In addition to comments regarding our kitchen cleaning, we received multiple inquiries regarding our use of the Baltic Dry Index (BDI). Despite some reader's comments that it sounds like some Estonian deodorant or Russian Sherry, it turns out to be a pretty useful economic indicator. Given that the US economy is linked to the global economy, banks should have a way to track the global economic picture as a data point in their economic forecast. If you are in need of such a metric, may we suggest our favorite - the BDI.
The BDI can be found on Bloomberg (on their public webpage under the ticker "BDIY"), Reuters and our free "Monthly Asset-Liability Package." The BDI is a measure of shipping rates for dry bulk carriers that move commodities such as coal, iron, grains, fertilizers, animal feeds, etc. around 26 major ocean routes. As a result, the BDI captures supply and demand for raw materials across the globe. It takes into account shipping capacity, fuel costs, bookings and even piracy. The key part here is the fact that the BDI focuses on raw materials, as this is our first hint that demand is increasing (or falling) for product inputs. As such, the BDI is a nice leading indicator of future economic change. Manufacturers purchase more raw materials in times of growth, thereby sucking up shipping capacity and increasing rates. When these same producers stop buying raw materials, due to excess inventory or lower infrastructure building, rates fall.
As a result, the BDI is a compelling indicator because it is a simple, real-time measure and difficult to manipulate/influence (unlike indicators such as unemployment, currencies or oil prices). While the BDI hit a high of 11,771 on 5/22/08, it quickly hit a low of 663 on 12/05/08. Now, it is hovering around 1,478 after a recent drop. As an aside, shipping, as an industry, is said to be in trouble when the BDI falls below 4,000. It is here, where revenue falls below most companies' fixed and variable costs. To counter, ships take longer (to use less fuel), avoid places like the Panama Canal (it is sometimes cheaper to go around Africa) or get taken out of service. Ships, unlike airlines, need larger crews and more maintenance, so it is harder to change capacity quickly. As a result, supply changes slowly, adding to the stability of the index. Should the index drop below 1,000, it is said that every transport is a money loser and thus cannot be sustained.
In the chart above, we graphed the BDI (blue line on the bottom) against the S&P 500 (green line on top) to show the high correlation to equity movement. As you can see in recent performance, despite the run-up in equity prices, the BDI has continued to sell-off, foretelling a similar trend that should be coming in the S&P. In other words, BDI paints a weakening global economic picture.
Until the BDI gets above 4,000, we expect weakness in global demand to continue, hurting the US economy. By tracking the BDI, banks can have a sensitive, accurate and forward-looking measure of the global economic picture.