Shipping

Yemen – Saleh’s death is the dangerous slice in the Iran & Saudi sandwich

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Even before the Arab Spring, CM (in a previous life) wrote that Yemen was a trouble spot. It’s former President Ali Abdullah Saleh (Sunni) has died of natural causes – he was assassinated in a spate of tribal violence in the capital Sana’a yesterday. No stranger to being an oppressive tyrant during his rule, after being ousted in the Arab Spring he was in recent years working with the Houthi tribe (Shi’ite) to regain power before switching back to a US backed Saudi-friendly deal maker. He proved that power is more important than religious sect. However the Houthi weren’t prepared to suffer a turncoat who betrayed them so Saleh was duly dealt with.

Why is Saleh’s death important? What it now does is give Saudi Arabia more will to take more decisive action against the Iran backed Houthi. It is no surprise that Saudi Arabia has cleaned house with the arrests of  royal family members to tighten the inner circle. It smells like the early stages of broader tit-for-tat skirmishes before all out conflict ensues. Yemen is often argued as a proxy war between the two.

While many are distracted by the US Embassy to Jerusalem as an unnecessary ‘in-the-face” action, it is a very firm line in the sand to where the US cards already lie. No big surprises. For now most Gulf States want Israel on their side to help them defend against and ultimately defeat Iran.

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At the narrow Bab al-Mandeb Strait separating Yemen and Djibouti/Eritrea, cargo ships make their way up the Red Sea to the Suez Canal, could become a major choke point. This year multiple US, Saudi and Emirati warships have been attacked by Houthi rebel forces. In January 2017 a  Saudi al-Madinah frigate was sunk in the strait. An Emirati HSV-2 swift naval craft was also put out of action in late 2015.

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Safe access to the strait is crucial at present because of Egypt’s reliance on imported LNG to maintain stable electricity supply. One LNG tanker heads to Egypt each weeknight through the canal. Just under 10% of global trade goes through it as well. Any blockage or restricted access would force ships to sail the long way around the Horn of Africa adding another 40% to the journey. This would have significant impacts on shipping and trade. Markets aren’t factoring anything at this stage.

The problem with naval conflict is that Yemen is backed by Iran which in turn is one of Russia’s best clients. Iran possesses the SS-N-22 Sunburn missile which is a supersonic anti-ship missile which even the US has no answer for. In recent years this has been upgraded to the Super Sunburn (P-270) which is even more lethal. It is a ramjet which travels at Mach-3 meaning if fired inside a 100km range then the target is likely to be toast (video here). It can be launched from a ship, submarine or land.

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Iran could blame a whole host of tribes (Sunni or Shia) sick of being under the jackboot of effective Saudi control/influence for an attack.

On December 2, Israeli jets bombed an Iranian military weapons base in Syria. Israel has warned Iran it won’t tolerate any military presence on Syrian soil. We shouldn’t forget that China has also deployed its special forces to Syria to help Assad. Clearly the Chinese see a good opportunity to clean up some of the spoils in the region. China is always happy to help out nations that are under sanction. It adds more mess into the geopolitical sphere.

While the GCC has stepped up its air attacks on Yemen post the death of Saleh, he was the only one that has been able to unite the country. Indeed it is possible that the secession of the south becomes an issue. At the time of reunification of North and South Yemen in 1990 many in the south felt their northern neighbors were pillaging too much of their oil reserve wealth. Even their private land was appropriated and spread among the Sana’a elite. Now that Saleh has gone, and Yemen fragmented again, we may see old scores settled. The Southern Movement (loyal to exiled President Hadi) in Yemen wants to take back what was stolen from them. So Saleh’s death may open a vacuum of more instability.

Iran would relish the opportunity of a fractured Yemen to further build its influence. Bab al-Mandeb may become a flashpoint to fight the proxy war. It is extremely messy, creates proper disruption and pushes Saudi Arabia and Iran closer to conflict.

Which ever way you cut it, diplomacy in the Middle East (what little there is) looks set to worsen. In a sense we are dealing with two large clients of Russia (Iran) and America (SA). Now China is siding with Russian interests by using it as a test run of its military muscle. China isn’t committing anything major but it wants to be at the negotiating table when it all goes pear shaped.

