Jackson Jambalaya

Financial Times chirps up about the crisis in international shipping:
"While the BDI has been dropping for months, the real collapse took place from the week after the Lehman bankruptcy. From a level of 4949 then, the BDI had, by last week, come down to 1149, for a decline over about a month of 76 per cent. This doesn't represent some piece of high-concept securitised paper meeting its maker in front of a judge; this is the real world of physical assets being employed to do actual work.....
It all goes back to that Lehman bankruptcy. Among the more serious casualties of that colossal failure of leadership was the letter of credit business. There is nothing more vanilla than the l/c for an international shipment. One bank tells another bank that it will accept the credit risk of an individual importer or exporter. They document that, with forms that have been around forever, clerks and computers shuffle the paper around. A fee is charged and goods are released for shipping, inspection, and delivery. The most boring business in the world. Until it stops.
After Lehman those clerks, and their computers, stopped trusting the clerks and computers at other banks. Treasury secretary Hank Paulson's ignorant and clumsy attempt to avoid moral hazard and systemic risk resulted in uncounted quantities of goods piling up on loading docks, and customers living off inventories and consuming less.
No, I don't think the Lehman leadership, or the shareholders who went along with them, deserved to be saved. It was not, however, necessary to sacrifice the worldwide flow of goods and credit to make them an example.
The government and banking leaders might think that those clerks and computers will have been reassured by the business cable channels telling them that things will be fine. Well, it hasn't happened yet.
Some critical institutions were caught in the middle of this. Wachovia, as I mentioned last week, did a lot of letters of credit for the Latin American trade. Royal Bank of Scotland has huge exposure to shipping. The line people working on trade finance need to be told that it is okay for them to take these risks, that they won't be laid off if they make one good-faith mistake...
http://www.ft.com/cms/s/0/03ff3bb4-a48e-11dd-8104-000077b07658.html

Still think that Bailout Bill should have been passed? Markets plunged how many points since it was signed into law? The government nationalized the banks. The housing market slows even more. Yet that is not even the worst part. International trade freezing up is what causes depressions. THIS is what has everyone in finance and government spooked.

Earlier posts on international trade crisis:
http://kingfish1935.blogspot.com/search?q=letters+of+credit
http://kingfish1935.blogspot.com/2008/10/update-on-trade-slowdown.html
http://kingfish1935.blogspot.com/2008/10/bloomberg-letters-of-credit-frozen.html
http://kingfish1935.blogspot.com/2008/10/more-news-about-grain-piling-up-in.html
http://kingfish1935.blogspot.com/2008/10/international-trade-shutting-down.html

FINALLY some of the American media is beginning to wake up to the shutting down of international shipping. Kingfish has been warning you about this little-known disaster in the making while the media has been asleep at the wheel. Bloomberg reports:

"Oct. 15 (Bloomberg) -- Commodity shipping rates plunged to the lowest in more than five years as a lack of trade finance left cargoes stranded and the global economic slowdown limited raw material demand.
Traders are finding it harder to get letters of credit that guarantee payments for goods, shipping executives said. Together with a slowdown in trade, that has contributed to this year's 82 percent drop in shipping costs for grain, coal and other commodities. Rates are so low that Zodiac Maritime Agencies Ltd., the line managed by Israel's billionaire Ofer family, announced today it may idle 20 of its largest ships.
``Letters of credit and the credit lines for trade currently are frozen,'' Khalid Hashim, managing director of Precious Shipping Pcl, Thailand's second-largest shipping company, said in Singapore yesterday. ``Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay.''
The Baltic Dry Index fell 11 percent today to 1,615, the lowest since February 2003. Rates for larger ships of the type Zodiac intends to idle fell 17 percent today, taking this year's plunge to 85 percent, according to the London-based Baltic Exchange.
Banks are leery of financing commodities and shipping transactions. Rio Tinto Group, the world's second-largest aluminum producer, may delay the planned sale of $10 billion of assets and Sterlite Industries (India) Ltd. shelved its $2.6 billion purchase of Asarco LLC. Ship owners can't find cash to finance the construction of new ships...."
http://www.bloomberg.com/apps/news?pid=20601087&sid=alFFUQ8a.WZM&refer=home

Naked Capitalism posted some more information on the slide of the BDI. There are also some good comments at the end of the story. http://www.nakedcapitalism.com/2008/10/baltic-dry-index-falls-nearly-20-in-two.html?showComment=1224057420000

If I had to make a completely uneducated guess, I think this is an example of what completely spooked Bernanke and Paulson into injecting $250 billion into the banks instead of first buying the bad paper. They see the wholesale rejection of letters of credit and trade credit by shippers, causing a depression and other crisis's if allowed to worsen. If the trade credit implodes, then we are facing a real economic disaster.

