Biggest New Port in the World Will Be In...?

Not the US. Not even China.

Wait for it.

Brazil.

Wait, what? Brazil? Why?

China is expected to overtake Japan as the world's second largest economy this year and may already be the world's greatest energy consumer. Now it is set to become Brazil's top foreign investor, with its companies plowing $20bn into the country in the first six months of 2010, compared with $83m in 2009. A recent study by Deloitte predicted that Chinese investments in Brazil could hit an average of about $40bn a year between now and 2014, with companies throwing money at sectors ranging from telecommunications, infrastructure and farming, to oil, biofuels, natural gas, mining and steel manufacturing.

China will need raw materials, and Brazil is eager to export those same materials. So the expansion of the Panama Canal will lead to increased trade between China and Brazil, something I did not think about.

Ghost Cities of China

If this is real, it is both amazing and rather depressing.

These are satellite images of huge developments in China. Developments in the middle of nowhere, meant to house people that don't live there and parking lots for businesses that don't exit.

How do you know there is no economic activity? No cars, empty roads, no trucks bringing goods to stores, no smoke from the factories, no trash in the streets, no children in the schools.

We saw this kind of thing in Soviet Russia, where towns were built not because of economic necessity, but because of central planning. The result was that after the fall of the Soviet Union, these towns were abandoned as people left to pursue a life elsewhere. Will the same fate fall on China or are they just setting the stage for massive future growth?

Time will tell, but the market will direct economic activity better than any city planner or government bureaucrat.

Panama Canal Reopens

From CNN:

The Panama Canal reopened Thursday after heavy rains and flooding prompted its closing for only the third time in its storied 96-year history.

Officials closed the canal around noon Wednesday after heavy rain in the Chagres River area, caused water behind the Gatun Dam -- which creates Lake Gatun, a significant part of the canal -- to rise.

The canal was reopened 17 hours later.

The last time the canal closed was in 1989, after the United States invaded Panama to topple strongman Manuel Noriega.

Landslides forced the canal to close for several months from late 1915 to mid-1916, just months after it opened.

The 48-mile canal is a key conduit for shipping between the Pacific and Atlantic oceans. The canal was built from 1904 to 1914 by the United States, which had sole control over the channel across the Panamanian isthmus until 1979. Then, after 20 years of joint U.S.-Panama control, the Panamanian government assumed administration on December 31, 1999.

3 times in only 96 years? What a hard working canal! These heavy rains would be very infrequent, only once in a hundred years or so. But you have to wonder if they would become more common in the future.

If it wasn't funny, it might be scary

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Jack Kyser Dies

RIP: Economists never die, they just lose their equilibrium.

Jack Kyser, the longtime “guru” of the Los Angeles economy, died over the weekend after a long illness. He was 76.

For 25 years as chief economist with the Los Angeles County Economic Development Corp., Kyser was the go-to person for the media, business leaders and elected officials who needed information and analysis of the local economy.

200 Countries over 200 years in 4 minutes

Beige Book

Just released from the Federal Reserve.

Some highlights from the 12th District (the entire West Coast).

1. Wages and prices are down. This means that inflation is not an issue. Some exceptions were raw goods such as aluminium and some materials sourced from China, namely apparel.

2.Retail trade for this holiday season will be better than last year by 3-7 percent.

3. Manufacturing demand was up for aircraft and metal fabrication, down for wood products.

4. Agriculture and raw goods extraction demand were up due to the low dollar and strong export demand for corn and livestock.

5. Real estate and construction were down.

6. Financial institutions were down due to consumers continuing to deleverage and the struggling credit quality of some banks.

Overall, this is what the recovery will look like.

If you want to get really depressed, look at the 11th District, where high cotton prices, beef prices and energy prices look more like a "real" recovery.

Why it is hard to start a small business

This pretty much sums it up.

Hotel built in 6 days

Only in China. Of coarse. I am thinking of all the limitations that would prohibit this same feat from occurring in the US. Labor cost would be a major one, as well as the ability to work 24 hours a day. Or meeting all the various construction codes, this would be especially important in terms of what you could and couldn't construct something with. You can't even get an LA building inspector out to the job site in less than 3 days for a preliminary inspection, and then it would be 3 more for a final inspection. Even a single story large concrete box takes 6-8 months out here.

One step I felt was missing, I didn't see them lay the foundation, just drying the concrete would take a day at least.

Data Visualisation

This is a pretty fun presentation, I liked the peak break-up times.

LA to Annex Vernon?

Worst. Idea. Ever.

From LA times:

Los Angeles City Councilwoman Janice Hahn on Wednesday introduced a motion calling for Los Angeles to annex Vernon, the small industrial city that has come under fire for the salaries and benefits paid to its top officials.

Hahn is the latest in a growing group of city and state officials pressing for drastic action in Vernon. Her motion was referred to the city's Planning and Land Use Management Committee and will be voted on in the next weeks, her chief of staff said.

Here is the story behind Vernon. It is a dictatorship. It may be a corrupt little fiefdom in the middle of Los Angeles. But it is a business friendly fiefdom, it is a wonderful industrial playground where the bureaucracy, the politics and basically all the BS associated with the anti-business practices of Los Angeles are avoided.

If LA annexes Vernon, I can almost guarantee it will kill businesses that operate there. They will move to Commerce, Irwindale, Industry or the Inland Empire because doing business in LA COSTS MONEY relative to these other options.

Kosmont does an analysis that compares the cost of doing business in various cities.

Here is what the rating of LA is: $$$$$ - 5 dollar signs, the highest possible rating of cities to avoid.

Here is some of what it costs to do business in LA:
Utility Tax Rates: Electric: 10%, Telephone: 5%, Cellular: 5%, Gas: 10%, Water: 0%, Cable: 5%

Development impact fees, public facilities fees, traffic impact/ trip fees, art in public places fee.

For wholesale sales, for every $100 in receipts you need to pay $1.09

Now compare that to Vernon:

Kosmont has a rating of $$, which is among the lowest in Southern California.
Utility Tax Rates: Electric: 0%, Telephone: 0%, Cellular: 0%, Gas: 0%, Water: 0%, Cable: 0%

There are no misc fees, unlike in Los Angeles.

For wholesale sales, for every $100 in receipts, you need to pay $0.06

The City of Vernon has its own light and power department, which basically subsidizes heavy power users.

No contest,

If LA were to annex Vernon, the only jobs it would create would be government jobs. Existing businesses would most likely relocate to other areas because the taxes and regulation of doing business in LA is outrageous.

I really wouldn't have such a strong opinion, except that I am trying to start a business in LA and I know first-hand the costs of such fees and red tape.

Truck MPG

The Obama administration is looking to make the nations trucks more efficient, requiring a 20 percent cut in emissions in model 2018 trucks. (Source: Bloomberg)

The work trucks covered by the proposal make up 4 percent of U.S. vehicles while
accounting for 20 percent of the oil consumed, according to the Union of
Concerned Scientists, a Cambridge, Massachusetts-based environmental group.
Long-haul tractor-trailers get about 6.5 mpg, the group said

MGP measure how FAR a truck can go on a gallon of gas, but a much better metric is how many ton-miles (or how MUCH) a gallon of gas will produce.

