I'll Trade You My World Economy for Yours

Deflationary Trade

The global shipping crash continues to get worse and this morning’s GDP data shows the US recession is already deeper than 2001 and probably 1990-91 as well.

Meanwhile the International Monetary Fund seems determined to make the whole thing worse by imposing the most ruinous strictures on supplicant nations.

Yesterday the Baltic Dry freight rate index fell below 1000 for the first time in six years and last night it fell another 40 points to 885. In June the index was 11,900, so it has fallen 93 per cent in a few months – a crash far worse than anything ever seen in the stockmarket.

The spot daily rental for a Capesize ship is now $6365, down from $234,000 per day over the space of a few weeks. Maybe that previous price was absurdly inflated, but at $6365 it is just $365 above the average daily cost of crews and fuel.

As a result the world’s ports are filling with empty ships because shipowners can’t afford to run them, as well as some full ships because the owners of the cargo won’t unload without a bank letter of credit, which banks are refusing to supply.

Shipping companies are starting to file for bankruptcy in increasing numbers as they breach loan covenants, and a shipping researcher, Andreas Vergottis of Tufton Oceanic has told Bloomberg that a fifth of the world’s dry bulk companies may soon have negative net worth because the market for second hand ships has collapsed and the value of their fleets is below outstanding debt.


From the Middle East

Deflation could well be the next major concern for economies across the world in the coming year as most global economies grapple with a grim financial and economic scenario, which is likely to deteriorate further, a senior official of Standard Chartered Bank said.

Dr Gerard Leyons, Chief Economist, Group Head of Global Research, Standard Chartered Bank, projected a further downfall specifically in the United States and the United Kingdom economies.

Leyons said in spite of some "helpful factors" in the year ahead such as correction in oil prices, a likelihood of lowered rates and cheaper mortgages, the outlook is grim. "We can't stop the recession that is about to hit us. But despite best efforts to stabilise the financial crisis, the economic situation will still deteriorate."

As further reductions in interest rates take place, worries pertaining to inflation are replaced by fears of deflation. "In fact, by this time next year, deflation may be the major concern. That is both because of the intense competitive pressure evinced in global supply chains and the deflationary pressures resulting from the financial crisis."

Talking about the correction in oil prices, he said that oil producers were not yet suffering from the recent correction in oil prices because many countries have budgeted oil prices not too far from previous levels, or even lower.

Considering the difficulties they may face in raising liquidity, the oil producers would require to open up their markets, he added.

"Because of the financial crisis, many oil producers will find it harder or costlier to attract capital, thus pushing up the cost of production. This many oil producing counties will need to open up their markets to attract capital inflows."

Adding that official interest rates in economies such as US and the UK could be expected to decline further by 0.5 per cent and more, Dr Leyons said the outlook for Europe too was poor.


RGE Ecomonitor

The financial wildfire has turned around the stagflationary trends seen earlier this year into a vicious cycle of global deflation in debt, assets, wages, and goods. Headline consumer inflation has peaked in most of the developed and emerging world, except in places where food/fuel subsidies were recently rolled back or post-Q3 data are still unavailable.

According to the IMF’s October World Economic Outlook, the world’s average consumer prices have increased 6.2% y/y Q2 2008. JPMorgan expects world CPI inflation to slow to 2.6% y/y Q2 2009. Lower commodity prices subdued headline inflation and are expected to continue doing so on slackening global demand.

Core inflation has yet to show a significant decline but a feedback loop of debt deflation, asset deflation, commodity deflation, wage deflation, and slower global growth will likely lead to flat or lower headline and core consumer and producer prices in Q4 2008 through 2009.

But in the short- to medium-term, stag-deflation seems the most likely scenario for the world economy.