Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

A Ship Buyer's Market

Stock-Markets / Global Economy Jul 10, 2012 - 05:09 AM GMT

By: Fred_Sheehan

Stock-Markets

Best Financial Markets Analysis Article"China should delay its bid to pass South Korea as the world's biggest shipbuilder to prevent a flood of new vessels extending industry-wide losses, said Clarkson Plc's Managing Director Martin Stopford. 'This sort of target really should be put aside for the time being,' he said in an interview Wednesday at a conference in Shanghai. China has asked state banks to boost financing for new ships to prevent order cancellations, safeguard jobs and support a plan to pass South Korea in ship production by 2015. At the same time, the global container-ship fleet has as much as 20 percent excess capacity...." -- China Shipyards Should Delay Bid to Pass Korea, Business Asia, December 4, 2009


"Jiangsu, the dominant province in Chinese ship manufacturing, received 61.7 percent fewer orders for ships in the first five months than in the same period of 2011, due to a slump in the global shipping market, new official figures have indicated....The sluggish world market and excess of transportation capacity contributed to the drop in orders, according to the commission." -- Chinese Ship Orders Drop Drastically, Xinhua, July 2, 2012

The unwinding of the commercial shipbuilding market will appeal to a small group of investors. It can be viewed more broadly as representative of value investments to come. The characteristics apply to assets that were ordered and built with projections of ever-increasing demand. Or, as described in the objective of Chinese shipbuilding above, to achieve national greatness, buyers or no buyers.

Demand for new ships is notoriously unpredictable. Shipping companies and commodity producers order when the economy is blooming: trade percolates, more ships are needed. Deliveries are often made after the business cycle has peaked and trade is wilting. Freight rates are falling at the same time cargo capacity (new and usually larger ships) is delivered.

The world economy is slowing fast. Trouble in shipping is being exacerbated by mendicant banks. A most neglected problem (in public discussion) is the deceleration of collateral, the consequence of which is forcing banks to shed assets. Europe is the center of balance sheet downsizing, but hardly alone. The base of assets that U.S. banks are permitted to pledge as collateral has shrunk by around $5 trillion since 2008. European banks lent generously to Asian companies, but are now retreating.

The indefatigable Andy Lees (AML Macro Limited) wrote in his July 2, 2012, Morning Headlines: " The contraction in European banks' balance sheets took another turn as Commerzbank announced it was to pull out of ship finance. It had been the world's 3rd largest maritime lender. Danish shipping association BIMCO said 'Ship owners stuck in a financial moment they cannot get out of are likely to get closer to a bankruptcy as yet another option in the traditional ship finance banking market is lost.' Lloyds and Soc Gen [Societe Generale] have already pulled out. About USD249bn is needed in new debt and equity in the coming 3 years to cover orders for new ships."

Commerzbank, Lloyds, and Societe Generale are in a fix. First, is the general encumbrance of European banks, not necessarily the three under discussion. National greatness in the Old World opens with government demands for banks to buy their nation's debt. This has been a losing proposition since the dawn of the Renaissance. Second, the quality of their pledged collateral is falling. Most European banks need to borrow from the ECB (European Central Bank), but can only do so by pledging eligible collateral. They are selling assets that would require additional collateral, or, simply selling assets to reduce exposures.

Dominoes fall: As Danish shipping association BIMCO warns, this pushes the ship owners closer to bankruptcy. The value of those assets declines. The ECB then demands more collateral to supplement current pledges. We will stop here. (The ECB is turning the quality of the collateral into a farce, but that should be addressed separately.)

It is not difficult to look at this dynamic and foresee falling prices around the world. Given the tentacles of central banks across asset classes, it is to Bernanke, King and Draghi investors look to forestall an avalanche. The central bankers are doing what they can to suspend the repricing of assets in a deleveraging world. The ECB collateral farce is one attempt. The Bank of England's announcement on July 5, 2012, that it will dump £50 billion into the British economy is another. Given the volume of assets in the world, this is pocket change, as is Bernanke's latest Twist. The Fed chairman must be chomping at the bit. He has a textbook opportunity (his textbook) to really test his acumen: $5 trillion at a minimum.

Redundant ships brought the Tisch family to mind (Loews Corp: L on the NYSE). Searching the archives, it was Jim Tisch who was interviewed in the August 26, 1985, issue of Grant's Interest Rate Observer. Ships were the Old Maid. "Sunk" was the headline in Forbes. "Used Ship Prices Set to Fall," claimed the Financial Times. A ship owner was quoted: "You'll probably [make] some money, but there'll be a hell of a bloodbath in the meantime."

Jim Tisch was buying ships for $5.5 million each. They had cost $60 million to build and would cost the same to construct in 1985. These assets (so to speak) were idling in Norway and Scotland (after having been renamed after Loews' movie theatres: Orpheum and Paradise, for instance).

The thinking was probably not much different than investing in movie theatres: how much do we need to fill them to make money? (They made plenty.) Today, the coincident problems of falling asset prices and depleted lending will empty ships, commercial real estate, and other structures of investors, renters, and the good word of Forbes.

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in