(snip)"California’s credit rating is already the lowest among all U.S. states.
But with Moody’s, S&P, and Fitch still greatly influenced by massive conflicts of interest, it’s not nearly low enough.
And sure enough, on Friday, Moody’s tacitly admitted as much, announcing that it may have to cut California’s rating by several notches in one fell swoop!
Standard & Poor’s put California on watch for a possible downgrade a few days earlier. Fitch did the same May 29.
The big problem: Once downgraded, California’s rating is likely to fall below the minimal level legally required for most money market funds, forcing these funds to dump California paper posthaste.
Moody’s wrote:
“If the Legislature does not take action quickly, the state’s cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July. … Lack of action could result in a multi-notch downgrade.”
But lack of action is precisely what Sacramento is now becoming most famous for. In fact, in their latest scuffle, Democrats proposed a budget that would raise $2 billion from cigarette taxes and oil companies. But the governor promptly vetoed the plan. So now Sacramento is in a new, escalating battle over the deficit just weeks before the state is expected to run out of cash to meet payroll and other bills.
State officials continue to insist that a state default is unthinkable … much like GM executives said their bankruptcy could never happen.
In my view, there is a very HIGH probability that California will default.
It’s obvious its debt merits a junk bond rating from every Wall Street rating agency.
And it’s equally obvious that the ratings agencies are artificially inflating the rating, stalling downgrades, and grossly understating the risk to investors.
My recommendations:
1. If you wait for Moody’s or S&P to act, it could be too late. Even if you can’t get what you might consider a good price, sell all California paper now!
2. Seriously consider dumping all tax-exempt bonds. I know the income is better than equivalent Treasuries. But if California defaults, it could set off a chain reaction of bond price plunges and defaults throughout the municipal bond market.
3. Don’t underestimate the impact California’s depression is having — and will continue to have — on the rest of the U.S. economy. At $1.8 trillion, the state’s GDP is so large, any further deterioration could wipe out every so-called “green shoot” in the national economy seen to date.
4. Stay safe, with a big portion of your nest egg in cash, tucked away in short-term Treasury bills … and with a very modest portion in gold, as an insurance policy against a dollar decline."(snip)



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