Five Things You Need to Know: Visualizing State Debt

1. Visualizing State Debt

States are broke, man! Busted. Ain't got no money, ain't gettin' no more money, they're all doomed. At least that's what we're told. So I had some fun this morning playing around with a Google Labs data visualization project. Here's a look at the woeful state of.. ahem... state finances, ordered by the magnitude of their debt at fiscal year-end 2009.



Man, that looks grim, right? Of course, if we go back to the good ol' days, you know, the late 90s? The final days of the last great bull market? We might expect to see a vastly different picture of state debt, after all, when you are on the tail end of a 20-year bull market states should be flush, right.? Wrong. The interactive chart below from 1998 shows that when it comes to leaders in state debt, even going back more than a dozen years all we're really doing is rearranging the deck chairs on the Titanic.



Must be the expenditures, right? Perhaps California and New York simply have too many months left over at the end of their fiscal year-end revenues.



Sure looks that way. But, then, that was the case in 1998 as well.
 


To be fair, while California and New York have always been big spenders, they've also always taken in more revenues, too. This was true in 1998.


 
And it's just as true in 2009... except wait. Ah, see, now this is a problem. Note the absolute level of revenues. While expenditures for California and New York have both more than doubled, as have state debt loads, revenues are actually below 1998 levels.

 

How did this happen? Well, let's go back a few years. Remember the great credit boom and reflation following the dot.com credit bust in 2002? Yes, see, the problem with artificially maintaining low interest rates is that it creates a misallocation of resources as businesspeople and consumers (and even state lawmakers) mistakenly assume that the artificial credit-induced demand for credit to purchases things such as homes, consumer durables and non-durable, as well as all the tax revenue associated with such transactions, on all levels, will continue in perpetuity. Look at how grand things were in 2007! Why, revenues were enormous! With revenues like this, who cares if we take on a bit more debt? We'll build for the future, take advantage of low interest rates now. We'll invest in ourselves!


 
And so the cycle repeats. Over and over again. Which, to be clear, is exactly what cycles are supposed to do... repeat. Sure, it appears there are some states with dreadful finances. And communities and towns and cities within those states with equally dreadful, if not worse, finances. But it's useful to remember the cyclical nature of credit and business. This too shall pass; a look at state budgets and the long road back to peak revenue.  


2. The Pinnacle of Success?

If you want to get a sense of how deeply entrenched the belief system of the last secular bull market is even today, more than a decade past its end, then consider this article, or video, or vidicle, whatever, "The Long, Slow Death of the IPO." The vidicle begins:
 

"IPOs traditionally have been the pinnacle of success for companies, but Barry Silbert, founder and CEO of SecondMarket argues that’s no longer true. The IPO market, he tells students in this Entrepreneur Thought Leader Lecture at Stanford University, is dying a painful death."

Okay, look, here's a faulty premise, in the very first words of the sentence no less: "IPOs traditionally have been the pinnacle of success for companies..."

The pinnacle of success? We are clear on what the word pinnacle means, yes? The mere consideration of an IPO as a "pinnacle of success" for a company is precisely what's wrong with so many companies today and why we still have a few years ahead before this secular bear market runs its course. Let's go back to the basics and consider what an initial public offering really is and see if we can slough off the detritus of a long ago bull market to get to the real nut of the true purpose of the thing.

An initial public offering is simply an issuance of shares of ownership to the public for the first time in a company's history. Before an initial public offering, privately held companies raise capital for business and expansion from angel investors, friends and family, or venture capitalists. Many companies are able to operate and expand quite well without ever issuing common stock to the general public. Take Bloomberg, for example. Or Neiman Marcus. Facebook is another example of a privately-held company considering an initial public offering in its futures.

Okay, so why make the transition from privately-held to public? While some companies, such as Bloomberg and Neiman Marcus, are fortunate enough to be able to expand operations without ever going public, many other companies, good companies, with good revenue and which may even be profitable, eventually require additional capital to expand and grow, capital on a scale that is unavailable without accessing larger capital markets.

To bring this full circle, an initial public offering isn't the pinnacle of success at all, unless we're talking pinnacle in the most cynical "owners/founders are cashing out" sense; it's actually just the first step in a much longer journey. That's an old fashioned way to look at it. But my prediction is that before the next secular bull market beings, what is old will become new again.


3. 29 Absolutely Crazy Statistics About The Housing Crisis

I see what you people click on. I see it. Apple (AAPL) stories, anything about Apple. (See what I did just there with Apple?) Also, Android OS articles, any kind of disaster porn,  and housing collapse stuff. Lots of housing collapse stuff. So you're definitely going to want to click on this: Should You Buy A Home In 2011? Check Out These 29 Absolutely Crazy Statistics About The Housing Crisis.

A sampling:
 

• During the first three months of this year, less new homes were sold in the US than in any three month period ever recorded.
• US home prices have now declined 32% from the peak of the housing bubble.
• Nearly 70 percent of all Las Vegas mortgages are now underwater.
• US home values have fallen an astounding 6.3 trillion dollars since the housing crisis first began.
• Two years ago, the average US homeowner that was being foreclosed upon had not made a mortgage payment in 11 months.  Today, the average US homeowner that is being foreclosed upon has not made a mortgage payment in 17 months.

Enjoy!  For a lot more housing statistics and analysis, see Minyanville's Housing Market Report.


4. The Great Education Bubble Myth

Gary North completely debunks the grand myth of the education bubble in a well written piece. It's for subscribers only, so I unfortunately can't direct you to it, but if you can find access to the piece you should take a look. The gist of it is that a Google search for "college" and "bubble" returns more than 41 million hits. Of course, not all of those are separate individual pieces, but it does illustrate how "hot" the "college bubble" topic is these days. As North points out, this is not new:
 

In May 1971, four decades ago, "Time Magazine" ran an article, "Education: Graduates and Jobs: A Grave New   World."  It raised the same sorts of issues that the "Is College a Bubble?" articles raise today. It quoted Allan Cartter:

This year applications to graduate schools are up slightly over 1970 totals, despite the fact that it is now clear that the long climb up the ladder to the Ph.D. no longer guarantees secure footing at the top. Economic recovery will provide some new jobs for these specialists, but not enough of them. Says New York University Chancellor Allan Cartter: "We have created a graduate-education and research establishment in American universities that is about 30% to 50% larger than we shall effectively use in the 1970s and early 1980s."

The main point in all of this for an investor is that if your thesis or big idea is among the hot media topics of the day, it is wrong. That's it. It's just wrong. You will never, never make a good investment decision involving anything that is a "key issue" in the mainstream media. Never. Herding behavior is what drives these topics, both in terms of investor interest, and later, editorial interest. College is not a bubble. Not anymore now than it was in 1971.

Speaking of education bubbles, everyone is aware of rampant grade inflation these days. As the chart below via the daily comics site Toothpaste for Dinner shows, grade inflation has been with us since the 1970s. And here's what we might expect to see in 2030.




5. The Federal Reserve for Dummies

From Omid Malekan, the creator of the Quantitative Easing Explained video, his latest explaining the Federal Reserve... for dummies... literally.