Starting in a London coffee house about A.D. 1744, the Baltic Dry Index (BDI) has since measured of the price of moving major raw materials (such as coal, iron ore and grain) by sea. Today, that measurement is made daily and almost minute-by-minute.
The demand for shipping varies with the amount of cargo that is being traded or moved in various markets. Thus, the BDI indirectly measures global supply and demand for dry bulk commodities shipped internationally. Because dry bulk primarily consists of materials that function as raw materials in the production of intermediate and finished goods (such as concrete, steel, food, etc.) the BDI is an efficient “leading economic indicator” of future economic growth and production for the global economy.
According to The Baltic, the BDI “provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade—devoid of political and other agenda concerns.” This absence of political influence is important because the BDI is one of the few economic indicators can’t be manipulated to deceive the public.
Other leading economic indicators—which serve as the foundation for important political and economic decisions—are often manipulated to serve special interests. Payroll or employment numbers are often estimates; consumer confidence measures mere sentiment; gross national product figures are consistently revised, etc. On the other hand, the BDI is totally devoid of speculative content. Unlike stock investing, people don’t book freighters based on sentiment or a hunch. People only book freighters when they actually have cargo to move.
Thus, the BDI provides a very accurate measure of the amount of “global” trade that’s taking place at any given time, and thereby provides a very accurate picture of the true state of the “global” economy.
However, it must be noted that the BDI measures the demand for shipping capacity versus the supply of ships. Because it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the California desert—the supply of cargo ships is generally tight and inelastic. Usually, there are “just enough” ships to handle whatever demand currently exists. As a result, the BDI is a very sensitive indicator and subject to dramatic swings based on relatively small changes in supply or demand. E.g., a small increase in the number of cargo ships (or a small decrease in the volume of cargo to be shipped) can push the price of shipping down significantly. In theory, the BDI might be down dramatically for several months and just as suddenly spike back upwards.
Therefore, it’s important to recognize that marginal increases in demand can push the BDI higher quickly, and marginal decreases in demand can cause the index to fall rapidly. Since the BDI is so sensitive that it can make dramatic changes in short periods, it’s possible to exaggerate the significance of any change in the BDI.
Recognizing the BDI’s sensitivity and susceptibility to sudden change, it is nevertheless true (and shocking) to discover that the BDI has fallen by about 94% from its all-time high in May of A.D. 2008 until today. That’s a 94% fall in just seven months. The BDI is now back to levels last seen twelve years ago.
According to some sources, the current low rates in the cost of shipping have moved dangerously close to the combined operating costs of vessels, fuel, and crews. As a result, some shipping companies may soon declare bankruptcy.
The current global credit crisis has caused the disappearance of letters of credit which are required to load cargoes for departure at ports. Lack of credit plus the collapsing price of raw commodities have created conditions that inhibit global commerce. These conditions have not been offset by recently cheaper fuel. Perhaps most troubling is the fact that while the Federal Reserve can pump billions of fiat dollars into circulation, the Fed has no power to issue global letters of credit. All of this tells us that 1) global trade is down spectacularly; 2) global trade is extremely sensitive to the availability of credit; and 3) global trade may not be quickly revived.
Movements in the BDI of this magnitude on a percentage basis are not entirely unknown. For example, in the fall of A.D. 2003 the BDI doubled from roughly 2,300 to 4,600. That’s a 100% increase. Pretty impressive on a percentage basis. On the other hand, in terms of mere magnitude on the BDI chart, the ’03 increase was from 2,300 to 4,600.
On the same scale, this year’s decrease from May to December was from a high of 11,600 to a low of 800. The previous 100% increase was impressive; the current 94% decrease is impressive. But while the ’03 index increased by 2,300 points, the current index fell by almost 11,000 points. In terms of magnitude rather than percentage, this year’s index fell by almost five times as much as the ’03 gain. That’s not just impressive. That’s scary.
The ’03 gain was attributed to China’s sudden and seemingly insatiable appetite for importing huge amounts of raw materials and exporting manufactured goods. But if it’s true that China was largely responsible for the sudden BDI gains in ’03, it should follow that China may suffer much of the losses in today’s sudden fall in the BDI. Implication: China may be in for even more economic and political stress than the USA. China could see riots, revolution. Companies located in China to take advantage of cheap labor might be suddenly destroyed or nationalized. Chinese stocks could fall dramatically in price. Those who’ve invested their wealth in China may be in for some very sleepless nights.
Along with the fall in the BDI, charts of the CRB (Commodity Research Bureau Index), crude oil, Standard and Poor 500, soybeans, and copper have fallen almost identically. Only gold and 10-year Treasury Bills have resisted the BDI trend. Gold has declined modestly while the BDI collapse 94%. Only 10-year US treasury bills have actually gained as compared to the BDI. Soon, however, when folks realize that our gov-co can’t truly redeem its bonds, only gold is likely to preserve wealth during the BDI fall.
Conclusions: The Baltic Dry Index (BDI) indicates:
1) Global trade is down dramatically;
2) There is no indication that global trade will revive any time soon;
3) As much trouble as may be coming at the USA today, even more may be headed for China;
4) If we can’t purchase goods from China, there may soon be need and opportunity to reindustrialize the USA;
5) The global economy runs on credit. Credit is based on debt instruments. I’ve guesstimated since July that 80% of most debt instruments can’t be paid and therefore won’t be paid. If I’m right, we will inevitably see a vast reduction in the amount of credit available to run the national and, especially, global economies. Unless the masters of the universe can devise a scheme to put our Humpty-Dumpty credit system back together again, global free trade may soon be largely a thing of the past while the forces of nationalism, protectionism (high tariffs) and reindustrialization once again become predominant.
While we wait to see the future unfold, you can search out the BDI on the internet, follow its movement, and use it as a fairly reliable “leading economic indicator” to predict where global and US economies are headed, and perhaps even the price of gold.
Buckle up.
