Yet More Trade Finance Worries (Not for the Fainthearted)

Readers may know we have been concerned about the dramatic fall in shipments of basic materials, as reflected in the collapse of the Baltic Dry Index. This in turn, as we have also stressed, is in large measure to the difficulty of obtaining trade finance, in particular letters of credit.

A very good post at London Banker, “Systemic Risk, Contagion and Trade Finance – Back to the Bad Old Days,” (hat tip reader Bruce) gives a very good recap of the problem and the ramifications. Key excerpts:

“We are now starting to see the contagion effects of the current liquidity crisis feed through to the real economy…

The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti. What is less discussed amidst the alarm is the reason for the collapse of the index – the collapse of trade credit based on the venerable letter of credit.

Letters of credit have financed trade for over 400 years. They are considered one of the more stable and secure means of finance as the cargo is secures the credit extended to import it. The letter of credit irrevocably advises an exporter and his bank that payment will be made by the importer’s issuing bank if the proper documentation confirming a shipment is presented. This was seen as low risk as the issuing bank could seize and sell the cargo if its client defaulted after payment was made. Like so much else in this topsy turvy financial crisis, however, the verities of the ages have been discarded in favour of new and unpleasant realities.

The combination of the global interbank lending freeze with the collapse of the speculative, leveraged commodity price bubble have undermined both the confidence of banks in the ability of a far-flung peer bank to pay an obligation when due and confidence in the value of the dry cargo as security for the credit if liquidated on default. The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade.

Adding to the difficulties, letters of credit are so short term that they become an easy target for scaling back credit as liquidity tightens around bank operations globally. Longer term “assets” – like mortgage-back securities, CDOs and CDSs – can’t be easily renegotiated, and banks are loathe to default to one another on them because of cross-default provisions. Short term credit like trade finance can be cut with the flick of an executive wrist.

Further adding to the difficulties, many bulk cargoes are financed in dollars. Non-US banks have been progressively starved of dollar credit….

Fixing this problem shouldn’t be left to the Fed. They aren’t going to make it a priority. Indeed, their determination to accelerate the payment of interest on reserves and then to raise that rate to match the Fed Funds target rate indicates that the Fed are more likely to constrain trade finance liquidity rather than improve it. Furthermore, the Fed may be highly selective in its allocation of dollar liquidity abroad, prejudicing the economic prospects of a large part of the world that is either indifferent or hostile to the continuation of American dollar hegemony.

If cargo trade stops, a whole lot of supply chain disruption starts….

If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall.

Everyone along the supply chain should worry about their children going hungry.

When that happens, everyone in governments should worry about the riots.

Controlling access to trade finance determines who loses their jobs, whose children go hungry, who riots, which governments fall….Trade finance is rapidly communicating the stress on bank liquidity to the real economy. It presents a systemic risk much more frightening than the collapsing value of bits of paper traded electronically in London and New York. It could collapse the employment, the well being and the political stability of most of the world’s population.

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  1. Anonymous

    Financial desecrations done!

    Pivotal change in humanity’s path?

    Predicted end to currency/trading based economics?

    Are we the Humans to witness a fundamental change in world behaver that, in all of history has not been witnessed before on such a scale.

    Does everyone get the fact that we all live on the same Island?

    I for one do not fear the change, I embrace it. Knowledge of of our selves and the planet we live on is far better than our predecessors.

    OK its my turn to play Doc holiday, as he was the other night. To my fellow pirates, may we create a world that in a small way attends to all humans regardless to ologys/isms and look to a better out come for humanity as a hole.


    May a caressing breeze envelop your being and remind you of the beauty of idealistic youth, unfettered by those that have a patent on truth.

    Skippy/passing out/gonig to catch flak from admin.

  2. a

    “What is less discussed amidst the alarm is the reason for the collapse of the index – the collapse of trade credit based on the venerable letter of credit.”

    People are saying that it’s because of a problem with letters of credit, and I still don’t believe it – or, at least, believe it’s the major cause. Trade should be down, because we are going into a depression and people are and will be buying less stuff. This means less goods and raw material need to be shifted around.