This study has the following:

Trucks: 250 Ton Miles
Rail: 437 Ton Miles
Barge: (local waterways) 545 Ton Miles
Ocean Cargo: 574 - 1050 Ton Miles (depending on the size of the ship).

Since trucks account for about 70% of all cargo shipment volume, minor increases to the ton-miles of trucks will greatly reduce oil consumption and CO2 gasses.

City Planning As Masturbation

There was a conference here downtown this past week entitled "Downtown 2020: Continuing the Renaissance" where planners views of Downtown L.A. 10 years in the future, with more housing, more jobs, improved infrastructure etc.

I am staring out my window at 2 completed EMPTY skyscrapers that were meant for luxury condo's, so I am not sure that more housing is really the problem. I am not really sure who they were expecting to live there but I would wager the price point would be out of reach of the average family. That and I would bet that their marketing was geared towards "Young Urban Professionals (without children)" or "Empty Nesters".

Panelist Christine Essel, CEO of the Community Redevelopment Agency of L.A.,discussed the need for more housing. “We would like to see another 5,000 units come online in this decade,” she said. “It is important for families to live downtown and not feel like they need to move out.” In order to accomplish that, she pointed to things like infrastructure and transportation needing some upgrades, in addition to bringing in an elementary school.

Well, have I got a broker for you to talk to about bringing more schools downtown.

Both Michael LoGrande, director of planning for the City of L.A., as well as Bill Witte, president of Related California, pointed out that connecting the different neighborhoods that have grown organically into one neighborhood is an important step. “I think there is potential for L.A. to break down the barriers that separate it, and blend it with the rest of the city,” said Witte.

What bothers me is that these people know what is best for everyone. Why not mix K-Town and MacArthur Park, why wouldn't these two groups of people love living together? Why not destroy the culture that makes these regions unique into one giant MonoCulture? They "grew organically" that way, and you think, Mr. City Planner, that you know better than the 1000's of people whose individual choices created the world the way it is?

However, a weakness in the transit system, according to Leahy, are the visuals such as dead landscaping, potholes and debris that transit riders see on their way into L.A. “If you come into L.A. on a bus or train on a freeway, you would not be impressed,” he said. “You need to look at this place through the eyes of a visitor and enhance the beauty of the wonderful things that are happening here
in L.A.”

Really? I think the weakness of the transit system is that it take 40 freaking minutes to get anywhere, the bus drives so slow and erratically that you are in many cases better off driving or even walking, plus you get to sit next to smelly homeless people and many times it is more expensive than actually driving? And you are worried about dead landscaping? Way to deflect criticism there.

Downtown remains the city’s economic engine, said Carol Schatz, president and CEO of CCA. “The current renaissance has transformed Downtown Los Angeles from a nine-to-five business center to a residential, cultural and entertainment destination, bringing 27,000 new residents, 93,500 new jobs, $180 million in tax revenues to the city and county and $10.9 billion in business revenues,” she said. She added that “It is critical to Los Angeles' economic future that this renaissance continue.”

Downtown as the "Economic Engine of LA?" Have you ever even seen the Port of Los Angeles, which is responsible for 1 in every 7 jobs here in LA? But hey, at least they are trying, right? So why not hold a self-congratulatory conference to talk about what a great job they have been doing?

Africe is really big

Here is an interesting graphic that overlays some of the largest countries with Africa. I had no idea that you could fit all of China, the United States, India AND ALL OF EUROPE into Africa.

One Hot Listing

So one of our retail brokers buildings made the news last night. In a bad way, it caught fire. I am sure things like this happen all the time, but it really sucks when it happens to someone you know.





Well, you know what they say, there is no bad publicity. And I am sure the landlord will probably come down on his asking price a bit, otherwise this deal may end up in smoke.

We are not talking fire-sale prices here, but this property is priced to move ... everyone in a two block radius.

Ok, enough for now.

FIFA in LA?

Looks like LA is in the works for the World Cup in 2018 or the 2022 games.

Possible sites would be the City of Industry.

That would be one big economic impact for the region.

MGA Entertainment Sued Again!

MGA Entertainment - the maker of the Bratz! dolls, and who has a 700K SF warehouse in Redlands, is being sued by a toy maker in Texas. Here is the article.





Here are the Legand of Nara bugs that MGA makes:








And here is the Hexbug made by the company in Texas:

On the surface, these two things do not appear all that much alike. But I would wager that the suppliers for these two toys are probably the same people. And the companies shipping the toys are likely the the same people. When your entire supply chain is outsourced all that remains is product development and marketing.

I would wager that in other areas of the world, your intellectual property rights are not as enforceable and any kind of leak can occur anywhere along the supply chain.

I have often wondered about this phenomenon in movies, why very similar movies are released by different major motion picture companies at the same time.

Think of the movie AntZ and A Bugs Life. Why are the odds of similar movies being released independently by two companies? Chances are that the people that work at these companies talk to each other and they get sold on the same idea. There are informal channels of communication and good ideas tend to get copied.

Oktoberfest Inflation

Thought this was an interesting graph: The price of a basket of goods (at Oktoberfest) Vs. the official inflation rate of Germany.

It could be that since the demand for Oktoberfest has steadily increased, so too have the prices.

Federal Reserve Comics

Found these pretty interesting. The New York Fed's way of relating to kids these days.

Alameda Corridor Problems

From the LA Times:

In 2007, the corridor collected $96 million in revenue to cover debt payments. In 2009, its revenue fell to $76 million. Through June, revenue had climbed 10% above the same period a year earlier but was still running 15% below what the corridor earned in 2007. And the surplus amassed during better years is running out.

The corridor authority's payments on debt principal and interest will jump to $117.1 million in 2012 from $102.5 million the year before. The tab keeps rising so that in 2033 the corridor will need to handle twice the cargo it received in 2009 to make $198.6 million in debt payments — an unlikely prospect.

Hopefully, the 50 billion transportation bill would help pay down the debt on this debacle.

The infrastructure plan will help the economy in long run by making it easier to transport goods, Obama said, while creating construction jobs in the near term. It calls for ambitious six-year goals, building or repairing 150,000 miles of roads, 4,000 miles of rail lines, and 150 miles of airplane runways.

The human side of employment stats

August unemployment numbers have already been released, a mere 3 days after the month ended. How they can come to the conclusion that 67,000 jobs were created in a mere half week is beyond me, and I put the odds of some kind of revision at 100%. Anyone familiar with government agencies will know that they do not work this fast, even under the whip.

Private sector jobs increased 67,000, while government sector jobs decreased by 114,000, mostly census workers. So the overall unemployment rate increased to 9.6 percent.

The WSJ has an interesting graphic that shows unemployment by both for the US in a cool thermo-graphic. You can see that our recession ranks right up there with the early 1980's recession.

I thought this was interesting from the article:

The 9.6% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force.

The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

The disparity in the rates in August was largely driven by an increase in the number of part-time workers who would prefer full-time work. That can be a worrisome indication that the jobs being created in the recovery aren’t the same quality as pre-recession positions.

Now, what about those people looking for work?

The Pew Research Center recently had a report with fascinating results about who is looking for work.

Of the 139 million workers in the US right now, 25% were unemployed in the last 3 years. That means that one in four people lost their job, had new jobs not been created, the unemployment rate would have been 25 percent.

Recently unemployed people are less satisfied with their current job, they tend to see themselves as overqualified, and they do not stay in their new jobs long.

