krogias

Over the last 6-9 months, we have seen many indicators of weakening demand and the impact on trade. For example, the collapse of the Baltic Dry Index - down more than 90%. This reflected lease rates for freighters and indirectly demand for bulk cargo capacity. The initial drops in shipping volume were modest but had a severe impact on commodity prices and shipping rates as the global economy swung from a sellers market to a buyers market. Now we are starting to see the full impact of credit withdrawal. Our thesis has long been that excessive and EZ credit (TM) were the root cause of massive false demand that radically distorted the consumer economies, those who manufactured and exported to them and the raw material suppliers to the manufacturers. The chain of causation has proven out and now we will see just how large that distortion was. Domestic Strife Our back of the envelope calculation is that first-order effects in the US will be 10% of GDP, with further ripple effects from the...

Today we turn our attention to China - certainly the most celebrated economy in the world today and possibly the most celebrated ever. Yet China's contemporary economy may be the most unbalanced in the history of the planet. The Problem Though it is hard to find reliable numbers, most sources agree that capital investment in China accounts for over 40% of GDP . Frankly, this is a terrifying and unprecedented number. For reference, Japan during their boom years was typically around 30% of GDP and never exceeded 35% for long. During the Roaring Twenties, fixed investment in the US economy averaged less than 20% . Looked at a bit differently, about 42% of China's economy is based on ------ the expansion of the economy. This creates tremendous momentum but also huge potential for disaster. Essentially, everything will be fine as long as everyone there believes the economy will continue to expand at a breakneck pace and invests accordingly. This is virtually the definition o...