What Does The Baltic Dry Index Have To Do With Anything?
The crash of this obscure measurement may tell us much more about the future of the economy than many want to believe.
From L. Todd Wood
Have you ever heard of the Baltic Dry Index (BDI)? Probably not. Even so, you should know what it stands for and you should know it just hit its lowest level ever.
The index tracks the freight rate for shipping large amounts of commodities overseas – things like iron ore, wheat and coal. If you think about it, this type of index can be a very good indicator of things to come. If exporters see demand for their products so soft that they reduce shipping contracts and drop freight prices to record low levels, what does that say about the direction of the global economy?
There are a number of reasons why the BDI is at record lows, but the main driver for the decline has been a marked lower demand for raw materials in China. China currently stands as the world’s largest manufacturer. So when the nation sees less demand for its products, they know better than anyone else that global economic growth is falling and they will be less willing to pay high prices for freight.
Simply put, this recent spectacular drop in the Baltic Dry Index is a red alert indicator to the market, and it’s not good.
Don’t believe me? Some of the most mainstream of talking heads are preaching the same. Take Jim Cramer, for example, who has been talking about the BDI as a powerful leading economic indicator for some time. It’s one of his favorite metrics to discern future market trends. Cramer has been pounding the table recently on downward velocity and low levels of the BDI.
You may not be surprised to hear that the last time the BDI cratered like this was in 2008, right before the Great Recession.
Now in 2015, the setup for the crash is even worse. The United States has $18 trillion in debt and counting. Europe is a mess. Russia is hurting. And Brazil and other former Latin American powerhouse economies are suffering under bad economic policies for the first time in a decade.
But all of the above predicaments pale in comparison to the largest bubble right now, which the BDI tells us is in China.
China has a real estate bubble and a growing civil unrest issue. The problem is that the Communist Party made a deal with the population: Give up your freedom for economic growth and prosperity. But with the global economy slowing, China has had to build cities that are empty just to keep workers employed. They can’t do this forever. Their economy is a house of cards and when China crashes, the world will feel it.
This is what the drop in the BDI is screaming to all of us: There is real economic pain coming. All the makings are in place for a massive economic shock, and this time we have no economic cushion. The Fed is out of bullets and we are broke. We can’t just print another $18 trillion dollars. For goodness sake, we haven’t even stopped printing money from the last crash!
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