8 in 10 re-employed workers are happy with their new jobs, while 9 in 10 people who never lost their job are happy with their job.

4 in 10 re-employed workers say their new job is better than their old one. 1 in 4 re-employed people went from full time to part time and 55 percent of re-employed people say they are worse off than before the recession (are the rest not paying attention?) and 1 in 3 say their lives are changed forever.

In my own experience we are highering for an entry level position. There were a good number of well-overqualified people who I would not hire. I am doing them a favor by not wasting their time and saving their dignity.

There were a good number of people who listed their present employer as a job reference even though they have only been there for 1-3 months. Why even list this as a reference?

Obviously they feel they could do better, otherwise they would have stopped looking for employment. They took their present job rather reluctantly and why would my low wage entry job be any different?

Looking for a job was one of the most unpleasant experiences of my life; at no other time did I feel that I had no control, that my worth was constantly being judged, and that the stakes for failure were high.

And then I got this job. Because I knew someone who knew someone. Which is how I assume most people find most jobs. I know it is going to factor into who we hire here. Relationships matter more than resumes.

Three Down Seven to Go

Rather depressing study finds that what goes up, must come down.

During the booms leading up to crises, it gets easier and easier for people to borrow money — to take on more leverage, in financial speak. Then the crisis hits, it gets harder to borrow, and everybody starts trying to pay back their debts. This is called de-leveraging, and it's what we're living through now.

The period of de-leveraging typically lasts as long as the credit boom that preceded it. The Reinharts suggest that the recent credit boom lasted for about a decade, and ended in 2007

Well, the goods news is that there will be an end. The bad news is that seven years seems like a really long time. Nobody wants to be poor, knowing you are going to be poor for awhile is a downer.

One thing about the Great Depression is that it was not until 1931, when it was painfully obvious that something was going on, that Hoover called it "a great depression. The crash was in 1929, so they were 3 years in before reality sunk in. And they thought it was just another economic downturn. It was not called The Great Depression until years later, 1934, when Lionel Robbins published a book called "The Great Depression".

So it took 5 years from the start to the middle for people to understand the severity of the situation.

Here are some things you didn't know about the Great Depression.

1. Churchill was wiped out by the Great Depression.

In 1924 he returned England to the gold standard, in what he would later call the greatest mistake of his life. This austerity measure was largely deflationary, since it was a dear money policy, and although popular worsened economic conditions.

2. Kennedy made a fortune.

Prior to the crash, Joseph Kennedy moved his fortune into real estate, Hollywood studios and liquor importing, although he may not call it bootlegging. Most of it came from real estate.

The lesson is that fortunes can be made or lost, even now.

Feng Shui & You

Article in the NY Times on dealing with Feng Shui.

Michael Heaner, a partner of the Kaufman Organization, which leases and manages office space in New York, said he had seen many deals fall through because of bad feng shui. For companies that put stock in it, therefore, Mr. Heaner has learned to ask for their feng shui master to examine the space before negotiating a lease. “Frequently you’ll get all the way down the road and figure out that the space really does not have the proper feng shui,” he said.

Penn & Teller are not fans.


107 Feng Shui - Bottled Water
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Life on a container ship

Here is a blog on one man's life working aboard a container ship.

An upcoming reality TV show like Deadliest Catch is not likely. Most of the time at sea you are doing nothing in the middle of nowhere.

When I dip you dip

Place your hand upon my hip ....

Man, this guy is such a downer.

David Rosenberg Interview



Too bad I think he is probably right. Inventory adjustment + government stimulus = unsustainable weak recovery = frowny face.

If you don't believe there's going to be a double dip, it's because the first recession never ended. If there is going to be a double dip, the odds are certainly higher than 50-50.

Labor Vs. Capital

In economics, goods and services come into existence through the production function, that is, the combination of the various intermediate goods required to make things and do stuff.

The components of the production function are: raw materials, capital (machinery, etc), labor, land and the entrepreneur to put everything together.

The combination of these inputs change over time depending on market conditions. One of the most basic is the nature of capital vs. labor since they are somewhat interchangeable.

Technology allows us to produce more output with fewer labor inputs. There are no longer phone operators to place calls for example.

If labor is cheap, you can cut back on capital to increase your profits.

I remember reading something about farms in China paying people to water the crops by hand rather than installing sprinklers, since it was cheaper in the long run.

Here is an interesting paper on an unexpected labor vs. capital decision, one involving the use of the cat and mouse game of captcha's, those screens used to prevent automated machines from posting comments or accessing information indiscriminately.

The capital approach would be to program a computer to be able to circumvent these computer countermeasures, essentially a better mousetrap.

The labor approach would be to pay someone to get around these countermeasures.

The paper suggests that the labor approach is winning, since you can pay somebody in Bangladesh as little as $1 to do 1,000 captcha's. It is quite an intensive study examining the changing nature of prices of labor and capital.

The whole time I am reading it I can only help but think, that spam you get in your inbox is helping to pay the wages for some third world worker. As the world gets more complex it seems like the work people are paid to do gets more and more frivolous.

Topsy-Turvy World

Where borrowing money made you richer than saving it.

NY Times:

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

...

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

This is not limited to the residential market eigther.

From GlobeST:

There’s almost no way to keep the volume of US CMBS loans in special servicing from topping $100 billion by year’s end, Fitch Ratings said Wednesday. In a report accompanying the announcement, managing director Stephanie Petosa wrote, “The number of loans transferring to special servicing is growing
exponentially.”

New Silk Road Economies

Article from Businessweek on emerging markets.

The takeaway? Emerging markets are trading with each other and by-passing the United States, which has traditionally served as the middleman.

For the most part, the reason we were needed in the first place is because of our stable currency, adherence to property rights, financial & logistical infrastructure. I suppose these countries are more comfortable with each other than before and don't need the U.S as an intermediary.

Cutting out the middleman is nothing new.

Arab middlemen controlled the spice trade, and their monopoly allowed them to inflate the prices of cinnamon and pepper for years. It wasn't until an Indian ship went adrift in the Red Sea that the Europeans realized there was an easier route to get all those spices they had been craving.

What fascinated me was the reference to the silk road.

The old silk road is a 3,000 year old trading route connecting the ancient civilizations of China, India, Greece, Egypt, Rome and Persia. The trade route exists even today and has been a part of history for as long as there has really been a recorded history.

Literally millions of people over thousands of years, people who don't speak the same language, people who practice different religions, who would hate one another if they ever met, all working together and united in a common cause. To make the world a better place through the exchange of goods and ideas.


The new silk road would be all the developed countries trading with each other directly. Which is easier today than it has ever been, probably in the history of the world.

Inland Empire Trying to Attract Foreigners

From Bloomberg

“Riverside County is the most aggressive in seeking overseas investors” among many California regions that are looking to create jobs, said Paul McIntosh, executive director of the group that represents the state’s 58 counties. A skilled labor force, abundant land, and proximity to ports in Los Angeles and Long Beach make it easier to forge trade deals, he said.

Now if they could only find a way to escape California's oppressive legislation. You don't notice it until you see what other STATES are doing:

In Texas, China’s Tianjin Pipe Group Corp. is spending $1 billion to build a production mill in the Corpus Christi area. Tianjin, which chose the site because it’s close to companies like Shell Oil Co. and Chevron Corp., will get property-tax abatements over 10 years from San Patricio County based on the number of jobs created and the land’s future value, said Leah Olivarri, a spokeswoman for its U.S. unit.

