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State Budgets Collapsing; Funding Absent
Massachusetts has joined California in approaching the federal government for emergency funds to deal with cash flow problems. In the case of MA, the state indicated a possible need for $7B in emergency loans. Massachusetts faces a $233M shortfall in revenue for its first fiscal quarter due to a slower economy according to a brief New York Times story (p. 35) on Sunday. But apparently the federal loan being contemplated is more related to the current credit crunch that is clogging up the banking system and in the case of the state preventing it from obtain commercial loans that it apparently was counting on.
California may have its own particular fiscal problems due to its unusual political and financial posture, but I doubt there is much unique about Massachusetts. If these states are facing cash flow problems I have to believe others are as well. The idea of the states of the union being unable to meet payroll without federal help is a bit nervous making.
As an investor my reaction is to hunker down in advance of a possible fiscal crisis in states - on top of the corporate banking crisis in the U.S. and Europe that is causing Western governments to put forward one rescue plan after another over the past weeks. No matter how compelling the values of the stocks of many fine companies may seem now does not seem like the time for an individual investor - or a fund, for that matter - to reduce his allocation to cash.
This time period is looking increasingly unique and dangerous. One assumes the world will get past it, that liquidity will be re-established and that the global economy will eventually return to its growth mode. But as Lord Keynes once so brilliantly observed, the market can stay irrational longer than you can stay solvent. Let’s be careful out there.
Tags: peak oil energy investments
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11 responses so far ↓
1 paultaut // Oct 5, 2008 at 9:34 pm
Agreed, But have added SBLK to my purchase list, current payout 20%, or 57% of earnings, no debt, has just added another container ship whose contract is worth more than their associated cost. Contracts extending through 2010 are around 70% of their fleet of 13(my lucky number).
Hopefully, Global trade will resume by then. Currently quoted at 7, will put in bid at 6 today, 10-6…ho,ho.
Their contracts are based on prices quoted earlier this year, not the current spot.
2 Isaac // Oct 6, 2008 at 8:01 am
Question for you Jim- In the longerterm, say 3-15 years, doesn’t internal factors such as the national debt load, entrenched entitlement spending and demographics, necessarily mean that the US dollar will trend downwards ( perhaps not against a specific country currency, but against hard assets like farmland, crude oil, gold)? If so, I find it difficult to understand why the dollar has been strengthening in relation to crude oil in past month, especially given the poor fiscal scenario we are now in. Is this just an example of shortterm inefficiencies in the market?
3 jkingsdale // Oct 6, 2008 at 8:36 am
The dollar vs. anything else has to be analyzed by case. So the dollar vs. oil is gaining right now because demand estimates for oil are falling so rapidly. Eventually the price of oil will reach an equilibrium.
The dollar vs. European currencies has been strong recently because the European economies are actually seen as going into a weaker condition than the U.S. economy. That perception could change and the dollar could begin to fall in relation to the Euro.
All these individual cases will fluctuate as perceptions change. But in a general sense, I think, the world will head toward deflation first which will tend to increase the value of the dollar. In deflation, each dollar is actually worth more compared with goods - which would be bearish for gold and oil. But eventually governments will have to inflate their way out of their deficits, which will make the dollar less valuable vs. oil, gold and probably European currencies.
Meanwhile, note the increasing weakness of the Mexican peso. As the price of oil falls along with Mexican oil production the financial viability of Mexico becomes more tenuous. About 40% of govt. revenue comes from oil. The country already has a good deal of political instability. A govt. fiscal crisis on top of that could be deadly. I would stay away from anything having to do with Mexico - I think it could become toxic in many senses.
4 Robert Essian // Oct 6, 2008 at 1:07 pm
Jim, deflation…Agreed.
Is there a time table (general) to say how long before we head towards the inflationary (hyper) cycle that history (in general) mandates.
I understand that money must grow or everything shuts down. Any thoughts?
5 Isaac // Oct 6, 2008 at 1:20 pm
Good points, and thanks for the explanation. Give me a call when we reach the deflation to inflation inflection point, OK?
6 aja8888 // Oct 6, 2008 at 1:38 pm
Throwing my 2 cents in here:
The state of Connecticut (where I am originally from) politicians are starting to bellow about the state’s budget “deficit” projected in 2009. I would suspect that more states will chime in once the income and sales tax revenue shortfalls start showing up.
