IDDLE SHIPS SHOW GLOBAL ECONOMY´S DEAD IN THE WATER / BARRON´S ( RECOMMENDED READING )

Wednesday, September 16, 2009

UP AND DOWN WALL STREET DAILY

Idle Ships Show Global Economy's Dead in the Water

By RANDALL W. FORSYTH

Cargo vessels anchored in South Asia portray a bigger threat to trade than politicians.

AMID ALL THE RHETORIC about a potential trade war between the U.S. and China, nobody seems to notice that global trade already has been a casualty of the Great Recession.

Asian stocks stumbled Monday after President Obama imposed a 35% duty on Chinese-made tires last Friday. But the bourses recovered Tuesday after it became apparent there would be no escalation into a trade war after Beijing called for talks at the World Trade Organization to resolve the dispute. Although China also promised to investigate complaints about U.S. producers' dumping of poultry and auto products, the appeal to the WTO shows a desire to settle this fight using Marquess of Queensbury rules.

But even without sticking the very visible foot of government in the process, trade has been contracting sharply, probably more than the official numbers let on. That's the inference drawn from unconventional sources.

For instance, the Baltic Dry Freight Index, which tracks shipping rates for cargo, is down 40% from its recent peak in early June and by more than half from last fall's highs. What's interesting is that the Baltic index moved up in tandem with the "green shoots" rally in global stock markets in the spring, but failed to follow through with stocks next leg up starting in July.

But an even starker indication of the collapse of global trade is the armada of empty tankers anchored in the South China Sea. The biggest fleet of ships in maritime history sits empty and eerily silent off Singapore, instead of hauling goods and fuel to and from Asia, according to a terrific report from the UK Daily Mail. (Hat tip to Joan McCullough of East Shore Partners for bringing the article to my attention.)

According to the article, this fleet may number close to 500 idle vessels -- bigger than the U.S. and British navies combined. That's equal to about 12% of the world's shipping capacity, which ought to be fully utilized hauling goods to American malls for the Christmas shopping rush.

But notwithstanding the seemingly robust August retail sales numbers released Tuesday, Western merchants are holding back on ordering goods, which means less raw materials heading to the factories of Asia. The result is a fleet of ghostly quiet modern-day galleons, anchored conspicuously high in the water off Singapore, as the Daily Mail details.

And as the shipyards of Korea continue to produce new vessels -- which were ordered what seems ages ago when trade was booming -- there will be additions to this idle fleet.

That is the problem with booms and bubbles. The irrational exuberance encourages malinvestments in excess capacity, whether in semiconductor fabs, container ships, office buildings or McMansions. The assets are superfluous, and drag down prices. But the liabilities taken on to finance them remain, while the falling asset prices make the debts harder to service.

That's the debt-deflation trap detailed in the early 1930s by economist Irving Fisher. It is a lesson that had faded into memory but is being relearned today.

One quarter's bounce will not cure the credit excesses built up over a quarter century. The container ships anchored in the South China Seas bear silent testimony to that.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved