Alternative Investments: Where To Find And Finance Them

The popularity of alternative investments has grown tremendously over the past few years. This helped spawn the creation of NuWire Investor, along with many other alternative investment focused companies. No matter how Wall Street tries to slice and dice it, the stock market just doesn’t cut it for every investor. There are lots of investors who want more control over their investments, or the opportunity to invest in things that are outside of the mainstream. Alternative investments are certainly not for everyone, but they are great for the right kind of investor. Since many alternative investments fall outside the mainstream, locating them can sometimes be difficult…enter NuWire Investor’s Opportunity platform.

Our Opportunity platform is still new, and we admit there are some kinks still to be worked out, but it offers a place for Investors and alternative investment providers to come together (for FREE I might add). If you are interested in alternative investments, or if you sell alternative investments, I encourage you to take some time to visit our Opportunity platform.

Once you find an alternative investment you like, then the next question for many people is how you are going to finance it. Some of the more mainstream investments, such as domestic real estate, are fairly easy to finance, but it can become a little trickier with today’s lending climate. Some opportunities that you can find on our site, though, have made arrangements with hedge funds and the like in order to offer investors incredible financing packages. A couple developments are offering 90 percent LTV investor financing (even for stated borrowers) at decent rates. Try getting that from a local bank:

https://www.nuwireinvestor.com/opportunities/go-zone-investment-opportunity--500-nuwire-special-51879.aspx (This developer even offers a $500 discount for NuWire readers--We like those!)

http://www.nuwireinvestor.com/opportunities/walt-disney-world-good-neighbor-hotelvilla-orlandofl-investment-opportunity-in-51873.aspx

In addition, there is also the possibility of using one's retirement funds to buy alternative investments; this structure is called a self-directed IRA. There are several providers that can set up these account structures, with the main difference among them being whether or not you want checkbook control. The largest custodial self-directed IRA provider is Entrust and the largest checkbook self-directed IRA provider is Guidant Financial Group, who recently made the Inc 500 list of fastest-growing businesses, at #384. (Full disclosure: Guidant Financial Group and NuWire, Inc. are owned by the same parent corporation.) Typically, the drawback to the checkbook account is the cost, but some creative developers are offering to pay for clients' self-directed IRA accounts:

http://www.nuwireinvestor.com/opportunities/free-self-directed-ira-account-to-invest-in-orlando-51907.aspx

http://www.mexicorealestatetours.com/mexico-real-estate-ira

Alternative investments are here to stay, and if you happen to be one of those investors who prefer to take more control over their investments, or who just prefer to stray from the ordinary, I urge you to monitor (and add to, if you sell these investments) our Opportunity platform. The more involvement we get from the alternative investment world, the better this website will become. If you choose to take up one of the offers, I also encourage you to come back after completing the transaction and let the NuWire community know how your experience went. You can do this by leaving a comment on the opportunity itself, or by simply sending us an email at info@nuwireinvestor.com and we can pass on the message. We are excited about this new Opportunity platform and hopefully as an alternative investor, you are, too.

U.S. Economy Grew 3.3 Percent In Q2, But…

The recent news that the U.S. economy grew 3.3 percent in quarter two this year came as a shocking, albeit pleasant surprise to Wall Street. The government had estimated a 1.9 percent increase for Q2 and economists surveyed by Dow Jones estimated a 2.7 percent increase, according to the Wall Street Journal. Has the economy finally turned the corner? Can we finally put this economic mess behind us? Well, not exactly; that thinking is still a little premature.

The economy certainly performed much better during Q2 than expected, but it is hard to say exactly what short-term impact the stimulus package had. In addition, another main driving force behind the growth was exports. With the dollar now gaining value against other currencies and the rest of the world beginning to feel their own financial hardships, it might be a stretch to think export growth will continue at its present pace. Richard Fischer, president of the Federal Reserve Bank of Dallas, was certainly not very optimistic in an interview he had with the Wall Street Journal Monday, “'Growth will taper down...to a snail's pace in the second half,’ and it ‘may be anemic for a while,’ Mr. Fisher said, adding that he ‘could see us approaching’ zero growth during the latter half of the year due to the ‘enormous stress’ created by financial markets, which remain strained.”

It is great news that the economy grew as it did, and especially that our export numbers are up. I, for one, was not predicting the economy to grow this much. I thought the stimulus package would have an impact and that we would show some growth, but my expectations were probably more in line with the government’s 1.9 percent estimates than the actual 3.3 percent that was recorded. That being said, I’m still concerned about the economy and feel as if the worst is yet to come. I see a deficit that is still growing out of control, a struggling housing market, a declining job market and low consumer and business confidence.

The economy is still fragile and any number of things could set it off in the wrong direction. So I’m going to take this news with a grain of salt. I’m happy that we saw some good growth and I hope that we can continue to grow the economy, especially our exports. I’m not going to hold my breath, though, and I’m still going to take due precautions with my investments.

Taking A Bite Out Of Obesity: Alabama’s New Fat Fee For State Workers

In a move that already has some getting their mu-mus in a twist, Alabama state has instituted a new annual fee for obese state-workers to offset lost productivity and high insurance costs. The fee is only $25 dollars for the year, which is half of what some smokers pay per month at companies and in state offices around the country because of their habit. Still, some are calling the new policy oppressive, even “Big Brotherish,” which I think we all can agree is hyperbolic and malapropos, not to mention ironic: By name alone, Big Brother would seem a kindred spirit to the “Big Boned” lot.

To other state workers, however, this sort of kick in the rump is long overdue; Alabama is at critical mass, with over 30 percent of the adult population now obese, second only to Mississippi and eking just ahead of Tennessee in third place. If weight is not curbed soon, this generation and those that follow will be facing astronomically higher incidences of obesity-induced diseases, bringing higher health-care costs to companies and the state, higher mortality rates and less productivity. In areas where the economy is already sagging like an unsightly mudflap, the situation is dire.

The issue at hand only becomes more complex, larger and jigglier as one considers it, for the bathroom scale only tells a portion of how obese individuals’ eating habits impact their lives. Most overweight people are not packing on the pounds by eating leafy greens and fresh fruit, but rather high-fat, low-quality foods. One must remember that this is often not by choice; poorer communities have the least access to fresh, healthy foods and frequently subsist on fast food and pre-packaged snacks which per serving have 1 percent of one’s daily required nutrients, 100 percent of one’s daily fat allowance, and 1000 percent of the trans-fats, pesticides, rat hair and roach droppings that one would ever wish to consume. In other words, obese individuals may ultimately be accountable for their own weight, but the infrastructure and culture that surrounds them makes it all too easy to pack on those costly pounds.

