Baltic Dry

Understands who can… The Brussels nightly drama yielded first tweeted “results”, then none, then yes. Then some bickering, Southern drama, then truce. Then they still were not done haggling.

Totalitarian governments, like persistent forms of cancer, have latched onto the long history of man, falling and then reemerging from the deep recesses of our cultural biology to wreak havoc upon one unlucky generation to the next.  The assumption by most is that these unfortunate empires are the product of bureaucracies gone awry; overtaken by the chaotic maddening hunger for wealth and power, and usually manipulated by the singular ambitions of a mesmerizing dictator.  For those of us in the Liberty Movement who are actually educated on the less acknowledged details of history, oligarchy and globalized centralism is much less random than this, and a far more deliberate and devious process than the general unaware public is willing consider.  

Unfortunately, the final truth is very complex, even for us… 

While we do not agree that anything will happen on Wednesday (or pre-Greek-election to be more precise) - aside from perhaps a small bump in BoE LSAP, Peter Tchir provides a useful update to our original 'full central bank menu' two weeks ago. Markets and economies are teetering across the globe.  More and more people are coming to the conclusion that a Greek Exit would be catastrophic. Central banks won’t want to act as though they are panicking, but neither will they want to wait much longer to act. Tchir believes investors will be extremely disappointed if nothing happens and expects markets to decline rapidly.  If central bankers do take some policy actions, it is key to figure out which ones are practical, which are merely symbolic, and which are just a dream and not an action.  Who says what is just as important in some cases as what they say.  When Merkel says something, we all need to listen.  When anyone from the EU in Brussels says something, it will be the same thing they have said over and over and is completely self-serving and should be ignored.  Anything Draghi and Bernanke might say is critical to listen to, because in this weird world, they have the most power to do something meaningful in a short period of time.

There are some people who also believe that the private Federal Reserve with the Treasury in tow has the ability to prolong the worst symptoms of the collapse indefinitely, or at least, until they have long since kicked the bucket and don’t have to worry about it anymore (the ‘pay-it forward to our grandkids’ crowd) .  I can say with 100% certainty that most of us will live to see the climax of the breakdown, and that this breakdown is about to enter a more precarious state before the end of this year.  You can only stretch a sun-boiled rubber band so far before it snaps completely, and America’s financial elasticity has long been melted away.  A pummeling hailstorm of news items and international developments have made the first half of 2012 almost impossible to track and analyze.  The frequency at which negative information has surfaced is almost dizzying.  However, a pattern and a recognizable motion are beginning to take shape, and, I believe, a loose timeline is beginning to form. 

Americans have been listening to the mainstream financial media’s song and dance for around four years now.  Every year, the song tells a comforting tale of good ol’ fashioned down home economic recovery with biscuits and gravy.  And, every year, more people are left to wonder where this fantastic smorgasbord turnaround is taking place?  Two blocks down?  The next city over?  Or perhaps only the neighborhoods surrounding the offices of CNN, MSNBC, and FOX?  Certainly, it’s not spreading like wildfire in our own neck of the woods…Many in the general public are at the very least asking “where is the root of the recovery?”  However, what they should really be asking is “where is the trigger for collapse?”  Since 2007/2008, I and many other independent economic analysts have outlined numerous possible fiscal weaknesses and warning signs that could bring disaster if allowed to fully develop.  What we find to our dismay here in 2012, however, is not one or two of these triggers coming to fruition, but nearly EVERY SINGLE conceivable Achilles’ heel within the foundation of our system raw and ready to snap at a moment’s notice.  We are trapped on a river rapid leading to multiple economic disasters, and the only thing left for any sincere analyst to do is to carefully anticipate where the first hits will come from. Four years seems like a long time for global banks and government entities to subdue or postpone a financial breakdown, and an overly optimistic person might suggest that there may never be a sharp downturn in the markets.  Couldn’t we simply roll with the tide forever, buoyed by intermittent fiat injections, treasury swaps, and policy shifts? The answer……is no.

Oil as a commodity has always been a highly valuable early warning indicator of economic instability.  Every conceivable element of our financial system depends on the price of energy, from fabrication, to production, to shipping, to the consumer’s very ability to travel and make purchases.  High energy prices derail healthy economies and completely decimate systems already on the verge of collapse.  Oil affects everything. This is why oil markets also tend to be the most misrepresented in the mainstream financial media.  With so much at stake over the price of petroleum, and the cost steadily climbing over the past year returning to disastrous levels last seen in 2008, the American public will soon be looking for someone to blame, and you can bet the MSM will do its utmost to ensure that blame is focused in the wrong direction.  While there are, indeed, multiple reasons for the current high costs of oil, the primary culprits are obscured by considerable disinformation…   The most prominent but false conclusions on the expanding value of oil are centered on assertions that supply is decreasing dramatically, while demand is increasing dramatically.  Neither of these claims is true…

When it comes to reporting the news, Reuters ability to get the scoop first may only be rivaled by its ability to "spin" analysis in a way that will make a normal thinking person's head spin.  Such as the following piece of unrivaled headscrathing titled "The good news behind oil prices" whose conclusion, as some may have already guessed, is that "the surge in crude oil is looking more like a harbinger of better days." Let's go through the arguments.

