GFC

Actually, vote on the political emergency

No surprise to see The Guardian parrot on about a climate emergency. The editorial completely misses out on the political emergency we face. The economic climate is a massive issue facing Australia. When Bill Shorten tells us that he “will change the nation forever” we shouldn’t view that positively. It is probably the honest thing he has said. Labor’s policy suite is the worst possible collection one could assemble to tackle what economic headwinds lie ahead. Our complacency is deeply disconcerting.

First let’s debunk the climate noise in The Guardian.

The math on the climate emergency is simple. Australia contributes 0.0000156% of global carbon emissions. No matter what we do our impact is zip. If we sell it as 560 million tonnes it sounds huge but the percentage term is all that is relevant. Even Dr Finkel, our climate science guru, agrees. What that number means is that Australia could emit 65,000x what it does now in order to get to a 1% global impact. So even if our emissions rise at a diminishing rate with the population, they remain minuscule.

Bill Shorten often tells us the cost of doing nothing on climate change is immeasurable. He’s right, only in that “it is too insignificant” should be the words he’s searching for.

Perhaps the saddest part of the Guardian editorial was to say that the Green New Deal proposed by Alexandria Ocasio Cortez was gaining traction in the US. It has been such a catastrophic failure that she lost an unsolicited vote on the Senate floor 57-0 because Democrats were too embarrassed to show up and support it. Nancy Pelosi dismissed it as a “green dream.” At $97 trillion to implement, no wonder AOC says feelings are more important than facts.

With the 12-year time limit to act before we reach the moving feast known as the tipping point, it gets confusing for climate sceptics. Extinction Rebellion wants things done in only 6 years. The UK House of Commons still can’t get a Brexit deal done inside 3 years but can act instantaneously to call a “climate emergency” after meeting a brainwashed teenager from Sweden. It speaks volumes of the desperation and lack of execution to have to search for political distractions like this.

The ultimate irony in the recent celebration of no coal-fired power in the UK for one week was fossil fuel power substituted all of it – 93% to be exact. Despite the energy market operator telling Brits that zero carbon emissions were possible by 2025 (40% of the current generation capacity is fossil fuel), it forgot that 85% of British homes heat with gas. Presumably, they’d need to pop on down to Dixon’s or Curry’s to buy new electric heaters which would then rely on a grid which will junk 40% of its reliable power…good luck sorting that out without sending prices sky high. Why become beholden to other countries to provide the back-up? It is irrational.

Are people aware that the German electricity regulator noted that 330,000 households (not people) were living in energy poverty? At 2 people per household, that is 1% of the population having their electricity supply cut off because they can’t afford to pay it. That’s what expensive renewables do. If the 330,000 could elect cheap electricity to warm their homes or go without for the sake of the climate, which would they choose? 100% cheap, reliable power. Yet Shorten’s plan can only push more into climate poverty which currently stands at 42,000 homes. This is before the economy has started to tank!

If one looks across Europe, it is no surprise to see the countries with the highest level of fossil fuel power generation (Hungary, Lithuania & Bulgaria) have the lowest electricity prices. Those with more renewables (Denmark, Germany & Belgium), the highest. That is Australia’s experience too. South Australia and Victoria have already revealed their awful track record with going renewable. Why did Coca-Cola and other industries move out of SA after decades? They couldn’t make money with such an unreliable

Ahh, but we must protect our children and grandchildren’s futures. So low have the left’s tactics sunk that using kids as human shields in the fight for climate change wards off conservatives calling out the truth because it is not cool to bully brainwashed kids. We should close all our universities. As the father of two teenagers, CM knows they know everything already so there is little requirement for tertiary education!

The Guardian mentioned, “But in Australia, the Coalition appears deaf to the rising clamour from the electorate [on climate change].” Really?

CM has often held that human consumption patterns dictate true feelings about climate change. Climate alarmist Independent candidate Zali Steggall drives a large SUV and has no solar panels on her roof! Her battleground in the wealthy seat of Warringah is probably 70%+ SUV so slapping a Zali bumper sticker does nothing but add to the hypocrisy.

