The Baltic Dry Index Collapse: A Tradeable Theme

One of the challenges and pleasures of being a (lower case) macro man is the intellectual challenge of finding tradeable themes. Sometimes they fall into your lap, such as last year's "implosion of the world financial system" theme. In other environments, things can become a bit trickier, not least because timing is just as important as direction in implementing a trade.

One of Macro Man's core views for the past several months has been that following the gradual waning of the financial crisis, there remains a bone-crushing recession to cope with in 2009. One of the direct outcomes of the hit to global domestic demand is, unsurprisingly, sharply falling trade volumes.

Last summer, the Baltic Dry Freight Index collapsed, a move which at the time was characterized as somewhat overdone. Since making a low late last autumn, the index has essentially flat-lined, implying that there is little to no fresh marginal demand for shipping.

Trade data around the world has subsequently confirmed the message from the BDIY. Taiwanese exports fell 41% (!!!!) y/y in December, while trade figures throughout the rest of Asia have shown similar weakness (if not quite of the same magnitude).

Now, there is a popular view that while current data is poor, the stimulus packages in China will bail out the Asian region if not the world. Macro Man is sceptical. Indeed, the greatest risk to asset prices is that the Chinese stimulus is a damp squib. And if you need any reminders of what that means for the world, check out the chart below, which shows China's trade balance with the rest of Asia. China usually runs a tasty deficit with Asia, as they import components for onshore assembly and re-export. Observe how China has managed to shift demand abruptly lower with Wal-Mart style ruthlessness.

Even Japan has started to suffer, as its trade balance has moved into deficit for the first time since the late 70's. The difference between now and then, of course, is that over the past few months Japan's terms of trade have improved sharply, whereas they were awful in the late 70's.

Continued weakness in global trade is one of Macro Man's favourite themes. The question then becomes how to play it. He likes being short the Singapore dollar as a proxy for pan-Asian trade volumes, plus there's a kicker from a possible devaluation in April (the MAS policy easing mechanism).

He also likes being short the Australian dollar, which in a sense is more of a pure China play via the commodity channel. Of course, Australia has its own domestic recession and collapsing housing bubble to deal with, which should further erode whatever erstwhile yield support that the Aussie has enjoyed.

Of course, one of the occasional frustrations about this industry is getting the economics spot on but failing to realize that via the trade that one implements. However, both of the trades above appear to be gaining market traction this week. In honesty, Macro Man isn't quite sure what to hope for with today's release of November trade figures in the US....well, other than lower volumes all round, which is after all at the core of his view.

Comments

[2houndz:]

You are not alone with the frustration of calling the right move based on sound logic and having the trade go wrong because of timing. When things looked bleak to me, the market didn't seem to see it for another 3-4 months. I'm certainly not smarter than the crowd, but apparently my glasses don't have the same rose-color tint.

As usual this is well-reasoned advice, but it still creeps me out when people write about themselves in the third person.

Jan 13 08:59 AM

[Conan the B...:]

Essentially, I would hazzard a guess that he sits in front of his computer and tries to put his thoughts into perspective. Writing in the third person probably allows him to bounce his thoughts off of himself.

I talk aloud sometimes when something previously in the background suddenly makes sense and I scramble online to verify.

Macro, probably has various screens available one with charts, the other with musings and occasionally, he melds the two and puts out an Article.

Because he has been at it for many years and is at ease doing it this way, The Articles come out more coherently than anything I would be able to do.

Being good at what you do has a drawback, there is no one else to call on for inspiration. So one goes for introspection and third party writing.

IMHO

Jan 13 11:16 AM

[secmaven:]

The collapse put Dryships at 3 and change. Within two weeks it was 15. If you are trading the Index you better trade it in reverse.

Jan 14 11:27 AM

[Conan the B...:]

DRYS, lot of debt.

China reported last night that imports fell about 22% in November and exports (oops do not remember) say 2%.

Anyways, the Chairman of the Hong Kong Industrial Federation estimates the future closing of 4,000 of its 17,000 shops and reflective job losses of 25% of its workforce or 2.5 million out of 10 miilion people.

Bloomberg Television, AM 1/14/09.

How bad things get before flattening is anybodys guess.
Since, DRYS has jumped 400% off its lows, I think it is relatively overbought.

Believe me, more and more analysts will come out of the woodwork dolling out sells on the whole sector.

Jan 14 04:50 PM