Posted on 07/11/2010 9:17:26 AM PDT by blam
A Reminder Of Why The Baltic Dry Index Is A Useless Leading Economic Indicator
Joe Weisenthal
Jul. 11, 2010, 9:16 AM
With the Baltic Dry Index falling for more than 30-days, there's plenty of talk about how this is a signal of collapsing global demand, and a confirmation that we are indeed headed for a double dip.
Well it could be saying that. Or it might not be. But before you jump to any conclusions, you should at least know what the BDI is really measuring.
Here's part of what our Vincent Fernando wrote (then an occasional contributor), back in May 2009:
But essentially one problem with using the BDI for economic forecasting is that the BDI could feasibly go up in an environment where commodities demand was shrinking, if the supply of ships was shrinking even faster. These would be negative economic factors. This is because the BDI's value is not solely driven from the demand side. To me, it makes far more sense to just look at nominal demand for commodities rather than the BDI since the BDI has the complicating factor of vessel supply growth one needs to consider. The other thing is that the BDI is a measure of spot rates for dry bulk commodities consumers who, generally, are in the near term forced to pay whatever it takes to get their raw materials shipped (A steel plant needs to keep operating despite some higher ore transportation cost). On the flipside, vessel owners are in a similar boat (no pun intended), and in the near term are generally forced to take whatever rate they can get to fill their ships. (A ship sitting around is just a cost, ie. fixed costs are high, thus using a ship at a loss
[snip]
(Excerpt) Read more at businessinsider.com ...
So who would be supplying all of this growth in ship numbers?
Is there anybody building ships right now? Or has existing construction been put in mothballs and are ships be decommissioned?
From what I've read the supply of shipping has been going down, meaning that the BDI actually appears better than it actually would otherwise be.
They neglect that the BDI is also a measure of confidence. Nobody is going to order or ship a commodity unless they are sure there is a complete transportation chain. Otherwise, both seller and buyer would be in a spot.
So what he is complaining about is far less volatile than he suggests. It is not the bulk of ships and shipping, but only the margins of this which are vulnerable to volatility. It is not the 10 ships that carry cargo from supplier to buyer, but only the 1, marginal ship that is at issue.
But shipping is not a perfect art, so likely that one ship, or one cargo, is “within the margin of error”. Taking into account such things as loss, theft, damage, etc.
I do not believe Weisenthal is a good analyst.
Baltic Dry Index is not the only thing that is falling in price.
Lumber prices are down.
Copper prices are down.
BDI, lumber, and copper all recovered since 2008/09 lows and now are falling.
A double dip recession could be in the offing.
Korea. There is actually over-supply of ships, and firms with cash snap them on the cheap. But the demand also shifts among the classes of ships, and ship-building continues quite briskly. Paragon, for instance, just bought a Panamax in May and announce last week the exercise of options for two container vessels to be delivered later this year.
Consider the cost of an unused ship, standing at the dock, as opposed to an unused ship, at anchor in a “mothballed” state (recall the rumors of 200-500 ships “mothballed” near Indonesia). Theoretically, idle ships in port still incur costs, and count as unfilled capacity in the BDI index, while the mothballed ships do not.
Like all other technical indicators, the BDI is a windsock, not a crystal ball. The signs and portents can easily be misinterpreted, for the same reason the weather forecast may be wrong.
Best you can do is to be totally objective. An honest interpretation of the indicators will tell you the probability gradient. No more, and no less. But markets can do anything, regardless of the relative probabilities.
As a trader/investor, you cannot control what the market will do. But you can control what you will do. In order to trade/invest profitably, you have to have the courage, self-honesty and discipline to act in your own best interest—immediately, ruthlessly, and without any regret, rationalization or equivocation. You also have to have the courage to NOT panic out of your winning trades too soon, but also the calm rationality necessary to exit the trade when the odds are no longer in your favor. That’s what it takes to cut your losses short, but let your winners run.
Actually, successful trading/investing is all about panic and greed. Profiting from the panic or greed of others, while not succumbing to panic or greed yourself.
I also think that rail and truck shipments are lagging indicators. They represent past production only now being shipped.
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