Guest Post by Karl Denninger
So it’s just overlevered oil producers that are in trouble, right?
The shipping industry is facing its worst crisis in living memory as years of rapid expansion fuelled by cheap debt have coincided with an economic slowdown in China.“We are now at the stage where people are struggling to remember an era when it was this difficult, we’ve gone through what it was like in the 90s, the 80s and the 70s, so expressions like ‘living memory’ start to apply,” said Jeremy Penn, the chief executive of the Baltic Exchange in London.The Baltic Exchange has set shipping rates for more than two-and-a-half centuries and the situation its members now face is grim.
The “industry” built a lot of ships. Of course they didn’t do any of that with cash they had received from operations; no, they did it using cheap credit (gee, who made that possible?) predicated and “secured” with promises of infinite 10% annual growth forever.
Of course that can’t happen. It never has before, and it never will, because mathematics make it impossible. But that didn’t stop the people from getting the loans and building the ships — borrowing the money at uneconomic interest rates (near zero) that had essentially no expression of risk embedded in them.
But of course there was risk. Lots of it. And now that risk has become realized.
The big problem today is that many of these ships are operating at a literal cash deficit. That is, their daily lease rates are below the cost of the fuel and crew. This of course means that every day you operate said ship you go more broke.
The shipowners cannot simply retire the older vessels either, because they’ve all taken on too much debt. Debt that, if you break the ships, becomes unsecured because the ship is the security, and of course the bank won’t let you do that as it would expose their phony “mark to model” game on an “asset” that in fact has negative value.
Gee, where have we seen this movie before?
Who holds this paper? Good question. The next question is who wrote derivatives on it?
Go ahead, believe it’s all ok — just like you did after Bear Stearns. You do remember Bear Stearns, right? We haven’t had our Bear Stearns point in time yet — they’re a bit better at hiding the rotten fish this time around, at least thus far, and why not given that nobody went to prison for the abject fraud they ran last time.
We’ll see how that works out for ‘yall between shipping and oil.
No comments:
Post a Comment