The State of Shorts

by Mr Juggles

Actually, the title has it backwards. Short the States.

The latest institution asking for a federal loan to help bridge a massive shortfall caused by a bad bet on housing is The Bank Government of California. Their revenue forecast has fallen by $3bn in the two weeks since the budget bill was signed. The budget originally called for a deficit of $15bn on a budget of $100bn. Ooops!

Consider the Fed speaking in Fedspeak below:

The evidence suggests that property tax revenues are quite responsive to changes in house prices. Although it takes several years for house price appreciation to feed through to property tax revenues, the long-run elasticity is on the order of 0.4.

Let me translate: California is just the beginning. Most states will face massive budget deficits in the next two years.

Recommendation: State income taxes will skyrocket in order to cover for a massive shortfall in property tax revenues. Balance a short position in 41 states by going long the 9 states without income taxes.

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