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Minyan Mailbag


Is there a Baltic Wet index?


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Minyan Adam asks: any thoughts on the Baltic Dry Index? It's had a precipitous slide over the last few months.

As you know Adam, The Baltic Dry index is an index that measures the cost of chartering a ship to carry dry loose freight (commodities like grains, iron ore, etc. as well as finished goods). As such, it is expected to capture not only demand for the raw materials that go into making finished goods but also the demand for shipping those finished goods themselves. Because of this, it is considered a leading indicator of economic activity.

This index bottomed in November of 2001 and rose 770% to the recent February 4th high, reflecting an obvious increase in demand for commodities and finished goods that has largely paralleled the growth in the world economy since the November 2001 period. Since February it has dropped an astounding 47%, giving back half of the entire 2+ year gain in this index in a mere 4 months.

It has been my belief, as I have made clear here, that the liquidity-induced economic growth that the U.S. and world has witnessed since 2001 has affected (distorted?) demand at every level: in asset markets, in commodity markets, in demand for final goods, etc. That the Baltic Dry index has reflected a world awash in liquidity should not be a surprise in this light. Chinese demand for commodities (and the ships that transport them) as well as U.S. consumers' demand for durable and non-durable goods (and the ships that transport them) has simply been reflected in the price of chartering a ship.

One of the hallmarks of credit- (liquidity-) induced economic growth is volatility; Austrian economists call this the boom-bust cycle. That the Baltic Dry index has, in 4 months, given back half of its entire 28 month gain, speaks directly to this volatility. Take a look at the chart: it's a classic visual of the boom-bust cycle. Demand was artificially (and unsustainably) increased beyond trend and since February that demand has, nominally, been cut in half.

The Baltic Dry index, because of its economic sensitivity, like the Dow Jones Transportation average, is considered a cyclical component. It's turn down, while clearly illustrating the boom-bust cycle costs of credit-induced economic growth, also strongly suggests that the world economy is at risk for at least a return to more normalized demand trends if not an outright decline in economic growth.

One index does not a trend make, but when combined with the fact that the Chinese are tightening monetary policy, that commodity prices are declining, and that cyclical stock indices have turned down sharply from their January/February highs, this presents a world at risk of experiencing the bust-phase of the boom-bust cycle.

No one is making that call: not economists, not Fed officials, not market strategists. But the Baltic Dry index might be.

No positions in stocks mentioned.

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