U.S. FINANCIAL CONDITIONS have tightened as lenders adopt more conservative policies and higher prices for credit, risk and leverage. The Federal Reserve Bank of Chicago’s national financial conditions index has is in the 87th percentile for all months since 1990 up from the 24th percentile a year ago:
EUROPE’s gas futures prices have slumped for nearby delivery months as storage facilities near their maximum capacity but inventories continue to build rapidly. Calendar spreads from November through January have slumped into contango as storage is maxed out:
LONDON’s coal market in the late 1830s and early 1840s saw the last and most ambitious in a long line of attempts to restrict supply to keep up prices. The volume of coal sold each day on the city’s coal exchange was linked to prevailing prices on a sliding scale. If prices rose, more coal was sold. If prices fell, a smaller volume was offered for sale. An example of the sliding scale from February 1837 is reproduced below. The “limitation of the vend” was managed by the London coal factors acting on behalf of and in conjunction with the coal mine owners of the Northeast.
The system was possible because cargoes of coal carried by ship from the Northeast to the Port of London could only be sold and unloaded in strict order of arrival. Regulations enforced by the port authorities and the coal factors themselves required unsold and unloaded ships to wait their turn in the lower reaches of the river. Ships could only proceed to the “legal quays” or for lightering from midriver in the Pool of London once the factors had arranged a sale and the city’s metering office (which measured and later weighed the cargos) had assigned a metering officer.
The coal owners were organised in a series of coal trade committees which forecast demand and allocated output among the mines. The London factors had their own society which managed the rules of the turn system, the market, and the sliding scale as well as reporting on market conditions and cheating efforts to the coal trade committees (“Sea coal for London”, Smith, 1961).
The “limitation of the vend” and the “turn” system eventually broke down in the early 1840s in the face of increased supply from new sources in the Northeast and other parts of the country. At the same time, increasing numbers of vessels avoided the costly wait for sale and unloading because they were delivering cargoes for the government or the rapidly growing gas-manufacturing companies. Instead of waiting for sale after arrival in the port, more and more cargoes were sold prior to arrival and in some cases even before loading in the Northeast.
Before the system collapsed, the queue of unsold and unloaded ships in the river, which could amount to hundreds of vessels at a time, stuck for days or even weeks at a time, rafted along both banks from London Bridge down to Greenwich, with more queued downriver in sections managed by the harbour master all the way to Gravesend, attracted adverse attention from consumers, the city government and parliament, especially at times of high and rising prices, triggering multiple enquiries into anticompetitive practices.
Half-hearted efforts to resurrect the system in the later 1840s and early 1850s were unsuccessful because the system of supplying coal by ship faced rapidly growing competition from the delivery of coal by the new railways to the metropolis. Rail deliveries were not covered by the ship-based system of waiting turn or the sliding scale. The rail network also opened up new inland sources of coal supply in Yorkshire, Durham and the Southwest to compete with the traditional producers in the Northeast, overwhelming efforts at market management.
Development and deployment of steam-powered coal ships rapidly displacing the traditional sailing ships from the early 1850s onwards also made a return to the turn system impossible. Steam-powered ships were faster, larger and needed fewer crew members so they were cheaper to operate. But they were also more capital intensive so their profitability depended on maximising time spent voyaging and minimising delays loading and unloading. Steam-driven ships could not afford to wait their turn for sale and unloading. Many were contracted to gas companies, which had always been exempt from the turn system, and often bought direct from the mine owners in the Northeast, bypassing the factors and the coal exchange. The rest usually voyaged with orders to sell immediately on reaching the port – or the cargo had already been sold before they were even loaded.
The limitation of the vend and the turn system is a fascinating case study in the how to make a cartel work and the problems that can cause it to break down, anticipating many of the practices and challenges faced by the Organization of the Petroleum Exporting Countries (OPEC) and the wider group of exporters (OPEC+).
Rough procedure for sale of coal in London during the late 1830s and early 1840s under the limitation of the vend and turn system:
Coal Trade Committee of major mine owners in the Northeast of England forecasts coal demand;
Total coal production apportioned between mines according to quotas;
Coal mine owner sells coal to ship owner at the quayside in Northeast of England;
Ship owner conveys cargo down east coast to Thames Estuary;
Ship reports to Coal Factors’ Office at Gravesend;
Ship given turn number based on strict order of arrival;
Ship’s papers and cargo details expressed by steamer or horse to London;
Ship also reports to Harbour Master at Gravesend for section order;
Ship directed to one of seven sections in the Lower Thames between Northfleet and Blackwall to wait turn;
Cargoes for the government or for gas-manufacturing companies sent direct to unloading wharves, thereby avoiding turn keeping;
Cargo registered with both the Coal Exchange and with Metering/Weighing Office ;
Cargo entered into both the Sales Turn and the Metering Turn lists;
Ships can appeal to magistrate for immediate unloading on safety grounds;
Ships caught cheating sent to bottom of sales and/or metering lists;
Coal Factor appointed by coal mine owner files paperwork with Customs and Lord Mayor’s office and pays bond;
Cargo waits turn for sale with the number of cargoes sold each limited according to prevailing prices on a sliding scale;
Cargo sold on Coal Exchange by Factor to a professional First Buyer;
Coal Meter/Weigher appointed to measure the volume of cargo as unloaded;
Ship given permission to proceed upriver to the Lower Pool for unloading;
Unloading gang appointed by the owner of one of the local pubs*;
Metering officer and unloading gang actually unload cargo at specified minimum rate per day;
Payment terms: one-third cash, one-third in note payable in sixty days, one-third in four days after sale;
Coal Factor notifies coal mine owner of completion of sale in accordance with obligations;
Ships caught deviating from the system refused future cargoes by sellers in the Northeast;
Ship returns to the Northeast to collect next cargo;
Coal Factors Society sends regular report on market conditions to coal owners in the Coal Trade Committee.
