The Baltic Dry index is sometimes forced to act as an indicator for the stock market. I’ve been guilty of this myself more than a few times (Baltic Dry Index, Commodities & The Stock Market). One such attempt was even mentioned by Albert Edwards of Societe Generale.
As a measure of the shipping rate and therefore the trade activity around the world, there is an intuitive reason for why it should act as a leading indicator. To be honest, I’m not sure exactly how accurate the Baltic Dry Index is as an early indicator for the S&P 500 index. But it certainly does seem to be mirroring the Chinese stock market very well. Here’s a comparison of the Shanghai Composite index along with the Baltic Dry index:
While most would assume that this relationship has to do with the fact that China’s economy is export driven, that is a fallacy. Recently Jim Chanos pointed out that the reality is that exports make up only about a quarter of China’s economy. So where is the bulk of the Chinese economy? Real estate. And it is a dangerous bubble ready to burst and plunge the entire global financial system back into the abyss.
As a caveat, the Baltic Dry index has been relatively weak for two other reasons. The recent flooding in Queensland, Australia has shut down the coal mining operations and ports there. Since approximately a third of the world’s seaborne coal originates from there, this has an obvious and severe impact on demand for ships. As well, JP Morgan is projecting that overall demand for shipping is expected to grow 8.1% this year while capacity is projected to grow 11.3%.
Those fundamental reasons have played a role in plunging the Baltic Dry index to depths not seen since the financial crisis of late 2008. But my hunch is that they are merely exacerbating an existing condition and do not account for the complete picture. The way that the Baltic Dry index shadows the Shanghai Stock Market Composite is too close and consistent to be a fluke.
The recent divergence between the Baltic Dry index and the Shanghai Composite may be reflecting the exaggerating effects of these fundamental forces. But the overall picture remains one of general weakness, both for global trade and for the Chinese stock market.