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"In 1744, merchants and ship captains traded news on Threadneedle Street in London… They gathered inside coffeehouses to discuss everything from politics… to yellow fever… to the cost of moving goods from point A to point B.
At the Virginia and Baltick coffeehouse specifically, merchants spent time dissecting shipping markets… figuring out capacity and how much dry cargo had to be transported.
The information shared in these coffeehouses (which were more appropriate for business meetings than neighboring alehouses) offered a new level of transparency in the shipping industry…
By 1823, as England’s trading network grew, Virginia and Baltick patrons decided to institutionalize their knowledge and create rules around shipping contracts… That’s how the “Baltic Exchange” was born.
Originally a private company that tracked shipping rates, the Baltic Exchange went on to create one of the most fascinating, yet fairly obscure, economic indicators: the Baltic Exchange Dry Index.
This index provides real-time maritime shipping information to traders looking to settle shipping contracts… It also winds up revealing broader economic trends.
If you haven’t heard of the Baltic Dry Index, now is the time to get acquainted with it. That’s because, today, this index is signaling an economic slowdown.
As investors, that means we’ll need to carefully evaluate our positions and prepare for continued market volatility.
An Index Worth Watching
My colleague C. Scott Garliss, editor of Stansberry NewsWire, highlighted the Baltic Dry Index in yesterday’s American Consequences piece…
“Suddenly, there’s too much capacity in the transportation sector,” Scott wrote. “And that usually signals a slowdown in economic growth.”
Capacity, in this context, is the maximum output that a company, like a shipping provider, can sustain in offering its services.
In reviewing this factor, Scott points to… you guessed it: the Baltic Dry Index. Most folks don’t know what this index is… if they’ve heard about it at all. It’s rarely cited on the cable news channels or in major media outlets, certainly not the way you hear about the S&P 500 Index, the Dow Jones Industrial Average, or even the West Texas Intermediate.
The Baltic Dry Index and I go way back…
I like it because it effectively measures the demand of shipping capacity against the supply of dry bulk carriers (cargo)… Remember that demand for shipping changes based on the amount of cargo that needs to be moved. Any marginal increase in demand pushes that index higher… while any marginal decrease in demand sends the index lower.
That’s what makes the Baltic Dry Index an important barometer of overall economic growth. Following the 2008 financial crisis, and throughout the European debt crisis, I carefully tracked this index to determine how and when the global economy might recover.
So when the Baltic Dry Index shows declining shipping demand, like today, that tells us the economy is likely slowing down. Granted, this index can be rather volatile… So I caution readers to keep in mind that it’s just one economic indicator.
But, in light of today’s turbulent market conditions, it’s worth our attention.
Indeed, the Baltic Dry Index slipped for a 13th session this week… hitting its lowest level in two months. And that makes sense, considering all that’s happening in the world.
The massive uptick in inflation, which is tied to the Federal Reserve’s overly accommodative policy, will likely worsen due to the war in Ukraine, as I explained last week.
That, coupled with renewed supply-chain worries linked to the recent COVID-19 shutdown in Shanghai, means we’ve got a number of complex problems to address.
As we confront higher prices and lower demand, we’re flirting with a stagflationary era, unlike anything we’ve seen since the 1970s.
Middle-Class America Is Paying the Price
Just this week, the U.S. Department of Labor reported an 8.5% annual increase in consumer prices… We haven’t seen spikes like these since December 1981. Middle-class Americans, the backbone of the U.S. economy, are paying this hefty price…
Grocery-store prices are up 10% overall in the past 12 months, as the costs of meat, poultry, fish, and eggs have jumped about 13%. We’re also filling up our tanks with gas that’s 50% more expensive than it was at this time last year.
And it’s not as though people have more money to cover these price hikes… Real hourly earnings (which are wages adjusted for inflation) have fallen for 12 straight months… and that trend is likely to continue.
That will eat into consumers’ discretionary income, as well as corporate profits, and possibly send the U.S. into a recession… as the Baltic Dry Index seems to suggest. While this is happening, investors should also take note that…
The Fed Is Running Out of Ammunition
The next few months could be choppy… Wall Street is beginning to price in challenging times ahead, and the Fed is unlikely to engineer a “soft landing” – an economic downturn that would avert a recession.
Fed Chairman Jerome Powell, however, is optimistic… At the Fed’s March meeting, he said “the probability of a recession in the next year is not particularly elevated.” But, as I’ve written many times, the Fed tends to get these things wrong…
Former U.S. Secretary of the Treasury Larry Summers explained his viewpoint in a recent Washington Post piece… In the past 75 years, every time inflation has exceeded 4% and unemployment has gone below 5%, the U.S. economy has entered a recession within two years. Today, with U.S. inflation at 8.5% and unemployment at 3.6%, Summers thinks there’s an 80% chance of a recession by next year.
Meanwhile, the war in Ukraine will push gas and food prices even higher in the coming weeks… Although the Biden administration is seeking energy alternatives, including an ethanol-gas blend that could reduce prices by 10 cents per gallon, America still doesn’t have a robust enough energy supply to combat this crisis.
Further, the cost of grain is increasing worldwide… Ukraine and Russia once provided about 35% of the total global grain supply, which is now off the market. Add to this the new threat of supply-chain issues by way of China…
The government has placed Shanghai on a mandatory lockdown amid a fresh spike in COVID-19 infection cases. This will only cause additional jams in the already-fragile global supply chain."
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