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  • From: bob ford <bobford79 AT yahoo.com>
  • To: homestead AT lists.ibiblio.org
  • Subject: [Homestead] World demand collapsing
  • Date: Sat, 22 Nov 2008 18:19:43 -0800 (PST)

Don and I have both posted commentary concerning the BDI (Baltic Dry Index),
and how ships are sitting in port, transposrting nothing. This is a new
article about the collapse of world demand. I have no idea how long this
deflation will last, before inflation firs up; but, while it does last look
for fantastic proices for what is available. Once supply runs out, look for
shortages. This article is talking finacials, but still gives an overwiew of
what is happening, even if not inteersted in the markets they discuss
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World Demand collapsing

By Chris Laird

Nov 20 2008 10:42AM




World economic demand is now collapsing along with the yearlong credit
collapse. Recent news is full of stories about how world economic demand fell
off a cliff in October, 08. Every sector is being hit, from new cars to
recycled cardboard. In each case, October is pointed to where economic demand
fell off a cliff…



Cars with nowhere to go in Long Beach harbor, California. Japanese ones!
NYTimes.com

“The ships keep coming, but there’s nowhere for the cars to go,” Mr. Golledge
said.

“Not far away, metal, cardboard, paper and plastic are piling up in the lot
of Corridor Recycling. The company takes in refuse from around the country,
then bales it for shipment to China. The cardboard is used to make new boxes
while used shrink wrap is turned into shoe soles and insulation for sleeping
bags and coats.

For much of this year, the company shipped about 25 containers a day, each
filled with 23 tons of refuse to be recycled. But after the Olympics, demand
slowed for recycled metal. In October, demand for everything else took a
sharp downturn, and for the last two weeks the company has not shipped a
single container.

“It just came to a complete stop. Absolutely a stop,” said Gilbert Dodson,
the recycling company’s co-owner. “I’ve seen it slow over the last 25 years,
but this is the worst,” he said of the current downturn...”

NYTimes.com

There are stories about ships all over the world stacking up in exporting
countries, anchored, and not able to sail because they cannot get letters of
credit for the shipments. Hong Kong was mentioned as having rows and rows of
loaded but idled ships stuck there.

The same goes for oil tankers, lines of them anchored even though they are
full, with no buyers. There has been a screeching halt of shipping worldwide.
Products are backing up in Asia.

Many of you have heard about the collapse of the Baltic Dry index, a shipping
index for containers. It has fallen from over 11,000 in July to around 800,
in only a couple of months!

Panicky China

Over 100,000 factories in China are to close by the end of the year. Chinese
plant owners are abandoning their plants, unable to pay their bills, and
abandoning workers with months of back pay unpaid. That is so serious that
riots are breaking out in Chinese cities, and even now there is 10 Pct
unemployment in some of the biggest exporting cities in provinces like
Guangdong. Unemployment in the cities is one thing that scares China. That’s
why they came up with that $500 billion stimulus plan. Compared to the size
of the Chinese economy, that’s like the US coming up with a $2 trillion
economic stimulus. Such a sudden and immense move is unheard of in China.
It’s said that China is actually buying some of their own inventory that is
stacking up.

GM bankruptcy

With the prospects of a US auto bailout shrinking, GM will go bankrupt in a
couple of months, they say. If that happens, the commodity complex will take
that as a big sell. It’s said that a car uses up to 40 pounds of copper, and
a house in the US uses 400 pounds or more. Copper has fallen drastically in
the last two months. Copper is considered a barometer of economic demand.

There are calls for GM to go ahead and declare bankruptcy while they still
have some cash. We just might see that happen right after Congress adjourns
for the year, if there is no bailout. The stock crash Tuesday at the end of
the day reflected that sentiment. Will we see a GM BK filing sooner than we
think?

Credit has not improved

Credit spreads have not improved. There is flight out of any and all bonds
into US Treasuries of all stripes. Now even 30 year US Treasuries have fallen
below 4%, while the 3 months short term USTs are below a half percent,
nearing zero. There is literally no money going into new credit of all
stripes, and this is worldwide too.

Businesses cannot roll over their short term credit facilities. That means
they have to operate on a cash basis. This has worsened in the last two
months, not improved. What that means is that when the cash runs out, they
have to shut down, and layoffs come. Get ready for a horrific next few months
of layoff news around the world.

Shortages?

We already mentioned how the literal total absence of credit is stalling
ships at the docks. I am starting to get concerned that, with the supply
chain so tight (typically 3 days worth in pipeline) we may see shortages of
many things if this credit meltdown and its resultant freeze on exports
continues.

Japanese exports have fallen almost 8% year over year, and exports to the EU
have fallen an astounding 17%. Japanese auto exports have fallen 15%.

I know we focused here on autos, but since most everything is manufactured
and shipped overseas it’s very possible that we will run out of many things,
and so will our trade partners. Right now there is surplus backing up in some
things like cars, but after factories worldwide shut down, scarcity will
start to appear. That will take some time, but it’s probably coming later.
There won’t be any money out there for new production demand by then either.
Everybody is over leveraged.

Layoffs have only just begun

In the mean time, since inventories are piling up, manufacturers will be
shutting down plants worldwide. Big layoffs are coming everywhere. The end of
08, and 09 are going to be the worst layoffs worldwide we have seen since the
Great Depression in the 1930s.

