Monday, September 28, 2009

Lost At Sea

A curious thing happened on the way to the market. While global share prices lift and float, nicely above the lows registered last March, something else entirely is happening at sea.

First, global share prices.
  • The MSCI World Index of developed countries' stock markets is up a torrid 63% from the low reached some seven months ago, when even perma-bulls had turned into a bunch of chicken-littles. Since the sky did not, in fact, fall (quite predictably after the gushers of liquidity unleashed by central banks) prices rebounded. Shares have now regained three-quarters of the ground lost in the vertical plunge of September 2008 - March 2009 (see chart below- click to enlarge).
MSCI World Share Index

Judging by share prices as discounting/predictive mechanisms, therefore, the global economy must be on its way to a significant rebound. But what about indicators based on more tangible assets that are less prone to emotional volatility and manipulation?

Thus, to sea..
  • Merchant ship charter rates had exhibited a similar pattern of collapse and recovery until this past June, when they peaked and rolled over. For example, Capesize bulk carriers (the largest dry cargo ships that cannot usually sail through Suez or Panama and must go around the Capes) are now being spot-chartered at $22,000/day versus $90,000/day just three months ago - and a far, far cry from the king's ransom of $230,000/day in spring-summer of 2008 (see chart below - click to enlarge).
Ship Charter Rates

Such huge vessels (upwards of ~170,000 dwt) carry widely used bulk commodities such as iron ore and coal in very large quantities; there is a direct correlation between how much it costs to ship them and global economic activity. For example, if China's steelmakers are ramping up production more ore and coal are shipped from Australia and charter rates go up. The economics of sea transportation being what they are, spot charter rates can be extremely volatile, while the price of ships themselves are also strongly affected.

Are we to deduce that lower rates for Capesizes mean that global economic activity is once again ebbing? It's not so easy. The erstwhile credit/asset bubble also produced a huge number of newbuilding orders for cargo ships. Loans were so plentiful, cheap and easy to obtain (e.g. no personal guarantees from the shipowners) that many non-traditional players entered the shipping market. Lots and lots of speculators unfamiliar with marine economics plunked down their money, leveraged it to the hilt and went to sea. Innocents before the mast, alas.. (obviously, the financiers who put it all together were not so unfamiliar, or innocent).

The following chart of scheduled newbuilding deliveries speaks for itself (click to enlarge):

Scheduled Deliveries of New Dry Bulk Carriers

Unless sizeable order cancellations come in (some are occurring) there are going to be many more ships afloat by the middle of 2010 than can find gainful employment at rates covering both operating and financing costs. Following is a more detailed breakdown of pending newbuilding orders:

Chart: Barry Rogliano Salles

With charter rates so far below the record-breaking levels seen last year, prices for the ships themselves have also plunged (see chart below, click to enlarge). A typical 5-year old 172,000 dwt Capesize now goes for 65% less than just a year ago.

Chart: Barry Rogliano Salles

And if charter rates and second-hand prices for dry bulk cargo vessels stabilized and even came up a bit, oil tankers are in deep trouble. Very large crude carriers (VLCCs) are barely breaking even, or losing money.



Predictably enough, prices for second-hand tankers are still falling.

Chart: Barry Rogliano Salles

Lost at sea, thus, are many tens of billions of monies that were invested (gambled, really) with the prospect of an everlasting economic boom. A boom fuelled entirely by ludicrously easy credit and China's siren song.

There is a conclusion to be drawn here for the broader economy, one that goes well beyond the seemingly isolated case of charter rates and vessel prices. The global economy post-2000 rested almost entirely on an asset-credit bubble; it produced a vast excess of speculative assets which cannot now be gainfully employed in the real economy, since the artificial demand of the bubble itself has been stripped out. This goes not only for ships but also for homes, office towers and hotels in Las Vegas, Miami, London, Shanghai and Dubai. It goes for manufacturing plants in Shenzhen and shipbuilding yards in Guangzhou and all over Korea.

What the credit bubble created, the credit collapse has rendered useless; the real economy always exacts its revenge upon those last left holding the leverage bag. Trading sardines, indeed.

18 comments:

Debra said...

Sigh...
And so much for the ridiculous idea that the markets could/would EVER manage to regulate themselves.

Somehow William seems SO appropriate for this post :
Two major plays, The Merchant of Venice, and Macbeth develop the metaphor of...
overextended investment and ambition (greed ?) that sweep away the investor, whose bark, although it cannot be lost, is tempest tossed (Macbeth).
Western society has for century used the metaphor of a ship at sea to describe our spiritual journey through life, the risks involved, and the difficulty in reaching safe port.
The post is appropriate from THAT angle, too.

Blue Peter said...