There is a lot of sensitivity surrounding the issue as well, and those who will be affected are already lowing at the gates about the unfairness of the situation. The main complaint among the policy’s detractors is that obesity is caused by health problems and heredity over which obese individuals have no control; therefore, these individuals should not be hit with a sort of “fat tax”, unlike smokers, who choose their unhealthy habit.

This argument is particularly weak, but I can see both sides of the issue. For kicks and giggles, let’s look at a point-counterpoint breakdown of some of the controversy surrounding obesity.

POINT	COUNTERPOINT
Obesity is and always will be voluntary. Generations before were thinner because they ate better and exercised more. It isn’t genetic, it isn’t magic, and there is no disease that makes one gain weight spontaneously, so says the first law of thermodynamics.	Certain individuals are genetically pre-disposed to store that consumed energy which makes them more prone to weight-gain. This, combined with the lethargy inspired by contemporary culture, leads to eventual obesity. To penalize individuals for this is discrimination.
This isn’t penalization; it's recouping losses that, though they may not be entirely in your control, still cost the system a great deal of money—much more than $25 per year, in fact.	To suggest that we pay more into the system also suggests that we are doing something wrong or that we are parasites on that system.
Yea. Pretty much. The truth hurts, huh fatso?	You know, it is derogatory remarks like that which cause a lot of overweight people to become depressed and seek solace in food, thereby exacerbating the problem.
‘Exacerbating the problem’ being code for ‘adding a cup size.’	I’m a man!
Indeed you are, a man whose very presence calls into question the words of John Donne: "No man is an island unto himself."	Screw this. Where are my Ding Dongs?

In the end, the fee is so minimal that no one’s wallet will be hurting for it, though a few feelings may be hurt. As the fee is also only annual, it will soon be forgotten and thus provide little motivation to people to lose weight. Furthermore, the fee is discretionary, and if an individual is putting forth a genuine effort, it can be waived.

The one last worrying aspect of this is that it creates one more precedent of what one might call a lifestyle tax. Though I personally would like to see fees levied against people who overuse the word “synergy” or sound effects in Power Point presentations (the mental anguish caused by these infractions does indeed cause lost productivity), I wouldn’t legislate these things for fear that I might one day be nickel-and-dimed by my own foibles and lifestyle choices. After all, if I want to drink a little paint when I kick back and play Russian Roulette at the local leper colony, I may be putting my health at risk, but that’s my business, thank you very much.

I’d love to hear from huskier readers what they think. Is this sort of policy motivational or degrading? Leave a comment and we’ll chew the fat.

Some Good News For The Housing Market Courtesy Of Freddie Mac

In a bit of bright news for the ever-gloomy housing market, Freddie Mac’s debt sale yesterday went better than planned. Freddie was able to sell $1 billion of 3 month bills and $1 billion of 6 month bills with relative ease, according to Reuters. This debt sale went over much better than the company’s last offering earlier this month, despite all the talk about a possible nationalization. This is great news for the real estate market because a poor showing at this debt offering would have led to higher mortgage rates for borrowers, which would have led to even more pressure on the floundering market. Fannie Mae’s debt offering is scheduled for tomorrow, so we shall see soon if they share a similar success.

Personally I have not been very high on Freddie Mac or Fannie Mae, and while it is a good sign for the companies that their debt offerings are still attractive, It does not cure the bigger problems plaguing the companies. The own a lot of mortgages on properties that are losing value. If values don’t correct soon, then they are going to face a huge number of defaults. I think we’ve seen pretty clearly that when people are upside down on their houses, they lose the incentive to pay their mortgages. The trend of how many people are going under is alarming, as evidenced in yesterday’s post about underwater homebuyers.

As long as the companies can continue to sell their debt at cheap rates, they should be able to weather the storm. The question is, how much longer will investors be willing to buy their debt? It is certainly encouraging for the companies that investors seem as confident in the debt offerings as they are despite the negative publicity, as this latest offering has shown. Investors must be under the assumption that the government will step in and save the companies if need be while still honoring each company’s debt obligations. The majority consensus about financial minds seems to be that if the government ends up nationalizing the companies it will indeed honor the debt, but would probably wipe out shareholders.

The result of this latest debt offering was definitely a positive for the housing market, but we will have to see if investor sentiment remains strong through the next wave of bad news.

60 Percent Of 2006 Western Homebuyers Now Underwater

2006 marked the peak of the housing market, and those who bought a home in 2006 likely owe more on the home than it is worth. According to a report issued by Zillow, 45 percent of all 2006 homebuyers are underwater, and almost 60 percent 2006 homebuyers in the West are upside down in their mortgages. The Western region of the U.S. has been hit the hardest, followed by the South, Midwest and Northeast. Of all the homes across the country--not just 2006--13.9 percent now have negative equity. The West leads with 18.2 percent of their homes having negative equity. The scary thing is that these numbers are expected to rise.

Zillow’s report predicts the peak for the percentage of homes with negative equity will be sometime around quarter two of 2009. According to their projections, the country will peak at around 16 percent. In the West, they foresee the peak at around 25 percent. This is an incredible number to think about. This would mean that one in four homeowners, regardless of when they bought their home or how much they put down, would be upside down on their home. This is obviously going to have a dramatic impact on people’s perceptions of their financial well-being. That will lead to lower spending, increasing the pressure on our economy, as well as more foreclosures as people cut bait and walk away.

On a positive note, existing home sales rose in July, exceeding expectations, but inventories grew and prices continued to drop, according to the Wall Street Journal. So the positive is that demand for homes is starting to return somewhat, but with more homes entering the market, that demand is not going to be enough to raise prices.

I think that the new housing bill, with its homebuyer tax credit and other aids, will help the market rebound, but it isn’t going to be enough to right this ship. This correction still has some fuel in its tank. There are also a few potential catalysts that could add more fuel to the fire, such as a Freddie and Fannie rescue/collapse and a possible recession with large job loss. If either of these things were to happen, not only would the predictions of a 2009 housing market bottom fall short, they could fall short by years.

I.O.U.S.A. Recap

I had the pleasure of attending the premier for the film "I.O.U.S.A." last night, and it turned out well. Obviously the message they were trying to get across is that the country’s economic situation, specifically our debt load, is perilous and something needs to do done quickly to address it. What is echoed throughout the movie is that if something is not done, our kids and grandkids are going to be the ones paying for our indulgences. The film does a good job of pointing out the four main problems which are going to create the deficit and it was interesting to hear some of the solutions proposed in the round table discussion afterward.

