Comments on: The most obscure but perhaps the most important economic indicator we've got

The most obscure but perhaps the most important economic indicator we've got

Mutant — Fri, 31 Oct 2008 04:25:25 -0800

How best to take the pulse of the global economy? While market driven rates such as LIBOR or US Government T-Bills reveal the state of fixed income and Credit Default Swaps tell the observer much about possible default rates, many analysts prefer a more basal view. The Baltic Dry Index is one such indicator.

For over 250 years member companies of the Baltic Exchange have tracked the cost of shipping goods across the globe. Everyday they produce The Baltic Dry Index, which is nothing more than "...a daily average of prices to ship raw materials". The performance of this index is unbiased as speculators do not participate in this market; hence we consider this an effective forward looking indicator of the expected state of the global economy, and presently the Baltic Dry Index is tanking. Looking for the bright side? The Baltic Dry Index tells us its now over 90% cheaper to ship goods and material across the globe than it was a year ago. At least until bankruptcies in the shipping sector reduce capacity to fit demand.

By: gman

gman — Fri, 31 Oct 2008 04:31:32 -0800

Why isn't anyone bailing out this sinking ship?

By: BrotherCaine

BrotherCaine — Fri, 31 Oct 2008 05:11:49 -0800

Was total volume of corrugated cardboard orders the traditional forward looking indicator at one point?

By: 0xFCAF

0xFCAF — Fri, 31 Oct 2008 05:12:34 -0800

Is this the hip new thing to talk about now that the TED Spread's 15 minutes of fame are over?

By: fixedgear

fixedgear — Fri, 31 Oct 2008 05:27:35 -0800

I prefer the Pistadex or even Pistadex.com on your iPhone.

By: stbalbach

stbalbach — Fri, 31 Oct 2008 05:45:54 -0800

Hey cool thanks. I've got a permanent Firefox window with tabs open to these charts - the pulse of the economic crisis: *US Treasury 3-month (higher the better - the proverbial "mattress") *TED Spread (lower the better - level of trust between banks) *Fear Index (lower the better - market volatility) *Baltic Dry Goods *CRB Index (Commodities) *How this bear market compares (historical context, reminder how things could go)

By: procrastination

procrastination — Fri, 31 Oct 2008 05:49:41 -0800

There is some discussion at Naked Capitalism (which has been doing an incredible job of covering the credit crsis) that the reason this is happening is not just because of a drop off in trade, but because the fundamental financial mechanisms of trade are broken.

By: delmoi

delmoi — Fri, 31 Oct 2008 06:12:46 -0800

By: stbalbach

stbalbach — Fri, 31 Oct 2008 06:26:41 -0800

procrastination, saw this in the thread comments of your last link:

Being a Dutch ex-linershipping broker please note the Baltic dry index is a spot-market which trades futures for bulkcarriers. A recent article of John Kemp in the Hellenic Shipping News explains a lot. "clearing queues at the massive commodity export harbours in Brazil and Australia have returned millions of tonnes of bulk carrying-capacity to the market. Clearing queues rather than a sudden downturn in trade volumes provides the best explanation for plummeting rates." The full article is available at "Freight index does not herald end is nigh: John Kemp"

By: blue_beetle

blue_beetle — Fri, 31 Oct 2008 06:27:00 -0800

A wizard did it.

By: Big Fat Tycoon

Big Fat Tycoon — Fri, 31 Oct 2008 06:29:13 -0800

Not sure how this is "obscure"? This has been a widely reported measure for at least the last several months, based on my reading.

By: There's No I In Meme

There's No I In Meme — Fri, 31 Oct 2008 06:36:33 -0800

I'm just hazarding a guess here, but the recent volatility of foreign exchange rates may be adding an element of risk to international trade that is compounding the financing concerns. A large influx of Euros or Pounds may not really be desirable if you're a Japanese manufacturer. Or do trade terms mitigate this kind of risk?

By: gman

gman — Fri, 31 Oct 2008 06:54:38 -0800

Not sure how this is "obscure"? This has been a widely reported measure for at least the last several months, based on my reading. Yeah, but you're a Big Fat Tycoon.

