Monday, July 13, 2009

California Dreaming

Things out in California are starting to get interesting. The state is currently in a budget crisis with a $26 billion deficit this year. The Federal government thus far has stood tough, knowing that with any wiff of financial relief the state will not make the tough decisions needed to balance the budget.

There are two looming problems with letting them fail. The first is that California is the 8th largest economy in the world, it is a monster. The government could care less about the people that live there or the people that own the California debt, however, if they default on their debt it is going to cause turmoil in the financial system.

And that would mean problems for their beloved banks. California debt default would trigger insurance payments that would need to be paid out in both the real world and the off balance sheet derivative world.

So have no fear debt holders, you will be paid in full, because Obama loves you.

The size of the bill, however, may be higher than people expect. The Californian economy is not in a recession, it is in free fall. Have you been reading in the news (or here) about the oncoming second wave of mortgage resets from the Alt-A loans? The wave that will be even bigger than subprime?

59% of those loans were made in California. That's right, 59%.

That means that the taxes on those homes, income to the state, is going to evaporate. As house prices crumble, the state continues to issue I.O.U.'s, and they raise taxes through the roof to try and balance the budget, businesses and people are going to flee the state. This will have the effect of driving income down even further.

Ironically, this same thing is going to happen to the country as a whole over the next few years. Hopefully the rest of the country is watching the show on television and has their popcorn ready, because Cali's problems will spread like a virus to a town near you, if it has not arrived already.


Roberty Kiyosaki, author of Rich Dad Poor Dad (number one selling business book of all time), spent some time this week with one of his financial advisors to discuss the money supply and gold. A reminder of his track record:

1997: Rich Dad Poor Dad was released. The book focused on purchasing positive cash flow real estate as an investment.

2000: Rich Dad's Guide to Investing was released. The book continued its focus on real estate but warned of irrational euphoria in the stock market. 2000 market the real peak in stock market value.

2005: In August of 2005 Kiyosaki releases an article titled "All Booms Go Bust." In it he warns of the irrational euphoria in the real estate market and puts out an all out sell signal. In that same article he says that he is taking his profits and putting them into gold and silver. At the time Gold was under $500 and silver was under $7. I have the link to the article below, please remember that this was posted at the absolute peak of the real estate market:

Here are some of his thoughts today:

Sunday, July 12, 2009

Recommended Reading

Newest addition to the recommended reading comes from Gillian Tett, who this month released "Fool's Gold." No, unfortunately I'm not talking about the story of Matthew Mcconaughey and more importantly Kate Hudson in bathing suits. I'm talking about the story of J.P. Morgan's original derivatives team from the early 1990's. The team the created the structured products that led to the greatest financial meltdown in human history. It has behind the scenes conversations, emails, and phone calls from floor traders all the way up to the great Jamie Dimon, Morgan's C.E.O.

This book focuses on the J.P. Morgan saga and throughout it references its counterpart on the trades, the company that took on most of the risk if the subprime mortgages actually defaulted: AIG. This month Michael Lewis, author of Moneyball and Liar's Poker, wrote a fantastic article for Vanity Fair showing an inside glimpse of the AIG machine and how it fed the monster through the bubble.


Wave Two Has Begun

The 6 month break in mortgage resets has ended, and the next tidal wave has just begun. Hold your breath, it'll be over by 2013.

16193713 T2 Partners Presentation On The Mortgage Crisis

Check out this SlideShare Presentation: