Given the somewhat positive reaction to my previous musings on travelling to India, I am extremely pleased to be given the opportunity again to be similarly incoherent about my recent trip to the 8th largest economy of the world. The clue is in the title. Yes, I have just returned from a jaunt to The Golden State, and yes, it‟s a difficult life. Before the jet lag really kicks in, I‟ve managed to scribble down a few of my thoughts.

Focussing mostly on the northern part of California - San Francisco and the surrounding Bay area - we were able to get a glimpse behind the mask of the state during its off-peak season. The full horrors of the Japanese earthquake were only just unfolding as I departed London Heathrow with tsunami warnings announced for the western coast of the US. Barring some minor damage to boats moored near Monterey Bay, the western seaboard remained largely untroubled.

Although avoiding seismological danger (for the moment), California is by no means problem free; as you may be or may not aware, it has a fairly hefty financial crisis on its hands. It is facing a budget deficit of $26 billion – the largest of any of the States in the US - and has the lowest credit rating. Yesterday, the California Legislature began voting on an austerity package that would have the people of Greece saying “Oooh, harsh.” Billions of dollars in cuts are being discussed; a substantial amount of which will come from welfare-to-work programs and health benefits for poor and working families.

Cuts in public education are the focus of countless headlines across the US, particularly the size of teacher lay-offs, despite powerful union opposition. The Huffington Post reported that school districts in California have issued nearly 19,000 layoff notices so far. Overall California‟s Governor Jerry Brown‟s 2012 budget includes proposed cuts of $1.2 billion from State Services, $1.7 billion from Medi-Cal, and $1.4 billion from higher education.

The Governor is also asking for a special vote to extend temporary increases in taxes of sales, personal income and vehicles for the next five years. Staving off even harsher cuts will require substantial extra revenue, and the State appears to be willing to take drastic steps to generate the cash. Our host also informed us of the planned transition of car pool lanes into toll paying lanes, changing an environmental concession into a source of income. Incidentally, „gas‟ is now about $4/gallon at the pump but from what I could tell, this hasn‟t stopped any cars being on the roads.

We filled up our car with $4 gas and drove the 230 mile round trip to enjoy the unspoilt natural beauty of the California State Parks, before they too are shut down due to cost cutting (or are obliterated due to climate changes exacerbated by tourists who fly halfway across the world, then jump in a gas-guzzling car to visit the very haven they are helping to destroy...Ahem.) California, which created the state park system in 1864, has more parks than any other state in the USA, covering 1.5 million acres, including 280 miles of coastline and 625 miles of lake and riverfront. Supposedly the Department of Parks and Recreation that oversees the parks system is facing $11 million in cuts to its 2011-12 budget, and that number could grow to as much as $22 million in ongoing reductions.

Two areas in this part of northern California rise untroubled above the pervading cloud of doom and gloom – the tech industrial hub of Silicon Valley and the wine producing regions of Napa and Sonoma. A relaxed lunch in one of the numerous cafés on University Avenue, Palo Alto allows one to catch a glimpse of the innovative American entrepreneurial spirit. An onlooker would remark on table after table of laptops, rows of café windows lined with coffee drinkers and their obligatory Apple iPads, and business pitches and demos taking place with turkey club sandwiches on the side.

A quick visit was also made to the „incubator‟ of the future tech giants down the road at Stanford University. The university has a sterling track record with new technology; former staff and students have helped to create 5,000 companies, employing 7,000 people. Hewlett Packard, Yahoo, Sun Microsystems and Cisco Systems all have their roots in Palo Alto. Despite some abysmal job numbers reported by the Bureau of Labor Statistics, companies here seem to be hiring. Google‟s YouTube is to boost its workforce by about 200 jobs and a cousin who works at Apple also reported his team to have grown substantially in the last year, in order to service the increased demand in iPhones and iPads. But even in the high-tech wonderland of Silicon Valley, reality is starting to creep in. Patent filings have declined over the past two years and the migration of new talent into the area fell noticeably last year.

In the interests of thorough investigative journalism, I also forced myself to take in some of California‟s wine culture in Napa valley. California produces 90% of all wine in the United States, contributing an estimated $52 billion to the national economy, and with US wine exports jumping by 26% last year, this industry seems to be bucking the negative trend.

On the investment front, Californians are well aware of the comparison of their state with Greece, and not simply of the question posed of which will default first on their debt. Besides lovely beaches and pretty coastal towns, California and Greece share common traits of dysfunctional politics and profligate spending.

Many American analysts and financial journalists seem to take comfort in the fact that no state has defaulted on its debt since the 1930‟s and point to this fundamental „advantage‟ over the Eurozone – California is „part of a country, not an ill-defined union, so they can count on help from the federal government‟. This optimism behind the lack of the defaults and faith in the states to find extra revenue has recently been driving investor appetite for municipal bonds (also known as „munis‟). Towards the end of 2010, these bonds that provide reliable tax deductible returns faced huge pressure and rising yields, forcing many mom-and-pop type investors to oversell in the market. Now, many savvy investors (Bill Gross of PIMCO being one of the most high profile) have
returned to the muni market, finding value in deep-pocketed institutional issues like Cornell and Harvard bonds, and solid bonds issued by water systems and hospitals. Even the 30 year California State general obligation bond is finding buyers despite the State‟s strained finances, spurred by the belief that a corporate bond is more likely to default than one issued by a state. Of course, in this case, one must also remember that munis, like most bonds, will certainly face a headwind if the economic recovery continues and inflation rises.

And finally... from „The Register‟ - A Texas master criminal's attempt to rob a Dallas bank ended badly after the teller requested two forms of ID before handing over cash.
Nathan Wayne Pugh, 49, was on parole for two previous aggravated robberies when he marched into a branch of Wells Fargo to make an illegal withdrawal. Confronted by the bank teller's demand for identification, he obligingly whipped out his Wells Fargo debit card and a Texas state ID bearing his name.

Pugh was cuffed as he tried to make good his escape with 800 bucks, and was earlier this week sentenced to eight years for the heist. The sentence will run consecutively with the 25 years he picked up for his earlier unsuccessful „fundraising‟ bids.
Only in America!

Aparna Ram Investment Analyst Seven Investment Management Limited