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Thread: Rich Californians now collecting 6.89% TAX FREE Interest ...

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    Default Rich Californians now collecting 6.89% TAX FREE Interest ...

    and the longer the state is unable to come to terms with its government spending levels versus tax revenue levels, the higher that interest rate will continue to rise !



    (snip)"The furloughs came after Schwarzenegger vowed to veto a package of tax increases and spending cuts approved yesterday. Democrats had attempted to find a way around a two-thirds supermajority normally needed for passage of a tax measure as they considered ways to close the $42 billion shortfall that has depressed California bond prices and forced officials to halt $3.8 billion of public-works projects. The deficit also threatens to leave the most-populous U.S. state without enough cash to pay bills by February.

    The furloughs would amount to a 10 percent pay cut, Chris Voight, executive director of the California Association of Professional Scientists, a group that represents about 3,000 scientists working for the state. The association and the Service Employees International Union announced they will sue to block the furloughs and any layoffs, which they said would violate collective-bargaining deals.

    Regressive Bargaining

    “We don’t think it’s right, and we’re prepared to file an unfair practices charge against the governor,” Yvonne Walker, SEIU Local 1000 president said today at a news conference in Sacramento. “We think it’s regressive bargaining. For him to do this outside of existing negotiations is improper.”

    Schwarzenegger today also ordered lawmakers into a new special session to grapple with the crisis, the third time he’s done so since Nov. 6.

    He again invoked powers granted him in 2004 to declare a fiscal emergency, which gives lawmakers 45 days to close the gap. If they fail to take action by then, they are barred from doing any other legislative work.

    The Legislature adjourned the previous special session yesterday after approving the tax increases, which Schwarzenegger then vowed to veto.

    Bond Prices

    California, the biggest borrower in the municipal-bond market, has $54 billion in general-obligation debt. It’s rated A+ by Standard & Poor’s and Fitch Ratings, the fifth-highest grade, and an equivalent A1 at Moody’s Investors Service.

    Last week, Standard & Poor’s said it may cut the rating on $54 billion of California bonds because of the fiscal problems, and investors have pushed down prices on the debt.

    A California bond maturing in 2038, which pays 5.25 percent interest, traded at 79.4 cents on the dollar yesterday to yield about 6.89 percent. That’s 1.8 percentage points more than similar trades three months ago, according to Municipal Securities Rulemaking Board trade data. "(snip)

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    That is an awfully misleading subject.

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    ^^^ what's misleading about it ? Amid California Democrats' calls for an income tax surcharge, those Californians who are rich enough to afford the $50k California muni bonds are now able to earn 6.89% interest that is 100% free of federal, state or local income tax. Compare this to perhaps a fully taxable 3.75% interest rate being paid on CD's and other investments that are 'affordable' by the California middle class ... which might actually pay 2.5% after federal, state and local income tax is taken out.

    If there IS a misleading aspect, it is the prospect that the state income tax increases being called for by the democratic California legislative majorities would actually apply to 'rich' Californians !

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    You keep referring to bonds as free money and for rich people, but the higher yield just reflects the higher default risk, doesn't it? (ie. California is going broke - you may not get the money that you loaned them back) If something looks too good to be true, it probably is. Or traders will come in and arb the hell out of it til it goes away.

    If you want to take on default risk for free, go do it. That's called subprime lending
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    A California bond maturing in 2038, which pays 5.25 percent interest, traded at 79.4 cents on the dollar yesterday to yield about 6.89 percent.
    Okay, so people are not willing to pay up for bonds, resulting in them trading lower (ie. you pay less for the guaranteed amount the government will end up giving you over the next 30 years). This could because noone wants to buy that stinking garbage due to default risk. Or it could be because people collectively have the view that interest rates will go up heaps, so locking in 5.25% return is a bad deal. It's not a conspiracy or anything.
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    I'll take my tax-free daily interest savings account paying 3.75%, guaranteed by the Canadian government thanks.

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    so people are not willing to pay up for bonds, resulting in them trading lower (ie. you pay less for the guaranteed amount the government will end up giving you over the next 30 years). This could because noone wants to buy that stinking garbage due to default risk.
    the 'supply and demand' equation for these muni bonds is going to steadily increase supply ... well that will remain true as long as California (or New York or any other state that continues to borrow and spend) must continue to issue new muni bonds versus going bankrupt. On the 'risk' side, in effect these bonds are no riskier than Freddie / Fannie bonds, since they have the implied guarantee the US federal gov't will backstop them ... well that will remain true as long as Democrats are firmly in control in Washington DC.

