Editor: Janine Hansen
Vol. 35 No. 6, email edition
Every June-July we ask people to renew their subscriptions to the Newsletter. If you check your label you will see the last date you contributed. We depend on your continuing support. Thanks, Janine
Inside View of the Nevada Legislature Special Session
Governor Jim Gibbons called a Special Session of the Nevada Legislature on June 27, 2008 in Carson City to deal with Nevada’s budget crisis. I attended the session. While I listened to the deliberations all day… and witnessed the votes on the final budget cuts that night… None of the discussions answered or even addressed the unspoken question. What if…the economy continues to decline and we have to make more budget cuts…
Now just weeks later, the governor has just announced that the revenues from gaming were “significantly worse than projected by the Economic Forum a mere three weeks ago.” In fact they were down $19 million. The Reno Gazette Journal reported on June 11, 2008 that, “May was the seventh straight month of gaming tax decline, just less than $64 million and down 22.8 percent from a year ago and almost 19.5 percent below projections by the June 2008 Economic Forum.” (See explanation of the Economic forum at the end of this article).
The Economic Forum’s Report is what led the Governor to call the Special Session to deal with the projected budget shortfall. At that time the Legislative Counsel Bureau’s Fiscal Division had a more optimistic report than the Economic Forum…And the Economic Forum was not just a little bit wrong, but 19.5 percent too high.
All during the Session, as the Legislators were weeping and wailing and gnashing their teeth about cutting the budget, there was never any official or even unofficial recognition that they may have to cut more. The possibility was never mentioned! They just kept promising that all of these cuts would be restored during the 2009 Legislature.
In particular, Assembly Speaker Barbara Buckley made her plans very clear when she said from the Speakers podium, “This will never happen again.” She plans to force a change in the tax structure in Nevada so that it is “stable.” In other words, so the taxes don’t decrease during an economic downturn. That’s amazingly arrogant! That means while all of us suffer the effects of an economic downturn that government should never have to tighten its belt. It also means that the state should depend more on property taxes, which tend to be more stable instead of things like gaming and sales taxes, which are more subject to downturns in the economy.
We all need to thank Governor Jim Gibbons for giving the Legislature a No Tax Increase mandate. Call: 775-684-5670 or 702-486-2500. Repeatedly, the Governor was bad-mouthed by big spending Legislators for refusing to raise taxes. One Assemblyman, during the discussions on the floor of the Assembly, denounced the governor as the 500-pound gorilla next door. Aren’t we glad that that gorilla next door is protecting us from the Big Tax and Spending vultures at the Legislature!
One tell-tale incident at the Special Session was the discussion about reducing by 50% to $47,995,714, the “Textbook, Instructional Supplies, and Instruction Hardware” budget. The School Districts represented by the Washoe County Superintendent asked the Legislature to make this cut rather than freeze the 4% salary increases. This should bring to your mind how really bloated this particular budget must have been to cut it by
50% without any howling. That means that there is still $47,995,714 budget to buy new textbooks for 433,885
K-12 students throughout the state, that’s $110.61 per student. Of course, the schools already have many textbooks which they will be using again this year. I wonder how many other bloated budgets this budget crisis will expose?
The Governor and the Nevada Legislature have already been forced to cut the budget by $1.2 BILLION. And even after these cuts, according to the Governor, the “state will close out the fiscal year $14.7 million below projections for gaming tax collections.”
The Legislature at the Special Session was not willing to even mention that there might be additional budget shortfalls, when 7 months in a row tax revenues when down. I consider that to be completely irresponsible! Just three weeks later the reality is setting in with gaming tax revenues going down by 19.5% more than projections.
There will be a huge battle during the next Legislative Session starting in February 2, 2008 on raising taxes to meet these increasing shortfalls. Be sure you know you are voting for Legislators who are committed Not to Raise Taxes or Fees. Janine Hansen, State President, Nevada Eagle Forum
Money Markets July 12, 2008, Excerpts
GM,
Fannie, Lehman: Too big to fail? Or too big to save?
by
Martin D. Weiss, Ph.D.
If you're worried about the IndyMac Bank failure on Friday — America's third largest in history — brace yourself. This crisis is about to get uglier. And in this double-length issue, I'm not going to pull any punches.