  3. Anonymous

    without letters of credit, there is no real way to enforcement payment across international borders. Letters of credit are low margin and are not the kind of financial instrument you can re-package and sell, so banks don’t really care about them. If you have done business with the receiver for years you might be able to come to a private agreement, but for the most part it really can freeze the movement of goods.

  4. Richard Kline

    London Banker does make the explicit (if not noted on record) assertion that banks are indeed _deliberately_ refusing letters of credit as a means of rationing credit generally. Tell me again: why haven’t we nationalized the banks, and fired managers who think like that?

    London Banker speaks to what _I_ think about when I see speculators donning bloody sheepskins and bleating that they are meek-and-mild banks; when I see alpha bankers floating balloons ‘on background’ that the government’s terms for money all but gifted to them are too dear; when I see financials buying up rotten securities so that they can punt them at a facility window at ludicrous prices for ready cash: I think about children going hungry. And the next thing I think about is what kind of impression I can make on a plutocrat’s cranium with the business end of a well-gnawed sheep’s thigh bone. And let’s be frank, there would be less head than sheepshank left at the end of such a discourse; I’m a burly guy.

    So this is why I encourage all the plutocrats to keep right on stealing while the cameras are rolling. It’s good for the citizenry to see y’all in your state of nature. I’m very unhappy about the ‘children going hungry’ phase. But if we get there, the _next_ phase will be one for the ages.

  5. Anonymous

    Ex Army Ranger+ ready to sign up for next stage. I put my life on the line for this shit.

    Hope I can scare the living crap out of them with my photo album.


  6. Richard Kline

    So Skippy, never fired a shot myself, let alone one in anger; aside from being a Quaker it wasn’t advisable for someone with my occasional temper to handle firearms.

    The problem with ‘resort to arms,’ as always, is that a helluva lot of civilians and other innocents get blown away in the crossfire. Many of them children. Organizing is what wins. This one can be done faster, cleaner, and safer by nonviolence; that is one major asset of our political tradition here. Organization is what will win. But there’s always a need for some tough hombres on crowd control and delegate security. Skills are skills, and all small unit tactics and basic security planning is the same.

  7. Anonymous

    The issuance of letters of credit is one of the fundamental necessary duties of banks, their refusal to issue ought indeed lead to nationalization…the exist due to their legal status, and the people control the Laws.
    Duty = dues, the banks owe it to us as part of the “legal deal” that creates them Banks.
    Their status as Banks is not divinely ordained, regardless of what the religious fundamentalists or “power-of-positive-thinking” capitalists may think – scratch that I mean “feel”…..

  8. River

    China/Russia recently concluded negotiations to trade commodities/finished goods directly, excluding dollars. Barter, iow.

    I expect to see more of this type arrangement going forward.

    We tend to think that we are the end all, do all, of historic trade. Not so.

    Here is a hypothetical question: Suppose you are a Chinese silk merchant and wish to sell 25,000 camel loads of silk, porcelain, etc, to wholesales in the west. Your goods are going to travel along the silk road and reach their destination in a year or more, will be guided and guarded by a mercenary army, will be insured, etc. How would you secure payment for your goods?

    If the ancients could work out trade with all the obstacles enumerated, and more, we can certainly do it today. Hey, they didn’t have even the telegraph. But, the did have time-tested and proven trade emmisarys and they did have those that knew how to calculate and price risk. Are we any smarter than those guys were?

  9. River

    Two points become obvious in my post above:

    Crooks had to be purged from the system. A trade emmisary, merchant army general, caravan master, etc, that was a crook had to be punished and knowledge of same had to become public knowledge. Examples were made of bad apples.

    Silk merchants that made mistakes in risk assessment were out of business after one bad deal. One caravan that did not make it to destination and complete its sale was loss enough to end the career of a silk merchant. The system was purged of a bad business model; The silk trader.

    Many times ventures fail on simple bad fortune. Suppose the caravan enters a war zone where peace existed mere weeks before. Risk still has to be priced in…war zone or not…and before the deal is struck. This is why such huge profits were made in the silk trade. As in gambling, we seldom hear of the huge losses.

