The Shipping Forecast

Markets have continued to perform well and the mood has turned increasingly bullish. At times like these it can feel odd to be holding up a hand and asking for a little calm.

Just as we tried not to be drawn into the despondency that followed the banking crisis, we now try to avoid being swept along by the euphoria, blind to the underlying problems which, almost without exception, are worse than before Lehman Brothers broke.

It was expected that there would be a bounce following the catastrophic retreats of the winter, simply because if there wasn’t then GDP would soon have fallen by Great Depression levels. However as we have stressed many times in even the worst recession most people keep their jobs and will still buy things, even if the pace is reduced dramatically, so in the Western world there is a clear inventory rebuild taking place

In China there has been massive stimulus with the government deploying some of its massive reserves in huge support package. This has then driven global commodity prices upwards, adding to the confidence in global markets further justifying the rise in other risk assets. But…

The real world intrudes

Ignoring sentiment there has been one reliable indicator of global trade (largely because it reflects real economic demand) and that is the Baltic Dry Index. This measures the price being paid for the rental of large bulk carrying ships; hence it represents real economic demand and expectations.

During the global boom this index rose rapidly, its steep trajectory matching those of the commodities being shipped, such as copper or iron ore. Post the Lehman Brothers failure the index crashed to earth; as trade credit disappeared. Once liquidity started to flow and trade picked up the index bounced back rapidly, although only into the trading range it had enjoyed earlier in the decade. What is really interesting is that over the last few months the index has plunged southwards, even while commodity and stock markets have enjoyed strong bull runs. This is clearly reflected on the chart below, which shows the index has moved sharply down through both its 20 and 200 day moving averages, not a good sign for those interested in chart (technical) analysis.

So what does this tell us? As we pointed out above this market is a reflection on shipping prices so sharp fall is not bullish for global growth. By comparison commodity markets are much more exposed to speculative flows of funds, just as stock markets are. This may indicate that the massive flows of capital being pumped into the worlds economies by central banks is finding its way into financial markets, rather than the real economy, where it is desperately needed. If this is the case it would indicate central banks may now be repeating the mistakes that created the bubbles that nearly destroyed the global economy in the first place.

While we think that this is a real risk and that many markets have got ahead of themselves if we look at shipping fundamentals it is important to recognise also that a significant number of Capesize vessels (very large bulk carriers, unable to traverse the Panama and Suez canal, hence having to travel round the Southern Cape’s) ordered at the peak of the boom will be delivered over the next couple of years, adding to shipping stock and helping drive down prices on a supply and demand basis. However new supply alone is not enough to explain the extent of the fall in the index, nor, more importantly its larger underperformance against the commodities that ships carry.

While this makes it difficult to draw a definitive conclusion it is important to maintain a balanced view on fundamentals, particularly in these confusing times, even if this means we are forced to accept that there may still be more rough weather ahead.

And finally……..

A city lawyer and a Yorkshire man are sitting next to each
other on a flight to Leeds. The lawyer is thinking that
Yorkshire men are all 'cloth cap and clogs' and that he can fool them
easily...
So the lawyer asks if the Yorkshire man would like to play a fun game. The Yorkshire man is tired and just wants to take a nap, so he politely declines and tries to catch a few winks.

The lawyer persists and says that the game is a lot of fun.
'I ask you a question, and if you don't know the answer, you pay me only £5; you ask me one, and if I don't know the answer, I will pay you £500.'
As may be expected, this catches the Yorkshire man's attention and to keep the lawyer quiet, he agrees to play the game.
The lawyer asks the first question. 'What's the distance from The Earth to the moon?'
The Yorkshire man doesn't say a word, reaches in his pocket, pulls out a five-pound note and hands it to the lawyer.
Now, it's the Yorkshire man's turn. He asks the lawyer, 'What goes up a hill with three legs, and comes down with four?'
The lawyer uses his laptop, searches all the references he knows. He uses the air-phone; he searches the Net and even the British Library. He sends e-mails to all the smart friends he knows, all to no avail. After a long search, he finally gives up.

He wakes up the Yorkshire man and hands him £500, which he pockets and goes straight back to sleep.
The lawyer is going crazy not knowing the answer. He wakes the Yorkshire man up and asks, 'Well! What goes up a hill with three legs and comes down with four?'
The Yorkshire man reaches in his pocket, hands the lawyer £5
and goes back to sleep.

Don't mess with Yorkshire men; they only talk different!