RateWatch #370 – Economy Looking Rosy? Unhappniess in California.
August 23, 2003 by Dick Lepre

What's Happening

The perception of improved economic growth has been good for equities and, this week, great for
the dollar but it applies upward pressure on interest rates.  Are folks "in the know" concerned
about rates in the long-term? According to Bloomberg "U.S. mutual fund investors withdrew a net
$3.6 billion from taxable bond funds during the week ended on Aug. 6 -- the biggest outflow in more than nine years." Our technical model forecasts upward pressure on rates for approximately 12 more months.

The Economy

I have been having a problem for the past year with reading what is happening with the U.S. economy.  For no real intellectual reason, I have had the idea that somehow the present economic recovery will take a very long time.

The facts out there say otherwise.  Equities have made a nice recovery.  Shards of good economic data keep showing up.  Interest rates are rising - a sign of distress to mortgage folks but a
first sign of economic recovery.

Here in California the discontent with the economy has turned into a gubernatorial recall. While this may be generating a lot of amusing press coverage there are some elemental truths here:

Californians are unhappy with politicians on a state level.  The focus of this is the recently
passed, delayed, unbalance but fudged-to-pass-muster budget.

To blame Governor Davis for this may seem and indeed be short-sighted.  The blame for the budget impasse should be placed more on the legislature but it is easier to blame the guy at the top especially when his party has overwhelming control of both houses.

Californians are unhappy with Sacramento and recalling the governor is the citizens’ way of
serving notice.  If he is actually recalled and replaced it will give whoever is governor a
new start on the state's problems.  There are (at least) two big problems: 1) balancing the budget
and 2) regaining lost jobs.

Unless I am missing something, the problem is that politicians (or maybe it is the laws that they
have passed regarding the budget process) do not recognize that the economy has its "ups and downs." When revenue is high during the booms some of it should be saved for the busts.  Instead, it gets spent.  The state has to start thinking like folks in the mortgage business who are notorious for up and down incomes.

The more important issue is jobs.  California has been hard hit by the both the dot-com crash
and the loss of high-tech manufacturing jobs. It would probably be more accurate to say that
Northern California is responsible for most of the state's job loss.

Replacing those lost jobs is the key to getting the state back to economic health.  I am going to
stop here because I am still working on the "what to do about the jobs problem" newsletter.

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