Saturday, October 25, 2008

Connections

What do the following charts have in common?
  • A chart of collapsing bulk carrier shipping rates, showing an over-the-cliff plunge of over 90% for the largest Capesize vessels.


Bulk Carrier Rates (Chart from: Dryships)

  • A chart of the Reuters CRB Index that tracks a wide range of commodity prices. Looks similar, doesn't it?

Here's the simple explanation.

A commodity bubble was fueled by massive amounts of liquidity (aka debt) that was available (aka issued) during the past few years. While the speculative frenzy was going full blast, traders were tempted to keep large and growing stockpiles of everything from coal and iron ore to wheat and soybeans in order to make large capital gains. This produced increased pressure on transport demand, particularly for the largest vessels possible (Capesize). Incremental boat supply being particularly slow to materialize - unlike, say, CDOs - charter rates went through the roof.

But when the credit bubble popped, everything else followed, too: the dominoes fall with great speed in our globalized world. So, don't look for charter rates to recover materially until stockpiles are worked down and fundamental physical demand (i.e. consumption) comes into line with commodity production rates.

12 comments:

Thai said...

I does seem to be happening almost exactly as you predicted.

Thai said...

Do you have a similar future prediction if world wide government debt seems to step up dramatically to fill it's place?

I know you are angry about some of this- but does it change your deflation forecast in the longer term?

Greenie said...

Commodity bubble financed by debt? All I heard here was peak oil nonsense - world was running out of oil leading to huge price for all other commodities, and why we needed to get emergency program for alternate energy, blah blah.....

Bro' Hell, why don't you acknowledge that you missed the whole plot and are no better than Bear Stearns analysts, who thought house prices would keep going up for ever due to shortage of houses?

Greenie said...

Government debt won't do a thing, because it will be too little and too late. Let's say you cannot meet your house payments, and government comes and gives you one month's help. Will that do anything to the price of your house? Nada.

Only if government buys all houses, all companies, all commodities, every BS under the sky at current prices, things will 'stabilize'. We all know how that experiment worked in the past in Stalin's Russia, don't we?

Madam Z said...

"A commodity bubble was fueled by massive amounts of liquidity (aka debt) that was available (aka issued) during the past few years."

Yes, just like the whole consumer spending bubble was fueled by debt, from the overinflated houses financed by complicated mortgages to the $150 sneakers, ipods and the 3 latte lunches that all went on credit cards charging double-digit interest. Let's hope that people have enough money to buy some plain coffee and No-Doz, so they can wake up and learn how to live within their means. (Yeah, I know. I sound like my father.)

fat_tail_rider said...

greenie,

Have a look at the the chart depicting the price fluctuations relative to supply of whale oil from the early 1800s to the late 1870s, when supply dwindled to near zero. (Figure 4 - you'll need to scroll down a bit).

http://www.theoildrum.com/node/4672

The price fireworks in whale oil began in earnest in the late 1840s, just as its supply was peaking. Tell me the first leg up and its violent retracement doesn't look a lot like what's happening now.

Wild price fluctuations up and down are not symptoms of speculation in a vacuum; they're an early warning sign that peak is upon us.

Cheers,
f_t_r

dearieme said...

This morning's Telegraph says that in Q3 Volvo took orders for 42,000 new lorries (trucks) in Europe - in 2007. The corresponding figure for 2008 is .... wait for it.....

dearieme said...

One hundred and fifteen.

Thai said...

Dearieme, that was the original report that hit the news wires. Since then, the has story changed.

Fat_tail_rider, without speaking for another person, Greenie and I have chatted about this in the past on his blog. I think the key to understand his view is that he thinks we are ALWAYS in peak oil (which being a fractalist (I just made that term up) I tend to agree with him on). It is the immediacy/panic/etc... most people project into the issue that he most takes issue with.

Remember, oil was unusable by human societies 500 years ago because the efficiency-technology of society made it both impossible to reach (drilling was hard), utilize (no internal combustion engine) and transport long distances (only mules back then). Wood was most definitely a peak commodity for people (and some societies did collapse over this in their inability to achieve social cooperation-plan ahead). But we all know sunlight is ubiquitous- we just can't 'reach' it today efficiently (like the people of the middle ages could not reach oil pockets underground 500 years ago).

Remember, the biggest ROI in energy today is by far and away conservation. If we use that ROI and conserve to a point where cars, homes, appliances, etc... truly become meaningfully more energy efficient than they are today, then alternative energies with much smaller EROEI like solar, wind, biofuels, etc... become economically viable. Whereas they are decidedly not economically viable at current efficiency levels.

Remember, cars, appliances, etc... are vastly more efficient today than they were in the past. The 'problem' is we took the efficiency we gained and used it to enhance 'lifestyle' features like air conditioning, safety, etc...

But if the trend to improved efficiency continues in the future as it did in the past (now there is hope in the power of deductive reasoning) AND we do not divert those efficiency improvements to more 'lifestyle' purposes, but instead use the improvements to achieve true mpg efficiency, etc... then cars, appliances, etc... of tomorrow can run from (say) electricity generated from whichever alternate energy source we want to choose with a much lower EROEI.

Greenie- does it not risk the US dollar long term? If it does, prices will not collapse nominally as the dollar instead takes the collapse for housing (though I agree it will do nothing in real terms).

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