The four main factors contributing to the deficit, according to the film, are budget, savings, trade and leadership. I think most people reading this blog are probably already aware of the budget and trade deficits, but the other two garner less attention in relation to our debt problem. Savings, or should I say the lack thereof, are a huge issue in this country. For the last couple years, our savings rate has actually been negative; as a country, people are spending more money than they make, which is a recipe for disaster. Not only is this going to leave us ill-equipped for emergencies or retirement, but it also means that we are becoming that much more reliant upon other countries. If we aren’t saving, that means we are going to continue to increasingly need savings from other countries to finance our expenditures. The problem with this is that it leaves us politically vulnerable, along with everything else that comes with debt.

The biggest of the four factors, though, is leadership. This point was hammered in again and again throughout the movie and in the round table afterwards. In order for us to effectively address this problem, we need to get leadership in place that is committed to solving it. The most important leader, of course, would be the president, but leadership in Congress is also vital. How are we going to get leadership in place that is committed to this? The people have to empower them. We live in a democracy and the people have the power to elect to office individuals who represent their values. Until we demand action, there will be none. Right now all that leadership is hearing is that we want lower taxes and any other handouts we can get, and until the people change their view, leadership will not change theirs. Ultimately in a democracy leadership echoes the voice of the people. For much of the movie, the filmmakers followed the “Fiscal Wake-up Tour” which is dedicated to bring the message of change to the people. As the movie showed through interviews with numerous people, the reality is that the average American has no clue how bad this problem really is. Before the people are going to stand up for change, they first have to understand why change is needed. This is the goal of the “Fiscal Wake-up Tour” and really should be the goal of every American.

I think this movie is a great start towards alerting the public of the problem. Unfortunately, I think the people watching it are the ones who already understand the problem. We need to figure out how to get this message to the masses who otherwise don’t know or don’t care. I think a start would be making this movie freely available on the Internet so that it could be sent around virally and hopefully get the attention of enough people to make a difference. I think that the movie will do a better job than any other medium out there at getting people fired up about this topic. I applaud the makers of "I.O.U.S.A." and I sincerely hope that their film is distributed to enough people that it can make the impact I think they are hoping for. If you haven’t already seen it, the film is definitely worth the time to go see. When you go, though, make sure to bring some less financially savvy people, too; it might be just the wake-up call they need.

Are You Ready For Higher Mortgage Rates?

Mortgage rates have been low for many years, but if things continue at their current pace, that isn’t going to last much longer. The biggest factor controlling the rates charged for standard 30-year mortgages is the price of bonds (called mortgage-backed securities) sold by Fannie Mae and Freddie Mac. Over the past few years, these bonds have been selling with an interest rate just a little higher than U.S. treasuries. Now, with all the problems being talked about surrounding Fannie and Freddie, investors are becoming more cautious. In case you need help connecting the dots, that means investors are requiring a higher spread on these notes. The more Fannie and Freddie have to pay to secure funds, the more they are going to have to charge to their borrowers; it’s that simple. The bigger question to think about is how these higher mortgage rates will affect an already suffering real estate market.

Probably the biggest single factor behind the housing bubble was the abundant access to cheap credit. More people than ever were buying homes because more people than ever could qualify for loans. This was in part because of law borrower credit standards required by lenders, but it was also in part because of the low interest rates offered. Homebuyers tend to focus more on the monthly payment than the actual purchase price of a home. If they know they can afford $2,000 a month, then they are willing to buy a home for up to that payment, whether it costs $250,000 or $400,000. With all these new buyers entering the market, and people now able to afford more home than ever before, this scenario created the perfect atmosphere for a run-up in housing prices. Now let’s look at present circumstances.

On a historical scale interest rates are still low, but compared to the interest rates during the height of the bubble, they are substantially higher. While interest rates are low compared to historical averages, housing prices are high compared to historical averages. With mortgage rates rising, along with the credit standards of lenders, we are getting the opposite effect of what we had during the bubble run-up. This means that we are decreasing the number of people who can buy homes in addition to decreasing the amount of home for which people can qualify. Obviously this is going to negatively affect the housing market. While we certainly have seen a sharp contraction in the housing market compared to what existed during the bubble’s peak, if mortgage rates continue to rise, you can bet that the contraction will continue and become even sharper.

Keep an eye on the investor confidence in Fannie Mae and Freddie Mac. If somehow the companies can regain this confidence, then mortgage rates could stabilize, but at this point that doesn’t appear likely to happen anytime soon.

Barack Obama Wants Taxes To Be Fair, But What Is Fair?

On Saturday Barack Obama and John McCain debated, among other things, their tax policies. One of the main points drawn from that debate on the side of Obama was his goal to make taxes fair. He went on to say that wealthy people were not paying their fair share, himself included. He specifically targeted families earning more than $250,000 a year as wealthy. A point brought up by William McGurn in an opinion piece published in the Wall Street Journal, though, begs some thought. “As we come to the end of the Bush administration, the top 1 percent of American taxpayers already pay 40% of all income taxes -- the highest level in 40 years. The top 10 percent of income earners pay 71 percent of the taxes.”

McGurn asked, “What specific rate of individual taxation would it take for the rich to be paying their fair share?”

This is an interesting question to ponder. The rich obviously are in a better position to pay more taxes and still live comfortably, but at what point does it no longer become fair for them to support the poor and middle class masses? In another Wall Street Journal opinion piece, this one by Peter Ferrara, it is pointed out that the bottom 60 percent of income earners pay less than 1 percent of federal income taxes on net. This means that the top 10 percent pays 71 percent of all taxes, the next 30 percent pays around 29 percent of all taxes and the bulk of employees, the remaining 60 percent, only pay 1 percent. Strictly on appearances here, one would think that the wealthy are paying significantly more than their fair share. The top 1.5 percent of earners in the U.S. made more than $250,000, according to the 2005 U.S. Census. It is that 1.5 percent that is specifically being targeted by Obama. Do these taxpayers get more services in exchange for their increased tax payments? The answer is a most definite no. They actually receive much less in return, because their payments go to support all the social programs and so on for which they aren't eligible. Is this fair?

