Sign of the Times - Trucker Protest Price of Fuel

From NPR: Dan Little, owner of a small trucking company in Carrollton, Mo., says diesel's climb to more than $4 per gallon has wiped out his profits. He and others in the long-haul community want someone in Washington to address their concerns.

From Logistics Management:

Trucking news: Talk of an April 1 trucking shutdown gains momentum

Jeff Berman, Senior Editor -- Logistics Management, 3/27/2008

WALTHAM, Mass—Speculation about a possible trucking shutdown on April 1 has been gaining momentum recently, according to media reports and Internet discussion boards.
The shutdown, which would be conducted primarily by owner-operators, is in response to the current run-up for diesel gasoline prices. Nationwide, diesel is currently averaging $3.989 per gallon and has gone up 70.9 cents in the last five weeks—all of which have been record-breaking—according to the Energy Information Association, a unit of Department of Energy. And in some parts of the U.S. diesel is already exceeding the $4 per gallon mark.
What’s more, the American Trucking Associations (ATA) called on the White House earlier this week to release oil from the Strategic Petroleum Reserve (SPR) to curtail this ongoing historical run-up in crude oil prices, which continue to hinder myriad segments of the U.S. economy and freight transportation—especially trucking—in general. And last week the ATA projected a record-high diesel bill for 2008, noting that that trucking industry is on pace to spend $135 billion on fuel in 2008—based on current price forecasts. This estimate, said the ATA, would be a $22 billion increase over the trucking industry’s $112.6 billion 2007 fuel tab.
Even though the media and Internet reports on this potential strike indicate that the reason behind it stems from truckers being fed up with current diesel prices, some people feel this strike is not a good idea and would send the wrong message.
“I don’t think it would be a very good thing for our country at all,” Department of Transportation Secretary Mary E. Peters told CBS 4 in Denver. “And if the strike is because of high oil prices, I think that would be taking an action that would affect American businesses and American consumers for something they don’t have a direct relationship to.”
Despite Peter’s sentiment, it appears that it may be falling on deaf ears when it comes to owner-operators. On a trucking Website entitled “Trucker to-Trucker,” Dan Little, owner of Little and Little Trucking LLC, who goes by the handle of Trucker Dan, is calling for truckers to shut down for one day, beginning at 8 a.m. on April 1.
He added that from that time striking truckers will not accept any loads at any price until the Federal Government admits and puts into action a plan that will give all owner-operators some help. He said this government help should come in various forms, including: suspending all federal and state fuel taxes until the economy recovers; having the federal government create an oversight committee to oversee insurance premiums charged for Class 8 truck insurance; and to stop allowing large trucking fleets to self-insure, which would create a more level playing field for all trucking companies, among others.
Another trucker on the same site said that “the price of fuel has increased exponentially over the last several months and oil companies, transportation companies, brokers and others all seem to be recouping their costs plus profit while the trucker continues to be squeezed from all sides as a producer delivering the goods and as a consumer attempting to support a family. The profit pie does not seem like it is being divided fairly.” He added that freight brokers never reveal their individual truckload profits, but few are going out of business, while many independent truckers and small companies are struggling to meet ends meet.
If this shutdown were to go on for any longer than one day, it may have a very negative trickle-down effect on shippers’ supply chain operations and processes.
“This is not a minor deal,” said David Schneider, Logistics Management Contributor and President of supply chain and transportation consultancy David K. Schneider & Company LLC. “When you consider any of the major truckload guys, 10-to-15 percent of them and maybe more use owner-operators. And then you have smaller 3PLs and brokerage operations that have contracted to provide services for bigger players, and almost half of their stable is going to be owner-operators.”
While it asked the White House to tap the Strategic Petroleum Reserve, the American Trucking Associations is not supporting the strike.
“We would not participate in or condone any strike,” said Clayton Boyce, ATA vice president of public affairs and press secretary. “It is hurting the wrong people and would not accomplish what they want to accomplish. We are taking a different tact in fighting the high price of diesel.”
While talk of the shutdown continues to gain momentum, it is not clear how many owner-operators will actually be participating, according to Norita Taylor, a spokesperson for the Owner-Operator Independent Drivers Association (OOIDA). Taylor told LM that percentages of those [OOIDA member drivers] participating or parking is not something that can be pinpointed since many members have indicated they do not intend to participate, adding that the OOIDA has no confirmed number of participants.
“What we’d like to see happen is for Congress to enact legislation mandating 100 percent pass through of fuel surcharges and transparency in those transactions,” said Taylor. “When prices on the stores shelves go up, it is not because of truckers. They are often not seeing these rises trickle down to them because of brokers or middlemen.”
While the owner-operators may be taking a stand with this shutdown, Eric Starks, president of FTR Associates, a transportation research firm, says its overall impact may be minimal.
Starks said it likely will be broad-based, noting that it may be comprised more of isolated incidents in certain pockets of the country, where owner-operators feel more compelled to do it.
“I have a hard time believing it will be widespread and spread beyond the owner-operators and even then it would be difficult for most of them due to the current situation…because most of them can’t afford to not drive and lose money.”

