With Wisconsin in the throws of a budget crisis and more pros predicting multi-billion bond defaults, is a serious crisis coming?
Strategic investor and CNBC contributor Doug Kass sure thinks so. And the founder and president of Seabreeze Partners says you’re probably underestimating the enormity of the problem.
As a topic, we know municipal bonds is enough to make you glaze over – but Kass isn’t talking about yields or hard to understand finance.
He simply believes the financial health of local and state governments is extremely precarious and the ripples generated by the fallout will be much worse than you realize.
Kass is most focused on shortfalls in pension funds (estimated to be anywhere between $1 and $3 trillion depending how the numbers are crunched.)
The way in which governments service that kind of debt is at the heart of this issue. Governments will potentially cut jobs, freeze wages, raise taxes and make deep spending cuts.
All that generates “a toxic cocktail of elevated unemployment and higher marginal tax rates,” Kass says. And pretty soon we're looking at problems that “jeopardize the economic recovery.”
Kass isn’t alone in his prediction. Widely followed analyst Meredith Whitney says much the same.
“There’s not a doubt in my mind that you will see a spate of municipal bond defaults,” she said in a “60 Minutes” interview. “You could see 50 sizable defaults, 50 to 100 sizable defaults, more. This will amount to hundreds of billions of dollars worth of defaults.”
As an investor what’s the takeaway? Kass says it’s really quite simple. Expect the consumer to remain the Achilles heel of the economy.”
That goes along with what he told us about a week ago; that the rally would soon come to a screeching halt.
As you might expect he suggests playing it short - but what you might not expect is that he likes shorting dental stocks such as Patterson or Henry Schein. Why dental? “40% of dental procedures are elective and can be postponed,” he explains.
We know what you're thinking? Doug Kass is a bear. He's been predicting the demise of this rally for months.
It's true that he leans on the pessimistic side but he's also widely followed for his market timing - he correctly called a bottom last summerand also predicted the crisis lows in March 2009.
Maybe, just maybe he's onto something. What do you think? We want to know!
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Trader disclosure: On Feb 18, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Seymour Owns (AAPL); Seymour Owns (BAC); Seymour Owns (F); Adami Owns (AGU); Adami Owns (C); Adami Owns (GS); Adami Owns (INTC); Adami Owns (MSFT); Adami Owns (NUE); Adami Owns (BTU); Adami's wife works for (MRK); Terranova Owns (VRTS); Terranova Owns (C); Terranova Owns (UPL); Terranova Owns (GM); Terranova Owns (MS); Terranova Owns (SLXP); Terranova owns (TEVA); Terranova Owns (BAX); Terranova Owns (CVI); Terranova Owns (RSX); Terranova Owns (SU); Terranova Owns (CNQ); Jon Najarian owns (AKAM), is short (AKAM) calls; Jon Najarian owns (AXL), is short (AXL) calls; Jon Najarian owns (CSTR), is short (CSTR) calls; Jon Najarian owns (JNPR), is short (JNPR) calls; Jon Najarian owns (NBR), is short (NBR) calls; Jon Najarian owns (RSH), is short (RSH) calls; Jon Najarian owns (SVU), is short (SVU) calls; Jon Najarian owns (SWY), is short (SWY) calls; Jon Najarian owns (X), is short (X) calls; Jon Najarian owns (CAT), is short (CAT) calls; Jon Najarian owns (AMD), is short (AMD) calls; Jon Najarian owns (BBY), is short (BBY) calls; Jon Najarian owns (CME), is short (CME) calls;’ Jon Najarian owns (CBOE), is short (CBOE) calls; Jon Najarian owns (GNW), is short (GNW) calls; Jon Najarian owns (NYX), is short (NYX) calls; Jon Najarian owns (NVDA), is short (NVDA) calls; Jon Najarian owns (V), is short (V) calls; Jon Najarian owns (WMT), is short (WMT) calls; Jon Najarian owns (ARUN), is short (ARUN) calls; Jon Najarian owns (RIMM), is short (RIMM) calls; Jon Najarian owns (GS), is short (GS) calls; Jon Najarian owns (SPWRA), is short (SPWRA) calls
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