09 February 2019

Baltic Dry Index - dropped like a stone

In September I suggested that the Baltic Dry Index was telling us to worry. Now it is telling us to be very afraid. Then I highlighted the fact that the Baltic Dry Index had dropped almost $300 to $1477 from its high of $1774. That turned out to be transient, and there was some recovery. In the last month, however, the BDIY (technically the Baltic Exchange Dry Index) has dropped like a stone, and now stands at close to one-third of its previous high.

The Baltic Dry Index provides a composite cost of shipping bulk goods and commodities, and provides a forward-looking view of global expected trade volumes.

Late last year, the index began to fall, and into the new year the fall has picked up steam. Year-to-date the index is down almost 50%, and has dropped almost two/thirds from its 2018 high. 

The BDIY is now at $610, a drop of $1164 in the past six months, and a drop of 52% from 1 January 2019, six weeks ago.

Baltic Dry Index as of 8 February 2019

It looks like we may be at the start of a recession due to a build-up of inventories and a concurrent reduction in international trade. The 1920/21 recession, usually attributed to difficulties in the economy adapting to the post-WWI increase in the labour force, also saw the forward buying of inventory resulted in bloated inventories and a collapse in demand. The resulting deep-V recession recovered because there was no intervention. This time, there will be significant intervention again, which instead of allowing the system to cleanse itself, will probably simply extend the period required for a real recovery.

If the Baltic Dry Index is right, and trade volumes are collapsing, then we are in for a rough ride, starting sooner rather than later.

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