By John Galt
August 14, 2011 – 12:00 ET
As the talking heads begin their next relentless wave of “buy and hold” recommendations along with the “underlying economy is sound” nonsense while dismissing the potential for a recession just like they did in 2008, more evidence is appearing on the horizon that indeed world economic conditions are deteriorating. On Friday a story appeared in the Canadian news paper, The Globe and Mail, via the Financial Times of London which is the clearest signal yet that the economies of the West are in fact beginning to slide towards the much feared double-dip recession (click on the title to read the article in full):
Container shipping faces new slide
While many might dismiss this story as “poor management” and whining about high fuel costs, the reality is that the increases in volume seen earlier in the year are starting to falter. The key paragraphs of this story highlight this fact:
Singapore’s Neptune Orient Lines on Friday produced some of the clearest evidence so far that container shipping faces a renewed downturn when it reported a $67-million (U.S.) first-half loss and warned it could lose money over the year as a whole.
NOL’s announcement came after Germany’s Hapag-Lloyd, another major operator, announced a sharp fall in first-half profits on Thursday and warned that in the short term, industry profitability would suffer from high fuel-oil prices and declines in revenue from each container movement.
The reason I think this is of a major concern as a future barometer for the remainder of this year is highlighted in this statement:
NOL, whose APL shipping line operates the world’s seventh-largest container fleet, is closely watched because it gives far more detailed information about trade volumes and revenues than its rivals and is widely regarded as well-run.
And this one also:
On future prospects, the company said deteriorating global economic conditions were weakening trade demand and exerting continued pressure on freight rates.
“Unless these conditions improve, NOL will post a full-year loss,” it said.
In other words there is a measurable decline in economic activity worldwide which will prompt the world’s shipping lines, even the Chinese, to begin contracting the size of their fleets and number out voyages if this trend continues, which at this time it appears that it will. Following the charts of the Baltic Dry Index offers another clue as it appears to be indicating a further decline in economic activity is well underway.
The three year chart indicates that we never recovered the pre-recession highs and in fact have endured a series of lower highs:
(Click to Enlarge/Reduce)
The trend is a somewhat pronounced negative move with a greater potential to retest the all time lows in the BDI versus the all time highs. The decade plus chart from InvestmentTools.com clearly shows the deterioration over the long term:
(Click to Enlarge/Reduce)
The worst part of the BDI charts and the news coming from two of the larger container lines outlined above is the idea that demand is actually contracting. That fact might be worthy of consideration when looking at a chart of the 5 year Thompson-Reuters CRB Index (via Bloomberg):
(Click to Enlarge/Reduce)
The five year chart might indicate that the trend to the upside in commodity prices might be stemmed for the moment, but the one year chart is flashing that an all out fire sale could be about to occur:
(Click to Enlarge/Reduce)
Once the death cross occurs and if gold breaks into correction mode, this index could decline if not outright crash just as it did in 2008-2009, except this time it would indicate a crushing blow to the economy as the impact on U.S. agriculture of a worldwide contraction could devastate the highly leveraged American family farm. I shall continue to monitor the container traffic which has declined slightly at several U.S. ports (Seattle, Portland, Los Angeles, Charleston), but is still above 2010 levels at Long Beach. As I have stated on the air and in these pages, I think the NBER will look back and declare that the “next” recession will start in September of 2011 and knowing the instantaneous panic which will set into the Washington, D.C. mindset and that of the Federal Reserve, a huge economic stimulus program from the President and Congress as well as a massive monetary bombardment from the Fed will be required. After all, we can not have a period of economic contraction while these clowns are out running for re-election now can we?
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