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Is Global Trade (and the Global Econmy) on the Verge of Collapse?

stuartbramhall's picture
photo credit Zero Hedge

photo credit Zero Hedge

Man the Lifeboats – She’s Going Down!

Picking up on a December 12th post by Tyler Durden at  Zero Hedge, Mac Slavo at Blacklisted News warns that a 8.2% overnight drop in the Baltic Dry Index (from 900 to 826the biggest drop since 2008) suggests that global shipping and trade are in deep trouble.

How Come They Don’t Teach This Stuff in School?

The Baltic Dry Index (BDI), issued by the London-based Baltic Exchange, was established in 1985 as a measure of the global shipping rates of dry bulk goods. As Durden and others argue, the BDI is an excellent measure of the demand for these goods. When countries are importing and exporting like mad, demand for container space increases and global shipping companies increase their prices. When global trade declines, they reduce them. According to Durden, Slavo and other reputable market watchers, big swings in the BDI are very predictive. A 95% drop in the BDI preceded the Wall Street crash in 2008.

The BDI (and global trade) recovered somewhat with the stimulus measures Obama enacted. Then in January 2012 it precipitously dropped again – by 65% in one month (from above 1600 to 726).

As you can see from the Zero Hedge chart above the BDI recovered a bit in subsequent months, but never to the levels it enjoyed in 2009 and 2010 (which were drastically lower than 2007 and 2008 levels).

Hellenic Shipping News expressed similar concerns about the December 12th BDI drop. They correlate the price decline with a 3.6 percent drop in US exports (in October). This was the biggest percentage drop since 2009.

According to the latest Dry Ships Inc report posted at their website, the BDI has continued to drop. On Friday December 14th it was 794.

As Durden states in a January 2012 post about the BDI, “Despite the astonishing amount of manipulation that goes into our fiscal system by major banks, there are still a few fundamental rules to economics that never change. The bottom line? Demand around the world is derailing, hinting at a broad spectrum disintegration of public buying power.Where demand goes, so goes the economy.”

Cross posted at The Most Revolutionary Act

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stuartbramhall's picture
Submitted by stuartbramhall on

If I understand Durden's analysis, it seems shipping companies are offering massive discounts on container space because so little shipping is happening any more. If you follow the curve down from 2008, it's like trade is approaching a virtual standstill.

Submitted by Hugh on

I would suspect that there are large amounts of excess capacity in shipping and this is keeping the Baltic Dry Index depressed.  That said, Europe and the US are going nowhere.  Growth in China is slowing, but no one knows how much for sure because the Chinese data can't be trusted.  Many of us think there will be a crash but exactly when is hard to say.   As the political elites in the US embrace austerity, as the European crisis deepens, and as China's multiple bubbles age, the probabilities go up, but what the precipitating event will be is still out there.

mtngun's picture
Submitted by mtngun on

Thanks for sharing, Stuart.