Thursday, January 29, 2009

Best Economic Indicator You've Never Heard Of

Both Dennis Gartman and Larry Kudlow have reported recently on the recovery in the London-based Baltic Dry Index (BDI), "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain."

A few years back, Slate Magazine called BDI the "The best economic indicator you've never heard of."

The chart above displays the BDI over the last three months, and shows the strong 34% increase in the BDI since its low in mid-December. Could this be a recovery "mustard seed?"

13 Comments:

At 1/29/2009 4:49 PM, Anonymous Anonymous said...

One heck of a mustard seed. Not.

In other international news, the 22.6% free fall in global air cargo is unprecedented and shocking.

The domestic news is somewhat more encouraging with the ATA truck tonnage in Acapulco dive mode while rail tonnage is off marginally year over year.

 
At 1/29/2009 5:00 PM, Anonymous Anonymous said...

Mark,

I always appreciate your efforts at finding something positive, but I believe that your chart is a bit misleading. The 34% rise now means that the index is down 91% from its peak last year instead of 94%. If you click on the 5 year graph here, the 35% bounce is almost imperceptible: http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND

 
At 1/29/2009 5:22 PM, Anonymous Anonymous said...

Anon at 5:00 pm: But, your chart is also misleading. Look at the longer term 3 year chart here:
http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND

It seems to indicate that there was an unprecedented surge in 2007 and early 2008 in the Index, at least partially as a result of the commodities bubble, followed by the huge decline in the summer and fall of 2008 (when the bubble began to burst and the credit crisis occurred). So, perhaps now the Index is heading back to a "normal" range of where it was in say 2006.

 
At 1/29/2009 5:28 PM, Anonymous Anonymous said...

BTW, the all time peak (on the above chart at least) was on roughly 5/20/08 at 11793. It is hard to argue that on that date the economy was significantly better off than two years before when the index was much lower and we were not in a recession. So, I think it is clear that the BDI provides some useful data but it is heavily influenced by commodity bubbles and is not always as useful in determining the state of the economy at a particular time.

 
At 1/29/2009 5:34 PM, Blogger 1 said...

"The 34% rise now means that the index is down 91% from its peak last year instead of 94%."...

Hmmm, a very interesting point and a good observation...

Funny how one link (thanks to anon @5:00 PM) leads to another...

From The Street: Wall Street: This Stimulus Is Pretty Lousy

House Democrats may be hailing the passage of a massive economic-stimulus bill, but Wall Street's reaction hasn't nearly as cheerful.

(skip to the bottom)

"The first TARP wasn't much of a success because there were no metrics anywhere," said Nolte. "They were basically doing a pirouette, tossing money in the air. My biggest gripe with TARP is that it's hard to measure success. There has never been anything in place that looks at the amount of money spent and the result, like one most good businesses would have."

 
At 1/29/2009 6:14 PM, Anonymous Anonymous said...

there is more shipping goin on via the seas because no one is in a hurry to get the products right now...hence the reason air cargo has fallen so far

 
At 1/29/2009 6:23 PM, Blogger 1 said...

"there is more shipping goin on via the seas because no one is in a hurry to get the products right now...hence the reason air cargo has fallen so far"...

Well that's NOT entirely correct but you also aren't wrong either...

I've been in the airlines for 33+ years and the reason that air freight shipments have fallen off over the last year was due to the price of jet A fuel...

Even at the volumes airlines buy the stuff it was still nearly as expensive as pumping gas into your own car...

So let's just say what was needed in a hurry was reevaluated...

Note that using air for cargo shipments has taken a nice up tick over the last month or so if the carrier I work for is any indication...

 
At 1/29/2009 7:03 PM, Blogger Dave Narby said...

I'm with Anon...

Mark, I generally like your blog for it's Libertarian bent and exposure of government ineptitude, waste, and areas to improve on...

But from time to time, for some inexplicable reason, you distort things to appear better than they are.

I'm not sure what purpose this serves - Kudlow and Gartman should be taken out to the woodshed and whipped with a hickory stick for promoting this permabull crap, and you should be given a slap upside the back of your head, (a la the Three Stooges) for not being more skeptical.

 
At 1/29/2009 9:03 PM, Blogger Matt Nolan said...

The BDI is an interesting indicator because it can be taken in a couple of ways.

Between 2003-2007 there was a tightening capacity constraint in the shipping industry - so the increase in prices tending to follow increases in commodity demand. Fundamentally, there was a binding limit on the number of vessels and commodity sellers were bidding up shipping prices to get their product out.

Prior to about 2002 the index was strongly correlated with oil prices - as there was no real capacity constraint, implying that there was competition in the shipping industry, and thereby implying that cost pressures drove prices.

As a result, unless the index skyrockets again, I would say that this sort of increase would be more the result of rising oil prices than the result of rising commodity demand.

 
At 1/30/2009 9:50 AM, Anonymous Joe Calhoun said...

Boy the pessimism is thick here which....makes me feel a little less so. The BDI is down a lot from its high but I think the point here is that it may have hit bottom.

Another great indicator for economic growth is the price of copper, which coincidentally, also seems to be bottoming:

http://stockcharts.com/h-sc/ui?s=$copper

I don't think Mark is saying that things are great and I wouldn't either, but he has been pretty consistent in saying that things aren't as bad as everyone thinks. I agree with that completely. The GDP number reported this morning was pretty bad, but it wasn't the -6 or -7% disaster everyone was expecting. It was pretty much in line with my expectations.

It is easy to be gloomy right now. Everyone is doing it and its easy to be a part of the crowd. But the crowd won't catch the turning point in the economy. Only those sifting through lots of reports looking for the good parts will be able to spot the recovery. It will pay handsomely for those who can get ahead of the crowd.

 
At 1/30/2009 10:20 AM, Blogger Mark J. Perry said...

Thanks Joe Calhoun. At some point we'll hit bottom and a recovery will start. If the BDI hit a bottom in December and increased by +34% since then, it's possible that could indicate a bottom.

If the Dow Jones, SP500 or NASDAQ increased by +34% in one month, we would treat that as terrifc news, and wouldn't complain that it was still below some level a year ago or two years ago.

 
At 1/30/2009 10:34 AM, Blogger Mark A. Sadowski said...

Wow, now it's all the way up to where is was in September 1987! I think the key point is that it just couldn't go any lower. Also, there is upward seasonal pressure due cold weather demand for coal and other fuel and decreased availability of shipping due to ice blocked ports and low rivers. In short, anyone who thinks this is signaling the bottom needs to have their head examined.

 
At 1/30/2009 10:36 AM, Blogger Finance said...

With regards to copper prices, its interesting to note that most metals(excluding gold), are priced near or at their production cost level; producer are not ready to sell at lower prices, they will stockpile, and reduce production

Short term implication are (a)mining Co's revenues will drop -- because of lower shipment at the new marginal price, (b) drop in profitability for these mining companies, (c) precipitous drop in CAPEX.

Sounds familiar! In the longer run it means that a floor has been reached. Reduction in CAPEX will lead to tightening of supply and eventually recover.

 

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