My Take: This protest is by independent trucker owner-operators and is scheduled for April 1st.

I read about this awhile ago, but I didn't believe the probability of owner-operators organizing a strike would be large enough for the general media to pick up on it. Due to their size and number, owner-operators don't have much bargaining power when negotiating contracts and price is really one of the few ways owner-operators can compete. And when you compete based solely on price, you can expect to get squeezed when times get tough.

Will keep you posted as this event unfolds on April 1st.

Sign of the Times - American Recession Makes its Way to China

From Businessweek:

China's Factory Blues
The days of ultra-cheap labor and little regulation are gone. As manufacturers' costs climb, export prices will follow.

Entrepreneur Tim Hsu first started making lamps more than 20 years ago in Taiwan. And like tens of thousands of other factory owners in Taiwan, Hong Kong, and Macau, he later moved operations to the Pearl River Delta region of Guangdong in South China, setting up his Shan Hsing Lighting in a sleepy hamlet of rice fields and duck farms called Dongguan. Since then the region has grown into the largest manufacturing base in the world for a host of industries, including electronics, shoes, toys, furniture, and lighting. The combination of low wages, minimal regulation, and a cheap currency was unbeatable. Hsu was so confident of Guangdong's future as the world's workshop that he spent $7 million on a much larger factory, which opened earlier this year.

Now many of China's manufacturers—including Shan Hsing—are undergoing the kind of restructuring that tore through America's heartland a generation ago. The U.S. housing market, which generated demand for everything from Chinese-made bedroom sets to bathroom fixtures, has plummeted. A new Chinese labor law that took effect on Jan. 1 has significantly raised costs in an already tight labor market. Soaring commodity and energy prices, as well as Beijing's cancellation of preferential policies for exporters, have hammered manufacturers. The appreciation of the Chinese currency has shrunk already razor-thin margins, pushed thousands of manufacturers to the edge of bankruptcy, and threatened China's role as the preeminent exporter of low-priced goods.

Hsu's new factory, it turns out, is running at just 60% of capacity, and he predicts that half of China's lighting factories—almost all based in Guangdong—will have to close their doors this year. "Shoe factories, clothing, toys, furniture, everyone is shutting down," he says. Hsu's not alone in his alarm. "We spent 20 years building up our industry from nothing to one of the biggest in the world," says Philip Cheng, chairman of Strategic Sports, which produces half the global supply of motorcycle, bicycle, and snowboarding helmets out of 17 plants in the Pearl River Delta. "Now we are dying." Cheng says he once earned 8% margins. His margins now? Almost zero.

Comprehensive statistics on shutdowns are hard to come by. But the Federation of Hong Kong Industries predicts that 10% of an estimated 60,000 to 70,000 Hong Kong-run factories in the Pearl River Delta will close this year. In the past 12 months, 150 factories making shoes or supplying shoemakers have closed in Dongguan, says the Asia Footwear Assn. More plants will disappear as demand slows: UBS (UBS) analyst Jonathan Anderson expects overall export growth of just 5% or less for China this year.

Chinese policymakers so far profess little concern. The closures are mainly hitting lower-value, labor-intensive exporters that pollute heavily and use energy inefficiently. Beijing now wants cleaner industries that produce higher-quality items for the local market, from cars and planes to biotech products and software. That emphasis not only helps boost domestic consumption—a key national goal—but also reduces frictions internationally from the ever-swelling trade surplus. "We are not abandoning the [exporters]," said Guangdong Governor Huang Huahua on Mar. 8. "[But] selling domestically is good for the country, good for the collective, and good for the people."

Still, the shift in the manufacturing base is likely to hit harder and be felt more widely than officials expect. So far, most shutdowns have been in Guangdong, but the pain is hardly limited to the region. When more than a hundred South Korean-owned factories closed over the Chinese New Year in the eastern province of Shandong, 1,200 miles from the Pearl River Delta, thousands of workers were left without jobs—and with unpaid wages.

My Take: Global markets are a tough business and if Chinese companies can't compete on price then they will have to make the switch to higher-end quality goods (easier said than done). This is the path Japan and Korea took in the 1960's through the 1980's.

As the American dollar continues to fall and American consumers cut back on everything as the recession takes its toll, China will have to find new markets for it's goods and will probably have to change the goods it produces and how it produces them.

American Trucking Association Predicts a 20% increase in fuel costs

From Logistics Management:

ARLINGTON, Va.—In a letter to President George W. Bush, American Trucking Associations President and CEO Bill Graves called on the White House to release oil from the Strategic Petroleum Reserve (SPR) in an effort to curtail the ongoing, historical run-up in crude oil prices which are hampering various sectors of the U.S. economy and the trucking industry.
This letter comes one week after the ATA projected a record high diesel fuel bill for 2008, stating that the trucking industry is on pace to spend $135 billion on fuel in 2008—based on current fuel price forecasts. The ATA also said this estimate represents a $22 billion increase over the $112.6 billion spent on fuel by the trucking industry in 2007.
And the impact rising fuel prices is having on trucking—and all other modes of freight transportation—is evident based on the Department of Energy saying yesterday that the average price per gallon for diesel fuel is now $3.989 per gallon, an increase of 1.5 cents from last week’s$3.974, and an overall increase of 70.9 cents in the last five weeks.
Along with diesel prices rapidly approaching, crude oil is consistently being priced at more than $100 per barrel, and this run-up has forced motor carriers to make fuel their top operating expense rather than labor, according to the ATA.
“As the price of oil skyrockets, it not only devastates truckers but their customers as well, many of which are mom-and-pop stores, and ultimately the consumer,” Graves said in his letter to the President. “We are very concerned that out-of-control energy prices will greatly magnify our current economic slowdown and delay our economic recovery….Please help not only the trucking industry, but the entire economy by trying to burst the bubble in the crude market by releasing oil from the Strategic Petroleum Reserve.”
Graves added that any policies the White House can implement to slowdown the spike in oil prices are needed. And he added that releasing oil from the SPR can be viewed as a major policy action. Crude oil inventories are not the problem, said Graves. But, he noted, “the oil market is no longer functioning on supply-and-demand fundamentals as many hedge funds drive up the price of crude based on based on speculation. We need something to break that chain, and a SPR release could do it.”
The current situation regarding the escalating oil and gas prices potentially may have a long-lasting and damaging effect on the trucking industry, according to Cliff Lynch, president of C.F. Lynch & Associates, a Memphis-based supply chain and logistics consultancy.
“For a long time we have lived with this [increasing oil and gas prices], but we really have not worried about it too much,” said Lynch in an interview. “It is not like it is just a few more cents per gallon we are talking about anymore. And it is getting to the point now where it is a serious drain on the motor carriers, especially the owner-operators with 200-to-300 gallon tanks to fill for $1,000 or more per truck.”
ATA Spokesman Clayton Boyce said that the current situation has been “very difficult” for many small trucking company owners, which has forced some to park their trucks and others to consider filing for bankruptcy.
“The smaller the company, the bigger the effect is generally what we are seeing,” said Boyce. “The smaller carriers tend to not be as effective is padding along the costs of the fuel to shippers.”
Lynch added that in time this situation may lead to a capacity shortage, because many carriers are not going to be able to afford these prices to remain on the road. And he said that standard fuel surcharge programs were never configured to deal with what carriers and shippers are facing now with the current run-up.
“Everyone thought they would see an increase of a few cents per gallon…now we are seeing a constant run-up with a [fuel surcharge] time lag on it, and it is a nightmare,” said Lynch. “We are past the point where something needs to be done. I am not a big fan of government intervention, but there is a time when somebody has to do something and the government is the only power in position to do it.”

My Take: Fuel costs are rising for a number of reasons: strong global demand, a falling dollar, and speculation. This last one is what I believe has been driving up fuel costs to ridiculous levels and here is an excellent piece explaining the run up in commodity prices due to recent Fed actions.

Some economic principals:
When the Fed lowers the interest rate, also known as an expansionary monetary policy, it is basically creating more money a.k.a. inflation. This is why the dollar is lower when compared with other currencies, there are more dollars in circulation now and it buys less (good for exports, bad for imports). When people are afraid, as the current financial crisis has most people worried, and when inflation is present people will turn to real goods, such as gold and oil (and real estate typically, although this period is definitely an exception).

When large amounts of people start buying gold, oil and other commodities, the price of these commodities is bid up. As people pulled their money out of real estate and the stock market (and treasury bills with low yields) a good number of these people put that money into purchasing gold, oil and other commodities (or promises to buy or sell gold, oil and other commodities).

The Fed in dealing with the housing bubble bursting has inadvertently created another bubble, a commodities bubble, which has led to an instability (wild ups and downs) in prices for commodities.

These prices will be passed onto the consumer in the form of higher prices and if the fuel in the Strategic Fuel Reserve was released to the public at current market prices (700 million barrels @ $100 a barrel), that would disrupt oil speculation and help to mop up some of those excess dollars.

Sign of the Times - FedEx Blames Economy, Pricey Fuel as Profits Dip

Industrial warehouses in the Inland Empire depend on international trade and commerce. Shippers from around the world store their goods here because of our strategic location in Southern California.

If trade decreases because of higher fuel costs, distributors here will be squeezed since they are moving and storing fewer products.

Which is why news like this is of a major concern to people like me:

FedEx saw its profits dip last quarter. The overnight shipping company warns that the year ahead may be more of the same as it feels the pinch of an economic slowdown and high gasoline prices.

Pulse of the Ports Peak Season Forecast Conference - Summary

Today I attended the "Pulse of the Ports" conference, hosted by the port of Long Beach. This is an annual event to discuss important matters that affect the health of the port and the logistics industry. The Inland Empire is basically an inland port for container traffic from Asia and events that impact the port play a pivotal role in the economic development of the region.

The panel discussion is as follows and is modeled after typical goods movement from production to consumption:

Mario Cordero - Board President, Port of Long Beach
Paul Bingham - Principal of Global Insight
Charles Woo - CEO of Megatoys, a manufacturer of toys and retail goods
Brian Black - Senior Vice President of Trade Management and Service Groups, Hyundai Merchant Marine
Doug Tilden - CEO of Ports Americas Group
Mike Mitre - President of ILWU Local 13
John Kaiser - Vice President & General Manager of Intermodal Marketing at Union Pacific
Vic La Rosa - President of Total Transportation Services

Mario Cordero started off the event by saying that the Port of Long Beach grew by only 0.3% over the prior year; the 2nd weakest year in the past 20 years. He cited a number of concerns, concerns that would later be echoed by every single speaker at the conference.

1. Labor - Contract negotiations of the ILWA and the PMA (Pacific Maritime Association)
   


2. Infrastructure - Efficiency and productivity of the port, using bond money or cargo fees to raise revenue.
   


3. Environmental - Impacts of the 2005 Green Port Policy
   

Paul Bingham of Global Insight predicts that growth in 2008 will be slower than 2007 but that a recession will likely be limited to the United States; Asia and the Middle East will only be slightly affected by US conditions. Imports decline started in mid 2007 and should rebound by mid 2008 or later when the economy improves, expect a 5% import growth in 2010. Decreases in imports and increases in exports have balanced trade a bit, making empty containers a little harder to obtain. No congestion is expected for the next 6 months due to weak import demand but the TWIC (Transportation Workers Identification Credential) and the ILWU renegotiation are events to watch.
On the supply side most of the new ship capacity added in 2008 are of the Post-Panamax variety and a lot of these larger ships can carry over 7,500 TEU's. Unfortunately, many of these ships are not on the transpacific route (Asia to US), many are designed to move trade between Asia and Europe. Vessel operators are employing mores ships but are moving them at slower speeds due to higher fuel costs. Higher fuel charges due to rising demand and the falling dollar will lead shippers to pass the cost onto consumers in the form of fuel surcharges. Last year fires in Southern California disrupted rail lines but a similar event seems unlikely this year.