It smells very similar to the lead up to the Arab Spring. More turmoil and complacent markets which are not quite absorbing the realities of “local problems” spreading to another neighborhood. Sure we’ve seen many leaders overthrown in Libya, Tunisia, Egypt and so on in the last uprising but the pressure on Saudi is mounting hence the recent crackdown internally.

The other dark horse is Erdogan in Turkey. He is facing a corruption probe over money laundering to help Iran evade sanctions and he seems keen to externalise his problems so he can shut down the local threat. He is threatening to cut off ties with Israel if the US relocates the embassy but for a man with clear ambitions to revive the Ottoman Empire that fell less than 100 years ago that is a mere formality in the future.

The flashpoint remains Yemen. It has the perfect storm of a pawn in a global game of chess. While it whiffs of local tribes seeking revenge there are too many willing to help them achieve their aims which only plays to the broader ructions throughout the rest of the Middle East. Last week Houthi rebels launched a missile attack against the UAE nuclear power plant under construction. Power corrupts. Absolute power corrupts absolutely

Tesla is trucking kidding itself

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Tesla has bagged 55 orders for the semi so far. Although it is no surprise that no major truck hauling companies have signed up. Funny that. To expect trucking companies who operate under strict cashflow constraints (afterall they’re businesses not wealthy consumers) to give Musk a $200,000 upfront deposit (aka interest free loan) per ‘founder series’ truck is to put in Tesla lexicon – ludicrous. Truck companies, as CM wrote in its 30 reasons why Tesla is likely to be a bug on a windshield, are conservative. They want to see the technology proven in the field before just forking over $150-200,000 and hoping for the best. Were the technology or charging infrastructure to come up short then the whole economic proposition would come unstuck.

The Tesla trucks are roughly 30% to 70% more expensive than diesel trucks which have up to triple the range on full tanks. Many new 2018 diesel models are available now at $120k vs Tesla’s $150k (300mi range) and $180k (500mi range).

If we used the $60,000 more expensive Tesla Semi can to recoup the difference then it will need to be driven 240,000 miles using the $.25/saving per mile vs diesel Tesla number. Some estimates suggest payback in 3-4 years.

One former trucking company planner wrote,

I was surprised when I saw this “two-year” payback period quoted by Musk last week and repeated on the website. Two years? Really? He had just gotten through showing us an operational cost savings of $.25 per mile over diesel.

Well if I am going to pay back the truck I need those savings to equal the purchase price in two years. Well $180,000 divided by $.25 is 720,000 miles or 360,000 miles per year. That is not even physically possible. A truck would have to drive non-stop for 24 hours a day, 365 days a year at an average speed of 41 mph. Subtract out recharging time of 30 minutes every six hours or two hours per day and four hours per day for loading and unloading and the truck must average 54.7 miles per hour for every mile driven. It is impossible to do.

My big trucks ran long trips moving from coast to coast or north to south. I pulled out my records just for the fun of it and my trucks averaged 13,000 miles per month in summer months and under 10,000 in winter months because of weather and tougher loading and unloading conditions. Most trucks ran about 120,000 miles per year maximum even with driver teams. This was due in many cases to operational time limits of over-sized loads (half hour before sunrise until half hour after sunset is mandatory in many states for safety reasons).“

Whether the new Tesla Roadster or Tesla Semi this new deposit scheme is actually more telling than the vehicles themselves. This can be none other than a cash grab interest free loans to keep the thing alive. I salute Musk for his pioneering spirit but playing with the big boys is never easier done than said. Can’t wait to see the cashflow numbers in Q4 reporting early next year. If we get a worsening of this chart beware.

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Perhaps we can also find some amusement in Tesla’s competitor (Nikola) tweets

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Israel & Saudi cooperation a surprise to Bloomberg News

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Bloomberg has written a puff piece wrapped in surprise on how the Saudi’s are likely to seek Israeli approval for a bridge which crosses from a new city Neom to Africa. There is one reason and one alone – Israel has a naval base at the Port of Eilat (in blue) at the southern tip of the country. If the height of the bridge is too low and surface naval ships can’t pass then the navy would be boxed in. Almost like ships in the Black Sea. So of course the Saudis won’t do it single handedly.

