Tony Tan: global recession risk higher now

On Singapore Business Times:

• Business Times - 24 Jul 2010
  
  Tony Tan: global recession risk higher now
  
  Dangers to world economy include Europe's debt turmoil, deleveraging in the United States, and protectionist pressures
  
  By CHEW XIANG
  
  A FRAGILE economic recovery could see the world tip back into recession 'sooner than expected', says Tony Tan, deputy chairman of the Government of Singapore Investment Corp (GIC).
  
  Dr Tan, also GIC's executive director and chairman of Singapore Press Holdings (SPH), told delegates at the Swiss Re Forum here yesterday that downside risks to the global economy have increased, highlighting three in particular: the debt turmoil in Europe, deleveraging in the United States, and protectionist pressures around the world.
  
  'It will take a long time for the developed world to fully heal from this crisis,' Dr Tan said. 'The economic recovery, while real, is fragile and there is a risk that negative shocks could push the global economy towards a recession sooner than expected.'
  
  Meanwhile, the developing economies will gain in economic importance and will expect more say on world affairs. 'The shift in economic power to the emerging world will likely increase geopolitical risks,' he said. 'Conflicts could also arise over access to natural resources.'
  
  Investors, meanwhile, will have to place a larger proportion of their assets in emerging markets. 'Far from being a risky and perhaps optional part of their portfolios, emerging markets will become a core and unavoidable asset class in global portfolios,' he said.
  
  But one major risk investors face is that the global recovery has so far been supported by extraordinarily benign government policies. 'Changes in policies or mistakes will thus have a significant impact on the global economic and financial environment,' Dr Tan said. 'A key challenge for policymakers is to properly time the withdrawal of unprecedented monetary and fiscal policies.'
  
  However, governments will have to juggle exit policies with, in some cases, the pressing need to repair public finances. 'The challenge for policymakers in many developed economies will be to convince markets that they have credible plans to ensure sustainable public finances over the medium to long term, while minimising the negative short-term impact on growth,' Dr Tan said.
  
  Asia meanwhile will have its own set of problems. 'Asia will increasingly face labour, natural resource and commodity constraints to its high-growth strategy.' As well, growth will have to depend on a more balanced economic model in that case, he said, which should boost Asian currencies and consumption. But policymakers will have to beware asset price bubbles, rising inflation and populist anger in the developed world that could lead to 'excessive regulation and protectionism', he warned.
  
  Dr Tan said: 'Asia is at the cusp of the next stage in its development. There will likely be bumps along the way - perhaps a few crises - but if we learn the right lessons from history, especially those of the recent Great Crisis, Asia will innovate and adapt.'

http://www.businesstimes.com.sg/sub/news/story/0,4574,396388,00.html?

If The Economic Recover Is Real...

Everyone is screaming out loud that we are seeing economic recovery.

Everyone.

And if you are not in the stock market, you are missing out one of the greatest bull run ever!

However, as pointed out many times before, if economic recovery is as real as what they are saying, why is the Baltic Dry Index moving the opposite direction?

Look at the numbers last night.

The index closed down yet another 3.1%!

So what kind of economy recovery are we even talking about?

And what about this article?

The ghost fleet of the recession anchored just east of Singapore

• Here, on a sleepy stretch of shoreline at the far end of Asia, is surely the biggest and most secretive gathering of ships in maritime history. Their numbers are equivalent to the entire British and American navies combined; their tonnage is far greater. Container ships, bulk carriers, oil tankers - all should be steaming fully laden between China, Britain, Europe and the US, stocking camera shops, PC Worlds and Argos depots ahead of the retail pandemonium of 2009. But their water has been stolen.
  
  They are a powerful and tangible representation of the hurricanes that have been wrought by the global economic crisis; an iron curtain drawn along the coastline.
• ...............
• 'A couple of years ago those ships would have been steaming back and forth, going at full speed. But now you've got something like 12 per cent of the world's container ships doing nothing.'
  
  Aframaxes are oil bearers. But the slump is industry-wide. The cost of sending a 40ft steel container of merchandise from China to the UK has fallen from £850 plus fuel charges last year to £180 this year. The cost of chartering an entire bulk freighter suitable for carrying raw materials has plunged even further, from close to £185,000 ($300,000) last summer to an incredible £6,100 ($10,000) earlier this year.
  
  Business for bulk carriers has picked up slightly in recent months, largely because of China's rediscovered appetite for raw materials such as iron ore, says Huxley. But this is a small part of international trade, and the prospects for the container ships remain bleak.
  
  Some experts believe the ratio of container ships sitting idle could rise to 25 per cent within two years in an extraordinary downturn that shipping giant Maersk has called a 'crisis of historic dimensions'. Last month the company reported its first half-year loss in its 105-year history.
  
  Martin Stopford, managing director of Clarksons, London's biggest ship broker, says container shipping has been hit particularly hard: 'In 2006 and 2007 trade was growing at 11 per cent. In 2008 it slowed down by 4.7 per cent. This year we think it might go down by as much as eight per cent. If it costs £7,000 a day to put the ship to sea and if you only get £6,000 a day, than you have got a decision to make.
  
  'Yet at the same time, the supply of container ships is growing. This year, supply could be up by around 12 per cent and demand is down by eight per cent. Twenty per cent spare is a lot of spare of anything - and it's come out of nowhere.'

Supply of container ships is growing coupled with lack of demand!

• Stopford explains: 'Globalisation and shipping go hand in hand. Worldwide, we ship about 8.2 billion tons of cargo a year. That's more than one ton per person and probably two to three tons for richer people like us in the West. If the total goes down by five per cent or so, that's a lot of cargo that isn't moving.'
  
  The knock-on effect of so many ships sitting idle rather than moving consumer goods between Asia and Europe could become apparent in Britain in the months ahead.
  
  'We will find out at Christmas whether there are enough PlayStations in the shops or not. There will certainly be fewer goods coming in to Britain during the run-up to Christmas.'
  
  Three thousand miles north-east of the ghost fleet of Johor, the shipbuilding capital of the world rocks to an unpunctuated chorus of hammer-guns blasting rivets the size of dustbin lids into shining steel panels that are then lowered onto the decks of massive new vessels.
  
  As the shipping industry teeters on the brink of collapse, the activity at boatyards like Mokpo and Ulsan in South Korea all looks like a sick joke. But the workers in these bustling shipyards, who teem around giant tankers and mega-vessels the length of several football pitches and capable of carrying 10,000 or more containers each, have no choice; they are trapped in a cruel time warp.
  
  There have hardly been any new orders. In 2011 the shipyards will simply run out of ships to build!

And what economic recovery are they even talking about?

By the way, if you put the CURRENT decline of the Baltic Dry Index into perspective than what if the following article "What Is Stock Market Leading Indicator Saying Now?" holds true?

Oh, less I forget. Let's also Cheer The Jobless Recovery!

Or perhaps BDI does not matter!

Or perhaps unemployment does not matter!

Hey, it's a freaking bull market and don't you pour cold water all over it!

Andy Xie: Is The Market Right That We Will See A V-Shaped Bounce For Global Economy?

On the English Caijing, Andy Xie talks about the possibility of a W-shaped recovery, New Bubble Threatens a V-Shaped Rebound

• A growing liquidity bubble that ignores structural facts is the basis for today's happy talk about a comeback for the global economy.
  
  By Andy Xie, guest economist to Caijing and a board member of Rosetta Stone Advisors Ltd.
  
  (Caijing Magazine) The United States is beginning to report data showing strong economic growth. Analysts are upgrading their outlooks for the U.S. economy, which is expected to grow at an annualized pace of 3 to 4 percent. And even before the U.S. revival emerged in the third quarter, China's data pointed toward a quick rebound in the second quarter.
  