    I am not advocating a return to barter. I am advocating the purging of failed biz models and failed risk assessment. Obviously, if barter was a better system it would still be in general use.

  10. robcyran

    Could some of the collapse in the BDI be the result of double/triple ordering? I’m not at all close to the topic of shipping, but one thing I’ve seen lots of times in technology is that end users panic during booms and double order to ensure they have parts. Component manufacturers have limited supplies so they ration sales to favoured customers or only partially fill orders. Double ordering helps because it makes you look like a very valuable customer and or ensures you get at least what you need to keep your production lines busy.

    Obviously there are some differences that even I can think of – commodities markets may be more close to perfect competition, they are obviously more bulky so storage is more an issue etc. Then again, things like memory chips are most prone to this behavior and they are about as close to a commodity as one can find in tech. And bulkiness may explain the BDI – as storehouses fill, ships act as informal storage?

    To complete the analogy, when end users in tech realize they have ordered far too much raw material, you see absolutely huge drops in demand and very suddenly – often down to marginal cost of production or bizarrely, below it.

  11. Bendal

    The general lack of spending may be part of the reason why general goods aren’t being shipped as much, but I doubt that’s the sole reason for the big drop in the BDI. My question is, how long will it take before this kind of collapse trickles down to where the media starts noticing it?

    And how long will it take before the governments realize they must do something about it?

  12. Matt Dubuque

    These are INTERNATIONAL letters of credit. Clearly this is our first example of a hyperdeflationary burst, a term coined by this writer and predicted by this writer to widespread disbelief in the US.

    It is a price collapse of 89% in 5 months, something they did not teach in US business schools.

    But it requires more than the participation of just one sovereign (i.e. the Fed) to address and remediate this.

    We need a global regulatory architecture.

    MORE than just the Americans.

    This is what the FSF is all about. Volcker, the Germans and the Chinese are on board, as of course is Gerald Corrigan and Timothy Geithner.

    Summers is not up to speed on this.

    Turn off the television. Take the time to master a book you barely understand at the moment.

    Matt Dubuque

  13. River

    Matt said…

    'It is a price collapse of 89% in 5 months, something they didn't teach in business schools'…

    Yes, it is a remarkable decline in the BDI. But what does the 15 year chart of the BDI show?

    The BDI varied between 1,000 – 2,000 for the past fifteen years untill mid year 2008 when it shot up to between 11,000 – 12,000. Now the BDI is back into it's previous fifteen year average. Will the BDI overshoot? Perhaps. See link below to view BDI average.

  14. Keith

    River, you are right of course. Trade has existed under much more risky circumstances than today. But remember that trade was so rare and difficult then that a merchant could get rich from one shipment of spices. That implies that there were not many shipments of spices getting through. If we want a situation where thousands of people line the beach in Long Beach, CA waving at an incoming ship full of priceless plastic garbage from the Orient, then we don’t need to worry about transaction costs.

    On another point in this blog, I like to see that people who are capable of reading and thinking are actually getting angry. I thought this was a country of fat lazy sheep, fed enough to keep them passive until the day of slaughter. Bush has had no problem tossing aside the Constitution in order to corrupt this nation. I for one wouldn’t have a problem with keeping these narrow interpretations of the law alive for another year so that Financial Terrorists could be declared Enemy Combatants, be dragged from their corner offices, and thrown into Guantanamo indefinitely. This would accompany the seizure of all of the Terrorists’ assets and houses, down to the crumbs that are much too small for the other Who’s mouses. Then these arrogant criminals, who are used to living in a world that was constructed by lawyers for them, might see that there is a downside to stealing Billions.

  15. Will

    so discussion of the DBI has been going on for some weeks now and it always ends in Armageddon. however, what I’m curious/confused about is the trickle down time frame. shouldn’t we be seeing inflationary pressure already? if grain, cotton, whatever is not coming in, then existing stores should be dropping below their normal levels – wouldn’t this alone begin to push prices up/cause shortages in the destination market place?

    why don’t we seem to see any effects of this yet, and how long until we do – particularly on food availability, which of course is the most fun one to watch.

