by Patrick Wood
In last week’s issue of Findings & Forecasts I stated,
“The Baltic Dry Index continues to collapse at an alarming rate. In the month of January alone it has given up almost 63 percent of its value. Today’s reading was 680, just 17 points above the 12/05/08 low of 663. After that, the BDI levitated back to 4661 by 11/19/09 and has meandered lower until December when it really collapsed. From the 11/19/09 peak, it has given up over 85 percent.”
Well, it broke through to a new low at 647 on Friday, and has three consecutive higher closes on Monday, Tuesday and today. At 647, the BDI is at the lowest point since February 3, 1986, or 26 years ago!
Shipping companies are wilting as rates go into the red. Bloomberg reported on Monday, “Glencore Gets Free Ship With a Fuel Discount as Charter Rates Go Negative”,
Glencore International Plc paid nothing to hire a dry-bulk ship with the vessel’s operator paying $2,000 a day of the trader’s fuel costs after freight rates plunged to all-time lows.
Glencore chartered the vessel, operated by Global Maritime Investments Ltd., a Cyprus-based company with offices in London, Steve Rodley, GMI’s U.K. managing director, said by phone today. The daily payments last the first 60 days of the charter, Rodley said. The vessel will haul a cargo of grains to Europe, putting the carrier in a better position for its next shipment, he said.
“Our other option was to stay in the Pacific and earn poor revenues or ballast to the Atlantic and pay the fuel ourselves,” Rodley said. Ballasting refers to sailing without a cargo…
The Baltic Dry Index, a measure of commodity shipping costs, advanced 1 point to 648 points today, rising from the lowest since August 1986 on Feb. 3. Owners and operators of vessels are paying as much as $50,000 a day in fuel to travel to ports to win work, or agreeing rates at zero cost as rates fall to records.
Charters for the so-called backhaul routes that reposition ships to the Atlantic Ocean region from the Pacific are falling to the lowest since indexes started, exchange data show. Rents for Capesize ships that haul ore and grain on backhaul routes were at minus $7,342 a day, the lowest since that index began in 1999, exchange data show.
GMI will pay Glencore as the Panamax-sized vessel travels from near the coast of Yosu, South Korea to Australia to load grain, reverting to a daily rate linked to a Baltic Exchange index level once the 60 days expired.
Details about the ship hire were included in a list of vessels charters published daily by the Baltic Exchange, the London-based assessor of freight costs. This is the first time the exchange has published vessel charters with rates at less than zero, said Derek Prentis, 86, the exchange’s longest– serving member.
D/S Norden A/S, Europe’s biggest publicly trading commodity shipping company, said Feb. 3 it hired a Supramax vessel at no cost other than fuel charges, its first such transaction in a quarter century.
Obviously, this cannot go on for long without a real shakeout in the shipping fleet. Fleet capacity has been growing as new ships are brought into service, but growth of bulk tonnage shipped has lagged at the same time.
The HARPEX index that pertains to shipping rates on inter-modal container ships has also continued to fall, but not as sharply as the BDI.
Dependence on Government
The Heritage Foundation just released its 2012 Index of Dependence on Government. The abstract state,
“The great and calamitous fiscal trends of our time — dependence on government by an increasing portion of the American population, and soaring debt that threatens the financial integrity of the economy — worsened yet again in 2010 and 2011. The United States has long reached the point at which it must reverse the direction of both trends or face economic and social collapse.”
Some selected highlights:
- 49.5 percent of Americans pay no income tax
- 70.5 percent of Federal spending goes to dependence programs
- Housing assistance jumped 42 percent between 2006 and 2010
- Welfare and low-income health care assistance surged 41 percent between 2008 and 2010
- Excluding government employees, 20 percent of Americans are dependent on government
- Federal government dependence spending (per capita) is now higher than disposable income
- 80 million baby boomers will be added to the roles in coming years, at a rate of 10,000 per day
There is no political will to face these problems head-on. Perhaps the denial comes from the perception that the problems are too large to deal with and thus unsolvable.
Nevertheless, reality is on our side here. A massive multiple train-wreck is in our future.
President Obama is exacerbating this entire picture by creating additional government dependence. This is the socialist’s dream, of course, but also a politician’s dream: Maximizing government dependence guarantees a continuance of establishment power. In other words, “we the people” are in a minority.
Derivatives vs. stocks?
I have written previously that most estimates of derivative market size range as high as $700 trillion. Some have suggested $1.2 quadrillion. It’s an inconceivable size.
There is no regulation or standardization in the derivatives market. There is no centralized market maker or exchange. Any kind of “bet” can be written into a contract. Any kind of “penalty” can be specified.
There is some evidence that the big Credit Default Swap (i.e., derivatives) issuers have been pledging U.S. stocks against the possibility of loss in the Greek (and others, too) bond market. If Greece goes bankrupt and triggers these contracts, the issuers must deliver a fixed amount of stocks to the opposing side. Yes, such a deal could have been made promising plain old cash, but apparently that isn’t exotic enough for these risk-on bankers and insurance company execs.
As Greece is headed for bankruptcy, those exposed to massive CDS losses may be buying up stocks early in order to protect themselves. This is roughly akin to a “short-squeeze” in a market where a large number of short sales are forced to cover at the same time when prices move unexpectedly higher, thus spiking prices even higher.
My thoughts are admittedly speculative because so little is known about the derivatives market. There is no statistical reporting service to break it down for us. However, we know from experience that you cannot underestimate the banksters’ ability to screw up every market that they touch. After a taxpayer bailout during the sub-prime meltdown, they learned no lessons about tempering risk; if anything, the propensity for risk today may be even greater than before because the taxpayer could be soaked again.
Stocks persist in subdividing higher but the Elliot Wave count shows that the move is fully ripe and poised for a reversal. Trader sentiment is as high as it was at the April/May peak, just before the major indexes started a wicked decline.
Market pundits are heralding the start of a new bull market, and if true, it would be the very first time in this writer’s lifetime that a bull market was launched under conditions like these.
So, the topping process is taking its time and getting as many as possible to go “risk-on” before the hammer drops. The new recovery high in the DJIA means that Primary Wave 2 is extended, and that Primary Wave 3 down has not yet started. The S&P 500 has not hit a recovery high (yet) and thus it’s Primary Wave 2 top is unchallenged.
The purpose of a Primary Wave 2 up is to fool the maximum number of traders, investors and analysts into thinking that it is really the first wave up in a new bull market. This happens on large and small scales alike. Whatever the given fundamental reasons, this hope quickly turns to fear when prices decline. During the second half of 2011, we saw rampant bullish sentiment change to abject fear in a matter of a few trading hours.
Gold and silver have kept pace with rising stocks, while the dollar has declined. The “all-the-same” phenomenon is still in place, indicating that when one market turns, the others will respond in kind.
As investors moved to equity investments, long term bonds have decreased in price, pushing yields up. The pattern clearly looks corrective.When stocks move down, money should travel back to bonds while seeking safety. Thus, I expect that the record low yield of 2.69 percent in 30-year U.S. Treasuries will ultimately be broken. Bernanke and the Fed are not helping matters by pledging to keep inter-bank lending rates near zero.
Low bond rates is a killer to investors who must live on fixed income. A person who retired in 2005 with a $1,000,000 portfolio would have expected an annual income of about $50,000. At today’s rates, he is lucky to make $35,000. That is not a real-life situation, but it underscores the point: Low rates decimate pension and retirement funds. Those who turn to more risk to compensate for the loss of income usually wind up losing principal as well.