When The Sky is Falling…
Pfäffikon SZ, Switzerland – Investors are gasping for air now that some “experts” claim the support has been removed from underneath the stock markets. Supposedly, we’re on the eve of a lot more misery now that the line-drawers are picking up on all kinds of downward signals. The Baltic Dry index is also frequently mentioned as it has lost about 75% of its value. Is the sky really falling?
Downhill
The Baltic Dry Index (BDI) is a leading indicator for the rates of bulk shipping over sea. Since August 2015 things have been rapidly going downhill for the BDI. Plummeting commodity prices and an increase in cargo ships built by China and South Korea are the main reasons for the decline. The theory accounting for an increasing BDI is that when the demand for goods and commodities increases, more things need to get shipped, which will lead to further price increases in transport. When the BDI declines the opposite becomes true.
Bellwether
The key question is whether the BDI is still a good bellwether for world trade. After all, despite the announced impending disaster, several economies and businesses are running quite smoothly. The current uncertainty is mainly sector driven and in certain cases strongly overstated. The BDI represents the prices, but not the volume, which leads to an incomplete picture of actual world wide transport. Increasingly large ships have been built in the past several years, but the targeted efficiency increases are under constant pressure due to the reduced oil prices. Moreover, the worldwide market for transport has remained stable, which has resulted in extra pressure on prices.
Not 2008
Thus, a comparison with the decline in the BDI in 2008 is premature. The conditions are different. Of course global growth and a surging oil price help to generate extra demand. Perhaps skippers are being asked to part ways with their old ships earlier than was the case before, which would bring the market closer to a balance. This takes time. The idea that the sky would be falling, now that the BDI is in freefall, is nonsense and is indicative of a high occurrence of “first level thinking.”
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