Moreover, according to Ferrara, if Obama is successful in his plan to increase Social Security payments for those making over $250,000 a year from 16 percent to 32 percent, they will receive less than a 0 percent real return from their lifetime payments. So they will actually end up paying for other people’s retirement. Again, this begs the question: is this fair? The answer, of course, will vary from one person to another, depending on their personal beliefs--and perhaps their income level.

Personally, I don’t think the word “fair” is appropriate. In my mind this tax structure is obviously not “fair.” In order to be “fair” people should only have to pay for the services they expect to receive or in some way benefit from. A wealthy person paying for the care of 1,000 poor people doesn’t qualify as “fair” in my book. That being said, I would never want to see 1,000 people dying of starvation so that a wealthy person could buy a new fancy sports car to add to their collection; I understand there has to be some sort of compromise. I think most wealthy people would probably say the same thing, but there is always something about giving money to the government through taxation that just gets on people’s nerves. Maybe it is because we constantly watch how they waste it. Because of this the wealthy always seems to find a sneaky way around these increased taxes.

Obama wants to raise taxes to pay for more social programs, but instead of increasing taxes for the wealthy, why don’t we appeal to their charitable side to accomplish the same social impact. We could get a little creative and try to figure out some ways to increase charitable donations from the wealthy, perhaps through tax incentives, but it could be done any number of ways. In the end, though, charitable organizations (at least good ones) are going to provide much more social impact for the buck than the U.S. government ever will. In addition, wealthy people are going to feel much better about giving more money to charity then they will about giving more money to the government. As a result, they might actually pay it as opposed to finding loopholes in the system. So to me this seems like a no-brainer: more change, happier taxpayers and less for the government to worry about.

It shouldn’t be about being “fair,” rather Obama should focus on accomplishing his goal of social change. He needs the wealthy to contribute more in order to see his goal to fruition, but increasing taxes isn’t the only, or even the best, way. Wealthy people have hearts, too--he should try appealing to those instead of trying to steal money from their pocket books.

Conventional Loan Applications Falling: FHA Loan Applications Skyrocket

It appears the FHA changes that the government has been passing have been working, at least in terms of increasing the number of people getting FHA loans. These changes most notably include the sharp increase in the maximum loan limits, something that opened up the FHA program to a load of new markets. FHA loan applications were up 133.9 percent in July, compared to conventional loan applications, which fell 50.2 percent in July, according to a survey conducted by the Mortgage Bankers Association (MBA). While the new changes are certainly having an impact, the bigger question is whether or not this is actually a good thing.

Beyond the fact that the FHA program has been opened now to higher priced markets, one of the biggest selling features for the FHA program is the low down payment requirements. Typically, FHA loans only require buyers to put down 3 percent, which in today’s lending environment is about the lowest down payment a buyer can hope for. If buyers use one of the down payment assistance programs, though, they can actually get 100 percent financing. While the new housing bill includes a provision meant to shut down these programs October 1st, a separate bill is in the works to bring them back. How that shakes out remains to be seen, but with or without the down payment assistance programs, FHA loans still represent the highest LTV loans on the market right now.

With the housing bubble is still not deflated, and foreclosures still wreaking havoc across the country, it is concerning to me that the government is adding more and more to its housing portfolio. This is the same debt that is crippling financial companies, yet we are trading treasuries for mortgage securities and originating all kinds of new high LTV, high risk loans. With the debt load we already have, the last thing we need is for all of this housing stuff to go bad on us, too.

We can of course debate whether these additional risks are justified by the potential economic benefits that will be received by saving the housing market from collapsing. Assuming that the market can be saved, my question becomes: At what cost? Will we ultimately be better off, or will we just end up even worse than before? The story I wrote about yesterday certainly doesn’t help me feel better about this, either.

Some Lenders Can’t Give Foreclosed Properties Away

So exactly how bad have things gotten in places like Detroit? Banks are having a hard time giving homes away. The Detroit News published a story last week which highlighted a recent transaction where a bank which had foreclosed on a property basically paid a buyer to take the property off their hands. The property was listed on the MLS for $1, but really that was only because, in order to make the sale legal, there has to be some transfer of wealth. In actuality, once you take into the account that the bank paid $500 toward the buyer's closing costs, they actually paid the buyer to take over the property. When all was said and done it was estimated in the Detroit News article that the bank paid around $10,000 to sell the home. This figure included approximately $3,500 in real estate commissions plus back taxes and water bills. For those who might be thinking this buyer got an amazing deal, though, let’s take a look at how this home got to the point it is at now.

According to the article, the home sold back in November 2006 for $65,000. At that time it was one of the nicest homes on the block. Last summer the home was foreclosed on by the bank; vandals broke into the home and stole everything of value, including the doors, plumbing, wiring, even the siding--everything, including the kitchen sink. One day, the real estate agency boarded up the home only to find the boards stolen the next day, used to board up another nearby home. You probably get the idea by now that this is not exactly the best neighborhood around. In addition, there is also the fact that taxes on this property run $3,900 a year. This new owner better run, not walk, to the court house and put in a request to challenge the property assessment or else this home may soon start eating away at their savings. Hopefully, too, they have some sort of understanding with the locals so that as they fix up the property the improvements aren’t immediately stolen. There is definitely a reason why it took 19 days to find a buyer even willing to take the property.

While Detroit happens to be one glaring example of the economic problems faced by some in our country, they are not alone. These $1 sales are common in other cities as well, including Cleveland. "And in some cities like Cleveland, judges aren't letting them [lenders] sit on the properties -- they're ordering them to tear them down or sell them,” Anthony Viola of Realty Corp. of America in Cleveland was quoted as saying in the Detroit News article.

Since it only costs around $5,000 to demolish a property, and that it cost the bank--at least for this transaction--around $10,000 to sell the home, it might make more financial sense to just demolish the home and hold onto the lot as an asset, which will hopefully be worth more someday in the future. Obviously, for this strategy to work, they would need to challenge the property tax assessment and get it lowered closer to the real value, which would be nothing. Once they did that they could sit on the property forever if they wanted (considering that they will be able to generate more income on the $5,000 savings then any expenses the vacant property might require), or they could even donate the property to charity, if they could find one to take it. Ultimately I wonder how much longer banks are even going to be willing to lend in neighborhoods like these. Something tells me it won’t be for much longer. Oh, that is unless of course the government is willing to guarantee the loans, which will probably happen. So next time it will probably be taxpayers who have the privilege to foot the bill on this. I don’t know about you, but I’m not excited about that prospect.