  16. Keith

    Will, I have been thinking about that in the back of my mind since the BDI issue started. Shouldn’t there be a consequence outside of that index? Where are the shortages, or where will the shortages first be seen? This should be knowable – what ships are not moving?

  17. cutNpaste

    This article in the London Banker (Hat Tip: Yves Smith) also had some very interesting comments:

    r0tiNeK said…
    Fantastic Post LB. I see these "convulsions" transpiring throught the world economy & they are quite violent – people still haven't REALLY felt them YET… when there is a complete disintegration of the credit markets and as a result confidence in Trade collapses, this is really serious stuff. As you've noted (and the other intellectuals too) this most recent collapse in the Baltic Dry index will be felt in the real economy within next 4months. The thing is I'm also seeing so many businesses go Bankrupt that I can't see the Demand in Trade going forward. It's honestly collpasing.

    14 November 2008 02:20
    yoyomo said…
    These currency and credit manipulations may be the opening salvos in an economic war that may turn violent as a crippled US, unable to heal itself, tries to make sure that its competitors are similarly handicapped. If you can't soar with the eagles, tie lead weights around the ankles of those who can; if that doesn't work, break their wings.

    14 November 2008 05:20 said…
    This is what I started worrying about in September. I was having trouble sleeping at night, as all I could imagine was the global logistics chain seizing up, as supply destruction shook hands with demand destruction. Thus muddying the waters between the two. As my area is oil, I have tried to explain to people that supply is already chasing demand down the price ladder. As for dry bulk shipping, it's really just an example of how the world works. Modernity is equivalent to highly developed credit systems. Without those, you don't have efficiency–or modernity. You are immediately cast backwards into a primitive system, where wages have to be paid, and received daily.

    Nice post, L.B. For two months now, I have hope the worst will not come to pass.

    14 November 2008 08:55
    Joseph j7uy5 said…
    To add insult to injury, or, perhaps, injury to injury, the USA in the 1990's decided that they no longer needed to keep reserves of grain or other foods. Enormous stockpiles of foodstuffs were allowed to dwindle. Just this year, they reached zero.

    14 November 2008 09:47
    DiverCity said…
    I routinely watch CNBC World from here in the USA. An anchor/reporter from Singapore, Adam Bakhtiar, has for a number of weeks been trying to sound the alarm regarding the ongoing deterioration of the Baltic Dry Index. The other anchors don't seem to share his concern or even know what he's talking about. It appears that we all better understand the seriousness of the matter and what it entails and portends.

    14 November 2008 10:02
    Jesse said…
    Brilliant and insightful post. Thanks for the perspective.

    14 November 2008 13:53
    Drake said…
    Likewise, a brilliant post.

    You should just write these kind of mails on Monday, it is nicer to ruin the work week than the weekend…

    Seriously, I have been following the collapse of the Baltic Dry Index without totally thinking it through. I have also been following what is happening in Island, which does not have functioning banks any more, and wondering when do the people there realize the true depth of the problems in which they now are – tradingwise and such. I did not realize that we are all going to be Islanders.

    This was a truly scary post, thanks for the wakeup. Bonds and equities, they worry me so much less now…

    @ Yoyomo
    Totally agree, we are going towards trading wars, tariffs and revenge tariffs, beggar thy neighbour world.

    14 November 2008 14:49
    Anonymous said…
    Thanks LB!

    I read your posts on RGE monitor, and I can definitely say this one scares the s*** out of me. A lot of food for thought and very sobering. Makes me wonder what 2009 will bring if this is not resolved – and that can't be good!

    14 November 2008 16:54
    Anonymous said…
    Aren't "letters of credit" pretty much why international banking was set up in the first place – to facilitate international trade? Its like the international money exchanges where only something like 1% of the money traded actually has to do with trade, and rest is wild speculation. And now they're throwing away the bit which actually has human value and usefulness to defend the dross.

    Galbraith in his book on the Crash of '29 notes a similar phenomenon. As the huge Investment Trusts crashed as all their bad leveraged stock went belly up, they were forced to sell all their real stock in real things like steel and automobiles to try and save the bad. Just as Hedge Funds are causing all the instability in the market now by having to sell off their good stock – at rock bottom prices – in order to shore up their bad. (And thus causing all this turbulence and artificial ramps and dips in the market).