Canadian snack maker Saratoga Potato Chips LLC is investing $4.9 million on a U.S. headquarters in Fort Wayne, Indiana, that will employ as many as 175 people. In return, Indiana is offering as much as $1 million in performance-based tax credits.

Thanks for playing Riverside.

More Inflation / Deflation Debate

Article in the NY Times about the great inflation / deflation debate.

They call those Fed chairmen worried about deflation as doves and those concerned with inflation as hawks.

James Bullard, of the St. Louis Fed, looks like he went from a hawk to a dove:

On Thursday, James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.”

These are pretty scary words as a Japanese-style deflationary spiral , or the lost-decade, as it is known in Japan has many different outcomes and not many of them are pleasant.

One is a persistently high unemployment, especially for younger people who must accept lower wages as the older workforce does not retire. There is a decline in the lifetime employed and an increased use of temporary labor and the acceptance of dead end jobs.

At the end of the article is mentioned my long time Fed hero Richard Fisher, of the Dallas Federal Reserve bank. He is a hawk.

I can always depend on Mr. Fisher to put it all in perspective. Here is his latest speech on the state of the economy.

Mr. Fisher believes that all the policy changes and a lingering uncertainty are responsible for the lack of action on the part of businesses.

The bottom line is this: In whatever realm and whatever form, excessive uncertainty is the enemy of economic growth. As Ben Bernanke wrote in 1980, the “resolution of uncertainty” can lead to “[a business] investment boom.” It follows, then, that if and as regulators and legislators provide more clarity, a major roadblock to economic growth will be removed.

It was recently reported that nonfarm, nonfinancial firms in the U.S. have over $1.8 trillion worth of liquid assets sitting on their books. Excess bank reserves being parked in the 12 Federal Reserve Banks exceed $1 trillion. If and as the incidence of
“random refereeing” and uncertainty is assuaged, then we might well have the opportunity for robust growth in employment and capital expenditure expansion as firms and banks put that excess cash to use. That’s the good news.

I would agree. People save money as a buffer against uncertainty and most people put off investments until they know which way the wind is blowing. In economics we have the concept of long term vs. short term. People only live in the short term, the day to day, the marginal occurrences that make up your lives.

People plan for the long term, what their overall goals are and what it is they are working towards. People never reach the long term, it is like the end of a rainbow. It is the equilibrium point where supply and demand are in balance and the whole economics profession makes sense. Economic fundamentals work in the long run we can tell you what the overall state of affairs is going to look like, but we cannot tell you exactly how we are going to get there.

We don't know if there is inflation or deflation going on in the short run. We know that if unemployment remains high and the economy is in a type of liquidity trap, then we should have deflation in the long term. We also know that if the Fed continues to expand its balance sheet, there will be inflation, greater debt, crowding out of private funds and higher taxes in the long run.

How can we plan for the short run when we can't even agree on what the long term equilibrium point is supposed to look like?

Shippers Unintended Consequences?

Interesting article in the NY Times

The cost of shipping something from Hong Kong to Los Angeles is at an all time high ($2,624), as the above chart shows. Last year the price was at an all time low ($871). The current price is even higher than during the boom times so what gives?

The price is the determined by supply and demand and price changes are determined by changes in supply and demand. Over the past year, shippers have reduced significantly the number of ships sailing and have slowed the speed at which the ships move, making them less efficient. This has the effect of greatly reducing the supply of space.

In addition, demand has gone up over the previous year as retailers order and sell more goods.

The effect has been a double shift with the overall result being higher prices. Not only that, but the indirect cost of wasted time, missed shipments etc greatly adds to the cost which is not reflected in the price but can be measured in the increased use of air freight, as people substitute out of ocean and into air.

To get products in on time, they need to spend a lot more. Cost Plus, for instance, has used air freight for some time-sensitive items, and that costs about 10 times what sea freight does, said Jeff Turner, who oversees supply chain and store operations. And for sea cargo, even though contracts with freight companies exempt Cost Plus from summer surcharges, known as peak-season surcharges, the retailer is paying them.

“We have agreements that literally say we don’t have peak-season surcharges for our business, but we’re treading completely new ground. Our carriers are coming to us and saying, ‘If you want to get on the vessels, we need to figure out how you guys pay peak-season surcharges,’ ” Mr. Turner said.

Mona Williams, vice president for buying at the Container Store, said the company was telling manufacturers to book space well in advance, and that it was moving delivery dates earlier.

And for items that simply must arrive, well, there are ways to do it. “Sometimes you can offer to pay a steamship company a larger amount of money, and they might take somebody else’s container and not put it on,” said Jeffrey Siegel, the chief executive of Lifetime Brands, but “in most cases, you just have to wait.”

So the only way to get your goods on time is to pay more and essentially bribe somebody to do their job? I mean, with shippers being monopolists and all, customer service never part of their business plan, but still you would think that such practices would be illegal, to say nothing of being immoral.

These shippers basically have the US economy in a chokehold since they are restricting trade.

Higher prices will force shippers to increase their capacity to increase profits. This takes time for the market to react and these spikes in price occur because of short term dislocations. Companies hedge their risk of these short term dislocations by long term contracts, but if these long term contracts are not being honored, how can any business be conducted?

Business is based on trust and where trust is lacking, there is always the power of the law to make sure contracts are being filled.

The amount if ill-will for these shippers is almost palpable.

Sales to Inventory Ratio

The inventory to sales ratio is maintained by the Census, of all agencies. It measures the inventory of goods from retailers and manufacturers, as well as the sales of goods from these same people.

The ratio should always be greater than one, since you can't really sell something that doesn't exist yet. The closer to one the ratio gets, the leaner the supply chain is. The higher the ratio, the more slack that exists in the system.

The ratio looks like this:

What a mess. I wonder what happens if we break it up by quarter?

Hmm, looks like there is some strong seasonality there, especially in the first quarter when retailers have a bunch of unsold Christmas goods. Q1 2009 when things went downhill, with a bunch of unsold goods just sitting on shelves

Q1 2010 was much milder, since retailers ordered far less goods.

Now what happens if we just look at sales, which is much more volatile than inventory? Sales are demand for goods, inventory is supply of goods, demand is always fickle and changing whereas there is a whole chain of events that lead up to supply, so it is far less responsive.

Here is sales. Things to notice, from 1992 to about 2001 things were steadily increasing. From 2001 until about 2004 things were pretty static, not much happening and then from 2004 to 2008, sales increased like crazy. So we have dot com bubble in the 1990’s, then 2001 recession and a muddling until 2004 when the housing boom took off and then a huge crash when the housing boom ended.
Now it seems that sales are beginning to increase, like they always do in the second quarter, then will probably be flat in the third quarter and then a slight rise or flat in the fourth quarter before going down again in Q1 2011. So where we are now in 2010 is where we were in 2006 in terms of sales.

What I cannot understand is why sales continued to increase in 2008 when we were officially in a recession? I think it may have to do with fuel prices, since they are included in retail sales, or maybe it just hadn’t hit home yet that we were screwed and people didn’t switch to saving mode, but by Q1 2009, it all came to a head.

Fun stuff.