  Is the global economy staging a V-shaped bounce? The buoyant financial market had been expecting a rebound for months. Was the market right?
  
  At the end of last year, I said I expected global stock markets to stage a big bounce in spring 2009, and the global economy to rebound in the second half. I also expected analysts to upgrade outlooks by this time. I warned that the economic pickup was due to inventory cycle and stimulus, and that the global economy would experience a second dip in 2010.
  
  In a normal economic cycle, an inventory-led recovery would be followed by corporate capital expenditure, leading to employment expansion. Rising employment leads to consumption growth, which expands profitability and more capex. Why won't it work this time? The reason, as I have argued before, is that a big bubble distorted the global economic structure. Re-matching supply and demand will take a long time.
  
  The process is called Schumpeterian creative destruction. Keynesian thinking ignores structural imbalance and focuses only on aggregate demand. In normal situations, Keynesian thinking is fine. However, when a recession is caused by the bursting of a big bubble, Keynesian thinking no longer works.
  
  Many policymakers actually don't think along the line of Keynes versus Schumpeter. They think in terms of creating another bubble to fight the recessionary impact of a bubble burst. This type of thinking is especially popular in China and on Wall Street. Central banks around the world, although they haven't done so deliberately, have created another liquidity bubble. It manifested itself first in surging commodity prices, next in stock markets, and lately in some property markets. Will this strategy succeed? I don't think so.
  
  The lifespan of a bubble depends on how it affects demand. The longest-lasting are property and technology bubbles. The multiplier effect of a property bubble is multifaceted, stimulating investment and consumption in the short term. The supply chain it impacts is very long. From commodity producers to real estate agents, it could stimulate more than one-fifth of an economy on the supply side. On the demand side, it stimulates credit growth and financial sector earnings, and often boosts consumption through the wealth effect. Because a property bubble is so powerful, the negative effects of a bursting are great. Excess supply created during a bubble's lifespan takes time to consume. And a bust destroys the credit system.
  
  A technology bubble occurs when investors exaggerate a new technology's impact on corporate earnings. A breakthrough such as the Internet improves productivity enormously. However, consumers receive most of the benefits. Competition eventually shifts temporarily high corporate profitability toward lower consumer prices. Because the emergence of an important technology brings down consumer prices, central banks often release too much money, which flows into asset markets and creates bubbles. While an underlying technology leads to an economic boom, the bubble feels real. More capital pours into the technology. That leads to overcapacity and destruction of profitability. The bubble bursts when speculators finally realize that corporate earnings won't rise after all.
  
  The cost of a technology bubble is essentially equal to the amount of over-investment involved. Because a technological breakthrough expands the economic pie, the costs of a technology bubble are easy to absorb. An economy can recover relatively quickly.
  
  A pure bubble tied to excess liquidity that affects one or many financial assets cannot last long. Its multiplier effect on the broad economy is limited. It could have a limited impact on consumption due to the wealth effect. As it neither stimulates the supply side nor boosts productivity, whatever story it is based on will have holes that become apparent to speculators. It doesn't take long for them to flee. Furthermore, a pure liquidity bubble without support from productivity can easily lead to inflation, which causes tightening expectations that trigger a bubble's burst.
  
  What we are seeing now in the global economy is a pure liquidity bubble. It's been manifested in several asset classes. The most prominent are commodities, stocks and government bonds. The story that supports this bubble is that fiscal stimulus would lead to quick economic recovery, and the output gap could keep inflation down. Hence, central banks can keep interest rates low for a couple more years. And following this story line, investors can look forward to strong corporate earnings and low interest rates at the same time, a sort of a goldilocks scenario for the stock market.
  
  What occurred in China in the second quarter and started happening in the United States in the third quarter seems to lend support to this view. I think the market is being misled. The driving forces for the current bounce are inventory cycle and government stimulus. The follow-through from corporate capex and consumption are severely constrained by structural challenges. These challenges have origins in the bubble that led to a misallocation of resources. After the bubble burst, a mismatch of supply and demand limited the effectiveness of either stimulus or a bubble in creating demand.
  
  The structural challenges arise from global imbalance and industries that over-expanded due to exaggerated demand supported in the past by cheap credit and high asset prices. At the global level, the imbalance is between deficit-bound Anglo-Saxon economies (Australia, Britain and the United States) and surplus emerging economies (mainly China and oil exporters). The imbalance was roughly equal to US$ 1 trillion, or 2 percent of global GDP. The imbalance was supported by: 1) the willingness of central banks in surplus, emerging economies to hold down exchange rates and recycle their surpluses into the deficit economies by buying government bonds; 2) the willingness of consumers in deficit countries to buy with borrowed money; and 3) Wall Street's ability to dress up high-risk consumer loans as low-risk derivative products. I am describing these factors to underscore that central banks are unlikely to bring back yesterday's equilibrium.
  
  Recent data point to a sharp increase in the household savings rate in the United States. Over two years, it rose above 5 percent from minus 2 percent. The current level is still below the historical average 8 percent. If normalization remains on track, it should rise above 8 percent, and probably reach above 10 percent, to bring debt levels down to the historical average.
  
  Some argue that, if low interest rates revive the property market, American households may be willing to borrow and spend again. This scenario is possible but not likely. The United States has not experienced serious property bubbles in the past because land is privately owned and plentiful. A supply overhang from one bubble takes a long time to digest. And American culture tends to swing to frugality after a bubble. One's outlook either for a normal recovery or a bubble-inspired boom depends on the outlook for the U.S. household savings rate. Unless the U.S. household sector is willing to borrow and spend again, emerging economies will not be able to revive the export-led growth model.
  
  If one accepts that the U.S. household savings rate will continue to rise, emerging economies must decrease their savings rates, increase investment, or decrease production. The best choice is to decrease savings rates. But savings rates are hard to change. They depend mainly on demographics and wealth levels. The quickest possible way out would involve creating an asset bubble that inflates household wealth and decreases savings. Many advocates of inflated property and stock markets in China have this effect in mind. Japan's bubble after the Plaza Accord in 1985 had its origin in the same dilemma. This approach, if it works, has catastrophic long-term consequences. Japan remains mired in stagnation two decades after its bubble began to burst.
  
  Some analysts are expecting China to repeat Japan's bubble experience, which occurred in the late 1980s. At that time, Japan's export-led growth model was stymied by a doubling of its currency value after the Plaza Accord. It tolerated a massive asset bubble to stimulate domestic demand and stabilize its economy. China's export-led model is facing a rising savings rate and declining U.S. demand for its exports. Asset inflation could be a way out in the short term.
  
  China doesn't need to repeat Japan's experience. One reason is that the circumstances are not the same. First, Japan was a developed country when its bubble started getting out of control in 1985. It couldn't divert its vast savings into infrastructure investment. But today, China's national urbanization project still has up to 30 percentage points to go. If the right mechanism can be implemented, China could divert more savings into urbanization.
  
  Second, China can decrease its savings rate substantially through structural reforms. Half of China's gross savings are in the public sector. The government and state-owned enterprises should decrease revenue-raising and increase borrowing to finance investments. For example, China's high property prices are based on the investment-fund revenue needs of local governments. If China's property prices were cut by one-third, the national savings rate could decrease by two to three percentage points.
  
  Third, the Chinese government could give its shares in listed state-owned enterprises to the household sector. The subsequent increase in household wealth could lower the national savings rate by three to four percentage points.
  
  China's exports are down by roughly one-fifth. It needs the national savings rate to fall by about six percentage points for the economy to function normally. Otherwise, the economy will experience either a recession or a bubble. And the purpose of a bubble, as mentioned, would be to temporarily decrease the savings rate.
  