Why do we ignore IATA forecasts that project air travel will double by 2030? Qantas has the largest carbon offset program in the world yet only 2% elect to pay the self-imposed tax. Isn’t that telling? That is the problem. So many climate alarmists expect others to do the heavy lifting.

SUVs make up 43% of all new car sales in Australia. In 2007 it was 19%. Hardly the activity of a population fretting about rising sea levels. In Warringah, waterfront property sales remain buoyant and any bank that feared waves lapping the rooves of Burran Avenue would not take such portfolio risk, much less an insurance company.

Shorten’s EV plan is such a dud that there is a reason he can’t cost it. Following Norway is great in theory but the costs of installing EV infrastructure is prohibitively expensive. It will be NBN Mark II. Will we spend millions to trench 480V connectors along the Stuart Highway?

Norway state enterprise, Enova, said it would install fast chargers every 50km of 7,500km worth of main road/highway. Australia has 234,820km of highways/main roads. Fast chargers at every 50km like the Norwegians would require a minimum of 4,700 charging stations across Australia. Norway commits to a minimum of 2 fast chargers and 2 standard chargers per station.

The problem is our plan for 570,000 cars per annum is 10x the number of EVs sold in Norway, requiring 10x the infrastructure. That would cost closer to $14bn, or the equivalent of half the education budget.

The Guardian griped that “Scott Morrison’s dismissive response to a UN report finding that the world is sleepwalking towards an extinction crisis, and his parliamentary stunt of fondling a lump of coal”

Well, he might doubt the UN which has been embroiled in more scandals related to climate change than can be counted. Most won’t be aware that an internal UN survey revealed the dismay of unqualified people being asked for input for the sake of diversity and inclusion as opposed to choosing those with proper scientific qualifications. The UN has climbed down from most of its alarmist predictions, often citing no or little confidence of the original scare.

Yet this election is truly about the cost of living, not climate or immigration. The biggest emergency is to prepare for the numbers we can properly set policy against.

We have household debt at a record 180% of GDP. We have had 27 years of untrammelled economic growth. Unfortunately, we have traded ourselves into a position of too much complacency. Our major 4 banks are headed for a lot of trouble. Forget meaningless stress tests. APRA is too busy twiddling its thumbs over climate change compliance. While the Royal Commission may reign in loose lending, a slowing global economy with multiple asset bubbles including houses will come crumbling down. These banks rely 40% on wholesale markets to fund growth. A sharp slowdown will mean a weaker dollar which will only exacerbate the problem.

We have yet to see bond markets price risk correctly. Our banks are horribly exposed. They have too little equity and a mortgage debt problem that dwarfs Japan in the late 1980s. Part/whole nationalization is a reality. The leverage is worse than US banks at the time of the Lehman collapse.

We have yet to see 10% unemployment rates. We managed to escape GFC with a peak of 6% but this time we don’t have a buoyant China to rescue us. Consumers are tapped out and any upward pressure on rates (to account for risk) will pop the housing bubble. Not to worry, Shadow Treasurer Chris Bowen assures people not to panic if their home falls into negative equity! This is the level of economic nous on the catastrophe that awaits. It is insanely out of touch.

Are our politicians aware that the US has to refinance US$8.4 trillion in US Treasuries in the next 3 years? That amount of money will crowd out a corporate bond market which has more than 50% of companies rated BBB or less. This will be compounded by the sharp rise in inventories we are witnessing on top of the sharp slowdown in trade (that isn’t just related to the trade war) which is at GFC lows. The 3.2% US economic growth last quarter was dominated by “intellectual property”, not consumption or durable goods.

China car sales have been on a steep double-digit decline trajectory for the last 9 months. China smartphone shipments dwindle at 6 year lows. In just the first four months of 2019, Chinese companies defaulted on $5.8 billion of domestic bonds, c.3.4x the total for the same period of 2018. The pace is over triple that of 2016.

Europe is in the dumps. Germany has had some of the worst industrial production numbers since 2008. German GDP is set to hit 0.5% for 2019. France 1.25% and Italy 0.25%. Note that in 2007, there were 78mn Europeans living in poverty. In the following decade, it hit 118mn or 23.5% of the population.

Global bellwether Parker Hannifin, which is one of the best lead indicators of global industrial growth, reported weaker orders and a soft outlook which suggests the outlook for global growth is not promising.