As much as people might think the Saudis hate Israel, they acknowledge the security Israel buys them vis-a-vis defending against a mutual enemy in the form of the Iranians who are active on SA’s southern border with Yemen. The Iranian Revolutionary Guard has been active in Yemen, Syria, Gaza, Lebanon and Iraq in recent decades supplying weapons and training. So sometimes mutual benefits (peace between the two countries) outweighs trying to  pull a fast one on them. It is likely the US State Department might send a friendly reminder of what is at stake geopolitically. In actual fact this discussion has been ongoing for a long time.

Playing with Financial Plutonium

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I am still dumbfounded by the level of complacency in financial markets. How  can there be any confidence in our financial system?  Reality is that confidence continues to wane. I mentioned a while back that the headline stock index in Europe has no financial stocks in it. Never in my history in financial markets have I witnessed this. It isn’t because other stocks have got bigger. Financials in Europe have shrunk to such irrelevant levels that they don’t make the cut. Argue all you want about FinTech revolutionizing banking as we know it however don’t dismiss that the core of financial markets resembles a rotting carcass with so little meat that even vultures are considering vegetarianism so slim are the pickings. If the financial sector is sick and it is what greases the economy beware this signal.

One thing that hasn’t changed is the arrogance of the banks. Deutsche proudly protesting that the DoJ’s $14bn fine is just a “starting point” all the while its shares dwindle at all time lows.  Europe’s most powerful bank 1/3rd the size of Australia’s NAB. I’m working on a report looking at the deterioration of financial profitability and market relevance.

All the while though I keep shouting from the rooftops like the tramp from Blazing Saddles and the bell chimes right as I try to warn of impending  global economic disaster.

“The world economy is dying (clang!)”

“what did he say?”

“I think he said the world economy is flying!”

“No, goddamnit!, I said the world economy is dying (clang!)”

You get the picture. What people still haven’t grasped is the velocity of money continues to slow rapidly. For every dollar pumped into the economy, smaller fractions of GDP are created. In Europe it takes €7 to create €1. In China it takes RMB8 to create RMB1. In the US it takes around $4.5. The more morphine that is pumped into the patient the less efficacy. The debt burden mounts to unsustainable levels. Asset bubbles abound. Central banks keep pushing on sweeping the damage under the carpet. Europe is at stall speed. France and Italy didn’t grow last quarter. The US stumbled into 1% territory while the previous quarter was revised to 0.8% – hardly cracking growth.

The most recent worrying red flag is Greenspan weighing into the central bank policy debate. If there was ever a tail-end Charlie behind the curve he is it. I look at the propaganda pushed by the White House in a self congratulatory tone. This idea that everything is fine. American wealth at all time highs and poverty at 50 year lows. The problem with such fiction is that Main Street is actually living the struggle. They are not theory. They are reality. Whether crushing pensioners with a lack of sensible low risk income products, or celebrating recent inflation through rent rises and healthcare costs is not to pat one’s back over. Real wages are falling, consumption is waning and life is getting tougher. Steeper Obamacare prices and higher rents don’t boost economic growth. This is bad inflation and most other items continue to struggle under the weight of chronic overcapacity. Hanjin Shipping woke us up to that sad fact.

It’s brutal out there but the Democrats talk of prosperity at the same time complaining at the lack of progress on welfare despite having their wise sage Obama at the helm for the past 8 years.

More misguided central bank policy continues in group think like fashion.  It is as if they are enriching financial plutonium to such dangerous levels that imminent detonation could occur. The experiment keeps going but the scale of the collateral damage is growing exponentially. Many central bankers know how bad things have got but pray they can leave their ivory towers and seek shelter before it blows up on their watch so they can evade direct responsibility.

For all of the pump priming, toxic asset buying and NIRP strategies of central bankers, there is one constant in all of this. Pain must eventually be taken to restore equilibrium. The longer we store up the gangrenous irradiated mess that has and is being created for almost two decades the bigger the scale of fall out.

So many are totally unprepared for the coming event. People will still argue that the most experienced and brightest minds work within these banks so we should back their collective wisdom but I’d bet money that most if not all have no idea about how the average Joe and Joanne works. Funny thing is the average Joe and Joanne are feeling the pain everyday as they struggle to get by. They’ve had enough.

I’m surprised the Democrats, the party that is supposed to favour the afflicted, continue to miss the obvious. Trump would never have seen the light of day had the establishment listened to their cries for help.

