Economics

More on the Baltic Dry Index, the index of spot rates for dry bulk commodity shipping (iron ore, coal, grains). After rallying substantially earlier this year, the BDI has pulled back substantially from 4,000 levels now to below 3,000. We had pointed out the threats to the BDI, and highlighted Transport Trackers call that BDI speculation at 4,000+ was a bad bet to be making. Well, we can further highlight the over-supply problem for dry bulk shipping, from the massive orderbook racked up during the recent bulk shipping boom. Dry bulk bulls argue that economic hardship will lead to massive orderbook cancellations, but Transport Trackers points out that even pretty aggressive ship cancellation assumptions are unlikely to change the fact that the oversupply problem is set to get worse before it gets better. Take a look at this chart from their recent piece: Note the supply growth rates for 2009-2010 and note that demand growth has fallen well below recent levels. So you have peak supply growth hitting far from peak demand growth. How can you expect anything towards peak dry bulk shipping rates? Note that BDI 4,000 is still a very strong rate vs. where it has been, shown here.

Wishful thinking: We’ve seen estimates from 15 – 50% for {cancelations-slippage-delays} of the bulk orderbook. The high end figures are wishful thinking in terms of market impact. We side with a 15% range figure, yet agree many vessels are/have been delayed. To note, when thinking of 40-50% cancelations-slippage is that also many rightly pointed out the real orderbook was perhaps 20% bigger at peak than that officially recorded back in mid-08. So, taking 40% off of the larger estimate would generate -28%, for arguments’ sake. Another trick we found was to annualize cancelation-delays based on 1Q09 world meltdown data.

I can't help but keep finding points of contention with Felix Salmon at Reuters. I think he writes well and I'm sure he's great to have a beer with. But he exemplifies the current environment of bank-hatred whereby hatred for their deserved wrongs has spilled over into a generalized resentment for a wide range of activities banks do and a desire to command them centrally, based on wherever the latest gaze of hatred happens to fall.

In a latest post he decries the "Scandal of Overdraft Fees", whereby one is basically charged a fee if you draw more money than you have in your account. He points out that they are frequently high ($25 range) relative to the offending average overdraft ($36) and how it's the poorest bank customers who pay the majority of overdraft fees. He then expands the hate to all fees in general, points out that banks earn a substantial portion of income from fees, and then concludes it's a raw deal and thus must be stopped. It's this final recommendation that haunts me most.

I'll simply address the attack on overdraft fees for now, to keep things focused. Look, I've been both the recipient of excellent banking service and on the tail end of fees as well. And I realize that frequently it's the poor who mismanage their money, thus succumb to fees, credit card interest, etc. Nevertheless, while some uniquely dastardly and heart-wrenching stories can come out of the woodwork, overall I believe we need to keep holding people responsible for their decisions and personal management. The beauty of holding people responsible is that we have less right (usually no right) to go and meddle with their personal affairs. While the darkside of nanny-stating and parenting people is that it opens the door to meddling with their lives and restricting their freedoms.

For example, if I don't pay a welfare wage to my neighbor, then I have no right to oppose him if he just sits around smoking marijuana all day. But the second I am required to pay for when he isn't working, then suddenly I can make an argument for why I find his lifestyle too lazy (or whatever one wants to call it), and why I have right to intervene. The same goes for managing one's finances. The second I am forced by law to support someone who mismanaged their money, then I suddenly have an argument to go in and force some change in their lifestyle. Or if they are obese but I pay for their healthcare... then suddenly their obesity becomes a cost to me and I start asking for controls on their lifestyle. See, this is the danger to freedom that the removal of personal responsibility presents, and I think many people, such as Mr. Salmon by the nature of posts such as the above, misunderstand. The more other people support us, the more claims they have on our life's decisions since our life decisions suddenly have forced claims on their property. 

Time Magazine really knows how to cater to the witch-hunt crowd, given their recent 25 People to Blame for the Financial Crisis piece. A funny thing I noticed though. Bernie Madoff is included as one of the top 25... To Blame For the Financial Crisis. The man is a scoundrel, and you can call him a lot of other bad names. But was he really one of the top 25 to blame for the financial crisis? How? Was he even related to it? If anything, it's the financial crisis that helped make his scheme unsustainable, and outted him. Let's see how Time explains his inclusion:

His alleged Ponzi scheme could inflict $50 billion in losses on society types, retirees and nonprofits. The bigger cost for America comes from the notion that Madoff pulled off the biggest financial fraud in history right under the noses of regulators. Assuming it's all true, the banks and hedge funds that neglected due diligence were stupid and paid for it, while the managers who fed him clients' money — the so-called feeders — were reprehensibly greedy. But to reveal government and industry regulators as grossly incompetent casts a shadow of doubt far and wide, which crimps the free flow of investment capital. That will make this downturn harder on us all.

So his guilt is that he revealed government and industry regulators as grossly incompetent. First of all, the fact that he revealed this has nothing to do with being a cause of the crisis. When you blame someone for something, they need to be culpable, ie. need to be a cause of whatever you are blaming them for. Second of all, he revealed "government and industry regulators as grossly incompetent", shouldn't we actually be applauding him here? Joking.

UNCTAD recently released report forecasting a 15% decline in global steel demand, which comes after a 1.4% decline in 2008. While most of the world is expected to experience sharp declines in demand, even China is expected to see a 5% decline, though in 1Q09 China still eked out 0.8% of demand growth.

The global contraction in demand has resulted in extremely low May 2009 capacity utilization levels of 43%, 49%, and 55% for the steel industries in the US, Europe, and Japan. Again, even China, despite its growth, was recently about 78% utlization as per the UNCTAD piece, and via other sources is expected to see capacity utilization in the 70% range this year due to over expansion of steel capacity.

What does the YTD data vs. forecasts tell us? We haven't seen the worst yet out of China. The UNCTAD report implies that most of the 5% decline in Chinese demand should be weighted towards the second half of 2009. The worst is yet to come from China in terms of steel demand, and keep in mind UNCTAD takes note of Chinese government stimulus plans. Falling capacity utilization forecasts fro YTD vs. full year 2009 imply the same.