FINANCIAL BEAR 3X (FAZ)

Obviously I pulled the trigger too early on this although I still think it will turn into a positive rating sometime by mid-2011. The first round of foreclosures were primarily with respect to subprime loans. I expect that will not be the case in the next round of foreclosures. I'm seeing high quality people (95% or better than peers) taking 3-6 months to find a job. People who legitimately qualified for loans in Silicon Valley are going to struggle as many can't find jobs, some take pay reductions, companies stop granting options and RSU grants, options expire worthless, and taxes increase (sales, state, and federal).

The high end homes in Silicon Valley are eventually going to have a hard time selling. The execs will always have money to buy the highest end homes, but the days of secretaries making millions of dollars on options are over. Eventually this change in compensation is going to cause drastic reductions in home values which in combination with the above could result in a major financial collapse. If real estate in Silicon Valley takes a dive I think it could potentially spill over to other parts of the country.

One potential option to help curb this looming meltdown of real estate (although I know it will never fly) is for the federal tax brackets to be tied to some kind of cost of living index per region. In high technology salaries are very similar regardless of where you live. Someone making a certain salary in Silicon Valley may be barely getting buy while the same salary in another part of the country allows you to live like a king.

As the government increases taxes it needs to look at how that impacts individuals' cash flow situations per region. Individuals can't accumulate seemingly infinite debt and issue bonds like the government.

I believe with a bit more thinking the government could potentially increase tax revenue while not contributing to the financial collapse.