What is the BDI Telling Us?

by William Kurtz, CandleWave LLC

The Baltic Dry Index (BDI) is considered a good coincident to leading indicator of economic activity. When the global economy is strong the demand drives up the cost of shipping and the BDI goes higher. When the global economy is pulling back, everything goes the other way, including the BDI. There are dramatic developments in the BDI which we will review shortly, but first I have a little discussion about the stock market rally.

This rally, which began on October 4, does not seem willing to let go.  It is reminiscent of the Great Rally of 2009-10-11, which retraced almost 80% of the drop from October 2007 into the Low of March 2009.  It also brings to mind the great mania in stock prices from 1995 to 2000, and also of the “hard rubber ball hitting the sidewalk” rebound into the all-time High of October 2007.  It seems that we are living in an age of extreme market movements.  This rally, now, has brought the Dow to more than 78.6% of the drop from May 2011; and the S&P 500 is almost at that number.

However, perhaps we should expect these extremes now.  After all, the current great topping event, which has been going for years and is in its last stages, is “one degree higher” in the order of things than was the case in 1929.  Everything is magnified.  Swings are wilder, and they take longer.  Imagine that “1929” was a standard grandfather clock, with a standard pendulum.  Imagine that what has been going on during the past few years is also a grandfather clock, except that this one is 50 feet tall, with a properly-sized pendulum to fit.  You can imagine that the swings of that pendulum will be wider, and that they might take longer.  You might not choose to open the glass door of that clock and stick your head in the path of the oncoming pendulum!

Perhaps there is another, but imprecise, corollary –  between these stock Index movements and the Richter scale for measuring the strength of earthquakes.  On the Richter scale, an increase of destructive power from Richter 7 to Richter 8 is not merely 1/7; it is doubled.  I do not know whether the ramp-up of this particular one “degree” in financial markets equates to a doubling of the swings and the expenditure of time for wave completion that should be expected now; but we can see the result clearly on the charts from 1995 to date.  This time, it really is different.  Perhaps we had better to get used to it; because the follow-through necessarily implies that the down moves which are inevitably to follow along very soon will be more extreme than we might expect, too.  The disastrous down move from the October 2007 High to the March 2009 Low is a perfect example.

“This is not your father’s 1929.”

I had written, some time ago, that this rally could take the Dow to about 12600.  Well, it was only 21 points shy of that number as of 4 PM yesterday (Thursday, January 19).  The Dow could easily break above that number anytime.

I’ve also attached (below) a chart of the Baltic Dry Index, which measures the cost to ship dry bulk cargo – for example, iron ore, or coal, or cement.  This Index is a Leading Indicator of worldwide economic activity.  You can see that the cost to ship has been sliding badly.  It’s almost as low as it was in the depth of the recession in 2008.  You can also see how high the Index did not rebound after a Low in early 2011.  So the next time someone repeats real estate brokers’ spin on how well the housing market is rebounding, or repeats the story about increased production with no increase in hiring, ask him or her whether he has seen the Baltic Dry Index numbers lately.  The gentleman or lady will have no idea what you’re talking about – but you will!

Click on graph for larger image.

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