  This discussion may seem to digress from the analysis of sustainability in the current economic recovery. But it brings out two points: The old equilibrium cannot be restored, and many structural barriers stand in the way of a new equilibrium. The current recovery is based on a temporary and unstable equilibrium in which the United States slows the rise of its national savings rate by increasing the fiscal deficit, and China lowers its savings surplus by boosting government spending and inflating an assets bubble.
  
  This temporary equilibrium depends on government action. It does not have a market foundation that would support sustained and rapid growth. Nevertheless, improving economic data will excite financial markets.
  
  China's stock market is cooling because the Chinese government is jawboning it down, based on fears of a big bubble downside. And the economy is beginning to slow. Markets outside China will likely do well for the next two months; diverging trends reflect that China's market recovered four months before others, and adjusts before others as well.
  
  Financial markets will turn down again when investors realize that the global economy will have a second dip in 2010, and that the U.S. Federal Reserve will raise interest rates soon. The turning point may well come sometime in the fourth quarter. By then, it would become apparent that China has slowed. U.S. unemployment will not have improved and, hence, its consumption will remain stagnant. And production data that's pushing expectations now will cool after the inventory cycle runs its course.
  
  Most analysts would argue that central banks won't raise interest rates before the recovery is on solid ground. The problem, though, is that fiscal stimulus can't resolve structural problems blocking a sustained recovery. Liquidity is the wrong medicine for the global economy right now. Overusing it encourages its side effect -- inflation.
  
  Conventional wisdom says inflation will not occur in a weak economy: The capacity utilization rate is low in a weak economy and, hence, businesses cannot raise prices. This one-dimensional thinking does not apply when there are structural imbalances. Bottlenecks could first appear in a few areas. Excess liquidity tends to flow toward shortages, and prices in those target areas could surge, raising inflation expectations and triggering general inflation. Another possibility is that expectations alone would be sufficient to bring about general inflation.
  
  Oil is the most likely commodity to lead an inflationary trend. Its price has doubled from a March low, despite declining demand. The driving force behind higher oil prices is liquidity. Financial markets are so developed now that retail investors can respond to inflation fears by buying exchange traded funds individually or in baskets of commodities.
  
  Oil is uniquely suited as an inflation hedging device. Its supply response is very low. More than 80 percent of global oil reserves are held by sovereign governments that don't respond to rising prices by producing more. Indeed, once their budgetary needs are met, high prices may decrease their desire to increase production. Neither does demand fall quickly against rising prices. Oil is essential for routine economic activities, and its reduced consumption has a large multiplier effect. As its price sensitivities are low on demand and supply sides, it is uniquely suited to absorb excess liquidity and reflect inflation expectations ahead of other commodities.
  
  If central banks continue refusing to raise interest rates during these weak economic times, oil prices may double from their current levels. So I think central banks, especially the Fed, will begin raising interest rates early next year or even late this year. I don't think it would raise rates willingly but wants to cool inflation expectations by showing an interest in inflation. Hence, the Fed will raise interest rates slowly, deliberately behind the curve. As a consequence, inflation could rise faster than interest rates, which is what the indebted U.S. household sector needs.
  
  This fool-the-market strategy may work temporarily. Its effectiveness must be reflected in oil prices; the Fed needs to target oil prices in its interest rate policy. If oil prices run from current levels, it means the market doesn't believe the Fed. That would force the Fed to raise interest rates quickly which, unfortunately, would trigger another deep recession.
  
  Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down -- and keep them down for a long time.
  

Baltic Dry Index Continues To Fall As China Continues To Cut Back Its Commodity Purchases

On CNBC News: Japan Exports Dip, Stimulus Effect May Be Waning

• Japan's exports fell in July from the previous month for the first decline in two months, in a possible sign that the impact of stimulus measures in major economies worldwide is starting to wane

The Baltic Dry Index closed lower yet again at 2388.

On Monday, 24 Aug, on WSJ journal : Shipping-Cost Index Drops

• By ART PATNAUDE and NEENA RAI
  LONDON -- The Baltic Dry Index, already down 26% this month, is likely to fall further during the rest of the quarter as China continues to cut back on commodity purchases.
  
  The BDI, a barometer of shipping costs for commodities such as iron ore, coal and grain, may rise in the fourth quarter as other major world economies are expected to increase imports. However, a record number of ships scheduled to come on line this year and in 2010 will keep freight rates under pressure even as the global economy recovers, analysts say.
  
  The BDI is often seen as a key leading indicator for global economic growth and production, and the August decline has been the sharpest since October's 72% skid, when freight rates were heading below break-even levels and the shipping industry was gripped with uncertainty.
  
  Friday, the index fell 2.6% to 2468, capping a 10% decline for the week and leaving it at a three-month low. The volatile index, which surged in the first half of the year on Chinese demand for iron ore and coal, is still about four times higher than December's 22-year low.
  
  Iron-ore imports to China were driven by the country's economic-stimulus package, in turn increasing demand for Capesize ships, the largest of the four vessel classes calculated into the BDI and the primary transport method for iron ore. In July, China imported nearly 55% of globally traded iron ore and about 10% of coal. This demand, as well as huge lines outside major ports that crimped the supply of available ships, helped elevate freight rates.
  
  "There is no doubt the last few months have been unprecedented and unsustainable when it comes to China's appetite for iron-ore imports," said Peter Hickson, UBS AG's managing director of global materials strategy.
  
  Some say that while forward prices already are pricing in a further slowdown in Chinese demand, they aren't taking sufficiently into account easing port congestion and the mass of new ships scheduled to roll onto the oceans this year and next. Some 1,000 dry bulk ships are expected to be launched this year, and another 1,000 are due in 2010, said Amrita Sen, a London-based analyst at Barclays Capital. In the past five years, the average has been 300 new ships.
  
  Forward rates for Capesize vessels are $37,000 a day for the fourth quarter and $29,250 for 2010. Friday, average daily rates for Capesize vessels fell below $40,000 a day for the first time since May. They had shot up to nearly $90,000 a day in June, from about $9,000 a day in January.
  
  "If anything, the forward curve is being a touch overoptimistic," said Richard Bowler, Citigroup director of commodities.
  
  Analysts say stronger growth from developed nations will be a key factor for rates next year. "For me, the next leg up is demand [from members of the Organization for Economic Cooperation and Development]," Barclays Capital's Ms. Sen said. "Unless you see that, [freight] rates will fall."
  
  Currently, there are few signs that demand for iron ore and other shipped bulk goods is turning around. In Rotterdam, Europe's largest port by volume handled, the volume of iron ore, also called throughput, was down 76% in the second quarter from a year earlier. Iron-ore throughput at Antwerp, Europe's second-largest port, collapsed 97% in the second quarter from a year earlier.
  
  "The situation [for iron-ore shipments here] could not get any worse," said Michel Moons, commercial manager of bulk at the Antwerp port.
  
  Port officials said that could change as steel mills rebuild stocks late this year in anticipation of economic recovery. Hugo du Mez, business developer of bulk goods in Rotterdam, said, "I do expect activity to pick up in the fourth quarter."

Hmmm... if economic recovery is to be believed why is China cutting back on its commidity purchases? Does China matter?

Is The Economy Recovery For Real?

With shipping stocks showing signs that they have 'bottomed', does this means that the global economy is recovering?

I found an opinion to this question.

On the MarketOracle.co.uk, No Green Shoots, Rail, Truck Traffic Down; Air Cargo Hoping For a Bottom

In the article Mike Shedlock reasoned that they were no 'green shoots' for the rail, truck traffic and air cargo.

Here's the chart provided and as you can see there are really no indication of any 'green shoots'!




As Mike puts it..

