TheChek News Flow

The recent Op-Ed by FreightWaves CEO Craig Fuller warning about an imminent freight recession sparked a tidal wave of selling, but in retrospect, Fuller was spot on. As Bloomberg's Simon White writes, real economic activity in the U.S. is slowing sharply, and "this is showing up in lower demand for new trucks and autos, and a tailing off in freight volumes, leaving transport stocks facing more downside."

As White picks up where Fuller left off, heavy truck sales in the U.S. are a "very good leading indicator of economic activity, with 65% of the dollar value of North American freight moved by trucks. But new truck sales have been falling sharply, now at -23% on an annual basis. New auto sales are falling at a similar rate. Truck and auto sales combined are falling at a rate previously only associated with recessions.

That said, White cautions readers that "before you enter your equity sell orders, this is not a recession prediction. Recessions are signaled by a rapid regime shift across many areas of the economy and markets, and there is no sign we are in the process of this happening." Nonetheless, this sharp decline in vehicle sales shows slowing growth is in the mail.

There's more: freight volume growth has also been slowing. Annual growth in containers loaded at the Port of Los Angeles is steadily heading down to 0% after hitting 20% last year. Lockdowns in China are clearly having an impact here. Cities and regions accounting for over 40% of China’s 2020 GDP are in full or partial lockdown. The Shanghai freight index is 13% lower than it was six weeks ago, the sharpest decline seen in the ten-year history of the index.

As we noted over the weekend, and as White picks up in his note, "shipping rates have been falling, but this is academic as it is virtually impossible -- while such a draconian lockdown is in place -- for exporters to load boxes in their warehouse and move the goods on to the ships."

To be sure, while lockdowns in China may be a proximate cause of falling shipping rates, "the remote cause is the fall in global liquidity as central banks step back from historically loose monetary policies to try to stem inflation." As White shows in the next chart, global liquidity has collapsed and points to continued depressed shipping rates in the coming months.

That commodities, their movement around the world, and liquidity are intrinsically linked has become starkly clear in this cycle. As a commodity producer, if you don’t have the liquidity to cover the margin on your short futures positions, bankruptcy means you can’t ship and deliver your commodities, exacerbating the rise in prices and triggering more margin calls.

This liquidity and economic-demand driven decline in shipping and truck usage points to underperformance of transport stocks. The S&P transport index is down 11% from its high made last month. Transports and autos are roughly flat to the S&P year-to-date, so should begin to lag. Furthermore, being underweight medium-to-high duration sectors is a good idea when in an inflationary regime.

Six Chinese military aircraft transited the airspace of Turkey and Bulgaria, both of which are NATO members, on April 11 to deliver missiles to Serbia, a key ally of Vladimir Putin’s regime in Russia.

The move is likely to be regarded as a display of force, as Serbian President Aleksandar Vucic previously had said that NATO refused to let the shipments of Chinese weapons cross through the airspace of its member nations.

The Y-20 cargo planes delivered the anti-aircraft weapons systems to Serbia via the civilian Nikola Tesla airport in Belgrade.

The FK-3, which is the export version of China’s domestic HQ-22, is a ground-to-air missile system that is frequently compared to the United States’ Patriot missile system. It can reach speeds of about six times that of sound (Mach 6) and has a range of about 93 miles. One system includes 12 missiles dispersed among three launch vehicles and a separate radar vehicle.

Notably, the Chinese aircraft flew together in mass formation rather than one at a time, and used state-of-the-art MLat (multilateration) tracking systems instead of the more traditional radar. Open-source intelligence analysts also noted that at least some of the aircraft had removed the coverings for their flare and chaff countermeasures—defensive systems to help evade missile attacks—possibly signaling that the Chinese aircraft either anticipated meeting some resistance or wanted to be seen as anticipating resistance.

The shipment will allow Serbia to become the first user of Chinese missiles in Europe, and will augment an already expanding arsenal of Chinese and Russian drones, tanks, and warplanes purchased by the nation in recent years.

The incident underscored Western fears that further arms buildup in the region could erupt into conflict as Russia continues to wage its war on Ukraine, and both Chinese and Russian leaders promote their own forms of authoritarian expansionism.

Serbia is currently seeking membership into the European Union, amid concern by some to be preparing for war with its neighbors in the Balkans, particularly Kosovo.

Serbia and its neighbors were locked in a number of bitter wars throughout most of the 1990s, during which reports of ethnic cleansing were rampant. The wars reached a bloody crescendo with the 1999 NATO bombardment of Serbia (then Yugoslavia), which resulted in the deaths of some 500 civilians and the destruction of vital infrastructure and cultural monuments.

In 2008, Kosovo declared its independence from Serbia, and subsequently expressed a desire to join NATO. However, China, Russia, and Serbia have refused to acknowledge Kosovo as a legitimate nation.

With that history in mind, Kosovo’s former President Hashim Thaci accused Serbia of plotting a Crimea-like annexation of parts of the territory in 2017, before stepping down to face a war crimes tribunal for acts he allegedly committed during the Yugoslav Wars.

Serbia’s relationship with China and Russia remains somewhat uneven, however. On one hand, the nation voted in the U.N. to condemn Russia’s invasion of Ukraine, while refusing to join international sanctions against Moscow or to issue any further criticism of the Russian troops there.