All else being equal, in a world in which nothing is ever really certain until it’s already happened (and then sometimes not even then), I suppose you have to opt for being able to see what’s coming at you before it gets there. All else being equal, again, I guess you would want to see what’s coming as far out as you can. The reason for both is so that you can take evasive action, or hunker down behind whatever you can for shelter. But what if whatever it is that’s coming your way you can neither avoid nor mitigate?
Via the Frankfurter Allgemeine Zeitung this morning, we have a report on something with the titillating name Baltic Dry Index. Like many things with a geographic name these days, it’s about well more than just the Baltic. It’s an index that tracks the price of shipping dry bulk commodities very long distances in ships of different classes — Handysize (35–50,000 d.w.t.), Supramax (50–60,000 d.w.t.), Panamax (the largest that will fit through the Panama Canal, it is a physical dimension rather than a load specification, although the most common size is 65–80,000 d.w.t.), and Capesize (too big for the Suez or Panama; we’re talking about something in the 150,000 d.w.t. range . . . folks, that’s Real Damn Big, by anyone’s standards). The index measures how much it costs per ton per mile to move things like coal, ores, grains, and the like. Things that are the basic materials used to make just about anything durable, and stay alive while doing so. Since shipping space is a not easily expandable on a quick-turn basis (it takes a day or so to make an 18-wheeler’s cab and trailer; it takes months to build, fit out, and pass an ore-carrier), the more people want to ship and the greater amounts they want to ship, the higher the price for any given shipping route. The less is being shipped and by the fewer people, the lower the cost.
Further, sea shipping costs are less susceptible to at least certain kinds of price distortions than other forms of transport. I’m thinking specifically about an owner’s practical ability to withdraw his capacity from the marketplace and thereby maintain artificial scarcity. If you don’t have enough freight to keep your locomotives and cars busy at your price point, you park them on a siding somewhere until you need them again. Very low out-of-service maintenance. Ditto heavy trucking. Keep the battery charged, make sure the engine block doesn’t freeze, and have some maintenance guy come along a couple of times a month and start it up for 30 minutes to keep the seals wet. That’s of course over-simplified, but not by much. Ship owners can’t just pull a ship out of service when the shipping price per ton per nautical mile falls below whatever they want to charge. A ship that is not actively loading, un-loading, or underway is a ship that is losing its owners phenomenal amounts of money. There is a reason why you don’t see merchant equivalents of the James River Ghost Fleet. Private owners can’t afford to keep inactive ships afloat, so they get sifted downstream through progressively less scrupulous, more neglectful owners, and generally end their days on a beach in South Asia somewhere, being chopped to bits.
In short, because the commodities whose shipping costs it tracks are so basic to so many manufacturing processes, the Baltic Dry Index makes a very reliable leading economic indicator. Its fluctuations express themselves in the general economy with an 8-12 month lag time.
And it’s dropping through the floor. Since the beginning of the year it’s dropped by roughly 50%, to less than 1,000. Back in 2008 it was at nearly 12,000. Add this to the U.S. economy having shrunk at an annualized rate of 1.0% in the first quarter, Japan cranking up its value-added tax (in the run-up to the increase’s effective date, Japan Went Shopping, delivering a (deceptive) “growth” of 6% annualized), Vladimir Putin holding a gun to Europe’s head in the shape of natural gas prices (Germany’s trade with Russia has imploded by 16% year-on-year since the onset of the latest Ukrainian crisis), and the Middle East about to explode all over everyone, and it’s hard to find something to be upbeat about.
The leading edge of the glacier is headed this way. Fasten your seatbelts accordingly.