Baltic Dry Index Crash Alert

Reading time: 1,642 words, 4 to 7 minutes

Regular readers know that one of the important gauges I rely on is the Baltic Dry Index to forecast the health of the global economy. The Baltic Dry Index tracks world-wide shipping rates of dry bulk commodities such as grain, ore, coal, etc. and it is not subject to manipulation and intervention because shippers don’t book cargo unless they have something to ship.

Last Friday, the Baltic Dry Index crashed more the 50% from 1799 to 893. See the chart below

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Notice how the current level is as low as the recession of 2001 – 02 and the crash of 2008. Analysts point out that major ship building in the last couple of years has increased the supply of ship capacity. No doubt that has some influence but it overlooks older, surplus ships being mothballed and certainly doesn’t account for a 50% drop in one day. In fact, from the long-term chart below, you can see the long term downtrend. The Index is in a bear market.


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So, why is this important? Let’s do a quick review. America is in a Depression. The EU, the world’s largest trade bloc (population 380 million) is melting down and going into another recession. The world’s 3rd largest economy, Japan is entering its 3rd recessionary “lost decade” and the whole world is waiting with bated breath for China, the manufacturing giant, to save us all.

That’s not going to happen. Analyst Prieur du Plessis of Postcards from Cape Town has compared the seasonally adjusted the Chinese CFLP Manufacturing PMI Index to the Baltic Dry Index. His startling conclusion is that “the monthly seasonal factors and the Baltic Dry Index track each other. The reason why is not hard to find, as China is by far the world’s biggest consumer and importer of commodities and therefore the biggest player in dry bulk.”

In other words, China has captured so much global manufacturing that the Baltic Dry Index is, in fact, a leading economic indicator of the Chinese economy. And, last Friday, the Chinese economy fell off a cliff. China is not going to save the world. It can’t even save itself now.

Stay tuned. 2012 is going to be a painful year.

Gerold
January 24, 2012

UPDATE Jan. 31, 2012

It’s always good to see that mine is not entirely a lone voice in the wilderness of propaganda and media bullshit. Here’s Brandon Smith writing for USAWatchdog

Baltic Dry Index Signals Renewed Market Collapse

By Brandon Smith

Guest Writer for USAWatchdog.com

Much has been said about the Baltic Dry Index over the course of the last four years, especially in light of the credit crisis and the effects it has had on the frequency of global shipping. Importing and exporting has never been quite the same since 2008, and this change is made most obvious through one of the few statistical measures left in the world that is not subject to direct manipulation by international corporate interests; the BDI. Today, the BDI is on the verge of making headlines once again, being that is plummeting like a wingless 747 into the swampy mire of what I believe will soon be historical lows.

The problem with the BDI is that it is little understood and often dismissed by less thoughtful economic analysts as a “volatile index” that is too “sensitive” to be used as a realistic indicator of future trends. What these analysts consistently seem to ignore is that regardless of their narrow opinion, the BDI has been proven to lead economic direction in the market movements of the past. That is to say, the BDI has been volatile exactly BECAUSE markets have been volatile and unstable, and is a far more accurate thermometer than those that most mainstream economists currently rely on. If only they would look back at the numbers further than one year ago, they might see their own folly more clearly.

Introduced in 1985, the Baltic Dry Index first and foremost is a measure of the global shipping rates of dry bulk goods, mostly consisting of vital raw materials used in the creation of other products. However, it is also a measure of demand for said materials in comparison to previous months and years. This is where we get into the predictive nature of the BDI…

In late 1986, for instance, the BDI fell to its lowest level on record, then, began a slow crawl towards moderate recovery, just before the Black Monday crash of 1987.

Coincidence? Not a chance. From 2001 to 2002, a similar sharp collapse in the BDI preceded a progressive drop in the Dow of around 4000 points, ending in a highly suspect (Fed engineered) illegitimate recovery. In 2008, the index fell to near record lows once again just before the derivatives and credit crisis hit stocks full force. To imply that the BDI is not a useful measure of future economic trends seems like an astonishingly ignorant proposition when one examines its very predictable behavior just before major financial downturns.

This is not to suggest that the BDI can be used as a way to play the stock market from day to day, or often even month to month. MSM analysts rarely look further than the next quarter when considering any financial issue, and that is why they don’t understand the BDI. If an index cannot be used by daytraders to make a quick buck in a short afternoon, then why bother with it at all, right? The BDI is not an accurate measure of the daily market gamble. It is, though, an accurate measure of where markets are headed in the long run and under extreme circumstances.

