Wednesday, June 10, 2009

Of Green Shoots and Red Ink

Fed Chairman Bernanke espied economic green shoots of economic revival in the U. S. three months ago, in a phrase made famous in part because he said it on Sixty Minutes. Well, here it is almost the ides of June, and the most populous, richest state in the country - California- not only is going to need drastic action to avoid insolvency, but its revenues in May fell well below projections. Thanks to CR, here is an excerpt from a letter from California State Controller John Chiang today to the Governor:

In the letter I sent you on May 29, I indicated we would have a negative cash balance of $1.02 billion at the end of July, and a low point for 2009-10 of $22 billion. The additional deterioration is a result of two factors: (a) May revenues coming in $827 million less than projected by the Governor’s May Revision, and (b) adjustments made by the Department of Finance to its revenue and expenditure projections. Attached is a chart detailing the projected cash low point for each month for the fiscal year starting July 1.

I cannot find the projected revenues for May, but based on information available on the Web, it was expected as of one month ago to equal $7 billion. A fall-off from the estimate of just several weeks earlier of $827 million is- how can we say it- amazing- and distressing.

You don't see an error in revenues to the downside of at least 10% when green shoots are flourishing.

Something is wrong here. It's probably the green shoots story.

Also, the New York Times is reporting that the China commodity story is looking weak, in China's Commodity Buying Spree:

Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak . . .

There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.

Those extra purchases beyond China’s daily needs have helped reverse the price collapse in commodities that followed the economic downturn last fall, but could also limit the scale of the rebound.

Moody’s Investors Service announced on Wednesday that it was putting a negative outlook on the base metals, mining and steel industries in Asia and the Pacific, having previously done so for these sectors elsewhere.

Everywhere I look, the forecasters are getting more optimistic and the data looks more and more sluggish.

With so many manipulated markets, having confidence in any special point of view is difficult, but the situation is most consistent with a gradual shift of economic growth to the creditor (underconsuming, export-driven) countries such as Asia from the indebted countries of North America and Europe.

Since the data out of China continues to be questionable, and that out of the "country" of California looks horrible and is "real-time" more or less, it is hard to question Dr. Roubini's view that the economy remains quite weak in the United States of America.

Copyright (C) Long Lake LLC 2009

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