The explanatory power of the Baltic Dry Index as a leading indicator is based on the assumption that the world supply of container ships is fixed, and therefore changes in shipping volumes accurately measure world demand.

But we can easily see the supply of container ships is NOT fixed. During the recession, hundreds of ships were sidelined. Now, we have a glut of Capesize vessels that were being built during the boom and more coming on line this year. Consequently the BDI is plunging along with shipping rates.

Idiot economists (on some blogs) love to trumpet the BDI when it's going up, and conveniently ignore it when it's going down.

Reginald,

Fair points, but all markets have temporary conditions, yet over time markets clear.

The bdi is a measure of shipping rates. Today the larfe force affecting them may be an oversupply of ships. Yet it does not take long to sideline those ships and layoff the crews.

You are correct that a full picture would be to look at inventoey and new production in pipe. But a persistence of the low bdi is something that demands and explaination.

The good news is rhat all those plastic mcdonalds toys coming from china will cost a few pennies less

Baltic Dry Index is for bulk cargo ships (coal, ore, grain). Container ship rates (New ConTex Index) have also been declining.

There is a lot of elasticity in supply based on transit speed. Right now the ships are slowed down to reduce fuel cost. "Shipping companies have also been deliberately slowing down their journeys to save fuel, with trips from China to the US now taking around 50% longer than they were early in 2011."

“What this is signalling is that the world economy is slowing down much more quickly than people have been thinking.”

I do not know too much about the supply of container ships and how they are used, but I would think that the drop of the Baltic Dry Index might be partially due to a sideswipe from European debt crisis.

The chart shows 807 but it is currently 753. A low point and it will rebound but the ship glut argument and transit time argument don't explain a 48% drop. Look at total tonnage available, the dry goods orders and port delay times. That large a drop indicates a decrease in demand even if only temporary.

Have been watching this chart too for some time now.

Equally worrisome are the stresses being experienced by shippers as they face losses on operations and payments on shiny new ships. Their stresses are then passed on to those European banks that financed this overbuild, those same banks that got their butts kicked by that Greek thing.

I have a Latvian friend, whom I once saw stirring his martini with his finger. Was he using a Baltic Dry index?