09 February 2019

Baltic Dry Index - dropped like a stone

In September I suggested that the Baltic Dry Index was telling us to worry. Now it is telling us to be very afraid. Then I highlighted the fact that the Baltic Dry Index had dropped almost $300 to $1477 from its high of $1774. That turned out to be transient, and there was some recovery. In the last month, however, the BDIY (technically the Baltic Exchange Dry Index) has dropped like a stone, and now stands at close to one-third of its previous high.

The Baltic Dry Index provides a composite cost of shipping bulk goods and commodities, and provides a forward-looking view of global expected trade volumes.

Late last year, the index began to fall, and into the new year the fall has picked up steam. Year-to-date the index is down almost 50%, and has dropped almost two/thirds from its 2018 high. 

The BDIY is now at $610, a drop of $1164 in the past six months, and a drop of 52% from 1 January 2019, six weeks ago.


Baltic Dry Index as of 8 February 2019

It looks like we may be at the start of a recession due to a build-up of inventories and a concurrent reduction in international trade. The 1920/21 recession, usually attributed to difficulties in the economy adapting to the post-WWI increase in the labour force, also saw the forward buying of inventory resulted in bloated inventories and a collapse in demand. The resulting deep-V recession recovered because there was no intervention. This time, there will be significant intervention again, which instead of allowing the system to cleanse itself, will probably simply extend the period required for a real recovery.

If the Baltic Dry Index is right, and trade volumes are collapsing, then we are in for a rough ride, starting sooner rather than later.


16 December 2018

The US was invading Cuba in 1962, but turned back

In 1962, the United States almost invaded Cuba. Almost.

The story of the Cuban Missile Crisis has been told many times, and there is little I can add to the history, except to say that the US was in the process of starting the invasion of Cuba, and that the invasion was called off. The following was told to us in a “Sociology of War” class at the University of Maryland in about 1982 or 1983. The United States was going to invade Cuba, and that airborne troops were in the air and on their way when Khrushchev “blinked” and Kennedy de-escalated.

Our professor was also an active duty US Army colonel (who by the end of the semester, had been offered a star to command a tank unit in Germany). He had joined the US Army as an enlisted man, a private. He progressed through the ranks, completed his university degree and was commissioned, and later completed his masters. In his early years, he was in the Airborne. He said of his year in Vietnam “when I arrived, I sprinted under fire from the airplane to a shelter, and when I left a year later, I sprinted under fire from the shelter to the airplane.” None of us doubted him, and the ribbons on his chest certainly were those of a warrior. 

He was also a scholar, and was teaching us about the importance of preparing a society for war; that leaders cannot simply say “bad guys, we must fight them” and automatically have the support of the people in pursuing a war. Likewise, there are processes that must be followed, steps if you will, to disengage a society from a war footing.

While speaking about the processes of preparing a society for war, he spoke about the Cuban Missile Crisis, and how each step in the process played out. I do not remember all, but years later I was able to see those steps play out in preparation for the invasion of Iraq in 2003.

He told the class that the official story was that the US was not about to invade, but that it would if there was no back down by the Soviets. As tensions rose, Kennedy stood firm and imposed the blockade on Cuba. All of this is well depicted in the film about the crisis, Thirteen Days

What that movie does not show is US airlifters flying from bases in the southern US toward south Florida. The Colonel told us that his unit had, on numerous occasions before the crisis, and at short or no notice, been mobilised and loaded onto aircraft and flown toward southern Florida, only to be diverted either back to their original base, or to another base in Florida. This was all about training and readiness.

At the height of the Cuban Missile Crisis, something different happened, that convinced him and everyone on the airplane that they would be landing in Cuba.

Loading an airplane full of troops is not unusual, nor is ensuring they have all the support materials, ammunition, radios, maps (yes, paper maps) of potential landing areas, medics and their basic equipment. They were used to this. And so there was the usual shuffling and grumbling about flying around for no good reason. Where would they end up, or would they just end up back at base in 10 or 12 hours? 

What they did not expect, and had never happened, was that this time the medics brought the plasma on board with them.

Plasma has a shelf-life of well under 24 hours if not frozen, and when thawed, the usable life at room temperature is 4 hours. “Fresh frozen plasma is stored in approved freezers at less than -30°C.  It is thawed just before use (a process which takes up to 30 minutes) and once thawed, must be infused within 24 hours if kept at 4°C (or 4 hours if kept at room temperature).”

This had never happened. Plasma is too valuable to simply throw away when the airplane is turned back. The only reason they would bring the plasma on board, the Colonel told us, would be if there was a very real expectation that the medics would need to use that plasma.

This was important, and was a clear signal to everyone on the airplane that they would be landing in a potentially hot situation. They would not be landing in Florida this flight, they would be landing in Cuba.

All the grumbling stopped; all the wondering stopped. Everyone on the aeroplane new they would see combat by the end of the next day. Their sergeants had always told them that until the plasma is with you, you aren’t going into real combat.

The United States was going to war, and the invasion of Cuba was in progress.

