Judgement Day for the Global Economy as BDI Tanks…Again

It’s frustrating how few people know of, or pay attention to, the Baltic Dry Index (BDI). You’d be hard pressed to find one Aussie news outlet reporting on it. And yet it’s arguably one of the most important health checks for the global economy.

The BDI tracks the price of shipping freight rates. It might look at the price of shipping iron ore through routes crossing the Indian Ocean, for example. As stimulating subjects go, shipping routes don’t rank highly. And perhaps that’s why the BDI remains so overlooked. But it shouldn’t. It’s very important.

Best of all, the BDI isn’t tainted like other metrics. Governments and central banks can’t bend the BDI to their will. They can’t ease its performance using monetary or fiscal instruments. Which makes it a haven for those among us attempting to measure the true state of the global economy.

I’ve written about the BDI on two prior occasions this year. When I first covered it back in May, it made for grim reading. Rates from Asian routes heading to Northern Europe had plunged 22.8%. Routes between Asian and US ports were down by 4% each.

At the time, the extent of the global slowdown wasn’t as obvious as it is today. The BDI suggested a global trade depression. Slowing global demand, and growth, became undeniable by June. Even more so once fears over China’s slumping economy spread to global markets.

The global economy was slowing, and it was reflecting the trade slump taking place.

And then something interesting happened.

first one

Source: Bloomberg

The BDI rose sharply between July and August (see above). There was no obvious explanation for it. Shipping freight rates were falling, even as the index climbed above 1,100 points. Most observers didn’t know what to make of it. As early as February the BDI had been at 500. A doubling of the index didn’t add up with the fact that global demand was slowing. And it wasn’t consistent with freight rates either, which were still falling.

It turned out that speculators were behind the BDI’s ‘rebound’. They were betting on shipping rates recovering this year. But they bet the wrong way. Global trade kept falling after June, as did shipping rates.

Eventually, markets caught wind of this. By August the BDI began its descent again. The index now resembles something closer to its true value. As it happens, it’s dangerously close to hitting a record low of below 500 points.

There’s no sign that a U-turn in fortunes is on the horizon. If anything, November proves that things are getting worse (see below). At no point in the last 30 years did the BDI have a worse November than in 2015…


second one

Source: Bloomberg

You can’t manipulate declining trade, as the BDI proves. Even if speculators bump up the index, it’s only temporary. You can’t inflate the trade of tangible goods over the long run. Eventually the truth catches up with everyone.

If trade is slack — which is an understatement — then global growth can’t see any real improvement. You won’t need any reminding of this fact. Both iron ore and coal have had a year to forget with weakening prices. Just this morning iron ore prices fell 4.5% on the back of falling Chinese steel production.

What next for the BDI and the global economy?

With the BDI falling three consecutive months, it could hit a new record low before the end of the year. But there’ll be no ‘recovery’ of the kind we saw in July.

If the ASX lost half of its value in three months, would there be panic? You bet. Yet barely anyone bats an eyelid when the BDI does the same. Anytime world trade is as bad as it is now, you can rest assured the global economy is in even worse shape.

Right here, we have proof that world trade is in recession. We could even start talking of it in terms of a depression. Yet you’ll never catch central banks speak of this. The same central banks who’d have you believe things are moving in the right direction. Who still talk of interest rates in terms of hikes, despite little proof of improving economic conditions.

Why does anyone think then that interest rate policy is reversing? The last thing the world needs now is for the Fed to start lifting rates. Rising US rates would tighten global credit. And with less capital in the system, it would only curb global growth.

Central banks claim to be guardians of economies the world over. They’re all about preventing recessions…or so they say. Yet with the shocking state of global trade, rate hikes would be nothing short of reckless.

Or maybe it’s time to pull the plug on this pyramid scheme once and for all. Central banks created this mess. But we’re the ones that have to live with the consequences of their actions. They can manipulate as they see fit, free of any responsibility. They’re the reason the global system is awash with phoney capital. And they enable governments to rack up debt. The likes of which no government can ever hope to pay back.

Buy your way into the world with debt, and pay for largesse with even more debt.

So let them raise rates then. Let them choke off global capital. We can watch as global trade draws back even further. And we’ll see pockets of recession snowball into a global depression.

If you didn’t know any better, you’d think this was the plan all along. A con job made in the ‘best interests’ of everyone. A stitch up we’ve accepted for the better part of a decade. More rate cuts and QE are good for the economy, they tell us. Without it, the entire system would collapse and anarchy would rise. Right? Not quite. But this scare campaign works. It leaves us convinced we need more stimulus, not less.

But soon enough they’ll convince everyone the global economy is healthy enough to reverse monetary policy. A policy of endless easing, that was once acceptable, will become ‘irresponsible’. And we’ll believe them.

As credit dries up, the sickly global economy will too.

And if you think Australia will weather the storm like we did in 2008, think again. When the next crisis hits, China won’t come to our rescue. Because unlike 2008, they’ll be the problem this time around. The commodity boom is done for. And it may never return.

All of which makes a recession in Australia likelier than it has been for decades. Markets and Money’s Greg Canavan says we’re on course for our first recession in 23 years. Yet that might be the least of our problems if the BDI is anything to go by…

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position.

From falling GDP growth, to declining terms of trade, all signs point to a crash. Trade imbalances have been growing for the better part of a year. Government revenues are down, and household debt is up. It adds up to a recession that’s coming sooner than you think.

But there is a silver lining in all this. If you act now, you can protect yourself from the fallout of the coming recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

Mat Spasic,

Contributor, Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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