A Slow Boat to China or Hollywood Hubris?
Having recently listened to Matthew Simmons being interviewed by Jim Puplava on the Financial Sense Newshour about his new book, Twilight In The Desert, I started thinking again and again about China - and their insatiable growing economy. In fact, I thought so long and hard about all of this I began trying to resolve some of the 'conflicted data' being reported in the financial press as it relates to shipping and China. You see, dear reader, with the Chinese economy experiencing amazing growth rates - they are naturally dependant on importing many goods to feed their industrialization process. Importation of goods requires lots of ships and because ships are expensive and take a couple of years to build - fleets are more or less finite and shipping rates are quite elastic to demand .
In case any of you are wondering exactly where I'm going with all of this, I would first like you all to consider that on July 20, 2005, CNN reported,
"BEIJING, China (Reuters) -- China's first-half gross domestic product grew 9.5 percent from a year earlier, the National Bureau of Statistics said on Wednesday while warning that investment was still too strong."
So we know for a fact that the Chinese economy continues to grow frenetically. With this being a given, I would now like to direct your attention to the performance of the Baltic Dry Index over the past 6 months. The Baltic Dry Index [the spot cost of hiring a ship] is set daily in London, England, has historically been a reliable proxy of world trade in dry goods and is a composite of daily inputs from the players in the global shipping industry. As you can see, this index 'crashed' in the past three months - and take special note how a critical chart support level [ ABC ] was 'blown through' at the end of June 05:
Chart Compliments of: www.investmenttools.com
Now I'm sure you've all heard the expression that 'a picture is worth a thousand words' or not, but the one above sure leads me to believe that 'something doesn't smell quite right in Denmark'.
The severe drop off in the Baltic Dry index, viewed in isolation, is highly suggestive that the Chinese economy is falling off a cliff - and we know [see above] for a fact that Chinese GDP grew at a 9.5 % clip. Using a little bit more rudimentary logic one would assume that if this were actually the case, Chinese demand for imported energy [currently 45% of China's oil demand is imported] would be dramatically lessening as well. It goes without saying that lessened demand for crude oil would be reflected in lower prices of crude - perhaps would have even plunged from the elevated price levels that crude has recently attained. But alas, according to Teekay Shipping
|Overview||End Feb '05
|Global Oil Demand||84.7(*)||84.5||• Global oil demand rose by 0.2 mb/d from the previous quarter. Economic growth in the US, Chinese consumption and seasonal factors were the key drivers.|
|Global Oil Production||83.8||84.2||• Global oil production declined by 0.4 mb/d; OPEC accounted for the entire decrease whilst non OPEC output remained steady from the previous quarter.|
|OPEC Crude Production||33.5||33.9||• The 0.4 mb/d decline in OPEC production was mainly as a result of closer quota compliance by Middle East members and disruptions to Iraqi oil production.|
|* : Current 1Q05 estimate|
News online , we can see that Global oil demand actually increased in Q1 2005 - with Chinese demand being cited as a factor driving demand. Furthermore, when we overlay the price of crude on the Baltic Dry Index - a slightly different picture begins to appear. After we overlay the Baltic Dry Index with the price of crude oil we get a picture that looks a little bit more like this:
Now I don't know about you, dear reader, but the above chart - categorically - does not look like it depicts a weakening global economy, but admittedly something in the picture above just doesn't seem to jibe - but what?
To resolve this apparent conflict and find the answer to that question, we need to dig a little bit deeper. First we might want to take a look see and find out if there was a heap of new tonnage [new ships] hitting the water at the time the shipping rates crashed through the resistance point [ C ] on the chart above:
|Fleet||End Feb '05
|World Tanker Fleet||338.8||333.9||• In the first two months of 2005 the world tanker fleet rose by 1.5% over end 2004.|
|Deliveries||5.9||6.0||• Deliveries during Jan.-Feb. were almost same as 4q04 partly as a result of the overspill from the 2004 orderbook.|
|Deletions||1.4||2.8||• The pace of demolition activity was slow as freight rates remained at relatively firm levels.|
|Newbuilding Orders||5.5||9.3||• Majority of NB activity focused on Aframaxes and VLCC's even as NB prices remained on an upward trajectory.|
|Orderbook||89.1||89.5||• The end Feb.'05 orderbook stood at the highest level since 1974.|
Low and behold, there really was no dramatic increase in tonnage added to the world tanker fleet. But surely something had to cause this major sell off, so what could it be?
