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).

Data: MSCI Barra

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).
  

Chart: Dryships

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):

Chart: Lorentzen & Stemoco

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.

Chart: Barry Rogliano Salles

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.