Thursday, July 09, 2009

Warning Signs From The Dry Bulk Sector Again!

The Baltic Dry Index plunged again.

Here is the ONE MONTH chart of the BDI.

The following WARNING was just published on the UK Telegraph Shipping flashes early warning signals again

  • Port statistics are revealing. They were a leading indicator before the production collapse in the Japan, Europe, and the US over the winter, and they may be telling us something again.

    Amrita Sen at Barclays Capital says the number of Baltic Dry ships waiting to berth — mostly in China and Australia — has begun to fall after peaking at 154 in mid-June.

    The Capesize Iron Ore Port Congestion Index (a new one for me, I must confess) is replicating the pattern seen a year ago just before the commodity boom tipped over.

    “The anecdotal evidence we are hearing is that vessel queues have been falling.
    There are reports of cancelled tonnage from China pointing to a slowdown in Chinese buying of coal and iron ore.

    “We are definitely expecting a correction. People have been building stocks of iron ore too quickly in anticipation of the stimulus package in China,” she said.

Hmmm... and what would this mean for the steel sector? Anyway, the article continues...

  • The Baltic Dry Index measuring freight rates jumped 450pc in the first half of the year on the China rebound, but has begun to fall back over the last two weeks. (Sen doubts freight rates will recover much since 1000 new ships are hitting the market this year and again next year, compared to 300 in normal years. There is obviously a horrendous shipping glut).

    Over at Naked Capitalism they are reporting that international port traffic for containers (ie finished goods) is as dire as ever. The rates for 40-foot container from Asia and America’s West have actually fallen this year from $1,400 to $920.

    “There has never been a decline like this before,” said Neil Drecker from the Drewry Report.
    The container industry is looking at a $20-billion black hole of losses. We can expect a lot of casualties.”

    As readers can guess, I remain extremely sceptical of this commodity rally (although it was to be expected as part of the inventory restocking effect).
    It is not underpinned by real global demand.

    It is a anti-inflation play by funds betting that quantitative easing by the world’s central banks will lead to systemic currency debasement. That may ultimately happen, but the more immediate threat is the abrupt slowdown/contraction of the broad money supply (M3, adjusted M4) and the collapse in the velocity of money, as well a post-War low in capacity use (68pc in the US), and a massive global “output gap”.

    All the deeper signs suggest to me that action by the Fed, Bank of Japan, Bank of England, and the European Central Bank is still not enough to offset the deflation shock. Though I recognize that this is a deeply unpopular view these days in the blogosphere.

    Deutsche Bank has told clients to tread carefully. It says the global output gap is minus 6pc, and it is this gap — not the level of economic growth as such — that drives oil prices over the long run. We have in any case seen a $10 dive in oil prices already as the doubts creep in on the global recover.

    Note that Deutsche Bank’s China team says the Chinese economy is “close to the cusp of the second down leg of a forecast `
    W’ on the back of tightening lending and slowing stimulus spending,” according to the bank’s latest report `Still Wary of Global Cyclicals’.

    We are all longing to be bulls again, but we (Mankind, especially the West) have a long hard slog ahead to work off our debt depravities.

Again it reflects what has been said by folks like Andy Xie Calls It Speculative Inventory And NOT Commodity Stockpiling!. Do see also postings like Can China Lead The World Out Of Recession? and very importantly this posting Massive Market Warning From Andy Xie Again

Or how about Stephen Roach's comments? Asia's Overblown Growth Hopes And A 20-Year Bear Market?

  • Professor Pettis latest piece rather interesting. Look at the size of the loan growth posted in his latest posting, China’s loan growth isn’t boosting my confidence in China’s “green shoots”

    • Credible rumors suggest that new loans in June will hit RMB 1.2 trillion or more, as banks rush to inflate their quarterly loan numbers, just as they did in March, on the assumption that any cap in quarterly loan growth will be based on the previous quarter’s numbers. I would argue that new lending in 2009, running at 2 to 3 times the new lending over the same period in 2008, is not at all normal and is very unlikely to be healthy.

    See also The China Accident Waiting To Happen To Every One Of Us

Today Professor Pettis updates on China's loan growth issue again. RMB 1.5 trillion in new Chinese lending — can we turn this thing off? Yes. It's astounding!

Which is why I chuckled yet again when I glanced thru the article from iCapital What does weak US employment means to the rest of the world?. iCapital highlights the amazing strength coming from China's automobile industry.

LOL! Strength in new vehicle sales means that the China economy is booming?

The amazing thing is iCapital does not even address why the vehicle sales boom is happening!

Take for example, the following article General Motors China sales up 38 percent

  • GM sold more than 100,000 vehicles a month in China in January-June for a total of 814,442, a record for any half-year, the company said in a statement. That compares with sales of 1,094,561 GM vehicles in China for all of 2008.

    The increase in sales was helped by stimulus policies, such as subsidies for replacement vehicles, and by strong growth in inland cities that have lagged behind China's wealthier coastal areas.

Sales boosted by stimulus policies such as China's OVERLY aggressive lending policies.

Let me highlight some comments from Professor Pettis write-up today.

  • Well, I was wrong. Here is what an article that just came out on Bloomberg says:

    China’s new lending more than doubled in June from a month earlier,
    increasing concerns bad loans and asset bubbles will emerge amid a credit boom.

    New lending was 1.53 trillion yuan ($224 billion), the central bank said on its Web site today, bringing total lending this year to 7.4 trillion yuan. The calculation for new loans is preliminary, the central bank added.

    The government is countering an export collapse by flooding the economy with money to fuel domestic demand. Rapid credit growth poses a risk to the nation’s lenders and a concentration of credit in some industries and businesses may damage the stability of the financial system, the banking regulator said yesterday.

    “Excess liquidity is fueling speculation and that means asset bubbles and wasteful investment,” said Isaac Meng, a senior economist at BNP Paribas SA in Beijing. “Expect credit to slow dramatically in the second half.”

Issac Meng's comments, "“Excess liquidity is fueling speculation and that means asset bubbles and wasteful investment.”

I wonder if the purchases of new vehicles be considered as wasteful investment?

Government made lending easy and the Chinese people took the loans to buy new cars.