In closing, I feel the same vibes I did when I called the impending crisis that was GFC1. This time will be much worse.  Financial plutonium is too rich and reaching fissile levels. Discount everything coming from the authorities. Pure common sense tells us the numbers don’t match reality.

There will be no “I told you so!” moment for me. Who would want to bask in misery?

Korea’s largest shipping company declares bankruptcy but many others sinking too

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Korea’s largest container transporter Hanjin Shipping has declared bankruptcy. Given the backdrop it isn’t surprising. Normally we should expect lending companies to play a supporting role to prevent excess boats “flooding” (no pun intended) the market and driving beaten prices down on loans to others even further. However even the Korean banks weren’t satisfied with the restructuring plan  of Hanjin. This could well be first blood but I wonder if the Korean government steps in and potentially nationalises it or encourages some zombie lending to save face.

The difficulty here is the state of banks, many German, who lend to shipping companies are on their last sea legs limiting wiggle room. 

3 months I wrote the following piece on that “Sinking feeling” regards to the shipping industry

Clarksons is the world authority on shipping. These are the latest prices in 2016 vs the 5 year average by type. New LNG, grain and oil carriers etc are holding up but the used market is being slaughtered. Ships are generally bought with a 25-yr service span at the very least. Global seaborne trade growth has shrunk from 6%+ growth in 2011 to less than 2% now.

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Clarksons is the world authority on shipping. These are the latest prices in 2016 vs the 5 year average by type. New LNG, grain and oil carriers etc are holding up but the used market is being slaughtered. Ships are generally bought with a 25-yr service span at the very least. Global seaborne trade growth has shrunk from 6%+ growth in 2011 to less than 2% now.

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Daily rates are naturally falling fast. 1yr Capesize ships used in the transport of raw materials are now 52% lower than the 5 year average and down 30%YoY vs 2015.

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Now one could have wishful thinking and view this as bottoming out but even with all the liquidity being pumped into world markets, trade is suffering from all that deflation in the system.

None of this is surprising  but it shows how slow our over capacity world is growing. If such news ends up causing some bankruptcies among lenders then this will really start highlighting this financial crisis we keep denying

Shipper sinking German shipping lender

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As I wrote several weeks ago, the shipping sector is in tatters. Even juggernaut Maersk took a massive write-down last year. So at the end of nearly every ship is a lender. Many lenders to the shipping industry are specialists. Nord LB was looking to bail in Bremer LB beyond the 54.8% it already owns. Bremer LB has to write off  €400m of its shipping portfolio.

This puts Chancellor Merkel in a bind. She can’t very well tell the Italians that their wish to prop up Italy’s ailing banks is unacceptable when those same problems are so close to her shores. The €50mn Bremen LB 8.5% coupon perpetuals blew out from 6.47% yield to 18.73% this month alone. Will Merkel be forced to come to the realisation that Italian and German banks share common ground and rescue them because it appears markets aren’t waiting?

The Central Banker’s karaoke song

Alan G

I was listening to World Party’s ‘Ship of Fools‘ today and thought a few changes to the lyrics would be quite apt for Central Bankers to sing…

We’re setting sail
To the place on the map where the economy  we think we can turn
Drawn by the promise of inflation and growth
By the light of the currency we burn
Drawn by the promise of the cycle from negative rates
Not the gold or the savings or pearls
It’s the place where we keep all the printing presses we need
We sail away from the plight of the world on this trip baby
Pay, they will pay tomorrow
They’re gonna pay tomorrow
They will pay tomorrow
Save us, save us from tomorrow
They don’t want to sail with this ship of fools, no no
Oh, save us, save us from tomorrow
They don’t want to sail with this ship of fools, no no
They want to run and hide

Right now
Lies and hope are gonna drive them over the endless sea
We will leave them drifting in the shallows
Drowning in the debts of history
Travellin’ the world, we’re in search of hope
But I’m sure we’ll build their Sodom like we knew we would
Using all their good people for our galley slaves
As our deflating boat struggles through the warning waves
But they will pay, they will pay tomorrow
They’re gonna pay tomorrow
They gonna pay tomorrow
Save us, save us from tomorrow
They don’t want to sail with this ship of fools, no
Oh, save us, save us from tomorrow
They don’t want to sail with this ship of fools, no
Where’s it comin’ from or where’s it goin’ to?
It’s just a, it’s just a ship of fools