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Friday, January 11

11th Jan - Credit Guest: Linkage


Another quality piece from Macronomics.

Previously on MoreLiver’s:                  

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The link between consumer spending, housing, credit growth and shipping. - A follow up


"Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence." - Helen Keller, American author

As we had argued in our conversation "The link between consumer spending, housing, credit and shipping" back in August 2012:
"The relationship between container shipping and consumer spending, traffic is indeed driven by consumer spending".

In October, in our conversation "Credit Chadburn on full ahead" we argued the following:
"Moving on to the subject of looking at different indicators which could clearly indicate if effectively a proper rebound is on the way and if the credit bell has arguably rung three times which would mean an acceleration in global economic growth led by the US economy, we noticed recently a significant rebound in the Baltic Dry Index"

If there is a genuine recovery in housing driven by consumer confidence leading to consumer spending, one would expect a significant rebound in the Baltic Dry Index givent that containerized traffic is dominated by the shipping of consumer products.
As indicated in the below gaph from Bloomberg, the resurgence in international traffic is conditional to a more meaningful rebound in housing in the US:
"Containerized traffic is dominated by the shipment of consumer products, and a resurgence in international container volumes is dependent on the housing market. Furniture and appliances are some of the top freight categories imported into the U.S. and euro zone from Asia. Furniture demand has been picking up, after bottoming in 2009 following the collapse of the housing market." - source Bloomberg.

Any change in consumer spending trends is depending on a more pronounced housing market revival and will directly impact container traffic (as we posited in our August conversation in relation to the link between consumer spending, housing, credit and shipping). Therefore tracking consumer confidence is key to determine if a more potent global trade rebound is at play - source Bloomberg:
"Consumer demand drives Asia-originated containerized traffic and freight flows to Europe and North America. Auto parts, furniture, apparel and textiles, along with appliances and kitchenware, are some of top containerized product types imported into the U.S. and Europe. Any changes in consumer spending will directly affect global containerized traffic volumes." - source Bloomberg
But as far as the Baltic Dry Index is concerned, while US Family Housing Starts looks to be on the mend in conjunction with US Furniture sales, we have yet to see a pick-up in the aformentioned Baltic Dry Index:
 Since 2006:
- in yellow the Baltic Dry Index,
- in orange US Family Housing Starts
- in white US Furnitures Sales.

The most obvious reason behind the lack of rebound in the Baltic Dry Index is stemming from the ship owner's cost mostly affected by fuel oil (Bunker prices) and the lack of price elasticity for the shipping industry given the glut of shipping capacity which is slowly being digested following the bomm and bust of the container shipping industry fuelled by cheap credit with non-performing loans still encumbering major players in the structured finance space such as German bank Commerzbank.

As indicated by Isaac Arnsdorf in his Bloomberg article from the 2nd of January entitled "Shipping Loses as Faster Trade Means Record Fuel Costs":
"The glut of shipping capacity and unprofitable rates may discourage some owners from speeding up. The merchant fleet of 86,500 vessels moved at an average 5.94 knots last month, compared with 6.48 knots a year earlier, data compiled by Bloomberg show. A very large crude carrier hauling 2 million barrels of oil can earn about $12,000 a day more by sailing at 10.5 knots instead of the standard 14.5 knots, according to DNB Markets, a unit of Norway’s largest bank."
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While the trade pick up from Asia is good news, it is not enough to trigger a pronounce rebound in the Baltic Dry Index, given, according to the same article:
"Accelerating trade may also discourage owners from scrapping older ships, prolonging the glut. A total of 45.9 million deadweight tons of capacity will be demolished this year, compared with 59.3 million tons in 2012, Clarkson estimates. That implies a 4.9 percent expansion in combined carrying capacity this year to 1.15 billion gross tons, the shipbroker predicts. The Baltic Dry Index, a gauge of dry-bulk shipping costs, averaged the lowest since 1986 last year, according to the Baltic Exchange, which publishes rates on 61 maritime routes. The Baltic Dirty Tanker Index of earnings for crude carriers and a measure of charges for six types of containers were the smallest since 2009, according to the London-based Baltic Exchange and the Hamburg Shipbrokers’ Association. Mitsui O.S.K. Lines Ltd., the owner of the world’s largest merchant fleet, said in October that rising fuel prices reduced its income by 3.1 billion yen ($36.1 million) in the three months to Sept. 30. The Tokyo-based company reported a loss of 5 billion yen for the period. A $100-a-ton change in bunker prices increases or diminishes profit by about $100 million for A.P. Moeller-Maersk A/S, the owner of the largest fleet of container ships, according to its third-quarter earnings report." - source Bloomberg
Bunker prices in Singapore, the largest refueling port, averaged $664.10 a ton last year, the most in at least a decade, according to data compiled by Bloomberg.
The good news from a "credit growth perspective" for housing, consumer confidence and spending as well as "shipping" is that US Credit Growth is indeed indicating economic pickup as displayed in Bloomberg Chart of the Day graph from the 9th of January:
"Faster bank-credit and money-supply growth plus rising Treasury yields signal the U.S. economy is poised to pick up this year even amid the fiscal drag triggered by last month’s budget deal, according to MKM Partners LLC. The CHART OF THE DAY shows total credit of commercial banks in the U.S. rose at an annualized pace of 7.5 percent since the end of September while a Federal Reserve measure of money supply, known as M2, advanced at a 12.3 percent rate. Treasury 10-year yields reached an eight-month high this month as investors plowed into higher-risk equities amid signs labor conditions were improving and Fed bond-buying may end this year." - source Bloomberg
As we have argued in May 2012 (Growth divergence between the USA and Europe? It's the credit conditions stupid...), it will remain the case in 2013.

Back in our May conversation we indicated the following reasons behind the growth differential between both economies was due to credit conditions:
"In recent conversations as well we have been highlighting the growth differential between the US and Europe ("Shipping is a leading deflationary indicator"):
"We have long argued that the difference between the FED and the ECB would indeed lead to different growth outcomes between the US and Europe (US economy will grow 2.2% this year versus a 0.4% contraction in the euro area, according to the median economist estimates compiled by Bloomberg):
"Whereas the FED dealt with the stock (mortgages), the ECB via the alkaloid LTRO is dealing with the flows, facilitating bank funding and somewhat slowing the deleveraging process but in no way altering the credit profile of the financial institutions benefiting from it! While it is clearly reducing the risk of banks insolvency in the near term, it is not alleviating the risk of a credit crunch, as indicated in the latest ECB's latest lending survey which we discussed in our last conversation -The LTRO Alkaloid - 12th of February 2012."
As far as the ECB and our "Generous Gambler" aka Mario Draghi are concerned in relation to credit growth and consumer spending, we have yet to see meaningful changes in credit growth which would improve the growth outlook for Europe:
"There has been little change in credit growth, which remained weak in November. The annual rate of decline in loans to the private sector (adjusted for loan sales and securitisation) remained at -0.5% in November. This development reflects further net redemptions in loans to non-financial corporations." - Mario Draghi, today's ECB conference.

EU Lending Breakdown - Retail Lending - Source Bloomberg:

"Following three months of marginal growth, loans outstanding to euro zone households total 5.25 trillion euros, within 0.5% of September 2011 all-time highs. Within this, consumer credit outstanding continues to tumble and now stands below 600 billion euros for the first time since mid-2007, while mortgage lending remains resilient." - source Bloomberg:
  
"Beware of little lending. A small leak will sink a great European ship." - Martin T. - Macronomics
Stay tuned!