Charles Woo of Megatoys manufactures toys and retail products in China. He is the co-founder of the toy district here in Los Angeles. Hong Kong used to be the toy capital of the world in the 1970's. The first generation of manufactures in China moved from Hong Kong to the mainland in the 1980's. The second generation of manufactures in the 1990's started in China and begun their own operations. This led to overproduction and over the last 20 years the price of goods has decreased every year as competition forced manufactures to reduce their costs to remain competitive. Woo has seen the price reduction become less and less every year and was expecting that prices would be flat over the previous year but his costs have actually increased 20%. A big part of the problem is that when he negotiated the contracts last year the exchange rate was 7.5, and he was factored in an exchange rate of 7.3 for 2008, but when he signed the deal it was at 6.7. This problem has never happened before and the problem is two-fold: raw material costs are rising by 10% or more and the currency fluctuation is making it harder to forecast costs. He said that when things get really tight, shipping plays a bigger part because at some point it doesn't make sense to ship things anymore and that the fate of the Chinese exporter and the steam-ship companies are inversed, when things are bad for shippers it is good for manufactures and vice versa. He said things were really bad for shippers now, so at least the manufacturers have a little foothold in prices. The retail industry has changed; there are only a handful of companies (Wal-Mart and other super retailers) that buy goods whereas in the past there was more flexibility and that he has had to focus on year round merchandise such as Halloween and Easter.
Charles also said that regulation and product safety are playing a bigger role and that the government is starting to screen the goods at the Chinese docks rather than on the American side, making it a Chinese liability and not an American one. This means that not everyone can make goods anymore and some of the manufacturing overcapacity will decrease.

Brian Black of Hyundai Merchant Marine said that prospects for carriers looks pretty challenging. Fuel costs, especially the price of oil, are adding to the shippers problems. In 2006, a metric ton of fuel cost $306. In 2007 a metric ton costs $500. 5 years ago a barrel of oil sold for $29 and now the market places it at $106. In fact, 60% of the costs shippers have are fuel costs and consumers are facing fuel surcharges from shippers, fuel surcharges from the railroads and fuel surcharges from truckers, a triple dip as everyone passes on their costs. Container growth in the United States is estimated to be 3 - 5% for the year, which is below the 8% average per year that existed for the last 10 years. Container growth is expected to increase in developing countries at a much faster rate than in the US.
Container traffic is starting to shift to the East Coast as shippers try to spread their risk around. Shippers are looking at alternative locations and ways to move their assets based on growth. Agricultural products make up a lot of US exports, which are difficult to ship since they don't go well into containers. Shippers want faster throughput, the speed at which containers can be re-used again, since the faster the turnaround on containers the fewer containers they have to lease.
On June 1st trucks are going to have to be registered, costing $250 to initially register a truck and $100 a year afterwords. In October, a $35/ TEU fee will be imposed. Older trucks will be banned and all these fees may increase drayage costs by 80 - 200%.
For the Olympics in Beijing, factories will be closing 30 to 60 days in advance and shippers are not sure if there will be a surge in volume prior to this event or if manufacturing will be outsourced to other locations. Shippers are wary of people using their containers to warehouse their goods during this time period since containers will still be at a premium with such uncertainty.

Doug Tilden of Port Americas Group said that there is an imbalance brewing in port development. Ports in China are being built at an incredibly fast pace and are very efficient but there is no growth in ports on the American side and productivity remains stagnant. The APM (A.P. Moller - Mersk) terminals in Portsmouth, VA are a promising sign but are no match for the infrastructure commitment of the Rotterdam APM .
The recession should ease tension at the ports but the bounce-back will hurt as the US recovers and the port goes back into overdrive.
LA/ Long Beach is still the gateway for Asian goods; higher fuel costs are actually a boon for California since fuel costs make it a lot more expensive to move things through the Panama Canal and into East Coast ports.

Mike Mitrre of the ILWU says his workers have a wealth of experience and do not want to chase work away. The upcomming negotiations for the ILWU started 5 months before the contract is due to expire, an event that has never happened before. It took drastic efforts to get the union to agree to meet early and such an early meeting signals the unions commitment to smooth and orderly negotiations.

John Kaiser of Union Pacific, the largest railroad in the United States, said that 2006 was a record year for moving units, due in a large part for freight moving out of the country. For the West Coast, train movement was flat from 2006 to 2007.