If you have ever heard the expression, 'sometimes you find treasure in the darnedest places' - you'll have an idea what went through my mind when I came across this gem of a Moscow Times/Reuters business story on July 5, 2005:
China Entering Stage as Global Oil Dealer
By Jonathan Leff
SINGAPORE -- Giant refiner Sinopec's offer to sell millions of barrels of crude was as much a ploy to depress global prices as a bid to shift surplus oil, heralding a new era of trading power from China, the world's No. 2 consumer.
Sinopec's trading arm Unipec, normally a buyer of oil, surprised Asian markets last week by offering an unusually large 6 million barrels of prompt physical crude, including cargoes from Latin America, the Middle East and West Africa.
Remember folks, China is no more a natural exporter of crude oil than you or I are builders of space ships. In fact, they've actually begun rationing the stuff. China needs oil and particularly right about now with their own Strategic Petroleum Reserve due to be completed in August 05. Being the silly guy that I am, I start asking myself - why would a country that imports 45 % of its voracious and growing oil demand suddenly become a seller of crude oil? The answer to that question, I would contend, does not rest in the notion of whether or not China is ramping up oil exports [because they categorically are not] - IT HAS EVERYTHING TO DO WITH CHILLING A PIPING HOT SHIPPING MARKET, CHARTS AND THE DATE.
Remember the support point at C on the chart above? Now take a closer look at the date when that point was pierced - that's right, it was at the end of June - at a major support level established in mid 2004! While I'm not going to make any silly claims of my being a shipping tycoon, I would like you to consider the following:
Firstly, I begin with the premise that the Chinese are smart and perhaps cunning - if not efficiently ruthless. Then, remember it has long been suspected that China has been satisfying a good portion of the world's structural silver supply deficit for a number of years. This is indicative of China's penchant to 'stockpile' strategic commodities and it is also manifested in China's desire to construct their own strategic petroleum reserve - nearly/now completed. If China had stockpiled a sufficient quantity of strategic bulk dry goods - which is not a stretch of the imagination by any means - they quite conceivably would easily have been in a position to temporarily withhold cargoes from the shipping industry with the expressed purpose of 'taking the steam out of shipping rates - thus the 'softening up' prior to the plummeting Baltic Dry Index.
From a 2004 Washington Post article, Booming China Devouring Raw Materials, we get a gleaning as to the mentality driving the industrialization process currently occurring within China. Where it was stated,
"Now China has made things even more volatile. Far from transparent and ruled by a Communist Party government, it has policies that are often hard to discern, and they can shift abruptly by fiat. Even minor changes within the vast country can dramatically alter global supply and demand".
I am going to go out on a limb and suggest to you, dear readers, that the chart point on the Baltic Dry Index being beaten up [at C ] the way it was; was the direct result of China offering a 'likely one time deal' of a 'few cargoes' of oil on the world's open market - a CANARD - for no other reason than 'to put the fear of god' into ship operators [not to mention oil speculators] all around the world that the Chinese economy was actually slowing down or worse yet - falling off a cliff. This mirrors the Fed's Alan Greenspan when he claims that inflation is under control and cites doctored CPI and PPI statistics [with help from the good folks over at the Bureau of Labor Statistics] - it serves as 'false justification' for ridiculously low interest rates he inflicts on those dependent on fixed income. These would be the same conundrum creating low interest rates, which coincidentally, he also desperately requires to induce good ole Joe Sixpack to keep refinancing his home - going further into debt - and spending like a drunken sailor. Interesting, if you stop to consider it, that most market manipulations - no matter how well devised - typically leave a discernable trail of identifiable bread crumbs. At issue in my mind, it all depends if anyone wants to bother looking for them. In considering this, one should remember that powerful insurance giant Marsh & McLennan - as a matter of fact, ran a premium price rigging scheme right under the noses of regulators - in a supposedly highly regulated industry, to boot - for years. So stuff like this does in fact happen - heck, if you don't want to take my word for it, just ask Eliot Spitzer.
