What does the Baltic Dry Index drop say about?

12 Şub 2020

The fact that 2020 could be the year of the beginning of the global recession or even the crisis has been talked about and written about. But after the United States and China entered into the first phase of the agreement, the conversation calmed down a bit and investors calmed down. The coronavirus epidemic has revived old fears.

We offer to look at the current situation in the world economy and its prospects through the prism of an original and very interesting indicator characterizing the state of economic activity - Baltic Dry Index.

The Baltic Dry Index (BDI) is a trade index that reflects the cost of transporting dry goods (coal, ore, grain, etc.) by sea along twenty major trade routes.

That is, unlike most classical macroeconomic indicators such as GDP or industrial production, which state what has already happened and, as a consequence, are very late in their signal function, this Index allows real-time monitoring of economic processes (more specifically, demand for raw materials).

An important feature of BDI is the absence of a speculative component in it, that is, it is not subject to fluctuations in investor sentiment or emotional capital inflows/outflows. Trade is limited only to member companies, and only those participants who have real cargo or have shipped to transport these goods provide contracts. That is, BDI gives an undistorted view of reality, which is very rare in the modern world.

So, over the past six months, the Baltic Dry Index has dropped from 2500 to 400. That is, it has lost about 80% of its value. This means one thing: the demand for transportation of raw materials is falling, which indicates a decrease in production as a whole.

The index demonstrated its predictive abilities in 2008 (BDI collapsed then by more than 90%, giving a signal about the approaching global financial crisis).

How to make money on this information (meaning the fall of the Baltic Dry Index over the past six months, more than 5 times, that is, 80%)? The most obvious option, promising maximum profits, are sales in stock markets that are overheated to the impossible.

Recall that we consider 2019 the last year of unjustified growth in the US stock market. Already in 2020, it will begin to adjust. The scale of correction is from 50% and higher. Given that in recent years, shares of technology companies in the US stock market have grown by an average of 7-8 times (and some issuers have shown growth of 10 or even 20 times), the US stock market will no doubt become the object of massive sales. We recommend participating in this process, selling both the market as a whole (Nasdaq index) and the shares of individual issuers (Apple, Microsoft, Alphabet, Oracle, etc.).