Excerpt<<Let's start with California, which for these purposes should be treated like a nation, not a state. California has the largest state economy in the U.S., and if it were a country, its economy would rank eighth globally. According to one credit tracking agency, California is now the tenth most likely to default of all major governments in the world, with odds currently at 1:4, and states cannot enter Chapter 9 bankruptcy, so the unwinding is likely to be messy.
Bottomline
This bear market is about secular deleveraging after a massive credit bubble. Although banks remain highly leveraged, the companies at the top of the private sector are taking their fiscal medicine and deleveraging. Consequently, corporate balance sheets in the S&P 500 have improved significantly over the last two years.
On the other hand, cities and states (and nations) have not even begun the deleveraging process. Meanwhile, small and medium-sized banks on Main Street are not lending, so city, state and national spending are the only stimuli keeping the economic patient alive at the grassroots level. That makes reducing public debt a bitter pill, indeed.
According to Elizabeth Warren, head of the TARP oversight panel, things are going to get worse fast. She stated, "The banks that are on the front lines of small-business lending are about to get hit by a tidal wave of commercial-loan failures." City and state governments will not be able to help, as their hands will be tied, their pockets empty.
Meanwhile, a $1 trillion gap in state pension and health care benefits for retirees will need to be filled, which means payroll taxes are likely to be increased 50% in some states within the next two years, further depressing the economic recovery. Therefore, be prepared for local infrastructure and commercial real estate to get hollowed out from the inside over the next 5-10 years. Not a pretty thought, but we think it is indicative of the Age of Austerity. How do you invest during such a contraction? Pick your investments carefully. We have two suggestions this week.>>
An short excerpt from The Spear Report, in its weekly general outlook summation 2/20/2009.
This is NOT for near term market direction.Max |
