.Baltic Dry Index Falls 93%
The Baltic Dry Index which is a direct indicator of the health of vital worldwide shipping and supply activity as well as the potential health of the global economy has recently slipped more than 93%. Its value has gone from over 11,000 to less than 800 with little except for a floor of zero to suggest the slide will stop in the near future. This means that worldwide, the demand for cargo ships and more importantly raw materials that go into producing the everyday items that consumers buy has come to a near standstill. This is an indicator of a massive worldwide slump and likely foreshadows more economic woes for not only the US, but also the entire globe.
To understand the Baltic Dry index one has to approach this economic telltale from multiple angles. Basically, the index is set where the supply of raw materials meets the demand for ships to be booked to carry those materials from country to country or continent to continent. The index is broken down into different segments that take into account the size of the ship and the type of the cargo that is being shipped. It can be observed at the Investment Tools website at http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm
Generally, when the BDI is charting a gain, stocks will likely close up and countries' whose currency are good market indicators of worldwide exchange, like the value of the Canadian and Australian Dollars are on their way up as well. When the BDI is performing badly, generally the US and worldwide stock markets are likely to also perform badly in the near future and the currencies of the countries previously mentioned, who are heavily affected by the foreign goods and raw materials exchange will also likely soon show losses. This is because the BDI shows exactly where the worldwide demand for raw goods and materials rests at any given period. When these raw goods and materials are not being moved around, production of almost everything imaginable slows due to the tightening supply of worldwide goods.
Another interesting point about the BDI is that is not currently a tradable exchange and can therefore not be manipulated by speculators and short-sellers. This means that it is fairly well insulated against inaccuracy and can be used as an excellent barometer of actual market conditions. Companies would not pay to book a cargo ship for the transfer of millions of dollars in goods if they were not sure they could produce them for delivery.
While it is important to look at this recent tumble in the BDI's value as a possible harbinger of worsening global economic conditions, it is possible to speculate about the cause of this huge loss and therefore take some of the mystery and potential fear out of this gut wrenching economic development. One of the biggest factors that could be contributing to the BDI's recent massive downturn is the US turned International credit crisis. If a merchant who is selling and shipping $100 million dollars in goods can not obtain a guarantee from a bank that payment will be delivered upon completion of the sale, not many merchants would want to take the chance that their buyer would not be able to furnish the money to complete the transaction. In the past this was less of an issue even when banks couldn't entirely guarantee that the buyer could pay completely for the goods.
Banks used to be able to sell the cargo outright to pay the debt of a buyer in default. The situation has since changed. Because consumer and financial sector confidence has fallen in consumer goods being shipped from overseas and an economy that has driven down the demand for consumer goods, these same banks are reluctant to trust that they could sell the ships' cargo and recoup their potential loss due to a default of payment either by a raw goods buyer or another bank. The booking of ships to carry materials is a fairly inelastic market, meaning that it's hard to build a new ship quick enough to meet rising demands for shipping services just as it is extremely costly for shipping companies to have these same ships idling and not working or generating revenue. In this way as well the health of the BDI is an excellent current and historical predictor of global economic health.
Another important factor that may be driving the enormous downturn in the BDI could simply be the drying up of demand for consumer goods, especially luxury items. Supply and demand may have found their equilibrium and just like the recent deflating of the real estate and stock market bubbles, the BDI may just be another victim of a worldwide economic correction fueled by the initial collapse of the US credit markets.
With consumer and investor confidence waning worldwide, it is not surprising that the US press has not picked up on this monumental shift in the value of such a key index. Is the 93% slide an indicator of even greater upcoming economic turmoil on a global scale? Or has the BDI seen its bubble burst in a move to equalize itself with the rest of the world's markets and indexes? Perhaps the bottom of the worldwide economic slump is becoming clear on the horizon and soon we will see a slow resurgence in consumer and investor confidence. Time will tell and it will be one interesting ride.
AC
To understand the Baltic Dry index one has to approach this economic telltale from multiple angles. Basically, the index is set where the supply of raw materials meets the demand for ships to be booked to carry those materials from country to country or continent to continent. The index is broken down into different segments that take into account the size of the ship and the type of the cargo that is being shipped. It can be observed at the Investment Tools website at http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm
Generally, when the BDI is charting a gain, stocks will likely close up and countries' whose currency are good market indicators of worldwide exchange, like the value of the Canadian and Australian Dollars are on their way up as well. When the BDI is performing badly, generally the US and worldwide stock markets are likely to also perform badly in the near future and the currencies of the countries previously mentioned, who are heavily affected by the foreign goods and raw materials exchange will also likely soon show losses. This is because the BDI shows exactly where the worldwide demand for raw goods and materials rests at any given period. When these raw goods and materials are not being moved around, production of almost everything imaginable slows due to the tightening supply of worldwide goods.
Another interesting point about the BDI is that is not currently a tradable exchange and can therefore not be manipulated by speculators and short-sellers. This means that it is fairly well insulated against inaccuracy and can be used as an excellent barometer of actual market conditions. Companies would not pay to book a cargo ship for the transfer of millions of dollars in goods if they were not sure they could produce them for delivery.
While it is important to look at this recent tumble in the BDI's value as a possible harbinger of worsening global economic conditions, it is possible to speculate about the cause of this huge loss and therefore take some of the mystery and potential fear out of this gut wrenching economic development. One of the biggest factors that could be contributing to the BDI's recent massive downturn is the US turned International credit crisis. If a merchant who is selling and shipping $100 million dollars in goods can not obtain a guarantee from a bank that payment will be delivered upon completion of the sale, not many merchants would want to take the chance that their buyer would not be able to furnish the money to complete the transaction. In the past this was less of an issue even when banks couldn't entirely guarantee that the buyer could pay completely for the goods.
Banks used to be able to sell the cargo outright to pay the debt of a buyer in default. The situation has since changed. Because consumer and financial sector confidence has fallen in consumer goods being shipped from overseas and an economy that has driven down the demand for consumer goods, these same banks are reluctant to trust that they could sell the ships' cargo and recoup their potential loss due to a default of payment either by a raw goods buyer or another bank. The booking of ships to carry materials is a fairly inelastic market, meaning that it's hard to build a new ship quick enough to meet rising demands for shipping services just as it is extremely costly for shipping companies to have these same ships idling and not working or generating revenue. In this way as well the health of the BDI is an excellent current and historical predictor of global economic health.
Another important factor that may be driving the enormous downturn in the BDI could simply be the drying up of demand for consumer goods, especially luxury items. Supply and demand may have found their equilibrium and just like the recent deflating of the real estate and stock market bubbles, the BDI may just be another victim of a worldwide economic correction fueled by the initial collapse of the US credit markets.
With consumer and investor confidence waning worldwide, it is not surprising that the US press has not picked up on this monumental shift in the value of such a key index. Is the 93% slide an indicator of even greater upcoming economic turmoil on a global scale? Or has the BDI seen its bubble burst in a move to equalize itself with the rest of the world's markets and indexes? Perhaps the bottom of the worldwide economic slump is becoming clear on the horizon and soon we will see a slow resurgence in consumer and investor confidence. Time will tell and it will be one interesting ride.
AC
posted by madtom at 9:28 PM
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