Skip to comments.What The Baltic Dry Index May Be Telling Us
Posted on 04/23/2011 4:48:03 PM PDT by blam
What The Baltic Dry Index May Be Telling Us
Stock-Markets / Financial Markets 2011
Apr 23, 2011 - 11:31 AM
By: Tim Wood
Just as with the stock market, I've maintained that the advance seen since the early 2009 lows, in other asset classes, are also counter-trend moves. This view has not changed and based on my research I believe that once these counter-trend bounces have run their course, the longer-term secular bear will again reassert himself. In doing so, I look for all asset classes to decline in conjunction with the phase II decline of the ongoing secular bear market, which I believe is similar to the 1966 to 1974 secular bear market.
It is widely believed that the economy has bottomed and that the worst is behind us. It is also widely believed that the Fed has every thing under control and that "they" will not let bad things happen to us. Well, they were also in "control" in 2000 and I would hope that you all remember the nearly 40% decline into the 2002 low. They were also in "control" in 2007 as the 54% decline seen by the Industrials began and it was not until the market and the economy hit their natural cyclical bottoms that these declines were halted. Of course, once the lows were made the Fed was credited for having saved the world. Fact is, the Fed is not in control. Rather, they react to the natural cyclical forces of the market. In doing so, their reactions ultimately only serve to make matters worse.
As an example, it should be obvious that the reactions surrounding the decline into the 2002 low and the efforts to stimulate the economy into 2007 created not only the housing crisis and the rising commodity prices that were seen into the 2008 top, but also the credit crisis and the collapse which all made the decline into 2009 worse than the initial problem they were trying to solve in the first place. People want to think that someone is in control and that "they" won't let this or that happen. Fact is, "they" are not really in control and all "they" do is react and in doing so, again, "they" only serve to make matters worse and I believe that this time is no different. As the markets moved down into the 2009 lows the Fed pulled out all the stops and have literally thrown the kitchen sink at keeping things afloat. But, fact is, the markets moved into their natural cyclical lows in 2009 and once these counter-trend bounces have run their course, we should see that once again, all "they" have done is to make matters worse.
Now I want to take a look at the Baltic Dry Index, which does not lend itself to speculation or manipulation as do stocks or commodities. This chart can be found below. In this chart I show data going back to 1985. I have identified the longer-term cycle that has historically averaged some 3 years from low to low. For a year now, the indications have been that this cycle has already peaked. For those who are not familiar with this index, I have copied the following documentation from Wikinvest.com.
"The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk."
"The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it."
It is my belief that the weakness seen in the Baltic Dry Index is confirming my conclusions that the rallies out of the 2009 lows are likely counter-trend bear market affairs and not a result of strong fundamental growth nor of a sustained "recovery." Through my research I have identified a very specific DNA Marker that has appeared at every single top in stock market history. I have also identified similar data for commodities and other indexes as well.
Once the DNA Markers are in place, not only will the stock market be at great risk, but so will commodities and the economy as a whole. The key now will be the formation and confirmation of the DNA Markers to cap these rallies and this is all covered on an ongoing basis in the monthly research letters at Cycles New & Views. With this all said I want to warn you that just as the talking heads and politicians did not see or understand the setup that lead to the declines into the 2000 top lows or the 2007 top, they do not see nor do they understand the current environment and even if they did I can promise you that they would not tell you. For the record, I did have the advantage of my research and the DNA Markers to guide me during those periods. As a result, it did in fact allow me to identify not only the 2000 top in equities, months before it became obvious, but also the 2007 top in equities, the 2008 top in commodities and even the top in housing in 2005, all ahead of time. I sincerely hope that people are listening now. There is another downturn ahead of us.
Isn't that always the case?
I think it’s still the same downturn.
(BTW - I thought this was a La Nina story, but found it interesting anyway).
She was quick and said tell Roger Alies he doesn't pay enough and where are these high paying jobs.
He countered well your housing should be cheaper
All the others on the panel rip him a new one
I know that there are FReepers out there that understand this stuff. More importantly, what does one do with cash if that is the long position in ones portfolio?
This is all pretty dry.
Dry bulk shipping is shipping raw materials like coal iron ore, wheat, raw materials for factories from port to port, and usually internationally. Dry bulk, along with all other shipping, took a deep dive in 2008 whan the financial crisis began, but has since stabilized. However, there are two big factors hitting dry bulk shipping right now, and for the next two years.
The first is China. China kept the dry bulk market afloat almost singlehandedly since 2008 due to their stockpiling commodities, and massive infrastructure growth. This is now, however, starting to fall off, and China is heading for much lower growth. Secondly, all shippers misjudged the markets in 2004-2008, and over ordered new ships. These have been delivered now, and dry bulk shippers are dealing with massive oversupply. This causes the shipping rates to collapse.
Basically the demand to transport raw materials is dropping and therefore future industrial production that uses these materials is likely to drop. Hence a downturn is ahead.
That the index has returned to the historic norm, again if I'm reading the graph correctly, in the face of another spike in fuel costs, says to me that business is going wanting. Whether that's due to oversupply of ships, which is touched upon in the article, or it's due to falling demand, which should be the case given the recent setbacks in the west as well as China pulling back, or if it's due to some combination of the above, is not clear.
Despite apparent past reliability, I don't think this is as solid a leading indicator as it's being made out to be, as a result. The world economy has been distorted almost beyond recognition in the past three years. It may mean something. It may not. It may mean something that is outside of current understanding, too, along the lines of Rumsfeld’s “unknown unknowns.”
BTW, You REALLY know evrything there is to know about
this Baltic stuff.
I’ve been following the BDI for a year. It is a very reliable forecast of what is coming. Not perfect. But reliable.
The VIX on the other hand...I used to follow that and now realize it is worthless. It no longer predicts volatility. It simply reflects what has already happened in the markets. I don’t even bother with it any more.
” what does one do with cash if that is the long position in ones portfolio?”
IF there is a crash soon, then cash is king, like it was in 2008. That was deflation.
IF inflation continues into the fall, the dollar will continue to fall, and cash loses value UNTIL that crash comes and hopefully the dollar bounces back up. IF.
I am not a trader, but those are the basics. I am 50/50 PreciousMetals and cash. This way I am betting that either way it goes, something will go up, but I am using a technique were being nimble is not important. I am not all in on one bet.
Please read more, and do your own due diligence.
The commodities are not overvalued. Well, maybe they are a bit and they may correct somewhat. But what the rising commodities are actually telling us is that the US dollar is losing its value.
I’m no investor or financial planner, but the basic idea is that if the dollar is losing its value, it’s best to invest those dying dollars in something that will maintain its purchasing power (e.g., the commodities).
Over 30 black swan events listed one month ago, most now in play:
Many came true and / or are still in play.
It's funnier to listen / watch the original cartoon that this came from:
but it seems that commodities and stocks are over valued. Is that correct?
It is not that the commodities are over valued, it is that the dollar is weak. You can thank QE2 for this. The more dollars we print the less they are worth.
The difficulty I have with the chart is that we are now at a low point. A high point was visited just before a huge downturn in the stock market. If we were about to face another big fat downturn soon, one would expect a higher point on the chart for the present, no? Somebody help me out here.
Seems like good news... it's NOT just that shipping has decreased - it's also an oversupply of ships.
Seems like good news... it's NOT just that commodities shipping has decreased - it's also an oversupply of ships - taints the reliability of the Baltic Dry Index...