    Galbraith noted dryly about this phenomenon that he'd seen swindlers swindling innocent people often enough, but this was the first time he'd noted swindlers swindling themselves.


    15 November 2008 01:45
    José Luis said…
    Antal Fekete, an heterodox economist of the austrian school, has deeply studied the importance of the Letter of Credit in commerce. He has stated the fall of the clearing system of letters of credit as one of the main reasons of the 1929 depression.

    See "Monetary reform: Gold and Bills of Exchange"

    15 November 2008 02:16
    Wisdom-Seeker said…
    A less gloomy thought:

    In the absence of Letters of Credit, there will be a tremendous opportunity for cash-rich shipping companies, no?

    The shippers have an opportunity to increase profits by taking on the financial risks, rather than dumping those upon the letter-of-credit bankers.

    Shipper with cash in hand (literally or in a local bank account) purchases a cargo in Port X. Shipper delivers cargo to Port Y, sells it, and drops cash into bank at Port Y.

    Therefore, if banks won't lend to shippers, there's an opportunity for investors to do so in order to give the shippers the cash to cut out the banking middleman.

    15 November 2008 05:55
    Anonymous said…
    Wonderful post, LB. Mish has been talking about the Baltic Dry Index for months, but this post does the best job I've seen of making it relevant.

    I just read an article about Hartford Insurance picking up a Florida bank for 10 million and thus becoming eligible for billions in TARP money. I suspect you would say this is the problem with TARP. It pulls working credit out of the 'letters of credit' system.

    Are you recommending the US reinstate the Glass-Steagall Act?

    15 November 2008 06:58
    RGEreader of LB said…
    A most interesting perspective.

    In recent months the Baltic Dry Index along with LIBOR, TED, etc. have made there way into the vocabulary of the pundits. In many cases the interpretation of these indices has been butchered, twisted and otherwise badly abused.

    Popular sentiment for the decline in the Baltic Dry Index relates almost exclusively to slowing demand. The perspective you (and a few others) are offering, suggests a different and far more serious dynamic.

    I wonder what portion of the decline in the index would be attributed directly to the credit issues you describe versus slowing demand. To that end if a solution were to be found to those specific credit issues it would stand to reason that the index would benefit proportionally.

    Related to that I wonder to what degree the depth of the economic slowdown would be reduced if such a solution were to be found.

    Finally to what degree are current economic forecasts factoring in what you have described?

    15 November 2008 07:00
    Anonymous said…
    Why worry about hungry children?
    When the supply line fails, we can just eat them!
    After all haven't we been doing so figuratively and financially for decades? What of the imposed immiseration on our posterity as we spend in every conceivable way in deficit? Born to bondage, these yummy and tender lieblings are saved a worse fate as wage slaves and dust heap scavengers were they not trussed, singed, and rotisseried (with apple in mouth no less) for our consumption.
    We really would just be doing them a favour.
    Yes, spendthrifts whose credit has collapsed can indulge the ultimate self-destruction–literal consumption of our young. My mouth is watering in the contemplation. Irish, Asian, melting pot infants…any will do with the right marinade.

    15 November 2008 08:02

  18. Anonymous

    One sentence in the London Banker post is hard to understand. Can anyone explain this to me? Thank you.

    “Indeed, their [ ie, the Fed’s ]determination to accelerate the payment of interest on reserves and then to raise that rate to match the Fed Funds target rate indicates that the Fed are more likely to constrain trade finance liquidity rather than improve it.”

  19. Anonymous

    The bulk dry shipping industry is affected by a downturn in iron ore and coal purchases in china. This is partially about china and its suppliers wrangling over price.
    The problem with letters of credit does not appear to be solely about whether banks will issue them but about whether they will be honoured by another bank. The problem not only affects shipping but international rail,air and road freight.
    I am not sure things are as bad as it may seem, with international banks like HSBC not really having problems. I am worried about wheat and grain, but also coal and perhaps power as a result.

