As the Baltic Dry Index (a global shipping price mechanism) scuffles back to early May levels despite a recovering global economy one must ask what are the drivers? We were raising the question nearly a month ago [Aug 7, 2009: Baltic Dry Index has Worst Week Since October 2008 - Blame China. Prescursor to Slowing Loan Growth?] but as always with the stock markets new does not matter until it matters - hence the cheap headlines of US markets down on China today are comical, considering the Chinese market has been down many days this month and it did not matter. But now it does.

China has simply been the world's driver of all things trade - especially of the commodity sort. When the Baltic Dry Index started rallying we were asking what was the real cause? [Feb 9, 2009: China and the Baltic Dry Index - What's Really Going On?] We opined it was the Alan Greenspan / Ben Bernanke effect on steroids [Feb 16 2009: Is China Pulling an Alan Greenspan?] and in retrospect we appear to have been dead right. When China turned on the spigots, commodities and asset values began to fly higher. The markets saw these moves up and attached them to organic recovery signals. Essentially it's been worldwide flooding of money from governments and central banks. If that is sustainable and if that is the good kind of growth is a question for another discussion.

If I can be blunt, it really just looks like a major headfake - central banks have been pushing money into the atmosphere and it is going to help out a relatively small band of speculators in most countries [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market] - really very little different than when Greenspan flooded the world with US pesos after the Asian currency crisis in 1998 and before Y2K at the turn of the century. We saw how that turned out (NASDAQ 1999-2002)

But since the market works on its own reality we have rallied constantly on green shoots - and we own a few things (such as a housing stock) not on belief in real recovery, but on the market's belief of perception of a real recovery. Which goes to the larger point newer investors need to learn - the market is not about reality, it is about the perception of reality... at least in the short to intermediate term. Does it matter if housing falls into a tailspin (which it will if the $8000 handout to 1st time homebuyers doesnt turn into a $15,000 handout for everyone)? Not in the near term. Does it matter if much of the surge in copper, oil, and other said commodities is nothing more than China stockpiling? Not for those who made money on those rallies. Obviously with central bankers across the world working overtime, the old signals we used to use are very difficult to use anymore because basic supply and demand issues of more and more paper currencies chasing fixed supplies of stuff has bastardized price mechanisms. What is real, and what is Memorex is very difficult to ascertain.

Which brings us back to the shipping index - all I know at this point is whenever China wants to buy things - prices surge and the Baltic Dry Index goes with it. When they turn off the hose - the BDI goes flaccid. What people are now using as a proxy on global trade really has become China's personal plaything. But that won't be how it is couched in the mainstream.

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If you really believe the world economies have turned healthier the past 3 months you have to look in the mirror and ask why Baltic Dry Index is back down to first half May 2009 levels. Especially because you used the Baltic Dry Index strength earlier in the year as a signal that world economies were improving. Or will it just be too convenient to only use the Baltic Dry Index as a signal when its going in the right direction, and ignore it when it's not supporting your case? I guess that depends on where you fall in the punditry pantheon. But let's remember the reality the next time the BDI starts to rally because while infotainment financial TeeVee is brushing the BDI weakness under the rug, let it be known the minute it turns back up it will be headline news. And we'll know that is simply means China has decided to show up again incrementally making purchases in the commodities market.

Aside from China's hand on the spigot the other (longer term) main issue facing shipping rates is potential supply of new ships. It is a complicated issue because older ships to transport coal, iron ore, fertilizer and the like are being retired while new ones are coming to take their place. There seems to be more supply than needed coming online - but then again with the wonderful recovery we are about to enjoy in theory we would need them. Ahem. Bloomberg has a piece on this subject below that is worth highlighting.

Our only position in this sector is Excel Maritime Carriers (EXM) which we've been patiently sitting with a placeholder position waiting for a gap in the lower $6s to fill. Why have I not been shorting it considering the very obvious gap? Scary sector to short when these stocks can move 10-15% in the drop of a hat. Why do I even bother with a long position in this sector? The same reason I own a housing stock when 18 million homes sit empty in America.... Kool Aid ingestion by stock market investors aka fundamentals mean little when 'perception' is everything.

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Via Bloomberg

  • Just as global trade starts to recover, the shipping market is crashing for the second time in a year as China reduces raw-material imports and record numbers of new vessels set sail.
  • The rate for leasing capesize ships, boats three times the size of the Statue of Liberty, will drop about 50 percent from the current price of $37,865 a day to as low as $18,000 before the end of the year, according to the median in a Bloomberg survey of six analysts and fund managers. Forward freight agreements traded by brokers show the fourth-quarter average price will be 7 percent lower.
  • Shipping rates, which already fell 59 percent from this year’s high, are retreating as the Organization for Economic Cooperation and Development predicts a 16 percent drop in world trade for all of 2009.
  • A record 146 capesizes will be added this year, equal to 28 percent of the fleet, according to Fearnley Consultants A/S.

[Oct 31, 2008: Credit Tsunami Swamps Trade]

[Nov 3, 2008: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens]