A hope for the global economy (part 1)

[Xi Ling]

First of all, I have to tell that I do not mean local crisis as the credit crisis in Briton economy, construction crisis such as in Ireland or Spain, fiscal, financial and structure crisis such as in USA or budgetary crisis such as in most countries where commodities is 30%, 40% or 50% of their budgets.

I mean the global crisis that started in July, August. When the Fed cutted the amount of US dollars available in international markets, and, simultaneously, Saudia flooded the market with oil. While all countries were concerned about inflation, suddenly we faced a deflationary recession. As it happened while US banks were shortening credit we put all in the same bag, but they are different causes and different victims. The global crisis affects to all countries without any exception, the credit crisis affects to many countries, but not all, and finally we have local crisis that affect just to their own victims.

Which is the global crisis that I mean? Let me show the main consequence of this crisis, and it can be seen easily through the Baltic Dry Index.  Follows a description of this index and its recent behaviour.

Baltic Dry isn't a Latvian deodorant or an Estonian cocktail. Rather, it's a number issued daily by the London-based Baltic Exchange, which traces its roots to the Virginia and Baltick coffeehouse in London's financial district in 1744. (2) 

The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain. (3) 

 Every working day, the Baltic canvasses brokers around the world and asks how much it would cost to book various cargoes of raw materials on various routes (e.g. 100,000 tons of iron ore from San Francisco to Hong Kong, or 1,000,000 metric tons of rice from Bangkok to Tokyo). (3) 

The BDI is termed a leading economic indicator because it predicts future economic activity. (3) 

On 21 May 2008 the index reached its record high level since its introduction in 1998, reaching 11,793 points. Half a year later, on 5 December 2008, the index had dropped by 94%, to 663 points, the lowest since 1986. These low rates move dangerously close to the combined operating costs of vessels, fuel, and crews. 

By the end of 2008, shipping times had been already increased by reduced speeds to save fuel consumption, but lack of credit meant the disappearance of letters of credit, historically required to load cargoes for departure at ports. Debt load of future ship construction was also a problem for shipping companies, with several major bankruptcies and implications for shipyards. This, combined with the collapsing price of raw commodities created a perfect storm for the world's marine commerce. Cheaper fuel was no longer able to offset this situation and global letters of credit are beyond the powers of the Federal Reserve. (3) 

As you can see in baltic_dry_index_feb09.gif this index is rather flat right now. Maybe we can see a hope of rebound, hopefully describing the type U crisis that I told in several messages. (4)

Also, we can see how oil price is stable. Gold, platinum and some other commodities are flat or even rising slowly again. 

I will elaborate this message more in detail along next days, I will tell what would happen in 2010 if this hope comes real. Right now, it is just a hope based on some indicators, it is not a prediction, at least not yet.

Peace and best wishes.

Xi

(1) The Baltic Exchange 

http://www.balticexchange.com/ 

(2) 
The Shipping News 
http://www.slate.com/id/2090303/ 

(3) 
Wikipedia. Baltic Dry Index 
http://en.wikipedia.org/wiki/Baltic_Dry_Index

(4) Source of Baltic Dry Index feb09 chart.

http://www.bloomberg.com/apps/quote?ticker=bdiy&exch=IND&x=15&y=11