Friday, April 25, 2008

Shoes Beginning to Fall in the States

This is a theme I have been promoting for a while, and it's going to hit this year, next year, and 2010. Unlike the federal government who fixes all fiscal emergencies by simply printing money out of thin air or taking hat in hand to China, Middle East, or anyone who will buy our Treasuries, the states do not have that luxury. I wrote about this a few times in the fall and winter [Dec 16: California in a State of Emergency - Coming to a Theater Near You] I wrote

Here it begins folks.... as I stated in this week's piece [The Web of Credit Snares Another: Cleveland]

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.

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

All in good time folks... most of the economic issues of the real economy will take quarters to play out while Wall Street wants its solutions "now" and can't forecast out more than then their next paycheck cycle.... they continues to refuse to see the impact the real economy is happening on Main Street. Today, an AP article is stating these effects we predicted are now happening. It also ties into my "regional recession" theory - this is why I keep saying if you live in Texas, own a farm, or in a Western Plains state you have no clue what all the fuss is about. The US itself will be bifurcated between the haves and have nots - the haves are those who are like mini Brazils or Russias - those rich in natural resources. The have nots? You relied on a service economy, auto industry, or housing boom. This is why I was laughing in early 2007 when everyone said, don't worry about housing, it is only 4.5% of GDP. For god sakes, our entire tax system is based on inflating that asset... and do you think states save for rainy days? Hah. Well the thunderstorms are coming now.... and it's just starting.
  • The finances of many states have deteriorated so badly that they appear to be in a recession, regardless of whether that's true for the nation as a whole, a survey of all 50 state fiscal directors concludes.
  • The situation looks even worse for the fiscal year that begins July 1 in most states. "Whether or not the national economy is in recession -- a subject of ongoing debate -- is almost beside the point for some states," said the report to be released Friday by the National Conference of State Legislatures.
  • The weakening economy is hitting tax revenue in a number of ways: People's discretionary income is being gobbled up by higher food and fuel costs, while the tanking housing market means people are spending less on furniture and appliances associated with buying a house.
  • The situation is grim in Delaware, with a $69 million gap this year, and bleak in California, with a projected $16 billion budget shortfall over the next two years, the report said. Florida does not expect a rapid turnaround in revenue because of the prolonged real estate slump there.
  • By mid-April, 16 states and Puerto Rico were reporting shortfalls in their current budgets as the revenue those budgets were built on -- typically, taxes -- fell short of estimates. That's double the number of states reporting a deficit six months ago. (just wait until next year when THIS year's reduction in median home prices nationwide hits every state)
  • The NCSL said the news is even worse for the upcoming fiscal year, with 23 states and Puerto Rico already reporting budget shortfalls totaling $26 billion. More than two-thirds of states said they are concerned about next year's budgets. (It's going to be more than 23 once we actually get there, trust me)
  • It also noted the silver lining for states where the economy is based on energy, such as North Dakota and Wyoming. Alaska is making so much money from oil that it announced an estimated surplus next year of $8 billion, almost twice the state's annual budget. (regional recession, regional recession, regional recession) In North Dakota, revenue is above legislative predictions by 13 percent, and in Louisiana, the oil and gas sector is robust.
  • Twelve states, including Georgia, Idaho and Illinois, reported that personal income tax collections were failing to meet estimates, and in eight of these, collections were even below a reduced forecast.
The WSJ also has a related article today - Economy, Credit Woes Foil Big City Projects. Even "stable" areas like Seattle (I have a lot of readers there, hello) are having trouble in this area.
  • A proposed $7 billion downtown Seattle project has become the latest major urban development to be scotched or delayed because of the credit crisis and a faltering economy.
  • The Seattle project joins other projects in New York, Phoenix, Atlanta and Las Vegas that have been shelved, scaled back or beset by financial problems in recent months. Many city officials hoped they would provide jobs and economic activity that could help make up for a housing-market downturn that still hasn't reached bottom.
Again, I keep repeating this: The pundits who are telling you we either have shallow recession or are coming out of recession are the same fellas who denied recession was even possible 6 months ago. How the same people who denied a recession was even possible, now have the cajones to tell us don't worry, we are going to be out of it by end of summer, is beyond me. Credibility = zero. We are in fact just beginning our "regional recession". Think 2nd inning, not 9th.

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