We’ve made a habit this past year of tracking the state of the Baltic Dry Index (BDI) at The Markets and Money. We feel it’s one of the least tainted global economic indicators available to us. What it says about the global economy will tell you more than any bull or bear stock market ever will.
As it happens, it’s tells a rather traumatic tale about the economy. Without fail, the BDI has managed to go from bad to worse almost every time we look at it. Yet it surprised even us when we saw what just took place.
To say that the Baltic Dry Index has hit rock bottom would be an understatement. We certainly hope it’s rock bottom, anyway. But we’re not counting our chickens just yet. So how bad was it?
Well, the index fell to 298, which was 50% worse off than the previous record low of 556 set back in 1986. Like any index, the general rule of thumb to remember is that bigger equals better. There was a point, back in 2008, when the index was at over 11,000. Which means that the BDI has decline by 3,600% from seven years ago! To call the figures abdominal would be an understatement.
But what does the BDI actually measure? Essentially, the index tracks shipping freight rates. It might track the cost of shipping iron ore from Australia to China for example. Freight rates works much in the same way as the BDI itself. The higher the cost of shipping, the more demand there is, and the better the global economy is for it.
Admittedly, tracking this index is a dry subject for many people (the clue is in the title). Maybe that’s why it receives so little attention in the mainstream press. Either way, it’s a very important measuring stick that cuts through the noise and crap that dilute other indices.
As I’ve written before, the BDI isn’t influenced by anything other than pure economics. Policymakers can’t manipulate the BDI using their various instruments to polish a turd. So it gives us a good reference point from which to gauge the state of the global economy.
That’s not to say stock market speculators have tried to inflate the index before. They have, but with limited success. Last year’s attempt to do just that proved a temporary boost that didn’t last. The truth always wins out when it comes to freight shipping rates.
Let’s take a look at why the BDI is tanking as it is.
To be fair, its decline, awful as it is, is also somewhat predictable. Blame commodity prices for it. The ongoing commodity rout, which shows no signs of improvement, makes a huge difference to the BDI as well. But is that the only reason?
Dana Lyons, of J. Lyons Fund Management, says commodities alone can’t explain the dramatic falls we’re seeing. He notes:
‘However, the depths that the index is now plumbing is quite alarming and suggests trouble in the global trade picture.
‘It would also suggest perhaps that the deflationary pressure is not just a supply issue. Consider every prior drop in the Baltic Dry Index down to the 500–600 level. Each time, the index immediately jumped as if latent demand was just waiting for those lower prices. That development has not yet occurred this time around, even as prices are reaching 45% below the previous record low.
‘The Baltic Dry Index has become a trendy thing to mention in recent years when discussing global market and economic conditions. The truth is, nobody really ever knows for sure what the broader message is behind the index’s behaviour. That said, this recent plunge is making it quite difficult to conceive that it means anything positive in terms of the global economy and deflationary pressures.’
When the index falls to its lowest ever level on record, the broader message is pretty obvious. Shipping rates are plunging because the global economy is too. We don’t need to draw any more conclusions than that.
So what can policymakers do in response? What will change to arrest this slide? In other words, what we’re really asking is, how can we fix the global economy? There’s no obvious solution.
More than that, the quick fix, credit Band-Aid solution isn’t the answer either.
Does anyone out there still think that easy credit is going away anytime soon? No, me neither.
You can expect ever lower (negative) interest rates to become more commonplace. Not just in Australia but in the US too. And yes, US rates are going back down as quickly as they went up by a measly 0.25%. That token gesture has already run its course, just one month after it was carried out.
As for the European Central Bank, they’ve held rates at, or below, zero for years. And just last week, the Bank of Japan joined the club of global NIRP’ers that have rates in the negative.
How long before the Fed does the same? How long before Reserve Bank of Australia follows suit? Don’t put anything past them.
On top of lower interest rates, expect more quantitative easing too. More helicopter money for markets to play around with. To distort asset prices. To go towards things that never fulfil the intended purpose of fixing structural problems within economies.
Central bankers can try and convince us all they like. But the days of monetary easing have only begun. They’re not at an end, as markets were led to believe. We’re entering a new era of monetary madness. The BDI merely shows us how low we’ve sunk, and how crazy things are about to get.
Junior Analyst, Markets and Money
PS: Uncertainty over China’s economy is at the forefront of what’s playing out across global markets today.
According to Markets and Money’s Vern Gowdie, we’re already standing on the edge of this next financial crisis.
Vern is the award-winning Founder of the Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s Top 50 financial planners, Vern believes there’s nothing we can do to stop what’s coming.
It won’t be only stock markets that crash when the crisis hits. There’s another multibillion dollar market that’s poised to collapse when the credit bubble pops. Australia’s gone through two such credit bubbles in its history. The third, and latest, has been building for the last 65 years. When it pops, it won’t be pretty.
The fallout of this crash could do serious harm to your wealth. Yet, with a little bit of work, you can safeguard your wealth from the worst effects of the crisis. Vern will show you how to do this in his brand new report. To download a free copy of ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’, click here.