Following the endless collapse in the Baltic Dry, it was only a matter of time before the shipping industry one-upped the Chairsatan, and was the first to introduce, dum dum dum, negative rates. That's right: you are now paid to hire a ship.

• GLENCORE HIRES SHIP AT MINUS $2,000 A DAY, GMI SAYS
• GMI TO CONTRIBUTE $2,000 A DAY TO GLENCORE'S FUEL COSTS
• GLOBAL MARITIME'S U.K. MD STEVE RODLEY CONFIRMS DEAL BY PHONE

Why is this happening? Perhaps because ships have to be kept seaworthy and in motion or else they become scrappage in as little time as 3 months. Think sharks. Needless to say, this will play havoc with shipping company (and affiliated entities') liquidity, as the biggest default wave in the history of the industry is about to be unleashed and tens if not hundreds of billions of European secured loans are about to be "impaired."

Concerned about European bank deleveraging impacting Emerging Market growth prospects? Worried over Global Trade Volumes dropping and a multi-decade low in the Baltic Dry? Fearsome of record inventories for commodities in China and the potential for a harder landing from credit contraction in the shadow banking system? Concerned that Europe's sovereign and financial insolvency problems are not all gone? Worry no more. It appears, and who are we to argue with the data, that the USA is in fact leading the world out of this global growth slowdown with its Composite PMIs the highest of all the major growth drivers. From Markit Economics, we see that perhaps Goldman's Jim O'Neill will have to change his famous acronym to UBRIC as the decoupling myth (not a lag or inventory cycle) remains firmly in place (and the record-breaking jumps in some of the US Services PMI sub-indices should be treated with all the respect in the world).

Just when it seemed that nothing could possibly surprise about adverse Greek bank exposure, as these are beyond insolvent already relying on the ECB for day to day operations as is, here comes one more development, this time courtesy of the one index that has been in literal freefall in the past two months, and recently hit a 20+ year low - the Baltic Dry. OpenEurope explains: "An interesting but niche issue has come to our attention recently in relation to the on-going troubles in Greece. The 'Baltic Dry Index' (a measure of global shipping demand/prices) has fallen for a month straight to record lows. When this index falls it suggests that there is trouble in the shipping industry, raising questions over the stability of shipping firms. As it turns out many of these firms have secured their financing from Greek and other European banks – meaning if they start defaulting on their loans these banks could take losses. This raise further questions over the bank recapitalisation plans and whether such contingencies have been thought of in the second Greek bailout (which sets aside €20bn for Greek banks)."

With the IMF cutting its global growth forecasts and signs of slowing evident in the dramatic contraction in World Trade Volume in the last few months, it is perhaps no surprise that the central banks of the world have embarked upon what Goldman Sachs calls an 'Unprecedented Alignment of Monetary Policy Across Countries'. Our earlier discussion of the European event risk vs global growth expectations dilemma along with last night's comments on the impact of tightening lending standards around the world also confirms that this policy globalization is still going strong and is likely to continue as gaming out the situation (as Goldman has done) left optimal CB strategy as one-in-all-in with no benefit to any from migrating away from the equilibrium of 'we all print together'. Perhaps gold (and silver's) move today (and for the last few months) reflects this sad reality that all your fiat money are belong to us, as nominal prices rise (but underperform PMs) in equities (and risky sovereigns and financials).

"Quirky canary-in-the-coal-mine indicator" indicating trouble. 

What is the bottom line?  The stark decline in the BDI today should be taken very seriously.  Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval.  All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving.  They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest.  They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely.  Is it any wonder that the Baltic Dry Index is in such steep deterioration? Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities.  Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities.  Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation).  Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus.  Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us.  It must be watched with care and vigilance...

While the number is likely influenced by the Chinese Lunar New Year, property consultant Shanghai UWin Real Estate Information Services Co. released an update on the Chinese new home sales market which is, to say the least troubling. Specifically, according to UWin, Shanghai new home prices fell 40.96% in the week ended January 29, compared to the previous week, to 16,144 yuan/square meter. If correct, it means that local homeowner violence is about to come back with a vengeance, as happened back in October when property developer office were stormed by angry mobs of home purchasers who saw an implosion in the indicated values of their purchases. Furthermore, not only has the market stalled, but it appears to be frozen, with just 4,400 square meters of new transactions closing, or an 89.21% drop on the week. And while the holiday has an impact, the volume is 36% of the 7 year average for Chinese holidays, so there is more in play here than just a seasonal grind. So just like the Baltic Dry where everyone is expecting a surge "any minute now" that the Chinese new year is over, nervous China bulls will have this new vertical to keep track of and make sure that it is merely a blip, as the alternative is a full blown Chinese housing bubble collapse.

Whether it is an over-abundance of ships (mis-allocation of capital) or a slowing global growth story (aggregate demand), the crash in the Baltic Dry Index has been significant to say the least. Seasonals are prevalent (and Chinese New Year impacts) but to try and clean up that perspective, we find that so far this year the Baltic Dry has fallen 42% more than its seasonal normal and is down by more than 50% since 12/30/11. Nothing to see here move along.