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[seosan08]

The LONG, cold, depressing winter of 2009 starts now!

World Demand collapsing
By Chris Laird
Nov 20 2008

http://www.kitco.com/ind/Laird/nov202008.html

World economic demand is now collapsing along with the yearlong credit collapse. Recent news is full of stories about how world economic demand fell off a cliff in October, 08. Every sector is being hit, from new cars to recycled cardboard. In each case, October is pointed to where economic demand fell off a cliff�

Cars with nowhere to go in Long Beach harbor, California. Japanese ones! NYTimes.com

�The ships keep coming, but there�s nowhere for the cars to go,� Mr. Golledge said.

�Not far away, metal, cardboard, paper and plastic are piling up in the lot of Corridor Recycling. The company takes in refuse from around the country, then bales it for shipment to China. The cardboard is used to make new boxes while used shrink wrap is turned into shoe soles and insulation for sleeping bags and coats.

For much of this year, the company shipped about 25 containers a day, each filled with 23 tons of refuse to be recycled. But after the Olympics, demand slowed for recycled metal. In October, demand for everything else took a sharp downturn, and for the last two weeks the company has not shipped a single container.

�It just came to a complete stop. Absolutely a stop,� said Gilbert Dodson, the recycling company�s co-owner. �I�ve seen it slow over the last 25 years, but this is the worst,� he said of the current downturn...�

NYTimes.com

There are stories about ships all over the world stacking up in exporting countries, anchored, and not able to sail because they cannot get letters of credit for the shipments. Hong Kong was mentioned as having rows and rows of loaded but idled ships stuck there.

The same goes for oil tankers, lines of them anchored even though they are full, with no buyers. There has been a screeching halt of shipping worldwide. Products are backing up in Asia.

Many of you have heard about the collapse of the Baltic Dry index, a shipping index for containers. It has fallen from over 11,000 in July to around 800, in only a couple of months!

Panicky China

Over 100,000 factories in China are to close by the end of the year. Chinese plant owners are abandoning their plants, unable to pay their bills, and abandoning workers with months of back pay unpaid. That is so serious that riots are breaking out in Chinese cities, and even now there is 10 Pct unemployment in some of the biggest exporting cities in provinces like Guangdong. Unemployment in the cities is one thing that scares China. That�s why they came up with that $500 billion stimulus plan. Compared to the size of the Chinese economy, that�s like the US coming up with a $2 trillion economic stimulus. Such a sudden and immense move is unheard of in China. It�s said that China is actually buying some of their own inventory that is stacking up.

GM bankruptcy

With the prospects of a US auto bailout shrinking, GM will go bankrupt in a couple of months, they say. If that happens, the commodity complex will take that as a big sell. It�s said that a car uses up to 40 pounds of copper, and a house in the US uses 400 pounds or more. Copper has fallen drastically in the last two months. Copper is considered a barometer of economic demand.

There are calls for GM to go ahead and declare bankruptcy while they still have some cash. We just might see that happen right after Congress adjourns for the year, if there is no bailout. The stock crash Tuesday at the end of the day reflected that sentiment. Will we see a GM BK filing sooner than we think?

Credit has not improved

Credit spreads have not improved. There is flight out of any and all bonds into US Treasuries of all stripes. Now even 30 year US Treasuries have fallen below 4%, while the 3 months short term USTs are below a half percent, nearing zero. There is literally no money going into new credit of all stripes, and this is worldwide too.

Businesses cannot roll over their short term credit facilities. That means they have to operate on a cash basis. This has worsened in the last two months, not improved. What that means is that when the cash runs out, they have to shut down, and layoffs come. Get ready for a horrific next few months of layoff news around the world.

Shortages?

We already mentioned how the literal total absence of credit is stalling ships at the docks. I am starting to get concerned that, with the supply chain so tight (typically 3 days worth in pipeline) we may see shortages of many things if this credit meltdown and its resultant freeze on exports continues.

Japanese exports have fallen almost 8% year over year, and exports to the EU have fallen an astounding 17%. Japanese auto exports have fallen 15%.

I know we focused here on autos, but since most everything is manufactured and shipped overseas it�s very possible that we will run out of many things, and so will our trade partners. Right now there is surplus backing up in some things like cars, but after factories worldwide shut down, scarcity will start to appear. That will take some time, but it�s probably coming later. There won�t be any money out there for new production demand by then either. Everybody is over leveraged.

