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Jim Grant On California And Greece
With Greece getting all the imminent default attention, have we forgotten California? Jim Grant chimes in.
- Greece: 3% of Eurozone GDP
- California: 13% of USA GDP
Rate Curves:
Greece
- 3 year: 3.45%
- 30 year: 6.26%
- 5 Year CDS: 400+
California
- 3 year: 1.89%
- 30 year: 5.59%
- 5 Year CDS: 333
Grant points out Trichet's Jan 14 commentary: "belonging to the euro area, you have an easy means of financing your current account deficit. You share a currency that is credible, so that you have a quality of financing that corresponds to that of a credible currency." Further: "this should be borne in mind, compared with the share of CALIFORNIA, FOR INSTANCE, in the overall GDP of the USA."
Grants reviews CA's Baa1/A- rating as the worst in the US, the S&P downgrade and the structural not cyclical problem of California.
- State Revenue up 22% in decade debt service cost +143%.
- Interest expense to consume 10% of revenues by 2013.
Howerver Grant's notes that Californida's debt / gdp ratio of "perhaps 25% is dwarfed by Greece 113%"
Yet as Zero Hedge has pointed out how much does a standalone credit metric such as a state's GDP truly matter? We know CA's trust fund when it comes to funding unemployment benefits is now empty and every month sees greater borrowings from the Treasury.
Case in point, we present State Unemployment Benefits as seen from the Treasury's (outflow) perspective ($MM):
Jan-08 3966
Feb-08 3572
Mar-08 3673
Apr-08 3664
May-08 3123
Jun-08 3053
Jul-08 3885
Aug-08 4650
Sep-08 5146
Oct-08 4951
Nov-08 4341
Dec-08 7384
Jan-09 8513
Feb-09 8808
Mar-09 10607
Apr-09 10883
May-09 9998
Jun-09 11982
Jul-09 11979
Aug-09 11454
Sep-09 12102
Oct-09 10749
Nov-09 10869
Dec-09 14065
We expect once the rumored cabal of Goldman and Soros finish their toying with Greece, they will look into the US. Then again, for fears of retribution by the President once it becomes known that a "US bank" (or hedge fund) is actively pushing CA CDS wider, this may be one of the most mispriced securities currently available. To those not fearing the wreath of the UAW, it may be worth the gamble on the short risk side.
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Toyota knows the wrath of UAW and their boy in the white house.
1% of GDP going to pay California unemployment benefits in 2009?
"1% of GDP going to pay California unemployment benefits in 2009?"
There is absolutely no need to work in America: welfare and perpetual unemployment benefits keep people from even looking for employment. My girlfriend is unemployed for 14 months and has no intention to look for any job at all.
Here is a link to the default length of unemployment benefits for all states:
http://money.cnn.com/news/storysupplement/economy/unemployment_benefits/...
Here is a link to the definition of the word 'perpetual':
http://www.merriam-webster.com/netdict/perpetual
And though there was an extension to bring the total coverage up to 99 weeks, that still does not equal infinity. Plus, I am willing to bet that your girlfriend does not have a family to support, so she is able to live on the reduced unemployment income. Not so much for the 1 million + unemployed that will be loosing benefits at the end of the month - who are far more aware that 'perpetual' unemployment benefits are a myth.
I'm an unemployed CA engineer. Got laid off in Dec 2008. I've applied to about 280 jobs, done about 70 phone calls, had 20 on-site interviews. Nothing yet, no offers. It's a miserable job market out here.
I am happy to have unemployment insurance to help out, but it doesn't cover what my family needs to survive. Welfare is quite limited in this state, and will be slashed further.
The unemployed aren't Reagan's "welfare queens".
Best of luck, I hope things get better. Thanks for the perspective.
Best of luck. You'll help make us stronger when angst turns to revolution.
California here i(t) come(s)!
vis a vis Trichet
true the currrency is Euro (for now),
but the credit is Greek
right now there's no currency funding mismatch, just solvency risk, maybe soon liquidity risk;
but the eventual devaluation could balloon their Euro-denominated liabilities so they will have to have multiple exchange rates like Argentina did: one for locals, and one for foreigners..to put the burden on foreigners.
The only credible analysis is to combine California's state and local debt with its prorated share of US federal debt. Grant is essentially comparing apples to oranges.
correct. +1!
What I also want to see is their total tax collection (sales + state income + federal income) vs. total spending. That would be a more accurate measure of deficit.
They are both fruit.
+1
Plus, with a printing press it's more about States finally giving into the Hamiltonian dreamsicle of total centralized power. No one remembers what the point of the Bill of Rights was anyway, anymore.
