Sierra Investment Management‘s Frank Barbera, Co-Portfolio Manager, recently published his latest chart commentary. The piece looks at the recent collapse of the Baltic Dry Index (BDI), which has declined an incredible 65% in just under 13 weeks. Now, at 511, the BDI resides at a new all-time low. Why does this matter?
The Baltic Dry Index measures the rates for transporting critical raw materials by sea; essentially the “day rates” for time-charter on what are known as Dry Bulk Carriers. Suppliers use these vessels to transport commodities such as coal, iron ore and grains to purchasers around the globe. In the past, the volatile shipping industry has often proven to be a good leading indicator for the health of the global economy.
There are several major themes at the core of the BDI’s sharp decline; they include:
- A broadly slowing global economy where key economic blocs, such as Japan and a significant portion of Europe, are entrenched in recession.
- China seems to be slowing sharply and taking with it other major economies such as Russia and Brazil.
- Much of the global economy seems to be sinking into a deflationary pattern.
In the current environment, the extreme weakness in the BDI may suggest that the global economy is indeed quite weak and that interest rates will remain low for some time to come.
Under such conditions, it is fair to expect that large segments of Sierra’s portfolios, including high-grade corporate bonds, municipal bonds and treasury bonds, could perform strongly in the months ahead.
Sierra Investment Management’s Frank Barbera: Baltic Dry Index Loses its Bulk
Source: Zero Hedge. January 1, 1985 through February 18, 2015
On November 4, 2014 the Baltic Dry Index (BDI) reached its 2014 peak of 1,484, and has since declined an incredible 65% in just under 13 weeks, during which time there have been only eight positive trading sessions out of a total of 63. This means that the BDI has been down 55 of the last 63 days. Talk about a one directional market.
Now, at 511, the BDI resides at a new all-time low. Why does this matter?
The Baltic Dry Index measures the rates for transporting critical raw materials by sea; essentially the “day rates” for time-charter on what are known as Dry Bulk Carriers. Suppliers use these vessels to transport commodities such as coal, iron ore and grains to purchasers around the globe.
When final demand for commodities is strong, day rates for the leasing of shipping vessels have a tendency to rise, and the industry roars. Conversely, when final demand for these commodities is weak, day rates can fall and the industry suffers.
Presently, there is a wave of bankruptcies overtaking the global shipping industry as final demand for a wide range of commodities appears to be fading rapidly, if not collapsing. Rarely has the shipping industry been overtaken by such a steep and one-directional nosedive.
There are several major themes at the core of this sharp decline. First is a broadly slowing global economy where key economic blocs, such as Japan and a significant portion of Europe, are entrenched in recession. In addition, China seems to also be slowing sharply and taking with it other major economies such as Russia and Brazil. In the end, much of the global economy seems to be sinking into a deflationary pattern. In the past, the volatile shipping industry has often proven to be a good leading indicator for the health of the global economy. As the supply of ships has a tendency to be flat over time, the global shipping industry tends to be particularly sensitive to sharp changes in final demand.
Right now, the message from the current trend appears to suggest that final demand is weakening sharply across the global economy.
At Sierra, we are continuously monitoring a wide range of global macroeconomic indicators to gauge whether the overall economic fundamentals are gathering strength or weakening. In a strengthening economic phase, interest rates can be expected to rise, with equities outperforming bonds.
In the current environment, the extreme weakness in the BDI may suggest that the global economy is indeed quite weak and that interest rates will remain low for some time to come. Under such conditions, it is fair to expect that large segments of our portfolios, including high-grade corporate bonds, municipal bonds and treasury bonds, could perform strongly in the months ahead.
Frank Barbera, Jr., CMT
Co-Portfolio Manager
To view the chart and read the piece in its entirety please visit the Sierra Investment Management website here.
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