AMB Earnings Transscript

Here is a link to the AMB transcript from Seeking Alpha.

I thought this was interesting.

Customers are reluctant to commit the space any earlier than absolutely necessary and their real estate procurement strategy can be best described as just in time leasing designed to keep their space use perilously close to their bare minimum requirements.

The only way customers have been able to handle their recovering consumption is to switch to unconventional inventory management and transportation strategies. For example, in order to manage to leaner inventory levels, customers are now placing orders in smaller quantities. This is evidenced by an increased frequency of orders and deliveries which is neither efficient nor sustainable.

A second strategy has been the increased use of air cargo to replenish out-of-stock items. And as the ocean carriers are employing slow steaming to save on fuel costs more of our customers inventory is spending time on ships, delaying the need for warehouse space. Ironically, this too has led to increased use of the more expensive air freight product to meet service levels.

The bottom line of all of this is that less inventory is being carried in warehouses right now and more is in the transportation network which means that the rebuilding of inventories is lagging the recovering consumption. We view these substitute transportation strategies as stop-gap measures as they are added expense will eventually become cost prohibitive.

You can think of warehouses as oil in an engine. It lubricates and protects, serves as a buffer between supply and demand. This oil costs money, but it is necessary to keep the engine running.

The engine in this case is the US economy. When the engine slowed down suddenly and screeched to a near halt you didn't need as much oil to keep things moving and a lot of the oil was drained to cut costs.

When it gets going again, you will need that oil to act as a buffer, otherwise there will not be products on the shelves when you need them, retailers will lose money from lost sales, consumers will lose since they will end up paying more for goods (since there are fewer goods) and manufacturers will lose since they produce and sell fewer goods (since everyone is ordering and purchasing less). Costs and inefficiencies to the system increase and everyone as a whole loses.

Air freight is a short term solution. It is more flexible and elastic (responsive to changes in supply & demand) than is ocean freight. It is also way, way more expensive and heavy bulk goods are poorly suited for air freight.

At LAX air freight has been up 28% in April, and has double digit growth since November 2009. In Ontario, things are not all that great. Air freight is up 10% over the previous year. This is because there is so much extra capacity at LAX that there really is no need to go to Ontario. Plus LAX is closer to the end destination those goods are headed for.

The IE warehouses are for ocean cargo, bulky items that need to be shipped via long haul truck. For air freight, you don't need the highway system. If you are shipping something to Chicago, you can just fly it to Chicago rather than unload it from a boat, ship it to Ontario for long haul to Chicago.

Good to see the rules of economics at play. I talked about air freight recovering before ocean freight like 9 months ago I think. In the short run, the volatility and randomness seem to dominate, but it the long run supply and demand will play out in predictable ways.

Christmas in July

Retailers economic worry could hurt So. Cal industrial market.

From the AP:

Retailers are having second thoughts about orders they placed earlier this year, when the economic recovery looked stronger and Americans were more willing to
spend money.

Now they worry they could end up stuck with too many toys and sweaters come the holidays and have to cut prices.

Stores are fretting that even small increases in their holiday stocks may be too ambitious. Some are waiting to see how spending turns out in the back- to-school season before trimming their holiday orders, but others aren't wasting any time.

...

Most stores have until August to do any tweaking on their holiday orders, though the largest chains, which have more power over suppliers, can cancel some orders later.

...

With unemployment stuck near 10 percent and the stock market having wiped out its gains from earlier this year, Americans are skittish about spending as the second half of the year begins.
Retail sales fell 0.5 percent in June compared with the previous year, the government reported this week. Clothing chains had to slash prices on summer tops and shorts even more than they planned to entice customers.

Now, stores worry that merchandise will pile up, leading to rampant price-cutting.

"It still feels like a fragile economy," said Brendan Hoffman, CEO of Lord & Taylor, which has plans in place in case sales slow down. Hoffman said that if business weakens, the department store will turn to more aggressive promotions.

Stores are still smarting from the huge discounts that made Christmas 2008 a disaster. They desperately want to avoid a repeat and have been cautiously increasing how much they put on store shelves.

Just when it seemed like things were getting better.

The scariest thing I have seen on the internet today

An article in Rolling Stone about economic bubbles and Goldman Sachs. It seems plausible and Rolling Stone may be one of the more reputable news sources these days.

If the statements in the article are true, I think the vampire squid analogy may be too nice. A more apt reference would be the Sacculina carcini:

A female sacculina begins life as a tiny free-floating slug in the sea, drifting around until she encounters a crab. When that fateful day arrives, she finds a chink in the crab’s armor (usually an elbow or leg joint) and thrusts a kind of hollow dagger into its body. After that, she (how to put this?) "injects" herself into the crab, sluicing through the dagger and leaving behind a husk. Once inside, the jellylike sacculina starts to take over. She grows "roots" that extend to every part of the crab’s body – wrapping around its eyestalks and deep into its legs and arms. The female feeds and grows until eventually she pops out of the top of the crab, and from this knobby protrusion, she will steer the Good Ship Unlucky Crab for the rest of their co-mingled life. Packed full of parasite, the crab will forgo its own needs to serve those of its master. It won’t molt, grow reproductive organs, or attempt to reproduce. It won’t even regrow appendages, as healthy crabs can. Rather than waste the nutrients on itself, a host crab will hobble along and continue to look for food with which to feed its parasite master.

You can kinda think of the US economy as the crab, and Goldman Sachs as the profit-maximizing slug intent on feeding only itself. I was really angry after reading that article, I will slowly work my way to acceptance (the fifth and final stage of grief) later today.

I always wondered about the 2008 oil price bubble, it hurt the trucking industry very severely and came out of nowhere and just disappeared.

The Rolling Stone article is worth the read, if nothing else it will make you appreciate the long-term effects of short term payouts.

$500,000 for a green card

So U.S. Citizenship and Immigration Services has requested that Southern California Logistics Airport stop advertising trying to raise money from foreigners because they believes:

"Essentially, Victorville RC (Regional Center) is actively promoting what appears to be defunct projects as viable development projects on its public Internet Web site and providing a downloadable brochure that clearly claims that these projects are viable," according to the eight-page letter dated May 4.

You can see the full article here.

I had no idea they give you a green card if you "invest" 500,000 into the US.

I am assuming that the U.S. Citizenship and Immigration Services has to sign off on these deals because seems like a law that allows people in the US to rip-off rich naive foreign investors.

For 1/2 a million bucks maybe that is why they call it a green-card.

Looks Like The WSJ sees what I see

And that is growth in the IE.

Full Story:

For the first time in years, John Rojas has a warehouse brimming with boxes.

The president of Cargo Cats Inc. said his warehousing business saw a spike in activity recently, and that his main warehousing unit is now operating at about 90 percent of capacity.

“We’re going at 100 miles per hour right now,” Rojas said, standing beside ceiling-high, towering stacks of boxes in his Mira Loma, Calif. warehouse.

Warehouses in the Inland Empire, which receives goods from the two largest ports in the country, reported a similar increase. To deal with the heavier load, many warehouses have taken on new employees.

Temporary hiring agencies, such as York Employment Services and CitiStaff Solutions Inc., do a lot of the hiring for warehouses in the district, and say they have been finding more work for more people.

...

