If freight rates really do point the way for all other markets, you'd better hang on tight ........

Friday 15th January 2016

If freight rates really do point the way for all other markets, you'd better hang on tight ........

ref :- "Globalisation moves in mysterious ways" , Gillian Tett in The Financial Times

We all religiously follow the fortunes of the Baltic Dry Index, right ? If your answer is "No", then it might be worth starting  --  though so dark is the picture it's painting just now you could be forgiven for thinking it's too late.

The Baltic Dry Index (BDI) was set up in 1985 and on a daily basis provides a measure of the cost of shipping raw materials across the globe (not just the Baltic Sea !) . As such it is an accurate indicator of the levels of world trade, which of course is in itself a reflection of health of the global economy and the prospects for growth. So let's look at a few numbers, chosen not at all randomly:

In May 2008, the BDI sets a record high of 11,793

In December 2013 , the BDI is trading at 2,330

In August 2015, just 5 months ago, the BDI is still trading at 1,200

Today, the BDI has broken down through 400 for the first time EVER, and has just posted a new low of 383

It's hard to imagine any measure that has performed so badly, and it seems entirely appropriate that this record is being set on such a dismal morning for other markets. China's Shanghai Composite stock market today officially attained the tag of a "bear market"  --  if that comes as a surprise to those thinking that it's looked that way for a long time, technically a bear market is one that has fallen 20% from its recent highs (in this case, just in December). Oil has crashed through $30 and is setting 12yr lows just as some of the big boys are raising the possibility of $20 crude. All a horrible coincidence?

Of course not, but sceptics might argue that the BDI is shipping-specific, and subject to its own particular functions of supply and demand. Well, it's true that near-zero rates brought an explosion of credit and a frenzy of shipbuilding to meet the demand in the boom years, so to that extent over-supply could be called shipping-specific. But the demand side, falling off a cliff as both the demand for commodities and the prices they command do the same, is very much an indicator of what's going on in the global economy. But is the BDI itself a "leading" indicator ? Well, we've seen this perfect storm of a combination of a credit crunch and crashing commodity prices before , in 2008. Remember that BDI level in May of that year ? 11,793 ..... by December it was trading at 663, a fall of 94%.  We know what happened to other markets in 2008 and its aftermath, and the BDI's moves pre-empted those of stock markets then. There are those that say it's happening again, and 2016 will be nothing short of, quote unquote, "cataclysmic".

Whether you agree or not, it's an uncomfortable thought .... Have a nice day!