Much has been said about the Baltic Dry Index over the course of the last four years, especially in light of the credit crisis and the effects it has had on the frequency of global shipping. Importing and exporting has never been quite the same since 2008, and this change is made most obvious through one of the few statistical measures left in the world that is not subject to direct manipulation by international corporate interests; the BDI. Today, the BDI is on the verge of making headlines once again, being that it is plummeting like a wingless 747 into the swampy mire of what I believe will soon be historical lows.
The problem with the BDI is that it is little understood and often dismissed by less thoughtful economic analysts as a “volatile index” that is too “sensitive” to be used as a realistic indicator of future trends. What these analysts consistently seem to ignore is that regardless of their narrow opinion, the BDI has been proven to lead economic derision in the market movements of the past. That is to say, the BDI has been volatile exactly BECAUSE markets have been volatile and unstable, and is a far more accurate thermometer than those that most mainstream economists currently rely on. If only they would look back at the numbers further than one year ago, they might see their own folly more clearly.
Introduced in 1985, the Baltic Dry Index first and foremost is a measure of the global shipping rates of dry bulk goods, mostly consisting of vital raw materials used in the creation of other products. However, it is also a measure of demand for said materials in comparison to previous months and years. This is where we get into the predictive nature of the BDI…
In late 1986, for instance, the BDI fell to its lowest level on record, then, began a slow crawl towards moderate recovery, just before the Black Monday crash of 1987. 
Coincidence? Not a chance. From 2001 to 2002, a similar sharp collapse in the BDI preceded a progressive drop in the Dow of around 4000 points, ending in a highly suspect (Fed engineered) illegitimate recovery. In 2008, the index fell to near record lows once again just before the derivatives and credit crisis hit stocks full force. To imply that the BDI is not a useful measure of future economic trends seems like an astonishingly ignorant proposition when one examines its very predictable behavior just before major financial downturns.
This is not to suggest that the BDI can be used as a way to play the stock market from day to day, or often even month to month. MSM analysts rarely look further than the next quarter when considering any financial issue, and that is why they don’t understand the BDI. If an index cannot be used by daytraders to make a quick buck in a short afternoon, then why bother with it at all, right? The BDI is not an accurate measure of the daily market gamble. It is, though, an accurate measure of where markets are headed in the long run and under extreme circumstances.
Over the course of the past month, the BDI has fallen around 65% from above 1600 to 726. Mainstream economists argue that the BDI’s fall in 2008 was a much higher percentage, and thus, a 65% drop is nothing to worry about. They fail to mention that shipping rates never recovered from the 2008 collapse, and have hovered in a sickly manner near lows reached during the initial credit bubble burst. By their logic, if the BDI was at 2, and fell to 1, this 50% drop should be shrugged off as inconsequential because it is not a substantial percentage of decline when compared to that which occurred in 2008, even though the index is standing at rock bottom. Yes, the useful idiots strike again…
Looking at the rate and the speed of decline this past month, it’s hard to argue that the current 65% drop is meaningless:
Another subversive argument against the BDI is the suggestion that it is not the demand for raw materials that is in decline, but the number of shipping vessels out of use that is growing. A smart person might suggest that these two problems are mutually connected. An MSM pundit would not.
In 2008, many ships were left to wallow in port without cargo, but this was due in large part to two circumstances. First, demand had fallen so much that too many ships were left to carry too little raw materials. Second, credit markets had sunk so intensely that many ships could not find trade financing necessary to take on cargo. In either case, the BDI still falls, and in either case, it still signals economic danger. The only way that the BDI could signal a major decline in shipping demand artificially or inaccurately is if a considerable number of ships under construction were suddenly released onto the market while there is no demand for them. There have been no mass increases or extreme changes in cargo fleets this past month, or at all since 2008, which means, the BDI’s decline has NOTHING to do with the number of ships in operation, and everything to do with decline in global demand.
What is the bottom line? The stark decline in the BDI today should be taken very seriously. Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval. All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving. They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest. They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely. Is it any wonder that the Baltic Dry Index is in such steep deterioration?
Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities. Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities. Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation). Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus. Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us. It must be watched with care and vigilance...