Union Pacific is increasing the capacity of it's Sunset Route (California to Texas) which will double the capacity for trains to travel from El Paso to LA. Union Pacific plans to spend 3.1 billion this year in infrastructure improvements because they see a bounceback after the US recession ends. Union Pacific also plans on installing another track through Pomona into the city of Industry and by 2011 they expect the new rail to be able to handle 110 trains a day (up from 70 trains a day that it is currently running).

Union Pacific also plans on creating logistics hubs around significant rail spots (Salt Lake City, Chicago, Houston, Inland Empire) meaning that they want to control the industrial land as well as the tracks.

These are bad times for the railroads: Furniture from Asia is down, vehicle sales are down 2 million from the previous year and no new coal plants mean that they will be shipping less coal.

The good news is that exports of grain are up (which have a hard time being transported by trucks since they don't fit well into containers) and chemical production in Texas is up.

Vic La Rosa from Total Transportation Services says that a slowing economy and rising fuel prices mean that truck carriers are reducing their fleet size. In addition, cargo is being diverted to the East Coast. Wal-Mart used to have 50% of its warehousing operations in California and have reduced that number to 10%, others are following suit. Things are too expensive in California.

The ports are demanding the following concessions from the trucking companies: a $250 a truck registration fee, RFID tags in the trucks, TWIC standards for employees, a truck ban on all trucks made before 1989, a $160/ FEU fee in addition to the pier pass cargo fees.

Punta Colonet in Mexico and Prince Rupert in Canada are serious threats to ports in California.

Vic is a member of the Coalition for Responsible Transportation (CRT) a topic I talked about in a previous post.

Texas Takes Lead As Nations Top Exporter

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Texas! Only steers and American exports come from Texas, Private Cowboy.

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From LAEDC :

Texas Takes Lead as Nation’s Top Exporter

The national export figures released on Friday by the Bureau of Economic Analysis (BEA) revealed a change in the top exporter. For the first time since the U.S. Principal Parties of Interest (USPPI) series has been in circulation (January 2006) California did NOT lead the nation in total exports. Instead, Texas ($11.688 billion) claimed that honor exporting $3.5 million more than California ($11.684 billion). California exports continued to grow, as year-over-year comparisons revealed an increase of +5.0%. Texas’ total exports increased by +13.5% during that same time. This reflects the national trend as total U.S. exports increased by +15.8% since January 2007. Texas was able to overtake California as top exporter by exporting significantly more manufactured goods. California ($8.2 billion) exported -7.8% fewer manufactured goods compared to a year earlier, while Texas ($9.7 billion) saw a +3.0% increase. Using the BEA’s Origin of Movement (OM) series, Texas again led the nation in January with $15.2 billion in total exports, a year-over-year increase of +14.5%. During that same period, California saw its total exports increase by 6.0% to $11.0 billion. The difference again came in the export of manufactured goods as Texas exported $4.6 billion more than California. California’s export of manufactured goods increased by +2.4% year-over-year to $7.8 billion, while Texas exploded over that same period with a +15.7% increase to $12.5 billion. Nationally, U.S. exports of manufactured goods decreased by -2.6%, while total exports decreased by -2.4%.
State export data by commodity are not available by USSPI. However, commodity data is available for OM state export figures. Both California and Texas exports benefited from high world prices for agricultural and energy-related products. Dairy and oil products reported the biggest year-over-year growth for California OM exports (increasing by +208.4% and +182.5% respectively), while aircraft had the largest negative impact (with a -25.3% decrease). Cereals, oil products, and optical & medical equipment contributed the most to the year-over-year growth in Texas OM exports (rising by +95.5%, +66.6%, and +42.3% respectively).The USPPI measure allocates export trade value according to the location of companies having the greatest economic interest in an international transaction, while OM measures trade values at the point where international shipments begin, often at consolidation points near border crossings or other ports of exit. With its long border with Mexico, Texas is home to numerous international border crossings and warehousing facilities, as well as major rail links between the United States and Mexico. Industry observers believe that many shipments originating in other states (including California) are credited with Texas exports to Mexico under the OM state export series. (April Lisonbee & Eduardo J. Martinez)

My Take:

Imports are a key source of growth for the Inland Empire and the Ports of Los Angeles / Long Beach is the entry point for imported Asian goods. Unfortunately, now is not a particularly attractive time to import goods into the United States.

The dollar is at a low point, it doesn't buy as much as it used to. This is good for exporters and bad for importers.

The economy isn't as strong as it used to be. As consumers cut back on their purchases it is likely to have a negative impact on importers.