General Motors is now nearer to bankruptcy than at any time since it nearly failed in 1920.
Its bonds are junk. Its sales are in shambles. Its management is in denial — quick to issue statements to stem investor fears, but slow to make decisions to avert financial disaster.
Even Wall Street, which typically sees the world through rose-colored glasses, estimates GM has a 75% chance of going broke within the next five years, based on the actual trading of specialized insurance contracts called credit default swaps. That's 3-to-1 odds the company will not survive!
In its heyday, General Motors was a $66 billion company with nearly half of the U.S. auto market. Today, it's a $5 billion company with less than one-fifth of the U.S. market.
Hard to believe, but true: Right now, in terms of the total value of shares outstanding, our country's largest maker of real cars is actually smaller than Mattel, a maker of toy cars.
Fannie Mae! This supergiant isn't just on a collision course. It's already the subject of government contingency plans for a takeover that would obliterate shareholders and devastate taxpayers.
Here too, high officials have issued denials faster than a spitting spider. Here too, the talk and speculation have been rampant. But the bare bones facts are undisputed: Even according to Fannie and Freddie's own, murky year-end 2007 statements ... Fannie Mae has just 1.6 cents in core capital to cover each dollar of mortgage and debt exposure. Its younger and smaller sibling, Freddie Mac, has only 1.9 cents.
Adequate? According to government regulators who owe their very existence to the two mortgage giants they regulate, yes.
According to analysts, accountants and auditors who can add two plus two, no. That's why William Poole, former president of the St. Louis Federal Reserve, declared last week that the two companies were already insolvent.
And that's why investors have driven their share prices down as quickly as they did Enron and WorldCom's six years ago. Damage so far: Fannie Mae is down 88.5% from its peak; Freddie Mac, 89.6%.
So whom should you believe? The high officials or the market wisdom?
Considering the reluctant admission made last week by Treasury Secretary Paulson about home foreclosures — that he expects 2.5 million this year alone, and considering the no-brainer forecast made by Bernanke — that this crisis will last deep into 2009 ...
It's a moot point — you need not believe anyone. All you have to do is look ahead into the future and you will see that ...
Fannie Mae and Freddie Mac may escape the fate of Bear Stearns — a Wall Street crisis of confidence that delivers instant failure. But can they escape the unfolding reality on the ground — millions of additional home foreclosures this year and next?
It's common sense: By the time a home they've financed is foreclosed, the mortgage has long been in default. And when the mortgage goes into default, Fannie or Freddie is on the hook.
So how can Bernanke and Paulson keep a straight face while denying the natural consequences of their own admissions? The fact is, they can't. In testimony before Congress last week, they were at a loss for words. They knew that if they spoke the truth, it would only deepen the panic on Wall Street. But they're also beginning to realize that twisting the truth isn't socially responsible either. In the long run, it only foments distrust and more panic.
Lehman Brothers' death spiral is, in some ways, even more troubling: If it fails, it will send the message that all the Fed's horses and all the Fed's men can't put this Humpty Dumpty back together again.
Remember: Ben Bernanke and his cohorts have already put the muscle of America's central bank behind primary broker-dealers like Lehman. If it turns out that even that is not enough to stem an exodus by trading partners and clients, what is?
Many investors aren't waiting around for the answer. By the closing bell on Friday, they had driven Lehman's stock down by 83.3% from its peak, all in less than 17 short months.
Dear Reader — therein lies the true tragedy of our times: Our entire financial system is at risk. But the biggest risk-takers, largely shielded from the pain, are being encouraged to dig us into a still deeper hole.
Are GM, Fannie and Lehman Too Big To Fail? Or Are They Too Big to Save?
Wall Street would have you believe they're too big to fail. They point out that GM still employs more than a quarter million people; and the entire auto-related industry, over four million.
They argue that without Fannie and Freddie, most of the U.S. mortgage market would be toast. They warn that the demise of a company like Lehman Brothers, so close on the heels of the Bear Stearns collapse, could precipitate an oft-feared Wall Street meltdown ... or worse ... a traumatic shock to the $596 trillion global market for derivatives.
