The Baltic Dry Index (BDI) historically has been considered a valuable leading indicator for all sorts of economic and financial market variables.
What is the BDI? It is a composite of global freight costs for dry bulk commodities such as iron ore, coal, and grains based on daily reports by shipbrokers to London’s Baltic Exchange. It is compiled from data on a wide variety of global routes and ship sizes ranging from 15,000 dead weight tons to 100,000+. The index was set at 1,000 on Christmas Eve 1984 and started trading the first trading day of 1985.
Some economists feel that the index has lost its predicting powers after collapsing during the global recession of 2008-2009. The combination of the Great Recession and the surge of new ships drove the index to 25 year lows during the crisis. While I understand the index has lost some historical comparison usefulness, I feel it is still a useful indicator of future world-wide demand.
Unlike observing prices in the commodity markets, the information we can glean from the BDI is not influenced by swings in investor sentiment or speculation. And it’s a daily index, not subject to delays like the Purchasing Managers’ Index.
What is the index telling us now? The BDI graph below reflects the daily index over the past 12 months. September-October-November showed steady improvement. Let’s hope that the downturn in early December is a short-term aberration and that the economy continues to strengthen.
“People who think they know everything are very irritating to those of us who do.” Author Unknown
By: Mel Miller, Chief Economist, First Affirmative Financial Network
Posted: December 18, 2012