A SMALL VOICE IN THE CACOPHONY, A LITTLE FINGER IN AN INCREASINGLY SOGGY DIKE.
We are not out of the woods yet. Not by a long shot. Did the measures taken by the USA and the EUnion create some small measure of optimism on Monday the long slide into depression was resumed on Tuesday, Wednesday and today, with the Dow, as I write this, setting the tone for another day in a distinctly minor key for the European markets come tomorrow.
An economic indicator few have heard of (I hadn't heard of it until two weeks ago, when the madness started) is the Baltic Dry Index (BDI). Wikipediadescribes the BDI as:
The Baltic Dry Index is an index covering dry bulk shipping rates and managed by the Baltic Exchange in London.(...)Currently, the BDI stands at just over 1,600 coming down from a high just shy of 12,000 in June of this year. That is a drop more then 85%, meaning that shipping has come to an almost complete standstill, and with it the entire global economy.
Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. However, since the demand for shipping varies with the amount of cargo that is being traded in the market (supply and demand) and the supply of ships is much less elastic than the demand for them, the index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as cement, coal, iron ore, and grain.
Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as a good economic indicator of future economic growth and production, termed a leading economic indicator because it predicts future economic activity.
But there is a worrying aspect about this that goes beyond mere shipping: Ocean shipping depends heavily on credit to finance ships and cargo. To put it in simple terms: A shipping company takes out a short term loan to buy the cargo, ships it overseas and sells the cargo. With the money thus generated the loan is paid back and what is left over is the companies earnings. Now, the huge drop has been explained by the credit crunch. The flow of credit dried up and hence shipping came to a stand still.
However, the measures taken around the world last week were aimed specifically at restarting the flow of credit. The BDI responded by... dropping even more. It didn't even display a small upsurge, as the stock markets did last Monday. This could indicate that the hundreds of billions of dollars and euros thrown at the financial system missed the mark spectacularly.
Then there's the Kondratieff Wave. Based on the somewhat controversial long-term economic theories by Nikolai Dmyitriyevich Kondratieff (1892 - 1938), a K-wave is a economic cycle that repeats itself every 60 years or so (the translated original 1926 paper is here in pdf). The K-wave is divided into four 'seasons', Spring and Summer being associated with growth and increasing debt, and autumn and winter being associated with economic recession and debt purging.
According to Tim Wood, who says about the US and EU bail out plans: "It ain't gonna work", the current economic climate bears all the signs of a K-wave 'winter'.
What we are dealing with is the wrath of Kondratieff Winter, which is about the purging of excess credit. Along with that comes deflation and along with that global stock markets enter into extended declines. Real estate declines, economic growth slows, commodities decline, bankruptcies accelerate as the excess credit is purged from the system, the banking system is shaken, the free market is blamed and we move toward national fascist political tendencies. We are now seeing each and every one of these symptoms of K-wave winter.A K-wave winter is characterized by a three year collapse, followed by a 15 year deflationary work out period. Quite (not) coincidently, the Long Depression featured in an earlier post on KV, was a good example of a K-wave winter, as was the Great Depression of the 1930's. See the graph in this pdf-file, for instance.
In the figure linked to, the next K-wave winter was estimated to start at 2000. Measures to prevent an economic decline, like keeping the interest artificially low (government interference!) have only postponed the inevitable. All markets as well as the economy must both inhale and exhale. Our leaders have tried to prevent the exhaling and it will be us who will all pay the price for the general ignorance of our political classes: By preventing the natural cycle from running its course the decline will only be steeper. Just to give you a taste of the enormity of what we're facing, here's The Mogambo Guru:
Well, the estimate from (as I recall) the International Monetary Fund is that the global total of derivative contracts outstanding is $1.125 quadrillion, whereas global GDP is about $50 trillion, although both numbers are so big that I couldn't make any sense of them even if I was sober, and being sloshed, I revert to more primitive responses, like screaming in fear and holing up behind the massive blast-proof door of the Mogambo Bunker Of Raging Panic (MBORP).Just so you know...
Only here, safe amongst gold, silver, guns, frozen pizzas and stacks of adult literature of the "Hot, Nasty Ladies" variety can I finally relax enough to calculate that to make this $1.125 quadrillion yield even a lowly 1%, it would take $11.25 trillion just to pay the interest! Hahaha! We're freaking doomed! A quarter of global GDP is needed just to pay a 1% yield!
Thus it looks like we're looking at least at 15 years of economic hardship before the debt is purged, with all the human misery that it entails. And while the EU Council leaders are together making positive noises about 'seeing the signs' that the bail out and guarantees are working, what has me worried is the promise by Sarkozy of a new financial world order, in which the state (or supra-state, as the case may be) exerts even greater control over banks than they did before (and which led us into this mess in the first place). Didn't Tim Woods just tell us that the K-wave winter is associated with 'national fascist political tendencies'?
I sincerely hope I (and mr. Woods. And the Guru. And mr. Kondratieff) am wrong. But that the slide of last week wasn't a 'blip' that was remedied by the massive state intervention of this weekend becomes clearer with every day that goes by with the stock markets going further down hill.