California And The Three R's: Real Estate, Recession and R'unemployment
Ruh ro, Raggy, we've got a mess brewing in Kalyfornia. So many of you didn't watch Scooby-Doo when you were younger. How about Johnny Quest? Not the remakes but the originals. Sort of James Bond and Indiana Jones wrapped into one.....for kids. Dr. Quest was the main reason I chose to focus on the sciences in college. Somehow that didn't translate into slaying monsters and evil doers. Okay, enough stupidity.
As you may or may not have noticed many municipal bonds and associated funds have weakened. Some alot. I recently saw a mutual fund manager talking about the "deals" in municipal bond valuations. Well, if you believe in Goldilocks and a soft landing, then that may be so. That would mean models predicting a recession is as close to certainty as certainty can be would fail for the first time in nearly a century. I guess a soft landing could happen. I could also win the lottery. Given the chances of me winning the lottery and the economy quickly recovering likely have similar probabilities, excuse me for being unimpressed with the general consensus still expecting a soft landing. Wall Street's herd mentality suffers from impulse control. They can't wait to climb all over each other and call this economic softness as finito and plow back into anything that has fallen including municipal bond funds. Goldilocks and Santa Claus are experiencing the same fate this year. They were both run over by a reindeer. A reindeer driving a Mack truck.
So, should we see a deflationary environment that I have been espousing while others are still squawking about inflation, (how we still hear this is surprising to me.) it doesn't take a rocket scientist to figure out that real estate will be part of that deflationary funk. Falling home prices, a weak commercial and residential real estate market, increased bankruptcies, higher commercial vacancy rates, lower asset valuations and lower rents will put tremendous pressure on municipalities and states that have been freely spending real estate related tax receipts like water flows from the eternal spring. California is seriously exposed to a significant housing correction. Couple that with mismanaged state and municipal finances and it doesn't seem so sunny on the west coast. Now, it has been some time since I looked so I'm going from memory but as I recall, there are enough licensed real estate agents in California such that one is available to serve something like every thirty working residents. It's like having your own personal concierge but no money to pay them. Not that they are all practicing agents. But, the statistic seems unusually high. California has become disproportionately reliant on real estate over the last decade. Of course, that has been reported enough that we knew that.
Has anyone every thought of incenting government agencies to save money by tying pay to efficiency, lower budgets, productivity enhancements and cost savings? Ironically, people generally do respond to increased earnings potential and a desire to positively impact their employer and the country. Government might actually find a way to live within a budget as consumers and companies do. And do so well before a crisis emerges. Then they wouldn't have to raise taxes in weak economies as reduced tax receipts threaten their castles of bloat. All while the rest of us are choking down gruel. Oh well, don't expect government to ever recommend such an incentive system. It must come from the people demanding reform. A universal truth about any bureaucracy is that it will first do what is necessary to protect its existence. Or to even enhance it. Doesn't matter what the bureaucracy is or whether it is constructive or destructive. Companies, organizations, government, Wall Street.....
I can't recall exactly but I believe it was the California Treasurer that recently said they saw no chance of a recession. And, what is that based on? I'll tell you what; a finger in the wind and political rhetoric. If that is true, might someone tell me why California's unemployment rate is up 23%? Using unemployment figures, California entered a significant slowdown over a year ago. Ironically, some of my long term analytics also confirmed that the global economy started to slow very significantly in the same time frame. Regardless, California's economy is weak and going to become weaker. And, at this exact time, California is issuing uninsured bonds as have many municipalities. Great deals in municipal bonds and state bonds? Uninsured bonds? Hey, we are good for it. Trust us. Wink, wink. Did you ever wonder why a Wall Street Journal poll showed 70% of Americans believed the country was in a recession yet Wall Street was so giddy? Could it be the fact that people were losing their jobs while hedge funds were cranking up more and more leverage to drive asset markets higher?
The Governator has inherited a fiscal mess that has been building for some time. It's time to have some serious pow wows in the smoking tent. What color will the smoke be? My estimation is red. The same color as the budget numbers for the state and many of its municipalities. I expect many states and municipalities will see their credit ratings adjusted. Negatively. Just at the time every person on Wall Street is jumping on the bridges, roads and infrastructure investment theme. And, how are these items going to be paid for with lowered credit ratings and lower tax receipts? More debt? Uninsured debt? Even if infrastructure investment would come to pass, how does that play into said stocks that are hugely overvalued? I'm not sold on municipal bonds or the infrastructure theme that is becoming another of Wall Street's group grope. Both are based on what they hope will happen versus what is actually happening. We've seen this movie before. It's a movie with a bad ending.