This election on Saturday is a choice between the lesser of two evils. The LNP has hardly made a strong case for reelection given the shambolic leadership changes. Take it to the bank that neither will be able to achieve surpluses with the backdrop we are headed into. Yet when it comes to economic stewardship, it is clear Labor are out of their depth in this election. Costings are wildly inaccurate but they are based on optimistic growth scenarios that simply don’t exist. We cannot tax our way to prosperity when global growth dives.

Hiking taxes, robbing self-managed super fund retirees and slamming the property market might play well with the classes of envy but they will be the biggest victims of any slowdown. Australia has run out of runway to keep economic growth on a positive footing.

We will do well to learn from our arrogance which has spurned foreign investment like Adani. We miscalculate the damage done to the national brand. Adani has been 8 years in the making. We have tied the deal up in so much onerous red tape, that we have done nothing more than treating our foreign investors with contempt. Those memories will not be forgotten.

There will come a point in years to come where we end up begging for foreigners to invest at home but we will only have ourselves to blame.

The editorial closes with,

However you choose to exercise your democratic decision-making on Saturday, please consider your candidate’s position on climate and the rapidly shrinking timeframe for action. We have endured mindless scare campaigns and half-baked policy for too many decades. We don’t have three more years to waste.

This is the only sensible quote in the entire article. The time for action is rapidly shrinking. However, that only applies to the political and economic climate. One can be absolutely sure that when the slowdown hits, saving the planet will be furthest removed from Aussie voters’ minds.

Drinking the UnKool-Aid

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It appears President Trump has been bullying the US Federal Reserve to drop rates by 1% and get them to reopen the spigots on QE. What he is failing to grasp is that businesses invest because they see a cycle, not because interest rates fall.

Trump tweeted,

China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!

This is a frightening proposal. Rates are at 2.25~2.50%. Although it masks a more important reality. Can Trump avoid a market calamity ahead of the next election? The real engine of the economy is slowing.

Despite the headline US GDP print of 3.2%, consumer spending and business investment slumped to the lowest levels under his presidency. Business investment spending was dominated by “intellectual capital” (soft) which is a pretty hard metric to put a reliable number next to. Equipment and structures (hard) contribution to business investment was near as makes no difference zero. Personal consumption of durable goods slumped to their lowest reading since 2011. Wholesale inventories (ex-autos/petroleum) surged ahead of sales.

Trump might argue China is adding stimulus. He is right. China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 Trillion annualised (a Japanese GDP)). This was 55% above estimates and a full 80% ahead of March 2018. This pump priming added 8% to the Chinese stock indices but since then the market has been rolling off.

The world does not need more debt to be inflated away to get us out of the current mess we are in. A recession is inevitable. To put it into context, the world, since GFC, has added $140 trillion in debt for a grand total of $20 trillion in global GDP growth. That is right. $7 of debt only got us $1 of GDP. So if the Fed acquiesces President Trump he will probably get even worse metrics.

Then again perhaps we can take the words of a venture capitalist, Chamath Palihapitiya, who said on CNBC that “central banks have created an environment where major downturns and expansions are almost impossible.” It is statements like this that almost guarantee that central banks have lost control. Central banks have one role – ensure that markets maintain “confidence”. Powell’s latest move to cut rates after such a shallow peak tells us that “confidence” is waning. 

Profligacy paid for by wishful thinking

Lots of promises. Lots of grand assumptions. To be honest, best just ignore the minutiae. It’s a complete waste of time. The biggest question is, if the global economy, by Treasurer Josh Frydenberg’s own admission, is slowing down (just look at government bond yields flattening/gone negative) how on earth is Australia going to grow receipts from $485.2bn in 2018/19 to $566.9b in 2021/22? A 17% growth in tax revenue. Expenses will rise from $487bn to $559.9bn respectively. Give aways +15%. Best hope the world economy doesn’t tank. Expenses are locked in. Tax revenues aren’t.

Worse, these projections have all been massaged higher than the 2018-19 budget. What has changed to our overall net position in the last 12 months to gain such confidence? Climate alarmists would blush at the extent of the upward massaging of numbers. Did Treasury sit down after consuming 3 bottles of Absinthe to come up with these revisions? Think about it. How can we get an extra $5.9bn in tax receipts in 2021-22 when conditions are sure to be worsening?

