Guambat Stew: Is the Baltic Dry Index all dried up?

At the end of 2008 Guambat began to take note of certain "anomalies" in the Baltic Dry Index and stock indexes. Then at the end of 2009, the Index proved its worth as a better index of economic health than, say, the DJIA. See the posts here.

FT Alphaville is noting that the further deteriorated Baltic Dry Index may have been a better harbinger of things in that former period than it is now. Or is it simply another case of denial?

Don’t panic, the Baltic dry is a rubbish indicator!

The Baltic Dry Index (BDI) — a measure of shipping costs for dry bulk goods — suffered its 29th consecutive daily decline on Wednesday, to record its longest losing streak in more than six years, according to Bloomberg.

It’s news that David Rosenberg at Gluskin Sheff, amongst others, managed to get pretty excited about on Wednesday. He, for example, thought it’s the sort of story that should have made the front pages by now:

The problem for the commodity complex in general is that the Baltic Dry Index, a usually reliable leading indicator, has plummeted by half since the end of May, is down now for 29 consecutive sessions and is at its lowest level in more than a year. Not to mention the fact that this is on nobody’s radar screen (page 21 news in the FT)!

And while many economists still view the index as an extremely useful barometer of global productivity trends — it appears there are some growing concerns about its usefulness today versus its usefulness say two years ago. And it’s all down to shipping supply.

Julian Jessop, chief economist at Capital Economics makes the case as follows:

The BDI is a composite measure of the cost of hiring a ship to transport dry bulk commodities such as grains, coal and metal ores. It is therefore understandable that the near-50% fall in the index since late May is attracting plenty of attention. However, there are two reasons to be wary of making big calls on commodities (or anything else) on the basis of the BDI.

But it doesn’t stop there. While the idea of a shipping index being a leading indicator might make logical sense, the BDI’s actual track record is pretty poor, says Jessop.

For instance, the best that can be said about the index is probably that it tends to move up and down at the same time as global commodity prices — hardly insightful.

For a start, fluctuations in the index could be driven by changes in the supply of shipping as well as in the underlying demand for commodities transported by sea. For example, a fall in the BDI could reflect an increase in the number of ships available to carry dry commodities (either new-builds or conversions from other uses, such as oil tankers). Similarly, the BDI might be distorted by temporary port closures, changes in the cost of fuel and insurance, and many other factors.