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[bob ford <bobford79 AT yahoo.com>]

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….