Long Road to Recovery

Long Road to Recovery

The Trans-Pacific Maritime crowd was in a black mood, convening in early March at what may end up being the bleakest point of the recession. The Dow Jones Industrial Average was in free fall, and would hit a 12-year low a week later. Only 24 of the 575 attendees at the JoC’s spring container conference (4 percent) who responded to a live poll said the recession would end this year. More than 40 percent (232 attendees) believe it won’t end until 2011, by which time it would have lasted 38 months since December 2007.

That is indeed pessimistic. At 17 months and counting, the recession is still shy of the 20-month slump in 1980-82 and well short of the longest in U.S. history — 65 months during the 1870s following an earlier Wall Street collapse.

Since March, however, developments have been, if not positive, then certainly less negative across a range of indicators. There is not a soul in the industry who is not wondering what this means and, in particular, whether it presages an actual recovery.

The Dow Jones Industrial Average had rallied 20 percent as of April 21, while a string of strong bank earnings beginning with the $3 billion profit reported by Wells Fargo led CNBC commentator Larry Kudlow to declare, “The banking crisis is over.”

Some agree a turnaround is in the works, and that a recovery in containerized trade volumes will soon provide evidence. Even with world trade still contracting — the World Trade Organization predicts global trade will decline 9 percent this year — some see early signs of a container trade recovery and say the time to jump back into container carrier stocks is now.

On April 13, Tom Kim, a Goldman Sachs analyst in Hong Kong, issued a buy recommendation on China Shipping Container Lines, whose stock had jumped 40 percent in value in the month through mid-April. He pointed to three indicators supporting the recommendation: a deceleration in the decline of spot rates, including a 6 percent week-on-week uptick in Asia-to-Europe rates as reported by the Shanghai Shipping Exchange; China’s surprising 34 percent month-on-month spike in March exports; and a deceleration in the rate of increase in container shipping capacity.

“While we continue to believe that the container ship industry fundamentals will remain challenging for the next 12 to 18 months, we believe that the worst point of the cycle may be behind us,” Kim said in the report.

Some investors “remain skeptical of our view,” the report said. Some point to the March volumes at Los Angeles and Long Beach, which were off 7.5 percent and 22 percent year-over-year — a vast improvement over February’s declines of 35.2 and 41 percent — as supporting the view that a turnaround is occurring.

As Nariman Behravesh, chief economist of IHS Global Insight, told JoC Senior Editor Peter T. Leach earlier this month, “We’re getting close to the bottom of the cycle globally.”

As true as that may be, the mere prospect of a recovery is being greeted with a hero’s welcome. Frightening is the only way to describe the dark days of the recession earlier this year. The prospect of economic collapse, on everyone’s mind to one degree or another, called into question many aspects of our current existence — standard of living, viability of government, personal security, civilization.

Many now believe that catastrophe has been averted, thanks to massive government intervention in many countries. But averting catastrophe is not the same as returning to prior years’ prosperity.
This is where the idea of a quick recovery may come crashing back to earth. Fundamental problems such as the depletion of the American consumer and the lack of a consumer culture in China suggest years of painful transition may lie ahead.

This is the concern expressed by Morgan Stanley Asia Chairman Stephen Roach this month. He agreed with President Obama’s recent statement to the G-20 that the current global economy provides “challenges that no single nation, no matter how powerful, can confront alone.”

As Roach wrote, “The global economy has become overly dependent on one consumer (Americans). Yet, like it or not, this source of growth will be severely impaired for years to come. A retrenchment by the American consumer should be viewed as a wake-up call for other nations to fill the void by stimulating their own consumers. The excess spenders need to save, and the excess savers need to spend.”

It is a tall order. China, with recent memories of traumatic upheavals such as the Cultural Revolution and a society focused on bettering the next generation, can’t flick a switch and become a consumer society that drives global growth. Europe can’t either. China can unleash a $586 billion economic stimulus, but orientation against spending is a deeply engrained cultural behavior that isn’t so easily influenced.

It will be a long road ahead.

Peter Tirschwell is senior adviser of The Journal of Commerce. He can be contacted at 973-848-7158, or at ptirschwell@joc.com.