One of the biggest bubbles over the last decade was the shipping bubble. Driven by the trade boom with China and other emerging markets, large investments were made in ships. Companies mortgaged their future and purchased a large number of ships, with the assumption of good times continuing forever. Long-time readers may recall when I wondered about the industry (from a contrarian point of view) back in 2009 in this post and this one. Time flies but even then, it seems like the shipping industry is still working through its overcapacity problem. It's interesting to note that they are still having problems—this, without China entering any slump, yet. Marketwatch reports,

The warning signs being flashed by the collapsing Baltic Dry Index (BDI), a leading global economic indicator, may reflect the folly of misguided expectations during the prior global economic boom, according to Hong Kong-based shipping analysts.

New super-sized ships ordered up during the era of cheap credit and surging global trade could explain the index’s 57% plunge in the last three weeks, according to Macquarie Research, which described this month’s BDI drop as “relentless” and “extreme.”

***

Shipping companies appear to have jinxed their own industry by ordering up too many grand ships when conditions looked very favorable before 2008.

Meanwhile, further new capacity, equivalent to 22.7% of the existing fleet, is due to be delivered this year, according to Macquarie calculations.

The Baltic Dry Index (BDI) hit a low back in late-2008/early-2009 and I didn't think it would decline back to that level again, but it appears to have happened. The following chart from stockcharts.com illustrates how the BDI has collapsed lately.


The index is very volatile but the move in the last month has been spectacular, with it down almost 70% within one month. From a long-term point of view, the index is approaching the multi-decade low set in 2009.

Tags: contrarian, global

Tags: insightful, Sunday Spectacle, Warren Buffett

The Globe & Mail's Report on Business magazine had a short blurb on the current state of computer trading in Canada. As many readers are likely aware, a huge chunk of the trading that occurs on stock exchanges presently comes from computer trading (such as high-frequency trading and computer-driven arbitrage).

I am not a trader and most readers of this blog likely aren't either, but you may be interested to see how the short-term traders act. Trading has always been tough—to make matters worse, many of the markets they operate in are zero-sum markets!—but now they are competing against computers following algorithms. I have never been a trader, and am not familiar with professional traders either, so it's not clear to me if the current environment is harder for the professionals. Instead of relationships, now it's down to the strength of the algorithms and computing power. As for amateur traders, I suspect the situation is probably the same as a decade ago (for small traders, whether you are competing against trading houses with massive capital and skill, or against powerful computers with a lot of money spent developing algorithms, it's probably the same difficulty).

The article profiled a few key players in Canada and had the following graphic on how some traders behave when trading against a computer.

(as usual, click on image for bigger picture)

Tags: Canada, traders

In his latest for The New Yorker, James Surowiecki points out two major flaws with private equity as it currently operates. In particular, he raises the carried interest controversy and the notion that private equity uses debt to extract profits, while, at times, running the company into the ground. Should the government scrutinize how private equity is allowed to operate in America?

Tags: opinion, private equity

China's total GDP will surpass USA within a few decades simply due to its larger population. But will each of its citizens be as rich as USA soon?

There is nothing to say China—or some other country—won't ever surpass the wealth of USA on a per capita basis, but it's not as likely as many assume. The Federal Reserve Bank of Dallas examined this question in their June 2011 Economic Letter (bolds by me):

So, is it likely that Chinese living standards will ever match those in the U.S.? To get a handle on this question, it is useful to look at other countries’ experiences over a long period. Many nations underwent development miracles in the latter half of the 20th century. Reviewing data on the evolution of global living standards over the period reveals two interesting facts. First, there are several countries where per capita GDP exceeds that of the U.S., often by significant amounts. Almost all of these nations are oil exporters. For them, per capita GDP may not accurately measure living standards because a significant component of economic activity involves depleting the country’s natural resources or wealth. Thus, we exclude those nations from the analysis.

Second, other countries with per capita GDP significantly exceeding the U.S. level are generally small, with large, offshore financial centers. Given the well-known difficulties associated with determining financial-sector output, per capita GDP in such nations may not accurately measure living standards. So we also exclude them.