By: storybored

storybored — Fri, 31 Oct 2008 07:26:12 -0800

What's missing of course was the Lehman-Stearns-Fannie-Freddie-soon-to-go-into-the-crapper-taking-most-of-the-economy-with-it Index.

By: digitalprimate

digitalprimate — Fri, 31 Oct 2008 08:44:37 -0800

Honestly, I'm not sure if this is relevant, but the vast majority of owners/operators in the bulk transport sector are asset players. They buy ships when freight prices (and hence vessel prices) go down, run them at break even or sometimes a loss until the next time freight markets swing up. There are some companies, mainly Greek but a couple of Norwegian, who have played these ups and downs successfully dozens of times, some going back to WWI. So all that means is that low freight rates will translate into buying opportunities for a lot of bulk owners/operators who may have been sitting on a pile of cash for up to a decade waiting for the right moment. Also, one more random thing, the main operating cost (as opposed to capital cost, i.e., debt servicing) on a bulk carrier is the bunkers, which, one would think, would be down now as crude is way down. /totally random things that may or may not be related.

By: nickyskye

nickyskye — Fri, 31 Oct 2008 08:53:15 -0800

Ooh, so exciting to learn a tip from somebody in the know. This is way cool! Thanks Mutant. This feels like a peek into the boiler room to know how a building is doing. Also enjoyed having the additional links in this thread. That's not to say I know anything about what this means but having the link and the pointer means I can try to learn and make a bit of sense of this complex topic.

By: nickyskye

nickyskye — Fri, 31 Oct 2008 09:05:32 -0800

PS for other beginners like me, adding this basic market watch link.

By: Xoebe

Xoebe — Fri, 31 Oct 2008 09:11:47 -0800

"who may have been sitting on a pile of cash for up to a decade waiting for the right moment." Provided that pile of cash didn't go away along with the bank it was stashed in.

By: Kwantsar

Kwantsar — Fri, 31 Oct 2008 09:28:45 -0800

What's up with EXM's stock? (They're one of the component companies of the dry bulk index) Really? What dry bulk index is that?

By: Kwantsar

Kwantsar — Fri, 31 Oct 2008 10:24:57 -0800

What's up with EXM's stock? (They're one of the component companies of the dry bulk index) Their P/E is like 1.44 now, and their share prices is 1/3rd their book value. Why is their valuation so low? I'm assuming other companies are similar. Snarking aside: 1. There is no "dry bulk index" of equities. Or if there is, it's completely obscure. 2. You should really not look at levered cyclicals on a P/E basis, especially at this point. 3. In 2010 and beyond, EXM is one of the more spot-market exposed companies in its universe. The new build in dry bulk carriers over the past few years has been absolutely stupefying, as China's appetite for Iron Ore (and coal and grains and bauxite, etc) is (excepting, perhaps, the post-WWII rebuilding) globally unprecedented. In response to this, 118 million dwt of capacity has been built in the past five years alone. To put this into context, note that ships have useful lives in excess of 30 years, and that 30% of the world's fleet has been built in just the past five. And the order books of the big builders (mostly Korean and Japanese companies with "Heavy" in their names) are swollen thick. In classic cyclical fashion, however, an economic downturn has cooled off the global construction industry, inventories of steelmaking and other materials have grown, and credit/demand is insufficient to turn all this stuff into bridges and buildings. There is absolutely no demand for the marginal unit of dry bulk commodities, and thus there is no demand for their transport. You probably understand this but what you may not understand is that bulk shippers can't really cut capacity, especially when there is no demand for even scrap steel. The bulk shipping industry is truly the mother of all fixed-cost businesses. It costs about $50 million to buy a Panamax bulker, which costs $5,000/day to operate. At peak, the ship rented for $70,000 (or so) per day. Now it rents for $7,000/day. If your contract structure is tied to spot pricing, and you financed that ship with debt, you're absolutely screwed. Furthermore, book value is practically meaningless for many of these companies that bought their ships in the past two or three years, at a cyclical peak. Slab prices (slab steel is the most important input to a bulk ship) were $200/tonne eight years ago. Six months ago prices were well into four figures, and look to be around $800 now. If your ship is on your books at the going market price when slab was almost 2x what it is today, you really can't use unadjusted book as a guide to value.