This is NOT an old school Coalition budget by any measure. This is a crossing fingers, closing the eyes and hoping we muddle through budget. If the proverbial hits the fan, a monster deficit is assured. Take it to the bank.

We are technically at full employment. Unless we embark on mass migration (which we’re looking to cut) how will flat wage enduring Aussies and corporates contribute to a 17% rise in the Canberra coffers? Wishful thinking. The government targets around 23.9% of GDP for tax receipts and pats itself on the back for “the government’s average real spending growth is expected to be the lowest of any Commonwealth government in over 50 years.” Although that claim is dispelled by their own tables contained here.

Cutting taxes can create more tax revenue. Poland sliced its corporate taxes in half in 2004 and doubled revenue. However that was more a grey money grab than pure unadulterated tax policy spurring public revenue growth.

Giving away more money to the middle class through tax cuts and hand outs in the hope they spend more seems wishful thinking. The problem is if global growth hits a wall, we don’t have a Howard/Costello surplus to buffer the storm. No $38bn backstop in the war chest.

China, the US and EU are struggling. Things are so bad in the US that the Federal Reserve had to chicken out of any more rate rises because it would tank the economy. Our growth will stall if the world slows. Forget 28 straight years of continuous growth in Australia. The knock on effects will see unemployment surge, consumption fall off a cliff, housing prices crash and tax revenues slump. Forget a $7.1bn surplus. Think $20bn deficit because the promises are too grand and the tax receipts blindingly optimistic.

Of note in the 2019-20 budget is the expansion of the ATO’s tax grab from evil multinationals and HNW individuals who’ve avoided paying their fair share. That will result in a $3.612bn extr over the next 4 years. That against the $5.74bn tax cut for middle class Aussies over the same period. Spending up everywhere. Just not sure why the Treasury hasn’t pointed to where the extra revenue is coming from.

Take the assumptions of 2.75% GDP growth flat to 2020/21. Unrealistic. Treasury assumes the same labour force participation rate with unemployment remaining to 5% and wage growth of 3.25% in 2020/21, up from 2.1%. All looks so simple. Yet inflation is expected to grow to 2.5% meaning real wages will be flat.

Aussies, saddled under 180% debt to GDP, shouldn’t take any sense of comfort from this budget. What Frydenberg presented tonight was nothing more than a hope that the most rosy scenarios play out when thunder clouds are so obviously rolling in. It’s utterly irresponsible. Yet that’s today’s political class – spineless. They’re unprepared to tell Aussies that they have to be prepared to live with much less. Instead of asking us to tighten our belts, a whole load of freebies that can’t be paid for end in our laps so they can hold on to power for a bit longer.

Debunking Modern Monetary Theory (MMT)

Corp Profit

While the Dow & S&P500 indices grind back higher thanks to the US Fed chickening out on a rate rise in because the economy can’t handle it, many people still overlook the fact that core US profitability has tracked sideways since 2012. 6 years of next to nada. Sure one can boost profits by adding back unrealistic  “inventory adjustments” but the reality is plain and simple. If you search for inventory adjusted earnings they’re still marginally growing but there in lies the point. Real profits aren’t.

Record buybacks fueled by cheap debt is the cause for ‘flattered’ earnings. No growth in E  just falls in S.  EPS growth can look spectacular if you ignore 50% of US corporates have BBB credit ratings or worse.

The latest lexicon is “modern monetary theory” (MMT). The idea that the central banks just manipulate markets in perpetuity. Austerity is no longer needed. Central banks print money and extinguish debts the same way. Seriously why bother with taxation? The question is if it is meant to be a sure winner, why aren’t we all living in 5 bedroom mansions with a Mercedes Benz and a Porsche in the driveway? Why not a helicopter?