For these reasons we can expect to see less activity at the ports and that will invariably have a trickle down effect for industrial space in the Inland Empire.

High Desert Economic Summit and the High Desert Corridor - Summary

Hello,

Yesterday I attended the 9th Annual Red Cross High Desert Leaders Economic Summit, which is an annual meeting to discuss issues relevant to the High Desert region of the Inland Empire. The High Desert includes Victorville, Hesperia, Adelanto, Apple Valley, & Barstow.

Here is a list of my notes from the meeting:

Brad Mitzelfelt, the San Bernardino County Supervisor, gave some interesting statistics for San Bernardino County:

• San Bernardino has a population of around 2 million, slightly less than Riverside County.
• Significant new developments include the SCLA (Southern California Logistics Airport, 8,500 acre master planned industrial park in Victorville being put together by Stirling Capital Investments) and the Apple Valley Airport.
• Foreclosures in San Bernardino are the 3rd highest in the state.
• The film and motion picture industry contributes $37 Million to the San Bernardino County economy.
• Still trying to get funds for the High Desert Corridor

The High Desert Corridor was the most significant local issue that was addressed at the conference since it directly impacts industrial development and traffic congestion, two of the largest issues facing the high desert region.

Below is a video that was put together by a group of citizens to raise awareness of the project. It is 7 minutes long; The production is pretty sharp and is a good primer to the development issues and implications of the transit corridor.

Larry Sharp from Arrowhead Credit Union gave a presentation from a local finance perspective. I learned that real estate loans typically follow the 10 year bond + 1.75%. The Fed Funds Rate, which is the tool the Federal Reserve uses to control the economy, isn't related to the 10 year bond. So it looks like we may be in for some tough times yet.

The Economic Stimulus bill doesn't hold much promise for consumers, but there are some interesting things in there for businesses; 50% depreciation in the first year (including leases).

Residential real estate remains a blight, and with a 37% decrease in home sales in Riverside County and a 53% drop in San Bernardino County, lenders are worried about sites such as http://www.youwalkaway.com/.

Adelanto, Apple Valley, Barstow, Hesperia and Victorville, talked about some recent developments in their communities, notably retail developments and large master planned industrial parks. Hesperia is offering some pretty darn good incentives to get development.

The Mojave Water Agency basically said that everything is ok. The High Desert gets 100% of its water from ground sources. The Delta Canal Study had some troubling implications, but it is good to have a strong agency willing to work with the local governments. California doesn't have enough water, but the High Desert will be fine, due to how the resources are currently allotted but cities like Long Beach are going to run into trouble.

Larry Kosmont, from the Kosmont Companies, gave a presentation on the attractiveness of doing business in the High Desert. Awhile ago I created a map showing the Kosmont rating of various cities.

Steve Johnson from Metrostudy, gave a detailed presentation on the housing market in the High Desert.

John Husing closed the event with his summation of current market conditions and a rather hopeful view of the future. I was honored to finally meet Dr. Husing in person.

I could go into greater detail, but presentation slides will be made available soon and I will link to it when that happens.

Sovereign Wealth Funds - Next Big Thing?

From Marketwatch.com

Sovereign funds eye Japanese REITs - report
By MarketWatch

SAN FRANCISCO (MarketWatch) -- Despite a general decline in large real estate deals due to the ongoing subprime loan crisis, sovereign wealth funds such as Government of Singapore Investment Corp., or GIC, have been stepping up investments in the Japanese market, according to a report in the Friday edition of the Nikkei Business Daily.
Large recent deals include Morgan Stanley's (MS:) sale for 77 billion yen ($750 million) of The Westin Tokyo to GIC, the Nikkei reported. Sovereign funds like GIC are government-controlled, and have stirred some controversy as they've invested in politically sensitive industries abroad. See related story.
But investments by sovereign funds in Japanese real estate have helped prop up real estate transactions in there, as they snap up properties and invest in the real estate investment trust market, the Nikkei reported.
GIC, which has over $200 billion in assets, has also acquired the Hawks Town commercial facilities in Fukuoka, and holds a 5% stake in Japan Prime Realty Investment Corp. (JP:8955: news, chart, profile) , an REIT affiliated with estate developer Tokyo Tatemono Corp (JP:8804: news, chart, profile) , the Nikkei reported.
Other sovereign funds boosting their presence in the Japanese real estate market are based in Dubai and other Middle Eastern countries, the Nikkei reported, citing unnamed sources.
The total market value of Japanese REITs on the Tokyo Exchange fell sharply in the second half of last year, the Nikkei reported, drawing the interest of sovereign funds.
In addition, the Nikkei reported that the Japanese market boasts a large amount of high-quality real estate that is generally under-priced compared to foreign equivalents

