By Jon Birger
Known for his early warnings on Bear Stearns and Lehman Brothers, analyst Martin Weiss of Weiss Research is now sounding the alarm about state of California municipal bonds.
In a new report, Weiss has some rather blunt advice for California muni investors: “Sell all California paper now!” His reasoning? California is facing a $24 billion budget gap with no obvious way to close it.
Asked to put odds on California defaulting on its $59 billion in outstanding general obligation bonds, Weiss doesn’t hedge. “It’s unavoidable,” he tells Fortune.
As a poor person I spend my income mainly on rent and food, then utilities, and $20/month on internet access. I spend almost no money on clothing, transportation, entertainment, or other discretionary spending like alcohol or junk/fast food. I don’t even have a library membership. So, assuming California’s poor do roughly the same, won’t heavy cuts to social spending undermine residential real estate values and thus property tax revenues, grocery retailers, wholesalers and growers, and utility revenues? The greater portion of my utility bill costs are not based on usage but on the maintenance of the various grids. These maintenance costs for California’s grids will stay relatively unchanged but the number of people paying will drop sharply. I guess one of the few benefits could be some easing of the strain on California’s electricity grid but overall the effect will be a large wave of additional financial pressure on California’s cities.
I’d wager that if California is anything like Alberta, billions could be generated by breaking up monopolies throughout the system that suck money and power into the hands of a very few, and by making it less difficult for people to start small businesses through book-keeping assistance, micro-lending, various regulatory changes etc.
Also, aren’t many of these poor Californians going to have to leave in order to survive? Where are they going to go? Nearby states should be planning for this in my opinion.