Seeking Alpha
written by Joseph L. Shaefer
Monday January 11, 2010
I’m hoping, as are most readers, that the worst is behind us and we are now in a rebuilding phase. But even if that’s true, the “laissez le bon temps rouler!” (“let the good times roll!") attitude of many consumers, most real estate buyers, and all politicians means neither the federal government nor any state government put aside any money for a rainy day but, rather, spent everything that came in during the good times leaving nothing as a cushion for the bad times.
That doesn’t mean the markets must go down. Nor does it mean that some sectors won’t do very well. Even in the worst of times, there are always breakthroughs in technology and health care, to name but two examples, where an individual company will discover an advance so compelling that it grabs the imagination of investors. And even in the worst of times, people gotta eat, gotta motate, and gotta invest in something – anything – that preserves their future purchasing power. That’s why food and agriculture, energy and other essential commodities, and stores of value like gold and silver can march to the beat of their own drummer.
But there is one area that I believe must work its way through its biblical “7 lean years” and that is municipal bonds. Without State & Federal handouts (fat chance!) I see a disaster brewing here -- and an opportunity for those willing to bet against them. Regrettably, any decline will hit the most conservative of investors, those who have been led to believe by brokers and rating agencies that they will be just fine if they stick with “quality” municipal bonds.
Why do I say “fat chance” of getting a bailout from a state or the feds? Because almost no state has the assets to bail out its cities and counties. And, in an election year, even the dullest of national-level politicians won’t dare take money from Texans or Alaskans or Floridians to give it to profligate states.
Municipalities have always derived a good chunk of their revenue from state subsidies. That’s only fair, since the “state sales taxes” are collected equally from residents of every city and county but it is the “City of Wherever” that must provide fire, rescue, police and other essential services.
But this time around, at least 45 states that I could find good numbers for are showing declines in total tax revenues. The average decline in total state tax revenue was between 12% and 16%. So what are most of these brilliant leaders doing to replace tax revenue? Creating jobs? Slashing taxes to encourage new businesses? Cutting spending? Of course not. By and large they are raising taxes, getting more and more from fewer and fewer. And the fewer and fewer are voting with their feet.
The cost of a one-way U-Haul truck is a pretty good indicator of where people are going. If the destination is an unfavorable one, prices are low. But if it is so popular that there are more people wanting rental trucks than there are trucks available to rent, prices will rise. Simple supply and demand. If the unpopular destination gets unpopular enough, U-Haul might even have to pay people to dead-head their trucks back to where the Diaspora originates. We’re not quite to that point yet, but the cost of a one-way rental from Austin, Texas to San Francisco, California is $900. From San Francisco to Austin, the cost is $3,000. ...continued
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