Zero Hedge
0
All posts from Zero Hedge
Zero Hedge in Zero Hedge,

Baltic Dry Index Crashes: Calamity or False-Alarm?

 

 

 

Jeff Nielson for Sprott Money

 

 

 

For this commentary to make any sense to most readers, it’s necessary to address the two questions which immediately come to their minds: “what is the Baltic Dry Index?” and “why should I care about it?” Dealing with these questions in order; the Baltic Dry Index measures the prices paid to ship various forms of cargo, in the form of an index.

 

 

Answering the second question starts with further elaboration on the first. This price index is seen as a proxy for the demand for shipping, versus the capacity of the existing global fleet, because (in legitimate markets) price is always viewed as a proxy for demand. In turn; the demand for shipping is often viewed as a proxy for global economic activity (all other things being equal). Put bluntly; if economies are growing, then “things” are moving (by ship).

 

 

What conclusions, if any, should we then draw from the fact that the Baltic Dry Index has just crashed to a new, all-time low? In this case, analysis definitely starts with a picture.

 

 

The chart above does more than merely inform us that the most-recent measurement of 530 is an all-time low, it further enhances our understanding of the BDI, in conceptual terms. We gain this greater understanding by simply looking at the horrific, (downward) vertical line in that index, which coincided with the Crash of ’08.

 

 

Undoubtedly all readers have a reasonably vivid recollection of that economic episode. Even if they did not experience any personal, economic pain; they would at the very least recall the general atmosphere of panic – and the acute “economic pain” experienced by others. Thus a vertical line in the BDI (downward) is not statistical indicator which should be taken lightly.

 

 

Once again, the BDI is plunging lower, vertically. While the vertical line is not (yet) of the magnitude of the Crash of ’08 (currently about 1/3rd that size); it has already plunged below the trough of that previous crash, as signified by the new, all-time low. Does this then mean that we should now be bracing ourselves for “the Crash of ‘15”?

 

 

In short, not necessarily. The key to interpreting the data of the Baltic Dry Index (and the chart above) comes from the qualifier used previously, in discussing the significance of this statistic: “all other things being equal”. With the BDI being a demand-oriented measurement (for shipping capacity); the first variable we must examine, to determine if “all other things” are equal is the supply of shipping capacity. Once again, a chart is highly illustrative of the conceptual factors at work here.

 

 

What we see is a dramatic increase in ship-building activity, and thus a sharp increase in the supply of cargo capacity within the global fleet of freighters. Obviously this “increase” is almost totally centered on the ship-building of two nations: China and South Korea. Before attempting to understand precisely what is signified by the two charts, in conjunction; it is necessary to first derive a greater understanding of this spike in ship-building activity.

 

 

Were China and South Korea engaged in a deliberate campaign of creating over-capacity in the global fleet, as part of some economic “power play” to squeeze-out other ship-building nations, such as Japan? While this interpretation is possible, it does not seem likely, once we begin to factor in other context.

 

 

The starting point is to refer back to the BDI chart. What do we see immediately before the unprecedented collapse which took place in 2008? An unprecedented rise in the BDI. Part of the reason why the collapse in the BDI looks (and was) so horrific was that it began from an all-time peak in the Index.

 

 

As noted before, with the BDI (often) being a proxy for global economic activity, what we see reflected in that pre-Crash rise was the strong, healthy, global economic boom which was underway – until deliberately sabotaged by the One Bank, in the form of its (manufactured) Crash of ’08. Thus the most rational/probable explanation for the sudden spike in ship-building activity (which began in 2007) was a reaction to the plunge in excess cargo capacity, signified by the record prices charged/paid to ship goods at that time.

 

 

It was old-fashioned supply and demand which motivated China and South Korea to begin their ship-building campaign. But what caused them to continue that pace of ship-building activity, even after the Crash of ’08 had cooled-off demand and prices? Two factors were at work here.

 

 

To begin with, the economic boom occurring in (primarily) “BRIC” and “Emerging Market” nations (their industrialization), is still in its early stages. Over the long term, as these economies begin to mature, and industrial activity intensifies further; the level of demand for raw materials (particularly “hard” commodities) must rise dramatically to fuel that activity, and those raw materials require ships to take them from producing nations to consuming nations.

 


But there is a second, more short-term factor at work here: old-fashioned propaganda. While the East has been manufacturing more goods, the West has been manufacturing more lies – larger/bigger lies, particularly those covering up the economic collapse occurring in our nations.

 

 

With Western governments (especially the U.S.) pretending there is much, much more economic activity in our nations than is actually taking place; the goods-producers of Asia (and other Emerging Markets) thought they would need to produce more goods to meet Western demand – and require more ships to transport those goods. In turn, the producers of raw materials thought they would need to produce more, to satisfy the increased demand from the goods-producers – and require more ships to transport those raw materials.

 

 

Everyone (except the Alternative Media, and our audience) was fooled by the economic lies of Western governments, which is why we also have gluts in the stockpiles of most categories of hard commodities. Everyone assumed that more cargo capacity was required, thus (in some respects) the current crash in the BDI was an inevitable event. At some point; the difference between shipping supply and expected demand (all based upon huge, Western lies) would collide with reality: a dramatically lower level of actual demand (for everything) centered in the decaying West.

 

 

Putting all this data and context together, we arrive at the following conclusion. Even though the current plunge in the BDI is vertical, even though that (modest) plunge has now taken the Index to a new, record low; this does not necessarily mean that we are on the cusp of an immediate, global collapse.

 

 

Regular readers know that “the Next Crash” has already been scheduled (by the One Bank) for 2016, to coincide with the next, U.S. election cycle – just as the One Bank did in 2008, just as it did eight years before that, after it burst the “Dot-Com” bubble. At this point; there is no reason to revise that previous thinking, and read-in any more significance to the current level of the BDI.

 

 

However, as already noted and for reasons already explained, the BDI is not an economic indicator which we can afford to ignore, even if we think we understand what is reflected in its data. We know that the One Bank wants the Next Crash to occur in 2016. However, as we have seen demonstrated on many previous occasions; it is anything but omnipotent, and anything but omniscient. In short; the banksters make a lot of mistakes.

 

 

It is certainly within the realm of probability that the One Bank could (will?) miscalculate, and will not be able to prop-up the frauds, Ponzi-schemes, and bubbles it has inflated (extremely) in Western economies all the way to the next U.S. election. Thus if we continue to see the Baltic Dry Index plunger lower and lower, vertically; it will tell us two things.

 

 

First it will conclusively indicate that a general, economic collapse is underway in much of, if not the entire global economy. Secondly, it will indicate that the One Bank “screwed up”, again.

 

 

Jeff Nielson for Sprott Money