• Rebound Questionable
  Shipping may have bottomed, but as long as the economy is losing 500,000 jobs a month and housing is still in a decline, any rebound will be anemic at best.

And the surging Baltic Dry Index has its doubters too. The current demand is driven by China's massive purchase of iron ore. Vessels were few. There were port congestion to the 'sudden' surge in order from China for iron ore. These factors drove the shipping soaring. And the doubters questions the sustainability of the demand.

So What Happens Next For Global Economy?

On FT.com Recovery not as easy as U, V, W

• Recovery not as easy as U, V, W
  
  By Gillian Tett
  
  Published: May 28 2009 20:09 Last updated: May 28 2009 20:09
  
  Are you expecting a “V” shaped recovery this summer? Or do you anticipate a scenario more like a “U” or a “W”? That is the question I have been asked repeatedly this month, as the debate about “green shoots” roars on.
  
  Personally, though, I suspect that none of the letters in the Roman alphabet quite captures what is most likely to go on. To be sure, the last year might seem to correspond to the start of a “V”, “U” or “W”.
  
  Last year, the financial system clearly fell off a cliff, like the downward slope of a pen. But this year, some form of reprieve got underway, marking a seeming turning point. Most notably, in the real economy, the data is looking a touch more optimistic, not least because western companies are restocking, after slashing their inventories late last year. And in the financial sphere, investors appear to have spotted the “floor” to last year’s crash – and started to jump back into the markets again, rediscovering their appetite for risk.
  
  But the problem centres on what happens next. Optimists in the market – or those who like to parade the “V” scenario – argue that this rebound has a long way to run in both the real economy and financial sphere. For the sheer scale of government support seems set to spark a fully-fledged recovery – or so the argument goes.
  
  But I find this scenario hard to accept. Right now, it is certainly hard to imagine a new round of banking collapses, given the current level of government support. It is also difficult to see deflation taking hold when central banks are being so hyperactive. Morgan Stanley, for example, calculates that the scale of excess liquidity sloshing around emerging and advanced economies is now “at a record high”, relative to gross domestic product.
  
  But while all that government support – and liquidity – might be enough to stave off collapse, it does not guarantee the rebound will prove truly dynamic.
  
  The essential problem is there is still a vast amount of deleveraging and restructuring that needs to be done, after the recent credit bubble: and on current evidence, that cleansing process could take years.
  
  Europe’s corporate landscape, for example, is currently littered with heavily-indebted companies in dire need of restructuring, but which are somehow still staggering on because their creditors are unwilling to pull the plug. Ineos, the chemical giant, is just one case in point. In America, consumers remain laden with debt which they have barely begun to pay down. On both sides of the Atlantic, numerous banks remain neither dead nor fully alive, propped up by government support.
  
  Most pernicious of all, the government bond world is threatening to dampen any cheer. Until now, Western governments have found it relatively easy to sell debt, even as projected issuance has surged. But this week’s activity in the treasuries market suggests that investors are getting jittery.
  
  And surveys echo that. Last week Citi, for example, polled European investors and discovered endemic concern about rising government debt. Separately, Barclays reported that 30 per cent of Japanese investors now anticipate a US credit rating downgrade.
  
  And while these predictions may be over-blown, this gnawing sense of unease will make it hard to create any aura of financial stability anytime soon. Moreover, in a practical sense, any rise in bond yields threatens to neutralise some – if not all – of the reflationary impact of the rate-cutting efforts by central banks.
  
  So where does that leave all those “V”, “W” or “U” arguments? If you add the different elements of the picture together, my best bet is that the coming months will look like the first half of a “W”, but then flatten out into a straight-ish, horizontal line – meaning that after an initial, small rebound, there is likely to be a long, bumpy period of “flatlining”, as the forces for reflation and deflation pull in opposite ways.
  
  That scenario may be overoptimistic. If government bond jitters turn more serious – say, if some auctions fail or there is serious political instability – it is entirely possible to imagine a far darker scenario, in which faith collapses in government finance. If that occurs, we would face both currency upheaval and more bank turmoil, as investors lost confidence that the state can keep propping up the banks.
  
  But if that government bond crisis does not materialise – which remains an “if” – then by a happy coincidence the resulting outlook looks rather similar to a symbol that is already plastered all over my notebook.
  
  Many years ago, when I was a rookie reporter, I learnt the Pitman system of shorthand. And it just happens that the half-squashed, assymetrical “W” pattern that I am struggling to describe is almost identical to the shorthand sign for “bank” (see right).
  
  So there you have it: as long as we avoid a government bond crisis, my best prognosis is for a “bank” shaped recovery-cum-stagnation, at least as depicted by shorthand. It is a fitting twist for a crisis that started with the shadow banks; perhaps the Gods of finance (and journalism) have a sense of humour after all.

Estimates Of Economic Costs Of A Flu Pandemic

* The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion (£2 trillion) and result in a nearly 5pc drop in world gross domestic product. The World Bank has estimated that more than 70m people could die worldwide in a severe pandemic.

* Australian independent think-tank Lowy Institute for International Policy estimated in 2006 that in the worst-case scenario, a flu pandemic could wipe $4.4 trillion off global economic output.

* Two reports in the United States in 2005 estimated that a flu pandemic could cause a serious recession of the US economy, with immediate costs of $500bn-$675bn.

* SARS in 2003 disrupted travel, trade and the workplace and cost the Asia Pacific region $40bn. It lasted for six months, killing 775 of the 8,000 people it infected in 25 countries.

Source: http://www.telegraph.co.uk/health/healthnews/5228878/Estimates-of-economic-costs-of-a-flu-pandemic.html

Comments:

Hmm... with most global markets having had their huge rallies recently, would this be the catalyst for the next leg down that the bears are waiting for?

Worsening Global Economy And Bad Loans!

David Roche, global strategist at Independent Strategy, speaks on CNBC Asia on the worsening global economics and the rising bad loans.

Empty Containers At Port Not A Healthy Indicator!

Busan, South Korea.

Empty boxes pile up at Busan port

• SEOUL: South Korea's biggest port is running out of room to store shipping containers, said Park Jung Ho, an official at one of Busan's nine operators. The bigger concern is that the boxes are almost all empty.
  
  Container trade at Busan, the world's fifth-largest port, has fallen about 40 per cent in recent months, said Park, at Busan International Terminal Co. Even by stacking boxes five deep and leasing a nearby lot, he barely has room for the 31,700 containers that have piled up on his wharves.
  
  "We are spending half of what we earn from our main business for storage space," said Park, who is responsible for placement of equipment and containers for the company.
  
  Empty containers, idled dockworkers and laid-up vessels have become a hallmark of ports from Singapore to Rotterdam that six months ago were straining to meet the flow of electronics, toys, cars and equipment. For Busan, surrounded by the world's five biggest shipyards, the outlook is even bleaker after the glut of vessels caused a record decline in global orders for new ships in January.
  
  "I've never experienced anything like this before," said Ryoo Chi Ho, manager at a shipping company in the port. "It's far worse than what we went through during the 1997-98 Asian crisis, since the biggest consuming nations were still doing fine then. Now, everyone's hit."
  
  Singapore, the world's biggest container port, handled 1.97 million 20-foot containers in January, 20 per cent less than a year earlier. In Shanghai, the second-largest, traffic was down 19 per cent, while Hong Kong, the No. 3, suffered a 23 per cent drop, according to the websites of the port authorities. Busan handled 894,172 20-foot standard containers in January, the fewest since February 2005, the Busan Port Authority said on its website.
  
  "Things have really started to get bad - labourers spend their entire day waiting for a call from the docks that they have a job," said Kim Sang Cheul, a dockworker at Busan. "People spend all day staring at their phone as if staring at it can make it ring. You're lucky if you get a call."
  
