The Baltic Dry Index: One Economic Indicator Worth Tracking

Economists and traders will find that most market indicators relying on forecasts are worthless in our present environment. Unemployment, inflation, consumer confidence, GDP... the data of traditional economic indicators are lagging.

One of many flaws is that the information is aged by weeks, sometimes even months, by the time reporting is done.

An alternate gauge used to monitor Global Markets is the Baltic Dry Index (BDI). The BDI is involved with the cost of shipping major raw materials and tracks brokered price quotes for moving goods from around the world.

A move up on the index means global trade is increasing and vice versa. Global economic activity ultimately influences the equity markets so heavy moves in the BDI often predict and precede like moves in the equity markets.

According to the economic principles of supply and demand:

1. The supply of cargo ships is limited. It takes years to build a new cargo ship and the high costs prohibit docking during periodic downturns.
2. The index tracks the cost of shipping raw materials instead of intermediate or finished goods thus providing a precise measurement on the volume of global trade at its earliest stages.
3. The number of ships in operation is not affected by changes in cargo rates...so even the slightest variance in demand results in changes to the index.

Plus:

• BDI is a real index and devoid of speculation as the index is not tradable.
• BDI is the only indicator with "real-time" updates...thus increasing its value.
• BDI is measured in a way that makes manipulation almost impossible.
• Reliable Data... BDI is not revised on a monthly or quarterly basis.

If you're looking for clear indication of a market bottom keep an eye on the BDI for a reversing trend.

*The following is to be taken as market commentary and general observation. It is in no way to be taken as advice or personal recommendation.

Disclosure: No related positions.

Comments

[investor88:]

Fair comment. Unless the BDI stabilizes and turns up, there is no real economic recovery.

2008 Nov 18 07:43 AM

[Fabien Hug:]

Good tip. Thanks .

2008 Nov 18 06:48 PM

[MILESCFA:]

And CNBC (?) said it was up today, making 4 days in a row!

2008 Nov 18 11:10 PM