This is the BDI (Baltic Dry Index) it shows the shipping rates for commodities. This index is non-speculative as these rates are set based on professional assessments made by a panel of international shipbroking companies[Link]. The index fell from about 10,000 to 773 in 3 months. In May 08 shipping a ton of dry bulk from Australia to China cost $45. Today it cost$4. A collapse of more than 90%. Imagine if you were a shipping company, at BDI=10,000 or 7000 you're making healthy profits, borrowing to build new ships and expanding capacity because the margins are so healthy. At 773, shipping companies are seeing losses with every shipment. It is not unusual for shipping rates to fluctuate as we go through economic cycles but this time it did not fluctuate - it collapsed. Within 3 months healthy shipping companies suddenly find themselves in danger of insolvency. What happened in shipping is a microcosm of what is happening in the global economy. In the words of the macro economists in PIMCO, the global economy had a HEART ATTACK.
"The economy has had a heart attack. It needs careful attention." - Mohamed El Erian Pimco CNBC 11/21/08
In July 2008, the economy was like a unhealthy overweight feller with high blood pressure, high cholesterol...clogged arteries and a bad heart. But in mid-Sept 2008, the collapse of Lehman Brothers triggered a heart attack. If you recall, the US govt bravely proclaimed "no more bailouts" prior to the collapse of Lehman. A week after the collapse of Lehman, they asked for $700B to bailout everyone else.... the collapse of Lehman put the overweight feller in ICU. The $700B was like a defibrillator to prevent the economy from sudden death. Now in ICU day to day different problems appear - the heart is weak so the kidneys are failing (GM?) , so is the liver ...and other organs.
"Construction firms face 'collapse risk'"- Straits Times 28 Nov 2008
Today's Straits Times talks about the possibility of close to 2000 (out of 6000) construction companies in Singapore failing as a result of this crisis. In another article, a well established British retailer Woolsworth has collapsed and 30,000 employees there may lose their jobs. In China there has been growing unrest and riots. There was some talk that the Chinese has given the world a "gift" by stimulating their own economy and cutting rates aggressively - they have not acted out of kindness by are driven by the need to survive. Thousands of factories depenedent on export to US has closed its doors and workers are left stranded and desperate in many parts of China. The tension in the Chinese society is increasing as the economy falters. While many analysts talk about the future of the global economy being increasingly dominated by China, China is fraught with numerous problems due to the incompatible mix of an authoritarian govt and capitalism. There is not outlet and process for resolving the problems brought about by capitalism.....problem shows up as riots, they just send in the police to disperse their rioters ...problem solved? The Chinese govt is now extremely concerned about unrest around the country : [Link].
The Americans have spent about a $1 trillion on bailouts and the Fed announced on Tuesday it will throw in another $800B into the consumer loan market to get it going, President Elect Obama is considering a $700B stimulus package to kick start the economy. There is some faith that the Americans can keep spending and spending to get out of this malaise. If the economy does not get better after so much money is thrown at it, I think we have to prepare for really dark days ahead.