Baltic Dry Index Tells the Real Economic Story

Let me preface this discussion by stating that I am not a technical analyst and don’t pretend to be. In this post you won’t see any discussion of resistance and support levels, wave counts, bollinger bands, head and shoulder patterns or channels. However that doesn’t mean I don’t believe in paying attention to charts, especially one as interesting as that shown below:

For those that are unaware, the Baltic Dry Index (BDI) is a real-time, unadulterated ( i.e. not massaged in any way by government or other agencies) daily average price of what it costs to ship raw materials across the globe via 26 different shipping routes. Since it is real-time, it is one of the best economic indicators available and is a proxy for the global demand for commodities.

The chart above shows a significant divergence between the BDI and the S&P500 since the beginning of July this year. The BDI plunged in the wake of last years crisis, bottomed out in December and recovered strongly through June of this year. However since June the BDI has fallen approximately 45% signaling a drop off in global demand, whilst the stock market continues to factor in ever greener pastures. Furthermore, consider the chart of the BDI versus the price of copper shown below:

Same story, whilst the price of commodities has soared on the back of expectations of a strong global recovery, the BDI says otherwise. Have both the stock markets and commodities gotten ahead of themselves? The BDI currently suggests that could the case. The stock market rally since March has been impressive (although volume has not been), however, at some point stock market expectations will need to be matched by economic reality.

Comments

[Pat C:]

I believe rail traffic matches this trend too but maybe not this dramatic, not sure. Would be interesting to see both of them graphed together.

Sep 23 03:16 PM

[conceptwizard:]

I agree that rail and transportation tonnage will confirm what the BDI is telling us. There is no recovery. When a recent interviewer asked Warren Buffett if he was on a desert island and could only receive one statistic, what would it be. The answer "transportation Tonnage". Why, because this is the true pulse of the Global economy and cannot be manipulated as everything else is.

Commodities are increasing because the dollar is falling, the market is being falsely pumped by indirect injections from the FED.

The FED will soon have to decide to save the dollar or bull the markets, it can't be both, and the deadline for that decision is fast approaching.

Sep 23 03:44 PM

[endoftheworld:]

It could be there is excess shipping capacity in which case shipping prices will not keep a linear pace with the materials/commodities

Sep 23 04:33 PM

[nukldrager:]

At last! An antidote for Tyler Durden. Thanks, looks like a reality check that won't bounce.

Sep 23 05:02 PM

[JeffDB:]

Speaking of Tyler Durden, he had an interesting post on Sept. 16th, showing images from Google Maps with ships graphically represented as either in use, or sitting and waiting.

www.zerohedge.com/arti...

Sep 23 07:54 PM

[yellowhoard:]

It would be interesting to know how much of the BDI is accounted for by Chinese hoarding of raw materials as they diversify away from US debt?

Sep 23 09:02 PM

[Mark Bern:]

Jeff - Thanks for the link. That was eye opening.

Yellow - I've heard reports that the warehouses in China are full, so now we may be starting to see the realities of the global economy since July. But I think you are right that Chinese speculation in hard commodities was making things look better than they really were. So, now that the China green shoot is basically dead, what do you expect the MSM to feed us next? Maybe a rebound in housing is just getting started? As far fetched as that may sound, I'd bet they try it.

On Sep 23 07:54 PM JeffDB wrote:

> Speaking of Tyler Durden, he had an interesting post on Sept. 16th,
> showing images from Google Maps with ships graphically represented
> as either in use, or sitting and waiting.
>
> www.zerohedge.com/arti...

Sep 23 09:24 PM

[doubleguns:]

Mark, trying to convince me that the housing has rebounded is like telling me jobs are coming back by the hundreds of thousands. Hahahahaha

I like your point. sic....

Sep 23 09:59 PM

[doubleguns:]

Your point should be very carefully considered. All jokes aside. It would be interesting to note available tonnage over the past 2-3 years to determine the answer to that question.

TFA any help with that?


On Sep 23 04:33 PM endoftheworld wrote:

> It could be there is excess shipping capacity in which case shipping
> prices will not keep a linear pace with the materials/commodities

Sep 23 10:02 PM

[Donald Ingram:]

The BDI is one of the last 'true' indicators that has not been 'massaged'. No one can construct a true picture of today's global economic situation, as economic figures are more and more contradictory or simply absurd. Measurement data and instruments have been so manipulated that its like looking through a dirty window pane at night to try and read a newspaper on the sidewalk! The media reflect this chaos and contribute to the confusion by spewing contradictory news on finance, economy and currency. Thank our lucky stars for the blogasphere!

Sep 24 02:54 AM

[Michael Clark:]

Chinese hoarding accounts for ALL of the bounce up from the bottom. Now China has stopped importing raw materials and the index is toast again.


On Sep 23 09:02 PM yellowhoard wrote:

> It would be interesting to know how much of the BDI is accounted
> for by Chinese hoarding of raw materials as they diversify away from
> US debt?

Sep 24 06:27 AM

[The Fundame...:]

Double,

Check out this link at Railfax:

railfax.transmatch.com/


On Sep 23 10:02 PM doubleguns wrote:

> Your point should be very carefully considered. All jokes aside.
> It would be interesting to note available tonnage over the past 2-3
> years to determine the answer to that question.
>
> TFA any help with that?

Sep 24 08:11 AM

[Jimbo:]

Apropos of the previous comments, I have observed what seems like thousands of 18 wheel trucks parked and not running. UPS, Fed Ex and the Post Office seem to have raised rates but traffic on these carriers seem to be down. Richard Russell keeps saying that Dow Theory requires watching the transportation averages as well as the Industrials. Looking out to the next year, what do we do if the option ARMS reset and employment does not pick up? Does the Fed just keep on keeping on?

Sep 24 11:38 AM

[Wildebeest:]

Yes, the real story is an absence of relative demand. FWIW some plots of BDI vs all base metals here:

wildebeests.wordpress..../

Summary here:

seekingalpha.com/insta...

Sep 27 06:09 PM

[Michael Clark:]

Do you think Dr. Ben really cares about saving the US Dollar? He WANTS inflation. He WANTS to devalue the currency. He desperately NEEDS to keep interest rates low so the illusion of recovery can be maintained. I don't think Dr. Ben has any moral dilemma about robbing future generations of their solvency. I think he only cares about today, and about his reputation today.


On Sep 23 03:44 PM conceptwizard wrote:

> I agree that rail and transportation tonnage will confirm what the
> BDI is telling us. There is no recovery. When a recent interviewer
> asked Warren Buffett if he was on a desert island and could only
> receive one statistic, what would it be. The answer "transportation
> Tonnage". Why, because this is the true pulse of the Global economy
> and cannot be manipulated as everything else is.
>
> Commodities are increasing because the dollar is falling, the market
> is being falsely pumped by indirect injections from the FED.
>
> The FED will soon have to decide to save the dollar or bull the markets,
> it can't be both, and the deadline for that decision is fast approaching.

Oct 01 11:37 AM