And they conclude that each and every one of these consequences is unthinkable. "The U.S. government," they say, "will simply never let it happen."
Yes, that's certainly the government's intent. And that's likely to be the pattern we see for quite some time. But it's not quite that simple. Nor is it just a matter of the moral hazard — the concern… that companies under the protective arm of the Fed have a lesser incentive to clean house. The bigger and more immediate issues boil down to these:
Issue #1. Yes, the U.S. government will be able save some of the big companies going bankrupt. But can it save them all? At approximately the same time?
Issue #2. We know the government has vast resources and will print more money out of thin air, as needed. But ultimately, can it do so fast enough to hold back the tide?
Issue #3. If the U.S. government assumes direct or indirect — full or partial — responsibility for Fannie and Freddie's $5 trillion in mortgages, including hundreds of billions that are going sour, what's going to happen to the credit of the U.S. Treasury?
The assumption is that the credit of U.S. Treasury is strong enough to prop up the likes of GM, Fannie and Lehman. But what makes people so sure these sinking companies aren't heavy enough to pull down the credit of the U.S. Treasury?
What Should You Do Right Now?
My recommendations:
1. If you haven't done so already, shed most of your non-resource stocks. Too late? No. The Dow is still near 11,000. It could easily go to 7200.
2. Build cash. Treasury bills are still the safest haven and Treasury-only money funds are among the most convenient vehicles. Examples: American Century's Capital Preservation Fund, U.S. Global's U.S. Treasury Securities Cash Fund, or our affiliate's Weiss Treasury Only Money Market Fund. They're not insured by the FDIC. But in my opinion, the securities they buy offer protections that are still better than any insurance — the direct backing of the U.S. Treasury Department.
Important: The same cannot be said for bank deposits – let alone for those that are uninsured. A prime, current example: When IndyMac Bank failed on July 11, 2008, it had an estimated 10,000 customers holding $1 billion in potentially uninsured deposits. And on the uninsured portions, the FDIC says the depositors will get only 50 cents on the dollar at this time.
Plus, all these vehicles (even including Treasury bills) suffer one disadvantage: They are denominated in sinking U.S. dollars. So you will need to offset that risk by allocating a portion of your money to the world's strongest foreign currencies with instruments like Everbank's WorldCurrency CDs or Rydex's CurrencyShares ETFs. And needless to say, continue to use other contra-dollar investments — such as gold.
3. Protect the remainder of your stock portfolio from stock market declines — or go for significant capital gains — using our favorite inverse ETFs…
5. If you have a personal adviser or money manager, ask if they offer programs specifically designed for protection and profit during bear markets. If not, consider moving your money to one who does.
Good luck and God bless!
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
What is Nevada’s Economic Forum?
“The Economic Forum was created by the Legislature during the 1993 legislative session. This group is responsible for providing forecasts of the state’s general fund revenues for each biennium budget period. The Economic Forum consists of five appointed members who cannot be employees of state government, including publicly supported institutions of higher education. The Governor appoints three of the members, one member is appointed by the Senate Majority Leader, and one member is appointed by the Speaker of the Assembly to serve for a two-year term.
“By statute, the Economic Forum is required to provide revenue forecasts on or before December 1 in even-numbered years and on or before May 1 in odd-numbered years. The December 1 estimates are used by the Governor in preparing the budget recommendations that will be presented to the legislature in January. The May 1 forecast is the final official revenue estimate that must be used by the legislature in balancing general fund appropriations with anticipated general fund revenues for the next biennium”. http://www.leg.state.nv.us/lcb/fiscal/Economic%20Forum/
Current Members:
Leo V. Seevers, Chair –
Appointed by Senator William J. Raggio (Senate Majority Leader)
John Restrepo, Vice Chair – Appointed by Governor Jim Gibbons
Michael R. Alastuey – Appointed by Assemblywoman Barbara E. Buckley (Speaker of
the Assembly)
Linda Rosenthal – Appointed by Governor Jim Gibbons
Cathy Santoro – Appointed by Governor Jim Gibbons
Nevada Families Eagle Forum Newsletter is published 12 times a year. The Subscription price is $25.00.
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