Their Best Work Ahead of Them, Not Behind Them.”
And that’s just what gets said in public. An engineer in his forties recently told me about meeting a tech CEO who was trying to acquire his company. “You must be the token graybeard,” said the CEO, who was in his late twenties or early thirties. “I looked at him and said, ‘No, I’m the token grown-up.’”
Investors have also become addicted to the youth movement:
The economics of the V.C. industry help explain why. Investing in new companies is fantastically risky, and even the best V.C.s fail a large majority of the time. That makes it essential for the returns on successes to be enormous. Whereas a 500 percent return on a $2 million investment (or “5x,” as it’s known) would be considered remarkable in any other line of work, the investments that sustain a large V.C. fund are the “unicorns” and “super-unicorns” that return 100x or 1,000x — the Googles and the Facebooks.
And this is where finance meets what might charitably be called sociology but is really just Silicon Valley mysticism. Finding themselves in the position of chasing 100x or 1,000x returns, V.C.s invariably tell themselves a story about youngsters. “One of the reasons they collectively prefer youth is because youth has the potential for the black swan,” one V.C. told me of his competitors. “It hasn’t been marked down to reality yet. If I was at Google for five years, what’s the chance I would be a black swan? A lot lower than if you never heard of me. That’s the collective mentality.”
Some of the corporate cultures sound more like playgroups than workgroups:
Whatever the case, the veneration of youth in Silicon Valley now seems way out of proportion to its usefulness. Take Dropbox, which an MIT alumnus named Drew Houston co-founded in 2007, after he got tired of losing access to his files whenever he forgot a thumb drive. Dropbox quickly caught on among users and began to vacuum up piles of venture capital. But the company has never quite outgrown its dorm-room vibe, even now that it houses hundreds of employees in an 85,000-square-foot space. Dropbox has a full-service jamming studio and observes a weekly ritual known as whiskey Fridays. Job candidates have complained about being interviewed in conference rooms with names like “The Break-up Room” and the “Bromance Chamber.” (A spokesman says the names were recently changed.)
Once a year, Houston, who still wears his chunky MIT class ring, presides over “Hack Week,” during which Dropbox headquarters turns into the world’s best-capitalized rumpus room. Employees ride around on skateboards and scooters, play with Legos at all hours, and generally tool around with whatever happens to interest them, other than work, which they are encouraged to set aside. “I’ve been up for about forty hours working on Dropbox Jeopardy,” one engineer told a documentarian who filmed a recent Hack Week. “It’s close to nearing insanity, but it feels worth it.”
It’s safe to say that the reigning sensibility at Dropbox has conquered more or less every corner of the tech world. The ping-pong playing can be ceaseless. The sexual mores are imported from college—“They’ll say something like, ‘This has been such a long day. I have to go out and meet some girls, hook up tonight,’ ” says one fortysomething consultant to several start-ups. And the vernacular is steroidally bro-ish. Another engineer in his forties who recently worked at a crowdsourcing company would steel himself anytime he reviewed a colleague’s work. “In programming, you need a throw-away variable,” the engineer explained to me. “So you come up with something quick.” With his co-workers “it would always be ‘dong’ this, ‘dick’ that, ‘balls’ this.”
There’s also the blind spot about having too many youth-focussed firms in the same market:
The most common advice V.C.s give entrepreneurs is to solve a problem they encounter in their daily lives. Unfortunately, the problems the average 22-year-old male programmer has experienced are all about being an affluent single guy in Northern California. That’s how we’ve ended up with so many games (Angry Birds, Flappy Bird, Crappy Bird) and all those apps for what one start-up founder described to me as cooler ways to hang out with friends on a Saturday night.
H/T to Kathy Shaidle for the link.
March 17, 2014
In the Washington Post, George Will says that we’ve learned nothing about helping the poor since Daniel Patrick Moynihan’s day:
Between 2000, when 17 million received food stamps, and 2006, food stamp spending doubled, even though unemployment averaged just 5.1 percent. A few states have food stamp recruiters. An award was given to a state agency for a plan to cure “mountain pride” that afflicts “those who wished not to rely on others.”
Nearly two-thirds of households receiving food stamps qualify under “categorical eligibility” because they receive transportation assistance or certain other welfare services. We spend $1 trillion annually on federal welfare programs, decades after Daniel Patrick Moynihan said that if one-third of the money for poverty programs was given directly to the poor, there would be no poor. But there also would be no unionized poverty bureaucrats prospering and paying dues that fund the campaigns of Democratic politicians theatrically heartsick about inequality.
