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The Crisis is Over: Long Live the Crisis

The Path to the Crisis of 2008: Beware of Future Expectations Jean-Paul Rodrigue Department of Global Studies & Geography, Hofstra University Theo Notteboom ITMMA - University of Antwerp and Antwerp Maritime Academy Terminal Operators Conference - Europe Valencia (Spain), June 8-10 2010.

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The Crisis is Over: Long Live the Crisis

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  1. The Path to the Crisis of 2008:Beware of Future ExpectationsJean-Paul RodrigueDepartment of Global Studies & Geography, Hofstra UniversityTheo NotteboomITMMA - University of Antwerp and Antwerp Maritime AcademyTerminal Operators Conference - EuropeValencia (Spain), June 8-10 2010

  2. The Crisis is Over: Long Live the Crisis • Many unfounded assumptions behind the recovery: • Randomness and uniqueness. • The cause (debt) is the solution (more debt) • The soundness of economic theory (Keynesianism). • “Appropriate” response from central banks and governments. • No unintended consequences of moral hazard. • Recession: • Clear the stupidity out of the system. • We have been very stupid (depression?). Hoocoodanode?

  3. The First Crisis of Globalization: Reaping the Consequences of Misallocations Production CAUSES Monetary system (fractional reserve banking, fiat currencies) Distribution SYMPTOMS Debt, asset inflation CONSEQUENCES Misallocations (bubbles) Consumption

  4. Business Cycles: The Trend that Time Forgot Credit-Driven Boom Peak Credit-Driven Bust Trough Depression Expansion Recession Expansion

  5. Blowing Bubbles and Compounding Distortions: From Technology to Commodities Commodities / Trade Bubble Tech / Stock Bubble Housing Bubble

  6. Globalization 2000-2008: A Bubble?

  7. Changes in the Value World’s Merchandise Trade, Production and GDP, 1950-2009 (in %)

  8. A Paradigm Shift in Neomercantilism?

  9. Keeping Doing the Same Thing? Baltic Dry Index, Monthly Value, 2000-2010 Commodities Bubble Housing Bubble -92% Which Bubble?

  10. Container Traffic Recovery Around the Corner?

  11. Monthly Trade between China and the United States, Billions of USD (1985-2010)

  12. Monthly Container Traffic at the Port of Los Angeles, 1995-2010

  13. American Foreign Trade by Maritime Containers, 2008 (in TEUs): The Trade Fundamentals

  14. Value Propositions behind the Interest of Equity Firms in Transport Terminals Diversification (Risk mitigation value) Sectorial and geographical asset diversification. Mitigate risks linked with a specific regional or national market. Source of income (Operational value) Asset (Intrinsic value) Terminals occupy premium locations (waterfront). Globalization made terminal assets more valuable. Traffic growth linked with valuation. Same amount of land generates a higher income. Terminals as fairly liquid assets. Income (rent) linked with the traffic volume. Constant revenue stream with limited, or predictable, seasonality. Traffic growth expectations result in income growth expectations. High Value! No risk!

  15. Port and Maritime Industry Finance: Who is Leveraging Whom? Investors Financial Markets Brokers Corporations Money Markets Commercial Banks Shipping Companies Private Investors Capital Markets Mortgage Banks Port Operators Investments Managers Equity Markets Merchant Banks • Insurance Companies • Pension Funds • Banks • Trust Funds • Finance Houses Private Placement Finance Houses Earnings Leasing Companies

  16. Reviewing Assumptions: The Impacts of “Financialization” Physical assets seen as financial assets. Assets perceived simply from their expected level of return. Rent-seeking strategies Disconnection From market knowledge Focus on short-term results Asset inflation High amortization Expectations of quick capital amortization. Expectations about future growth and the corresponding volumes. From long-term business cycles From outcome of actions Lack of accountability From local/ regional dynamics Lack of regional embeddedness Lower contestability Perceived liquidity. Capacity to quickly enter and exit the market. Loss of embeddedness

  17. Dumb Money at Work? EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

  18. World Container Traffic and Throughput, 1980-2008. Reaching Peak Growth? Niche markets Maturity Massive diffusion Network complexities Peak Growth Network development Productivity multipliers Acceleration New (niche) services Productivity gains Adoption

  19. Fallacies of Forecasting: 2020 Throughput Forecast, Selected Large Ports, Linear and CAG Scenario If you build it they will come… From under estimating to over estimating trends Linearity prevalent in growth trends (1998-2007) • Compound annual growth common in forecasts • Non-contestability assumption Advanced forecasting (c. 2007)

  20. Terminal Operators; Well Positioned or Overextended? Then: Dynamics oriented towards expansion. Now: Rationalization, performance improvements and the search for niche markets.

  21. Container Terminal Portfolio of the four Main Global Terminal Operators, 2009

  22. Container Terminal Portfolio of Other Global Terminal Operators, 2009

  23. Conclusion: Beware of Future Expectations • Intense phase of capital accumulation in the shipping and port sectors. • Some of the growth expectations based on unsubstantiated assumptions. • “Financialization” transformed the industry and expanded misallocations. • What could be some specific consequences on the maritime industry?

  24. It’s the debt stupid…

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