I don't understand why some cheer about CA potentially defaulting. Won't that be bad for the rest of the county and for the rest of the world?
Yes it's bad. People cheer about it because it is what SHOULD happen what and NEEDS to happen and what IS happening and it's facinating to watch. Also, it happens so SLOWLY and is so painful, we get anxious as we watch and wish it would just be over quickly wo we can get on with a fresh start.
only in the land of magical thinking.
Very few are cheering about CA potential default.
CA is serious business that could mean a collapse of the whole castle.
Greece is a pure game of duplicity (every one knows that Greece can and will be bailed out if stuff gets too sour. No one tells to keep pretending)
Greece is a safe bet. You can make money rather easily by betting against Greece with minimal risks if you cover yourself well.
CA, people prefer to ignore the situation, turn the eyes away and cross fingers the situation will mend itself.
Greece is a fear game, like striking matches near a pile of wet newspapers, wearing a full abestos suit.
California, that's striking matches near thousands of dry black powder barrels, with powder spread on the floor while being naked, hairy and covered with oil.
A different game. Different risks.
Dont expect people to focus attention on CA.
Next stop: Prison Planet. Wave to the Predator drones kids!
I think it's more along the idea that if CA goes down the crapper, it will help to bring down the Fed (and company) Ponzi. It's more along the lines of rooting for the infection to get worse, forcing the infected person who wishes to ignore the problem to do something. Keeping this Ponzi afloat is not a good thing because the longer it goes on, the worse the consequences will be for everyone.
Would you consider saying it's good the infection on my arm isn't being treated now because it would divert resources from more serious cases. But not treating the infection now means gangrene sets in and then we're talking amputation later, rather than antibiotics now. So you think even more resources diverted later is better than less resources diverted now? Does your view change if it's your arm? It's your economy.
Short term thinking (meaning 30 seconds at a time) is extremely dangerous when you're holding dynamite with a 35 second fuse that's already lit. Since we can't force the Fed and company to deal with the issue now, people are simply hoping circumstances (California falling into the ocean of debt default) will force them (Fed and company) to do what they don't want to do.
At least that's my take on this issue.
The analogy is not relevant.
Greece does not divert resources. Greece only appeals because people know it is going to be bailed out if needed. Because it must be done to preserve the EU. And more important, it will be done because it can be done.
It is feasible.
California is another beast.
The 'downfall' will not hurt everyone. The Fed is an excellent means of transfering a lot of real wealth from the rest to the world to the US.
When it is over, the consequences will not be worse for everyone.
I dont think that you can state that african nations (or some others) are considered to be part of a human body. Or if you consider them that, you have also to face the fact that many US citizens will be very happy to get amputed from them.
The bottom line is that the Fed allows the US to pour money over the world, money that is exchanged against real wealth towards the US.
When the game ends, the people at the bottom of the pyramid are going to suffer big time (funny thought when you consider they are suffering at present times really bad days with starvation, pandemias, wars...)
No analogy holds up with unlimited variables. History is also a poor analogy. You did get me thinking though.
California is the statist's socio-economic laboratory.
Of course I want to see it crash and burn!
California is responsible for more hokey crap to spread across the fruited plains than any other state.
Now it's time for them to pay for their sins. They wanted statism, they got it.
They made their bed. Now they can sleep in it.
Let's call this era the "Little default age"
Just like "Ice Age" the cartoon, but even funnier! :)
retribution of the president? are you kidding? they aren't afraid of barack. not a bit of it. they are running the markets and the country, who cares what the white house says?
irrelevant.
what he said
so true
They control Barak, either knowingly or unknowingly.
Anyone catch Barak's speech at the memorial or whatever for the CIA guys that got killed in afghan? He basically kissed the CIA's butt more than Proctor kissed that of Lieutenant Harris in the Police Academy movies.
All the fake debt in the world, must be defualted on. It ain't pretty, but it's better than TRYING but NEVER succeeding in paying it off (decades long). Because you'll kill yourself and your country (whatever country it is) trying to pay it off. Not to mention the higher costs involved with everyone paying off these bad loans. Or the fact that all these loans over the years raised prices higher than they should have, thus necessitating even bigger loan amounts.
Besides the debt of the world also contains derivatives, which is the far far more destructive than all the regular debt in the world.
But they said the statistical models in the derivatives were solid??? If they were, this crisis wouldn't of popped off like it did. Statistical models are a joke. Anything with correlation inbetween 0 and 1 are useless. Which is all statistical models do.
