Bonds based on pot sales?

The bond market has become so insane that 2 outrageous ideas are now taken seriously.

By Kim Peterson Oct 8, 2010 2:21PM
Marijuana © Halfdark/fstop/Getty ImagesWhat would you rather buy: California bonds backed by marijuana taxes or Mexican government bonds that don't mature for 100 years?

Neither? Ding! We have the right answer.

The financial situation is so precarious in California that some people there are considering issuing bonds backed by marijuana taxes. That's according to Amy Resnick, editor of The Bond Buyer.

Resnick attended the California Public Finance Conference recently and wrote on Twitter that some attendees think the market would accept those bonds if Proposition 19 passes. The proposition, headed to voters next month, would legalize marijuana for people older than 21. It would also allow local governments to collect taxes on pot sales.

Cities in California are already on board with marijuana taxes, particularly after seeing the revenue flow into the city of Oakland. The budget there is getting a $1 million-a-year boost from taxes on its four dispensaries, Bloomberg reports.

There are many reasons not to support a bond backed by pot taxes -- and they have nothing to do with your personal opinions about marijuana. The first question to ask is this: Does the federal government have the authority to override state laws on marijuana?

Marijuana use is illegal under federal law. The uneasy relationship between federal and state authorities in this area could change at any time, depending on how the political winds blow. There's no guarantee of a consistent flow of revenue from pot taxes. Post continues after video:
OK, well, how about the Mexican century bonds? The government is selling $1 billion in bonds due in 100 years and says it wants to take advantage of record-low yields to fund operations, Bloomberg reports. The yield on the 100-year bonds was at about 5.8% Thursday.

Analysts are wary of the bonds, with one saying it shows the credit market is approaching a bubble that is blinding investors, Bloomberg reported.

"I'm not seeing investor interest yet in 50-100-year bonds. This might create a market, but I'm skeptical," one analyst told the Financial Times. "Given the illiquidity, there are better uses for investors' cash."

But analysts from the company that arranged the sale -- GoldmanSachs (GS) -- were, not surprisingly, enthusiastic about the deal. "The appetite among investors for investments in Latin America is very strong," one told the FT.

I think this quote sums up bond mania nicely now. It's from two analysts at RBC, reprinted by Bloomberg: "The market overlooks fundamentals at its peril. Enjoy the party while it lasts, but caveat emptor; the music will surely stop at some stage, and when the party ends, the hangovers could be extreme."

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