  20. Doug

    Will –

    I concur. I have not seen any stories about supply shortages due to the type of claims made in this article.

    “The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade.”

    Is this comment “theoretical”, suggesting what could happen, or are there actually goods _not being shipped_ and if so, which goods?

    It is difficult to judge the merit of this article. There are not any real world specific examples.

    So this article could be inflammatory in nature.

    “Short term credit like trade finance can be cut with the flick of an executive wrist.”

    It can be. But is it?


  21. River

    If posters will go look at the link that I posted above and then think about what you are looking at, all will be revealed.

    This is not rocket science. For FIFTEEN YEARS the BDI was in a relatively narrow range, about 1,000 to 2,000. Then in mid 2,008 it shot up to 11,000 – 12,000, then it plummeted as fast as it went up. Now the BDI is back in the range of it's 15 year prior trend.

    It skyrocketed in mid 2008. What else was happening in mid 2008? Commodities were going ballastic! Freight rates followed!

    Once more, here is the link:

    Or, all can continue to speculate about a catastrophe that isn't.

  22. Roaaad

    In my daily work I trade the derivatives based on the Baltic indices (so-called Forward Freight Agreements). We track a lot of the movement of ships around the world on a daily basis as part of our fundamental research. The letters of credit issue is only a small part of the reason for the collapse in the drybulk freight market and it is largely used as an excuse, suggesting that this is only of temporary nature and will recover as soon as the banks will start lending again.

    The real reason is an abrupt slowdown in Chinese imports, related mainly to destocking of iron ore stockpiles and the global cuts in steel production (-18% y-o-y in China in Oct). Simply put, demand for the big ships on the long-haul iron ore trades are down by 20 – 30% in the last 3 months. Imagine a 30% demand shift in any market and you will have a collapse down to production cost. This is nothing new and we were at these levels in the previous recession as well (2001/02).

    Note that grain shipments are one of the few things that are moving fairly normal, so the worries about food shortages are thus far overblown.

  23. ccm

    anon 11:41

    The idea is that banks will get a 1% (i.e. federal funds rate) return just by storing their cash at the Fed. This may discourage them from lending the money out. (This theory seems to assume that the banks can’t get much over 1% in their lending operations — which is nonsense.)

    The Fed clearly wants to guarantee banks a minimum of 1% on their money. The only question is whether that rate of return is drawing bank funds away from private investors.

  24. Yves Smith


    I was hearing reports six weeks ago, two separate incidents of long-established buyers with pristine balance sheets and plenty of liquidity being unable to arrange imports because the buyer’s bank would not accept their bank’s L/C (in both cased, big international banks). I only know of the cargo in one case, coal. So this is happening.

    I also posted on this blog a story from Canada that reported that L/Cs woes were starting to affect grain shipments there, not large scale, but farmers were alarmed that it was happening at all. The article also said that this problem had started in the US sooner.

  25. Will

    @river – thanks. im no expert, but looking at that historical chart i wouldn’t place any real money bets on Armageddon until these numbers get much worse. looks like its settled at historical lows – Id think we’d need some real cries of fear from the actual market first before running to buy a 100 lb bag of rice and some krugerrands.

  26. mdf

    I have to concur with Will and doug: until actual specific instances are documented, the article reads like peak-oil-esque hyper-FUD.

  27. Anonymous

    Anyone know if there is a similar measure covering the freight rates for container vessels since these might give some idea of any contraction in the movement of finished goods ?

  28. Anonymous

    This article from the London Times backs Yves argument

    For historical reasons the UK is till a major center for maritime transactions so the City of London will have a pretty accurate idea of what is really happening to world trade. It would be foolish to dismiss their predictions too lightly.

    By the way it seems container rates may be going the same way as bulk shipping rates next year.

  29. William Mitchell

    East Asia is perhaps even more exposed to this than the US, not only because of export dependence, but also because of their greater effectiveness at decentralizing the supply chain. A product assembled in Guangdong may have sourced components from several different countries. Hong Kong, through which much of this sourcing is orchestrated, would really be hammered.

