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The Baltic Dry Index Versus Container Rates: Who to Believe?

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Who to Believe? There is a ferocious debate underway among economists over which leading indicator to believe, the Baltic Dry Index, or international container shipping rates.

The BDI, a measure of the cost of chartering bulk carriers for coal, iron ore, wheat, and other dry commodities, has just suffered one of its most dramatic sell offs in history, plunging some 60% since May. The downturn has been accelerated by the recent delivery of a glut of new ships that were ordered during the boom years 3-4 years ago, when getting cheap money was as easy as falling overboard. There is no doubt that this index is shouting loud and clear for a double dip in the world economy.

On the other hand, and if you notice, most economists are two handed, the rates for standard 20 foot containers shipped to international destinations has gone absolutely through the roof. The Maersk Line has even gone to the extreme of diverting its fastest ships to return empty containers from the U.S. to China. The big driver here has been intra Asian trade, as well as rising imports by big US customers like Wal-Mart (WMT). This shortage has been exacerbated by the large scale cancellation of orders to build new containers during the 2008-09 crisis, and strikes at key manufacturers in China. The data points to a global economic recovery centered in Asia, and trickling down to the U.S. and Europe.

 Who to believe? 

I’ll let American rail traffic cast the tie breaking vote, which you can see in the chart below. After crashing in 2008-09, it performed a “V” shaped recovery, and has been holding its gain’s ever since, although is only at 80% of full capacity. This is my “gull winged” chart, which you see for the prices of almost all financial assets these days.

And the envelope, please!

The conclusion is unequivocal. We are in for a slow, bumpy long term recovery that will deliver the long term U.S. growth rate of 2% that I have been predicting all year.

Too bad the stock market doesn’t know this yet.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two and a half years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

 

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Thu, 07/22/2010 - 16:03 | 484237 Testicular Cancer
Testicular Cancer's picture

This one goes great with that other post about inflation vs deflation. BIFLATION! Fantabulous term. Wish I came up with it.

Thu, 07/22/2010 - 15:53 | 484209 poggi
poggi's picture

A fedex 747 pilot seated next to me on a recent flight says fedex tonnage started trending up last August and has climbed steadily since.  A client, a multi-modal provider of shipping and logistics services, says its business is gang busters and it's buying containers as fast its supplier can produce them. 

Thu, 07/22/2010 - 16:56 | 484365 Freebird
Freebird's picture

Yup, so instead of shipping a container as before, a business is now fedexing in 2 or 3 cubic to meet confirmed sales orders.

Thu, 07/22/2010 - 16:31 | 484127 bingaling
bingaling's picture

Good article - I am leaning towards agreeing with you . So this is it. The economy early post American dominance . Unemployment from 9-20%(depending who you believe) ,a consumer who is way in over his head and cant afford much with wages getting lower.If no black swan arrives in the near future this could go on for 200 years .

Thu, 07/22/2010 - 14:44 | 484061 wstrub
wstrub's picture

 

Thu, 07/22/2010 - 14:43 | 484060 wstrub
wstrub's picture

Prices on our 40’ High Cube containers have gone up from 3200$ per container in March to $6300 predicted in August.  Ouch……….  There is a lot of collusion going on between the major shipping lines to drive these prices up the last 4 months. 

Thu, 07/22/2010 - 16:45 | 484339 Freebird
Freebird's picture

+20 & 40DCs

Thu, 07/22/2010 - 15:23 | 484138 Greyzone
Greyzone's picture

Price per container is not the only consideration. Volume shipped matters as well as number of new container ships under construction. Why do I say this? Consider that if you have 1000 ships (hypothetical number) operating at the height of economic growth but this number then falls to 200 at the bottom. Then as growth returns some ships are returned to service but not all, because idle ships require costly maintenance or later costly refits in order to remain or become sea worthy. In that situation, the oldest ships are sold off as scrap and taken out of commission entirely.

So if you want to really figure out where the economy is going, you need not only price per container and volume shipped but the number of new ships demanded. Clearly you can get high prices per container if only 500 ships are operational when there were 1000 before.

