Stockton, California Freed to Declare Bankruptcy

photo: reuters

 

On Monday a federal judge ruled Stockton, California would be allowed to declare bankruptcy, making it the most populous city in the nation to do so to this date.

As usual, the outrageous pensions and benefits offered to public workers is behind the proposed bankruptcy, pointing the way to much more disruption going forward, as Governors won't take the steps to slash the benefits or make the workers pay more into their own pensions. The result is what we're seeing in states all around the nation, where cities will be forced at an unprecedented level to declare bankruptcy.

What is important about this particular bankruptcy will be the outcome of the issues involved; primarily, whether creditors or government pension funds get to be paid first by the respective cities.

In other words, does the federal bankruptcy law take precedent over California law. The law of the state asserts the state pension fund must be paid.

The U.S. Bankruptcy Judge ruling on the case, Christopher Klein, said this: "I don't know whether spiked pensions can be reeled back in. There are very complex and difficult questions of law that I can see out there on the horizon."

Stockton, with its pension promises, already owes the California Public Employees Retirement System (CalPERS) approximately $900 million. It's a very similar situation in cities across California. So much for the big government, Keynesian experiment in California. To think people not that long ago looked at California as a bellwether for the rest of the county. It is of course; one that shows exactly how not to conduct business at the state and local level. This is why big government must be shrunk. It is no longer sustainable. In truth it never was, it always has been a matter of time before it all came collapsing down around the ears of state and local governments.

Other cities in California under severe pressure because of the outrageous pensions allotted government workers are San Jose, San Bernardino, Atwater and Fairfield, among over a dozen others.

In order to finance the pensions of these government parasites, numerous cuts in employment have been made by the city, including a Police Department which is only allowed to respond to emergencies in progress. The crime rate in Stockton is one of the worst in the nation.

I wonder if investors are still feeling comfortable and safe with their municipal bond investments which a number of so-called experts declared as safe?

It's far past time to shrink government and its parasitic workers, who are increasing the amount of unfunded liabilities while refusing to cut back on their borderline criminal perks.

Warren Buffett on the Next Financial Crisis

While testifying before the FCIC last week on unrelated matters, Warren Buffett of Berkshire Hathaway (NYSE:BRK-A) fame was asked about where he sees the next financial crisis in the United States coming from, and while it wasn't surprising to me because I've known the risks for some time, it could be enlightening for those who aren't aware of it at this time.

Buffett's response? Municipal bonds.

The problem is the same reasoning behind the current economic crisis and debt load, is the same reason for the upcoming bursting of the muni-bond bubble, and that is the complete and irresponsible spending by politicians who refuse to say no.

Worse than that, it's the usual entitlement spending which the government is locked into which is unsustainable, but again, the politicians refuse overall to stop these types of programs, cut taxes, and encourage the private sector to take care of things.

According to George Soros, he said a couple of months ago, that the best way to invest in relationship to this situation is to go "short on bonds by buying a CDS contract carries." He added it would almost guarantee "unlimited profit potential."

JPMorgan (NYSE:JPM), Charles Schwab (NYSE:PSCHW) Fixed Income Deal

JPMorgan (NYSE:JPM) and Charles Schwab (NYSE:PSCHW) have a new deal where Schwab clients have access to all of its fixed-income product line, as investors continue to look for sounder and safer places to put their money.

Included with the deal will be all the research JPMorgan has, and access to corporate debt securities, municipal bonds and nonconvertible preferred securities Morgan has underwritten.

Matt Zames, co-head of global fixed income at JPMorgan in New York, was extremely happy with the deal, saying the bank has been seeking ways to expand its product offerings to individual investors for a long time.

Other products from JPMorgan could be offered to Charles Schwab clients in the future.

Gold Responding to Interest Rates

One thing this super recession has taught people, and if nothing else, it could be a great silver lining to some of the pain people have gone through, and that is, interest rates exist for a certain purpose, and they aren't always safe, and there are other factors to consider when deciding whether to invest in something with interest rates, or consider another option.

Just look at municipal bonds as an example. Who would have used the term risk and municipal bonds in the same sentence three years ago? Now though, there are a growing number of financial advisers urging their clients to get out of them, as they are highly toxic at this time, and could be for years, depending on a lot of factors; like the financial health of the city issuing them and the project the money is being raised for.

So many people think when the Federal Reserve finally raises interest rates, people will flock out of gold and other commodities and get the higher returns offered through those types of investments. Most believe that won't happen until the latter part of 2010 at the earliest. The Federal Reserve held things right where they're at today concerning interest rates, and gold responded in a nice upward movement.

Anyway, what are the potential consequences of interest rates going up for holders of gold? The real question will be how much more does the average investor on the street understand the fundamentals of gold as it relates to monetary policy and its effects on the economy. If they at least have a general understanding of that, there won't be much of a move out of gold, although the majority of holders continue to be seasoned or institutional investors. If the average person starts investing in gold, that will be a major factor in the overall impact on gold.

Another key element is the same question, but being directed toward institutional investors. Are they any more in the know than the average, individual investor? In many, if not most cases, they aren't. They are Keynesian's, even if they don't understand what that means, and they will operate based on certain assumptions that probably are no longer viable in the post-recession world, once there is a post-recession that is.

Inflation is going to be held off much longer. Money will eventually be released into the markets, and the pent-up demand is extraordinary, and we could see amazing surges in commodity prices as a result. Look at iron ore this year based on demand, and as far as globally, we're far from what could be called a recovery in any meaningful way.

Another big part of the puzzle is the bond market. Once that collapses, which it almost assuredly will, even more investors will pour money into commodities, especially gold. At that time all bets are off as to how high gold prices will go.

Once that happens, we will then finally enter into a possible gold bubble, but that's not here, and won't be until these other events line up.

Gold won't be going away any time soon as a solid investment and place of safety. I think we're really just getting started, and while exact timing and events could take some interesting turns and twists, we will ultimately arrive, and those positioned in gold will benefit greatly while protecting their wealth and spending power.