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Is Baltic Dry a harbinger of doom?

Posted by smeddum on October 6, 2009

Is Baltic Dry a harbinger of doom?
Philip Coggan InvestmentAdviser

Monday , October 05, 2009


The pubs and coffee shops of Britain are probably not full of chat about the Baltic Dry index.

But it is worth a look all the same, as the index tracks the cost of moving raw materials by sea. It is thus a rough-and-ready guide to global trade activity, although of course it is also affected by shipping capacity.
The index is very volatile. In the summer of 2008, it was hovering around the 12,000 level. It then suffered a dramatic plunge that took it below 1,000 around the turn of the year. There then followed a sharp rise, with the index hitting 4,000 by June, as hopes grew for economic recovery.
But while the stock market rally gained strength during the summer, the Baltic Dry has changed direction again. It has halved back to the 2,000 level. The conventional explanation for the setback is that China spent much of the early part of the year stocking up on cheap commodities. Now that their inventories have been replenished, they have taken a break.
However, that explanation seems to raise a whole set of further questions. After all, isn’t China supposed to be the engine of the global economy these days, heading for growth of 8.1 per cent this year and 8.5 per cent next, based on consensus forecasts? Why would it need to take a pause at all?
We blithely grumble about the incompetence of our own government in running the economy, but we seem willing to accept the Chinese administration can smoothly manage all the challenges it faces, such as finding jobs for all the agricultural labourers who are migrating to the cities. And while people in the UK berate the bankers for their lending mistakes, we seem willing to accept the state-controlled banks of China will be able to allocate capital efficiently.
Indeed, there is just a sense that the massive stimulus imparted to the global economy by governments worldwide is losing its strength. The ‘cash for clunkers’ programme in the US ended in August. the annualised rate of car sales dropped from 14m that month to a likely 8.9m in September, according to the car-buying website – the industry is used to annual sales of 16m. A tax break for homebuyers will end in November, but already there are signs of another slowdown in home sales. In the UK, the new year will bring a double tax whammy, with a rise in VAT accompanied in April by the new 50 per cent rate for high earners.
In the money markets, central banks have taken their first tentative steps towards an exit strategy, cutting back some of the lending facilities they were offering the banking system. The money the Bank of England has pumped into the economy via quantitative easing has largely ended up back with the central bank in the form of reserves.
There is still the worry governments have just papered over the cracks. The real problem is that the US consumer, having sustained the global economy for so long, has run out of spending power – he is uncertain about his job and no longer wants to borrow. The Chinese consumer cannot make up the shortfall.
Printing money does nothing to make the economy more productive. Fiscal deficits help a little in the short term, but do nothing in the long term, as consumers rightly expect higher taxes as a consequence, and the market eventually imposes higher borrowing costs. All the efforts of Japan’s authorities have not yet returned that economy to the glory days.
The Baltic Dry’s surge earlier this year may thus be a harbinger of what’s to come. The authorities can prop up the economy for awhile, but eventually, the effort will prove too great.
Philip Coggan is Buttonwood columnist for The Economist

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