Layoffs have only just begun

In the mean time, since inventories are piling up, manufacturers will be shutting down plants worldwide. Big layoffs are coming everywhere. The end of 08, and 09 are going to be the worst layoffs worldwide we have seen since the Great Depression in the 1930s.

Another Great Depression?

So, since world demand is literally falling off a cliff since October, and businesses are running out of cash (there is no credit at all out there for the companies or their customers), it appears we are indeed in the beginning stages of a real world economic depression, what�s next?

USD prospects

First, as far as the USD goes, things don�t look good. The USD already had big problems with the US fiscal and trade deficits totaling $1 trillion a year for the last 5 years. Now, the fiscal deficit alone will be over $1 trillion and growing. Sure, a slowing economy will bring down the US trade deficit, but the pressures on the USD are becoming big enough to cause real trouble.

Another thing is that the USD has been held up for decades by the US appetite for imports. As the US economy falls into depression, the incentive for our trade partners to keep buying US bonds to fund our fiscal deficits dwindles.

Right now, there is seemingly unlimited demand for US treasuries. But, that will change. Right now, there is flight to safety of any kind. Since every government on the planet is carrying a huge public debt, the US seems one of the best bets � for now.

But, at a $trillion a year US fiscal deficit, and with other governments now needing to use their excess dollars to support their own fiscal deficits and try to prop up their economies (China for example), the appetite for US treasuries will fall dramatically at some point. Again, this is guaranteed by a big drop in US import demand.

Currency crises, USD

As we mentioned in the last public article, there are ongoing currency crises brewing right now. Russia is literally chewing through those foreign reserves they built up in the last 5 years commodity boom to defend the Ruble. They have been forced to give up.

Korea has big trouble with the Won. They also have chewed through a lot of their foreign reserves defending it. And it�s doubtful they have enough foreign reserves to handle a lot of short term commercial credit that is not rolling over, and their businesses are in big trouble from that, and that is building to a head in the next month. Russia has the same issues with having to roll over hundreds of billions of short term credit in the next month, aside from trying to defend the Ruble.

The USD has strengthened from all this in several ways. It is in demand as the main settlement currency worldwide. That is why the US Fed has had to make unprecedented amounts of currency swaps with the world�s central banks recently (currency swaps are where central banks trade currencies to get dollars or whatever between themselves).

And then, as we mentioned before, the US treasury bonds are regarded as safe, for now.

But the USD is reaching a tipping point. What�s keeping it alive now is the flight to cash and safety. But that process will peter out, and then the $trillion dollar US fiscal deficits, combined with the pullback of trade partner interest in US treasury bonds will end up killing the dollar.

How far off is that stage? Maybe 2 to 4 years. Frankly, I think it�s nearer than we all might think. It certainly is now an imminent concern, not a thing far out in the future. It�s even possible the USD could have a drastic fall in 09.

World currency turmoil, not just the USD

And, the currency turmoil in general is going to worsen all over the world, not just for the US. The EU political and fiscal situation is not a lot better than the US. The Euro is saddled with big fiscal deficits throughout the EU that are getting worse. The dissention between the weaker economies like France vs stronger Germany is hitting the creditability of the Euro. That�s one reason it�s dropping. Then, consider that, politically, the EU is not stable at all. Remember, this whole EU Euro experiment is barely 10 years old.

Other currencies such as our trade partners� are in doubt. Again, consider Russia and Korea, and many others we aren�t mentioning. Since these economies are still predicated on trade with the West, especially the US and the EU, if the USD goes down, so do their economies and their currencies. There will definitely be a big world currency domino effect if the USD has a devaluation or confidence crisis.

This is one reason that we suggest some currency diversification, to include precious metals of course. Of course the hard question is which ones? None are sure havens alone.

Gold prices

And as we mentioned before, gold and precious metal prices are dropping in the paper markets, since everything is being sold to get cash. Gold is one of the ones that will remain standing. It�s cash par excellence and a central bank reserve asset.

Of course the gold stocks and metal stocks are getting hit too. But this is all general liquidation from the funds� whew a lot is going on isn�t it.

401ks etc

We continue to be concerned about tax deferred retirements. First, the tax deferral is something that is a red herring. Since the US is running ruinous fiscal deficits, taxes on �tax deferred� retirements will be raised dramatically as the US starts to enter a USD crisis.

