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Revenge of Risk Off?

In respect for economic history and brilliant but long-dead monetary thinkers, some years back I assigned the "inflationist" label to the outspoken Keynesians. Paul Krugman now calls his analytical/policy adversaries the "austerians," an entertaining update to the wretched "liquidationists" and "Bubble poppers" from bygone eras. In this epic battle of inflationists vs. austerians, I'll place my bets on the superior constructs of the "austerian" analytical framework. And, as the perennial optimist, I remain hopeful that contemporaneous analysis will at some point help (re-)expose the many flaws and misrepresentations of inflationist ideology.

To be sure, those promoting only more aggressive fiscal and monetary stimulus ignore Credit theory and financial history. There is absolutely no discussion of Credit Bubbles or financial Manias - as if there's no evidence that either has ever existed. Dr. Krugman proposes only more egregious deficits and central bank monetization without factoring in myriad risks, including the risks of Credit revulsion, currency collapse and global financial meltdown. Rather than 2008 developments alerting officials to systemic Credit collapse vulnerability, the inflationists have hung their (and everyone's) hats on the specious "100-year flood" premise.

When the inflationists point to consumer price inflation as the predominant risk to their suggested policy course (and then quickly dismiss it), it just strikes me as disingenuous. They somehow ignore how the current policymaking course is increasingly impairing the creditworthiness of the heart of our and the world's financial systems. They disregard how these policies have patently contributed to unprecedented global economic imbalances. Moreover, the inflationists somehow remain oblivious that policy interventions have fomented dangerous speculative dynamics throughout global securities markets.

Quite complex dynamics have become critical to macro analysis. From my study of Credit inflations, it is clear that unfettered Credit growth attains a propensity for exponential expansion throughout the upside phase of the Credit cycle. Pro-cyclical policymaking, especially in our age of unconstrained global finance, fundamentally exacerbates Credit boom and bust cyclicality. The current interplay of global Credit cycles is extraordinary: Europe's Credit Bubble is bursting, China's (and the developing world's) is booming, and ours is somewhere in between.

Importantly, in the late phase of Credit excess, in what I refer to as the "terminal phase," things tend to go haywire. First, the amount of new Credit balloons uncontrollably, while the resulting heightened risk of a bust invariably ensures aggressive pro-Bubble policy interventions. Second, as the quality of the new Credit deteriorates, the overall increase in system Credit risk turns parabolic, imperiling highly exposed (leveraged) financial sectors. Third, this bulge of risky new finance tends to be distributed haphazardly throughout the real economy. In short, well-entrenched Monetary Processes responsible for huge amounts of risky finance foster malinvestment, economic fragility, wealth-redistributions, and destabilizing speculation. "Activist" inflationary policymaking exacerbates these deleterious processes, and the inflationists completely disregard ample global evidence of this harsh reality.

There is just no getting around the fact that efforts to sustain Credit cycles turn perilous. As should be obvious these days, prolonging the "terminal phase" of Credit excess poses great risk to underlying Credit systems, the financial markets and real economies. Here in the U.S., Keynesian policies ensure a historic expansion of government debt, blunt stimulus that inflates incomes and consumption while doing little to incentivize sound investment (hence a self-sustaining, job creating recovery). Massive government-imposed distortions instead foment market and economic uncertainty, in the process thwarting necessary economic restructuring. In Europe, several futile years of policy measures meant to stem the downside of the Credit cycle have done little to stabilize the "periphery" - while doing irreparable damage to the "core." Globally, unprecedented fiscal and monetary activism has only aggravated imbalances and fostered highly speculative securities markets.

My thesis holds that LTRO and concerted global central bank liquidity measures from late-2011 were destabilizing for global markets, while providing quite limited, at best, medicine to underlying Credit stress. There was added confirmation this week that, despite unprecedented policy measures, Europe is sinking into a problematic economic downturn. There was also evidence of heightened vulnerability in the highly-speculative global "risk on" market dynamic. And with securities markets increasingly susceptible, sentiment toward global economic prospects has begun to shift.

Crude oil sank $6.44, or 6.1%, this week. The Goldman Sachs Commodities Index dropped 4.5% to the lowest level since January. This week the New Zealand dollar was hit for 3.3%, the Australian dollar fell 2.8%, the Brazilian real 2.1%, the Indian rupee 1.7%, the Russian ruble 1.6%, the Canadian dollar 1.6%, and the Swedish krona was down 1.5%. The U.S. dollar index gained 1.0%.