The FedRed examined data of all the countries, excluding those filtered out as described above, over the last 50 years and produced the following scatterplots:


The chart above shows growth rate (y-axis) versus real GDP per capita (which is a proxy for income). It should be obvious how as we move to the right (income increases), growth rates slow down. According to this data, barely any country grows beyond 10% per year (real) once GDP per capita surpasses $10,000 or so (do note that some oil-rich and tiny, financials-oriented, countries are excluded).


The second chart is a bit more confusing and illustrates how countries perform as they get closer to the US GDP per capita level. Since the US GDP per capita has varied over time, this chart is way more confusing than it seems and it's hard to discern much from it.



The best chart of the bunch is the one above. It shows G7 members, which includes some super-star growth countries in the post-war period. Countries like Germany (dark-green square), Italy (grey), and Japan (aqua) had spectacular growth in the post-1950's period as they were rebuilt from a low, war-destroyed, level. Even with amazing growth, the fast-growing Germany, Japan, et al, have not been able to surpass USA's GDP per capita.

The country that is closest to USA, in terms of wealth, is Canada (purple). One can think of Canada as the slightly-poorer neighbour down the street. Canada hasn't seen as strong a growth as Europe but it has kept pace with USA. As USA became wealthier (move to the right on the chart), Canada has grown at a similar level (the vertical gap to the 100% line has generally stayed the same).

The author finishes his report by saying,

Why do countries fail to reach U.S. living standards? Therein lies something of a mystery. Economists speak of a middle-income transition, or middle-income trap, where previously rapidly growing economies slow down dramatically and never achieve the same standard of living as the technological leader. The reasons for this are unclear. It may be that policies appropriate for one stage of development are less effective at later stages and that the institutional structure lacks the agility to adjust as circumstances change.

In a recent paper, economists Barry Eichengreen, Donghyun Park and Kwanho Shin examined a large number of growth slowdowns over the past 50 years (declines in per capita GDP growth rates of at least 2 percentage points from rates of at least 3.5 percent per annum).

The economists looked for factors correlated with these declines.They found that the slowdowns tend to occur when per capita GDP reaches about $17,000 in 2005 PPP-adjusted dollars and when per capita GDP reaches about 58 percent of per capita GDP in the lead country. Maintenance of an undervalued exchange rate also appeared correlated with the slowdowns.

***

In 1820, China was responsible for about one-third of global GDP, while the U.S. accounted for just 1.8 percent. So, the likely shift in relative size in the next decade is in some ways simply a return to what we previously experienced. Even then, U.S. living standards were twice those of China. If China were to become the first country to completely close the gap with the U.S., it would mark a significant break with development patterns observed over the past half-century.

(source: "Will China Ever Become as Rich as the U.S.?" by Mark A. Wynne, Federal Reserve Bank of Dallas. Economic Letter—Insights from the Federal Reserve Bank of Dallas. Vol. 6, No. 6, June 2011)

Tags: Canada, China, economics, global

I took a look at some of the qualitative aspects Netflix (NFLX) in prior posts (here and here) and it's time we look at the financials. I think any success or failure with Netflix's stock will still come down to its business model and competitive dynamics but, nevertheless, the financials provide a valuation guide for an entry point.

The stock has run up so much this month that its valuation isn't attractive right now. Most of the shareholders of Netflix—or at least those represent a big chunk of the volume—appear to be growth investors or momentum traders, so you will see more volatility in this stock than a typical company.

As I have mentioned before, Netflix is going through a major transformation, from a DVD-by-mail business to an online streaming business, so its financials prior to 2010 aren't reflective of its future. Furthermore, the company has grown so rapidly within an year that focusing on a few quarters is more insightful. I decided to look at quarterly numbers, which typically isn't a good idea with most companies.

(I had good feedback on my prior post so feel free to leave your comments, challenge my views, and point out any mistakes.)

Tags: investment evaluation, media, Netflix (NFLX), technology