*For more information on this particular $1 house in Detroit see Zillow's excellent write up. They have a bunch more pictures as well.

*Photo courtesy of Bearing Group (MLS photo for 8111 Traverse St, the property mentioned in the article)

Both Europe And Japan Economies Shrink: Emerging Economies Next?

In Q2 of this year, the Euro Zone saw its GDP shrink 0.2 percent and Japan’s GDP saw a decline of 0.6 percent, according to the New York Times. Since we have been focusing so much on the doom and gloom surrounding the U.S. economy, I thought it would only be fair to talk about the problems in the rest of the world, too.

This Euro Zone’s decline is the first quarterly decline that the group of nations has experienced since joining forces under the Euro in 1995, according to the New York Times. The Euro Zone’s two big economies, Germany and France, both contracted individually. Germany’s decline was more or less expected, and came in at 0.5 percent. On the other hand, France’s drop was a big surprise, according to the New York Times; it came in at 0.3 percent.

Japan, which represents another of the Group of 7 (G-7) economies, also has been hit hard. They reported a decline in their GDP of 0.6 percent. The G-7 consists of the U.S., Japan, U.K., Italy, France, Germany and Canada. When the group was formed, these seven countries represented the seven largest economies in the world. This make-up has changed thanks to China’s tremendous growth over the years, but these seven economies are still all toward the top of the list. Not one of these seven economies is doing well at this point, and it is possible that all of them could see economic contraction before the year is out. The U.S. has avoided one thus far, but let’s see how things look once the stimulus package impact wears out. The U.K. barely squeaked out gain in Q2 and many economists are predicting that their economy will contract in Q3. With the largest economies in the world all struggling, it seems we are set for a widespread global slowdown.

You can be assured that when all these countries slow down at the same time, the lesser economies of the world will suffer, too. No economy is completely shielded from all these economic powerhouses. Investors would do well to remember this, as well as that emerging economies, while offering diversification, are also much more volatile than developed economies. The biggest losses will likely be seen in the smaller countries. Don’t get me wrong--I’m a huge fan of emerging markets over the long term, but investors need to take proper precautions right now to protect themselves, because things are only going to get worse on the global scene.

Alan Greenspan Says Nationalize Freddie Mac And Fannie Mae

By now I think most people are aware of the blank check the government gave to Freddie Mac and Fannie Mae as part of the recently passed housing bill, but was this truly the best way to fix the problems of these government-sponsored enterprises (GSEs)? According to Alan Greenspan in an interview with the Wall Street Journal, this solution was “bad.” Instead Greenspan thinks that we should have nationalized the GSEs, wiping out shareholders in the process, restructure them and then sell of the pieces in order to form five to 10 private companies. Greenspan has long warned that the current structure of these GSEs threatened the nation’s financial stability, according to the Wall Street Journal, and Greenspan saw present circumstances as the perfect time to make a much needed change. Greenspan isn’t the only one with this opinion either; former Nixon Treasury Secretary George Shultz had these words of wisdom, as quoted in the same Wall Street Journal article: “If they are too big to fail, make them smaller.”

How the markets would react to the nationalization of the GSEs is up for debate, but Greenspan seems assured that things would be just fine. Right now the companies enjoy the full backing of the U.S. government, only the shareholders get to keep all the upside. So no risk and lots of potential for reward? Sounds like a pretty sweet set-up they have over there.

Typically, I’m not a big fan of government getting involved in business. I’ve always been of the philosophy that the market will work things out. But this circumstance is very different. The government has already intervened by granting these companies an official unlimited line of credit. We can debate whether or not they had one before, but now it is official. At this point, taxpayers are potentially on the hook for trillions of dollars; we have essentially taken on all the risk without the possibility for reward. This is obviously a horrible arrangement for taxpayers. While I don’t like the idea of keeping the companies under government control, that is not what Greenspan is calling for. He is saying that the government should take control of the companies only long enough to sell them off to private investors, who will form five to 10 smaller companies in the process. To me this plan seems much better then what we have in place. This solution also would work out much better in the long term, since it would increase competition. In addition, since there would be a bunch of smaller companies, we wouldn’t necessarily have to worry about a collapse in the market if any one of them went under. That means we wouldn’t have to bail them out if they made stupid business decisions, which is a winner in my book.

I don’t normally agree with Greenspan, but in this case I think he is on to something. The government offering up taxpayer dollars to keep two flailing giants afloat is a horrible plan, and the time has come for a change. Present circumstances offer us the chance to make a change and if Bush isn’t up to the task, I hope that the next president is.

Freddie Mac Says Enough Is Enough To New York

In what shouldn’t come as a shocker to legislators in New York state, but probably does, Freddie Mac has announced that they will no longer purchase subprime mortgages in New York state dated after September 1st, according to the Wall Street Journal. New York passed a law that will go into effect on that date that is meant to curb abusive lending practices, but which could also increase risks for lenders. Freddie Mac saw enough problems with the law that they said enough is enough, and decided they aren’t going to bother with it.

I’ve been saying for some time that many of these laws being passed are ultimately going to hurt the consumer, and this is just the first step. Freddie Mac is the second largest mortgage buyer in the country, and without them in the equation, bottom line lending costs for consumers will go up. Now, we can debate all day whether or not people should even be buying homes if they have to use subprime loans, but that is not the point. If the goal was to eliminate subprime loans, then they just should have done that; by passing legislation such as this, though, they are just going to increase the cost of the loans for those borrowers who do use them.

We will have to wait and see how this ends up affecting the real estate market in New York, but it certainly isn’t going to help it. I don’t know how popular subprime loans are there in the first place, but it is likely that low income areas will be hurt the most. Typically that is where subprime loans are most widely used. Investors who are looking to buy property in these low income areas should look carefully at the borrowing possibilities for potential buyers. If subprimes are out of the question, then you had better make sure that people can get a FHA loan, or that you are offering some sort of owner financing. New York may also not be the last state to take such steps as these, and it is possible that Freddie and possibly even Fannie Mae could take a similar stance to the new rules in the other states.

Banks Increase Lending Standards Across The Board

The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices released by the Federal Reserve describes a lending environment that has gotten worse across the board. I won’t bore you with all the details; feel free to click on the above link if you want those (or you can read Mish’s blog post--he does a great job of summing up this report), but I do want to make the point that these numbers are not encouraging. Sure, residential lending standards have increased--I think most people understand that-- but we need to realize that this credit tightening is not confined to just residential real estate. Banks are hesitant to lend to pretty much everyone right now. That includes businesses loans, commercial real estate loans and consumer loans.

