05 October 2014

Two Bill Buckners For One Mickey Mantle?

With its usual panache`, the Sunday NYT has more on-point material for the macros, micros, and quants than one short blog can reasonably deal with. I'll limit myself to two pieces, which share a minor thread.

First, is the situation with container ships. This a full page and a half on the conundrum faced by container shipping companies: how to forecast demand for slots, price of fuel, and cost of moolah to decide whether to buy, and if so how many, new ships. The piece uses the recent Triple-E types of Maersk as example, in the body (so to speak) of the new Mary Maersk. In economics, generally in 101 class, the student is introduced to the farmer's dilemma; no there isn't a Wiki piece, oddly. (If you go there, you end up with Prisoner's Dilemma, which is somewhat worse.) The problem, in a nutshell, is that farm product is largely dependent on forces out of the farmer's control, weather mostly, such that a bad harvest in one year will, often, lead to higher than usual prices that year. The Dilemma: plant more the coming year, expecting (hoping?) that other farmers won't and that the high price will be sustained. Generally, doesn't work. Ruinous competition. We see similar at today's gas pump; all that horizontal drilled black gold is driving price down. Sniff!!

What's interesting about the container ship problem is that Acts of God are less significant. It's almost entirely the result of human decision making. Some quotes.

How to drive prices down:
"There's too much capacity in the market and that drives down prices," [Ulrik Sanders, global head of the shipping practice at Boston Consulting] continued. "From an industry perspective, it doesn't make any sense. But from an individual company perspective, it makes a lot of sense. It's a very tricky thing."

A classic game theory problem, seen by upper level undergraduate and graduate macros, micros, and quants. What to do? What to do?

Remember the JIT movement? Kind of a secondary gift from Deming, though not often explicitly mentioned. So, what do these behemoths mean?
The industry wants ships that carry more containers, more slowly. Fuel prices are a major factor, so ships now commonly "slow steam" to save fuel, cruising at 16 or 18 knots instead of 22. A typical trip from Poland to China takes 34 days.

Sends us back to the good old days of primitive industrialization. We're all going Chinese.

Which brings us to a statement of such opacity, that it is hard to believe
When the world economy slackens, so does the shipping industry. At one end of Mary's route, the growth engine of China has been losing steam, while at the other, Europe is again flirting with recession.

Ah, folks: the growth engine of China is shipping widgets to the US and EU. These are not separable events. Gad.

Bigger is better, in capital. But how to get bigger?
"In this down cycle, the new-built prices are low and money is cheap, so you would much rather go and buy the vessels than go and acquire a company" that has older ships, said Martin Dixon, director of research products at Drewry. "Many shipping lines are struggling to make money, so cost leadership is key to survival. Hence, you're seeing a lot of investment in bigger ships."

In the airline industry, 727s were sold off to regionals and such when more fuel efficient Boeings and Airbuses start coming into production. Turns out, there's not that situation in container shipping. But, at least, we have fiduciary capital turning into real capital, not sub-prime used car loans and beachfront condos. I think, that's better?

The engineering of Mary reminds me of that cruise to Bermuda in an ancient boat. Tin foil boats in a typhoon? Yikes!
The two men looked over the ship's side and spoke on walkie-talkies to sailors on the ground. Minutes passed -- 10, 20, 30. The Mary, crawling at 0.1 knots, began sidling up to a pier.

"Compared to the whole size and the weight of the ship, the steel plates in the side are actually pretty thin," the captain explained. "If we get a speed higher than that, we'll start buckling plates."

Next, second, and last a short piece on free trade. Regular reader may recall the many times these endeavors have talked about New Gold (the US buck), export driven (small) economies, the US trade deficit and how all of these factors have to exist in symbiotic rhythm for the whole house of cards to stay vertical. Well, another Left Wingnut offers up some musing. Just two quotes.

First a bit on how to ignore experience.
[in 1995], the W.T.O. adopted a rule obliging members to abide by rich nations' patent laws. (Never mind that Americans stole technologies from Europe throughout the 1800s.) These laws typically enabled investors in rich countries to reap substantial rewards, while poor nations like India were forced to pay the same price for patented drugs as the rich West, because they were not allowed to make generic substitutes.

But the consensus was flawed. Even free-trade advocates now admit that American wages have been reduced as a result of outsourcing, the erosion of manufacturing and an ever-increasing reliance on imports. Middle-income countries, meanwhile, have been blocked from adopting policies that might make them world-class competitors. Nations that have ignored the nostrums of the Washington Consensus -- China, India and Brazil -- have grown rapidly and raised their standards of living. Improvements in poverty and inequality occurred in Latin America only in the 2000s, after the I.M.F. and the World Bank reduced their grip on those nations.

Second, a simple re-statement the macros, micros, and quants can't ignore.
A third lesson is that models of growth that depend indefinitely on exports are not sustainable. The large imbalances in trade between China and the United States distort economies. The same is true of Germany's huge trade surpluses, which are based on a fixed euro and restrained domestic wages.

To the extent that capital seeks out slavery level subsistence wages, in the short term the micros and quants crow of their success, and excess compensation. In the medium term and longer, everybody loses. In due time, there'll be no one to buy the widgets. Not to mention, which these endeavors do on occasion, that exporting countries have a habit of moving their currencies, relative to the importers, in ways advantageous to themselves. The Golden Goose is the middle class consumer. China has about 1 billion folks. The country could have grown its domestic economy, but chose to "sell" its citizens to foreigners. India did likewise.

The thread? Well, trade, of course. And the permanent fact that, They Ain't No Such Thing As A Free Lunch.

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