Mark Doss, owner of Mark Doss Trucking who was eating at the Ontario West Travel Center on Monday, said, “In ‘08 and ‘09, you could actually find a place to park. Now, you can’t.”

He said it’s been difficult to find a parking spot at gas stations, food joints and other places around the Inland Empire warehouses since the Spring. From January through April it was “dead, dead” on the highway 10, he said. But since then, he has noticed about a 30 percent increase in traffic coming into the warehouses.

The Inland Empire is a growth market, and looks like these "green shoots" are starting to take hold. We have seen it in increased activity in Inland Empire, mostly in the East but also starting in the West.

When I heard someone say that recovery was going to happen in the Inland Empire first, I was a little skeptical, since things were going down so fast it was hard to think of them going back up.

But the East has shown the quickest turnaround, mainly because it is more responsive to prices (more elastic is how economists would describe it). The less elastic markets, such as Central Los Angeles & especially Vernon, have not fared as well.

Nothing like a soured commercial loan and mounting debt to motivate landlords to reduce prices.

Clerical Workers Strike At POLA

I have not heard too much about this in the news until today, but evidently clerical workers at the Port of Los Angeles have been striking since their contract expired July 1st.

Here is the story.

Striking clerical workers at the nation's busiest port complex expanded their walkout to a fifth terminal Friday, temporarily shutting down loading and unloading operations when dockworkers at the facility refused to cross the
picket line.

The disruption ended after an arbitrator ruled the clerks' union had bargained in bad faith and ordered the longshoremen back to work, said Stephen Berry, who represents 14 shipping companies at the ports of Los Angeles and Long Beach negotiating new contracts with the union.

...

The strike, which began when the clerks' contract expired July 1, appears to have
caused no significant disruptions in shipping. The clerical workers process paperwork for the shipment of cargo, but managers at the struck terminals have been handling the workload, Berry said.

The shippers want to use new computer programs giving customers access to shipping schedules, a move that the union has said would endanger jobs. The union is seeking contract provisions against outsourcing.

Zimbabwe Money Washing

Found this article pretty interesting.

Basically, with an inflation rate of a billion percent, the US dollar is the de facto currency of Zimbabwe and many other countries that cannot maintain stable price controls. The reason for this is that citizens trust the value of the US currency rather than the rapidly inflating currency of their own country.

The effect is that money stays in circulation for really, really long periods of time. And we are talking about physical currency here, I am not sure if people accept checks for US dollars in Zimbabwe.

The effect is that the money supply for these dollars is fairly stable, so prices remain constant in US dollars, but the money is really, really stinky. People hide it in their shoes and other places, and it will exchange hands until it falls apart.

So the article talks about people washing money to get rid of some of the funk. Since US dollars are made out of cotton, this can be done the same way you would a pair of jeans, at the laundromat.

One interesting side effect is basically to prove the reverse of Greshems law, that good money will drive out the bad money; people will part with the stinky dollars and keep the good ones for themselves.

I love how an economic principal that started in the 15th century to explain currency debasement still has relevance today.

Since the US imports more than it exports, it has to exchange US dollars for goods. These dollars (physical or otherwise) are held in foreign reserves.

I read somewhere that there are more dollars outside of the US than inside, but I have not been able to see any official government information that would prove this true or false.

Big Wheels Keep On Spining

This chart shows the total tonnage transported by the trucking industry. (Seasonally adjusted; 2000 = 100)



Here is an article on a rebound in trucking from NPR

A couple of things I found surprising:

1. Capacity is tight because a lot of owner operators left the business when things got tight in 2007. Many of these people will not return. Some 1,700 small trucking companies folded just last year. That sent thousands of drivers out of the business, and that wave of failures has swelled even as the freight markets improved.

2. The rise in trucking freight volume has led to a rise in the value of semi-trucks. Previously, when freight conditions were weak, the value of these semi's fell considerably. Now that the values are rising, banks are more likely to repo these trucks because it is easier to sell them.

Bohemian Index

From the Martin Prosperity Institute, a location quotient measure of artists to the general population. This means that Los Angeles has twice the national average of artists living here. The least bohemian area is Riverside, which has half the national average of artists.

Full article is here.

RSA Animate - Drive: The surprising truth about what motivates us

Incentives matter, but money is not the only incentive. What I like about my work is the freedom I have. Freedom to do this blog for instance.

Wal-Mart is now its own 3PL

From Bloomberg:

The goal: to handle suppliers' deliveries in instances where Wal-Mart can do the same job for less, then use those savings to reduce prices in stores, Abney says. Wal-Mart believes it has the scale to allow it to ship everything from dog food to lawn chairs more efficiently than the companies that produce the goods. "It has allowed our suppliers to focus on what they do best, manufacturing products for us," he says. "With lower costs usually comes increased sales."

Yes, lower costs, increased sales, but also reduced margins? I would assume Wal-Mart is a tough business to do business with. For many of these suppliers Wal-Mart is their sole customer, or would Wal-Mart also be delivering their goods to Target and other retailers? Or would they only be covering the logistics to their own DC's, in which case what do you do if they are not on time? If your 3PL company screws up, you get another company to service your needs. If Wal-Mart screws up, who are you going to complain to? We have laws protecting consumers from a monopoly, but what about producer protection from a monopsony?

And for industrial real estate demand, if Wal-Mart is moving goods to their own DC, this may reduce the need for 3PL space accross the country.

World Economy as it stands

As told by Australians.

Tesla to move plant to North California

It is as if a million voices cried out and were suddenly silenced. Tesla is locating its plant at the recently shuttered NUMMI plant in Northern California.

The news stunned city officials from Downey, who expected to vote Thursday on a lease deal allowing Tesla to rent 20 acres of city property south of Los Angeles. Downey spent months courting the automaker to locate its factory there, and officials said they were certain of clinching a deal after meeting with Musk recently.

"Tesla has been extremely disingenuous in their dealing with Downey, and I now have new appreciation as to why America is fed up with many large corporations," Downey Councilman Mario Guerra said. "This last-minute betrayal is even more shocking because [Downey] was hours away from signing the lease with Tesla that would have been an economic boon for the city."

What a terrible blow to Southern California. It makes sense for Tesla, since they don't have to wait for a new factory to be built. But, they could have built the new factory to meet their specifications, plus construction of a new factory would have a greater economic impact.

How terrible does Downey feel for playing the fool?

Greece Fire

What a day! The DJIA was down almost 10% in a single day, the worst decline since 1987 (20 years folks). The culprit most people say is Greece may not be able to secure a bailout by the European Union. This has sent the Euro down and the dollar up.

As of this writing, the Euro was equal to 1.26 American Dollars, the lowest point in over a year and I assume the Euro is probably headed down until this Greece thing is worked out.

This has sent the price of oil which is denominated in dollars, down. All other real goods would also go down in price on a stronger dollar. Oil ended the day at $77.

A strong dollar is again counter to the "export recovery theory" that I have been spouting, namely that in order for the US to begin to pay down its debt, the dollar would have to depreciate, (a.k.a. inflation) leading to increased US exports.

The problem with this theory is that, the dollar is not depreciating. It is growing stronger as foreigners demand dollars, putting downward pressure on interest rates (10 year Treasuries decreased 14 basis points to 3.398). I expect that rates are probably going to decline tomorrow as well.

This also means that since the demand for dollars is high, the US can issue more debt, something I was hoping we could avoid, lest we turn into Greece.