    Thus in a manner very similar to the gov't created 'profit spread' for bailed out banks, the gov't has also created a very large 'profit spread' for muni bond holders. And that 'profit spread' is even wider when one also factors in that rich Californians buying these muni bonds are also avoiding say a 36% federal income tax and an 11% California state income tax rate on the bond interest payments received. Thus in terms of after-tax profitability, in order for a rich Californian to do better than a California muni bond, they would have to achieve something like a 10% rate of return on a fully taxable investment !


    As to the 'conspiracy', with a conventional $1 million business investment, the federal gov't would be pocketing up to 36% or $360k per year in tax revenues. Similarly the Cal state FTB would be pocketing up to 11% or $110k per year in tax revenues. But when an investor liquidates an existing $1 million business investment in favor of a California muni bond, both the federal and state treasuries receive ZERO in tax revenues. To make matters worse, the state treasury must SPEND an additional $67k per year in the form of muni bond interest paid to the $1 million bond owner. There is really only one reason that the federal and California state gov't are willing to endure such a dramatic tax revenue swing ... and it's not purely financial !

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    Well, the tax benefit should be priced in, like franking. If people believed it wasn't, they would do the trade to take advantage of it. Do you believe you've spotted trading opportunities that no one else has, even all the rich investment bankers? Do the trade then!

    So in summary, you think the yields will keep going up because the cali govt _must_ keep borrowing more money, and it's guaranteed to never default, so it's safe as can be to keep lending them money at higher and higher interest rates? I am not a bond trader, but something doesn't sound quite right there.
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    ^^^ like Fannie / Freddie bondholder bailouts, what's 'not fair' is asking US taxpayers who did not benefit from the original lending and spending to ultimately pay the bill. And I'm certainly not alone in this observation ... as both the Bloomberg article and the rising popularity of state specific tax exempt muni bond (and bond funds) attest.

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    Quote Originally Posted by person View Post
    Okay, so people are not willing to pay up for bonds, resulting in them trading lower (ie. you pay less for the guaranteed amount the government will end up giving you over the next 30 years). This could because noone wants to buy that stinking garbage due to default risk. Or it could be because people collectively have the view that interest rates will go up heaps, so locking in 5.25% return is a bad deal. It's not a conspiracy or anything.
    Bonds work the opposite of the stock market. The less people want them - the higher the interest rate (to collect more people willing to take the risk.)

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    ^^^ yes but ... just like Fannie / Freddie bonds, the markets are assuming that the US FED will step in and back up California against bankruptcy, similarly leading to earning very high interest rates (especially in terms of tax-free interest rates) with little or no real 'risk' (thanks to implied US government guarantees against default). In essence, this is really no different than US FDIC insurance erasing the risk of buying a high interest rate CD at a troubled financial institution ... albeit that the minimum buy-in price is 50-100 times as high ( which prevents working / middle class savers from taking advantage ) and the interest rates paid are twice as high (more than twice if you account for the tax avoidance).

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    Quote Originally Posted by Deogol View Post
    Bonds work the opposite of the stock market. The less people want them - the higher the interest rate (to collect more people willing to take the risk.)
    I know, my friend. So if the buy side dries up, you end up paying _less_for a guaranteed $1 in 30 years ( = "yield going up"). The government goes "I'll sell you a $1 IOU!" and you go "No way man, you're always broke. I'm not paying more than 70c for your worthless promises, and even then I don't think you'll pay me"
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    ^^^ yes that is the free market theory. But if you add an implied government guarantee into the mix, the ACTUAL situation turns into the first guy paying the second guy 70 cents today for a promise that the second guy will pay back $1 X years down the road plus 7% annual interest (on the 70 cents) ... with a third guy (rich uncle) guaranteeing to continue making the interest payments and final payment even if the second guy doesn't !

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    Well, that's where we differ in view. I am confident that the market is correctly pricing in the risk of default, and you believe there's no risk of default, so the bonds are a strong buy. Perfectly acceptable differences in opinion
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: Rich Californians now collecting 6.89% TAX FREE Interest ...

    ^^^ true in the simplest sense. However, your interpretation denies the arguable existance of a DELIBERATE gov't action to create and maintain a high interest rate low actual risk tax shelter that is of specific benefit to the uber-rich (i.e. those that can afford the $50k-$100k initial price tag of the muni bonds) ... at exactly the same time that the same gov't is supposedly gearing up to enact highly publicized tax increases that are to be specifically targeted to penalize the same uber-rich. Those highly publicized tax increases on the uber-rich were also much of the reason that the new gov't was elected !!!

    Therein lies the new gov't's hypocracy, as well as my basic point in posting this thread.

    ~
    Last edited by Melonie; 01-05-2009 at 04:20 AM.

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