As you may or may not have noticed many municipal bonds and associated funds have weakened. Some alot. I recently saw a mutual fund manager talking about the "deals" in municipal bond valuations. Well, if you believe in Goldilocks and a soft landing, then that may be so. That would mean models predicting a recession is as close to certainty as certainty can be would fail for the first time in nearly a century. I guess a soft landing could happen. I could also win the lottery. Given the chances of me winning the lottery and the economy quickly recovering likely have similar probabilities, excuse me for being unimpressed with the general consensus still expecting a soft landing. Wall Street's herd mentality suffers from impulse control. They can't wait to climb all over each other and call this economic softness as finito and plow back into anything that has fallen including municipal bond funds. Goldilocks and Santa Claus are experiencing the same fate this year. They were both run over by a reindeer. A reindeer driving a Mack truck.
So, should we see a deflationary environment that I have been espousing while others are still squawking about inflation, (how we still hear this is surprising to me.) it doesn't take a rocket scientist to figure out that real estate will be part of that deflationary funk. Falling home prices, a weak commercial and residential real estate market, increased bankruptcies, higher commercial vacancy rates, lower asset valuations and lower rents will put tremendous pressure on municipalities and states that have been freely spending real estate related tax receipts like water flows from the eternal spring. California is seriously exposed to a significant housing correction. Couple that with mismanaged state and municipal finances and it doesn't seem so sunny on the west coast. Now, it has been some time since I looked so I'm going from memory but as I recall, there are enough licensed real estate agents in California such that one is available to serve something like every thirty working residents. It's like having your own personal concierge but no money to pay them. Not that they are all practicing agents. But, the statistic seems unusually high. California has become disproportionately reliant on real estate over the last decade. Of course, that has been reported enough that we knew that.
Has anyone every thought of incenting government agencies to save money by tying pay to efficiency, lower budgets, productivity enhancements and cost savings? Ironically, people generally do respond to increased earnings potential and a desire to positively impact their employer and the country. Government might actually find a way to live within a budget as consumers and companies do. And do so well before a crisis emerges. Then they wouldn't have to raise taxes in weak economies as reduced tax receipts threaten their castles of bloat. All while the rest of us are choking down gruel. Oh well, don't expect government to ever recommend such an incentive system. It must come from the people demanding reform. A universal truth about any bureaucracy is that it will first do what is necessary to protect its existence. Or to even enhance it. Doesn't matter what the bureaucracy is or whether it is constructive or destructive. Companies, organizations, government, Wall Street.....
I can't recall exactly but I believe it was the California Treasurer that recently said they saw no chance of a recession. And, what is that based on? I'll tell you what; a finger in the wind and political rhetoric. If that is true, might someone tell me why California's unemployment rate is up 23%? Using unemployment figures, California entered a significant slowdown over a year ago. Ironically, some of my long term analytics also confirmed that the global economy started to slow very significantly in the same time frame. Regardless, California's economy is weak and going to become weaker. And, at this exact time, California is issuing uninsured bonds as have many municipalities. Great deals in municipal bonds and state bonds? Uninsured bonds? Hey, we are good for it. Trust us. Wink, wink. Did you ever wonder why a Wall Street Journal poll showed 70% of Americans believed the country was in a recession yet Wall Street was so giddy? Could it be the fact that people were losing their jobs while hedge funds were cranking up more and more leverage to drive asset markets higher?
The Governator has inherited a fiscal mess that has been building for some time. It's time to have some serious pow wows in the smoking tent. What color will the smoke be? My estimation is red. The same color as the budget numbers for the state and many of its municipalities. I expect many states and municipalities will see their credit ratings adjusted. Negatively. Just at the time every person on Wall Street is jumping on the bridges, roads and infrastructure investment theme. And, how are these items going to be paid for with lowered credit ratings and lower tax receipts? More debt? Uninsured debt? Even if infrastructure investment would come to pass, how does that play into said stocks that are hugely overvalued? I'm not sold on municipal bonds or the infrastructure theme that is becoming another of Wall Street's group grope. Both are based on what they hope will happen versus what is actually happening. We've seen this movie before. It's a movie with a bad ending.
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