Avoiding Bubbles – Stream of Thought…
As we have all seen, I ain’t a very good market timer. Hence the slowdown in market timing trading. Ahem.
But, I have managed to avoid big downturn bubbles. I actually made a little bit in 2002 and lost a tiny bit in 2003. Likewise in 2008. And, managed to catch much or all of the gains in 2004 and 2009. I just seem to move to the long term norms in the other years – for example last year; yuk, yuk
Anyway, the .com crash was an easy read. As was the credit crash of 2008. Now everyone is looking at a furtherance of some form of private sector crash for the future. I think, however, that we should look for a public sector crash. And, that is not good for either you or me.
Why a public sector debt crash? I don’t have to look far to get a good picture. I just have to look at my city (San Diego), my state (California), and my country (the good old USA). Each of these entities spent more than they had in good times and bad. And much of that was from a mix of responsibility creep and employment cost creep. My city invested in its employees by increasing pension and health care obligations in the out years. My state invested in its employees by increasing pension and health care obligations in the out years. And, by increasing I am not talking about hiring new employees (although responsibility creep did increase staffing) – I am talking about the enhancement of retirement benefits. For my city and my state the out years are now. We, and most other local and state public sector entities, are trying to deal with those out year obligations. And the financial gaming used to document the viability of those obligations is meeting reality. That is, the tax base does not support the promises made by past politicians. Thus,
‘Enron By The Sea’ and ‘California Crashing’. San Diego started dealing with the problem in 2006 and we seem to be on our way out of the hole. California is just waking up – but the politicians are still kicking the can down the road. But even Governor Brown can see that the road will end during
his term. Even he is demanding salary and benefit cuts. My city and state were living in revenue and spending bubbles. The blowout of the revenue bubble is forcing a retrenchment of spending. The spending bubble will be popped by retrenchment in employee costs – past and future.
Which brings us to us…
Our public sector entity creates money. It borrows money. And, it only ran tiny ‘surpluses’ in the late 90’s by gaming the financial responsibilities of promised benefits. Social Security and Medicare were (are) considered ‘off balance sheet’. Our entity used the increased revenue from an explosive economic boom starting in the early 1980’s to cover creeping responsibility spending. The enhanced revenue stream was used to cover increasing day to day expenses (new responsibilities). It was not saved. It was not invested. And, it was not placed in a lock box for the ‘now’ obligations. The tax base will not support current spending. So, our entity is borrowing to cover 40% of its hand to mouth spending. Soon the borrowing will get very expensive. We call that a credit bubble. I don’t like what I see. I will come out all right. I am not dependent on a Federal pension (I didn’t even know I had a pension benefit till a few years ago). I am almost out of consumer debt. I have a marketable skillset. And, if there is a retrenchment of responsibility I am employed by a Constitutionally mandated entity. Regardless, I am a Federal employee and I have enjoyed what I do (for the most part). However, reality is coming.
We have been living in a 30 year bubble.
Bubbles pop.
Pop.