* Not a joke. Gangs got hired on the understanding they would spend a large part of their earnings in the pub. There were 70 public houses between the Tower of London and Limehouse where men who wanted to work would assemble. “He who spent most at the public house had the greatest chance of work” (“London labour and the London poor”, Mayhew, 1851).
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U.S. FINANCIAL CONDITIONS are tightening rapidly, nearing levels consistent with the onset of a recession or at least a pronounced mid-cycle slowdown. The Federal Reserve Bank of Chicago’s adjusted financial conditions index, which measures financial pressure, has risen to the highest since the first wave of the pandemic in 2020 and before that 2011. In contrast to those episodes, however, this time the central bank plans to tighten conditions even further to squeeze inflation out of the economy rather than easing them to support growth and employment:
SOUTH CHINA continues to experience torrential rainfall, with cumulative precipitation this year at Xiangjiaba on the Sichuan/Yunnan border almost +60% higher than the seasonal average for 2014-2021, and even heavier rains expected in July and August:
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Finland prepares for end of Russian gas flows ($BBG)
U.K. grid practises black start with renewables ($BBG)
* An interesting cluster of stories has emerged over the last 24 hours about China increasing crude oil purchases from Russia, but using the extra volumes to replenish strategic reserves, which the White House says would not violate any sanctions. The first six items should all be read in this context.
China does not report commercial or strategic reserves and there is less distinction between them than for IEA countries, so there is no way of ascertaining whether extra crude is really going into strategic inventories or being added to commercial stocks to be refined or depleted later. The concept of “replenishment” of strategic stocks is also curious because China did not join the U.S.-led emergency oil releases in late 2021 and early 2022.
An outside observer might conclude China is boosting its purchases of deeply discounted Russian crude, but the White House has decided to ignore it, at least for the time being, because it does not want to risk triggering a further rise in prices, especially before congressional elections in November, where inflation is emerging as the dominant political issue.
U.S. FINANCIAL CONDITIONS were tightening rapidly even before this week’s tumble in equity prices, as access to credit and risk capital becomes more restricted and expensive:
EUROPE’s GAS FUTURES summer-winter calendar spread from July 2022 to January 2023 has moved into a small contango of €2/MWh, down from a record backwardation of more than €70 in early March, as storage fills at record rates and inventories become more comfortable:
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U.S. FINANCIAL CONDITIONS for households and businesses wanting to borrow or raise capital tightened again last week and are the most restrictive since the first wave of the pandemic in 2020 and before that 2012:
U.S. INFLATION is becoming more deeply embedded in the economy with service sector prices climbing at an annualised rate of almost 8% over the last three months, the fastest increase since 1990 and before that 1982.
Some commentators have dismissed the increase inflationary pressure as a problem of supply bottlenecks rather than too much demand. Separating the supply side and demand side this way is an analytical error. Insufficient supply is the same as excess demand and vice versa.
But the data also shows inflationary pressures have spread from the energy- and raw materials-intensive merchandise sector to the labour-heavy services sector. Rapid service sector price increases usually signal the imminent arrival of a recession:
BUSINESS CYCLE turning points and phase transitions are hard to spot in advance or in real time in the official statistics because most data is published with a lag of 1-3 months. Latency in the statistical system conceals the much more rapid change in business conditions. But it may be possible to detect mid-cycle slowdowns and end-of-cycle recessions much closer to real time by focusing on the behaviour of key companies.
In presidential address to the American Economic Association in 2017, economist Robert Shiller characterised a recession as “a time when many people have decided to spend less, to make do for now with that old furniture instead of buying new, or to postpone starting a new business, to postpone hiring new help in an existing business.”
Decisions to reduce spending, postpone expensive purchases, defer or freeze hiring are all indicators of a potential slowdown. Sometimes the reasons will be company or household specific. But if there are enough companies and households behaving in the way the likelihood of an imminent slowdown is much higher.
In that context, these recent news headlines are all indications economic momentum is slowing:
“Uber to cut back on spending, treat hiring as a privilege” (Wall Street Journal, May 9)
“Twitter freezes hiring as two senior executives leave the company” (Wall Street Journal, May 12)
“Amazon’s net loss prompts query: has it built too many warehouses?” (Reuters, April 29)
This is not conclusive proof the major economies are entering a slowdown, and it cannot show whether it will be a mid-cycle soft patch or something deeper that qualifies as a recession, but the headlines are strongly suggestive pattern.
DISTILLATESHORTAGES are pulling up crude spot prices and calendar spreads as refiners maximise crude processing to meet demand for freight and manufacturing fuel:
U.S. FINANCIAL CONDITIONS are tightening rapidly as investors and intermediaries anticipate higher interest rates and a slowing economy. The Federal Reserve Bank of Chicago’s national financial conditions index – derived from 105 indicators covering risk, credit and leverage – shows conditions are the tightest since the first wave of the pandemic in 2020, and before that 2016 and 2012. The adjusted index, which attempts to isolate purely financial rather than real-economy factors, is the tightest since 2020 and before that 2011:
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