David Kotok is thechairman and chief investment officer of Cumberland Advisors. The views andopinions expressed in this piece represent only those of the author and notnecessarily those of S&P Global Market Intelligence.
In an email to me, a valued client sent a link to adisturbing read about public pensions, followed by a query. M.L. [namewithheld] has been a client for years and has a long period of terrific resultsin munis with us as his manager. He wrote:
"NY Times: 'A Sour Surprisefor Public Pensions: Two Sets of Books'
"What will be the effect oncurrent and future munis if they force valid pension projections?
"Hope all else is good."
M, the NY Times story is amust-read for any person who advises folks on munis. In our firm, I will copyit and email to all parties. John Mousseau and our bond team can give you thespecifics on your personal portfolio.
As a general theme, we have thelowest interest rates in history. (Source: 2014 speech by Andrew Haldane, Bankof England, and reaffirmed herewith an update.)
We are worried. There is also $45trillion of sovereign debt, and $13 trillion of it is trading at negativerates. A disaster is in the making. The effects are distorting many marketprices, including munis.
We are also worried about politicsnearly everywhere. Governments are failing their citizens almost everywhere.The differences among nations are wide ranging degrees but the symptoms of poorgovernance persist at many levels. That includes states and local jurisdictions.
And pension promises are corruptedand misstated, as the NYT piece describes. Low interest rates mask these sinsand raise risk to investors.
The object for us is to preserveyour capital.
We presently have four states onour DO NOT OWN list: Illinois, New Jersey, Connecticut and Kentucky. Ten moreare on a watch list, including Louisiana.
M. The basic issue comes down totransparency and truth. Many politicians are liars. A number of pension boardslike the one mentioned by the NYT show the failure of governance.
So here is what we must do. Selectcredit with great care. Sell and run from any trouble quickly and early.Maintain iron discipline on principles that are used to preserve principal.
M. Thank you for sending your note,which allowed me to use the bully pulpit of a chief investment officer toremind our entire firm and our clients of the risks we must manage for them.
Stay safe. Come see us in Sarasota.
Editor's note:Cumberland Advisors wrote a clarification for this commentary, which can beviewed here.