Payroll data again disappointed, with U.S. job growth having now declined for three straight months. There will of course be various bullish and bearish spins on the data, yet it should be clear that the U.S. economy is lacking sufficient momentum to bolster global economic prospects. With downside risks abounding and economic locomotives not evolving, the global economy is now at heightened vulnerability.

My bearish thesis back in December was premised on the view that an impaired European banking system would prove a catalyst for a problematic tightening of Credit conditions in Europe, as well as in the developing economies where Europe's banks were important financiers. Moreover, the European debt crisis was a likely catalyst for a bout of global speculator de-risking/de-leveraging, implying a tightening of liquidity throughout global markets. However, the $1.3 TN LTRO and other global central bank interventions incited a dramatic change in the global liquidity backdrop. "Risk off" was abruptly ousted by "risk on." A major short-squeeze, reversal of risk hedges and speculative leveraging together created a tsunami of liquidity. And as markets rallied, a view took hold that a new multi-year bullish liquidity cycle had commenced. Somehow, it even turned euphoric.

The first quarter saw record global corporate debt issuance, along with huge flows into global risk markets. Investors and speculators alike turned remarkably bullish, determined to fixate on the favorable policy backdrop while dismissing global fragilities. Even the non-believers couldn't afford to not jump aboard. Such a speculative backdrop bolsters the perception of ongoing liquidity abundance, in the process setting the stage for eventual disappointment, risk-aversion, de-leveraging and a return of market liquidity issues.

Perhaps it's premature to declare The Revenge of "Risk Off." But it's moving in that direction. Clearly, the sanguine view of global economic prospects was based upon an ongoing favorable financial backdrop. The LTRO was to have bolstered the capacity of European banks to lend, while continued heady global securities markets were to inspire both general confidence and booming corporate debt issuance. To boot, there remained significant capacity for stimulus throughout the developing economies. Weaker data in China was seen in positive light, ensuring looser policies and an unending Chinese boom (along with unrelenting Chinese demand for everything desired, real and financial).

A more bearish view of the world might begin to look at China in the context of a historic, and increasingly fragile, Credit Bubble. A shift in sentiment might also find global players pondering Chinese corruption, market integrity, financial sector solvency, and political stability. And while loose policies can prolong "terminal phase" excesses, there undoubtedly reaches a point where financial distortions and economic imbalances overwhelm the (overestimated) capacities of policy measures. My sense is that China is somewhere between inching and lurching closer to such a point. And, increasingly, bullish and bearish global views on China are wildly divergent, fostering market uncertainty. A problematic global scenario would see a bout of de-risking/de-leveraging coincide with waning confidence in the vaunted model of Chinese financial and economic engineering. At the minimum, doubts are growing in the optimistic view that economic resiliency in China and recovery in the U.S. will counter European weakness.

There will be important elections this weekend in France and Greece. Mr. Hollande, the presumptive new Socialist French President, has handled circumstances capably and has somewhat calmed market fears. Yet his election will signal a decisive leftward lurch in European politics. The Greek election has the potential to destabilize that nation's troubled reform efforts. The political landscape is unusually splintered, with extremist parties making headway. There is the potential for political chaos pushing forward what seems like Greece's inevitable exit from the eurozone.

Interestingly, in the face of unsettled global markets, European bond markets performed well this week. Spanish 10-year yields declined 14 bps to 5.71%, Italian yields dropped 21 bps to 5.42%, and French yields fell 18 bps to 2.82%. There is talk of a more pro-growth approach to policymaking, with even ECB President Draghi supporting a new "growth pact." In Spain, efforts are said underway to create a "bad bank" structure to offload problem loans from an increasingly impaired banking system. That said, perhaps part of this week's European bond strength can be linked to short covering, as a vulnerable speculator community increasingly finds itself on the wrong side of various global markets.


For the Week:

The S&P500 dropped 2.4% (up 8.7% y-t-d), and the Dow fell 1.4% (up 6.7%). The Morgan Stanley Cyclicals sank 2.9% (up 10.1%), and the Transports slipped 0.8% (up 4.1%). The Morgan Stanley Consumer index declined 1.9% (up 4.8%), and the Utilities dipped 0.5% (down 1.6%). The Banks were hit for 3.4% (up 19.8%), and the Broker/Dealers were slammed for 5.0% (up 13.7%). The S&P 400 Mid-Caps fell 3.4% (up 9.8%), and the small cap Russell 2000 sank 4.1% (up 6.9%). The Nasdaq100 was down 3.8% (up 15.8%), and the Morgan Stanley High Tech index fell 3.0% (up 16.3%). The Semiconductors dropped 4.3% (up 9.2%). The InteractiveWeek Internet index fell 4.6% (up 11.2%). The Biotechs declined 2.0% (up 33.0%). Although bullion was down just $21, the HUI gold index sank 6.1% (down 15.4%).