Logically if central banks can buy our way out of this debt ridden hellhole, why is growth so anemic? Why is European GDP being cut back? Why is German industrial production at its worst level since 2009? Why does Salvini want to jail the Italian central bankers? Why does the Yellow Vest movement in France carry on for its 15th consecutive week? If MMT works why would the EU care if the UK leaves with No Deal? MMT can solve everything for unelected bureaucrats in theory. Even £39bn can be printed

Last year the US Fed announced it had stopped reporting its balance sheet activity. In 2006 it stopped reporting M3 money supply. Curious timing when inside 2 years the world was flung into the worst recession since 1929. Transparency is now a danger for authorities.

The question boils down to one of basic sanity. All assets are priced relative to others. It’s why an identical house with a view in a nice neighborhood trades at a relatively higher price than one in a outer suburban back lot. The market attributes extra value even if the actual dwelling is a carbon copy. It is why currencies in banana republics trade by appointment and inflation remains astronomical. Investors don’t trust their ability to repay debts unless given extremely favorable terms. Market forces at work.

To put the shoe on the other foot, if all countries adopted MMT why bother buying bonds for retirement? The interest is merely backed by a printing press. Best consume 100% and save zero. The government has moved beyond moral hazard and hopes no one will notice

Take a look at Japan. It has $10 trillion in outstanding debt which is 2x its economy. The Bank of Japan owns 60% of that paper bought through a printing press. The market for JGBs is so manipulated that several Japanese mega banks have handed back their trading licenses because it has become worthless to be on that exchange. The BoJ thinks it can make whatever prices it chooses. The ultimate aim is to convert all of the outstanding debt into a zero coupon perpetual bond with a minor ‘administration’ fee in order to assign some value to it. To the layman, a zero coupon perpetual means you get no interest on the money you lend and the borrower is technically never required to pay the borrowed amount back. Such loans are made by parents to their children, not central banks to politicians (although one could be forgiven to think their behaviour is child like).

Yet the backdrop remains the same. Consumers are tapped out in many countries. Lulled by a low interest rates forever mentality, even minute rises to stem inflation (real is different to reported) hurt. My credit card company constantly sends emails to offer to transfer balances at 9% as opposed to the 20% they can charge if I don’t pay in full.

APRA recently relented on interest only mortgages after demanding it be tightened to prevent a housing bubble getting bigger. Now mortgage holders hope the RBA cuts rates to ease their pain.

Like most new fads, MMT can’t remove the ultimate dilemma that Milton Friedman told us half a century ago. Inflation is always and everywhere a monetary phenomenon. One can’t hope that putting money in the hands of everyone can be sustainable.

The one lesson that we should have learnt from GFC was that living at the expense of the future has rapidly diminishing returns. All we did was double down on that stupidity.

Do we think it normal that Sydney house prices  trade at levels the Japanese property bubble did in the late 1980s? Do we realize that we hold as much mortgage debt than Japanese banks did for a population 5x our size? Do we think that our banks are adequately stress tested? When an economy like ours has avoided recession for a quarter century, it builds complacency.

MMT is nothing more than a figment of the imagination. It preys on the idea that we won’t notice if we can’t see it. Unfortunately behind the scenes, the real economy can’t sustain the distortions. The French make the best modern day example of  a growing number of Main Streeters struggling  to make ends meet.

Central banks monkeying around with MMT smacks of all the same hubris of the past. It is experimental at best and reckless at worst. Markets can be manipulated for as long as confidence can be sustained. Lose the market’s trust and all of a sudden no amount of modern day jargon  can overcome what economists have known for millennia.

If you flood a global economy with cash at 5x the rate the economy can feasibly grow then it will ultimately require bigger and bigger hits to get the same bang before the jig is up. It’s a Ponzi scheme. Bernie Madoff got 120 years jail. Why not the central bankers?

So what is the best asset out there? Gold. It can’t be printed. It requires effort to discover it and dig it out of the ground. Of course the barbouros relic deserves to be consigned to the dustbin of history. If that were so Fort Knox might as well leave the gate open. The more it is hated only makes this contrarian investor want it more.

Poverty, poverty on the wall, the French aren’t even the worst of all

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Why are we surprised at the yellow vest uprising across France? Poverty/risk of social exclusion across Europe has continued to spiral upwards since the Global Financial Crisis (GFC). There were 78mn living below the poverty line in 2007. At last count, Eurostat notes that number was 118mn  (23.5% of the European population). In the Europe 2020 strategy, the plan is to reduce that by 20 million.  37.5mn (7.5%) are living in severe material deprivation (SMD) , up from 32mn in 2007.