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written by Braedalbane , January 30, 2012
Never heard of it. Now, thanks to you I have! You do continue to impress me with knowing things that one doesn't find in the MSM or even places where real news sometimes occurs. BDI? Far out Brandon.
Well looks like it's time to batten down the hatches, what hatches are left that is. Thanks for the education...as always. Much appreciated.
And you're absolutely right about non-frankenstein seeds. In other words real seeds. I've been working on that front myself. This is the year I get serious about "a garden". There are going to be some seriously freaked out perennials! Ha!
written by Dubbleoj , January 31, 2012
Supply has not only crept upward, it has leapt upward in the last few years. Just last year alone 60 super container ships (with capacity over 14,000TEU) were odered. This year new deliveries will increase supply by 12%. Delivered TEU capacity will be 766,000ish, with only 120,000TEU being scrapped. And this is just container vessels, total deadweight tonnage in all shipping is going through the roof. This will continue for the next two years as stupid owners keep buying stupid ships and dont scrap enough. Shipping companies have been waging a market-share war, lowering the hell out of prices to kill off the small guys, while the huge companies have been living off their cash reserves. Its been working.
Sure consumer demand is down, shipping portfolios are being offloaded by tons of banks making it hard to secure financing, whatever, all valid. I firmly believe in the BDI's value as an economic indicator, but to say that supply currently has no effect and is not creating an imbalance is a big mistake. Micro does affect macro.
Remember that huge WTI/Brent spread from last year? Most people assume it was due to the glut at Cushing combined with slack demand in the US, pushing prices DOWN. Whats going on now? Enbridge bought that pipeline from Conoco and started reversing its flow back to the Gulf, which (coupled with other political nonsense/market manipulation) has cut the spread by more than half. Thats a physical event by market players affecting an entire industry.
written by Brandon Smith , January 31, 2012
@Dubbleoj
Sorry, but 60 new ships is nothing. In 2010, there were over 50,000 cargo vessels in operation. The percentage of new ships being introduced into service is infinitesimal in comparison. If you are suggesting that a mere 60 ships are the cause of the current BDI implosion, I would have to say you have no clue what you are talking about. Just as I would say that the assertion that a single deal between Conoco and Enbridge is meaningless when compared to the Russian/Chinese bilateral trade deal revolving primarily around oil which gave slack to the market, at least for a time. There are far more important players and events going on out there than are obvious in the tiny world of the average daytrader.
Also, I'm not sure where you are getting the numbers for a 12% increase in new ship supply for 2012. It sounds like a purely hypothetical number, and I have found no evidence of such sizable orders in production at this time. I would certainly love to see a link that supports that claim.
Regardless of what happens in 2012, ship supply has not changed dramatically since 2008, when the BDI's primary collapse began. Orders for new ships have not increased anywhere beyond the standard. Again, the fall of the BDI today has NOTHING to do with the number of ships in operation and everything to do with the amount of goods available to ship.
Bottom line; the ships have not increased dramatically, but demand HAS decreased dramatically.
I realize its fun to play make-believe with irrelevant or obscure vessel production stats and think that one has a grasp on some hidden intellectual key to the markets, but that method of analysis simply doesn't fly these days. In fact, its how we got into the terrible position we are now in.
In our era of hyper-manipulated stocks and government indicators, one must acknowledge that the dominant theme here is the MACRO, not the micro. Focusing too much on the small picture draws a person to miss the big picture. The micro has not determined any substantial move in any market since the economic crisis began. We are living in a financial world of domino triggers and massive chain events. Its time we wake up to that fact.
written by ed farley , January 31, 2012
would also support your claim.
The whole oversupply issue is just the usual MSM normalcy bias. They'd be better off emphasizing the 'January Effect' than playing with non-existent statistics.
Good article.
written by Chan , January 31, 2012
I'm going to say that the historical coorelation is there.
I'd have to say that math is subjective and a 50% drop from $2 to $1 is meaningless. It can just as easily interpret as a no drop. I'm not going to say the situation applies here. I'm guessing the BDI drop percentage wise is significant. because it's a large number.