  Kim said most workers' earnings have fallen by half and some were taking home less than 1 million won (US$672) a month.
  
  The dockworkers' troubles may herald a similar fate for employees at the shipyards in Gyeongsang Province, where Busan is located, including Hyundai Heavy Industries Co, Samsung Heavy Industries Co and Daewoo Shipbuilding & Marine Engineering Co.
  
  While global shipyards are still working through contracts placed since 2006, new orders have plummeted in the past four months. Hyundai Heavy, the world's largest shipbuilder, said on February 27 that orders dropped 54 per cent in January, mostly for equipment such as marine engines and oil rigs. The company said it has had no orders for new ships since September.
  
  "It's pretty tough now," said Lee Jong Chul, vice-president of STX Group, owner of the world's fifth-largest shipyard. "There have been requests for cancellations, but we persuaded owners to revise orders to a different vessel type or contract terms." - Bloomberg

The Potential Global Meltdown

More comments on the woes of Russia and its potential worldwide threat.

Published on UK Telegraph.

Failure to save East Europe will lead to worldwide meltdown

• By Ambrose Evans-Pritchard
  Last Updated: 2:05AM GMT 15 Feb 2009
  
  If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.
  
  Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.
  
  "A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.
  
  The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.
  
  Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.
  
  Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.
  
  Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.
  
  "This is the largest run on a currency in history," said Mr Jen.
  
  In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
  
  Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
  
  They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
  
  Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
  
  Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
  
  Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.
  
  But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.
  
  Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
  
  The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.
  
  Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
  
  "This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.
  
  "There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."
  
  Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.
  
  If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.
  
  The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.
  
  So we watch and wait as the lethal brush fires move closer.
  
  If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?

Other postings : Russia Crisis Worsens As Ruble Tumbles , Russia Crisis Worsens and Another Russian Crisis?

Other postings: Europe Is In Its Deepest Recesssion!

Early Corporate Earnings Notes For 2009

Published on Bloomberg News, Global Corporate Profits to Drop in ’09; More Bankruptcies Loom

• By Katie Hoffmann and Joseph Galante
  
  Jan. 5 (Bloomberg) -- Corporate earnings will continue to slump into the first half of 2009 amid the first simultaneous recessions in the U.S., Japan and Europe since World War II.
  
  Earnings at Standard & Poor’s 500 companies will probably fall in the first half, marking eight straight quarters of declines. In Europe and Asia, the outlook may be even worse as the recession curbs demand for retail goods and exports.
  
  “It’s going to be a miserable ride,” said Bruce McCain, chief investment strategist at Cleveland-based Key Private Bank, which manages about $30 billion. Earnings probably won’t rebound until the end of 2009, he said. “The market recovers, then the economy recovers, then finally the earnings recover.”
  
  Companies are battling falling consumer demand and dwindling cash flows after banks tightened lending to cope with billions of dollars of real-estate losses. The U.S. Federal Reserve has cut interest rates to as low as zero percent, while governments worldwide have taken stakes in banks and companies to prevent a collapse of the global financial system.
  
  “We hit the peak in earnings in 2007, and in 2009 we’re going to see continued deterioration,” said Diane Garnick, who helps oversee $500 billion as an investment strategist at Invesco Ltd. in New York. Analysts’ earnings estimates are “still way too optimistic.”
  
  In the U.S., profit at Standard & Poor’s 500 companies will fall 11 percent in the first quarter, followed by a 6.2 percent drop in the following three months, according to data compiled by Bloomberg. Earnings should improve in the second half, driven by a rebounding financial industry, the data show.
  
  Europe, Asia
  
  While profits will rise 4.3 percent for the full year in the U.S., earnings in Europe are projected to decline for all of 2009 and analysts predict worsening reports out of Asia because the recession hasn’t fully hit there yet.
  
  The energy industry will lead U.S. declines, with earnings estimated to drop 29 percent in 2009. Profit at Exxon Mobil Corp., Chevron Corp. and ConocoPhillips, the largest U.S. oil companies, will probably fall after the recession sapped fuel demand, spurring a 78 percent drop in crude-oil prices from July’s record.
  
  At Irving, Texas-based Exxon Mobil, the world’s biggest publicly traded company, earnings will probably tumble 39 percent to $28.2 billion, the first decline since 2002, according to a Bloomberg survey of analysts.
  
  “We expect industry earnings to be down sharply, especially in exploration and production,” said Gene Pisasale, who helps manage $13 billion at PNC Capital Advisors in Baltimore.
  
  Retailers Close
  
  Earnings at U.S. retailers will fall 20 percent this year, according to analysts’ estimates. The International Council of Shopping Centers in New York predicts 73,000 U.S. stores may shut in the first half of 2009 after what may have been the worst holiday-shopping season in 40 years. That’s after about 148,000 stores closed last year, the most since the 2001 recession, according to the trade group.
  
  “You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains -- either multi- regionally or nationally -- go out,” said Burt Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York.
  
  AnnTaylor Stores Corp., Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations as consumers tighten budgets. More than a dozen U.S. retailers filed for bankruptcy in 2008, including Circuit City Stores Inc., Linens ‘n Things Inc. and Sharper Image Corp.
  
  Wal-Mart Stores Inc., the largest retailer, may report a 6 percent profit increase this year by offering lower prices to consumers seeking bargains, according to estimates.
  
  ‘Very Difficult’
  
  JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley, the biggest U.S. banks, will probably post higher profits this year compared with 2008, when finance companies wrote down more than $720 billion of losses.
  
  “For the large financials, it’s going to be a very difficult year,” said David Burg, a Purchase, New York-based analyst at Alpine Woods Capital Investors LLC, which manages about $6.5 billion, including JPMorgan shares. “The story for 2009 continues to be radical transformation -- companies fundamentally changing their business model.”
  
  Goldman Sachs and Morgan Stanley, which were the two biggest U.S. securities firms before converting into banks, will suffer from a 15 percent decline in mergers and acquisitions and slowing underwriting fees, Kenneth Worthington, an analyst at JPMorgan in New York, said last month in a note.
  Autos, Technology
  
  U.S. automakers will show some improvements in 2009 after sales plummeted last year, forcing the government to lend $13.4 billion to General Motors Corp. and Chrysler LLC to keep them out of bankruptcy.
  
  GM’s loss may narrow to $12.8 billion from $19.6 billion last year, according to analysts’ estimates. Ford Motor Co. may report a loss of $6.38 billion, compared with $9.2 billion last year, the estimates show.
  
  Technology will be one of the best-performing sectors in the second half as customers start to increase budgets, said Pete Sorrentino, senior portfolio manager for Cincinnati-based Huntington Asset Management, which oversees $16.5 billion. Earnings at software and services companies may rise 8.1 percent in 2009, while profits at hardware makers may slip 6.7 percent, according to analysts’ estimates.
  
  Apple, Google
  
  Consumers may continue to curb spending in the first half, dragging down sales at Apple Inc., maker of the iPhone and Macintosh computers, David Bailey, an analyst at Goldman Sachs in New York, said last month. Google Inc., owner of the most popular search engine, will probably post a 14 percent increase in profit in 2009 as it clamps down on spending, according to the estimates.
  
  Health care will be one bright spot, as sick people still need medical treatment, said Les Funtleyder, an analyst with Miller Tabak & Co. in New York. Profit at Standard & Poor’s 500 drug companies and medical equipment makers, such as Johnson & Johnson and Pfizer Inc., may increase 6.8 percent in 2009.
  
  “Health care tends to be recession-resistant,” Funtleyder said. “Some people may use fewer drugs, so that’s obviously a bad thing, but it’s less cyclical than other industries.”
  
  In Europe, profits at Dow Jones Stoxx 600 Index companies may fall less than 1 percent this year, compared with a 17 percent decline in 2008. Oil and gas companies face the heaviest declines, according to analysts’ estimates.
  
  Wild Card
  
  “The biggest near-term risk is how tough it’s getting overseas,” said McCain at Key Private Bank. “That’s the wild card.”
  
  Earnings at European oil companies may drop 21 percent in 2009, compared with a 4.7 percent gain last year, according to estimates. Profit at Royal Dutch Shell Plc, Europe’s largest oil company, may drop 27 percent. The company postponed projects in Canada and Australia as demand for oil declined.
  
  European retailers may post a 12 percent drop in earnings this year. Discounts of 70 percent or more during the holiday shopping season by U.K. stores hurt profit margins and may lead to a raft of bankruptcies, said Nick Hood at Begbies Traynor.
  
  Nokia Oyj, the largest mobile-phone maker, said last month the global handset market may contract this year for the first time since 2001. Earnings at Espoo, Finland-based Nokia could decline 14 percent in 2009, according to analysts’ estimates.
  
  Asia Recession
  
  Half of Asia will probably be in recession this year as a $700 billion drop in export earnings causes economies in Japan, Hong Kong, Singapore, South Korea and Taiwan to shrink, according to Macquarie Group Ltd.
  
  Japanese corporate earnings may extend their slump after the yen rose against all major currencies in 2008 and eroded the value of exports. Credit Suisse Group AG estimates earnings will be weakest in the first half at carmakers, machinery producers and technology companies.
  
  Japanese automakers are slashing output, jobs and profit forecasts as the global recession deters consumers from buying new cars and sport-utility vehicles. Toyota Motor Corp., Japan’s biggest automaker, last month predicted its first operating loss in 71 years for this fiscal year because of the slump and a stronger yen.
  
  Vehicle demand from emerging markets, where automakers had counted on sales shoring up collapsing demand in the U.S., Europe and Japan, is also likely to decline as fallout from the credit crunch and economic slump spread, said Song Sang Hoon, a Seoul- based analyst at Kyobo Securities Co.
  
  No Immunity
  
  “No one will be immune from this downturn. It’s time to see who’s losing least, not who’s winning more,” he said.
  
  Among technology companies, Tokyo-based Sony Corp. will begin eliminating 16,000 jobs as the slump undermines sales of Bravia televisions and Cyber-shot digital cameras. Panasonic Corp. is projecting profit in the year ending March 31 will be 90 percent lower than previously anticipated.
  
  Asian banks will grapple with falling earnings and rising defaults on loans this year as economies from China to Australia slow, prompting central banks to slash interest rates, said Tim Rocks, an Asian equities strategist at Macquarie in Hong Kong.
  
  Lenders in Japan, Australia, Singapore and South Korea raised money in the final quarter of 2008 after they escaped most of the initial writedowns and credit losses that forced U.S. and European rivals into government takeovers.
  
  “This quarter and the first quarter ‘09 are just going to be really ugly quarters,’’ said Frederic Dickson, who helps manage about $19 billion at D.A. Davidson & Co. in Lake Oswego, Oregon. ‘‘It’s just going to take a long time to get confidence restored.’’
  

FedEx Sees Weaker Global Economic Trends To Worsen!

Posted on Yahoo Finance yesterday: FedEx Corp. Reports Expected Second Quarter Earnings

• “Second quarter results benefited from rapidly declining fuel prices and continued cost management,” said Alan B. Graf, Jr., executive vice president and chief financial officer. “However, demand for our services weakened sequentially throughout the quarter and global economic trends continue to worsen, substantially reducing our second half outlook. We are adjusting our expense plans to more closely align with the weaker business conditions, and are now targeting capital spending of $2.5 billion for fiscal 2009, down from $3.0 billion at the start of the year.”

Not a good indicator.

Make No Doubt About It - Chinese And Global Manufacturing Are Slumping!

Posted yesterday: China's Steel Industry Slows Down

On CNBC news, Chinese Industry Slumps as PMI Hits Record Low

• The downturn in China's manufacturing sector gathered pace last month as falls in new orders and production drove the official purchasing managers' index (PMI) to a record low
  
  The index, which is based on a survey of industrial firms across China, fell to 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing (CFLP) said on Monday.
  
  The index is designed to give a timely snapshot of the state of the manufacturing sector, which has been a major driver of China's headlong economic growth in recent years.
  
  A reading over 50 indicates an expansion of activity in the manufacturing sector, while one below 50 suggests a
  deterioration.
  
  "November's PMI shows that the Chinese economy is slowing down at an accelerating rate. The signs of economic contraction are more evident," said Zhang Liqun, a government economist who comments on the survey for the logistics federation.
  
  Zhang said the government had taken many aggressive steps to counter the slowdown, but these would take time to have an impact.
  
  "China's economy will bounce back to a comparatively high growth rate in the spring of 2009 as the effects of the various measures show through," he added.

And Dr. Marc Faber says that China's stimulus package won't work. See video clip here: http://www.cnbc.com/id/15840232?video=945548876

And the manufacturing slowdown is not only a Chinese problem!

On Bloomberg news: U.S. Economy: Manufacturing Shrinks Most in 26 Years

• Dec. 1 (Bloomberg) -- American manufacturing contracted in November at the steepest rate in 26 years, leading Europe and Asia into an industrial slump as a recession that began in the U.S. in December 2007 spread around the globe.
  
  The Institute for Supply Management’s factory index dropped to 36.2, below economists’ forecasts, and its gauge of raw- material costs plunged to the least in six decades, intensifying concern over deflation. The Tempe, Arizona-based group’s report came as factory indexes in China, the U.K., euro area, and Russia all fell to record lows.
  
  The U.S. entered a recession a year ago this month, according to a declaration today by the National Bureau of Economic Research panel that dates American business cycles. The economic slowdown and decline in inflation are putting pressure on policy makers to keep lowering interest rates and boost stimulus plans.
  
  “This downturn in the global economy is probably more synchronized than we have ever seen,” said Jonathan Basile, an economist at Credit Suisse Holdings in New York. Policy makers should “open the flood gates” for more action, he said.
  
  Stocks worldwide tumbled and yields on U.S. Treasury securities fell to the lowest ever on concern a lack of financing will stunt consumer and business spending.
  
  The ISM index was projected to drop to 37, according to the median of 61 economists’ forecasts in a Bloomberg News survey. Estimates ranged from 33.5 to 40. A reading of 50 is the dividing line between expansion and contraction.

And the possible suggestion is that..

• “The U.S. manufacturing report made it clear it’s going to take a while before we get out of this recession,” Mamoru Shimode, chief equity strategist at Deutsche Bank AG, said in an interview with Bloomberg Television. “The stronger yen will directly hit Japanese manufacturers’ earnings, and their stocks are likely to lead declines in the Tokyo market today.” (Source: here )

There Is Real Crisis Out There In Global Trade!

When the shipping industry is breaking down as what we are seeing within the Baltic Dry Index ( the Baltic Dry Index has plunged some 93% of its high in May 2008), we know that there is a massive crisis in global trade.

How optimistic can one be right now when there is a trade flows are breaking down?

The following two articles highlights the massive problems!

On theGlobeandMail.com, Global shipping slump stokes fears

• The global financial crisis and China's reduced appetite for raw materials have left the ocean shipping industry reeling, disrupting trade around the world.
  
  "What is happening now is that importers and exporters no longer trust each other, or their banks, and cargo is piling up at export ports waiting to be shipped," London-based shipbroker HSBC Shipping Services Ltd. said in a confidential report to clients. "This breakdown in trust, mirroring mutual suspicion in the interbank loans market, is now seriously undermining global trade flows and, by default, shipping."
  