Over the course of the past month, the BDI has fallen around 65% from above 1600 to 726. Mainstream economists argue that the BDI’s fall in 2008 was a much higher percentage, and thus, a 65% drop is nothing to worry about. They fail to mention that shipping rates never recovered from the 2008 collapse, and have hovered in a sickly manner near lows reached during the initial credit bubble burst. By their logic, if the BDI was at 2, and fell to 1, this 50% drop should be shrugged off as inconsequential because it is not a substantial percentage of decline when compared to that which occurred in 2008, even though the index is standing at rock bottom. Yes, the useful idiots strike again…

Looking at the rate and the speed of decline this past month, it’s hard to argue that the current 65% drop is meaningless:

Another subversive argument against the BDI is the suggestion that it is not the demand for raw materials that is in decline, but the number of shipping vessels out of use that is growing. A smart person might suggest that these two problems are mutually connected. An MSM pundit would not.

In 2008, many ships were left to wallow in port without cargo, but this was due in large part to two circumstances. First, demand had fallen so much that too many ships were left to carry too little raw materials. Second, credit markets had sunk so intensely that many ships could not find trade financing necessary to take on cargo. In either case, the BDI still falls, and in either case, it still signals economic danger. The only way that the BDI could signal a major decline in shipping demand artificially or inaccurately is if a considerable number of ships under construction were suddenly released onto the market while there is no demand for them. There have been no mass increases or extreme changes in cargo fleets this past month, or at all since 2008, which means, the BDI’s decline has NOTHING to do with the number of ships in operation, and everything to do with decline in global demand.

What is the bottom line? The stark decline in the BDI today should be taken very seriously. Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval. All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving. They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest. They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely. Is it any wonder that the Baltic Dry Index is in such steep deterioration?

Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities. Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities. Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation). Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus. Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us. It must be watched with care and vigilance…

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About gerold

I have a bit of financial experience having invested in stocks in the 1960s & 70s, commodities in the 80s & commercial real estate in the 90s (I sold in 2005.) I am appalled at our rapidly deteriorating global condition so I've written articles for family, friends & colleagues since 2007; warning them and doing my best to explain what's happening, what we can expect in the future and what you can do to prepare and mitigate the worst of the economic, social, political and nuclear fallout. As a public service in 2010 I decided to create a blog accessible to a larger number of people because I believe that knowledge not shared is wasted.
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8 Responses to Baltic Dry Index Crash Alert

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    • Nurdin says:

      Such a great article . Thanks.I too beeilve that baltic dry index can be used to see overall direction of worldwide economies. So this sharp fall tells us that we are in perfect bear markets and the jump we recently saw in stock markets worldwide is definitely a typical bear market rally meant to trap investors.Going forward, i do see markets falling (ofcourse we cant and we shouldnt time the fall) but the overall direction of trade should be downwards. The fall may be similar to or worser than 2008.Investors should short on every rise in these bear markets (like we buy on dips in bull markets) and then wait patiently to let their Selling position generate long term profits. Commodities have started to cool off now and if they start to fall considerably, we will probably see the fall very soon.

  3. Pingback: Canada Collapsing | Gerold's Blog

  4. Uma says:

    Such a great article…. Thanks.

    I too believe that baltic dry index can be used to see overall direction of worldwide economies. So this sharp fall tells us that we are in perfect bear markets and the jump we recently saw in stock markets worldwide is definitely a typical bear market rally meant to trap investors.

    Going forward, i do see markets falling (ofcourse we cant and we shouldnt time the fall) but the overall direction of trade should be downwards. The fall may be similar to or worser than 2008.

    Investors should short on every rise in these bear markets (like we buy on dips in bull markets) and then wait patiently to let their Selling position generate long term profits.

    Commodities have started to cool off now and if they start to fall considerably, we will probably see the fall very soon.

    • gerold says:

      Good analysis. I agree that, although we can see the direction, the timing is always difficult to predict. Shorting the rises will be the only way to profit in a falling market but some investors are frightened of short-selling or can’t if they’re in registered pension plans. However it’ll be the only way to make money in a falling market. The alternative is sit on cash and lose to inflation.
      BTW – yesterday “American Shipper” reported January U.S. rail shipments are already down in January.

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