Secondly, we're in a hyper manipulated mass opinion market so as long as the manipulators say the BDI doesn't matter, it won't matter. It only matters if they decide so. I'm saying, it's within their control, not yours or the informed people's.
written by Umberto Indicci , January 31, 2012
The BDIY hit a low of 663 on 5 December 2008 and recently hit 702. It is very possible that the bottom is in and is being retested. Losses have been priced in. Check out DRYS.
written by Tbrowner , January 31, 2012
The shipping tonnage cost over time is the BDI. Other tipping point variables need to be considered such as percent utilization of existing shipping tonnage, port utilization, bunker fuel costs. Those variables can cloud the signal that the BDI gives to the global financial markets. I'm quite certain that corrected for some of these variables that a useful clear predictive picture would emerge. In a time where cost of capital is at historic lows, deleveraging is taking place, many commodity prices are being and have been distorted by speculation, not actual demand. Shipping is one of those commodities.
written by Ddaniels , January 31, 2012
Thanks everyone for the input and advice. So, tell us where to put our money and when? If I were buying SPX options, when should I start shorting them?
Thanks again!
written by Chan , January 31, 2012
@Ddaniels
So predicting the future and what the manipulators will do is useless, besides I'm not good at telling the future.
Basically Brandon and a bunch of people are trying to make sense of life, financial life specifically. It's the same way we -- people who have concerns -- go through life asking the questions of whether God exists, what the purpose of life, etc.
I don't think anyone has ever succeeded.
I'm not trying to belittle his research and informed state of mind.
Does it matter if the high or low tide is caused by the moon's gravitational pull? I say God pulls on it.
At the end of the day, it's useless to debate the causes, the BDI, the moon, or God. It's useful to know that as Rhett Butler said "there're always opportunities at the high a low of civilzation." You just be agnostic of the state of the world when it comes to the stock market.
So just commit yourself to the market and hope for it to move because a leveling market is money under mattress. Try to lose less than you gain, which means setting a stop loss.
If I say walking on the sidewalk is safe and you won't get hit by a bus, I'd be wrong. But if I say in general, you'll live then I'm right. So just spread your bets among 25 stocks or so.
Fly under the radar, that means 5 contracts max for any Options.
If you want more, deposit an aditional 25 cents.
PS: Don't forget math is subjective.
written by Brandon Smith , January 31, 2012
@Chan
The BDI is NOT subjective, especially compared to most other economic indicators which can actually be manipulated through capitol infusion or diffusion. In the world of economics, at its very core fundamentals, 1 plus 1 does indeed equal 2. Supply and demand are universal, and undeniable. You have only been conditioned by the mainstream system to think otherwise.
The whole "leave it in God's hands" thing is just a thinly veiled excuse for nihilism and laziness. Whatever you or I happen to believe, nothing good or honorable on this Earth has ever been done without the effort of the people to understand the world around them and to act when imbalance is prevalent. Conscience is inborn and inherent; it is also not "subjective". I'm not sure what kind of Christian you are, but every Christian around me would find your philosophy distasteful.
This is not about playing the market. The market is unplayable. The BDI is valuable in exposing this. The point is to change the market entirely, or to walk away from it completely, NOT to keep participating in the crime and "hope", like some naive child, that its destructive nature will somehow blow over.
written by Del , January 31, 2012
Chan is more likely 'New age' and postmodern, judging by his post.
written by T bagg Todd , January 31, 2012
Brandon, nice article. I learned something new today. I have had my money on the sidelines, my 401k has been sitting in dollars since the last big dip in the market a few months back. The market is extremely volatile, and I am confident it is heavily manipulated as you suggest. Just look at silver alone and that should be proof. But if the dollar gets devalued, and we are looking at Germany inflation in the 1930's, does it even matter where I put my dollars anymore? Isn't there a fund where you can bet on a stock market crash?
written by Denarius , January 31, 2012
-
Some recent posts on this very subject appear here
http://crowlee.proboards.com/index.cgi?action=gotopost&board=dailydenarius&thread=329&post=11126
and for the three posts following in the topic.
-
written by Vivek , January 31, 2012
"The whole "leave it in God's hands" thing is just a thinly veiled excuse for nihilism and laziness. Whatever you or I happen to believe, nothing good or honorable on this Earth has ever been done without the effort of the people to understand the world around them and to act when imbalance is prevalent. Conscience is inborn and inherent; it is also not "subjective"."