The Greek Debt to GDP ratio is 101%, meaning that Greece owes more than it produces.

For the US, the Debt to GDP ratio is around 88%. If current spending continues, we will reach above 100% in 2016.

The U.S. is not Greece however. 50% of the GDP of Greece depends on government spending, and a lot of the rioting we are seeing is because cuts to entitlement programs effect a lot of poor and unhappy people.

GDP Grew By 3.2%

Source: Econobrowser

BEA, All the Way! Good news, right? Well, the stock market certainly doesn't think so.

And I don't really think so either.

To the casual observer, the 3.2% quarterly increase, when compared with the last quarter-over-quarter increase of 5.6% may look like things are getting worse.

But we can just expect regression towards the mean, the economy is still growing. The 3.2% increase is on top of last quarters 5.6% increase, so we are kicking ass over last year still.

What I am concerned about is:

1. Inventory adjustment took a dive. A major dive. I was wishing for another quarter at least of unsustainable inventory adjustment. Although it still accounted for about 1/2 the GDP growth, it was still not enough. I knew it was going to end, but I didn't get my GDP fix yet. So this may mean less demand for industrial warehouse demand in the short term. We were foolish to count on it in the first place, but now that it has come and gone I am still feeling a little empty.

2. Exports slowed. What happens when the facts conspire against the narrative I was crafting? I have a speech coming up in a month on how exports were going to change the course of the nation, save the world, redevelop the supply chain. And now my job got that much harder.

3. Consumer Spending Increased: Why is this bad? You need consumer spending for imports and consumption makes up the majority of GDP anyway. Because unemployment remains high, real disposable income was unchanged after rising last quarter by 1% and where did the extra consumer spending come from? Savings declined from 3.9% last quarter to 3.1% this quarter, and decreased savings will lead to decreased investment down the road. So, who cares? Well, what did consumers buy hot-shot? Durable goods, things they put off buying when they didn't have any money. Do you know the reason why they are called durable goods? Because once you buy them, you don't need them for 5-7 years, so you can expect consumer spending to decrease in future quarters.

So, these numbers are likely to get revised, but the one takeaway is that we are probably out of the recession. The bad news is that things are not snapping right back to where they were and many of the same problems are still here, high unemployment, sluggish business investment, and a tapering off of export growth.

In many ways it feels like we are still trying to find a way out, hunting and pecking without some other bubble, be it exports, green tech etc. for everyone to rally behind.

AMB April Industrial Index: Growth

AMB collects monthly data from a geographically diverse set of customers, representing a range of business sectors, currently moving inventory through the supply chain. Monthly changes are useful for identifying business trends, turning points in customer activity and the way companies are utilizing space, as well as relative changes in markets and industries. The AMB IBI is a leading indicator of macroeconomic conditions.

"Our current findings indicate that economic conditions have improved materially since we released the index in November," said David Twist, AMB's vice president, Research. "We believe that the economy has entered a more diversified stage of recovery and we expect that U.S. GDP will surpass its previous peak from mid-2008 in the latter part of 2010."

Key Findings

-- The April AMB IBI measures 64.8 for overall business activity (over 50
signals expansion). March and April were the two strongest consecutive
months since inception of the index in 2007.
-- We expect business activity to remain elevated throughout 2010 as the
recovery advances.
-- The April AMB IBI implies that the job base should continue to expand in
the coming months.
-- The index forecasts that container volume and air cargo growth are
expected to post double-digit gains in the first half of the year and
net industrial space absorption should be relatively flat.
-- The AMB IBI indicates that industrial space utilization is on the cusp
of expansion, driven by higher production levels, improving imports into
the U.S. and rebuilding of inventories.

Zipfs Law

Land use economics is a fascinating area of study that has not garnered widespread media attention. So when it does get some press, my inner-nerd goes wild.

In this blog post from the NY Times, the author, Ed Glaeser, explains how well Zipf's Law explains the relationship between population and population rank in US cities.

In a nut-shell, this law states that the population of the largest city will correspond to its rank. in the following ways; Population = 1/x, where x is equal to the rank order of the cities.

So New York is the largest city, and Los Angeles is the second largest. So the population of Los Angeles will be around 1/2 the population of New York. Chicago is the third largest city, which will have a population roughly 1/3rd the size of New York. Dallas is the fourth largest city, which would have a population of 1/4th the size of New York, and about 1/2 the size of Los Angeles.

One offshoot of Zipf's law is Gabaix's law, which states that population growth rates are independent of the initial population.

This is a little counter-intuitive because you would assume that it would be harder for large cities to continue to grow whereas it would be quite easy for small cities to grow. Thus small cities would grow at a faster pace and eventually catch up to larger cities.

But this is not the case if population growth is independent of the initial size, as Gabaix's law states.

When you examine the history of Los Angeles an anomaly emerges. In 1880, Los Angeles was not even on the top 100 of the largest US cities. In 1890, it was #57, in 1910 it was #17, in 1940 it was #5, in 1970 it was #3, in 1990 it was #2. So in the span of 100 years, Los Angeles went from not even on the list to the second billing.

Amazing and unexpected.

Weyerhaeuser to become a REIT?

Interesting developments.

FEDERAL WAY, Wash.--(BUSINESS WIRE)--Yesterday Weyerhaeuser Company (NYSE: WY) announced it has received shareholder approval to issue a significant number of shares to enable the payout of its Earnings and Profits to shareholders in
conjunction with its conversion to a Real Estate Investment Trust (REIT).

No timetable has been set for the conversion and Earnings and Profit payout, however, the Board of Directors has previously stated that the earliest and most likely timing would be in 2010.

The Board of Directors also announced, when the Earnings and Profit payout occurs it intends to distribute the maximum amount of stock allowable under the Internal Revenue Code. For 2010, the IRS allows a 90% stock distribution of Earnings and Profits.

“The REIT structure best supports our strategic direction,” said Dan Fulton, President and CEO. “We appreciate the approval by shareholders which will allow us to take the necessary steps to complete the conversion process.”

Weyerhaeuser Company, one of the world’s largest forest products companies, was incorporated in 1900. In 2009, sales were $5.5 billion. It has offices or operations in 10 countries, with customers worldwide. Weyerhaeuser is principally engaged in the growing and harvesting of timber; the manufacture, distribution and sale of forest products; and real estate construction and development. Additional information about Weyerhaeuser’s businesses, products and practices is available at http://www.weyerhaeuser.com.

Looks like they might do less cutting of trees and more building of buildings. Some of the largest landowners here in Southern California were gas companies, who owned the land and didn't know what to do with it. They eventually developed the land they acquired long ago and have been very good landlords.

I suppose forest products would be no different.

Phelan to Join DCT

Beer & Derivatives, my lucky day!

Article from Businessweek on how derivatives were actually meant to work.

MillerCoors and other brewers also buy massive quantities of wheat, rice, malt, sugar, and corn. The prices of all those commodities can swing wildly, so the financial products known as derivatives—hedges on whether prices will rise or fall—help the brewer lock in a price range that smooths profits. Now the Obama Administration is looking to prevent another financial crisis by regulating the derivatives MillerCoors uses.

Fortune 500 Just Released!

The Fortune 500 for 2010 has just been released. Wal-Mart is the largest company in the US in terms of revenue, surpassing Exxon Mobil by quite a large margin.

