I have long been a fan of the Baltic Dry index when looking at the worlds economic health. It is the cost to ship bulk goods from one place to another. The better the economy, the more goods get shipped so it serves as a good proxy. Some of my posts: here, here, here and here.
Now this from The New Yorker:
THE SURPRISING RELEVANCE OF THE BALTIC DRY INDEX
On January 11th of this year, online financial circles lit up with dire news. “Commerce between Europe and North America has literally come to a halt,” one blogger wrote. “For the first time in known history, not one cargo ship is in-transit in the North Atlantic between Europe and North America. . . . It is a horrific economic sign; proof that commerce is literally stopped.” Although the Web site that first broadcast this information is prone to hysteria—there are, in fact, many cargo ships on the world’s oceans, in plain sight—more pessimistic market experts, such as Zero Hedge and the Dollar Vigilante, eagerly quoted it for their millions of readers. The story fit neatly into a narrative: the global economy, despite outward signs that it has clawed its way back from recession, is a small step away from an enormous crash.
But if sober-minded, mainstream economists were tempted to dismiss this ostensible trade calamity outright, they found that they couldn’t. The index that inspired these warnings, known as the Baltic Dry Index, was until recently viewed as a credible, if obscure, source—one that has accurately signalled prior systemic failures, and one that economists of all stripes have routinely consulted as a trusted proxy for trade activity. Based in London, this gauge reflects the rates that freight carriers charge to haul basic, solid raw materials, such as iron ore, coal, cement, and grain. As a daily composite of the tonnage fees on popular seagoing routes, the B.D.I. essentially mirrors supply and demand at the most elementary level. A decrease usually means that shipping prices and commodities sales are dropping (the latter because shippers are competing over fewer consignments). Shipping is a direct indicator of whether people want goods, and softness in shipping prices is therefore a sign of weakness in manufacturing and construction.
In January, when the B.D.I. surfaced as a heated topic in certain geeky economic corners of the Internet, it had fallen to a record low of 429, an eighty-per-cent decline from December, 2013, and far below its record high, in May, 2008, of 11,793. It continued to plunge for another month, hitting a nadir of 291 on February 12th. The index has rebounded a little since then, but not enough to dampen some concerns raised by its descent. While the catastrophic scenarios offered by the pessimists aren’t quite plausible, the B.D.I.’s dramatic plunge does appear to have indicated a genuinely alarming economic trend about the strength of global trade, with implications for jobs and corporate profits, that many economists had overlooked. Which raises the question: Why did economists color their judgment by discounting the B.D.I. in the first place?
A well-written article - lots more at the site.