Then dive in here and get in touch if called.
http://aadivaahan.wordpress.com/2012/01/23/watershed-day-may-this-pour-through-a-million-pairs-of-eyes/
written by Umberto Indicci , January 31, 2012
Silver (AGQ) and DRYS ... short term.
written by Lazy Goblin , January 31, 2012
Then you need to educate yourselves.
WSJ put out a great article on the subject just yesterday.
http://blogs.wsj.com/marketbeat/2012/01/30/the-baltic-dry-meltdown-continues/
written by Umberto Indicci , January 31, 2012
Small gain ...
written by Anon , February 01, 2012
We, in the U.S., are headed for TROUBLE. Why? 1% of Americans are invested in silver and gold. Read more:
Source of the quotes which follow: MILES FRANKLIN NEWSLETTER
http://archive.constantcontact.com/fs003/1101357242253/archive/1109184235954.html
“Silver Eagle sales consumed 114% of U.S. domestic silver production in 2011, whereas Gold Eagle sales accounted for only 13.5% of domestic gold production.
The public is beginning to understand that silver offers a much more affordable way to protect one’s wealth than gold. This realization has now taken a bigger bite out of the U.S. domestic silver production pie than is available. Even though the United States can import silver presently to supply its investment and industrial
demand, this situation will change when the U.S. economy enters into STAGE 2 of the collapse.”
“Despite the terrible conditions during the “Great Depression”, at least the country had two positive factors going for it: 1) A banking system backed by gold and 2) vast resources of energy, metals and minerals to tap into to pull itself out of its current market ills.
Today, the banking system is on the verge of collapse and the country has consumed its best resources which peaked 40-50 years ago.”
“Briefly, Orlov witnessed firsthand the collapse of the Soviet Union in 1989 and then wrote a book titled Reinventing Collapse: The Soviet Example and American Prospects describing these different stages. According to Orlov, a country does not have to systematically go through all five stages of collapse. But when the financial collapse occurs, the commercial collapse is sure to follow. With all things considered, Orlov believes the overall conditions are far worse in the United States today than they were for the U.S.S.R in 1989.”
“The graph above indicates the degree of mass psychology in the different investments. Presently, the overwhelming majority is invested in the $17 trillion retirement market. Unfortunately, these retirement assets (all on fiat paper) will go the same way that the housing and financial markets did in 2008-2009. It is only a matter of time.”
GOT SILVER? (GOT GOLD?)
“All retirement plans are based on a continued income stream from the market. There is really nothing backing these assets except the faith that the market will continue to grow and function providing the returns to pay its investors when they retire. However, the financial system already experienced its Negative Paradigm Shift in 2007-2008, rendering growth at its necessary rate to perpetually sustain an income stream under a fiat monetary system now impossible.”
written by chris goodwin , February 01, 2012
I thought the Baltic index was for BULK freight rates, not containers, which are used for completed goods (manufactures) -not basic raw materials.
So 60 new container ships, even if of humongous size, should not have any impact on the BDI. Just as the "Dry" part of the name excludes oil and gas tankers, however ginormous they become.
But of course, with increasingly dispersed manufacturing capability, and at ever higher levels of competitive skill, the need to shunt things around has got to level off sometime (?)
written by Ronel , February 01, 2012
This article is correct. DRYS (Dryships) and TBSI paint the picture, including declining volume in the stocks. I can support this phenomena with a very personal observation: we lived close to the Canadian railway that takes cargo from Vancouver docks eastward into Canada. A main bloodline from the Orient. In 2003 - 2005 there were at least a train 1 to 2 hourly day and night passing our house. Then we moved away for a couple years and returned in 2009 to the same area close to this main railway. The train traffic dwindled to once every 8 - 12 hours, it was a stark difference. It is now 2012, and the trains have not increased. I rather trust those trains (and BDI) than what I am being told by big government.
written by Hugh B , February 02, 2012
Brandon
I have read your article after watching the BDI chart for the last 8 weeks. I can only agree with your analysis within your own chosen field. An outsider looking in with just a small understanding of charts would indeed know something to be seriously wrong.
On an aside “denial and stupidity” run rampant in human behaviour until people run out of room to practice both. Walking down any High Street in London would give the average Joe an indication of serious structural problems out there.
