(Memo to files: NEVER title a column “Please read my column” again…ever! It was meant as a joke but also to stress the import of what is happening in markets. TB)
…yesterday we got the Budget Deficit for November and it was slightly worse than expected at $98.2 billion, but the key point is that receipts are growing less than revenues…in fact, since the budget surplus peaked in 2001 (was it a coincidence that the stock market started its tumble a few months before?), while tax receipts fell by about 300 billion, outlays never even blinked and despite the surge of $800B a year up to date the pace of outlays never once slowed, and has in fact risen about $1 TRILLION since then (9/11, Afghanistan, Iraq helped push it up a lot!). Question: the OMB estimate of deficit for fiscal 2008 is $258.3 billion!…will the real number be larger or lower? If you said lower consider the drop in Wall Street bonuses to come (Goldman excepted), and lower revenues due to job losses everywhere, along with reduced income to banks and other financial institutions due to credit losses. But that will not appear till late in the year as some income is taxed when received including severance packages which will be big…especially all those departing CEO’s. But what happens going forward?
It is obvious that federal tax receipts in fiscal 2009 will be much lower…while spending will continue to rise unabated as in the past…especially in an election year! Rep. Charlie Rangel on CNBC this morning said that offsets are needed to make the cut in the AMT (and especially if we finally eliminate it), since Bush’s budget already included the revenue from the higher AMT and after three years of rising receipts and a booming economy, why weren’t those temporary cuts…the ones the GOP wants to make permanent and that gave 98% of the benefit to the wealthiest Americans…rescinded? Sen. Grassley on the other hand says there should be no offsets since revenues far exceeded estimates and it is all due to the tax cuts. NO! It was due to incredible earnings by CEO’s, hedge fund and private equity managers, etc. But it is an outright lie to say that the lower tax rate caused this. The budget is out of control and no one is going to do a thing about it…even in a crisis…and it can now be argued that this is not the time to raise taxes…in short it is all rhetoric and both sides are at fault with no end in sight.
So it is safe to say the federal government will suffer from the subprime fallout. But what about state and local governments? They too will suffer. Worse, they too had huge windfalls from those top bracket taxpayers. California had a huge one from all those Google folks…and this made Schwarzenegger look like a hero…so much so that he is issuing (with the blessing of the voters) hundreds of billions of bonds for infrastructure that will be paid for by future generations and the interest on the takes precedent over all other expenditures. California will be hit very hard due to the mortgage market as will Florida. New York will be pretty much immune since their real estate market is still pretty strong…in the City! Nevada has no income tax and relies on sales and property taxes. Also, some states have lost money on those subprime investments…extent unknown.
But it is local government that will truly suffer. Mortgage companies closing…huge job losses and tax revenues declining. The other night on the news was a picture of people in lines in Solano Co., CA, to pay their property taxes by the deadline…huge lines…many holding cash they had just scraped up. Then the Treasurer said that next year will be easier for them since their taxes will be reduced: a $500k home with a $5,000 tax bill (1%) is now worth $400k so they will save $1,000…of course ole negative TB had to start thinking of a potential 20% cut in taxes to the county…there has been a huge boom in Solano as well as Contra Costa County…so where will the shortfall be made up? TB is sure this is occurring in other areas of the country that rode the real estate boom, believing prices could never decline…ever.
OK, now you are saying there he goes again…never sees the light at the end of the tunnel…well, folks, right after he wrote this, TB went out to pick up the morning paper…honestly! Remember too that this was supposed to be yesterday’s column. There on the front page of the SF Chronicle was this slug:
STATE BUDGET CRISIS: EXPERTS SEE A TAX HIKE
Now do you see how easily it is for those running our government to err?…and how quickly that error can be magnified? Now consider all those ‘eggspurts’ who as late as three weeks ago said there was no chance of a recession just a mid cycle slowdown…then two weeks ago a slight chance of recession…last week 50/50 chance…and now a recession is almost a certainty…depth to be determined (TBD). That is how quickly a seachange can occur! By the way, California also has one of the highest income tax rates and has no capital gains treatment…all ordinary income! Trust ole TB…we are not going to be alone! One other concern will be the impact on borrowing costs particularly with the problems of monoline insurers who many investors rely on for safety in investing…of course the offset is lower interest rates.
So let the stock market begin…it loves to climb a wall of worry, right? Then it should be a monster rally!
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC December 13, 2007