We know now that Khrushchev “blinked”. We also know that part of the “blinking” was an agreement by the US to remove its Jupiter nuclear missiles from Turkey. So much is known about the Crisis. The story above was new to me, and I have not seen it told anywhere else; that the United States was already “in the air and on their way to Cuba”, and the American troops were going to land in Cuba.

11 December 2018

I Bless the Rains down in Panama

I’ve said that Panama has four seasons: Sun Glorious Sun, When will it every Rain, Rain Glorious Rain, Dear Lord when will we see the Sun. The dry season is hot and dry, and the fields and roadsides are burned casting a pall of smoke over much of the country. We are entering the dry season now (December) and it will be Sun Glorious Sun for the next three to four months.

By then we will be wishing for rain, to clear and damp down the dust, and to bring green back to the city and countryside.

When the rainy season does arrive, it will rain more each month for nine months than the highest precipitation months for London in the UK. Or to put it another way, for only three months of the year will the rainfall in Panama City be less than the highest monthly rainfall in London.

The rain in London pokes at you, for hours, with cold little stabs all over any exposed skin. It is also driven by the breeze or wind, so it hits you sideways and does so all day long. It is as if God poured a jug of cold water over you and then sent it around and around in the wind, to hit you from every direction. Certainly, London has downpours, the wonderful April Showers to bring May Flowers. But mostly, the rain is a long drawn out affair, and once it starts you know that the day will be spent indoors if at all possible.


Panama City rain is different. It is tropical rain. The best description that I have is that God drops a dumpster full of water onto you. It crashes down for 30 – 45 minutes, then stops. Except of course for the deepest part of the rainy season, when all you really want is a few hours of sunshine.


Let's look at what that means. The upper photo was taken during a rainstorm. Not a terribly strong storm, as you can actually see the buildings in the background. The lower photo was taken a few hours later when the rains had cleared. In a very strong rain, none of the buildings in these two photos is visible.


The test questions for a Panamanian driver’s license give a clue to the impact of the rain. When studying for the theory questions, there is a set of sample questions available online. One of the questions stumped me:

What is the impact of heavy rain on your car?
A) You drive slowly
B) Your car stops
C) You drive with your emergency lights on
D) Watch for other drivers

I was stumped. Well, yes, driving more slowly makes sense, and certainly watching for other drivers is important – critical in fact. Emergency lighting makes a lot of sense with the intensity of the downpours. But no, the right answer is B) your car stops.

At face value that just doesn’t make any sense.

My car, well, any car I’ve owned, can drive perfectly adequately through the rain. And why would my car stop just because it is raining. 

The real meaning of answer B) is that the roads will flood, and any lower land or poorly draining areas will flood. And they will flood quickly. While the municipal drainage systems are reasonably good, the volumes of water simply overwhelm them, and very quickly some of the key roads will be a couple of feet (most of a meter) deep with fast flowing water. 

Here is how your car stops:




Yet for all that rain, the most wonderful things about it are that the rains clear the humidity (for a short period) and the rain is not cold, though it does take the heat out of the air. It a real pleasure to sit on a balcony during a rainstorm and be able to stay dry and cool.

05 December 2018

Panamanian Real Estate, the Central American Lobster Pot?

When looking around you in Panama City, it is impossible to miss the incredible number of skyscrapers and to miss the cranes and new skyscrapers that are under construction. Panama City ranks as number 21 in world cities with the most skyscrapers over 150 meters in height, with 50 such building, so far.

This is pretty incredible for a country with a population of just over 4 million, and a city with a population, if you include the entire surrounding area, of 1.5 million people, and a national GDP per capita of $22,000. This ranks Panama at number 80 in GDP per capita. Yet this clearly is not the case in the city and country. Average GDP is not $22,000 when wages for most workers range between $400 and $800 per month (with a "13th month" built-in bonus). 41% of the Panamanian workforce has not achieved even a high-school level education, a prerequisite for a growing knowledge working economy that can also sustain a consumer-driven economy.

Multi-year empty CBD office space
Yet there clearly is money sloshing about, or at least there was. Many of those very tall buildings are residential towers, with at least one being 62 floors with a swimming pool on the roof. Yet looking at those towers at night and counting the lighted floors, and it appears that the buildings are 30% - 40% occupied at best. 

The same situation holds true for office and commercial real estate (right), at least at the middle to higher end. A nearby building, with 24 floors of office space, has had at least 9 of those floors empty for the past 18 months or longer. In all probability, those 9 floors have never been occupied. Yet the building continues. The photo at right was taken early in the morning to clearly show the empty floors, with the sun shining through unimpeded by furnishings, partitions or internal walls.

Construction represents just under 20% of the Panama economy, a level that cannot be sustainable over the longer term. Yet that construction boom has continued year after year.

All the way back in 2007, Reuters reported that, even before the full impact of the Global Financial Crisis (GFC), Panama City was on track to bring more apartments onto the market than Miami in the 1995 - 2005 decade; over 11,000 units by the end of 2010. Not all of those units were built, but many were. And while the GFC certainly slowed everything down, building picked up again. Between 2017 and 2019, over 8,500 new apartments are expected to come to market.

