By Paul-Martin Foss
Many people familiar with Austrian economics are familiar with the Skyscraper Index, popularized by Mark Thornton. And while there may not be a perfect correlation between the building of large skyscrapers and business cycles, it is still the case that the same conditions that lead to the building of mega-skyscrapers are those that lead to the boom and bust of the business cycle. Easy central bank money makes long-term, capital-intensive projects cheaper and incentivizes the misallocation of resources into those projects. Of course, it isn't just skyscrapers that can be indicative of a central bank-induced business cycle. The same can be said of other sectors as well.
Many of the same people familiar with the Skyscraper Index are probably also familiar with the Baltic Dry Index, which tracks the cost of shipping dry goods by ship. The Baltic Dry Index hit record lows earlier this year and, although it has since recovered somewhat, will likely still remain low due to an oversupply of ships. According to Bloomberg:
Thanks to the ongoing need to replace aging ships and the long tail of orders placed in more profitable times, the world's dry bulk shipping fleet is still growing despite losses that should be causing shipowners to throttle back. About 2.8 million deadweight tons have been added to the fleet since December alone - equivalent to about one new Capesize bulk carrier every five days. Thanks to those super low iron ore prices, scrap is cheap, making it less attractive to clear the oversupply by demolishing ships. About 163 dry bulkers have been taken to the scrap yard so far this year, according to IHS Global, but there are still 9,484 in service.
Ships aren't cheap to purchase, nor are they easy to dispose of. But when financing is abnormally cheap and expectations of future business are rosy, it stands to reason that shipping companies would put in a raft of orders. Now that the positive economic outlook has been shown to be ephemeral, shippers realize that they got caught in a bubble economy. Because of cheap financing they placed orders for ships that they now realize they won't need. And it isn't just bulk carriers that are facing a glut. Container ships are in much the same position. But consumer and business demand just isn't there to support the amount of shipping capacity.
There is no underlying economic strength because whatever demand was there was just being supported by central bank money printing. Take away the easy money and you're left with the reality that the post-financial crisis economy is still weak and has not been allowed to reallocate malinvested resources. Until that happens, which would require central banks to get out of the way, there will be no real recovery. Ship owners and shipyards will learn that the hard way, with losses in billions of dollars not outside the realm of possibility.
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