Our economy is driven by lending and borrowing--it has to be because we don’t have any savings. It is pretty safe to say that if Americans started buying only what they could afford our economy would collapse. In order to stay afloat, we have to keep borrowing; it is the only way to keep the train chugging in the short term (which is all the government cares about, but I’m not going to get into that). That being said, when lending becomes tighter, our economy pays the price. Borrowed money is our lifeblood, and right now the flow is being restricted. The Fed is trying to do their part by making the money cheaper and more abundant, but unless banks start actually lending out this money, it isn’t going to do them much good.

While lending is the lifeblood of our economy I should also add that it most definitely is toxic. We need to understand that we cannot go on borrowing more money forever. Right now the U.S. economy is acting more or less like a ponzi scheme. Basically that means that they are taking money from investors and the only way to pay these investors back is by bringing on more investors. As long as there is a steady stream of new investors coming in with their money then there are no problems. However, if anything happens to restrict the supply of new investors so that the money they bring in doesn’t cover the payments due to the old investors, then all hell breaks loose. The U.S. government obviously has the trump card in that they can print money at their whim, but we all know where that leads.

Those who want to know more about the U.S.’s addiction to borrowing should check out the new movie I.O.U.S.A. I don’t imagine that the Fed will take these tightening lending standards lying down, though; it will be interesting, to say the least, to see what they come up with to combat them next. They say that inflation is an overriding concern right now, but that shouldn’t keep them contained for too long. The thing investors need to remember is that this party can’t and won’t go on forever. They can drag it out, but at some point people will start heading for the doors.

China’s Olympic Opening Ceremony

Like millions of other people across the world, I watched the Olympics opening ceremony on Friday, and I can say that it was quite a spectacle. While it certainly was an amazing show, the likes of which I have never seen before from an opening ceremony, the price tag for this show made me choke. When the announcer said that China had spent $300 million on just this one show I was shocked. I knew they had spent $40 billion on the whole Olympics, but most of that went to infrastructure improvements and pollution cleanup. $300 million for a show just seems ridiculous.

To me, this just proves the point that China is trying to use these games to show the world that they are now a power to be reckoned with. What better way to do that than throw down $40 billion for the Olympics and $300 million for the opening show, both of which are unprecedented numbers.

The problem with this is that the world already knows China is now a powerhouse. We all know about the growth in their economy, and pretty much every country in the world wants a piece of China right now. They don’t need to prove a point that has already been made. While in one sense the employment created by all this spending is a good thing for China, one can’t help but feel the money could have been put to better use. China still has a lot of poverty in their country as well as many other areas of need, which could have greatly used some of these funds set aside for the Olympics. I don’t think there is any chance of China seeing a return on the money they have spent in the form of increased tourism (or anything else for that matter) after the Games, so really, most of this money will have been wasted on what the country considers a big party for themselves.

The Olympics is a great event with loads of history and tradition, but when countries start using it to make statements or impress the world (and to be fair, China is not the first, nor will they be the last to use the Olympics in this way) it is just a shame. Countries shouldn’t neglect the good of their people for the sake of a game. The Olympics bring in a large sum of money and countries should be smart and spend only on the Olympics what they can expect to see in return, anything beyond that is just a waste.

Europe’s Economic Outlook Doesn’t Appear Much Better Than U.S.

Seeing how the U.S. dollar, along with most other world currencies for that matter, has fallen against the Euro, one would think that the Euro Zone (countries of the European Union which use the Euro) was in great financial shape, but that isn’t necessarily the case. Spain and Ireland in particular are suffering mightily as they were unable to control the booms (see One Interest Rate, 13 Economies article), and now busts of their economies. The two stalwarts of the Euro Zone, France and Germany, have been holding the Euro up thus far, but now even their economies are starting to feel the heat. Oh, and don’t forget about the U.K.--even though they are not part of the Euro Zone, they are one of the largest economies in Europe and their outlook looks especially grim.

The German ZEW economic sentiment indicator has plunged to a record low, French business confidence has dropped, retail sales are down sharply and European companies are starting to default on their debt at alarming levels, according to Money Morning, an e-mail newsletter from MoneyWeek magazine. These are all obviously negative signs that point to the fact that the Euro Zone is heading in the wrong direction economically.

The U.K. isn’t doing all that great either. The U.K. had the same sort of run up in housing prices experienced in the U.S., only their down cycle is just beginning. Furthermore, their economy is driven by two key industries, construction and finance, both which are doing extremely poorly right now.

Even with the troubles being experienced in the U.S. the dollar could regain some ground against the Euro and British pound. While this might please travelers who are looking to visit Europe in the near future, there is a big concern to keep in mind with all this. When we talk about struggles in the U.S. and Europe, we are talking about the largest importing countries in the world. You can bet that if all these countries struggle at the same time, it will be felt across the world. We very well could be headed for a serious global recession of sorts, and investors certainly should be keeping that in mind.

I.O.U.S.A: An “Inconvenient Truth” For The U.S. Economy

I.O.U.S.A is being touted as “An Inconvenient Truth” for the U.S. economy. It is a new film that aims to shed light on the dire straits of the U.S. deficit economy. “An Inconvenient Truth” acted as a wake-up call for many about the problems we face with global warming, and film promoters are saying that this film will have the same effect about the U.S. economy. The film is debuting August 21^st in 400 theaters across the country, followed by a live video town hall meeting with Warren Buffet, among others, and will open the following day in 10 cities, according to the Washington Post.

I’ve already got my tickets and am curious to see how the film turned out. I’ve heard really good reports about it so far. For those of you who aren’t already heading to the theater to watch it on the 21^st, I will report back and let you know how it was.

If you’re curious about the movie and want to find out more about it, make sure to read the Washington Post article on it, which explains how the movie came to be and provides some background information on the production and financing of the movie, in case that stuff interests you. For more information on the movie itself, visit the movie’s website. The film was produced by Agora Entertainment, and their website also has some information about the movie. Last but not least, I’ve attached the movie trailer to this post so you can get a little sneak peek of the film. I think it is about time that the country wakes up to the potential problems our enormous deficit poses, and I applaud, if nothing else, the idea behind making I.O.U.S.A. Of course, I will have to withhold judgment on whether it is any good until the 21^st.