The SMD rate represents the proportion of people who cannot afford at least four of the nine following items:

  • having arrears on mortgage or rent payments, utility bills, hire purchase installments or other loan payments;
  • being able to afford one week’s annual holiday away from home;
  • being able to afford a meal with meat, chicken, fish (or vegetarian equivalent) every second day;
  • being able to face unexpected financial expenses;
  • being able to buy a telephone (including mobile phone);
  • being able to buy a colour television;
  • being able to buy a washing machine;
  • being able to buy a car;
  • being able to afford heating to keep the house warm.

The French are merely venting what is happening across the EU. The EU could argue that at 18% poverty, the French should be happy compared to other nation states. Europeans aren’t racist to want a halt to mass economic migration when they are the ones financially struggling as it is. Making economic or compassionate arguments aren’t resonating as they feel the problems first hand.

Is it a surprise that the UK, at 22.2% poverty, wanted out of the EU project to take back sovereign control? Project Fear might be forecasting Armageddon for a No Deal Brexit but being inside the EU has hardly helped lift Brits from under a rock. Why would anyone wish to push for a worse deal that turns the UK into a colony?

Why is anyone surprised that there has been a sustainable shift toward populist political parties across Europe? Austria, Italy, The Netherlands, Poland, Hungary, Sweden, Germany…the list goes on. Even France should not forget that Front National’s Marine LePen got 35% of the vote, twice the level ever achieved. Is is a shock to see her polling above Macron?

The success and growth of EU-skeptic parties across Europe will only get bigger. The mob is unhappy. Macron may have won on a wave of euphoria as a fresh face but he has failed to deliver. He may have suspended the fuel tax hikes, but the people are still on the street in greater numbers. He has merely stirred the hornet’s nest. Perhaps UK PM Theresa May should take a look at the table above and realise that her deal will only cause the UK to rise up. At the moment sanity prevails, and when it comes in the shape of Jeremy Corbyn that is perhaps a sign in itself.

Shipping industry needs to save ITSELF before it has any chance of saving the PLANET

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Yet more eco-mentalism being celebrated by the UN International Maritime Organisation (IMO) with little thought to the very economics that has crippled shipping companies for so long. Shipping companies need to save themselves before bothering to save the planet.  Although the back slapping for the supposed “watershed agreement” (their words) will be achieved by 2050. The most pressing global issue of our times and these metal hulks which burn the ugliest, dirtiest and cheapest fuel (bunker) available have 32 years to get there. Perhaps the irony is that bankruptcy might take half the ships out of service meaning the emissions target could be hit decades earlier. A brief look at history.

It wasn’t so long ago that Korea’s largest container transporter Hanjin Shipping declared bankruptcy.  The above chart shows the daily shipping rates for the industry which remain tepid for the past decade. The problem with the shipping industry is the fleet. Ships are not built overnight. Surging order books and limited capacity meant that as the pre GFC global trade boom was taking place, many shipping companies were paying over the odds without cost ceilings on major raw material inputs (like steel). This meant that ships were arriving at customer docks well after the cycle had peaked at prices that were 3x market prices because of the inflated materials.

The pricing market was looking grim in 2016. CM wrote, “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.”

Ship Prixces

According to Weber’s Week 4 report, VLCC rates for the route from the Arabian Gulf to China dropped to $10,925 per day on January 26 from $18,389 per day on January 19, which represents a 40% fall week-over-week. The average rate for all VLCC routes dropped to $13,179 per day from $19,974 per day on January 19. The current rates are 67% lower year-over-year.

Clarkson’s note 2010 build Capesize rates have fallen from $20,000/day 6 months ago to less than $3,900/day as of April 2018. 84K CBM LPG carriers have fallen from over $800,000/mth in April 2016 to $542,000/mth today.

Take a look at the financials of global leader Maersk. It recorded $US27.1bn of revenue in 2012 but only $24bn in 2017. Yet profitability slumped from $2.1bn to a paltry $25mn. Maersk carries around $34 billion in deferred tax loss carry forwards. That is the extent of the ‘financial baggage’ it still carries. The three major Japanese shipping companies have had a hell of a hit to profitability in recent years. See below.

