I have been meaning to write on this topic for some time now, but was beaten to the punch when one of our clients (a tech-savvy and apparently research-savvy) sent Scott and I an email yesterday asking if we were following what was happening in the shipping lanes around the world. Indeed we are.
First, some background on what the Baltic Dry Index (BDI) is. Back in the day when we worked on the trading desks and lived, ate and breathed every tiny movement in financial and economic indicators, this Index was called the Baltic Freight Index. Today it measures time-charter on 23 shipping routes around the world for four various sized ships carrying dry goods (not oil tankers).
The reason why this Index is so important is, it represents a measurement of dry bulk that primarily consist of raw materials that go into various stages of production. Also, it is obviously global in nature so it gives us a leading indicator on the state of the world economy and trade.
Here is the BDI on a 10yr basis:
As you can see, it peaked out in 2007/2008 and has been "flattened like a pancake" as our client (and new research associate) observed. It hasn't done much of anything for 8yrs. On a 1yr basis though, it has ticked up fairly substantially:
What gives with this 1yr chart? There are two possibles conclusions I can draw from this: 1) that there are more dry goods being shipped around the world over the past six months which should be a harbinger for global growth and 2) there has been a weak vessel in the world's shipping lanes for the past number of months that might be helping the Index tick higher...more below...
I would note some caution on extrapolating from the past six months on the BDI that we will see a surge in global GDP. The past week has seen the seventh largest shipping company in the world, South Korea's Hanjin, file for bankruptcy protection. As soon as that happened, ports all over the world that were to receive Hanjin ships, and their dry bulk loads, refused the ships at port. Today, these ships are stranded at sea...literally! Ports the world over have refused Hanjin permission to dock for fear they will not pay their port charges when invoiced. And Hanjin itself, is refusing to enter port for fear that their ships would be repossessed as first lien collateral lenders seize the ships.
The ships are running out of fuel, food, water, etc but most importantly,at least for the global economy (maybe not the sailors who are a snick peckish by now), the contents of those ships will not hit their intended port targets and their intended ultimate destination. Think about a factory in Idaho that builds steel widgets waiting for a shipment of pig iron steel coming in from China...they wait, and wait but the shipment doesn't arrive. A month goes by and still no steel from the Hanjin ship. So the Idaho steel widget manufacturer has to cut production, idling lines, and maybe even temporarily laying off line workers. Any idea what this will do to GDP, wages, etc? They ain't going up, that is for sure.
Remember the US West Coast Port Strike (LA, San Fran and San Diego) in Feb 2015? Every economist used that as an excuse as to why US GDP under-performed their expectations for 1Q15 (it came in at .2% Ann and if my memory serves correctly, the talking head economists had it coming in closer to 1.0% Ann).
Point being, these unexpected and sudden events can have serious negative consequences on economic growth, labour wages, etc.
In the meantime, I thank and give credit to our client for nudging me on this topic. Keep them coming. Anyone else want to get in on this action on a no-names basis?