Living Beyond Yours Means – California’s Economy Gets Worse

California’s Pain Is Only Beginning

BIG SUR, Calif. — As Sacramento squabbles over the state’s $42 billion deficit, Californians are getting a bitter taste of what’s to come after the steep budget cuts that are inevitable when legislators and Gov. Arnold Schwarzenegger finally hammer out a deal.

Some world-famous parks like Pfeiffer Big Sur State Park may not open this year. After-school programs in low-income areas are being scuttled, putting high-risk teens on the street just as police forces are being cut. Schools are closing classrooms, and some highway projects have ground to a halt. The state may not be able to monitor some sex offenders as required under law.

Other states face budget cuts too, but California’s budget mess stands out for its size. Its deficit is projected at $42 billion by mid-2010. Since Gov. Schwarzenegger declared a fiscal emergency 14 weeks ago, he and lawmakers have been deadlocked over how to close the gap. Democrats want tax increases and moderate spending cuts; Republicans seek deep cuts and no tax increases; the governor wants a combination.

The governor’s office warned Tuesday that if no budget deal is reached by Friday, the state would send layoff warnings to 20,000 workers. Gov. Schwarzenegger also said he intends to cut 10,000 jobs through layoffs and attrition to save $750 million over 17 months.

If it’s true that California sets the trend for the nation, we can all expect more economic pain.  California has discovered the limits of the theory that a government can borrow and spend its way to prosperity.  It will be interesting to see what outcome the state arrives at with its budget process.  Raising taxes would be self defeating and borrowing more would be total lunacy.  The last option result of cutting spending is already being deployed and will likely continue, putting a further drag on the state’s economy.  The era of reduced expectations is slowly dawning on California.

China Becomes Nervous Over US Debt Holdings

China Needs US Guarantee for Treasuries

Feb. 11 (Bloomberg) — China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.

The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,”  He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.

Benchmark 10-year Treasury yields climbed above 3 percent this week on speculation the government will increase borrowing as President Barack Obama pushes his $838 billion stimulus package through Congress. Premier Wen Jiabao said last month his government’s strategy for investing would focus on safeguarding the value of China’s $1.95 trillion foreign reserves.

“In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe,” said He in Beijing. “That would be one of the prerequisites for more purchases.”

“The biggest concern for China to continue buying U.S. Treasuries is that if Obama’s stimulus doesn’t work out as expected, the Fed may have to print money to cover the deficit,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., partly owned by Morgan Stanley. “That will cause a dollar slump and the U.S. government debt will lose its allure for being a safe haven for international investors.”

The Chinese are correct to worry about the value of their US Treasury holdings.  It is becoming more obvious by the hour that the huge spending proposals coming out of Washington guarantee that the Fed will be printing money.  The Chinese may currently not be able or willing to liquidate their holdings in Treasuries.  The one certainty here is that the Chinese appetite for additional US debt securities will greatly diminish going forward.

Real Estate Long Way From Bottoming

The Reality Behind Real Estate

by Michael Pento, Delta Global Advisors, Inc. | February 10, 2009

Much has been written lately about the beginnings of a recovery in the real estate market. Just last week housing bugs (investment “bugs” are not exclusive to those who only love gold) were cheering the latest data point which they claimed as evidence the market is making a comeback.

So with all this good news out there, why am I still projecting a continuation of falling home prices? Inventories, especially the key reading of vacant homes for sale. The reason the number of vacant homes for sale is more salient than those that are occupied is that a home sitting vacant is much more likely to stay on the market until it is sold, regardless of price (as opposed to occupied homes, with owners who might simply pull the listing if they don’t like the price). Because the owners of so many unoccupied homes are banks, they are especially motivated to hit the bid on a property.

The reason there is an intractable level of homes for sale clearly stems from the faltering economy, which is causing massive layoffs and skyrocketing unemployment. The rate is currently 7.6%, a 17-year high. This compels homeowners (many of whom owe more on their home than it is worth) to walk away from their properties. After all, how much motivation do home owners need to abort if they are already upside down on the home and now find themselves without a job?

Home prices and mortgages rates may have to fall well below historical levels in order to clear away the massive buildup in inventories, and it’s a condition which may need to exist for a protracted period of time before home price stability can occur.

Healing takes time, but that is not part of our new administration’s plan to fix the real estate market. Instead, like his predecessor George W. Bush, the Obama team feels it is better to artificially prop up home prices at an unsustainable level rather than have them retreat to a price that can be supported by the free market. But then again, isn’t this just more evidence that the idea of free market capitalism is being trampled—by both parties.

The Government will waste huge amounts of resources trying to fight free market forces and fail in the end.  Attempts to establish artificial market prices has never worked and it will not work now.

PIMCO Demands That Fed Print Money

PIMCO Says World Faces Second Wave of Economic Crisis

Feb. 11 (Bloomberg) — Pacific Investment Management Co., which runs the world’s biggest bond fund, said the global economy faces a “second wave” of turmoil unless governments adopt larger spending plans.

“The economic setback is still in its early stages,” Koyo Ozeki, head of Asia-Pacific credit research at Pimco’s Tokyo office, wrote in a report on the firm’s Web site. “Any further decline in housing prices could accelerate the downturn, intensifying the pernicious feedback loop and possibly leading to a second wave in the financial crisis in the next six to 12 months.”

Bill Gross, Pimco’s co-chief investment officer, said on Feb. 5 the Federal Reserve will have to buy Treasuries to curb yields as debt sales increase.

“To overcome that second wave, governments worldwide would have to spend vast quantities,” Ozeki wrote. “The resulting erosion in their finances would increase the risk of dangerous side effects.”

It sounds like the largest bond fund in the world is getting so nervous about their bond holdings that Bill Gross is calling on the Fed to print money via the purchase of Treasuries.   We are reaching a very dangerous point in the nation’s finances when there seems to a consensus that printing money is the only solution to our economic woes.  The free market solution of restructuring and bankruptcies is being avoided at all costs.  Expect a long drawn out economic nightmare.

What is the end result of printing money?   See The Zimbabwean Dollar – The Point of No Return – this may be our future.

Japan’s GDP Down 50% In One Year?

Titanic Sails Again to Sink Deck-Chair Economy

Feb. 11 (Bloomberg) — NEC Corp. started a trend that will forever change Japan.

The nation’s largest personal-computer maker on Jan. 30 said it will fire more than 20,000 employees. That announcement would have been shocking enough had it not opened the floodgates. Since then, Panasonic Corp. said it will cut 15,000 jobs. Nissan Motor Co. is cutting 20,000.

Even during the darkest days of the 1990s — deflation, bank failures, public bailouts — companies avoided mass layoffs. NEC’s precedent seems to have made it fashionable to do just that. What’s next? Sony Corp. firing 50,000 people in Tokyo?

The psychological blow to Japan’s already skeptical consumers is sure to deepen the recession at a speed few thought remotely possible just two months ago.

“Japan’s recent economic decline is faster than that of the U.S., which has been experiencing the worst financial crisis in a century,” Kazuo Momma, head of research and statistics at the Bank of Japan, said in Tokyo on Feb. 9.

Momma said the world’s second-largest economy may have shrunk at an “unimaginable” speed last quarter. Gross domestic product fell at an annual 11.7 percent pace in the fourth quarter of 2008, according to the median estimate of 23 economists surveyed by Bloomberg News. That would be the steepest decline since 1974.

At this rate, Japan’s GDP gets cut in half in about a year.  The social and economic devastation we are experiencing will test governments worldwide.  Based on the governmental “solutions” we have seen so far, I would not be optimistic.   See the next link for what our future may look like.

Is There A Possibility For Optimism?

Boomers – Your Crisis Has Arrived

by James Quinn
February 10, 2009

“There is a mysterious cycle in human events. To some generations, much is given. Of other generations, much is expected. This Generation has a rendezvous with destiny.” Franklin Roosevelt – 1936

President Roosevelt was correct. The generation he was speaking to was already dealing with the worst financial crisis in the history of the United States, the Great Depression. By 1945, over 400,000 of this generation had lost their lives. Another 600,000 men were wounded. Much was expected and much was sacrificed. Every generation has a rendezvous with destiny. The generation that won World War II passed the ultimate test and proceeded to produce the next generation, the Baby Boom Generation. Their rendezvous with destiny is underway. Will it be a rendezvous with history that results in World War III, the collapse of the Great American Republic, dictatorship, or a return to the original Constitutional principles upon which this country was founded?

Based on the foolish actions of most politicians in Washington over the last thirty years, I fear for the future of our country. I don’t think the politicians in Washington comprehend the state of affairs. I sense the mood of the country turning. Fear, anger and disillusionment are the prevalent themes. Change is coming, but it is not the change that Barack Obama campaigned for. It will be forced upon us by circumstances beyond any one person’s control. While we are hurtling towards our summit with destiny, Congress continues its path of pork barrel spending, short term solutions, party politics, and condemning our children and grandchildren to a lower standard of living. The “leaders” of this country are using the tried and true method of using fear to ram through their $900 billion tax on future generations. President Bush used the same fear tactics to launch his invasion of Iraq. I see a similar success story with the coming stimulus package. Maybe the coming crisis will ultimately lead to Great Leaders rising to the occasion.

Another insightful writing by James Quinn with some very profound thoughts – well worth reading the full text.

When Does Gold Break Out To The Upside?

Investors Bet Gold To Reach $1,000

Feb. 10 (Bloomberg) — Gold speculators have increased their bets this year by 24 percent that prices will reach $1,000 an ounce by April.

Open interest in options that allow the holder to buy gold at $1,000 by April surged to 9,934 contracts as of Feb. 6 from 8,005 at the start of the year on the New York Mercantile Exchange’s Comex division. Mounting financial turmoil is boosting demand for the precious metal as a haven. Since Jan. 15, the price of the option has almost doubled, outpacing the 12 percent gain in gold futures.

Gold has gained for eight straight years and soared to a record $1,033.90 an ounce in March as mounting bank losses and a declining dollar increased demand for the metal as a store of value. Financial turmoil may push the price above that record to $2,000 as traders buy the metal as a haven, said Eric Sprott, the Canadian money manager who last year predicted banking stocks would collapse.

“The focal point is $1,000,” said Philip Gotthelf, the president of Equidex, who correctly predicted in October crude oil would fall below $40 a barrel. Gold above $1,000 is a “warning signal to central banks that people have already lost faith in currencies,” Gotthelf said.

My only question is why gold is not already selling at $5,000.  Once the $1,000 barrier is decisively breached, expect a massive gold rally with up moves of hundreds of dollars a day.  Gold is a thin market and the price will move accordingly.