After all the NFC has won 13 straight coin tosses in the superbowl, a 1 in 8,100 or 1 in 81,000 event, surely beyond the reach of any statistical model, and thus deemed impossible. In our world we'd develop everything around the fact this couldn't happen because the statistical models told us that. Except, the NFC has won 13 straight coin tosses in the superbowl. Which means whatever statistical model made up to guague that is wrong. Well if you change what you are measuring to derivatives, you realize that their statistical models everything is based off of, is a guess, that is no more right or wrong than any other educated guess. It either IS or ISN'T, there's no such thing as .955 of a thing. There's no statistical modeler that can anticipate all the variables in life. Thus we've built the Dubai Tower of the world economy on quicksand, incapable of understanding and reconciling a simple outlier that blows the model sky high.
This crisis was never about 'out of control spending' on needful things. It was about the world being put on the statistical model is king and infallible path, and that slowly destroying the real economy.
We didn't get here because of California or Greece's liberal spending. We got it through derivatives and supply side economics. This then created the low tax/high speculative path. It came from bailouts of the banks. It came from the destruction of derivatives, or sorry, the turning south for the first time. It came from wars no one needed, and tax cuts no fat cat deserved yet rewarded himself or his squid by levering up more.
It's just under a broken and falling apart system, those that spent more would be first hit. Thus why the states/countries with more social spending are failing first. The only difference between all the countries is time, not how much they spend on social needs.
Not that the NSA isn't trying. No wonder they put it in Utah:
http://findarticles.com/p/articles/mi_qn4188/is_20060224/ai_n16181224/
http://www.time.com/time/magazine/article/0,9171,975285,00.html#ixzz0eyk8agsbJust a heads up, local stock brokers are doing their darndest to make their clients broker by aggressively pushing (err, I mean selling)high yielding muni funds, which they are touting as conservative alternatives to low yielding CD's and no yielding money markets.
ah, so that's why they call them 'brokers'.
lol :)
PCK is a closed end California muni bond fund, which has the benefit of low cost leverage through having 40% of its capital structure in auction rate preferreds locked in to a variable yield currently below 1%.
This enhances the yield for the common to 8 1/2% double tax free for California residents.
Two caveats: the bonds they hold are crap and if short term interest rates increase so will the cost of the leverage so be ready to jump ship at the first sign of trouble!
CA is toast, much of their "assets" are FNM paper, they're also ignoring billions (perhaps trillions) in unfunded pension & healthcare liabilities, CA voters also have a right to "just say no" and cut taxes without govt approval.
You should hear at this comment from Donald Saltarelli (after the famous Orange County California bankruptcy, Don was appointed by Governor Pete Wilson to the Orange County Board of Supervisors to clean up the mess). He says that Pennsylvania is studying the possibilityy of a Chapter 9 BK
http://kingworldnews.com/kingworldnews/Broadcast/Broadcast.html
California's general public in California is being gutted by the Democrat Unions--more benefits for their membership--on one side and the Pub tin hat crowd--no tax increases but refuse to state what entitlements or programs to cut--on the other.
Its hard for any elected official to pass through the primaries without bowing to one extreme or to the other and the leglislature is polarized. Gov Terminator seems basically pragmatic but has been excoriated by both sides.
Sad situation but Cal seems a likely fail. Bonds are by Cal law supposed to be paid at a high priority in a BK proceeding but WTFKnows what some judge will do.
The real elephant in the room is that Calif is broke and should go thru BK. CA govt is the distilled result of people finding out they can vote themselves benefits, and other clues to the dwindling spiral of democracy.
It's hard for me to imagine California not servicing their General Obligation bonds while its banks, corporations, state agencies, and high net worth individual residents are solvent. They do have taxing and police power, after all.
Of course financing California is a Ponzi scheme like so many entities - it is viable so long as it takes in more money than it pays out. If it does not it will again issue IOUs until it sells assets, taxes, issues more securities, receives bailout whatever.
And the IOUs will be just fine for highly taxed Californians. Cali tax is nine point something percent for a nice income, so it won't be hard to tender the IOUs back to the State as tax payments.
Where are Federal and Cali top rates of tax going to be in a couple of years? At least 50%, which means 6% double tax free is equivalent to 12% taxable. And many new munis issued today are taxable BuildAmerica bonds, so the old GO taxfree bonds may become relatively more attractive as tax rates increase.
1. It takes a 2/3 vote to increase taxes.
2. CA doesn't accept their own IOUs for taxes.
Kudos to Grant. A few years ago, when Greek spreads were tight, he said to buy Greek CDS. That recommendation has gone up 20x.