By: JPD

JPD — Fri, 31 Oct 2008 11:37:07 -0800

I'd add that 1) Kwantsar is 100% right on - especially on the BV/Steel relationship thing 2) Bulk Shippers going bankrupt doesn't remove capacity and fix the market. Supply only contracts when ships get scrapped - and guess what, scrapping ships is less attractive at lower scrap prices. 3) Container shipping is having similar problems that only seem to be accelerating. Most routes are now pricing at less then cash costs

By: Kwantsar

Kwantsar — Fri, 31 Oct 2008 11:48:58 -0800

An in-depth summary of the international dry bulk shipping industry can be found in the recent-ish F-1 filings of Safe Bulkers or Paragon Shipping. Which can be found using the search engine of your choice.

By: digitalprimate

digitalprimate — Fri, 31 Oct 2008 12:28:38 -0800

To get a sort of "from the front lines" view, I wrote to an old colleague of mine (yeah, I know; unnamed source, so take it for what it's worth), who is the head of marine credit for Enormous Fuel Company X. He writes: Dry bulk is the most dangerous area currently, and customers in that area are those we are watching most closely and a few have already bit it. Tankers are still fine. Liner shipping is still ok, but is going to really start to suffer in 2009, probably for a few years due to the large # of n/b's (post-panamax) to be delivered by 2010 and the general economic downturn. Typical overcapacity and bloodbath/consolidation will then ensue. So that on the spot summary pretty much supports what's been written in the public domain. The only thing I'd add, is that, at least in the past, the bulk owners/operators with money would be willing to sit tight even when scrap prices collapsed, just running vessels at a loss until the next upturn. If you look at the difference in what some owners paid at the bottom of the market for their fleet versus what they can make in 10 years when they sell it at the top, it can be an enormous profit. For people in marine credit, the trick is always to try and ascertain which shippers can hang and which can't, and appearances can be very deceiving.

By: delmoi

delmoi — Fri, 31 Oct 2008 12:30:21 -0800

1. There is no "dry bulk index" of equities. Or if there is, it's completely obscure. Er, I meant the Baltic Dry Index index, that we were talking about.

By: wendell

wendell — Fri, 31 Oct 2008 13:44:43 -0800

The performance of this index is unbiased as speculators do not participate in this market. I'm sure there are powerful people working to "fix" that at this very minute. A legitimate economic market that has not yet been turned into a Casino for the Rich and Leveraged? Wow. its now over 90% cheaper to ship goods and material across the globe than it was a year ago That statistic doesn't reassure me, it scares the shit out of me. At that kind of a price drop, it's hard to imagine anyone in the shipping business getting enough income to cover basic expenses. Which means it's likely that there will be so many bankruptcies in the shipping sector, it will reduce capacity more than enough to fit demand, meaning at least a short-run shortage of shipping resources while the market sets itself straight that would have a seriously negative effect on manufacturing, i.e. shortage of raw materials, forcing temporary shutdowns of factories, lay-offs, etc.

By: BrotherCaine

BrotherCaine — Fri, 31 Oct 2008 16:13:40 -0800

Wendell, I'm no expert, but I'd think shipping capacity would only permanently reduce if those ships go to the breakers. If instead speculators buy the ships for pennies on the dollar, the former owners / creditors will be the only ones hurt in the long term.

By: adamvasco

adamvasco — Sun, 02 Nov 2008 19:27:50 -0800

digitalprimate you are correct about bunker costs being one of the major factors here. Back in June bunkers were just over $700 a metric ton now its down under $400 again and companies are now reducing or dropping their fuel surcharges. However the Shipping industry will ride the storm of financial crisis.

By: Forktine

Forktine — Sun, 02 Nov 2008 19:41:18 -0800

This is one of the most interesting FPPs I've seen here in a long time. I don't pretend to understand the issues at play, but I'm finding it fascinating to read about.