The Collapse Of California's Economy
The Dynamic Wealth Report
February 18, 2009
Why I Hate California
California’s about to fall into the ocean. If not literally, then
figuratively. The state’s on the verge of economic collapse. Look at
your portfolio closely. If you own California state or municipal bonds,
I suggest you think hard about selling. If you’re going to sell, sell
them now!
I’ll tell you why in a moment.
California. The name alone brings thoughts of the great outdoors. The
beach, the mountains, beautiful farmland, and even desert. The state’s
arguably one of the most outdoor friendly. It’s hard to go far without
seeing people starting a hike, a bike ride, or heading out for a picnic. The beautiful weather doesn’t hurt either.
For me, early thoughts of California are wonderful. I remember the fun I
had as a kid. Every year my parents would throw us in the car for the
8
hour drive to Southern California. I loved the trips to the beach, to
SeaWorld, and the zoo. We’d also visit my uncle who lived in California
at the time.
A few years later I was deciding between colleges.
My choices were a small college in Texas or one in California.
California won hands down. It wasn’t even really a choice. I knew living
in the Golden State was for me. Living in the LA basin was great… but
the air pollution was horrible.
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After college I moved to Northern California. That’s where I made my
home for more than a decade.
Everyone is seduced by the state’s natural beauty. It’s hard to get away
from. But that’s the problem. All of that beauty does one thing… it
hides a cesspool of economic turmoil and political mismanagement.
Everyone in that state has been lied to!
Don’t believe me, just ask anyone who calls California home.
One of the big reasons I decided to leave California was because of the
mess. The finances for the state of California are a mess, and they’re
not getting any better. The entire state is grinding to a halt. It won’t
be long before businesses and residents see the light and flee the
state.
Just look at the current budget.
Right now, the Governor is firing state employees left, right, and
center. The state has a $42 billion dollar budget deficit, and they’ve
run out of money. It’s so bad, they’re looking to pay tax refunds with
IOUs. The state legislature’s trying to work out a compromise (they’ve
been working since November on the issue).
Here’s the problem.
The state government is spending too much, and they keep increasing
taxes.
I know. After living in California for over a decade I paid my fair
share (and probably more) of taxes. It was ridiculous then, and it’s
only getting worse. Many people don’t realize this, but California has
one of the highest tax rates in the nation. Right now the state is
looking to increase sales taxes (by 1%) and gasoline tax (by $0.12 per
gallon)… and increasing income taxes (by 5%). Despite this high tax
rate, the state still needs to take on massive debt to continue
operating.
Think of it this way. California has one of the largest economies in the
world. If California was its own country it would rank in the top 10
economies globally. They’re bigger than most other countries! Despite
being an economic powerhouse, they still can’t get their financial house
in order.
One of the largest economies, a huge tax base, sky high tax rates, yet
spending is through the roof (and the debt is massive).
This is just disgusting. If they were a company, I’d be shorting the
stock!
Who’s to blame? The politicians. Seriously. I’m not going to split hairs
between the political parties. I’m not going to point fingers at
individual politicians. I’m going to blame them all.
There’s an easy solution… Spend less.
Earth shattering isn’t it? Spend less. You know what most
people do when a recession hits. They stop spending. You’re probably doing it now. You’re cutting back costs. Maybe you cut back on the cell phone bill or
the cable bill. I bet you’re even cooking at home more… and eating out
less.
If we can do it why can’t the state government do it?
But I’m not a politician… and even the simple ideas get convoluted
around politicians. This is why California is on the brink of economic
collapse. You need to cut your exposure to the state as much as
possible.
The state is going to try and borrow more money to spend their way out
of the recession. It’s a vicious cycle and right now they’re caught in
the vortex. If history teaches us anything, you can’t spend your way out
of the recession - unless you’re the federal government and you print
your own money. (Thank you Ben Bernanke.)
Here’s the reality of the situation. It’s going to get much worse before
it gets better. And that’s a problem. Investors holding California
state
or municipal bonds should think long and hard about moving out of these
investments.
Why? Because bankruptcy is an option.
I bet you didn’t know they could do that. Just a hint of the state
possibly needing to file for bankruptcy and the value of these bonds
will plummet. Then you’re stuck. Your ability to sell will be really
hampered… or you might not be able to sell them at all. (Just like the
toxic CDOs the banks are holding today.)
I know what some of you are thinking… no state has ever filed for
bankruptcy. Know what, you’re right. But do you remember New York City
in the 1970s? Do you remember Orange County in 1994? If a
city can go bankrupt, why not a state?
Oh, and just to set the record straight, NYC didn’t actually file for
bankruptcy. They threatened to… until they got huge concessions from
bond holders. Take my word for it. As the state of California spirals
into the financial abyss… their already poor credit rating’s just going
to get worse. That’s when the threats of bankruptcy will start to take
hold. You don’t want to be holding notes or bonds from the state when it
all comes crashing down!
Remember, once California falls into the ocean, I might have some ocean
front property in Arizona to sell you!
• Gold ($967 per oz)
Gold continues its march higher. I wouldn’t be surprised to see the
commodity breach $1,000 soon. Continued uncertainty over the global
markets and concern of inflation help push this commodity higher.
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