HardAssetsInvestor

Written by Julian Murdoch  |

August 20, 2009

Rethinking The Baltic Dry

Details

The Baltic Dry Index is considered a leading indicator of global economic health. But is the crystal ball cracked?

• The wild ride of the Baltic Dry
• BDI's performance next to stocks and commodities
• BDI as a window to the future?

 

Leading Or Lagging Indicator

The Baltic Dry Index, or BDI, is an index that tracks a blending of rates to ship dry goods - basic raw materials like iron, coal and grains - on three different-sized boats on the four main shipping routes.

Conventional wisdom - or perhaps just tradition - has analysts looking at the BDI as a leading indicator of how commodities and the global economy will perform. The old adage is that no one hires a ship unless they have something to transport, and if people are transporting things, that means they're buying and selling.

The idea does make some sense. But lately, the BDI's ups and downs have looked less like Harry Potter's Marauder's Map and more like the meanderings of a drunk driver.

Maybe, though, the BDI never has been a crystal ball. To dig a bit deeper, I caught up with Paul Hickey from Bespoke Investment Group, who's written regularly about the usefulness of the BDI as a technical indicator.

"You'd rather see it rising than falling," explains Hickey. "But it hasn't always been a perfectly reliable indicator to watch."

 

Is That An EKG?

Lately, if the BDI were a roller coaster, it would be an E-ticket ride. In the past six years, wild swings have been the norm, rather than the exception:

 

(For a larger view of this chart, please click on the image)

 

This BDI chart from Allied Shipbroking's weekly sales and purchase report starts back in 1985 and goes to August 17, 2009. It illustrates that the BDI has always been volatile, but prior to 2003, that volatility moved within a narrow band. Only since October 2003 have we started to see extreme swings - some as wide as 100% or more.

The past three months have been no exception:

 

 

Since May 20, 2009, the BDI has been up 60%, only to drop all the way back down - and then some.

Most recently, the 25% drop between July 29 and August 12 has particularly troubled analysts. "The decline in the BDI is certainly somewhat of a negative for the whole idea of a global economic recovery," says Hickey.

But looking at the BDI on its own doesn't really tell you much. It's just a number without context.