  30. Francois

    If shipments are not taking place, we should hear something from the actors down the food chain, no?

    Has any producer of finished goods like bread (wheat) or structures (steel) signaled a problem in getting their shipments to their plants?

    Until we hear that it is the case, (assuming the lag time isn’t too long) we have precious little to base our concerns.

    Just my 2 n’gwees

  31. mdf

    This article is just a re-hash of the current one, albeit lacking the apocalyptic tone.

    Again, the question is not whether a shutdown of international trade would be a disaster, or that there are tough times ahead for shippers, but whether there is any hard evidence that:

    "Everyone along the supply chain should worry about their jobs."?

    "Many will lose their jobs sooner rather than later."?

    "Everyone along the supply chain should worry about their children going hungry."?

    Reading London Banker's blog, I am disturbed by the isomorphisms to the peak oil arguments. "The entire world needs cheap oil" -> "Everything you touch is tainted by oil" -> "Oil discoveries are down" -> "Oil is running out" -> "WE ARE DOOOOOOOOMMMMEDD!"

    Each one merely a plausible statement, but when considered in their entirety, the final implication is left sorely lacking in support.

    Is it too much to ask for more details on these models, and their conclusions, before, as per Will, we start stockpiling food and ammunition?

  32. Lemmy Caution

    I’m a production worker at a grain export facility on the US west coast, and we are on track for a RECORD YEAR by the end of 2008. That said, a rumor has recently circulated that our facility will shut down the second shift early next year for most of a month due to reduced shipments. Bummer for me since I work the second shift, but this was standard operating procedure as little as five years ago.

  33. russell1200

    In deflationary times, letters of credit are not all that secure because the seized cargo is of less value when it reaches port.

    I doubt the bankers are all that smart about it, and I am not a great believer in the efficiency of markets, but when a market as large and diverse as the shipping industry seizes up it would be wise to look a little closer at the situation than just assume its bankers being naives.

  34. Anonymous


    Why are you taking credit for coining the term hyperdeflation, when Willem H. Buiter wrote a research paper published in the Oxford Economic Papers in 1987 entitled A Fiscal Theory of Hyperdeflations?

    Do you always take credit for the work of others or did you just make an exception in this case simply to inflate your already grossly enlarged ego?

  35. Anonymous

    Having trouble following the logic here.

    There is no shortage of iPods or any other imported gadget that I can see. There also appears to be no upward price pressure on imported goods in general. One or both of these things should be visible if the root cause is lack of credit stalling otherwise “ok” trade.

    Seems far more consistent that the dramatic decline in shipping costs is closely related to either a strong decline in shipping demand or a strong oversupply of shipping demand.

  36. Anonymous

    C’mon Matt, we’re waiting to hear your explanation why you have repeatedly taked credit for coining the term hyperdeflation when a simple Google search (an American company) indicates that Buiter coined the term hyperdeflation more than 20 years ago.

    Are you at a loss for words?

  37. Anonymous

    9:41, I suggest you read more closely. The “trade finance” meme has always been about raw materials, not high value added, high value to weight and bulk finished and intermediate goods. No one has EVER mentioned finished goods as being the focus of concern. By that point in the supply chain, you are dealing with intercorporate transfers or well established vendor relationships that don’t involve letters of credit.

  38. Anonymous

    Retailers placed their bets around August for holiday sales and then pre-order. It takes time for the logic to show up on the stat sheets as profit or loss…..give it time.

    Yves alludes to a financial world war taking place and trade is just one of the battles.

    Recession, then depression, finally destruction. Beginning to see ‘destruction’ used more often.

    The ‘Gee’ meeting will try to bluff the US into isolating its debt. Fat chance.

    Russia and China in a trust for direct trade, that should be interesting.

  39. Richard Kline

    So River: “Here is a hypothetical question: Suppose you are a Chinese silk merchant and wish to sell 25,000 camel loads of silk, porcelain, etc, to wholesales in the west. Your goods are going to travel along the silk road and reach their destination in a year or more, will be guided and guarded by a mercenary army, will be insured, etc. How would you secure payment for your goods?”

