One point I forgot to mention in the 2008 1st half predictions piece is the role of ever decreasing housing values on state (and city) revenue. A large part of revenue inflows is based on an asset (real estate) that is decreasing throughout the country. Budgets (and benefits) are set to recent 'good times'. Like most enterprises very few government institutions will save for coming rainy day times - they just assume the good times will continue to roll. But when they don't, they are in trouble. Especially if a very large revenue source starts to shrink (property taxes). And this should be happening over the next few years throughout the country.
What's the solution? Print more money. Wait. You can only do that at the federal government level. So I guess the solution is.... well, I don't know what the solution is.
Again, keep in mind how critical California is - its GDP if it stood as a stand alone country would place it around #7 in the world. So these 'messy subprime mess' that 'only affects' Ohio, Michigan, Florida, and California... (as the politicians put it), is so much bigger. Housing "only" affects 4.5% of GDP blah blah blah...
I don't know when (or hey, even if) the equity markets will finally come to the realization of the scope of the coming damage, as the bond markets obviously have. But this is only 1 of many shoes. Again, do you expect home values to go up in 2008? How will California's 2009 budget look? In just over a month the projected shortfall in CA has risen from $10 billion to $14 billion. Give it another 12 months... as many people sitting on overinflated 'assets' are finally going to sell at 20-30% lower prices. Remember, new homes are being sold off at 40% off levels seen in 2006 as home builders desperate to get rid of inventory price at fair value....
Why do you care if you don't live in California? Well it will be hitting a lot of other states for one, and secondly eventually the "real economy" affects the market ... eventually... no matter how persistent the 'invisible hand' is in seeing that this not happen. I will repeat, by the time these political candidates get to their primaries the economy is going to be the 1st, 2nd, and 3rd issue. We're just getting started here.
Fiscal Emergency for California
- Facing a projected $14 billion budget deficit, Gov. Arnold Schwarzenegger on Friday said he will declare a fiscal emergency, which will allow the governor and lawmakers to cut spending more quickly and also sets the stage for slashing state services and programs - perhaps by as much as 10 percent.
- California's fiscal crisis, which is beginning to approach levels that contributed to the 2003 recall of Gov. Gray Davis, is due primarily to a collapsed housing market and related woes in the subprime mortgage industry.
- It doesn't help that while revenues are especially volatile - disproportionately reliant on income taxes - the state has a number of fixed costs as well as guaranteed funding adopted by voters, most notably for public education.
Wait! Paulson wants local municipalities to float tax free bonds to pay for the housing bust. Wow, it sounds like a lot of credit is going to be needed with all these new bonds that are going to be needed to pay for BOTH the housing bust AND to generate tax revenues. All in the fact of a credit crunch. The timing could not be more.... perfect.
5 comments:
Mark,
It certainly seems as though you see the light. I am suprised that you are as long as you are in the markets. As the great Jesse Livermore once said it is patience that makes you the money. On the short side I am just waiting for the collapse of the technolgy industry...I will take full advantage of that.
Ron Paul 2008
Remember, this is a long mutual fund
hence I am limiting myself to general rule of 25% cash max and 20% short. This would fit into the spirit of what most mutual funds are allowed to do. To read how I would be really set up, you can go check out www.fundmyhedgefund.com ;)
I am far more 'short' in personal account at this moment. But even if we see all these bad things in the near future you have to remember, counter trend rallies can be nasty and the bulls will throw everything they can to make the market stay up. A lot more people want the markets up than down. But again, a hedge fund is run very different than a mutual fund.
RP has 2.5M already! Hoping for 6M!+
Not that I am a big proponent of bonds, but how do they generally fair in a recession? When do bonds do best? I know they are interest rate sensitive, but I forgot how they do in the various stages of a cycle.
Thanks
Not a big bond person. With the demand for safety bond rates are dropping in the treasury level - can't even beat inflation rates, and then on the corporate side the yield is in junk bonds but I wouldn't really want to own junk bonds in an environment we are in/headed to.
Just an FYI...
I've started emailing all the major news stations CNN FOX MSNBC, asking them why they are not covering Ron Paul. I think it is a disgrace that they are shoving these other idiots down our throats. If you get a chance maybe you can also email you distaste (if you choose of course) :)
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