How The Baltic Dry Index Predicted 3 Market Crashes: Will It Do It Again?

Feb. 18, 2015 7:31 AM ETSPY, DIA, QQQ, IWM60 Comments
Jonathan Fishman profile picture
Jonathan Fishman
1.76K Followers

Summary

  • The BDI as a precursor to three different stock market corrections.
  • Is it really causation or is it correlation?
  • A look at the current level of the index as it hits new lows.

The Baltic Dry Index, usually referred to as the BDI, is making historical lows in recent weeks, almost every week.

The index is a composition of four sub-indexes that follow shipping freight rates. Each of the four sub-indexes follows a different ship size category and the BDI mixes them all together to get a sense of global shipping freight rates.

The index follows dry bulk shipping rates, which represent the trade of various raw materials: iron, cement, copper, etc.

The main argument for looking at the Baltic Dry Index as an economic indicator is that end demand for those raw materials is tightly tied to economic activity. If demand for those raw materials is weak, one of the first places that will be evident is in shipping prices.

The supply of ships is not very flexible, so changes to the index are more likely to be caused by changes in demand.

Let's first look at the three cases where the Baltic Dry Index predicted a stock market crash, as well as a recession.

1986 - The Baltic Dry Index Hits Its first All-time Low.

In late 1986, the newly formed BDI (which replaced an older index) hit its first all-time low.

Other than predicting the late 80s-early 90s recession itself, the index was a precursor to the 1987 stock market crash.

1999 - The Baltic Dry Index Takes a Dive

In 1999, the BDI hit a 12-year low. After a short recovery, it almost hit that low point again two years later. The index was predicting the recession of the early 2000s and the dot-com market crash.

2008 - The Sharpest Decline in The History of the BDI

In 2008, the BDI almost hit its all-time low from 1986 in a free fall from around 11,000 points to around 780.

This article was written by

Jonathan Fishman profile picture
1.76K Followers
I am a highly trained professional equity analyst. My specialty is finding companies with excellent ratios of risk to reward. Before going independent, I was the head analyst at a boutique Israeli hedge fund. Today I am a consultant to several multibillion-dollar firms. I have covered many sectors, including technology, solar and semiconductors. I have learned to connect the dots and discern how forces in these various industries will affect individual companies. I am a big believer in analyzing investments from the top down. This means identifying themes and trends that can reveal where industries and individual companies will be in the future. There are no magic formulas for this process, just a lot of hard work. After I've found a company, analyzed it and concluded its value, then it is just like a poker game with endless cards. All we have to do is sit and wait for the next card to reveal itself and adjust our thesis accordingly. Once we find the true value of a company, we must ignore day-to-day market chaos. If we have done our research properly, we do not need to worry if the Dow goes up or down a particular day, week or month. Peter Lynch, Ben Graham and Phillip Fisher are my biggest influences. I encourage anyone who wishes to learn more about the market to read any of their books.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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