Total number of ships operating plus demand for new ships are also numbers that should be considered when evaluating longer term growth or contraction scenarios. If the number of operating ships is lower than at the last peak and the number of new ships under construction is very low compared to historical norms, then you won't have a recovery no matter what sort of fantasy dust you snort.

Thu, 07/22/2010 - 14:43 | 484054 economicmorphine
economicmorphine's picture

Who actually does analysis like this?

1.  BDI - depression

2.  Containers - Growth baby!

3.  It's a wash, so what do railcars tell me?

4.  Hot Damn, I was right all along.

5.  I am fucking brilliant.  See?  I told you!

6.  Garçon!  check s'il vous plaît

Thu, 07/22/2010 - 13:25 | 483900 Reductio ad Absurdum
Reductio ad Absurdum's picture

Yesterday MHFT writes a piece titled:

"Why I’m Not Buying the US Stock Rally"

Today MHFT says:

"We are in for a slow, bumpy long term recovery that will deliver the long term U.S. growth rate of 2% that I have been predicting all year."

Who to believe indeed. Are you schizophrenic?

Thu, 07/22/2010 - 14:03 | 483983 fireangelmaverick
fireangelmaverick's picture

Which part about the "Mad" did u not get?

Thu, 07/22/2010 - 14:00 | 483977 Ned Zeppelin
Ned Zeppelin's picture

Truth in advertising. "Mad" HFT.

Thu, 07/22/2010 - 13:47 | 483957 Jim in MN
Jim in MN's picture

Mad

Crackers

Touched

Gone-o

Fruitlooped

Batty

Nuts

C  R  A  Z  Y

Thu, 07/22/2010 - 16:22 | 484280 almost_have_a_name
almost_have_a_name's picture

Mad as a Zero Hedger'

Thu, 07/22/2010 - 13:49 | 483961 Jim in MN
Jim in MN's picture

He has always depended on the kindness of strangers....

Thu, 07/22/2010 - 13:06 | 483858 SimpleSimon
SimpleSimon's picture

Price is only one factor.  Volume shipped needs to be factored in as well.  If there are fewer containers, then prices would go up.  Would a better metric be price times capacity utilized to determine what these indexes are telling us?

Thu, 07/22/2010 - 14:18 | 484016 Noah Vail
Noah Vail's picture

Containers are a lousy metric, so cheap and easy to fabricate there are always an abundance of them. Just depends on how many holes in the top you want. Shipping tonnage is the usual metric.

Thu, 07/22/2010 - 16:50 | 484348 Freebird
Freebird's picture

Maybe, but you want a ship a 40 foot out of HK and box availability is only Taiwan, you're going to pay 750 united states paper today to get it moved.

Now it is possible to see how the shipping lines are improving their numbers....

Thu, 07/22/2010 - 13:00 | 483844 Gully Foyle
Gully Foyle's picture

Someone listed packaging as being severely down. Boxes and packing materials. They stated it was a similar indicator as tax revenue is.

I have not seen that mentioned again.

Does anyone have more information?

Thu, 07/22/2010 - 12:19 | 483741 ertyqway
ertyqway's picture

As an anecdotal datum point, my office window looks out over Elliott Bay, with a clear view of the shipping channel into the Port of Seattle container ship facilities at Harbor Island. I've been watching ship traffic at the same time I've been watching the BDI.

At least for the Port of Seattle, shipping traffic dropped off significantly in 2009 and early 2010. This spring, it started to pick up again (as in: the number of ships coming into port more than doubled in a short period). Over the course of the spring, ship traffic has continued to increase, and the ships are coming in with full stacks of containers on the decks.

But here's the thing: even though there are more ships and they look like they're fully loaded, most of them are coming in riding very, very high in the water - so high that the bow bulbs are half out of the water. They're riding so high, that at first glance I'd assume they were empty, except that they've got a full load of containers on them.

I have no idea what that means, but I thought it was very interesting.

Thu, 07/22/2010 - 16:21 | 484275 almost_have_a_name
almost_have_a_name's picture

Full of Chinese soldiers, they are so cute with the red star-glint in their eyes !

Thu, 07/22/2010 - 14:14 | 484007 Noah Vail
Noah Vail's picture

Yep, riding high with full container load means returning empties. But INBOUND? I would interpret that as being an excess of unused containers because, like railroad cars, they  do not return empty.

