Death Spiral of the Dry Baltic Index

In spite of early 21^st century cheerleading by CEO’s and MSM columnists, globalism has been with us for centuries from origins in the Silk Road, Merchants of Venice, Dutch trading companies and so on. But the latest model, which multinational corporations, governments and billions of livelihoods are attached, can be reduced to several basic movements of raw materials, energy, goods and capital:

 

1.    Move production away from places with high labor costs – the US and Western Europe - towards places with cheaper labor – Asia, the global factory (Wage Arbitrage).

2.    Move raw materials from the Global South - Africa, South America and Australia to Asia.

3.    Move oil from the Petro states to Asia to fuel production and the US to fuel consumption.

4.    Move finished knick-knacks from Asia to the US for consumption.

5.    Move capital (Petrodollars) from the US and Asia to the Petro States in exchange for oil.

6.    Move capital surpluses from Asia to the US to purchase debt instruments (e.g. Treasuries) which fuels more debt-based consumption in the US.

7.    Move material from discarded and recycled finished goods to Asia for reproduction, repackaging and disposal.

8.    Move capital, borrowed at zero percent interest rates from Japan, to fuel speculation (Carry Trade) which resulted in debt-based inflation of the underlying collateral and consumption.

 

The first innings of a global depression and the effects on movements of raw materials, energy and finished knick-knacks that support this global model, is best illustrated by the Baltic Dry Index, an indicator of shipping rates for raw materials. The Baltic Dry Index is a good leading indicator for the overall global economy because it is not based on a survey like consumer confidence polls and instead is based on a sampling of actual booked shipping rates around the world.

 

 

This is a very nasty head and shoulders pattern followed by a freefall that best sums up graphically the seizure in world markets.  The graph is also forbearing of the future business impacts due to the whipsaw effect and extreme volatility over the last couple of years.

 

Imagine being a shipping company, leveraged up on debt to outfit a fleet of extremely expensive ships. You made assumptions about the going rates and then the bottom completely fell out of the shipping market. You’re getting 7 cents for every dollar you used to earn. Or you’re a mining company with operations which are no longer economic, or you’re an international oil company that just shelved deep offshore projects that required a seemingly conservative $80 per barrel oil at $147 barrel oil. Maybe you’re the leader of a Petro welfare state with an economy that grew addicted to $90 oil and an angry population at the gates. Then there’s the Chinese government concerned with an increasingly restless population of unemployed as factories get shuttered.

 

The point is that an overwhelming majority of the players in these global movements, from source to sink, were hopelessly addicted to speculative financing of unproductive activities. Judging from the long list of retail closings, the days of an endless market for cheaply-built consumer, feel-good junk from the laundry list of Big Box specialty retailers are ending. So less ships with metal ore float to China, less Happy Meal toys get exchanged for Treasuries and less shipping containers wind up at ports in Los Angeles.

 

Like any addict, rather than quit cold turkey, world leaders are scrambling to substitute one drug for another. Maybe with zero percent interest rates to mimic those in Japan which unwound in the summer of 2007, the Feds can create a US Dollar carry trade to try and fuel more unproductive use of capital and risk taking.

 

In any event, even at zero percent interest rates and the possibility of higher returns somewhere else, when fear and loathing rules the day, return of investment trumps return on investment, which also has the effect of crimping productive activities – like small business investments and energy projects we’ll need to heat homes and keep the grid up and running.

 

Globalism, or more aptly put, trading between countries, didn’t begin in the 2^nd half of the 20^th century and in all likelihood won’t end in the 1^st part of the 21^st. but the model is shifting by painful necessity to something less insane.