Wednesday, March 28, 2012

A Dry Subject

It's one of those things I look at in passing in the process of some other, more specific, search... the Baltic Dry Index, or BDI. That's the market analyst's index of the cost of ship hires for bulk solid cargoes. What makes it valuable is that it is a very good leading indicator of heavy industrial activity as a whole across the world. As it measures the current bid prices for hiring certain size ships, it is also a direct indicator of profitability in the bulk cargo trade... and right now, it is pretty darn weak. Here's what I mean by that:

Over the twenty-plus years of the Index's history, it has demonstrated some amazing swings, hitting 10,000+ values in the 2007~2008 bubble boom and falling to the 600's in the collapse by the end of 2008... but what does that all mean? Well, the first level you should look at is the roughly 1,000 value as that happens to correlate fairly closely with break-even costs for owning and operating the ships. Generally speaking, this means that at over a thousand, shipping firms can make a profit; under a thousand, they are losing money.

But the second meaning, that as a leading indicator of manufacturing activity, is what gives the Baltic Dry its real utility because that speaks in a large way about the profitability of entire economies, not just shipping firms. That comes from the situation that prosperous economies consume (more), and the eventual end of that consumption is material possessions, and even in this day of software, media and financial instruments the main things that are consumed are *things*... and those are mostly manufactured. If you see an Index of a healthy couple-three thousand, you can rest assured that manufacturing firms believe that in some months ahead (say 3~6) they will be able to sell what they make, so they are buying the raw materials they need now and hiring ships to get those raw materials soon.

All good with that?

Right then, here's the problem: On February 2nd, 2012, the BDI went through its all-time floor to 662 (eventually falling to 647 in the next days). That article linked discusses a lot of the why.

As of the latest, March 27th 2012, the BDI is at 917, trending very slightly upward. For the curious, and later day readers, one can see the latest BDI here without subscribing to the Baltic Exchange.

Frankly, this isn't good. All the talk based on Stock Market and Financials speaking of how the economies of the major nations are on some pace of rebound *is just talk* for at least the next quarter or two.

And that means lots of things: continued increases in instability in the developing manufacturing exporters; little job growth in the established manufacturing economies, and; poor overall consumption growth in the consumer economies. The first could lead to problems that spill over (even more social instability in PRChina is particularly dangerous) and the latter two both imply poor-at-best GNP growth in places like the U.S.A., Europe and Japan... combine that with the national budget problems in those places and more bad things loom.

However... if those consumer economies can avoid making any more mistakes (Pick an example: GovJapan is still talking about raising the sales tax rate two-fold, which will certainly bubble consumption in the period between announcement and implementation and then crater demand thereafter... just about the worst thing a country can do when consumption is already depressed), and roll back some of the mistakes they've already made, you'll see a steady rise in the BDI *before* those economies really get going again.

This makes the Baltic Dry Index one of the things you may never have heard of that you should pay some attention to, and I remain amazed that it is not one of the commonly cited leading economic indicators in this interconnected world we live in.

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