Paris Hilton For President: Energy Policy For People (magazine)

Paris Hilton has recently released a video rebuttal to a rather ill-advised John McCain ad which compares Barack Obama with “celebrities” such as Hilton and Britney Spears, suggesting a lack of substance despite their charisma. The original ad seems desperate and is as insulting to the viewer as it is to those mentioned. Meanwhile, Paris’ ad is actually witty, albeit a touch misinformed about energy policy.

Who would have thought that perennial tabloid darling Paris Hilton could actually deliver a speech more effectively and with greater poise than our president of eight years? It seemed, in fact, that her relevance was beginning to fade until the McCain ad was released. While I doubt that Ms. Hilton will win a single state in November, this may have the unfortunate side-effect of reinvigorating the public’s fascination with her. Thanks, John; I guess we’ll always have Paris. Still, we could do worse than President Hilton: I dare say that she would have looked as convincing as Bush did arriving in a flight suit on the USS Lincoln to announce “Mission Totally Accomplished! Luvz it!” She might even be able to pronounce Sarkozy properly.

But my praise of Ms. Hilton stops there. In the video, she suggests combining the two energy policies of McCain and Obama to help solve the energy crisis. Her suggestion is to allow offshore drilling to tap those rich deposits for cheap, easy fuel as we work on alternatives. Appropriately enough, the last time I used the words “rich,” “cheap” and “easy” in the same sentence, it was to describe Paris Hilton, but unfortunately her plan is as superficial as her cult, and it is flawed for the same reason that McCain’s “solution” is flawed.

Offshore drilling would be a placebo for the problem at best, as the restricted areas would provide only a drop in the proverbial barrel of our oil consumption. Furthermore, it will take several years to construct derricks and refine the crude, providing no immediate relief and precious little when the wells truly begin to produce. All of this assumes that the oil would be sold exclusively to Americans, and we should know by now that this is not a given.

The Paris for President campaign is off to a rocky, though amusing start. I’m afraid she won’t have time to really establish a solid platform by November. That said, I think her decision to start this late in the campaign is a refreshing one. This overextended campaign season has been costly and grueling for everyone involved, and though I can’t get behind Hilton on her energy policy, her frank approach is a balm in this hostile election year. She even may have a running mate selected before the Republicans or the Democrats. She mentions Rihanna, but a ‘Hilton Clinton’ ticket has such assonant appeal, and it’s better to be called assonant than asinine, which is how I would describe the campaigns of other nominees at this point.

Luvz it, indeed.

Freddie Mac CEO Ignored Warnings Knowing Government Would Bail Them Out

This is really not much of a surprise, but now we have official reports from company insiders that the CEO of Freddie Mac, Richard Syron, received and chose to ignore numerous warnings from within the company that Freddie Mac was taking on too much risk. A New York Times article published yesterday shared interviews from several current and former employees at Freddie Mac. They made it clear that Syron preferred to increase profits rather than manage risks. Here is a quote from one of the former employees interviewed in the article:

“'The thinking was that if something really bad happened to the housing market, then the government would need Freddie and Fannie more than ever, and would have to rescue them,' Mr. Andrukonis said. 'Everybody understood that at some level the company was putting taxpayers at risk.'”

Now, of course, Syron says that the company never assumed that the government would step in, but one would expect him to say that, especially under present conditions. The bottom line is that Syron--and, to be fair, other Freddie Mac executives--tried to maximize profits however they could and as a result, enjoyed some nice bonuses. According to the New York Times article, Syron’s share was $38 million. Meanwhile, the company’s market cap has lost around $80 billion and now the company is expected to cut their dividends by around 80 percent after the company reported a loss of $821 million last quarter, according to Bloomberg. The following is a quote taken from the same Bloomberg article:

“'This correction is more severe than what we've seen in the recent past,’ said Christopher Whalen, co-founder of independent research firm Institutional Risk Analytics in Torrance, California. ‘Both Fannie and Freddie are going to be profoundly insolvent by the time we're done with this.’”

Freddie Mac is also in worse shape than Fannie Mae because Syron chose to limit the amount of additional capital the company was to raise to--a much lower amount than Fannie Mae. He also delayed the latest $5.5 billion offering, and now because stock prices have plunged and investors are wary of Freddie Mac, the cost of that debt is likely to skyrocket, according to the New York Times. That being said, Syron still has a job, and now he has an official blank check courtesy of the U.S. government. Makes you feel pretty good as a taxpayer, doesn’t it?

Jim Cramer Says Now Is The Time To Buy A House

Jim Cramer, host of the widely acclaimed show “Mad Money,” recently said on one of his shows that you need to buy a home in the next six months. He is basing this argument on the fact that banks are calling the bottom on the housing market, along with the new housing bill which was just passed. So this begs the question: Is Jim Cramer some sort of financial mastermind, or is he just plain mad?

Beyond the fact that calling the bottom of any cycle is nowhere near an exact science, the most recent financial data is not looking good for the housing market. Job losses are increasing, foreclosures are continuing to mount and mortgage delinquencies are spreading beyond subprime debt. In my blog post yesterday I quoted the head of one of the biggest banks in the country as saying the outlook for their mortgage debt is “terrible.” Even if Cramer is correct, and right now marks the bottom of the housing bubble, it probably still isn’t the best time to buy. Housing prices are not just going to stop falling all at once; when they do turn around it is likely to be gradual. Saying that the time to buy is right now is a pretty far reach in my mind.

He is basing his prediction mainly, it seems, on banks and the housing bill. I see a couple problems with that. First off, the banks have not shown at all that they have a strong grasp of the housing market. How much money have they lost so far, after all? Saying they have predicted the housing bottom, so therefore it must be the bottom, seems pretty dumb. If anything, knowing that they have predicted the housing bottom would make me even more scared than I already am. Secondly, he thinks that the housing bill is going to aid the market. Looking at the housing bill, it doesn’t appear that it is going to have the impact that he thinks. There is a $300 billion FHA measure, a tax credit for certain home buyers and the Fannie Mae and Freddie Mac aid. Those are the main provisions meant to save the housing market. I look at those and just think, “Oh man, I wonder how much this is going to cost me.” The FHA measure is going to help people refinance out of loans, however, as I mentioned in a post about the prior FHA loan aid, it didn’t turn out to have the impact that was hoped for. The loans ended up going to people who probably would have been fine without them, so basically these homeowners got a nice taxpayer subsidy, but it really didn’t help stabilize the housing market much. Obviously this new aid is on a larger scale, but I think the same thing will happen--in the end, we are likely to be disappointed. The Fannie and Freddie aid just makes official what we already knew--that the government was going to bail these companies out no matter the cost. So this might have relaxed the nerves of some Fannie and Freddie debt investors, but the move isn’t going to change all that much. The tax incentive may have some impact--that remains to be seen--but again I don’t see it as a market changer. It is possible that Cramer is right on this, but I’m not sold quite yet.

