Friday, March 18, 2016

China Ocean Freight Indices Plunge to Record Lows

There’s simply no respite.

Money is leaving China in myriad ways, chasing after overseas assets in near-panic mode. So Anbang Insurance Group, after having already acquired the Waldorf Astoria in Manhattan a year ago for a record $1.95 billion from Hilton Worldwide Holdings, at the time majority-owned by Blackstone, and after having acquired office buildings in New York and Canada, has struck out again.
It agreed to acquire Strategic Hotels & Resorts from Blackstone for a $6.5 billion. The trick? According to Bloomberg’s “people with knowledge of the matter,” Anbang paid $450 million more than Blackstone had paid for it three months ago!
Other Chinese companies have pursued targets in the US, Canada, Europe, and elsewhere with similar disregard for price, after seven years of central-bank driven asset price inflation [read…Desperate “Dumb Money” from China Arrives in the US].
As exports of money from China is flourishing at a stunning pace, exports of goods are deteriorating at an equally stunning pace. February’s 25% plunge in exports was the 11th month of year-over-year declines in 12 months, as global demand for Chinese goods is waning.
And ocean freight rates – the amount it costs to ship containers from China to ports around the world – have plunged to historic lows.
The China Containerized Freight Index (CCFI), published weekly, tracks contractual and spot-market rates for shipping containers from major ports in China to 14 regions around the world. Unlike most Chinese government data, this index reflects the unvarnished reality of the shipping industry in a languishing global economy. For the latest reporting week, the index dropped 4.1% to 705.6, its lowest level ever.
It has plunged 34.4% from the already low levels in February last year and nearly 30% since its inception in 1998 when it was set at 1,000. This is what the ongoing collapse in shipping rates looks like:
The rates dropped for 12 of the 14 routes in the index. They rose in only one, to the Persian Gulf/Red Sea, perhaps in response to the lifting of the sanctions against Iran, and remained flat to Japan. Rates on all other routes dropped, including to Europe (-7.9%), the US West Coast (-3.5%), the US East Coast (-1.0%), or the worst drop, to the Mediterranean (-13.4%).

The Shanghai Containerized Freight Index (SCFI), which is much more volatile than the CCFI, tracks only spot-market rates (not contractual rates) of shipping containers from Shanghai to 15 destinations around the world. It had surged at the end of last year from record lows, as carriers had hoped that rate increases might stick this time and that the worst was over. But rates plunged again in the weeks since, including 6.8% during the last reporting week to 404.2, a new all-time low. The index is now down 62.3% from a year ago:
Rates were flat for three routes, but dropped for the other 12 routes, including to Europe, where rates plunged nearly 10% to a ludicrously low $211 per TEU (twenty-foot equivalent container unit). Rates to the US West Coast fell 8.4% to $810 per FEU (forty-foot equivalent container unit). Rates to the East Coast fell 5.2% to $1,710 per FEU. Rates to South America plunged 25.4%.
This crash in shipping rates is a result of two by now typical forces: rampant and still growing overcapacity and lackluster demand.
“Typical” because lackluster demand has been the hallmark of the global economy recently, and the problems of overcapacity have also been occurring in other sectors, including oil & gas and the commodities complex. Overcapacity from coal-mining to steel-making, much of it in state-controlled enterprises, has been dogging China for years and will continue to pose mega-problems well into the future. Overcapacity kills prices, then jobs, and then companies.
The ocean freight industry went on a multi-year binge buying the largest container ships the world has ever seen and smaller ones too. It was led by executives who believed in the central-bank dogma that radical monetary policy will actually stimulate the real economy, and they were trying to prepare for it. And it was made possible by central-bank-blinded yield-chasing investors and giddy bankers. As a result, after years of ballooning capacity, carriers added another 8% in 2015, even while demand for transporting containers across the oceans languished near the flat line, the worst performance since 2009.
“Massive Deterioration,” the CEO of Maersk, a bellwether for global trade, called the phenomenon. Read…  “Worse than 2008”: World’s Largest Container Carrier on the Slowdown in Global Trade

Unpaid subprime car loans hit 20-year high

Americans with lower credit scores are falling behind on auto payments at an alarming pace.

