BDI: One of My Favorite Indicators Right Now

The Baltic Exchange
The Baltic Exchange

We all know how well the stock market has done since its recent bottom in early March. But has it done too well? Has the market’s recovery gotten ahead of the economy’s recovery?

Economists will measure the recovery in all kinds of ways, but for one easy-to-understand snapshot, I recommend you look at the Baltic Exchange Dry Index (BDI).

Quite simply, it gives you a good sense for how much “stuff” is being shipped by sea.

Technically the BDI is a measurement of the cost to transport dry cargo, such as coal, cement, steel, grains, etc. It is produced by the Baltic Exchange in London and takes into account about 20 worldwide shipping routes.

I think this is a telling indicator because it gives us a sense for the amount of goods shippers are carrying, clues us in to supply and demand, and helps us measure strength of demand in different geographic regions around the globe.

A lot of money is moving into Asia where there is a consistency in both growth and demand. China, for example, is not a country with a lot of natural resources, but it is cash rich and its

2008 Baltic Exchange Dry Index
CNBC.com
2008 Baltic Exchange Dry Index

economy is growing at a robust rate. It needs those resources and has the cash to buy oil, iron ore, steel, copper and the like, which then need to be shipped to China.

If you look at a chart of the BDI, you’ll see that it reached a high of 12,000 in the middle of last year before falling off a cliff to 700 in December. It lost 95% of its value in that short time period as the U.S. and many global economies contracted.

2009 Baltic Exchange Dry Index
CNBC.com
2009 Baltic Exchange Dry Index

The index then reversed course and turned upward in December, which may have been a precursor to the market rally that followed in March. The BDI ultimately went over 4000 in early June, but since then the trend has been down. It has dropped about 45% to roughly 2400 in the last two months.

More on the BDI

Could that be a precursor to a market pullback? It’s certainly possible, especially when you consider that we are heading into September, a notoriously bad month for stocks (as we talked about in the video).

I’ll continue to watch the BDI closely, and I suggest you keep an eye on it as well. It will help us spot strength and weakness in economies around the world, many of which have done better than the U.S. in recent months.

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