I realize there's no sign of it in the commonly reported indicators such as the stock market averages or the unemployment figures, but there's one leading indicator that suggests we may be seeing light at the end of the tunnel, and it may actually be daylight, rather than the headlights of an approaching train. There is something called the Baltic Dry Index, which is an index of the cost of moving major types of bulk cargo (grain, coal, ore, etc.) between major ports around the world.
The Baltic Dry Index has been called "the best economic indicator you've never heard of" because since its inception in its current form in 1985, it's been a major leading indicator of economic activity -- and one that's largely uninfluenced by speculative activity that can have such major temporary effects on the stock and commodities markets. It's a measure of the actual cost charged by actual ship owners for shipping actual cargo between actual ports.
The reason it's so sensitive is that the market in shipping bulk cargo is an example of the almost perfect operation of supply and demand, uninfluenced by speculation or monopoly activity. There are tens of thousands of general and bulk cargo ships plying the world's seas, and they're owned by literally thousands of shipping companies, some of which own many ships, and others of which own only one or a few. But however big the owner, there is one constant: A ship which isn't carrying cargo is losing money, because it requires at least a skeleton crew to keep it operational. Therefore, owners will tend to lower their prices rapidly in response to decreased demand for shipping, rather than simply have the ship sit at anchorage somewhere. Furthermore, since shippers need to get their materials to buyers without delay, the prices for shipping tend to increase rapidly when there is high demand and a shortage of available shipping capacity. What's more, since these ships carry raw materials, which are the precursors to finished products carried by vehicle carriers and container ships, the price of shipping their cargo is more of a leading indicator. In addition, there is much more concentration in the ownership and operation of vehicle carriers and container ships, so their prices (if a similar index were kept for them) would tend to be less sensitve to changes in economic activity.
What has the Baltic Dry Index told us in the past? The last time it made a major bottom was in late 2001. The S&P 500 and the Dow didn't bottom out until October of 2002. The graphs are shown here, but since the scale isn't sufficient to show exactly when the stock market indices bottomed out, I looked them up elsewhere: http://www.investmenttools.com/...
So what is the Baltic Dry Index telling us now? It hit an all-time high slightly above 11,600 in in early-to-mid-2008, and began totally tanking immediately thereafter. It wasn't really a leading indicator this time, since neither the Dow nor the S&P 500 reached their 2007 highs at anytime after that, but neither was their drop during 2008 nearly as precipitous as that in the Baltic Dry Index. But the Baltic Dry Index bottomed out at the very end of 2008, and is now rising rapidly, while the stock indices are still dropping like rocks.
So what does this mean? First, a couple of cautions, because I'm not suggesting that anybody go out and invest their life savings in the stock market right now, although I think a little nibbling on quality companies with low debt might be worthwhile. The Baltic Dry Index reflects the demand for shipping, but it also reflects the supply of shipping. During the last months of 2008 and the initial month or so of this year, virtually every bulk cargo and general cargo ship in the world was operating at a loss. Since it costs money to keep ships at anchorage while generating zero revenue, owners will continue to accept cargo rather than keeping them at anchorage, as long as the price being paid for shipping cargo from Point A to Point B is more than the marginal cost of shipping the cargo vs. having the ship at anchorage. But since owners can't operate at a loss indefinitely, ships operating at a loss tend to get scrapped earlier than would otherwise be the case.
I volunteer regularly serving visiting seafarers at my local seafarers center (a very rewarding activity that I'd strongly recommend for anybody who lives near a port city and enjoys meeting people from different cultures), and I've heard from multiple seafarers that quite a few ships have been scrapped a year or two earlier than would normally have been the case, rather than keeping them operating for the last few years of their useful life at a loss. But since the useful life of an oceangoing ship is roughly 30 years (somewhat more if it's well-maintained), it's obvious that owners aren't going to scrap ships that have years of useful life left because of a temporary downturn in the world economy -- especially when the market for scrap steel is seriously down.
But the fact is that after a terrible crash from roughly 11,600 in early-to-mid 2008 to a low of under 1,000 at the end of last year, the Baltic Dry Index has increased to 2,167. Many container ships and vehicle carriers are still idle, or operating with much less than full loads, but things have turned around (at least slightly) for ships carrying the raw materials upon which the world's commerce is based. I've got a feeling that as terrible as things feel right now, and as much worse as I suspect they'll get during the next few months (and I think there is little doubt that they'll get worse during the next few months), we might see a turn-around sometime within the next year. That doesn't mean the economy will be GOOD within the next year -- merely that there is at least one indication that it might find a bottom.
But one final caveat: The increase in the cost of shipping bulk cargo, without a concommitant increase in shipments of finished goods by container ships and vehicle carrier ships might mean that companies see a bottom of the economic cycle and are preparing to increase their production of finished products. But it might also mean that the Chinese have focused more on producing goods for their domestic market, which would mean using their dollar assets to import raw materials from around the world that are used to produce products consumed locally, rather than shipped overseas in container ships in order to generate more dollars, which are then recycled. It seems to me that such a development would be in the immediate best interest of the Chinese people, and in the long-term best interest of American workers who need jobs, but there seems but little question that it would have an immediate inflationary impact in the United States.
So the bottom line is that I don't claim to know what the increase in the Baltic Dry Index means, but what is absolutely certain is that the cost of shipping bulk cargo is well off the lows of the end of last year, and that has been a pretty good leading economic indicator over at least the past couple of decades. You can see a number of charts analyzing that phenomenon here:
http://www.investmenttools.com/...