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Sunday, September 11, 2011

Market Thought... the paradox

Will a global recession take hold? Has everyone lost their buying power? Is a massive de-leveraging taking place crushing the global economy?

Despite what the talking heads or the ever-constant-negative-folks say, there is price evidence to the contrary. The Baltic Dry Index has been rising since August 15th.

For many months now the index lost its status as an economic barometer because of the massive amounts of ships that came on line, creating a huge glut of shipping capacity, crushing rates. (Hence the flat-lining of the index.)

However, around August 15th, as the equity markets were collapsing, credit markets started pricing in sovereign defaults and EU bank runs started, the BDI started to go higher. Over the weekend I tried to find a reason. The only thing I found was a consultants view that the supply glut will moderate by 2012.

Economically speaking, shipping rates go up when there is more demand in relation to capacity. Rates rose, which means either capacity was taken off line or demand went up.

Another piece of info that I found interesting was Union Pacific's CEO stating that things have slowed, but not at levels suggesting a double dip. More importantly, he stated inventory ratios were extremely low. "The lowest they have ever been".

Basically, if we don't get a credit freeze, and the monetary easing from the emerging markets work, there will be a rush to replenish these inventories. Could the above be a prelude to this? I do not know.

An opinion I do not share, but that I did see floating around:

The rise in the BDI is actually a negative indicator, suggesting a global war. I do not share that opinion. However, in WWII rates did spike after ships were actually destroyed and physically blocking key routes making Aristotle Onassis a very wealthy man. High-tension geopolitical events between Israel and Egypt did take place near mid-August, leading Israel to quickly issue a rare official apology. Needless to say, tensions have not eased. Israel's ambassador left Egypt today. Israel is also facing high tension issues with Turkey as well, which I even blogged about.

Updated 09/12/11: China had a 30% rise in imports for August. Add the 24% rise in exports, evidence suggests actual demand is causing the BDI to rise.

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