Who is buying these units? In a city in which huge numbers of people live on the minimum wage of $2.50 (average) per hour, feeding the family is more important than aspiring to live in a high rise. Even professionals earn is the range of $1200 per month. 

So "average" people are not investing in these apartments and commercial buildings. But someone is.

Google Maps, 2018
Look at Panama's location on the map, sitting between Costa Rica to the west/north and Colombia to the south. Noriega was overthrown, officially, because he decided to participate a little too actively in the drug trade, instead of helping the Americans to stop that trade. Admittedly there is more than a little evidence that he worked with the CIA and others to ensure that drugs reached America. Yet when the Americans decided to remove him, it was not for his rejection of the "School of the Americas" (for training right-wing governments and their security forces in counter-insurgency and "public order"), it was because he refused to stop the drug traffic. The cultural and emotional scars of that invasion remain.

Noriega was a small-fry, and the drugs were going to come from Colombia and Peru no matter who was in power in Panama, and those drugs were going to, and continue to travel north via Panama and Costa Rica and other countries in Central America. And the resulting drug money needs to go somewhere.

We were recently informed of a finca (farm or undeveloped country land) for sale - hundreds of hectares. Literally a few kilometres along each boundary. Who was selling it? "Oh, he's a narco from Colombia" we were told, completely matter of factly. (we were looking for 4 - 5 hectares, not 500+ hectares).

For a narco, like any investor, the choice is pretty simple; do I concentrate my investments in one sector or one country, or do I diversify? Panama, and Panamanian property and construction provides a good diversification opportunity that is not under the control of the Colombian or American governments.

But not all the money parked in Panama is dirty. If you lived in Venezuela in the 1990 and early 2000s, it was a rich country. And there were many rich Venezuelans. There still are, though far fewer. But those that are still rich saw what was coming and moved some of their assets out of the country. Where did that money go? Certainly, much of it arrived in Panama as investments in residential property, and specifically in the new towers that were going up all along the Ave Balboa and overlooking the Pacific Ocean. 

"Clean" money, for the same reason, has flowed in from Colombia, Brazil and Argentina. Panama is a "safe" place to put that money, where it cannot be seen by your home country government (this might change) or by the Americans, who are trusted by no one in Latin America.

The downside for these investors, clean and dirty, is that there needs to be a market into which they can sell the asset, otherwise there is the risk of a "lobster pot" economy. It is easy to get in, but almost impossible to get out. Yet as most investors are looking for somewhere "safe" to park their money, Panama continues to appear to be a good place to park it. The economy continues to grow, albeit at a slower pace at the moment, and investment opportunities in commercial and high-end residential real estate abound.

Yet one day the government of Venezuela will fall and be replaced by a government that actually seeks to grow the economy by encouraging a functioning market economy. When that happens, Venezuelan money parked offshore will attempt to come home. That will mean selling assets outside of Venezuela, which will include property assets in Panama. We are already seeing examples of individuals seeking to sell, and it looks ugly.

Overheard was a conversation in which a gringo was lamenting the difficulty in selling an apartment bought seven or eight years ago. While background prices of property investment have increased for new-builds, existing high-quality properties cannot sell. This gringo was looking at selling for almost 20% less than the seven or eight-year-old purchase price.

This story is hardly unique, and while the likes of "International Living" and many gringos in Panama continue to laud the country and residential property market, the "lobster pot" continues to trap lobster after lobster.

For some people that will be acceptable - better a 20% loss on an investment in Panama that a confiscation of 100% of the asset in Venezuela. Likewise, such a loss by a narco is still an 80% retention of gains from the production and sale of an illegal product - drugs. Money laundering always costs a higher premium that moving clean money.

Still, the money flowed in, an almost constant river of money through the 2000s and 2010s. But last year (2017) the flow began to slow. What happened?

It seems, though I have no evidence to support this, that Venezuelans have simply run out of assets to get out of the country, while at the same time, Colombians, with the peace deal with FARC, have found home a safer place to invest. Argentina is back in crisis, and has spent so long in various crises that any easily movable financial assets have probably already found homes outside the country. If the crisis continues, there may come a time when Argentina actually becomes a magnet for investment.

Anecdotal evidence (that means someone close to the industry told me) suggests that in 2018, construction permits for new construction in Panama City are down by 50% on permits issued in 2017.

Does this foreshadow a squeeze in available properties, or saturation that will require a correction to soak up excess capacity? I do not know the answer, and there are probably three answers for every two people in Panama that you ask.

So to come back to the original point, the money in Panama is not coming from organic growth, but from external investment. Unfortunately for Panama, that external investment is in large part going into construction, and therefore is building wondrous high-rises and commercial property. It is not building the foundations for a self-sustaining economy. Cut off the foreign construction investment, and there is inadequate local demand or debt servicing capacity to replace the construction industry job that will be lost.

A country in which 41% of the working population does not have a high-school level education cannot sustain a "knowledge worker" economy or an economic pyramid. An upturned drawing pin (thumb tack) economic "pyramid" cannot sustain a construction based economy without a consistent and continuous flow of inbound investment.