The rate of seriously delinquent subprime car loans soared above 5% in February, according to Fitch Ratings. That's worse than during the Great Recession and the highest level since 1996.
It's a surprising development given the relative health of the overall economy. Fitch blames it on a dramatic rise in loans with lax borrowing standards that have helped fuel the recent boom in auto sales. More Americans bought new cars last year than ever before and the amount of auto loans soared beyond $1 trillion.
But research conducted by a group that tracks people's credit scores, TransUnion, suggests that plummeting oil prices is a factor in rising defaults because of the flurry of pink slips in the oil industry.
auto loan delinquency
North Dakota, the epicenter of the shale oil boom and subsequent bust, experienced a 42% spike in seriously delinquent (60 days or more) auto loans during the fourth quarter, according to TransUnion.
Louisiana, another state hit hard by the oil crash, had the highest auto delinquency rate, while late payments in Texas and Oklahoma jumped about 14% apiece.
"We're seeing the impact of the oil slump causing economic shock. It's putting people and families in distress," said Jason Laky, TransUnion's auto and consumer lending business leader.
To cope with the crash in oil prices, American oil companies like Chevron (CVX)ConocoPhillips(COP) and Halliburton (HAL) have been slashing jobs aggressively.
By comparison, the overall U.S. economy continues to hum along, adding jobs at a healthy pace.
Fitch points out that the subprime end of the market is where there's increased competition to peddle loans. The ratings firm flagged an increase in loans to "borrowers with no FICO scores," lower downpayments, and extended term lending.
No wonder there was a 34% rise in subprime loan losses in February, though they remain below recession levels.
Fitch said auto loans to borrowers that have better credit scores remain "stable." Losses are below historical averages and Fitch expects the auto loan market, including the subprime section, to improve this spring as borrowers get flush with tax refunds.
"Losses in the overall auto finance industry are just incredibly low," said Lou Loquasto, automotive finance leader at Equifax.
used car sales
Problems in subprime loans are bringing back bad memories of the mortgage meltdown that fueled the Great Recession. But there are major differences.
First, unlike mortgages during the housing boom, auto loans aren't sold as investment ideas that will make people rich. Most people know their vehicle will lose value over time.
Plus, auto payments are often much more manageable than monthly mortgage payments.
Consumers also have a long track record of prioritizing their auto payments because they simply can't afford to lose their car, which is their only way to reach jobs in most cases.
"You can always switch over and rent. But if you lose your car, you probably lose your job," said TransUnion's Laky.
Even if the auto-loan market isn't facing a repeat of the 2008 crisis, worsening subprime credit problems could make it harder to get car loans in the future.
"It could have a spillover effect," said John Bella, Jr., managing director at Fitch.

There Is No Escape: This is What’s in Store for the Real Economy

The Census Bureau announced today that total business sales in January did what they’d been doing relentlessly for the past one-and-a-half years: they fell! This time by 1.1% from a year ago, to  $1.296 trillion, and by 5% from their peak in July 2014.
They’re now back where they’d been in January 2013. Sales are adjusted for seasonal and trading-day differences, but not for price changes. And since January 2013, the consumer price index rose 2.8%! This is why the US economy has looked so crummy.
That’s bad enough. But it gets much worse.
Total business sales are composed of three categories: sales by merchant wholesalers (33% of total), by manufacturers (36% of total), and by retailers (30% of total).
Sales by merchant wholesalers took the biggest hit: they plunged 6.4% from January a year ago, to $433.1 billion.
Symptomatic for the lousy state of business investment, sales of professional equipment dropped 4.1% year-over-year, with computer equipment and software sales plunging 10.2%. Sales of electrical equipment, the largest category among durable goods, fell 5.0%. Sales of machinery fell 1.4%. And “misc. durable” sales plunged 8.6%.
The economy’s kick-butt, take-no-prisoners winner? Sales of drugs soared 11.0% to $53.6 billion. As we found out today via Express Scripts Drug Trend Report, those sales increases weren’t caused by people suddenly taking more drugs; they were caused largely by price gouging.
Turns out, prices of brand-name prescription drugs soared 16.2% in 2015! One third of these drugs had price increases of over 20%! On average, they’re up nearly 100% since 2011. This is a patent-protected, monopolistic industry that has managed to rip off every consumer and government in the US. And there’s more. Express Scripts:
Moreover, the industry faced opportunistic manufacturers who exploited monopolies with old generic medications and captive pharmacy arrangements, and ongoing scheming by compounding pharmacies to promote sales of high-priced, no-value compound medications.
That’s a nod toward, among others, Valeant whose shares plunged 51% today. They’re now down 87% since July last year when a short seller with a big megaphone exposed the company’s nefarious practices.
Wholesales of drugs, at $53.6 billion in January, are the largest category, durable or non-durable, and make up 12.4% of total wholesales. That’s how out of whack the industry has become, after decades of price gouging.
Sales by manufactures, the second component of total business sales, dropped 2.3% year-over-year, while sales by retailers rose 2.7%. These percentage changes are not adjusted for inflation. With overall CPI up 1.4% for the 12-month period, real retail sales growth looks even worse.
This chart shows total business sales – and the elegant 5% swoon since July 2014. Sales don’t decline like this in good times:
With total business sales declining for a year-and-a-half, you’d think executives get the message and cut their orders to keep inventories from ballooning. But this just hasn’t happened. Optimism has reigned under the motto that next month will be better, that the Fed has our back, that radical monetary policies can somehow increase demand, rather than just inflate asset prices.
And so inventories kept ballooning – in January, by another 1.8% from a year ago to $1.812 trillion.
That’s up 18.5% from the peak of the prior inventory bubble in August 2008. But sales in January were up only 5.8% from their peak in 2008! And we know what happened to sales after that summer in 2008: they crashed as the Great Recession was chilling the US economy. See the cliff-dive in the above chart.
Inventories at retailers, after a lousy holiday season, jumped 5.7% in January year-over-year. As for the formerly booming auto sector, inventories of motor vehicles and parts soared 8.1%.
Whacked by declining sales and rising inventories, the crucial Inventory-to-Sales Ratio, which is a measure of how overstocked businesses have become, has totally blown out. At 1.40 in January, it is much worse than the ratio of 1.32 in September 2008, the month when Lehman filed for bankruptcy:

What happened then is this: Sales cratered, inventories built up, and the inventory-to-sales ratio spiked, ultimately hitting 1.48 in January 2009. Businesses, seeing that sales alone wouldn’t solve their inventory problem, were radically cutting their orders. This ricocheted through the economy, with entire supply chains coming to a near-halt as other businesses, whose own sales were getting cut by their customers, adjusted by slashing orders further and laying off people in massive numbers. These layoffs hit retail sales. And so it went.
Ironically, rising inventories inflate GDP. At first, economists hype it as a sign of “confidence.” Businesses are stocking up for the future boom. Much of the increase in GDP in late 2014 and throughout 2015 was based on rising inventories. But rising inventories just pull future economic activity into the present. They tie up a lot of capital, cost money and manpower to store and maintain, and can lose value to obsolescence. This is not exactly a secret. A whole science has sprung up to keep inventories low.
Businesses will eventually figure out that hope for a boom isn’t good enough, that sales won’t grow enough to bring inventories back in line. And just then, at the worst possible time, when profits and sales are already declining, they cut their orders to fix their inventory imbalances. This hits sales of their suppliers, and they cut their orders. As this ricochets through the economy to employment and retail sales, it cuts into GDP, as it did during the Financial Crisis, or to a lesser extent during every business cycle recession.
This is what’s in store, so to speak, for the US economy. There is no escape from inventories that are bloated to this extent: they lead to a recession when they get fixed. Unless the Fed, in a stroke of its usual genius, goes out to buy this excess merchandise as part of its new QE and stashes it on its balance sheet where it can rot quietly.
Not that this inventory fiasco worries the stock market, which has been protected by the magic of Consensual Hallucination, though that may be changing. Read…  For Stocks, a Reality Too Ugly to Behold?

Tax Refunds Speak Volumes about so called ‘recovery’

The #1 Reason Why the Stock Market Hasn’t Crashed Yet Despite Panic Selloff!

There’s Only One Buyer Keeping S&P 500’s Bull Market Alive – Bloomberg Business…
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CBO suggests taxing drivers by the mile | Washington Examiner…
‘Robo-advice’ approved by FCA but axes 220 jobs at RBS – BBC News…
economic finance…
Chinese Owner of Waldorf Astoria Bets Big on More U.S. Hotels – The New York Times…

Oil price higher than $50-60 per barrel will lead to oversupply on market — minister

Russian Energy Minister believes that it is inappropriate to raise the price to more than $50-60, because then there will be an overflow of investment in projects and an oversupply

MOSCOW, March 17. /TASS/. Raising oil prices above $50-60 per barrel is inappropriate, it will lead to oversupply in the oil market, Russian Energy Minister Alexander Novak said on Thursday.
"I think that, in principle, it is inappropriate to raise the price to even more than $50-60, because then there will be an overflow of investment in projects, not very efficient at low prices, and again there will be an oversupply, which in its turn will lead prices down. But it is, so to say, the theory of the question. How it will actually be on the market — there are a lot of different factors that influence. That is why we cannot predict like we do using mathematical models. The dependence is not mathematical here," he told reporters.


Oil market balance may be achieved 9 months after output freeze decision is made

According to Russia’s Energy Minister Alexander Novak, the average global shale oil production will drop 500-600 thousand barrels daily in 2016


MOSCOW, March 17. /TASS/. An oil market balance may be achieved in nine months after the production freeze decision is made, Russia’s Energy Minister Alexander Novak said on Wednesday.
"If such [oil production freeze] arrangements are achieved, we estimate [market] rebalancing will be reduced to somewhat from six to nine months. The balance of supply and demand and oil market stabilization might be achieved late in 2016 - early in 2017," the minister said.
At the same time, the minister predicts the average global shale oil production will drop 500-600 thousand barrels daily in 2016.
"Shale oil production will decline by at least 500-600 thousand barrels daily this year," the minister said.



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