Second, we view most of the tax deferred retirement plans as only serving the brokerages (who pushed the whole idea when it was invented decades ago) and mainly a big savings account for the governments. If that grows, the governments have more taxes to collect, don�t they?

And then, a huge drawback of tax deferred accounts is that it deters people from getting liquid and cashing out. The money is kind of locked in there since people don�t want to take the tax hit.

These concerns about tax deferred accounts apply to pretty much any country too.

And then, by being sort of frozen, people end up riding bear markets down with these tax deferred accounts, instead of doing something that really puts meat on their monthly budget table � like paying off the house.

A paid off residence puts a roof over your head. And you can�t live inside a 401k, now can you. The other thing is a paid off residence is the single greatest defense against an economic depression and a USD collapse.

Gold is for some cash type protection from a USD collapse�.

[caniff]

That is a pretty grim article, but it seems to make a lot of sense of the current state of affairs. I know I'm cutting back on purchases, so times me by billions of other people and we have a serious worldwide demand issue.

The USD, according to the author, could see a steep decline in 2 to 4 years (but perhaps sooner). He points out that if that happens it will also take a boatload of other currencies down right along with it (including the Won ).

[mises]

Good. Let's just get this over with. We can't avoid a severe recession. Do we want the band-aid off fast or slow?

[caniff]

[mises]

Yes. We have to let the recession dissolve excess supply, wherever it might be. Poorly managed firms must fail. Banks that are broke must fail.

If we are going to throw 800billion at a problem, it should be cleaning up around the corners. Retraining, unemployment benefits, infrastructure building and the rest. The US might do well to copy the Canadian system of tech schools to help out distressed and depressed areas. BCIT, NAIT, SAIT are excellent places for workers to quickly retrain into another industry at affordable cost and extremely high standards. The establishment of heavily subsidized schools like those in Ohio, Mich and elsewhere would be a long-sighted yet immediate stimulus. My 2cents.

Anything but try and keep the party going.

[seosan08]

Recessions are basically corrections of mistakes in boom times. And there is lots of dead wood laying around on the economic landscape. That's why I say let the Big Three fall. They're way overleverged and have the albatross of retirements and UAW wages hanging around their neck as well.

Japanese companies do fine without all that. Cut out the dead weight, retool and work on the infrastructure, etc... IMHO, Asia will pull out in 2-3 years where the USA is probably more like 5-10 years to recovery. Get your gold while you still can and look to cherry pick Asian stocks while they're down. I'm looking at sometime from spring to late summer to start--possibly later.

[mises]

How do you figure Asia will recover more quickly? Asia is a big place, with quite a bit of political-economic variation. Besides, Japan still has not recovered from her last recession (that lasted a mere decade).

I'm no fan of the economic pissing contest between nations and I have no idea what will specifically happen in the future, but you're ignoring massive problems in the large Asian economies.

[seosan08]

[Bigfeet]

Nice summary article. And I'm sure things will get worse. This part is especially nice to us ESLers here in SK:

"Korea has big trouble with the Won. They also have chewed through a lot of their foreign reserves defending it. And it�s doubtful they have enough foreign reserves to handle a lot of short term commercial credit that is not rolling over, and their businesses are in big trouble from that, and that is building to a head in the next month. Russia has the same issues with having to roll over hundreds of billions of short term credit in the next month, aside from trying to defend the Ruble. "

[Bigfeet]

I think this is more than a recession. I don't remember things falling this fast this hard in any of the past recessions. This is a major unwinding of debt. The world is getting poorer. This may just be a depression, folks.

[ontheway]

[mithridates]

This thread reminds me of a question of mine: how much more luck would the world have with the recession if all the problems that could conceivably be solved in the short term are mostly done away with, or at least heading towards a resolution? Let's say for example in the next year we're all incredibly lucky and Iran says sure, we don't need nuclear power and I guess we're okay with Israel being around (and gets a bunch of stuff in return), Cuba and the US make up, Cyprus decides to reunify and things start going better with Turkey and the EU, Nagarno-Karabakh seems to be heading towards resolution, Iraq's still making some progress here and there, all that. Is the world capable of pulling together to avoid the worst of this?

[mises]

A recession is excess supply, basically. While those thing you mentioned would help bring confidence into some individual markets it wouldn't meaningfully change the overall picture. Anyways, a recession is necessary. We need this.

[mises]