One-month Treasury bill rates ended the week at 5 bps and three-month bills closed at 7 bps. Two-year government yields were little changed at 0.26%. Five-year T-note yields ended the week down 4 bps to 0.78%. Ten-year yields fell 5 bps to 1.88%. Long bond yields dropped 5 bps to 3.07%. Benchmark Fannie MBS yields declined 4 bps to 2.81%. The spread between benchmark MBS and 10-year Treasury yields widened one to 93 bps. The implied yield on December 2013 eurodollar futures declined 2.5 bps to 0.625%. The two-year dollar swap spread was little changed at 29 bps. The 10-year dollar swap spread increased one to 14 bps. Corporate bond spreads widened. An index of investment grade bond risk ended the week up 4 to 99 bps. An index of junk bond risk jumped 16 to 595 bps.

Debt issuance picked up. Investment grade issuers included ABB $2.5bn, Goldman Sachs $2.0bn, Wellpoint $1.75bn, Wells Fargo $1.5bn, US Bancorp $1.25bn, Liberty Mutual $1.0bn, Aetna $750 million, Altera $500 million, Colgate-Palmolive $500 million, American Honda Finance $400 million and Consumer Energy $375 million.

Junk bond funds saw inflows rise to $1.2bn (from Lipper). Junk issuers included CIT Group $2.0bn, Right Aid $420 million, Sabre $400 million, Central Garden $450 million, CNG Holdings $400 million and Istar Financial $275 million.

I saw no convertible debt issued.

International dollar bond issuers included Glaxosmithkline $5.0bn, BP Capital $3.0bn, Barclays $2.0bn, Iceland $1.0bn, Ericsson $1.0bn, Telesat Canada $700 million, International Bank of Reconstruction & Development $500 million, Person $500 million, and Korea Western Power $500 million.

Spain's 10-year yields declined 14 bps this week to 5.71% (up 67bps y-t-d). Italian 10-yr yields dropped 22 bps to 5.42% (down 161bps). Ten-year Portuguese yields jumped 63 bps to 10.85% (down 192bps). The new Greek 10-year note yield rose 10 bps to 20.22%. German bund yields were down 11 bps to 1.58% (down 24bps), and French yields fell 18 bps to 2.82% (down 32bps). The French to German 10-year bond spread narrowed 7 to 124 bps. U.K. 10-year gilt yields dropped 13 bps to 1.99% (up 2bps). Irish yields dipped 3 bps to 6.73% (down 153bps).

The German DAX equities index dropped 2.9% (up 11.6% y-t-d). Spain's IBEX 35 equities index sank 3.9% (down 19.7%), and Italy's FTSE MIB fell 6.2% (down 7.8%). Japanese 10-year "JGB" yields declined less than a basis point to 0.89% (down 10bps). Japan's Nikkei declined 1.5% (up 10.9%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index fell 1.4% (up 7.1%), while Mexico's Bolsa increased 0.2% (up 6.3%). South Korea's Kospi index gained 0.7% (up 9.0%). India's Sensex equities index declined 2.1% (up 8.9%). China's Shanghai Exchange gained 2.3% (up 11.5%).

Freddie Mac 30-year fixed mortgage rates dropped 4 bps to a record low 3.84% (down 87bps y-o-y). Fifteen-year fixed rates fell 5 bps to a new low 3.07% (down 82bps). One-year ARMs were down 4 bps to 2.70% (down 44bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 5 bps to a record low 4.40% (down 88bps).

Federal Reserve Credit declined $14.6bn to $2.846 TN. Fed Credit was up $159bn from a year ago, or 5.9%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/2) jumped $13.4bn to $3.496 TN. "Custody holdings" were up $75.6bn y-t-d and $43.5bn year-over-year, or 1.3%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $678bn y-o-y, or 6.9% to a record $10.457 TN. Over two years, reserves were $2.476 TN higher, for 31% growth.

