WASHINGTON, July 11, 2012 – We move from this column’s unexpected joust with global warmists to another metaphorical solar flare—this time, one that’s erupting in California. According to CNBC, the city of San Bernardino will file for bankruptcy protection: “Chapter 9 bankruptcy would give San Bernardino an opportunity to restructure its battered finances, city staff said during a webcast of the city council meeting.”
If San Bernardino goes through with this intended action, it would become the third California municipality to file for bankruptcy. Additional municipalities are in the on-deck circle.
This is very possibly the beginning of the municipal domino effect in the nation’s biggest state as the piper finally demands to be paid. Arguably, California’s epic profligacy has turned it into America’s version of Greece—and given its sheer size and population, maybe America’s Spain and Italy as well.
Via clever gerrymandering and mid- 1990s chicanery by Al Gore and company to jam pile new immigrants as rapidly as possible onto the voting rolls, California turned permanently socialist-Democrat over the last twenty years or so, gerrymandered to the hilt to assure a permanent leftist majority in its government. The state, once the comfortable abode of conservative saint Ronald Reagan (and even Dick Nixon), now very strongly resembles modern Greece in its addiction to deficit spending on extravagant projects (like the bullet train to nowhere) and its inability to face reality.
Like much of our troubled country today, California government is strongly influenced by the perpetual adolescents who now, as aging Boomers, create mountains of unfunded governmental fantasies with the aim of making themselves feel morally superior. Unfortunately, the bill for their profligacy is staggering—not the least of which is their looming early retirement and pension tsunami.
This single state fiscal cliff could very well could lead to a Eurostyle mess here in the U.S. TARP 2, anyone? And who will get to pay for it? You and moi, of course. We should all keep an eye on this one, particularly holders of quadruple A California muni bonds. (The rating agencies, apparently, are hiding in the same hole they inhabited when liar loans were in vogue.)
San Bernardino’s plight will more or less be ignored on Wall Street today as traders focus on their own version of Waiting for Godot, which we could perhaps re-title Waiting for Uncle Ben. The most recent Fed minutes will be released at 2 p.m. EDT today and traders are hoping for some clue as to the possibility of another round of quantitative easing, aka QE3. They might be disappointed, as we already know about the Fed’s tentative attitude toward pulling this lever during an election year.
Actually, the Fed is between a rock and a hard place on this. Each successive action it’s taken to keep interest rates low has been less effective than the last. The U.S. money supply has actually increased enormously while the effect has been minimal. The reason is that all these newly minted Benjamins lack what economists would call “velocity.” In other words, such an enormous amount of money should have a huge effect on purchasing power, job creation, real estate lending, and so forth, leading to the long hoped-for increase in job creation that would finally lift us out of Great Depression II.
Problem is, all this money is parked in vaults, accomplishing nothing, courtesy of Dodd-Frank and plain old outright fear on the part of many banks to lend to anyone other than IBM, GE, or their own CEOs. Fed efforts thus far to prime the economy have not really done so because Congress, for three years running, has failed to do its part to get business going, proving to be as much if not more of an obstacle to economic progress and tax reform as its mirror legislature in California.
The monolithic, adolescent stupidity and cupidity of California’s—and America’s—legislators brings to mind a rabble rousing speech given by far left “student” radical Mario Savio (1942-1966) at UC-Berkeley in 1964. In his oration, Savio railed against “the machine,” which at the time was the university’s relatively conservative hierarchy but also encompassed Eisenhower’s old “military-industrial complex.” We found a YouTube video that excerpts this speech, and thought you might like to encounter it at this point to savor the irony.
At any rate, the market will open up like it did yesterday, bubbling with confidence that the Fed will reveal the shape of QE3 in its 2 p.m. reading of the tea leaves. If past Fed announcement days are any indication, markets will stay relatively pumped through most of the morning. But then, if the (illegally informed) insiders catch wind that there’s not going to be anything new in the minutes, the selling will start around lunchtime, accelerating into a downhill slalom as the minutes are released. If the news is unambiguously good (unlikely), the market could re-launch into an optimistic close.
So we’ll watch and wait and see what happens today, perhaps using this morning’s market goose to lighten up on iffy positions. Meanwhile, let’s all keep San Bernardino—and California—in our rear-view mirrors.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
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