The welfare state, primarily devoted to pensions and medical care for the elderly, aggravates inequality. Young people just starting up the earnings ladder and families in the child-rearing, tuition-paying years subsidize the elderly, who have had lifetimes of accumulation. Households headed by people age 75 and older have the highest median net worth of any age group.
In this sixth year of near-zero interest rates, the government’s monetary policy breeds inequality. Low rates are intended to drive liquidity into the stock market in search of higher yields. The resulting boom in equity markets — up 30 percent last year alone — has primarily benefited the 10 percent who own 80 percent of all directly owned stocks.
January 14, 2014
The Heritage Foundation has posted their 2014 economic freedom rankings. Here’s a slideshow of the top ten countries by Heritage’s ranking formula:
Canada’s economic freedom score is 80.2, making its economy the 6th freest in the 2014 Index. Its overall score is 0.8 point better than last year, reflecting improvements in investment freedom, the management of government spending, and monetary freedom. Canada continues to be the freest economy in the North America region.
Over the 20-year history of the Index, Canada has advanced its economic freedom score by 10.7 points, the third biggest improvement among developed economies. Substantial score increases in seven of the 10 economic freedoms, including investment freedom, fiscal freedom, and the management of public spending, have enabled Canada to elevate its economic freedom status from “moderately free” 20 years ago to “free” today.
A transparent and stable business climate makes Canada one of the world’s most attractive investment destinations. Openness to global trade and commerce is firmly institutionalized, and the economy has rebounded relatively quickly from the global recession. The financial system has remained stable, and prudent regulations have allowed banks to withstand the global financial turmoil with little disruption.
July 27, 2013
In the US, municipal bonds — bonds issued by city or other municipal governments — have been widely viewed as “safe” investments. Detroit may cause that view to change drastically. Reggie Middleton has been sounding the alarm for a few years:
Following up on my timely post “Here Come Those Municipal Defaults That Everyone Said Couldn’t Happen, Pt 2“, I comment on Meredith Whitney’s OpEd in the Financial Times. If you remember, she — like I — warned of municipal defaults years ago and was ridiculed for such. Ms. Whitney is quoted as saying:
“As jarring as the reality may be to accept, Detroit’s decision last week to declare bankruptcy should not be regarded as a one-off in the U.S. municipal market.” she said.
“There are five more towns like Detroit in Michigan alone. There are many more municipalities across the country in similar positions.”
“The bill for promises past is now so large for some cities and towns that it is crowding out money for the most basic of services — in the case of Detroit, it could not even afford to run its traffic lights,” she said.
“Will [lawmakers] side with taxpayers, unions or the municipal bondholders? If they back residents, money will be directed to underfunded public services at the expense of pensions and bondholders. If they side with the unions, social services will continue to be cut and the risk to bondholders will increase considerably. If they side with bondholders, social services and pensions are at risk.”
In the case of Detroit, elected officials, for the first time in a very long time, are siding with residents, Whitney said. This is a new precedent that boils down to the straightforward reality of the survival and sustainability of a town or city, she said.
“After decades of near-third-world conditions in the richest country in the world, the city finally stood up and said enough was enough,”
Well, this is the problem. Defaulting on revenue bonds where the underlying asset (ex. a housing project, utility, or infrastructure project) is not generating the sufficient cash flows is part and parcel of the risk of investing in said class of bonds. This is widely accepted and understood, which is likely why those bonds have a slightly higher yield.
For some obscene reason, defaulting on the general obligation bonds which purportedly carry the “full faith and credit’ of the municipality as a back stop is deemed as wholly different affair. The reason? Who the hell knows? This is a point I tried to drive home in the original “Here Come Those Municipal Defaults That Everyone Said Couldn’t Happen” article in 2011. Backing by the full faith and credit of a public entity does not make an investment risk free. To the contrary, if said entity is fundamentally insolvent, the investment is actually “riskful” as opposed to risk free.
Treating these bonds as unsecured in the bankruptcy is essentially the way to go. If you don’t want to do that, well you can still consider them backed by the full faith and credit of the insolvent municipality, which is essentially unsecured — and move on anyway — particularly as many potential collateral assets of value would have likely been encumbered by agreements with a little more prejudicial foresight.