"Are we to deduce that lower rates for Capesizes mean that global economic activity is once again ebbing? It's not so easy."

Damn! just when I'd learnt to keep my eye on shipping rates (well, BDI anyway), that's no longer enough. So, do we have other measures of global economic activity to see whether it is growing or ebbing?


Peter

NagyGa1 said...

Debra, the source of the problem is that there is a price control on the interest rates by the Fed, which is just the direct opposite of free market.

MarcoPolo said...

the aircraft counterpart to your post lies at anchor in the Mojave Desert

Anonymous said...

"Trading sardines, indeed."

Love it....! One of my favorite anecdotes...

Great post,

Econolicious

Anonymous said...

Hell, from time to time, there will be excesses in certain industries, and yet the broader economy can continue to hum along nicely. Example is commodities industry which suffer from over capacity for many years 2 decades ago.

So will it be a stretch to say that current excesses in shipping is just another phase in the global economy, and we are already out of the woods by now?

marcus said...

"Lost at sea, thus, are many tens of billions of monies that were invested (gambled, really) with the prospect of an everlasting economic boom. A boom fuelled entirely by ludicrously easy credit and China's siren song."

How much of these monies have been "accounted" for and how much is yet to be lost? Are there any metrics that provide this insight?
What percentage of this loss has been absorbed by the economy so far?

Greenie said...

Hell, any idea who will take the losses?

Or maybe I should ask differently - which entity will dump the losses on US taxpayers? :)

Edwardo said...

We have a deeply distorted, probably terminally ill system of credit intermediation in the U.S. This has a lot to say regarding why serial bubbles (like the present one in the stock market) are a constant feature of the land (and sea)scape.

There is no local or global economic recovery to speak of, (just as there was only a counterfeit asset expansion prior to the bust)simply the unwarranted and desperate belief in one.

I think the quality of comparing the Merchant of Venice to our present global predicament is strained, Debra.

However, if you want to make the case that Antonio, who knowingly and stupidly entered into a very dangerous debt with Shylock, but was subsequently bailed out (to Shylock's ruin) by his Christian brothers and sisters, is much like the manner in which our own sub-prime/derivatives bust and banker's bailout unfolded, well, I am more or less on board with that.

Antonio (Christian) = banks
Shylock (Hebrew) = public
Portia (Christian) = banks

The Merchant of Venice is the story of Christian control and cronyism.

The Great Bust of '08 was the story of banker control and cronyism.

As for Macbeth. Well, the Devil (or his witch minions) or his witch of a wife, made him do it..sort of.

Joe said...

Thank you hell. This is exactly what I said the other day about this whole decade being a debt-orgy economy.

ShadowStats GDP data fully confirms this.

Joe M.

Debra said...

Edwardo, I NEVER read Shakespeare as allegory.
Allegory is simplistic reading.
The ENTIRE action of the plays is what's interesting, to use that damning word.
The Merchant of Venice is ALL about investment, and CREDIT, too, while we're at it.
And it was written more than 400 years ago, and STILL examines some pretty essential points about the way the GLOBAL economy works.
Macbeth was for the ship metaphor.

Dink said...

I wanted to play the Shakespeare game too. I recalled that Caliban from The Tempest was nasty so comparing him to bankers seemed apt. I went to wikipedia to refresh my memory on the character and came across this:

"That, if I then had waked after long sleep,
Will make me sleep again; and then in dreaming,
The clouds methought would open, and show riches
Ready to drop upon me, that when I waked
I cried to dream again."

It seems many a permagrowth pundit is crying to dream again ;)

(But Hell won't let them with reality posts like this one)

Anonymous said...

Why would shipping from Austalia to China go around either cape?

Thai said...

"Let the world slide".

-The Taming of the Shrew

I am sure you all probably caught this article forwarded by Mish, but just in case you missed it.

Sion said...

Great Post. Great Charts! Many Thanks.

Old Sea Dog said...

You have indeed put things in perspective. The container ships are facing yet another sad story. There are at least 500+ ships laid up at the Singapore and Hongkong anchorage's . Not to mention there is no sign of box cargo movement between continents in preparation for Christmas/Festive season which should have begun and running hot by now. Still one Hopes .....

Old Sea Dog said...

You have indeed put things in perspective. The container ships are facing yet another sad story. There are at least 500+ ships laid up at the Singapore and Hongkong anchorage's . Not to mention there is no sign of box cargo movement between continents in preparation for Christmas/Festive season which should have begun and running hot by now. Still one Hopes .....

Anonymous said...

Hell:

One of the charts that I would love to see is.....

Basis the s&p 500 index. Revenues per share (RPS) vs. Earnings per share (EPS). What I'm really interested in seeing is how constrained revenues will transform into earnings on average for the index.

Best regards,

Econolicious