Sub­mit­ted by Bran­don Smith from Alt Mar­ket

Baltic Dry Index Sig­nals Renewed Mar­ket Collapse

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 deri­sion 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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