What 100 Sacked Wharfies Mean for Your Future

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Last week 100 employees of Hutchinson Ports Australia were awoken by a text message advising them their services were no longer required. Boyfriends and girlfriends terminate relationships by text these days, so it shouldn’t come as a surprise that this new age of heartless communication has spread into the corporate world.

Understandably, the workers were gutted by the decision to terminate their employment.

These are people with mortgages to pay, mouths to feed and retirement dreams to finance.

The sacked employees are not taking the decision lying down. Union action is underway at the ports and in the courts.

On the other side, Hutchinson justify their decision by saying they’ve lost work and the port operations are becoming uncompetitive.

Who’s right in this specific situation? I honestly don’t know. Each side has their version of the truth.

But if we take a few steps back and we can join the dots to see how this situation (and others yet to come) has arisen.

According to the American Geophysical Union (AGU) in November 2014:

…research used satellite data to estimate the number of vessels on the ocean every year between 1992 and 2012. The number of ships traversing the oceans grew by 60 percent between 1992 and 2002. Shipping traffic grew even faster during the second decade of the study, peaking at rate of increase of 10 percent per year in 2011.

The report identified, ‘International trade and the sizes of merchant fleets have both enlarged rapidly over the past two decades, explaining the steep rise in ship traffic.

More ships needed to be built to transport raw materials to the manufacturers and finished products to the consumers.

Baby boomers in full flight with their credit cards, home equity loans, store credit and payday lending created a consumption binge without parallel. More of everything was required to satisfy the appetite of wide-eyed western consumers.

The 1990s started the ball rolling, but after 2000 (in the lead up to the GFC) it found a much higher gear…which is why shipping traffic grew even faster during the second decade [2002 to 2012]’.

The mining boom was a direct result of China needing to build ports, shipyards, factories, cities and transport infrastructure to supply the world with things we didn’t need, purchased with money we didn’t have, to impress people we didn’t know.

The GFC rang the bell on unbridled credit fuelled Western consumption. Orders dropped.

However we had a system that was built to produce and transport an amount of goods (raw materials and finished products) based on not only a continuation but an expansion of old consumption habits.

When demand fell, authorities knew that leaving a good chunk of this excess capacity idle would risk wholesale bankruptcies and a possible contagion effect in credit markets.

So China followed the central planners ‘guide to managing a panic 101’…create money out of thin air and create artificial demand.

In the space of six years, 2008 to 2014, China quadrupled its debt load from US$7 trillion to US$28 trillion. It took China many decades to rack up US$7 trillion in debt and in the space of six years they created a further US$21 trillion…out of thin air.

Naturally a spend-a-thon of this magnitude creates economic activity. The resource rich countries were the primary beneficiaries of China’s reckless attempt to stimulate global and domestic demand for ‘stuff’. The mining boom is credited with saving Australia from the worst of the GFC.

And it did, but it was a boom based on false demand.

But underneath all this artificially engineered economic activity, the baby boomer consumer of yesterday was transitioning to the retiree of today and tomorrow. The enthusiasm for flashing the plastic was waning. No amount of newly minted yuan, dollars, pounds, euros or yen would persuade them change their minds significantly in sufficient numbers.

While the headline data showed a certain level of economic activity, a good portion of this was fluff created by central banks and governments spending money they didn’t have.

The addition of US$57 trillion in global debt since the GFC was a masking agent to what was actually happening. The real economy — what genuine people genuinely spend — has been far weaker than the official, heavily massaged GDP numbers showed.

Now that China has taken the foot off the accelerator of their turbo charged debt vehicle, the cracks are starting to show in a system with way too much capacity and not nearly enough demand.

According to a recent article in the Wall Street Journal, two unnamed executives from Asian and European shipping carriers spilled the beans on finished goods shipped from China to Europe:

We are now shipping at an absolute loss. With the bunker-adjustment-factor surcharge at $300 for Asia-Europe, we are losing more than $50 per box. Unless by a miracle demand grows, we are up for heavy losses in the next quarter and maybe the rest of 2015.

Goods are being shipped at a loss due to weak demand. This is the reality of a world in which private credit growth is flatlining. Without households going further into debt, the system is grinding to a halt…much like what happens to an engine without sufficient oil.

The termination of 100 wharfies is simply a very small piece of a much larger global picture. I know this is cold comfort for those personally affected by the forces of the global credit contraction. But it is what it is. The forces are in play, and trillions and trillions of newly minted currency has been powerless to stop them.

In addition to boomers preferring cruise ships to container ships, the other major force impacting the global economy is automation (robotics).

The following chart is from the Bank of America Merrill Lynch report ‘A Transforming World – Year Ahead 2015’.

Manufacturing jobs are being shed as more and more workplaces opt for robots.

Ironically, over the past decade cargo handling is one of the areas that has been dramatically affected by the implementation of automated systems.

But according to Hutchinson’s, obviously not enough automation to offset the global squeeze on shipping.

The working world is being squeezed on two fronts — boomers leaving and robots entering the workforce.

These deflationary forces will create another GFC…one with far more intensity than we saw in 2008. And next time there will be no China to save Australia.

Unfortunately, we are going to see more and more stories of employees being told their services are no longer required.

Businesses will shut up shop or go bankrupt.

This is what happens when a credit dependent system is in withdrawal.

We are entering a very difficult period. One that I suspect is going to last for much longer than anyone anticipates.

Make sure your financial house is in order. Live within your means, pay down debts, and build a cash buffer.

Regards,

Vern Gowdie,

Editor, Gowdie Family Wealth

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Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.
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