Apart from certain pockets of resistance in CA like Orange County the rest of the states liberal philospohy including out of control spending, litigation and a failure to control non citizens from sucking up all of the states services is only going to end one way...BADLY.
there is a long and rather conspiratorial aspect to all this, beginning with Enron, (Republican backed energy traders) and a Democratic governor who was trying to raise taxes, (somewhat) and how that led to a recall election, and AHNOLD. The voters of California are not stupid, they knew that voting in a Republican might help them curry favor with the Bushinistas. TO FF consider that if CA doesnt' elect a Governor friendly to the current poliltical fad in Washington that there are going to be six more years of winter..) COnversely once AS is gone, the good times can roll again. You can short CA up until and even after the election if you can read the tea leaves.
But Wall Street started rallying the stock market when the end of Bush came into view, and then sold off again when it was obvious Bush III was going to be elected.
sigh. For a long time the political/corporate machine has wanted to turn California into a third world antebellum state. AHNOLD thought he could pull it off, but a bunch of elementary school teachers took him out behind the woodshed. Don't sell CA short!!
One of my favorite recent Grant quotes:
"The trouble with 0% interest rates is that they instigate speculation in almost every asset that moves (and when such an immense market as that in Treasury securities isn't allowed to move, the suppressed volatility finds different outlets). By practicing price, or interest-rate, control, the Bank of Bernanke fosters a kind of alternative financial reality. Let the buyer beware—of just about everything."
California in about 3 years...
http://www.youtube.com/watch?v=Ml54UuAoLSo
Freaking brilliant on so many levels.
short Greece
Well, we should discuss Federalism while we're at it. Doesn't California send a lot more in taxes to DC than it receives in Federal outlays within California? Part of the reason Cali appears broke is the crushing burden of Federal spending "mandates" imposed upon populous states.
This is not to excuse their own feckless state gov't, but it doesn't help. This "mismatch" between taxation and mandates will lead to a Federal bailout, in my opinion. I'm not in favor of it, but it's coming. Insurance is expensive for Cali, in my opinion.
Greece is the opposite: getting a lot from EU while contributing little. They have no argument and will have to swallor austerity or face default.
Exactly - California with its balanced economy - Agriculture, Aerospace, Manufacturing, Movies, Ports, Tourism etc is well placed to prosper as an independent nation, certainly better than most States.
California's greatest problem is its political process, by which it has marginalized itself as far as the Federal Government is concerned - swing states get much more attention and largesse.
Abe Lincoln will personally come back from the grave to halt any states attempting to read the Constitution back to the Feds.
Can someone explain to me how we have not exiled the Bush family to a deserted island off Haiti????
Dubya presided over the last 8 year orgy of greed, fraud and the complete GUTTING of our regulatory system-
How is he not in jail right now for these crimes against America?
Probably because your simplistic characterization completely misses the bigger reality of the problems that have been accruing since 1913. Not all of us can comfort ourselves with as much facility as you: we are burdened with understanding how complex things are.
You, on the other hand, just want to rehearse a tired lefty rant.
Love it
I didn't hear alot of people complaining during those 8 years. People, who used their home equity as an ATM to buy toys and take trips and build big homes and put nice furniture in those big homes - I didn't hear them complaining. Mortgage brokers - I didn't hear them complaining. Realtors - I didn't hear them complain. Contractors, who improved peoples homes, getting paid from the home equity ATM, and using their compensation to buy new Dodge mega trucks - I didn't hear them complaining. The auto workers, building those mega Dodge trucks - I didn't hear any complaints from them. People with 401ks/IRAs - I didn't hear any complaints from them. And on and on and on. Alot of people profited very well from 2004 to 2007. And if you didn't, you don't understand America. And if you are not prepared for the on-going credit contraction, then you don't understand economics.
The SuperBowl/NFL is instructive here. They were the first to go bust only they didnt announce it. These businesses received tens of billions from the taxpayors via stadia funding. The NFL has received billions so the typical citizen will also feel entitled (police, teachers fie,politicians,etc) to their millions in pensions. This is our cultural legacy.
Can someone explain to me how we have not exiled the Bush family to a deserted island off Haiti????
Dubya presided over the last 8 year orgy of greed, fraud and the complete GUTTING of our regulatory system-
How is he not in jail right now for these crimes against America?
As Quig states, its not a Dem/Rep issue. In fact it never was. You need some real schooling !!
Can I have a wreath, please?
just wanted to note that the implied bailout guarantee w/ CA is far greater than the Greeces EU gang. just saying that prob takes a piece of the yields down
Soon Jerry Brown will be governor of CA. He will work out the budget problems because the government union workers 100% support him. He originally authorized Government worker unions in CA and promised them generous pensions after his term expired. Now the unions will want to repay the favor with reasonable wage and benefit increases.