Baltic Dry Index
Have you noticed that the Baltic Dry Index (BDIY) has climbed roughly 900 points (+~50%) since 8/3?
As you know, the BDIY is an aggregate index of different class sizes (handymax, capesize, and panamax) which essentially attempts to measure the price of moving major raw materials (not finished goods) by sea around the globe.
I recall your mailbag from June discussing the action in the BDIY as the index dropped precipitously and the potential implications thereof.
As you highlighted, the index is considered a solid leading economic indicator; when prices are high the economy is booming, when prices are dropping it's a potential signal of an economic slowdown.
Any thoughts on what the recent move is telling us (if anything) about the global demand picture? Perhaps the story isn't about demand at all -shipping supply has increased (China has added significant capacity along with a push out of the lifespan of ships in use which has been extended).
This is a good example of projection bias. The index is up 50% 900 points from 8/3 but remains 3,600 points below its peak in December 2004. Focusing on the move up over the last 3 weeks and ignoring the much more massive decline over the last 37 weeks is part and parcel of the insight that Amos Tversky's research into behavioral economics (risk-seeking vs. risk-averting behavior) has provided.
The recent picture isn't telling us anything - unless the move lasts MUCH longer and goes MUCH higher. The decline from December 2004 is large enough and long enough to be 'telling' us something. And what it is telling us, along with the yield curve, along with the forward curve, and along with liquidity, is that economic activity is likely to contract meaningfully in 2006.
The debate over final demand related issues or supply related issues w/r/t this index is moot. The index has a good leading indicator relationship irrespective of whether the price decline is more supply related or more demand related. And in the final analysis one cannot look at demand without understanding supply and vice versa so assigning more or less value to either one is foolish sine they are intertwined in important and complex ways.
This type of analysis - looking at the last 3 weeks at the expense f the last 37 is what I term the 'tyranny of the present.'
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