Why are these 500 companies such a big deal you may ask? Well, in 1955, the 500 largest companies in America represented around 39% of all activity in the country, or around 2/5ths of GDP. In 2010, the fortune 500 companies represent around 75%, or 3/4ths of GDP. So, in theory, 75 cents out of every American dollar is a result of these 500 companies.

The companies themselves are a snapshot of the economy of the U.S. and provide insight into the geographic diversity of the country. The top 5 states in terms of revenue are: New York, Texas, California, Illinois & Arkansas (due to Wal-Mart). Companies in these top 5 states account for around 50% of all the revenue in the Fortune 500 firms.

If we do the same analysis for industries, a similar snapshot of the economy emerges. The top 5 industries are: Petroleum Refining, Commercial Banks, General Merchandisers, Insurance: Property & Casualty, and Specialty Retailers. These top 5 industries make up around a third of all economic activity generated by all Fortune 500 Companies.

Pulse of The Port 2010 Forecast

The Port of Long Beach does an annual forecast. You can view the entire piece here.

Some takeaways that I thought interesting.

Don Magaddino does a magnificent job each year and this year was no exception. He teaches the Masters of Global Logistics at Long Beach.

The US in 2009 lost around 7 million total jobs. California lost 460,000 and around 50,000 of those jobs were logistics jobs.

Inventory replenishment was responsible for the current growth we are seeing in GDP. He believes the recession is over with growth for the US in 2011. Modest economic growth of around 2-3%. He sees employment lagging employment growth and to a lessor extent.

Consumption is down but he believes 2012+ will take us to the pre-recession highs. There are a number of factors weighing on consumption, being unemployment, decline in income growth, loss of housing and equity wealth, increased risk perception and a tight credit market.

In 2009, there was a spike in durable goods consumption, notably the cash-for-clunkers program, which basically displaced consumption. He sees more being spent on non-durable goods in the future as consumers who have postponed their retail purchases during the worst of the recession begin to make these purchases again. Services should also have a strong showing.

As far as port activity, he sees loaded outbound increasing 7.7% in 2010, to around the same level as in 2007. For loaded inbound, he sees a 8,9% increase, around the same level as in 2008.

The next speaker was Jeff Sieward, from Home Depot. Last year the speaker was from Lowe's. Both companies are major importers of goods, with Home Depot being the 3rd largest importer in the U.S. with 10% of their stores here in California. They have a distribution center in Mira Loma and are currently building a 667.000 SF rapid deployment center in Ontario. They have some big things in the work, the fact that they are building a center rather than buying a cheaper, already existing one signals to me at least that they run a very tight logistics ship and Jeff seemed like a very sharp guy.

For 2010, he sees sales increasing 2.5% over 2009. (This is a low-ball estimate and should be pretty easy to beat.)

He works a lot with shippers, and the extra ocean capacity has shippers reducing supply in order to drive up rates to profitable levels. Home Depot is diverting more of its NEW cargo to alternate ports while keeping its EXISTING levels of So. Cal cargo the same. So growth from the 3rd largest importer to So. Cal ports is capped. The reason?

Port diversification, more discretionary cargo going directly to those markets, being diverted to other ports to lower the overall price. He summed up the competition the So. Cal ports are facing, with East Coast ports offering huge incentives for him to move there. These other ports were calling themselves the 7-up of ports, the Un-California. (Because 7-up is the un-cola, took me awhile to get the humor).

He hinted at why the new center in Ontario will be special. The rapid-deployment center will have different channels of distribution depending on what is ordered and used more and can be delivered at a quicker pace, thus reducing shipping cost by moving all high velocity goods together while slower moving supplies will travel together.

The next speaker was perhaps the most honest out of all of them. It was Wolfgang Freese of Hapag-Lloyd. This is a shipper that makes 140 ports of call at Long Beach (he didn't want to say how many times he goes next door to Los Angeles).

Shippers were among the worst hit in the recession and this guy did not pull any punches. He in many ways is a customer of the Ports of Los Angeles and Long Beach, and he has not been a very happy customer.

Basically, in 2008 he delivered 8% less than in 2007 and in 2009 he delivered 19% less than in 2007. But, wait, there is more.

In 2009, his West-Coast trips were down 25% over 2007, while his East-Coast trips were down 11% relative to 2007. He is favoring East-Coast ports because they are cheaper and the infrastructure on those ports is getting better. He complained about the inconsistent fees and an uncertain cost horizon at the West Coast Ports and stressed that doing business in Canada & Mexico is far cheaper than the Southern California ports.

He said that now is the worst business climate for the shipping industry, ever. Carriers lost 22 billion in 2009, profitability is down and intermodal traffic is down 20%.

He mentioned a statistic that was really chilling: Retail sales were up only 1% in 2010, yet port traffic was up 15% in an inventory restocking scheme that is unsustainable.

His company is working on faster ships, (meaning smaller ships) that will be more flexible. Part of the problem was that large ships were built that could only dock at a very limited number of spaces (LA & LB being one of them). In the future, he sees the supply chain as more flexible, with more ships going to more places rather than larger & fewer ships going to major port hubs.

Translation: LA & LB will lose market share and can really only count on captive cargo, the discretionary cargo will find the lowest cost once these barriers are removed.

Peter Payton for the ILWU spoke, mainly talking about how in the economic crisis, everyone fell back to protect their own individual interests at the expense of the whole.

Next was Frank Capo, a terminal operator. He was lamenting the fact that in 2006 everyone thought that the ports would be at max capacity and would need to build a port the size of Oakland every year to handle the flood of cargo.

The next speaker was Fred Malesa from BNSF. His company manages 300 trains a week to the ports. BNSF is spending 30 billion in the next 12 years, a lot of it in Memphis for an intermodal hub. He said that gains were being made in grain, steel and chemicals, and expected intermodal to be up in 2010 over 2009.

The last speaker was Matt Schrap from the California Trucking Association. He sees a 70% increase in tonnage in 2010 over 2009, a huge increase. This will be done with fewer employees however, since most companies are still laying off drivers.

California has the greenest fleet in the world and trucking creates jobs. 1 truck creates 80 support jobs. He sees an increase in trains due to pricing pressures, with each train being able to handle 280 - 330 trucks. The on-dock railroad at the port handles 270,000 containers a year, which means reducing a significant amount of truck trips.

He said truckers will still haul a majority of goods, since goods will still have to be transloaded by truck, the last 30 miles of any good will almost always involve a truck. Just-in-time inventory strategies require the flexibility only a truck. He is worried about gas prices and fuel taxes. Generally, it is politically easier to tax diesel than gasoline, since voters are less sensitive to passed on fuel costs than direct gas charges. Cap & Trade is also a tax on truckers and is against the current cap & trade policy of charging truckers without giving them adequate permits.
He said that consistent regulation is required, the Green Ports trucking program was a nuisance for the people he represents but it was implemented in a consistent manner so the negative impact is reduced.

So that my friends is the 2010 Pulse of the Ports Peak Forecast in a nutshell.

Special tip of the hat to the Port of Long Beach for putting this event on year after year. It has sparked my continued interest in the supply chain and is a great information resource.

Wag of the finger goes to the Port of Los Angeles for not putting something of this magnitude on, or if they do not advertising it to the extent that Long Beach does.