Shipping Markets: Quantitative Easing Round 2 - $600 billion

Dear Readers,

As you no doubt have noticed, there has been a big debate over the $600 billion for Ben Bernanke's "long-term treasury purchases". Here is a quick recap of the debate to date:

On the 3rd of November 2010 the Federal Reserve announced Round 2 of Quantitative Easing, purchasing $600 billion of long-term Treasury securities through the second quarter of 2011, forking out $75 billion per month through next June. A group of economists launched an "attack" on the Federal Reserve with an open letter to Fed Chairman Ben Bernanke (published in the Wall Street Journal and the New York Times), saying that this will "risk currency debasement and inflation". This decision has also raised some concerns with some of the U.S. trading partners, including China, Germany and Brazil, some of which are already battling inflation problems. The Fed's response was that the "plan" will always be amenable to change, depending on the effects it has on world markets.

So, the question for which you are all here: "What does this mean for shipping?"

$600 billion is a large amount by anybody's standard. It is highly likely that this huge influx of cash will devalue the U.S. dollar to some degree. This, of course, will affect anybody holding U.S. dollars, be they shipping companies "sitting" on cash for good purchase opportunities, or governments like China. As a broker friend of mine said "inflation is the enemy of idle or risk-averse money". Could this mean that shipowners will try and make use of that money before it loses value? Could we see a move for more vessel purchases while "their money is good"? On the flip-side, could we see the shipowner sellers holding out in order not to receive U.S. dollars before its devaluation? Many brokers are expecting vessel prices to finally come down and reflect the existing market. Could a combination of these 2 factors come to play, and we see an unchanged market, reflecting even more uncertainty?

This influx will also affect other sectors of the market, like Breakers and Shipyards. To use shipyards as an example, they are paid in U.S. dollars, but they pay their workers and suppliers in their local currency. A devaluation of the U.S. dollar will mean a decrease in their profit margins, since their expenses will remain the same. In order to keep their margins constant, they will likely raise the U.S. dollar price making the vessel more expensive to the shipowner "sitting" on cash. Could this mean that we will see more newbuilding deals in order to capitalise on the current value of their dollar? Even if they decide to ask for payment in their local currency, the effective increase in price will be the same to the buying shipowner.

Bernanke wanted to "move the economy" with this money. Both sides of the argument have valid points and only time will show the victor of the argument. However, will "rush" purchases be a good thing (i.e."Buy now before I lose my money!!!")?

I hope that this won't cause decision makers to make hasty decisions, because "he who hurries, stumbles".

Best Regards,
Theo Scholiadis - S&P Broker


Main articles used (list not exhaustive):

- Bernanke's Fed Sets Sail With $600 Billion QE2
[Site: Forbes.com] [Date: 03/11/2010]

- Fed's Bond-Buying Plan Faces New Assault By Critics
[Site: Los Angeles Times - Business] [Date: 14/11/2010]

- Open Letter to Ben Bernanke
[Site: Real Time Economics] [Date: 15/11/2010]