Another Great Depression?

So, since world demand is literally falling off a cliff since October, and
businesses are running out of cash (there is no credit at all out there for
the companies or their customers), it appears we are indeed in the beginning
stages of a real world economic depression, what’s next?

USD prospects

First, as far as the USD goes, things don’t look good. The USD already had
big problems with the US fiscal and trade deficits totaling $1 trillion a
year for the last 5 years. Now, the fiscal deficit alone will be over $1
trillion and growing. Sure, a slowing economy will bring down the US trade
deficit, but the pressures on the USD are becoming big enough to cause real
trouble.

Another thing is that the USD has been held up for decades by the US appetite
for imports. As the US economy falls into depression, the incentive for our
trade partners to keep buying US bonds to fund our fiscal deficits dwindles.

Right now, there is seemingly unlimited demand for US treasuries. But, that
will change. Right now, there is flight to safety of any kind. Since every
government on the planet is carrying a huge public debt, the US seems one of
the best bets – for now.

But, at a $trillion a year US fiscal deficit, and with other governments now
needing to use their excess dollars to support their own fiscal deficits and
try to prop up their economies (China for example), the appetite for US
treasuries will fall dramatically at some point. Again, this is guaranteed by
a big drop in US import demand.

Currency crises, USD

As we mentioned in the last public article, there are ongoing currency crises
brewing right now. Russia is literally chewing through those foreign reserves
they built up in the last 5 years commodity boom to defend the Ruble. They
have been forced to give up.

Korea has big trouble with the Won. They also have chewed through a lot of
their foreign reserves defending it. And it’s doubtful they have enough
foreign reserves to handle a lot of short term commercial credit that is not
rolling over, and their businesses are in big trouble from that, and that is
building to a head in the next month. Russia has the same issues with having
to roll over hundreds of billions of short term credit in the next month,
aside from trying to defend the Ruble.

The USD has strengthened from all this in several ways. It is in demand as
the main settlement currency worldwide. That is why the US Fed has had to
make unprecedented amounts of currency swaps with the world’s central banks
recently (currency swaps are where central banks trade currencies to get
dollars or whatever between themselves).

And then, as we mentioned before, the US treasury bonds are regarded as safe,
for now.

But the USD is reaching a tipping point. What’s keeping it alive now is the
flight to cash and safety. But that process will peter out, and then the
$trillion dollar US fiscal deficits, combined with the pullback of trade
partner interest in US treasury bonds will end up killing the dollar.

How far off is that stage? Maybe 2 to 4 years. Frankly, I think it’s nearer
than we all might think. It certainly is now an imminent concern, not a thing
far out in the future. It’s even possible the USD could have a drastic fall
in 09.

World currency turmoil, not just the USD

And, the currency turmoil in general is going to worsen all over the world,
not just for the US. The EU political and fiscal situation is not a lot
better than the US. The Euro is saddled with big fiscal deficits throughout
the EU that are getting worse. The dissention between the weaker economies
like France vs stronger Germany is hitting the creditability of the Euro.
That’s one reason it’s dropping. Then, consider that, politically, the EU is
not stable at all. Remember, this whole EU Euro experiment is barely 10 years
old.

Other currencies such as our trade partners’ are in doubt. Again, consider
Russia and Korea, and many others we aren’t mentioning. Since these economies
are still predicated on trade with the West, especially the US and the EU, if
the USD goes down, so do their economies and their currencies. There will
definitely be a big world currency domino effect if the USD has a devaluation
or confidence crisis.

This is one reason that we suggest some currency diversification, to include
precious metals of course. Of course the hard question is which ones? None
are sure havens alone.

Gold prices

And as we mentioned before, gold and precious metal prices are dropping in
the paper markets, since everything is being sold to get cash. Gold is one of
the ones that will remain standing. It’s cash par excellence and a central
bank reserve asset.

Of course the gold stocks and metal stocks are getting hit too. But this is
all general liquidation from the funds… whew a lot is going on isn’t it.

401ks etc

We continue to be concerned about tax deferred retirements. First, the tax
deferral is something that is a red herring. Since the US is running ruinous
fiscal deficits, taxes on ‘tax deferred’ retirements will be raised
dramatically as the US starts to enter a USD crisis.

Second, we view most of the tax deferred retirement plans as only serving the
brokerages (who pushed the whole idea when it was invented decades ago) and
mainly a big savings account for the governments. If that grows, the
governments have more taxes to collect, don’t they?

And then, a huge drawback of tax deferred accounts is that it deters people
from getting liquid and cashing out. The money is kind of locked in there
since people don’t want to take the tax hit.

These concerns about tax deferred accounts apply to pretty much any country
too.

And then, by being sort of frozen, people end up riding bear markets down
with these tax deferred accounts, instead of doing something that really puts
meat on their monthly budget table – like paying off the house.

A paid off residence puts a roof over your head. And you can’t live inside a
401k, now can you. The other thing is a paid off residence is the single
greatest defense against an economic depression and a USD collapse.

Gold is for some cash type protection from a USD collapse….








  • [Homestead] World demand collapsing, bob ford, 11/22/2008

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