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Quotes For The Week

A hat-trick of quotations for you…

The rejection of the package is good because it shows that some people in the U.S. are still sane. A bailout will not buy the U.S. a way out. The government is less powerful than markets in fixing this mess.

-Marc Faber, in a September 30 phone interview with Bloomberg

Sometimes I think we need to put out an ad: “No, we don’t have any more jobs than you do.”

-Jodi Royal-Goodwin, the redevelopment agency director for Reno, Nevada, in response to an influx of homeless people coming to the city looking for jobs

Altogether, we have had eight years of no gains in real median wages, flat stock market returns, and minimal net new jobs. Despite what you have heard, after adjusting for debt spending, population growth and realistic adjustments to the GDP deflator, there have only been 3 or 4 quarters of GDP growth since 2005. If you adjust for military, government and minimum wage positions – i.e. jobs funded by tax payers and jobs that don’t pay anything - there have been absolutely no net new jobs. Bush’s largest gains have been with inflation, oil and food prices, debt, trade deficits, bankruptcies, foreclosures, and healthcare costs. If an assembly of the world’s leading economic strategists were to design the most destructive economic disaster possible, they could not match the results of Bush’s tenure. Even the most loyal Bush supporters will admit he has been an absolute disaster – that is if they’re being honest.

-Mike Stathis, Managing Principal of Apex Venture Advisors and author of America’s Financial Apocalypse, in a Market Orackle (UK) piece from September 14

Florida County Looks At Using Inmates To Maintain Foreclosures

U.S. News & World Report’s Luke Mullins recently came across a story of how one Florida county intends to maintain its glut of foreclosed properties. Mullins wrote back on August 15:

You think living next to that abandoned house with waist-high grass is unsettling? Just wait until the prisoners start showing up…

From The Suncoast News, in Florida:

Pasco County officials will ask for permission to use county jail inmates to help clean and mow lots of foreclosed homes that have fallen into disrepair.

“We’ve got to get in front of this,” Commissioner Michael Cox said today [August 12] in bringing up the issue. “Last I heard there were 6,000 homes in foreclosure” in Pasco, he said…

And the prisoners? Well, they should at least be glad they’re not being made to perform Michael Jackson’s “Thriller.”

Cebu Provincial Detention and Rehabilitation Center
YouTube Video Link

Source:

“County Wants Prisoners to Primp Foreclosures”
Luke Mullins
U.S. News & World Report, August 15, 2008

U.S. Senate Passes Housing Bailout Legislation

“Progress” continues to be made on the next major bailout. According to Bloomberg tonight:

The U.S. Senate passed a $300 billion plan to help thousands of Americans keep their homes and tighten regulation of Fannie Mae and Freddie Mac in an effort to ease the worst housing slump since the Great Depression.

The legislation, approved 63-5 today, would let an estimated 400,000 struggling homeowners avoid foreclosure by refinancing their subprime mortgages into fixed-rate loans backed by the government. The measure also offers tax incentives to potential homebuyers and sets aside $4 billion to help communities buy foreclosed properties.

Chicago’s Mayor Daley moonlighting as a real estate agent? Yeah, I guess I can see it…

“‘Got House?’ Oh, I’ll give you house!”

Source:

“Senate Approves $300 Billion Plan to Stem Housing Foreclosures”
Brian Faler
Bloomberg, July 11, 2008

No Property Tax Relief In Sight

More bad news, American homeowners. Just when you thought there might be a silver lining to declining home prices in that property taxes would be lower, the Wall Street Journal is reporting that local governments throughout the United States are raising property tax rates to compensate for revenue shortfalls. These taxes serve as a major source of funding for municipal governments, accounting on average of about 40% of general revenue, according to the Census Bureau.

The Journal’s Conor Dougherty wrote on April 24:

…flat assessments and rising rates add up to higher bills for many. Arlington County, Va., recently raised its property-tax rate 4% in part to cover retiree health benefits. Portland, Maine, has a proposal to raise the property-tax rate 3.7%, and lay off city workers. Oak Ridge, Tenn., near Knoxville, is preparing to raise its rate 5%, in part to cover the rising cost of items, such as gasoline for police cars and asphalt to resurface streets…

Some cities and states are dropping plans to roll back or eliminate property taxes. Arizona Gov. Janet Napolitano, a Democrat, recently vetoed a bill that would have repealed the state property tax. The tax, which had been suspended for the past two years, will be back in effect next year.

Despite revenue shortfalls, a number of local governments continue to increase spending. Dennis Cauchon of USA Today wrote yesterday that state and local governments have run deficits for the last nine months, according to Commerce Department reports. While tax collections went flat in the middle of 2007, he noted that local government expenditures continue to grow. In fact, federal, state, and local governments are hiring new workers at the fastest pace in six years, Cauchon reported yesterday. Federal, state, and local governments added 76,800 jobs in the first quarter of this year, according to the Bureau of Labor Statistics. States added 16,000 jobs while municipalities hired 47,000 employees. The USA Today reporter wrote:

But the job expansion could later cause financial problems for governments that are spending too much.

“More hiring has nothing to do with good government or economic policy,” says economist Kenneth Brown, research director at the Rio Grande Foundation in Albuquerque. “It has everything to do with government being slow to react to economic change.”

Ain’t that the truth…

Sources:

“Rising Property Taxes Fill Gaps, Pinch Homeowners”
Conor Dougherty
Wall Street Journal, April 24, 2008

“Hiring leaps in public sector”
Dennis Cauchon
USA Today, April 29, 2008

Economists Predict 6% Jobless Rate, 2 Million Lost Jobs

Earlier today I read an interesting article that discussed the U.S. employment outlook and which jobs may or may not be good bets in a deteriorating economy. Martin Crutsinger of the Associated Press wrote:

While the downturn is expected to be short and mild, economists are still forecasting the unemployment rate, which jumped to 5.1 percent in March, will climb much higher before the nation’s job engine sputters back to life.

Economists are forecasting a jobless rate that will peak at around 6 percent, but probably not until early next year, several months after the recession is expected to end. Analysts said as many as 2 million people could lose their jobs in the current downturn.

Mark Zandi, chief economist at Moody’s Economy.com, said:

All the indicators suggest that we will see even larger job declines in coming months. Businesses are getting nervous and pulling back.

“Safe” Jobs:

• Healthcare
• Education
• Farming
• Some manufacturing (airplanes, heavy machinery)
• Government

“Unsafe” Jobs:

• Other manufacturing (automakers, housing-related like appliances, furniture)
• Construction
• Housing-related industries (real estate agents, mortgage brokers)
• Wall Street firms
• Discretionary services (tourism-related)

Source:

“Job winners and losers in hard times”
Martin Crutsinger
Associated Press, April 7, 2008

State Budgets Hit Hard By Housing Bust, Slowing Economy

Back on January 28, I read in Bloomberg that the Washington D.C.-based research group The Center on Budget and Policy Priorities announced half of all U.S. states were projecting budget deficits for the next fiscal year as the U.S. economy slows and tax revenue disappears. According to their report (revised on February 1):

At least twenty-four states, including several of the nation’s largest, face budget shortfalls in fiscal year 2009. Of these 24 states, 20 have already made specific estimates; the combined deficits of these 20 states are expected to total at least $34 billion for fiscal 2009 — which begins July 2008 in most states. Another 3 states expect budget problems in fiscal year 2010, although some of those gaps may occur earlier than expected. Many of the other states have not yet released information about their fiscal status.

The center explained why this was happening:

The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like. Weakening consumption of other products has also cut into sales tax revenues. Property tax revenues have also been affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.

The slower growth in tax receipts is coming at a time when state lawmakers hammer out spending plans for the next fiscal year, which begins in July for all but four states. According to the center, states, unlike the federal government, typically cannot borrow all the money they need when revenues fall short, which leaves them with no other choice but to draw down reserves, cut spending, and/or find new sources of money (new taxes) . In California, which faces a $14.5 billion deficit, Governor Arnold Schwarzenegger has proposed releasing prison inmates early and closing state parks, in addition to selling $3 billion of bonds to help pay the bills. A number of states are getting creative when it comes to finding new sources of funds. In a January 28 article entitled “Cash-Strapped States Resort to Odd Taxes,” Michael Gormley of the Associated Press wrote:

Need a few million dollars to fill a budget deficit? Lease a toll highway, like Indiana and Virginia did, or cash in on future lottery profits as a half-dozen states are considering. You could slap a tax on pornography as six states already have, or tax strip joints like they do in Texas, where they call it a “pole tax.”

Some states take a slice out of pumpkin sales at Halloween. And most states tax Shaquille O’Neal and Barry Bonds when they visit, using a “jock tax” on professional athletic events.

Amused? That will cost you, too. Many states collect an amusement tax for live performances.

Nate Bailey, of the nonpartisan Tax Foundation, had this to say about the new funding initiatives. He told the Associated Press:

They range from the outright crazy to the absolutely insane. People at the local level already feel overtaxed and politicians, in a somewhat spineless way, look for a hidden way to increase revenue without raising taxes.

Shortfalls are anticipated to be significant in states whose economies were driven by the recent housing boom. Arizona is expecting a budget deficit of between $1.3 billion and $1.7 billion, or 12.1% to 16.2% of its FY 2008 general fund. Nevada is forecast to have a shortfall of $565 million, or 7.8% of its budget.