  The Baltic dry index, a shipping barometer of the volume of global trade, has plunged to its lowest level in nearly a decade.
  
  Since hitting a record high of 11,793 points in May, the index has tumbled 93 per cent. Yesterday, the index posted its first gain in more than a month, rising 11 points to 826 points - still down 83 per cent over the past seven weeks.
  
  "The speed and violence of this collapse is as unprecedented as it was unexpected," HSBC said, noting that spot freight rates to charter ships plummeted to an average of $7,340 (U.S.) a day at the end of October from a daily peak of $233,988 in June.
  
  With shipments of "dry bulk" commodities such as iron ore and coal slowing, HSBC warns that "global shipping is being contaminated by global finance."
  
  China went on an importing spree for raw materials in preparation for the Beijing Olympics in August, but then closed factories and steel mills to cut down on air pollution during the 2008 Summer Games.
  
  "We fully anticipated that China would return to business as usual," HSBC said.
  
  "Instead, China dragged its feet as the insidious effects of financial contagion spread from the West."
  
  While there could still be an estimated 8-per-cent jump next year in China's gross domestic product, it would be a deceleration from the 12-per-cent GDP growth last year. "Factories in Guangdong province in the south, the world's shop floor with the greatest concentration of manufacturing output on earth, are closing down as costs are overwhelming skinny profit margins," HSBC said.
  
  Stuart Bergman, director of economics for Export Development Canada, said he views the Baltic dry index's decline in ocean freight rates as a leading indicator of an economic slump in 2009.
  
  With fewer bulk commodities being shipped, it means that factory production is destined to falter. For instance, weaker iron ore shipments will translate into lower steel output, he said in an interview. "It's mainly the China story, but there's a general slowdown in global trade flows."
  
  China had been exporting a steady stream of manufactured goods to industrialized countries, but with the credit crunch, demand for finished products has softened as importers in the West face tightened credit markets, which have made it tougher to import as much as they would like, Mr. Bergman added.
  
  Randy Cousins, an analyst at BMO Nesbitt Burns Inc., said some exporters are reluctant to accept letters of credit.
  
  "This is symptomatic of the seizing up of credit markets. It's symptomatic of a broad-based slowdown in world economies," Mr. Cousins said. "There's no question that there has been a dramatic drop in shipping demand in the past four to six weeks. It's extremely difficult to get financing to move stuff between point A and point B."
  
  The HSBC report said the market for buying and selling used ships has slowed to a crawl, while contracts to build new vessels are being delayed or, in some cases, buyers have left behind down payments, unable to finance the balance.
  
  HSBC said it expects financing concerns will be gradually resolved to clear the way for healthy trade again, although it could take months for the recovery.

On the UK Independent, Holed beneath the waterline

• The staggering and sudden decline in the cost of chartering a cargo ship reflects both the global economic slowdown and the ongoing credit crunch. Sarah Arnott reports
  
  Thursday, 6 November 2008
  
  Hold on to your hat: the Baltic Dry Index was down at 826 points yesterday, a shattering drop from its high of 11,793 in May.
  
  The index, which tracks the price of shipping bulk cargo, might not sound like a reason to choke on your cornflakes. But it is an unparalleled, if subtle, barometer of the global trade in economic building blocks like iron ore, coal and grain – and it is telling a worrying tale.
  
  Put simply, the cost of shipping has dropped through the floor. Sending a tonne of iron ore from Brazil to China in early June would have set you back more than $100 (£62) per tonne, or around $15m per voyage. But freight rates have now dropped to only slightly over $10 per tonne, or just $1.5m for the 70-90 day journey.
  
  As if that wasn't dramatic enough, the drop in daily charter rates is even sharper. At the peak of the market, a 170,000-tonne Capesize bulk carrier was hired out at the eye-watering daily rate of $234,000. At the beginning of this week, it was $5,611 – a fall of nearly 98 per cent.
  
  Peter Kerr-Dineen, chairman of Howe Robinson ship brokers, said: "The scale of change in rate is utterly staggering – the market has come down from super-boom territory to pretty close to bust, effectively in two months."
  
  Contracting demand for imports in recession-wary economies across the world is a factor, as are steadily falling commodity prices and the mechanics of supply and demand in the shipping industry itself. But the real trouble is less obvious, largely unprecedented, and potentially devastating.
  
  The wheels of international shipping are greased with "letters of credit"issued to buyers of bulk cargo by their banks. These guarantee the value of the shipment once it is in transit but before it is delivered. The problem is that the credit crunch, with the resulting liquidity problems in the international banking sector, is taking its toll on the availability of these entirely routine instruments. "We have the hugely worrying and unprecedented development where there are perfectly creditworthy shippers and receivers unable to open perfectly standard letters of credit," Mr Kerr-Dineen said.
  
  Cargos are sitting on docksides because the finance is not available to ship them, with the gravest implications for the future. "This is a nuclear bomb in the freight market, and in world trade," Mr Kerr-Dineen said. "Liquidity has to return because if there is insufficient money to provide standard finance, world trade will be sharply cut back and economic growth will implode."
  
  This comes at the worst possible time, on top of a string of other adjustments already affecting the shipping market. After an unparalleled boom over the last five years – fuelled in large part by rocketing Chinese demand – it was to be expected that the overheated market would cool. And in the shipping industry itself, the number of vessels started to catch up with demand. Meanwhile ballooning commodity prices were being undercut as additional supply, fuelled by the high prices, started to come on stream.
  
  Against such a background, more recent concerns over the economic slowdown in both the East and the West have pushed users of commodities to run down their existing stocks, rather than buy in new supplies at what are still relatively inflated prices.
  
  These are all to some extent predictable economic adjustments, but a more sinister effect has been that de-stocking is masking the shortages caused by the dearth of credit. Mr Kerr-Dineen says there are around three months left before stocks run out.
  
  "If the problem is not resolved, there will be no way in which even the sharply revised economic growth forecasts for 2009 will be met, because without normal trade economies cannot function. Ultimately, flour mills will run out of wheat and power stations will run out of coal," he said.
  
  So far, the most significant problems have been confined to the bulk commodities trade. Manufactured goods have been are less affected because there is less reliance on letters of credit, said a source in a large container shipping company. Large shippers like Walmart or Nike do not need the letters because they are, in effect, sending to themselves. And even where trade is between companies, long-standing commercial relationships leave a lot more to trust than in the more volatile commodities market.
  
  But firms using containers to ship bulk products such as bananas, meat or fish are feeling the pinch. "We are certainly seeing unusual delays in issuance of letters of credit for commodity trades," the source said.
  
  Banks are charging more to issue the letters, and nervous traders are requiring guarantees, where historically trust might have been enough.
  
  Jeremy Penn, chief executive of the Baltic Exchange which runs the Baltic Dry Index, said: "Sentiment is also a key driver and has gone completely into reverse. People are also waiting for prices to fall further. There is no incentive to do today what they think will be cheaper tomorrow."
  
  George Cambanis, head of global shipping at Deloitte, said: "Everybody can still hold their breath for the time being, but it is anybody's guess how long it will take for money to start circulating again."
  
  He added: "Trading has virtually come to a standstill, because there is no cargo for the ships. There has also been no trading of vessels in the last few weeks, so there is no market value out there for companies' capital investment in their ships."
  
  No longer oiling the wheels
  
  Freight cargo is not the only piece of the global economic infrastructure being hit by the on-going constriction of credit. Companies looking for forward hedging are also struggling to find banks willing to put up the cash.
  
  Earlier this week, Michael O'Leary, the chief executive of Ryanair, admitted that his plans to hedge 2009's fuel requirements went awry because banks were not willing or able to take the risk. "We were originally planning to hedge about 50 per cent of our needs for the next 12 months but we just couldn't get there," he said. "Banks in hedging are withdrawing and fuel companies don't trust the banks as counter party risk."
  
