Thursday, September 24, 2009

Falling Baltic Dry

At Pinnacle we watch many different global growth indicators and one in particular has peaked my interest. The Baltic Dry Index is an index that measures dry bulk shipping rates in certain shipping lanes around the world, and therefore offers a glimpse of real time demand for infrastructure material. As the chart below shows, this index has recently fallen almost 50% from a May 2009 reading of 4300 to the present reading of 2175 (of course it did rise over 500% from November 2008 to May 2009). This fall is a direct result of an increase in shipping capacity and a decreasing demand for goods, particularly out of China.

As China poured the record stimulus into the market the demand for iron ore and other industrial metals experienced a rapid rise. This caused shipping rates as measured by the Baltic Dry to rapidly rise as well. But it also created an incentive to keep old ships in the shipping lanes to handle the rapid demand rise. And now the shipping companies are experiencing the hangover from artificial demand as the stimulus package is slipping and China’s appetite is waning.

The direct impact on the stock market is not being seen though. Clearly real demand for industrial metals is not present in the global economy, and this would normally portend a weak stock market. But during a liquidity driven market perhaps the index loses its forecasting ability. We will continue to monitor this and many more indexes to judge global economic health.