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How does one invest in the shipping markets when the global economy is manipulated by central banks?
With EYES WIDE OPEN and Very, Very Carefully!!! Be Ready to Say “NO” a Lot!!!
Over the past year, Quantitative Easing (“QE”) and Zero Interest Rate Policy (“ZIRP”) have begun to have a major impact on the shipping markets. Private equity has committed serious capital to the shipping industry and it appears that additional private capital is intent on acquiring shipping companies and assets. Additionally, the public markets have seen an increase in offerings to access the capital markets. Underlying the infusion of capital in shipping is a global monetary policy that is extremely accommodative. In fact, it is the most extreme and experimental, globally coordinated monetary policy in history.
Since 2008, central banks have dramatically expanded their balance sheets to offset a deleveraging private banking sector and directly inject liquidity into the banking sector. The U.S. Federal Reserve has grown its assets from USD $890 billion at the end of 2007 to USD $3.9 trillion as of September 30, 2013. In total the “Big 4â€³ central banks (the U.S. Federal Reserve, the European Central Bank (“ECB”), the Bank of Japan (“BOJ”) and the Bank of England (“BOE”) have grown total assets equal to US$ 9.8 trillion.
The resulting expansion of central bank assets among these four central banks alone has caused certain asset prices to soar, and even more bubbles to be created, which will eventually burst, only to be replaced with even more failed attempts at reflate economies.
The “real canary in the coal mine” has been and is the Chinese banking system.
Since 2008, Chinese bank assets have grown by an astounding USD $15 trillion, bringing the total assets to USD $24+ trillion. In effect, over the past five years, Chinese banking assets have expanded 50% more than current combined assets of the “Big 4â€³ central banks.
In fact, in the last twelve months ending September 30, 2013, Chinese bank assets grew USD $3.6 trillion. The bulk of the credit creation is lending to lower quality credits, like shipyards, with poor cash flow. The real value of the additional assets created by Chinese banks over the past five years could actually be 20% to 30% less (due to credit losses) than the USD $15 trillion created.
This type of credit creation is unsustainable.
A tightening by the People’s Bank of China (“PBOC”) this past June froze the interbank market. It was only until the PBOC in late July/early August when an “Unofficial Economic Stimulus” program was initiated did the Chinese economy show signs of reinvigoration.
The implication of continued massive amounts of liquidity injections is significant. The amount of liquidity being created by QE among the “Big 4â€³ central banks is material to ongoing GDP growth globally. Liquidity is “heroin” and the central banks cannot wean the system of it. Furthermore, if any one of the “Big 4â€³ central banks considers tapering, one or all of the other central banks will be required to pick up the slack. However, if China is not able to continue supporting this massive amount of credit expansion, businesses will experience a capital shock that will have wide repercussions.
A recent rise in borrowing costs and tighter credit markets is disconcerting as it may undercut the uptick in China’s economy that began in late July/early August. It is an environment that until mid-October enabled shipowners and shipping investors to directly benefit from higher shipping rates and one that caused global stock, commodity and currency markets to rally. Since mid-October, the growth in China’s economic recovery has begun to unwind as a result of higher bond yields and interest rates. “The recent sharp rise in bond yields was mostly due to worsening funding conditions and growing expectations for a tighter monetary policy as Beijing seeks to deleverage the economy,” said Duan Jihua, deputy general manager at Guohai Securities.
The shipping markets, particularly the container (liner) and dry bulk markets, are dependent on it. However, additional injections of liquidity will only lead to additional newbuildings and fleet capacity causing a long-term recession resulting from lower rates. However, hold on for a different type of wild ride if the “Big 4â€³ or China were to try to taper/unwind this accommodative monetary experiment. If the global economic juggernaut that is being fueled by liquidity is disrupted, a significant financial adjustment may cause this global economic “train to skid off the tracks”.
Either way, shipping markets and shipping investors, particularly those in the container (liner) and dry bulk markets, may not fare well in coming years.
Jay Goodgal can be reached via email at [email protected]
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