Friday, January 27, 2012

The Baltic Dry Index - A Harbinger of Bad Things To Come

Most non-professional investors may only have heard of the rather obscure Baltic Dry Index (BDI) in passing.  In this posting, I will open by giving a brief rundown on what the BDI is and how it is useful for predicting the world's economic performance followed by a look at what has happened to the BDI prior to, during and after the Great Recession.  I'll also take a closer look at what has happened to the BDI in recent months, giving readers the chance to see what may lie ahead for the world's economy in the near future.

The Baltic Dry Index is issued daily by the U.K.-based Baltic Exchange which has been in existence since 1744.  The BDI tracks the worldwide international shipping prices of major raw material dry bulk cargoes by sea including grain, iron ore coal and other fossil fuels.  The BDI measures the actual shipping costs of these raw materials for four different sizes of merchant vessels on 26 different geographic routes and averages them into one index.  As such, it is one of the very few leading, non-speculative, non-revisable economic measures, unlike GDP growth, unemployment and consumer sentiment measures, all of which are lagging indicators.  Changes in the BDI are often used by investors to measure changes in the demand for different commodities around the globe.  These changes are considered a leading indicator of future economic growth; if the BDI is rising (i.e. shipping prices are rising), there is increased demand for the shipping of commodities by various end users around the world, signalling future economic growth since most of these precursor commodities are generally linked to the eventual production of finished goods like steel and concrete.  If the BDI is falling, there is less demand for marine shipping of commodities, indicating that the world's economy is likely to contract.  Basically, the BDI measures the demand for shipping capacity versus the supply of bulk, ocean-going carriers.  Because the lead time to build carriers is quite long, small increases or decreases in demand for shipping can result in relatively large upward or downward swings in the BDI.

Now, let's take a longer term historical look at the BDI as shown on this chart:

The BDI hit an all-time high of 11793 on May 20th, 2008.  As the Great Recession became entrenched in the world's economy, the Index fell to a low of 663 on December 4, 2008 for a drop of 94 percent, reflecting a massive plunge in shipping rates as demand for shipping by sea plummeted and rates fell from $233,988 per day to less than $2800 per day.

Here is a medium term look at the BDI from January 2009 to the present:

This graph shows us that the BDI peaked at 4661 in November of 2010 as it appeared that the world's economy was firing on all cylinders after the Great Recession.  It dropped to a multi-year low of 1043 in January 2011 as the wheels started to come off the Eurozone (i.e. Portugal and Ireland debt problems).

Here is a chart showing the BDI over the last five months:

Back in mid-October 2011, the BDI peaked at 2173, up from 1252 in early August 2011 as the world debt crisis reared its ugly head and remained in a range between 1766 and 2173 until four weeks ago.  Since the beginning of 2012, the BDI has fallen very steeply (termed a "long tail down" pattern) to just below 700 (more precisely, 662), a new record low not seen since the depths of the Great Recession when the BDI hit 666.

It appears that the BDI, which has plunged 69.5 percent since its most recent peak in October 2011, is indicating that a world-wide recession is on our doorstep, something that many lay people have sensed for some time.  Yes, there could be another explanation; the drop in the index could well be reflecting a glut of shipping capacity which can be corrected by ship-scrapping, accelerated new vessel delivery and poor weather in some export markets and even the Chinese Lunar New Year (although, for the sake of consistency, such a decline did not take place in January 2010), however, we may ultimately find out that the rapid decline is, in fact, presaging a rather strong global economic slowdown as the demand for many commodities dries up.  Only time will tell us whether the world's economy is slowing up more quickly than the so-called experts are predicting.  With a three month lag between drops in the BDI and drops in the world's stock market in 2008, we should know by the end of the second quarter whether the BDI is "prescient".


  1. Thanks for the post, I would be really interested to know what sort of lag time there is between drop in the BDI and recorded fall in actual commodity prices. Has anyone heard of such a measure, or am I just not understanding the BDI?

  2. So what is the correlation of BDI to past US bear markets going back 70 or more years?

  3. If you look at the charts for the Dow ($INDU) and Russell 2000 ($RUT) for 2008-2011, it appears a sharp change in BDI may precede these indicators by 3 months. I.e. the market lag 3 months behind the BDI. So, if the author is correct and we use the current BDI value of 753 as the "low" for now, then we should see the markets in dire straits around the 20-30th of April 2012. We'll see I guess.

  4. Also, after I ran a chart overlay for weekly BDI and weekly INDU (Dow), they are almost exactly 3 months apart, with BDI leading. But, what I cannot explain is that from 2008 to June 7th, 2010 the indicators were pretty much in tune, ups and downs, but since June 7th 2010, we have a serious divergence between them. The Dow has sky-rocketed while the BDI has headed South. Does anyone with more experience have an idea of what might be going on here? What happened in June to cause this break (discrepancy)?

  5. QE2 was announced on the 27th of August 2010 at jackson hole, but people were already expecting it in june-july 2010.

    QE is the discrepancy

  6. Oh, but QE will be able to keep commodity price alive for a couple more kicks at the can...

  7. I'm wondering, with the mention of a possible QE3, how long that will prolong the inevitable? Perhaps another year? Are there only a few of us who are able (willing) to see the wool that's pulled over our eyes enough to know what's coming? BDI closed down again, today, to 680. Week of December 1st, 2008 was the bottom at 663 followed by the market crash 3 months later. If we blow past 663, I fear the house of cards must, at some point, come tumbling down.

  8. The correlation is iffy. Looking at BDI vs Dow, BDI has been trending down since September while the Dow has been moving up. The divergence is extreme at this point. What does this say about using BDI as a predictor of future market turns? In the past six months, it's been a contrary indicator.

  9. QE ran its course and never again. 80% of people are stupid and thats why it succeeded. Freshly printed money from the printing presses found its way not to our pocket but the pockets of big corporations. The productivity of these corporations is very low but is never measured properly the reason being the difficulties in accruing intangible investments over the decade and half. To compensate the emphasis in the last decade and half was on the derivatives and ponzi schemes instead on productivity. Shareholders were lured into internet wonders etc. And then big technology bubble and recession happened. This recession never stopped actually! What happened in this decade is manipulation of mounting debt world-wide and this had (temporarily) hidden the fact that the recession never stopped. This all happened through derivatives game which became global so no competitive advantage in stupidity. Now the time has come to put 20 trillion of dollars on the balance sheets. Now is Hic Rhodos hic salta. This will result in the sharpest decline in the history of stock market. s&p will go down to 650.
    Infusion of money from presses postpones the inevitable. All this money was given practically free of charge to - corporations, i.e. those who caused all of this to happen by hiring wrong people on fake jobs. What corporations did with all this money given to them free of charge. They bough other corporations, i.e. they got them for free. So they boost numbers and stocks go up. They fired people and official productivity numbers did not suffer, off course as 80% of people doing nothing or doing wrong things, and intangible asset investments mounting and mounting and mounting. The cause is systemic, it is a Gordie knot. After s&p reaches 650 there will be major overhaul in corporations and only in 2023 the real economy will start growing again

  10. Check out this article about the BDI, seems like more people are paying attention: