Andre J. Peschong

As a stalwart California coastal resident that has been through many of the boom and bust cycles over the last 30 years from the oil crisis in the mid seventies, the hyper inflation of the early eighties and the destruction of the military/aerospace industry at the tail end of the eighties and early nineties and let’s not forget the S&L debacle of the early nineties.  These events truly affected the California economy more than the country because it was ground zero.  The events that have unfolded in the last 12 months have rattled people to their core shaking even the heartiest souls into a grip of fear.  That can be fear of losing what they have left, fear of not finding work or fear of being taxed out of the state. 

I share all of these fears but California tends to be a very resilient economic force in the world.  So as the saying goes when times are good California is great and when times are bad California is terrible.  I want to understand how we got here and how we can get out of this.  I need to hear from people who fundamentally understand what has occurred and get their perspective on where California is going from here.  I wanted to interview people who make their living in deciding what happens next and who also have their own skin in the game.  What better place to start than a wealth manager and CA resident, David, who has done extremely well in navigating these treacherous waters.

-First a little of your background so the readers have an idea of what makes you tick.

I am a Senior VP and Wealth Advisor at one of the largest Wall Street brokerage houses.  I am a Certified Financial Planner, and have been in the business for ten years.  Prior to that, I ran a firm providing business management services to some of the most successful musical artists in the country.  I am passionate about politics, free market economics, and USC football.  I am on the board of the Lincoln Club of Orange County, and very involved with the Club for Growth. 

-How bad of shape is California in right now?

It is bad, very bad.  But it is not any worse than we should all have expected it to be (and frankly, not as bad as earlier this decade when Grey Davis was doing his best to ruin our state).  Governments routinely spend more than they bring in, but unlike the federal behemoth of Washington D.C., states can not print money, and states can not sell treasuries to foreign investors.  California faces an incomprehensible exodus of big and small businesses to outside, more business-friendly states (Texas, Colorado, Nevada, Arizona, Idaho, etc.).  We have the highest debt service in the country, rendering it nearly impossible to sell new debt, yet we face massive budget deficits, and a total lack of political will to cut where cutting is needed.

-Will it get worse before it gets better? D3: The Mighty Ducks dvdrip

That depends on the phrase I used above, “political will”.  If Sacramento believes that the solution to this mess is higher taxes for high income earners, and more burdensome fees for job-creating businesses, then it will get far worse before it gets better.  And if the unions maintain their powerful strangle-hold on this state, it is impossible to see light at the end of the tunnel.  BUT, I sense a paradigm shift going on in the minds of voters.  And if voters get mad enough, Sacramento’s political will could very easily reverse.

-How high do you think unemployment will eventually get in California?

I believe the numbers will be skewed by the amount of business proprietors and workers who leave California.  Many currently unemployed people will find jobs, but will leave the state to do so.  Because our economy was so dependent upon real estate development, real estate construction, and real estate services (mortgage, brokerage, title, etc.), the numbers here are worse than most parts of the country.  However, there are abundant possibilities in technology in this state as well.  At the end of the day, California tends to have lower unemployment than the national average when unemployment is low, and higher unemployment when the national average is high.  I believe the national average will max out around 10-10.5%, and California will be somewhere around 12%.  We already see an impressive amount of re-training and career reinvention, though.  I have a lot of confidence in people’s ability to find work and create work when it is in their self-interest to do so.  Replacing private enterprise jobs with government jobs is horrible for productivity.

-Is the cause of this fiscal mess best blamed on the politicians in Sacramento or is that just the easy answer? From Dusk Till Dawn full movie Shred divx

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It is exactly 1/3 of the answer.  I blame the politicians in Sacramento for most of the problem, but the public employee unions to whom Sacramento seems enslaved deserve a lot of credit for our fiscal mess.  They have successfully negotiated countless pension agreements, compensation commitments, and benefits packages that are completely and totally untenable.  They do this with the weight of their own political lobby and dues paid by their members without representation.  The final 1/3 of the blame rests with the voters who have taken for granted that we can spend $60 billion per year on a very subpar public school system and not have to hold our elected officials accountable.  We have voted for every single bond measure we could if we liked what the bond would buy, but without any consideration of the cost of servicing the debt.  We need to be far tougher in the ballot box; that will force Sacramento to act tougher when they are in session.

-What are some potential catalysts that could turn the CA economy around, if any?

I believe a weakening of the power of the public employee unions will be a huge headstart.  I passionately commend school choice initiatives as a way of beginning that process.  Some spending discipline is a requirement, and that means electing officials who have the guts to say no to special interests, and even no to voters who are used to the state doing way, way too much.  Our economy will turn around when we allocate capital and resources where they are most efficiently used, and that place will never, ever be Sacramento!  Finally, business-friendly initiatives would be revolutionary at turning the economy around.  A reduction of corporate state income tax rates; a cease-fire on the capital gain tax; a lowering of the regulatory cost involved with hiring labor; I could go on and on and on.  Perhaps our next Governor will fly to Gov. Rick Perry’s office in Texas and say, “Governor, please tell me the top five things you have done, because I need to do them in California!!”  The problem us, Gov. Perry would never tell him – he is having far too much fun recruiting business away from us. 

-Philosophically, what are you telling your clients to do in this tenuous time?

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As it pertains to California debt, my clients investing for tax-exempt income are improving the credit quality of the holdings, looking for better yield in the general obligation and essential services bonds that I feel face little possibility of default.  We are avoiding high yield bonds in local municipalities that have little or no financial back-up, and that could become “sacrifical lambs” in the state’s economic mess.  Outside of municipal bonds, I still find the “reflation” trade very attractive, and believe that the market lows of November 08’ and March 09’ created once-in-a-lifetime valuations for certain dividend-paying names.  I like the commodity story for now, and believe that one has to keep powder dry to profit from the volatility.  This is going to be a very interesting era, and as long as I avoid market indexing, I think I can make money right now.

-Last thoughts?

Investors need to be careful to pair the return they are trying to achieve with the risk they are willing to take.  Chasing yield, and forgetting that with higher yield comes higher risk, is a destructive habit.  As citizen-investors we need to be accountable for our own decisions, and hold our elected officials to more accountability as well.  California has the most extraordinary natural resources in the country, and is certainly the most desirable place to live in the country.  Politicians can only screw that up if we let them.

The economic force of California impacts the entire country.  The pain being experienced by Californians is unfortunately the hangover from the substantial run up in real estate both residential and commercial.  The demand was artificial fueled by institutions looking for yield and the perception of safety that the rating agencies gave to these investors.  Common sense gave way to greed and the mantra of outsourcing manufacturing anything tangible to India, China and Brazil was overwhelming.  The entire country is feeling it and paying for it but right now the state that felt the largest amount of euphoria during the good times is facing a painful economic lesson.  Unfortunately the ones to pay for it will be the residents.

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