Throughout much of 04 and the early winter of 05, unsubstantiated rumors circulated in financial markets that a slow down in China's economy was unfolding or imminent. This type of persistent commentary, circulated largely by Wall Street or monetary types, took the edge off many markets - from commodities to shipping to the odd slip in the price of crude oil. But by the time first half GDP was reported in July 05, low and behold, we learned that China's economy grew by a sizzling 9.5 %. That would be the same 9.5% China's economy grew for all of 2004. By manipulatively wearing down market sentiment and then giving the market in question 'a jolt' at a crucial chart point, a mindless panic by ship owners ensued and a subsequent cascade in global shipping fares was achieved. We often see the same type of false pronouncements from Fed officials and their open mouth committee - who would have us believe they mistakenly forgot their mitts when they came to the ball park? So much so that major financial news outlets like CNN and CNBC seem to frequently get duped [ or sly like foxes, perhaps? ] by these 'false flags' - and do their sponsor's bidding over the airwaves 24/7, to an unsuspecting and trusting public who graze at their troughs. Of course, the fertilizer they were really spreading in this case was that an economic slowdown was either imminent or already underway in China due to the collapse of the Baltic Dry Index. This, ladies and gentlemen, is nothing short of 'Hollywood hubris' at its finest.
I am not saying all of this to imply that China's economy never will or never can slow down. Quite to the contrary, I strongly suspect at some point it will - because it must. However, to make pronouncements by reading so much into a poorly performing Baltic Dry Index in isolation, without good corroborating evidence is foolhardy. I would strongly suggest that when instances of one economic indicator behaving 'unnaturally' or contra related indicators is occurring - flags should be going up as to why - and a reasoned plausible explanation should be sought.
Remember that forecasts from Wall Street, for the past three years, of an impending return to 28 dollar crude oil have been categorically wrong. These are the same folks, by and large, who have been predicting an imminent slow down or hard landing for the Chinese economy over the same time period - do you ever stop to wonder how their investing clients have fared over this time frame if they have acted on this advice? Now ask yourself why the mainstream financial media have paid these same pundits so much reverence and afforded them continued face time rendering the same utterances without taking them to task on their past gaffes [or guesses perhaps]?
$$ ...AND NOW LET'S PAUSE FOR A COMMERCIAL BREAK...$$
The reality, dear reader, is at their core - financial markets today are really no different today than they were two thousand years ago. Folks in positions of responsibility who we've bestowed great amounts of public trust upon can be counted on, over time, to adopt self ingratiating practices and act in their own self interests that stem from greed. This is a constant that has transcended racial and even religious lines throughout history. In large part, some might argue, this is why civilizations advance and recede with the same predictability as seasonal change.
In case any of you are wondering - where the Chinese learned to manipulate markets in this manner, I would suggest to you that they simply learned from the best - none other than our esteemed Sir Alan of Greenspan and Co. along with a pile of Wall Street mavens - raconteurs of hedonics, inflation, productivity gains, GDP and other fine flimflam vintage economic reporting. Now, Greenspan and Company certainly know the importance of establishing trust in his numbers, respect in his utterances and maintaining market sentiment - seeing as how he presides over the biggest house of cards on the planet, fiat money, which de facto epitomizes 'blind faith' and constantly requires 'a nudge here' or 'a nudge there' to keep the minions believing. For proof as to how geared the whole financial system is to chart points and technical analysis; one need look no further than the percentage volume of trades that gets mindlessly executed on the NYSE in program trades for a given week. Scrolling through this page you might be astonished to see that, typically, anywhere from 50 % to as much as 71 % of trading in a given week doesn't even require anyone physically saying 'buy' or 'sell', 'mine' or 'yours'. A computer simply executes the trades when predetermined 'chart points' or 'spreads' are achieved. And see, I wrote this whole article without even once mentioning how Greenspan, Snow and Co. manipulate the price of gold. I knew I could do it! But please excuse me if I get a chuckle or two when Sir Alan asserts, in a recent response to Rep. Ron Paul [under oath] as to whether there is any merit in going back to a gold standard,
"And the answer is: I don't think so, because we're acting as though we were [already] there."
It's like rain on your wedding day. Are you laughing too?