Earlier posts on this subject:

Time to Wake Up
More News about Grain Piling Up in Port
International Trade Shutting Down?

Another story about credit crunch affecting shipping. International trade is slowing down. Think this is some arcane subject that doesn't affect the average American? Think of all the goods that come from overseas. Oil. Metals. Food. Textiles. What is going to happen if this continues for more than another month? This is the stuff that really causes an economy to contract. Unfortunately, these stories are reported in the Canadian media while ignored by the money honeys. When are they going to start doing their jobs?

Foreign Policy's blog writes:
"Still think the global credit crunch is all about the TED spread and collateralized debt obligations? Think harder. Export-bound grain has started piling up in Canada as sellers have begun refusing to trust the credit lines and financial institutions linked to their foreign buyers.
The problem is that Canada's export cargoes don't get loaded until buyers can prove their ability to pay -- proof that has been increasingly hard to come by in the wake of bank defaults and shrinking credit markets worldwide. Unable to get credit lines, many buyers have left the grain market, generating big losses for Canadian shippers. Add to this the greater costs that shippers now shoulder because of delayed payments, and the picture starts looking pretty bleak.
And Canada isn't the only country suffering from the crunch. U.S. and South American shippers are taking even harder hits. Los Angeles and Long Beach -- home to two of the biggest ports in the United States -- have already seen a 9 percent drop in imports this year. Global shipping rates are down 74 percent from last May.
With 90 percent of the world's trade in goods going by ship, credit access is key to trade's survival. It's also key to investment in product development, which surely will fall as manufacturers face greater declines in profits. ..." http://blog.foreignpolicy.com/node/10010

The Financial Post on October 10 reported:
"The fall in commodity prices is being exacerbated as international buyers delay or even back out of purchases in the hope that the market will go still lower.......
While the retreat of buyers from the market is a key contributor to the price free fall, industry insiders say some purchasers are backing out of deals at the last minute, leaving piles of unsold grain, coal and other raw materials backed up at ports in the United States and Canada....
Speaking in an interview earlier this week, Mr. Temple said the phenomenon is happening mostly at U. S. and South American ports but is starting to appear in Canada.
While declining global demand is a factor in commodity prices, the biggest driver is the credit crisis. Thanks to the near-evaporation of credit, even willing buyers have been unable to step up to the plate.
Banks have ceased to trust one another and letters of credit backed by once-revered global banks no longer carry weight.
According to Mr. Jensen, some companies have managed to get around the problem by using alternative financing but in some areas trade has dried up completely.
A spokesman for Export Development Canada declined to comment....."
http://www.financialpost.com/story.html?id=871673

Still don't believe The Kingfish? Reportonbusiness.com confirms such stories:
"At Port Metro Vancouver, the country's largest port, the early impact of the credit crisis is being seen. With traditional lines of credit drying up, some bulk cargo such as grain is stuck because buyers' proof of payment isn't considered adequate...."
http://www.theglobeandmail.com/servlet/story/LAC.20081010.RBANKSBC10/TPStory/Business

A quick check of the Baltic Dry Index (See chart above), a leading indicator of shipping prices and volume, shows the Index has plunged since early September (52% decrease. The Baltic Exchange describes the Index as "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain."). The Index confirms in part the reports on the grain piling up in ports as international trade slows down due to the credit crunch. Keep in mind the freezing up of international trade (due to the Smoot-Hawley Act jacking up tariffs to 60%) was one of the leading causes of The Great Depression. Same problem, hopefully a different result. People need to start demanding more answers from our leaders as well as the media.