Back on October 11, 2007, I talked about a Retuers article which noted half of all U.S. states were collecting less from their sales taxes than expected, which could signal a recession was ahead. I wrote:

Philippa Dunne is a co-editor with the New York-based Liscio Report, which was founded by veteran bond-market reporter John Liscio in 1992 on the belief that real time information on monthly state tax receipts is crucial to understanding the state of the United States economy. Ms. Dunne said that, “There are a lot of unknowns, but the state sales tax receipts are pretty much at recession levels.” She added that about 25 states are seeing disappointing sales tax revenues. How sales taxes perform is one way to judge a region’s economy since the data is released promptly and reveals consumer spending trends that are otherwise hard to discern, according to Goldman Sachs in a July 2007 report.

U.S. Property Values May Take $233 Billion Hit

Back on June 5, I wrote that the Center for Responsible Lending was predicting 2.4 million foreclosures nationwide will take place before the U.S. housing bust is done. This figure exceeds the 2 million homeowners thought to have been created by the housing boom (2 million being the most optimistic estimate). The Center is a nonprofit, nonpartisan research and policy organization based in Durham, North Carolina, and is dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.

Today, the Center released a report saying that an expected surge in home foreclosures will result in U.S. property values declining by $223 billion, with most of the impact taking place in minority communities. Because of a “spillover effect” impacting 44.5 million homes across the country, roughly 1 in 3 households will see their property values drop by $5,000 on average. Local government tax revenues will be also be hit hard by the decline. “These foreclosures are wiping out wealth that people often took a lifetime to build. Many families will never achieve homeownership again,” said Martin Eakes, the center’s chief executive, to the Associated Press today.

The Center for Responsible Lending concluded in the report that:

By any measure, the epidemic of home losses is severe, and will not only harm the families who lose their homes, but also nearby homeowners who suffer drops in their property values and communities who suffer the impact of lower tax revenues. Further, while the rate of subprime foreclosures is alarming today, the worst is still ahead.

The report predicts that 24 states and 42 counties will experience declines of over $1 billion each in local house prices and tax bases. Hopefully, you’re not included on this list. A copy of the report (.pdf format) can be viewed here.

Wall Street, Financial Services Jobs In Jeopardy

Several news services today are announcing that Boston-based Fidelity Investments told some of its managers to begin letting employees know of impending layoffs. One report from the Wall Street Journal says that 200 employees could receive their layoff notices today. According to CNN Money this morning, James Lowell, editor of the independent Fidelity Investor newsletter, told the Journal that he’s expecting “the largest number of layoffs Fidelity has made in years.” Back in 2002, Fidelity cut 1,695 jobs, or 5% of its staff.

The situation at Fidelity is part of a growing trend of layoffs in the financial services sector that are taking place on Wall Street and elsewhere in the United States. 140,000 financial services jobs have already been cut in the United States this year, according to Chicago-based Challenger, Gray & Christmas. This number surpasses the previous record of 116,647 pink slips issued back in 2001. Wall Street alone has already lost 42,404 financial jobs in the first 10 months of the year. On October 23, BusinessWeek stated that the job cuts have spread well beyond brokers in the subprime mortgage business, and are affecting senior mergers-and-acquisitions bankers, financiers, and traders.

Broker-dealers have been active is reducing their workforces. Morgan Stanley (900), Bear Stearns (310), Lehman Brothers (1,200), and Credit Suisse (320) announced cuts in residential mortgages, banking and leveraged finance. Those institutions with significant losses, particularly UBS (1,500), Citigroup (15,000), and Bank of America (3,000), are trimming their workforces even further and issuing warnings that more layoffs may be ahead. On October 26, Reuters reported that Merrill Lynch is expected to issue pink slips after a third-quarter net loss fueled by mortgage and leverage loan losses.

Significant job losses in the financial services industry can wreak havoc on the local economies that depend heavily on the sector. On October 28, Challenger, Gray & Christmas’ James Pedderson told The Times (UK) that:

The last two months’ cuts have been dominated by the mortgage, credit and lending areas. The biggest fear now is that with all the foreclosures and lack of confidence, consumers will stop spending. Then these problems could spread into other areas. But we haven’t seen that yet.

Pedderson said the layoffs were likely to have a significant impact on the local economies of New York, Chicago, and other cities with a thriving financial services component. He added, “You are talking about people who were making $300,000 (€200,000) a year suddenly being out of a job.” he said. The Manhattan Institute recently published a report that claimed New York City could lose two jobs for every one cut on Wall Street. On Monday, Bloomberg reported that New York Mayor Michael Bloomberg halted city hiring and cut agency budgets this year and next as he anticipated a fall in Wall Street profits. The financial industry accounts for 9% of the city’s tax revenue (about $3.3 billion in fiscal 2007) and as much as 20% of the state’s revenue ($9.6 billion).

While the employment outlook depends on the health of the U.S. economy going forward, of course, headhunters who help bankers and traders find jobs see layoffs ahead, according to Reuters. Korn/Ferry headhunter Jonathan Kim said:

There could be massive layoffs in areas that were built up quickly over the past three to four years. We’ll see a number of cuts in the areas that lost money.

Some on Wall Street are upset that their bonuses will take a hit this year. Maybe they should be thankful that they still have a job…