M2 (narrow) "money" supply dropped $40.5bn to $9.814 TN. "Narrow money" has expanded 5.7% annualized year-to-date and was up 8.9% from a year ago. For the week, Currency increased $1.5bn. Demand and Checkable Deposits rose $6.5bn, while Savings Deposits sank $46.9bn. Small Denominated Deposits declined $3.2bn. Retail Money Funds increased $1.7bn.

Total Money Fund assets fell $14.8bn to $2.567 TN. Money Fund assets were down $128bn y-t-d and $159bn over the past year, or 5.8%.

Total Commercial Paper outstanding jumped $14.0bn to an 11-week high $940bn. CP was down $39bn y-t-d and $190bn from one year ago, or down 16.8%.

Global Credit Watch:

May 2 - Bloomberg (Lucy Meakin and David Goodman): "German government bonds rose, driving the nation's borrowing costs to record lows, on speculation Europe's economic slump is deepening and exacerbating the region's financial crisis. Yields on German two-, five-, 10- and 30-year securities fell to all-time lows as reports showed unemployment in the euro area rose in March and manufacturing contracted for a ninth month in April..."

May 2 - Dow Jones: "Jens Weidmann, chief of the German central bank who carries considerable weight among European Central Bank rate-setters, stepped up his defense of fiscal rectitude... His comments come amid a raging debate in Europe about whether governments should continue to pursue strict budget discipline amid signs that cutbacks are impeding economic growth. 'Precisely in times of uncertainty it is important that policy remains credible and sticks to that which it has committed itself,' he tells the German weekly Die Zeit. 'A forceful budget restructuring and decisive structural reforms are the best growth policy, because through this confidence is created and the capacity of the economy is strengthened...'"

May 2 - Bloomberg (Gabi Thesing and Simon Kennedy): "European Central Bank President Mario Draghi's insistence on shielding his institution from losses on Greek debt risks blunting his crisis-fighting tools. Investors forgave about 100 billion euros ($132bn) of Greek debt in March in the biggest sovereign restructuring ever, swapping existing bonds for new securities with clauses making future overhauls easier. The ECB's holdings, however, were excluded from both the losses and the new terms. That exemption suggests private bondholders will rank behind the... central bank in any future euro- region restructurings, making them wary of accompanying any revival of the ECB's currently-suspended bond-buying program with purchases of their own. 'The ECB's sticking-plaster is less sticky now,' said Laurent Fransolet, head of fixed-income strategy at Barclays... 'While the Security Markets Programme may help reduce the probability of a country defaulting in the short term, any foreign investor will be wary that they'll end up at the back of the queue if it does go wrong in the end.'"

May 1 - Bloomberg (Lucy Meakin and Emma Charlton): "European Central Bank measures to stem the region's debt crisis threaten instead to undermine the euro. ECB loans worth more than $1.3 trillion have been recycled into government bonds, capping borrowing costs. As Italy's reliance on its local institutions increases and Spanish banks accelerate purchases of domestic government securities, however, the economic ties that bind the fate of euro members to each other loosen, weakening the incentives for cross-border support to defend the currency union. 'As the local bond markets have become owned only by domestic institutions, there is less and less incentive for the other countries to support and bail out one of those,' said Stephane Monier, who helps manage more than $150 billion as head of fixed income and currencies at Lombard Odier Investment Managers. 'Basically you're planting the seeds for the disintegration of the euro zone.'"

May 2 - Bloomberg (Paul Dobson): "Italian and Spanish banks are running out of cash borrowed through the European Central Bank's three- year-loan program, diminishing their 'firepower' to buy government bonds, according to Royal Bank of Scotland Group Plc. Banks in Italy have spent the equivalent of 46.4% of the funds they received from the longer-term refinancing operations, while Spanish ones have used up 42.3%, Harvinder Sian, Biagio Lapolla and Simon Peck, interest-rate strategists in London, wrote..."

May 1 - Bloomberg (Selcuk Gokoluk): "Turkey's outlook was cut to stable from positive by Standard and Poor's, which cited 'less buoyant external demand and worsening terms of trade.'"

Global Bubble Watch:

May 3 - Bloomberg (Lee Spears): "Facebook Inc., the world's most popular social-networking site, is seeking as much as $11.8 billion in its initial public offering, the largest on record for an Internet company... The company was considering an IPO valuation of as high as $100 billion..."

May 3 - New York Times (Carol Vogel): "It took 12 nail-biting minutes and five eager bidders for Edvard Munch's famed 1895 pastel of 'The Scream' to sell for $119.9 million, becoming the world's most expensive work of art ever to sell at auction. Bidders could be heard speaking Chinese and English (and, some said, Norwegian)..."