  The budget carrier was stung by soaring oil prices that reached $147 per barrel in July and more than doubled the airline's fuel bill, from €393m (£318m) to €789m (£638m) in the first six months of the year.

By the way, the Baltic Dry Index has managed to record it's 2nd consecutive gains!

It gained some 13 points yesterday.

However does it matter now?

Even Scrap Buyers Are Fighting For Survival!!!

The following news clip caught my attention. Yes, it's yet another horror story!

• Buyers cancel orders as scrap steel prices fall
  Prices of ferrous scrap tumbled at least 80% in the past four months, but demand is expected to recover next year
  
  Beijing: Scrap steel buyers in Asia are cancelling orders after prices tumbled at least 80% in the past four months as demand slumps, traders said.
  
  “There are buyers in China, India and Europe that are literally fighting for their survival,” said Bob Garino, director of commodities at the Institute of Scrap Recycling Industries Inc., a trade association representing at least 1,600 companies. “Steel prices have fallen off a cliff, and they just don’t have the money to honour their contracts.”
  
  Sims Group Ltd, the world’s biggest recycler of scrap metal, said in October sales may fall and it may write down inventories. Steel makers in China, Japan, India and Korea, which account for more than 50% of global output, are slashing production as the global economic slowdown curbs demand from builders and car makers.
  
  Prices fell to $120 (Rs5,664) a tonne this month, from $730 a tonne in July, said Jeff Allman, managing director of ferrous trading at St. Louis-based Kataman Metals Inc., which does more than $1 billion in scrap trades a year.
  
  Scrap iron and steel prices in Japan slumped 22% to 14,076 yen ($141) a tonne in the week ended 27 October, according to the Japan Ferrous Raw Materials Association. That’s the lowest in at least three years. Prices in Korea dropped 27% in August from July, Citigroup Inc. said on 7 October.
  
  Surplus ferrous scrap is sitting in yards, ports and on ships as contracts are renegotiated, said Kataman Metals’ Allman.
  
  Profit margins have dropped to at most $20 a tonne, from as much as $200 a tonne previously, he added.
  
  In Thailand, which imports 2mt of ferrous scrap a year, 800,000 tonnes of the material is without buyers, said Suppakit Varnapurna, steel scrap manager at SCT, the trading affiliate of Siam Cement Pcl., the country’s biggest cement maker.
  
  Pramod Kumar Saraf, director of Chennai-based scrap buyer Jai Bhawani Steel Enterprises Ltd, agreed to share losses with a seller on a 2,000 tonne shipment by halving the agreed price to $250 a tonne.
  
  “Sellers are desperate,” Saraf said in an interview in Shanghai. “We have compromised too.”
  
  China, the world’s largest steel maker, will probably post a 20% output decline in the fourth quarter, the Central Iron and Steel Institute said earlier this week. Japanese mills are cutting production by the most in at least five years, the nation’s trade ministry had said on 29 October.
  
  Worldwide annual production of ferrous scrap is about 330mt a year, according to the Institute of Scrap Recycling’s Garino.
  
  Scrap from discarded cars, machinery and beams in developed economies is recycled into steel in so-called electric arc furnaces. Conventional blast furnaces use iron ore and coal to make steel.
  
  Still, China and West Asia will continue to consume large amounts of steel for urbanization and infrastructure, helping demand for ferrous scrap to recover as early as the first quarter of 2009, Kataman Metals’ Allman said.
  
  Falling copper prices have also led buyers to cancel purchases, said John Chen, executive vice-president of Tung Tai Group, a San Jose, California-based scrap metal trader that also owns processing yards in China.

Source: http://www.livemint.com/2008/11/06001517/Buyers-cancel-orders-as-scrap.html

Dr. Marc Faber Says A Global Bust Is Likely To Happen

Here are some lates comments from Dr. Marc Faber.

• There were also some speakers who thought that the Asian financial crisis in 1997-1998 made many Asian companies become conservative investors and borrowers, but that the United States failed to follow its own prescriptions for Asia, which then had also suffered from too much leveraging in the property market. It was also clear that the subprime-mortgage crisis was brought about by too much liquidity, easy credit and inadequate government regulation.
  
  A few were brave enough to recommend what sectors to invest in, but cautioned investors to look at valuations on a per-stock basis instead of per country and industry. One fund manger even managed to pick out a few choice stocks in the Philippine market that could offer earnings opportunities once their share prices drop to desired levels.
  
  Most of the fund managers tried to end the conference on a more hopeful or optimistic note, with some even predicting that the world will probably be in a better place by 2010.
  
  What really happened?
  
  Speaking on the subprime-market meltdown, Dr. Marc Faber of the Hong Kong-based Marc Faber Ltd. put the blame squarely on the US Federal Reserve for its loose monetary policy. The Fed had cut its overnight rates from 2001 to 2007, “which led to strong money supply growth and strong credit growth….Seventy percent went to housing real-estate investment. Between 2000-2007 home prices then rose steadily and went way above the trend.” From 6 percent at the beginning of 2001 the Fed funds rate was slashed gradually, finally reaching 1.5 percent this month as the Fed moved to stimulate the sluggish economy.
  
  Further, Stephen Weiss, senior vice president of Income Research and Management, said the US banks basically didn’t do their homework in checking the credit background of their borrowers, many of whom would probably not meet lending standards under the normal circumstances. The banks then sold the mortgage bonds—which were given high ratings by credit-ratings agencies—despite the low quality of the borrowers.
  
  “The credit crisis is very serious. The Fed can cut rates and pursue even more expansionary monetary policies. Also, fiscal measures can be expanded further. However, in the current conditions such policy measures will increase the rate of inflation and accelerate the depreciation of the US dollar,” added Faber.
  
  A $700-billion bailout package was recently approved by the US Congress enabling the Department of Treasury to take over troubled lending institutions. Over the weekend President Bush and G-20 finance ministers resolved to unite to combat the spreading credit crisis.
  
  “Regardless of policies followed by the US government and its agencies, the consumer is in recession and the recession will deepen. Trade and current-account deficits will shrink further and diminish international liquidity. The shrinkage of global liquidity is bad for asset prices, including commodities. Also, deleveraging is occurring among financial intermediaries. This is extremely negative for an economy addicted to credit growth.
  
  “We had an unprecedented global economic boom. A global bust is likely to happen,” was Faber’s prognosis.

Source: http://businessmirror.com.ph/index.php?option=com_content&view=article&id=288:opportunities-amid-the-global-crisis&catid=34:perspective

In that same article, it was absolutely great to see the following passage!

• US didn’t learn from Asian crisis
  
  During the panel discussion on the “Fixed Income Markets Outlook,” William Thomson, chairman of Private Capital Ltd., a Hong Kong-based wealth management company and adviser to the London-based Axiom hedge-fund group, said the subprime-credit mess in the US “almost mirrors the [Asian financial] crisis in 1997 where greed and crony capitalism and the absent of regulation” were the norm. He added that the Americans “forgot their lectures to Asian economies a decade ago,” when the regional economy crashed as the property market burst and currencies collapsed.
  
  After the Asian financial crisis, it took only four to five years for the region’s economies to recover because its residents have a high savings rate reaching 30 percent to 40 percent of total gross domestic product. (The exception is the Philippines, with a historically low savings rate.)
  
  So he expressed uncertainty for the outlook for the West because the “OECD [Organization for Economic Cooperation and Development] savings rate is quite low,” with the US in particular, at only 14 percent to 15 percent of its GDP. “That’s only a third of the Asian savings rate so it [the US] has a bigger hill to climb. The recession will not be an easy one to get out of.”