Also, Cramer didn’t really differentiate between buying a house that you plan to live in or an investment property. If you are in the market for a home to live in, then I revert back to the “you’ve got to live somewhere” rule. Trying to time the market is futile and not worth the happiness and comfort of your family, so if you are looking to buy a home to live in, do it--but make sure to buy within your means. If housing prices are beyond your means, then you shouldn’t be buying. End of story. If you are looking at investment property, on the other hand, then depending on the area and your strategy, it may make sense to wait for a better deal. I’m a big proponent of cash flow real estate, and either the numbers work or they don’t. I don’t factor in appreciation, so as long as the property is cash flowing now, and I can safely presume that it will cash flow well into the future, then ultimately I know I’m going to make money on the deal regardless of the real estate market fluctuations.

Time For The Next Wave Of Loan Defaults And Bank Failures

If you thought we were almost through the subprime mess and that things are going to start getting better, you might want to consider this news: According to some financial experts, the subprime problems are only the beginning. Alt-A (low document and stated-income-type loans) and even prime mortgages are starting to see dramatic upticks in their default rates. Alt-A loan defaults have quadrupled to 12 percent from April 2007 to April 2008, and delinquencies on prime loans doubled during that same period, according to the New York Times. The chairman of JP Morgan Chase, James Dimon, called the outlook for these mortgages “terrible” and said he expected losses on the company’s prime loans to triple in the coming months, according to the New York Times. Economist and New York University Professor Nouriel Roubini went so far as to say in a Reuters article that hundreds of banks were going to fail, and the ultimate price to tax payers would likely be between $1 and $2 trillion.

If these Alt-A and even prime mortgages start to go bad, we are going to be in for financial trouble far worse than we’ve seen so far from the subprime meltdown. Subprime mortgages make up only a small percentage of total mortgage loans, and the government was hardly on the hook for any of them. If prime loans start going bad in large numbers, though, we had better watch out. Now that Fannie Mae and Freddie Mac have an unlimited line of credit--and official backing of the U.S. government--taxpayers could potentially have to foot the bill on trillions of dollars of mortgage loans. Worse, though, if either one of these companies--or any of the big banks for that matter--have to seek government assistance it will likely send a tremor through the entire financial industry and economy. How many foreign governments, or anyone, are going to feel good about buying U.S. treasuries when our financial system is falling down around us? And we have to take into account that the government has been trading U.S. treasuries for mortgage debt in order to prop up these financial institutions, so now our economy and dollar are being supported by these mortgage instruments. Not exactly the pillar of safety and security that we would like be supporting our currency.

Jobs are declining, inflation is rising, and now this. I’m not sure exactly how we are going to get out of this mess, but I’m sure the ol’ government has something up their sleeves. I’m sure it will involve some sort of bailout and printing of money, so basically some variation of the status quo. The good news for us is that the world is addicted to U.S. debt, the same way we are addicted to being in debt, and as long as we have our foreign friends paying our way, we will be good. Kind of like the former movie star or sports hero who never has to buy their own meals. We all know what happens to them when they get too old, though, and people stop remembering their greatness. How much longer our run will go on, I don’t know, but I can tell you I certainly am not buying treasuries or financial stocks right now.

State Fiscal Pressures

We all know about the fiscal problems at the federal government level, but what about the state level? Well, things aren’t looking too good on that front, either. Most states are running a deficit, but unlike the federal government, these states can’t just print more money when they need it. Because of that, many states are being forced to dramatically cut back services and lay off workers and/or substantially cut their pay. Things at the state level are getting worse quickly, so investors definitely should keep up on this information. To help with that, the Center on Budget and Policy Priorities published a fiscal pressure ranking for the states.

To determine their rankings they looked at three variables: employment, Poverty and the housing market. The following are quotes from the report detailing the reasons they chose each variable:

• Employment: Changes in employment are closely related to changes in state income and sales tax collections. If fewer people are working, there will be less income tax revenue and also less consumption.

• Poverty: Change in the number of food stamp recipients is the single best early warning measure about what is happening to poverty in a state. If the number of food stamp recipients is increasing, the poverty rate generally is rising, and there likely also will be higher enrollment in Medicaid and SCHIP, as well as increasing pressure on other programs that serve the poor and near-poor.

• Housing Market: Change in the foreclosure rate is related to sales tax revenues, both because people who feel they are losing home equity value are likely to reduce their consumption and because there is less direct purchase of building materials and home furnishings.

According to their rankings the five states in the worst fiscal shape are Florida, Arizona, Nevada, Rhode Island and California. The five states in the best fiscal shape are Texas, Louisiana, Oklahoma, Nebraska and Kansas. The full rankings can be seen in the report. The lone surprise to me in these rankings is Rhode Island. I had no clue Rhode Island was in such distress, I guess because they are so small, they kind of slide under the radar.

Perhaps the clearest example of state fiscal problems can be witnessed in California. Thanks to budgetary issues, Governor Arnold Schwarzenegger announced yesterday that the state would be laying off thousands of part-time workers and cutting pay of around 200,000 workers, all the way down to the minimum wage of $6.55, according to the Los Angeles Times. They say this is only a temporary pay cut, though, until a new budget can be agreed upon and signed. The problem is that Republicans and Democrats disagree on the best way to fix the deficit in California’s budget, and neither side is willing to budge. The Los Angeles Times quoted Schwarzenegger as saying, “I have a responsibility to make sure that our state has enough money to pay its bills….It is a terrible situation to be in. I don't think any governor wants to be in this situation. . . . But this is really the only way out at this point." In this quote, he was speaking about the executive order to cut the jobs and reduce the pay of the 200,000 workers.

As one can imagine, the fallout from this order will likely be hard felt. There are not too many people who can make it in any state, let a high-priced one like California, on $6.55 an hour. With the housing crisis already being felt across the state, this is just one more blow that they really didn’t need. While this situation is so far unique to California, budget deficits are not. More than half the states are running budget deficits right now, and since they can’t print money, their debt levels can only go so high before cuts are forced upon them. Over the next year or so, look for a slew of cuts from the state level, and of course don’t forget about the cities; they are in the same boat (see Vallejo bankruptcy).