Currency Watch:

May 4 - Bloomberg (James G. Neuger): "Four elections this weekend have the potential to reshape the European political map and show how the response to the financial crisis remains hostage to the whims of voters on both sides of the region's economic divide. Recession-weary Greeks will pick a new government and polls show the French will probably install a Socialist president for the first time since 1981. Local elections will test Italy's political pulse, and voters in a northern German state may deal a symbolic blow to Chancellor Angela Merkel's coalition. The May 6 elections capture the popular agitation in debtor and donor countries alike, after emergency loan packages worth 386 billion euros ($507bn) and a focus on deficit reduction failed to halt the debt crisis."

The U.S. dollar index rallied 1.0% this week to 79.50 (down 0.8% y-t-d). On the upside for the week, the Japanese yen increased 0.5%, the South Korean won 0.3%, and the Taiwanese dollar 0.2%. On the downside, the New Zealand dollar declined 3.3%, the Australian dollar 2.8%, the Brazilian real 2.1%, the Canadian dollar 1.6%, the Mexican peso 1.5%, the Swedish krona 1.5%, the euro 1.3%, the Swiss franc 1.35, the Norwegian krone 1.3%, the Danish krone 1.3%, the South African rand 1.1%, the British pound 0.7%, and the Singapore dollar 0.6%.

Commodities Watch:

The CRB index fell 2.7% this week (down 2.7% y-t-d). The Goldman Sachs Commodities Index sank 4.5% (up 1.3%). Spot Gold slipped 1.2% to $1,642 (up 5.0%). Silver dropped 3.1% to $30.43 (up 9%). June Crude slumped $6.44 to $98.49 (down 0.3%). June Gasoline sank 5.4% (up 12%), while June Natural Gas rallied 4.3% (down 24%). July Copper fell 2.7% (up 8%). May Wheat ended the week down 6.0% (down 8%), while May Corn gained 1.4% (up 2%).

China Watch:

May 3 (Bloomberg) -- China had a trade surplus in April of just above $10 billion as exports and imports showed 'very small growth,' Commerce Minister Chen Deming said... The trade figure compares with a median estimate of $9.9 billion... and an $11.4 billion surplus in April 2011. Chen... said exports and imports expanded 'maybe just several percentage points.' Economists had forecast an 8.4% rise in exports from a year earlier and an 11% increase in imports."

Europe Economy Watch:

April 30 - Bloomberg (Gabi Thesing): "Growth in loans to households and companies in the 17-nation euro area slowed in March as a cooling economy curbed demand for credit. Loans to the private sector grew 0.6% from a year earlier after gaining an annual 0.8% in February, the European Central Bank said today. The rate of growth in M3 money supply, which the Frankfurt-based ECB uses as a gauge of future inflation, increased to 3.2% from 2.8%."

May 3 - Bloomberg (Jennifer Ryan and Fergal O'Brien): "Euro-region unemployment rose to a 15- year high and manufacturing contracted for a ninth month, adding to signs the economic slump is deepening. The jobless rate in the 17-nation euro area increased to 10.9% in March from 10.8% in February..."

May 4 - Bloomberg (Simone Meier): "Euro-region services and manufacturing output contracted more than initially estimated in April, adding to signs of a deepening economic slump. A euro-area composite index based on a survey of purchasing managers in both industries dropped to 46.7 from 49.1 in March... That's the fastest rate of decline since October..."

May 2 - Bloomberg (Lorenzo Totaro): "Italy's unemployment rate rose more than economists forecast in March to the highest since 2000... Joblessness increased to a seasonally-adjusted 9.8% from a revised 9.6% in February..."

April 30 - Bloomberg (Rupert Rowling and Lananh Nguyen): "Mumtaz Ozkaya, a leather-clothing salesman in London, is slashing his usual 1,000 miles (1,609 kilometers) a month of driving by 30% and taking cheaper vacations, as record fuel prices burden European motorists. 'Wages are still the same so I am cutting back on miles and also on holidays,' Ozkaya said... a Shell-branded service station near Old Street in the U.K. capital, where regular gasoline costs 143 pence a liter ($8.76 a gallon). 'Whereas we used to go on holiday to a five-star hotel for three weeks that is now a four-star for two weeks.' The average retail price in the European Union's 27 member nations surged to a peak of 1.69 euros a liter ($8.44 a gallon) on April 20..."

U.S. Bubble Economy Watch:

April 30 - Bloomberg (John Gittelsohn): "The U.S. homeownership rate fell to the lowest level in 15 years in the first quarter... The rate dropped to 65.4% from 66% in the fourth quarter and fell a full percentage point from a year earlier..."

May 2 - Bloomberg (Giles Broom): "Rich Americans renouncing U.S. citizenship rose sevenfold since UBS AG whistle-blower Bradley Birkenfeld triggered a crackdown on tax evasion four years ago. About 1,780 expatriates gave up their nationality at U.S. embassies last year, up from 235 in 2008... The embassy in Bern, the Swiss capital, redeployed staff to clear a backlog as Americans queued to relinquish their passports."

Central Bank Watch:

May 3 - Bloomberg (Jana Randow and Jeff Black): "European Central Bank President Mario Draghi left open the option of further stimulus if the economy continues to deteriorate as investors await the outcome of elections in Greece and France. While policy makers didn't discuss lowering interest rates at a meeting in Barcelona today, Draghi pointed to new growth and inflation forecasts next month that may change the ECB's policy stance. Uncertainty about the commitments of future leaders in Greece and France to fiscal reforms, paired with worsening economic data and renewed tensions in financial markets, may force the ECB's hand."

May 1 - Bloomberg (Michael Heath): "The Reserve Bank of Australia cut its benchmark interest rate by half a percentage point as inflation pressures abate, delivering a bigger-than-forecast reduction that sent the local dollar and bond yields tumbling. Governor Glenn Stevens and his board slashed the overnight cash rate target to a two-year low of 3.75% from 4.25%, the deepest reduction in three years..."

May 2 - Bloomberg (Caroline Salas Gage and Joshua Zumbrun): "The odds of more Federal Reserve stimulus diminished... as four central bankers said it probably won't be needed and an unexpected acceleration in U.S. manufacturing provided fresh evidence of economic strength. John Williams, president of the San Francisco Fed, joined his counterparts from Richmond, Philadelphia and Atlanta in casting doubt on the need for additional purchases of bonds to push down longer-term interest rates."

Real Estate Watch:

May 4 - Bloomberg (Scott Hamilton): "U.K. house prices dropped the most in 1 1/2 years in April as a stamp-duty exemption for first-time buyers ended and the economy fell into its first double-dip recession since the 1970s, Halifax said. Prices dropped 2.4% from March..."

Muni Watch:

May 3 - Bloomberg (William Selway): "More than half of U.S. states expect to end their budget years with cash surpluses as a recovery in the economy buoys tax collections, a sign of easing pressure in statehouses across the country. Twenty-nine state governments, including New Jersey, Indiana and Arizona, anticipate ending their fiscal years with more money on hand than forecast when they put together their annual budgets, according to a survey...by the ... National Conference of State Legislatures."

California Watch:

May 2 - Los Angeles Times: "The legislative analyst's office has a new number that is adding to California's financial headache: $3 billion. That's the total amount that tax revenue has lagged behind goals set by Gov. Jerry Brown's administration in the current fiscal year... Much of that gap comes from a disappointing April, the most important month for income taxes. Income taxes were $2.07 billion short of the $9.43-billion goal, and corporate taxes fell $143 million short of an expected $1.53 billion..."

May 2 - Associated Press (Judy Lin): "The leaders of California's three higher education systems warned... that more budget cuts will hurt the state's economic recovery. The heads of the University of California, California State University and California Community Colleges spent the day lobbying state lawmakers and the governor's office to make higher education a priority as they prepare to put together a new spending plan for 2012-13. Frustration over rising tuition and fewer courses have been playing out across California's college campuses. At the same time, administrators have been criticized for handing out handsome compensation packages."

May 1 - Bloomberg (Alison Vekshin and James Nash): "Police officers and firefighters in San Jose, California, can retire at age 50 with 90% of their pay. The deal has left Silicon Valley's capital so short of cash that a library and community center has stood unused since its completion two years ago. The predicament of the 10th-biggest U.S. city reflects the painful choices that rising public-worker pension and health costs are inflicting on municipalities. In San Jose, the burden has become a $2.7 billion unfunded liability, costing the city its AAA bond rating. Next month, voters will decide on a measure that would trim the city's payments for its two pensions. 'Our police officers and firefighters will probably make more money in retirement than they did while they were working,' Mayor Chuck Reed, 63, said... 'We're seeing the impacts of that on our ability to provide services.'"


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