When Enron and World Com collapsed you began to understand that the 50,000 accountants at Arthur Anderson could not really count ............................ or they were counting pixel cash that was not really there. The re-capitalisation of the Banks with public cash has solved nothing except allowing the game to carry on slightly longer.
The current resource wars underway in the World today are for control of the raw products which your shipping index tracks. Everything is inter-connected and when an index such as the BDI collapses then those raw products are not arriving at the points of manufacture. In the short term the manufacturer’s may draw down on inventory in storage ........................ that game lasts no more than 2 months.
The end result of this is taking the medicine we should have done 2 years ago when the music stopped. Instead we refuse to tackle the structural problems and kick the can further down the line. There will indeed be a market collapse (world-wide) ............................ my guess , not long after the Olympic circus closes.
written by Philip Issac , February 03, 2012
Brandon
I'm not disagreeing with your overall conclusion of the state of the world, but specifically for the BDI from 2008 onwards I think the correlation with economic activity has broken down. The main cause is that prior to 2008, the sector was in a fair balance, now the capacities, ship-sizes, routes, etc have all changed. We must remember the BDI only averages daily spot charters for ships of a certain size.......today you have the likes of Vale owning and shipping iron ore in ships several times the size of the largest (capesize) ships included in the BDI
written by Brandon Smith , February 03, 2012
@Phillip
They were saying the same thing back in 2008 when the BDI collapsed right before the credit bubble burst.
"Shipping has changed"
"There are too many new boats"
"Raw material demand is merely shifting, not falling"
This is simply not the case. The BDI is a clear expression of global DEMAND for raw goods, and no amount of change in shipping routes is going to cause the BDI to drop 60% all the way to a near record low of 680 in the course of a month.
Also, you are incorrect on how the BDI is measured. The index includes vessels of the Handymax, Panamax, and Capesize dry bulk carriers, not just one size of carrier. The super-sized carriers which you are referring to have not been produced in near enough quantity to affect the BDI in the manner we see today.
With all that said, I suppose we'll just have to wait and see if I am correct. When the markets in Europe and the U.S. begin to tailspin, I suppose I could say "I told you so", but I would rather people just listen to common sense now so there is no need for me to point out their mistakes later.
written by ed farley , February 03, 2012
As I see it....
The index is down roughly 40% y-o-y which is a far more telling figure as it allows for the usual January effect of demand suppression, mainly caused by the (Chinese) new year hangover.
Any collapse in aggregate demand WILL lead to an immediate over-supply of ships, so stressing any supposed oversupply of shipping in itself as a reason for the fall is a somewhat myopic and disconnected way of looking at things. Of course, it can be viewed as an oversupply problem, but what are the accompanying factors? Besides, I believe the supply of bulk ships only increased 8.9% over the last year and 2.8% in the last three months. Hardly a devastating figure, if true.
And, lastly, when the MSM starts using Brazilian weather patterns as an explanation for the fall of such a key trade index then you know that they are engaging in outright obfuscation. And/or they really don't have a clue.
written by Steve L. , February 03, 2012
With the understanding that reduced shipping translates directly to vital shortages, particularly in countries that do not have favorable agricultural conditions to grow their own food, I have wondered whether there is any type of correlation between this index and the food shortages that were reported as an underlying cause of the "Arab Spring" revolutions that have occurred throughout the Middle East.
If that is true we could be in for another wave of revolutionary activity in another year or two.
written by Kevin R , February 04, 2012
@Brandon/author Great article but your "predictions have been common knowledge for weeks to months. IE Asia trade agreements, EU collapse and QE 3. Try something we don't already know.
written by Brandon Smith , February 04, 2012
@Kevin
If you were familiar with my work at all, you would know that I've been writing about the economic situation for four years. I PREDICTED the bilateral trade agreements in Asia, way back in 2008. I also predicted credit downgrades and debt problems in the EU, and I've been warning about QE3 since QE1.
What were YOU writing in terms of the economy four years ago?
written by Livia , February 10, 2012
I've been checking info about BDI for my boss, to try to see a clearer future through the mist of of present terrible economy, and happen to see Brandon's articel, I think it great, Brandon has a sharp logical mind to analyse the situation, at least this articel is convinced to me^_^