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If the volume of goods transported by sea increases 3% every year, the volume in 40 years will be 3.3 times today’s volume. To cut total CO2 emissions in half by 2050, CO2 emissions per ton-mile need to fall by 85%. NYK is looking at the following ship that will cut emissions by 69% in 2030.

If the shipping industry is not fixed through market forces it will be difficult to repair the profitability and balance sheets that would allow the companies to invest in more eco friendly vessels. Bankruptcies are mergers are needed to streamline the sector.

According to Clarksons, the global fleet of all types of commercial shipping is 50% larger than it was before the GFC despite the World Trade Organization saying growth in global trade has crept up from $14.3 trillion in 2007 to $15.46tn in 2016 (+8%). Scrapping rates have fallen 40% since 2012 but since 2017 have risen moderately, appealing to owners with too much tonnage on their hands.

The International Chamber for Shipping’s secretary general Peter Hinchliffe said, “This is a ground-breaking agreement — a Paris agreement for shipping — that sets a very high level of ambition for the future reduction of carbon dioxide emissions…We are confident this will give the shipping industry the clear signal it needs to get on with the job of developing zero carbon dioxide fuels so that the entire sector will be in a position to decarbonise completely.”

What a wonderfully naive plan. At least the IMO can feel warm and fuzzy despite so many headwinds ahead of an industry still in structural distress.

Chapter 11 bankruptcy filing trends in the US surging

Chap 11.png

The Chapter 11 bankruptcy trends in the US have been picking up in the last 4 years. While well off the highs of the months and years of the GFC and years following it, the absolute numbers of filings has exceeded the levels leading up to the crisis in 2007/8.

Chap 11 by year.png

Here we put 2006/7/8 alongside 2016/17/18. The average monthly bankruptcy filings were around 355 in 2006 moving to 429 in 2007 and then 718 in 2008. If we looked at the data in the 12 months prior to the quarter leading into Lehman’s collapse, bankruptcies averaged 463/month. The ultimate carnage peaked out at 1,049 in 2009 (1,377 in Apr 2009). For 2016, 2017 and 2018 (annualized) we get 454, 480 and 521 respectively.

Chap 11 Comp.png

Bankruptcy filings tend to be seasonal and often show peaks in April when tax season coincides with businesses.

However the %-age spike in bankruptcies in 2008 ahead of Lehman’s downfall was 46%. In the latest recorded month from the American Bankruptcy Institute (ABI) was 81%. This March 2018 spike is the second highest since the GFC hit. April figures will be interesting if we get another lift on that figure. Not even seasonality can explain away the differences. The trends seem clear.

Thinking logically, we are at the end of the generous credit cycle. Interest rates are heading north thanks to a less accommodating Fed. Naturally ‘weaker’ companies will have more trouble in refinancing under such environments. The lowering of corporate taxes would seem to be a boon, but with loss making businesses it becomes harder to exercise tax loss carry forwards.

We’ve already started to see GFC levels of credit card delinquency at the sub-prime end of town. Sub-prime auto loan makers seeking bankruptcy protection have surged too.

Fitch, which rates auto-loan ABS said the 60+ day delinquency rate of subprime auto loans has now risen to 5.8%, up from 5.2% a year ago, and up from 3.8% in February 2014 to the highest rate since Oct 1996, exceeding even GFC levels.

growing number of car loans in the US are being pushed further down the repayment line as much as 84 months. In the new car market the percentage of 73-84-month loans is 33.8%, triple the level of 2009. Even 10% of 2010 model year bangers are being bought on 84 month term loans. The US ended 2016 with c.$1.2 trillion in outstanding auto loan debt, up 9%YoY and 13% above the pre-crisis peak in 2005.

The irony here is that sub-prime auto loan makers expanded lending because new technology allowed these companies to to remotely shut down and repossess vehicles of owners who were late on payments. That game only lasts so long before it forms its own Ponzi scheme.

Throw skittish financial markets, geopolitical instability and the mother of all refinancings coming the US Treasury’s way it is not to hard to see bankruptcies pick up from here.