    In fact, the risks were insuperable, and long-distance overland trade was _not_ conducted in this fashion. Instead, goods typically passed on to two or three parties, who conveyed them partways and resold them. China never sold directly to even the typical brokers of such goods in the Near East, who for most of Classical Antiquity were Syrian Christian communities, let alone to ultimate ‘end users.’ In fact most of the time, the ‘goods’ were payments of various kinds made to nomadic power brokers, who in turn sold them on, directly or indirectly, to contractors for the Syrians. Trade flourished when the nomads were strong, could extort large volumes of tribute, and could guarantee security for the caravans. A fair present comparable for the latter situation is the roll of US politico-military power in guaranteeing seaborne oil trade. Hmmm.

    And re: China-Russia making barter arranagements, they are both thinking ahead to dollar crisis conditions. They have every reason to believe that they may end up on the wrong side of dollar swap rationing in an eventual pinch, or contrariwise be forced to buy deteriorating US dollar debt to hold their trade positions stable. And they are right in my view in both concerns. So they are cementing connections which will be buffered from such disruptions.

  40. Richard Kline

    So Roaaad, you point indirectly to the fact that there are two issues in play, here, and that disentangling them is by no means easy to do without better data. The fall in rates and volumes both for the BDI is clearly driven by demand collapse, notably in China as you say, and has a strongly cyclical vector. Thus this decline isn’t ’caused’ by problems with letters of credit. Undoubtedly you are correct in saying that. Part of the plunge also is, as you say, part of negotiating tactics between parties trading these bulk commodities, who have seen bizarre price gyrations and might like to get prices and contracts re-negotiated. In that context, ‘excuses’ concerning LoC are one more chip in the dicker, sure.

    OTOH there are significant reports, of which Yves has tracked several down, of banks actually refusing to accept letters of credit. There seemed initially to be some hints that this was due to concerns of counterparty risk, but hints are not facts. More believably is the scenario we are now hearing murmurs regarding, that banks simply don’t want scarce capital tied up in the low-yields of a market sector going through a huge cyclical decline. Again, it would be good to get some clear and published research on this issue, either to clear it up or to highlight the scale of the problem. I do suspect that the problem is real, if not necessarily critical, yet. But it would be important to know _how_ real it is _before_ it becomes critical. Airy words of ‘much ado about next to nothing’ won’t cut it if there is a real underlying problem.

    What I find most salient, then, is that this is an issue that the public authorities could fundamentally address, but they are supine in sloth. Too busy bailing out cronies. Guarantees of LoCs, or direct ‘Thou Shallt’ actions by financial regulators could render this concern a non-issue, but of course decision makers are too busy primping for their photo ops. Any ‘Friends of Barack’ want to put this one on his Blackberry before he shuts the thing off?

  41. freude bud

    There is a related, if only distantly, story of an incredibly steep contango in the oil market (CL NYMEX) just now. The differential between front month and Dec 2009 is about $10/b. The differential between front month and Dec 2016 is about $30/b. That’s more than 50% of the front month price!

    Verleger says that means there’s no storage left, but the last EIA data suggests that crude stocks, though above the historical average, are still well below the top of the historical average. According to John Kingston at Platts’ “the Barrel” blog folks at an oil conference this week made clear that there is storage out there for the buying.

    Although I think part of the story behind this is the guesstimation that oil will fetch more in the future, I also believe that financing issues are bedeviling the markets.

    I’m guessing this was exacerbated by the anti-speculation legislation, but it hasn’t been signed, so only in the psychological sense. (No point in involvement in a market 1 year from now if you’ll be banned from it at that stage.)

  42. roaaad

    Richard Kline –

    I have no doubt that there is a serious LoC issue. However, it is nigh on impossible to disentangle its impact on demand with the loss in demand for commodities due to destocking in China and the general global slowdown, particularly in the steel industry where we have seen “ccordinated” cuts in production in the last month. As someone else alluded to, the annual iron ore price negotiations between the miners and the producers are also kicking off now, and there is undoubtedly some gamesmanship going on in this regard as well.

    This is clearly a demand-driven slump, however, as the supply growth of ships, while high, is on par with the previous 3 years.

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