Why I’m Overthrowing the Government
Submitted by madhedgefundtrader on 01/07/2010 09:52 -0500
zerohedge.com
I finished my indoctrination on how to overthrow the government last weekend. Specifically, I attended a grass roots meeting of activists in Berkeley, California planning to collect 450,000 signatures by April to put the “California Democracy Act of 2010” on the November ballot.
The measure seeks to amend California’s broken constitution by permitting passage of budget and tax measures with a simple majority. The current two thirds requirement, which California shares only with the miniature states of Rhode Island and Delaware, is widely blamed for the legislative impasse in Sacramento that has driven the state to financial ruin.
Overdependence on capital gains—up to 40% of revenues in good years—enabled the state to just barely balance the budget at stock and real estate market tops, but to death spiral into hemorrhaging deficits during the inevitable busts that followed. Furthermore, since proposition 13 capped real estate taxes at 1.25% in 1978, the state’s population has grown by 16 million to 38 million, placing a backbreaking strain on all services.
Our hulking, language mangling, steroid injecting governator, viewed by both parties as a complete failure in his seven years in office, blames it all on Washington. There is some merit to what Arnold claims. The Internal Revenue Service is basically a giant machine devilishly designed to suck money out of California and spend it everywhere else. The Golden State is far and away the largest revenue generator for the federal government, but only gets back 78 cents out of every dollar it forks over. The rest is blown in the Midwest, the South, and Alaska—huge net recipients of tax dollars—and usually the first and loudest to complain about free government handouts. The second biggest net payer into the system is, surprise, surprise, New York. This has been going on for decades.
Only six obstinate legislators from the farm belt and the Deep South (Orange County) are holding hostage the world’s sixth largest economy, right after France. During the frequent 24 hour debates over the budget, they show up with Costco sized bags of Cheetos, soggy baloney sandwiches, and six packs of Diet coke so they can camp out, and if necessary, sleep at their desks in order to cast a “no” vote at every opportunity.
Decades of relentless gerrymandering have made virtually every seat in the state safe, so elections offer no solutions. Daryl Steinberg, president of the California Senate, told me that voters of all political stripes are fed up to the gills. Once boasting the best public education system in the country, California now ranks 47th in spending/pupil and 49th in pupils/teacher. The University of California, the top public university in the world, and a veritable PhD and Nobel Prize factory, has endured two 20% back to back budget cuts. Students are rioting, and for good cause. Schools, police and fire departments, parks and aid agencies are closing throughout the state. My local high school had to cancel its sports and music programs to keep class sizes from rising above 40.
Antiquated infrastructure is falling apart, with the San Francisco Bay Bridge closed for five days in November, forcing the local economy to take a huge hit. The barbaric prison system, which has been ruled by a federal judge as inflicting “cruel and unusual punishment,” is letting 24,000 prisoners out early, since it can’t afford to house or feed them. The public outrage is so violent the initiative will almost certainly pass.
When it does, taxes are going to go up a lot. Target numero uno: property taxes and the top 5% of income earners. Expect a battle royal, as the top 1% of taxpayers already pay a marginal state tax rate of 10.3%, the second highest in the country after Vermont, generating 50% of state revenues. This will make our sunshine the world’s most expensive.
That will be great news for the Golden State’s beleaguered bond holders, who will love to see new sustainable sources of revenue. Take a look at the California municipal bond funds (VCV), (NCP), and the (NVX). Any hint that the Land of Fruits and Nuts is about to make a major dent in this year’s anticipated $21 billion budget deficit will cause the yields on its long dated tax free paper to shed its distressed premium very quickly, sending prices soaring.
If California were a stock, I’d be buying it now, but you can do the next best thing with bonds. If you want to join the revolution, or just learn more about the issue, go to www.CAMajorityRule.com
For more iconoclastic and out of consensus analysis, please visit my website at www.madhedgefundtrader.com |
