Now that California is eying IOUs for second time since the Great Depression and after Gov. Arnold Schwarzenegger has declared California's first-ever fiscal emergency, it’s not all bad news.
Schwarzenegger warned that the state may issue warrants, which are a promise to pay with interest, to suppliers and contractors as the seizure in credit markets could make it too costly to borrow.
“It’s getting worse very quickly,” Schwarzenegger told reporters Dec. 1.
“It’s like an avalanche in that it gains momentum. And that’s what we’re in right now, so it’s a real crisis.”
Of course, that assessment depends on what side of the fence you are standing.
First the bad news:
On Dec. 1, California State Finance Director Mike Genest said in a letter to legislative leaders, obtained by Reuters: “Specifically, it now appears certain that available cash reserves from all sources will fall below the cash cushion target of $2.5 billion in February and that the state will begin delaying payments or paying in registered warrants in March.”
Registered warrants are essentially short-term IOUs with interest.
The State of California has been obliged to do this before, in 1933 and 1936 during the Great Depression, in 1971 and ’72 and in 1982 through 1984.
Now, the good news:
For income-seeking and buy-and-hold investors, all that bad news coupled with forced selling by mutual funds and institutional investors overall is providing good buying opportunities for State of California's debt.
As an example, on Dec. 8, debt issued by California (Rated A+ by Moody’s and Fitch; A1 by Standard and Poor’s) traded at 92.768 yielding 9.513 percent.
Not bad when 12-month Treasurys yield 0.49 percent and 2-year Treasurys yield 0.95 percent.
However, take care, I would buy only limited amounts because I expect seeing higher yields in 2009.
© 2017 Newsmax. All rights reserved.