A cargo ship loaded with containers bound for Vancouver's port makes its way under the Lions Gate Bridge.
Bespoke Investment Group (via Abnormal Returns) points out that the Baltic Dry Index has collapsed in recent months. Since its near-term peak in mid-October, it has fallen 49 per cent and is down 43 per cent in the past month alone. What's going on here?
The index measures changes in the price to ship various raw materials, and was once seen as a pretty good gauge of economic activity. That is, when the economy was good, the index rose. And when it collapsed, it was a sign of trouble. The problem is, its reliability has been called into question in recent years – such that its recent collapse has gone all-but-ignored.
The Baltic Dry Index surged to a record high in 2008, but the S&P 500 actually began to decline about six months before the BDI. In that way, the BDI was a lagging indicator of the stock market. It did, however, signal that the global economy was in deep trouble: It sank 94 per cent in 2008. The BDI also rebounded slightly before the stock market, rising nearly 250 per cent before stocks finally bottomed out on March 9, 2009.
Since then, though, the BDI has meandered at levels about 80 per cent below its pre-crisis peak, providing few glimpses into the state of the economy. One theory is that shipping prices are suffering not through a lack of trade, but through a glut of large ships. In other words, the Baltic Dry Index is flashing red – but no one really knows what that means, and fewer people seem to care.
David Berman