Here in Texas, things seem OK since the state collects a ton of money from oil and gas production revenues. We pay no state income tax here which is one of the reasons I like it here.
7 paultaut // Oct 6, 2008 at 2:13 pm
Going into 08 the dollar was seen as going nowhere but down, $200 oil coincided with Euro at 2.00, Oil faltered and started to drop in tandem with weakness in other commodities and the dollar started getting stronger but it really wasn’t until oil hit 110 that the dollar finally started moving up.
During this time frame, the Gov. kept intruding primarily by raising the Margin rates on commodity traders. They essentially created the current deflationary spiral.
And then they let Lehman fail, what utter idiocy. To let a company that size fail without knowing the full extent of its widespread leverage or contents was a supreme act of arrogance gone wild.
Power corrupts and absolute power, corrupts absolutely. Bernanke and Paulson felt they could do what they wanted when they wanted. They created the Emergency and expected a “Blank Check” and the Power to wield it, no questions asked.
Today, the Transports confirmed the Bear on an intraday basis.
The commodity drop has caused an unintended consequence. They have added the Agricultural sector to the endangered species list. Farmers are going to start hurting big time and will expect the same consideration other failing industries are receiving. 50% drops in wheat, corn, soybeans. What does that do to their borrowing power? Fuel and other costs have not dropped the same amount. Are Banks going to lend to them? An Industry that is subject to the weather?
Whatever happens tommorow, if interest rates are not reduced substancially, I expect a probe toward 9,000.
Inre, the dollar: everyone now seems to agree that no one in the EU knows what they are doing and that the dollar can only go up.
I believe the Dollar will begin to slide and this time it will be both swift and deep. Currently Treasuries are perceived to be a safe haven but if funds are needed for self preservation, then Dollar denominated Treasuries will be the first to go.
8 jkingsdale // Oct 6, 2008 at 3:06 pm
I don’t know when deflation turns to inflation but it won’t be quick. A deflationary trend can be enormously powerful as we found out in the 30’s.
Re: the dollar - I’m very concerned that the dollar will be worth very little eventually given our fiscal deficits and the programatic deficits that are coming in social security and medicare/medicaide. On the other hand, it’s not totally clear that Europe will be in a lot better shape. So the question in my mind is: against what will the dollar fall? The Euro? Swissy? Yuan? Ruble? Certainly gold seems like a good candidate.
We could have a couple of years of deflation with the govt. pushing liquidity into the system like mad and creating a potential for future inflation. Would that make the dollar decline vs. gold? If so we’d see a combination of deflation and in increase in the price of gold - which seems a little nutty.
All of which is to say we may be in uncharted ground. The only thing I think I know for sure is that the Mexican peso should be and is getting weaker as the price of oil sinks. Which, incidentally, should be very good for the dollar.
9 robert essian // Oct 6, 2008 at 4:55 pm
Jim, thanks again for taking your time for us (me).
Cruel but cool stuff…Hope all is well…Peace
10 paultaut // Oct 6, 2008 at 9:56 pm
Australia cut its interest rate from 7 to 6% today. Their Banks and Stocks which had been down immediately jumped.
The Strong dollar is negatively impacting other than dollar currencies by draining them outright. This is causing Foreign Currency Defense mechanisms to kick in through the Sale of the Dollar. Last week Russia sold $4 Billion to defend the Ruble. Weakness in Asian Currencies increases their inflationary expectations. Unlike the Asian contagion of 98, this time around they have Mega Surpluses of USD.
What could cause the Dollar to implode Virtually overnight Asian sales combined with explosive money supply growth internal to the US, as is currently occuring with the S. Koreans selling “other” currencies to defend its own.
Did You really expect the emerging markets to sit idly on the side watching their buying power vanish?
The Balance of trade has shifted dramatically since the last currency crisis.
It is not a matter of destroying the value of their dollar holdings, its the self preservation of their own.
I do not have a clue whether all hard commodities will surge to the upside. But Gold definitely will.
Deflation is US/West biased, Inflation is a problem for the rest of the world.
11 paultaut // Oct 6, 2008 at 9:59 pm
CEF
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