My Thoughts: The dollar is at a 13 year low in relation to other currencies. The Federal Reserve Bank of Atlanta keeps track of such things, and the chart below is from their website and shows a trade weighted basket of currencies against the dollar. Not a good time to go overseas on vacation or to buy foreign exports, since a weak dollar means you will be paying more for the same service.

I mentioned earlier why this was happening, and this is just another example of the effects.

If history is to be any guide as to what property types would benefit most from cash loaded foreigners, we only need to look at history. ( *cough* Japan). Over-valued trophy properties are likely candidates and industrial warehouse / distribution centers are not. (Unless you are a cash rich company with a legitimate business interest here in the United States).

But, we have seen what happens to foreigners who have a legitimate business interest and it doesn't set a very good example for future industrial purchases. (*cough* Dubai).

Real Interest Rates Are Now Negative

From the man who wrote some of my economics textbooks, Greg Mankiw.
http://gregmankiw.blogspot.com/2008/03/real-interest-rates-are-now-negative.html

From his Blog:
Click on the graph to enlarge and see better an unusual phenomenon: inflation-adjusted interest rates below zero.Nothing in economic theory precludes negative real interest rates, or even suggests they should be anomalous. Nominal interest rates cannot be negative, because people would just hold cash instead of bonds, but real interest rates can be negative. If real interest rates were very negative, investors could start investing in inventories of goods, but this arbitrage is not easy. Storing goods is costly, and many things in the CPI basket, such as services, are not storable at all.In standard models of asset pricing, negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high. Low growth expectations encourage households to save, which drives down equilibrium rates of return. High uncertainty drives up risk premiums, which in turn drives down the return on safe assets, perhaps below zero. Both forces seem to be working now.

My thoughts:

What Mankiw is demonstrating can be seen in the huge run up in commodities (especially gold and oil) that we have seen in the last year or so. It also explains why the interest rate on my ING account (4.5% when I started a year ago) has now dipped below the “official” inflation rate. Thus I am being penalized for saving money, so I might as well spend it before it becomes useless or invest it in a riskier asset. (Which is exactly what I did when I purchased those Bank of America shares).

Usually in times of a falling dollar (also known as inflation), which is what has been going on for the last 2-3 years, real assets, such as gold and real estate, become particularly attractive, since, being real assets they cannot be touched by inflation.

However, real estate is usually purchased with borrowed money, and in periods of high inflation, you will also see higher interest rates, as investors respond to the real interest rate (adjusted for inflation) and not the nominal interest rate (the one quoted in the paper) in a process known to economists as the Fischer Effect. Perceptions of risk also influence banks and their likelihood of lending money. In an earlier post, I pointed out that the perception of risk is particularly bad right now.

Thus, banks will seek higher rates of return to counteract the effects of inflation (and to also factor in the probability of default), and less money will be lent to pursue entrepreneurial ventures (buying, selling and building buildings). Less money being lent to purchase buildings ( a decrease in the supply of loan able funds) has the effect of reducing the number of potential buyers, (since the price of borrowing money has gone up, only those companies or firms that can expect the higher rates of return needed to counteract the higher interest rates will be funded), which has the effect of lowering sales prices (since sellers are competing against fewer buyers).

Lower real estate prices (a real asset) can be expected (because of the run up in the cost of borrowing) at the same time that inflation is creeping upwards (real assets should increase in value) leads to two contradictory forces: real estate prices should be rising and falling.

The Feds actions are intended to get banks to issue more loans (since the cost of the banks borrowing money from the Fed has been reduced) and it looks like a different mechanism will be needed to get the end result.

If you have seen me in the last year or so, I have been vehemently opposed to the Fed cutting interest rates, as I see inflation as a greater evil than that of economic contraction. A negative real interest rate is the consequence of such cuts a.k.a expansionary monetary policy.

The upcoming expansionary fiscal policy (the “stimulus-package”) should further compound our folly and fuel inflation, inching me that much closer to moving all of my assets out of American dollars.