Tuesday, October 28, 2008
trade finance shutdown
Thailand on Monday said it planned to barter rice for oil with Iran in the clearest example to date of how the triple financial, fuel and food crisis is reshaping global trade as countries struggle with high commodity prices and a lack of credit.
The United Nations’ Food and Agriculture Organisation said such government-to-government bartering - a system of trade not used for decades - was likely to become more common as the private sector was finding it hard to access credit for food imports.
take context from yves smith, who has been on top of the seizing up of letters of credit for weeks. first take this offering, which relays the views of UBS macro analysts.
... I have been banging the drum about slowing demand in emerging Asia being the principal cause of almost all the macro economic dislocations we are seeing at the moment - but even I must admit that I have been surprised at the scale and the pace of this apparent fall in demand. And that's because I think I was missing something. In two of my more recent notes, I have pointed out some of the oddities of the commodity markets such as the essential futility of the cost of production argument to support prices and the systematic way we seem to have over-estimated demand during the up run in the cycle. I would now suggest that the BDIY [baltic dry, mentioned here -- ed.] is now sending us a similarly muddled signal, namely that while apparent demand has collapsed, real demand has been much less impacted and that what we are actually seeing is a huge run down in stocks.
The cause is the break down of the world commodity trading system. For the past few weeks Andy and I have been reporting in our respective dailies on the difficulties being faced by importers and exporters of basic materials in getting access to bank finance to fund trades. For example, Andy wrote about South Korea's request for immediate aid support from the US to fund food and fuel imports, I discussed how the lack of trade finance was reducing the volume of coal shipments into Rotterdam and was affecting the volume of US grain exports. When you come to think about it, if banks are reluctant to lend to each other because of perceived counter-party risk, why are they going to lend to a small trader from Asia, Africa or even Europe. We know of banks that have rejected letters of credit from other banks - and we are aware of banks that have simply refused to pay out on letters of credit because they claimed they did not have access to the funds. Without a working trade finance system the global market is going to break down……… eventually.
And that's where we are at the moment. The reason that spot iron ore prices in India have collapsed - more than halving in three months, is because Chinese demand has vanished but it has vanished because of a combination of real demand destruction and apparent demand destruction caused by the inability to finance cargoes. Its the same for other bulk commodities, industrial metals, coal, oil and even food. The slump in global demand for basic materials is real but it is not as bad as the BDIY would make you believe.
For now the gap between the real and apparent demand destruction is being filled by running down stocks. Now this can last for a while both because stocks were, I believe, generally larger than the market perceived and because investment stocks of commodities are being returned to the market and because lower real demand means lower consumption. But in the end, stocks will become exhausted and then we face a binary option. If the trade finance markets remain closed than manufacturing around the world will start to shut down and the world will fall into a depression. But if trade finance resumes then commodity prices should stage a spectacular dead cat bounce as stocks get rebuilt.
The former case is too dreadful to hope for so I must assume that in some way finance resumes and the markets bounce.
yves then further offers this from john dizard at the ft:
The government and banking leaders might think that those clerks and computers will have been reassured by the business cable channels telling them that things will be fine. Well, it hasn't happened yet.
Some critical institutions were caught in the middle of this. Wachovia, as I mentioned last week, did a lot of letters of credit for the Latin American trade. Royal Bank of Scotland has huge exposure to shipping. The line people working on trade finance need to be told that it is okay for them to take these risks, that they won't be laid off if they make one good-faith mistake.
Maybe secretary Paulson could go down to the docks in New Jersey, Norfolk, Long Beach, or Jacksonville to symbolically sign some documents. I know, it's the unfamiliar real world of production and transportation, but the pain of walking around the Port Newark-Elizabeth Marine Terminal will be over quickly.
... As one ship broker told me: "Values are down by half within the past six months, but nothing is actually being sold right now. The problem isn't with a single trade route. It's global."
This better be the next fire that's put out.
the thailand/iran barter deal is accompanied by others, and can be seen as a result of an inability to utilize normal credit and clearing functions of the global financial system as regards trade. this leads me directly to the doorstep of michael panzner. economist greg mankiw writing in the new york times rather circumspectly questioned the fundamental presumption of many economists -- that is, that we have learned so much since the 1930s about economics that we will not repeat the mistakes that led there. but panzner has made a living recently out that highlighting that the problems facing the global financial system are -- as is the system itself -- far more complex and difficult to intervene in than anything faced by policymakers then. his thinking of course echoes that of nassim taleb and benoit mandelbrot. the international trade finance shutdown -- almost completely unremarked on and indeed probably unnoticed by policymakers and financial press alike, yet vital to our national survival and a direct unintended consequence of the financial crisis -- is an example of such complexity at work.
what's more, the stakes are higher -- as i've noted here before, this overoptimized system of financial, economic and social intermediation has widened the collapse gap. if this is in fact the collapse of the american empire, events may spiral further out of control more quickly than anyone in the united states imagines or perhaps can imagine -- manifesting our failure of imagination in the most awful ways.
oh, and i have nothing to add as they were excellent discussions for which i cannot improve upon.
i do have one question though. in the comments for:
is your link for "these idiots" correct or erroneous?
regarding your same comment query there, i suspect my answer is:
there are a horrifying multitude of "these idiots" (skinheads and such) throughout our great nation. and they are a force to be greatly feared. (and if you have a bunker consider yourself lucky.) because "these idiots" may very well satisfy your speculation, gm, "[that it is] likely that obama's biggest tests will come not from without".
frustration and desperation - often correlated with poverty - has many different faces. and it is not confined to urban areas. it is rampant and common throughout america. and we both know it is growing.
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