Fri, 07/23/2010 - 14:43 | 485913 ertyqway
ertyqway's picture

Maybe it has something to do with re-allocating container supply. Or, more sinisterly, is part of what another commenter below describes as part of industry collusion to drive shipping prices per container back up by taking containers out of use.

Who knows?

But boatloads of lightly-loaded or empty containers coming into the Port of Seattle is a new one on me. And, just to clarify, the ships seem to have been leaving mostly empty after unloading, and right now the port facilities are completely empty though the stacked container stock in the yard looks like it's at about half capacity.

Thu, 07/22/2010 - 17:01 | 484376 Freebird
Freebird's picture

Sounds like one of the great 2010 global empties tour.

Remember, when you could get cash back on empty bottles...same gig, returning them to the supplier after a huge debauched binge.

Any parallels drawn intentional.

Thu, 07/22/2010 - 14:52 | 484073 Lapri
Lapri's picture

Maybe empty containers are in high demand in the US, as people convert them into living quarters in this lousy housing market...

Thu, 07/22/2010 - 12:50 | 483817 SimpleSimon
SimpleSimon's picture

They are shipping in chinese air? And taking back cleaner US air?

Thu, 07/22/2010 - 11:41 | 483613 carbonmutant
carbonmutant's picture

Zero Hedge gets a reference by Ambrose Evans-Pritchard on the Double Dip in the BDI

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100006933/do...

Thu, 07/22/2010 - 11:30 | 483568 Leo Kolivakis
Leo Kolivakis's picture

I believe shorties got caught with their pants down this morning. Forget all these indexes, keep an eye on Dryships (DRYS) which is finally perking up:

Thu, 07/22/2010 - 12:56 | 483834 HedgingInfinite...
HedgingInfiniteRiskIsNotPossible's picture

Sir, my balls are gone now. I am a eunuch. My balls. Gone.

Thu, 07/22/2010 - 12:30 | 483766 carbonmutant
carbonmutant's picture

DRYS has 30 panamax ships and only 7 capesize vessels. So it's obvious that DRYS is benefiting from the container rally in finished goods. Unfortunately shipping raw materials is a minor component of their revenue.

Thu, 07/22/2010 - 12:12 | 483712 traderjoe
traderjoe's picture

Careful boasting on one morning's move. And some of the short's might have covered in the afternoon yesterday and then sold again this morning. Plus had a couple of the after-hours losers (NFLX, SBUX). Even BIDU was a nice morning fade from the pre-market. 

Thu, 07/22/2010 - 11:33 | 483583 Gordon Freeman
Gordon Freeman's picture

Be wary of buying stock in a company run by a bipolar sociopath...

Thu, 07/22/2010 - 11:46 | 483626 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

Well, that criteria narrows the field of choice considerably.

Thu, 07/22/2010 - 11:20 | 483534 furieus
furieus's picture

Anyone else notice that the charts MHFT references in ZH posts are not only not included on ZH, but not on his main website either?  I asked a similar question last week in his "what is the bond market really telling us" piece.

 

Where's the beef... err chart?

Thu, 07/22/2010 - 12:16 | 483728 Eternal Student
Eternal Student's picture

If you want to see some real data, for free, it's here:

http://www.calculatedriskblog.com/2010/07/rail-traffic-softens-further-i...

"• On a seasonally adjusted basis, U.S. rail carloads fell 1.3% in June 2010 from May 2010, following a 1.1% decline in May 2010 from April 2010. After bottoming out in May 2009, seasonally adjusted rail carloads trended upward, with some fits and starts along the way, through April 2010. They’ve now declined for two consecutive months."

So if you accept the premise that it's rail traffic which is the deciding factor, it's downward, contrary to what MHFT is reporting. 

 

 

Thu, 07/22/2010 - 15:01 | 484095 Greyzone
Greyzone's picture

MHFT always appears to be talking his book. Your observation about rail shipping is good. The observations of others that BDI is raw materials and containers are finished goods are also good. BDI down now means containers down later. Rail down now means less domestic raw materials and finished goods both.

Thu, 07/22/2010 - 14:10 | 483997 Ned Zeppelin
Ned Zeppelin's picture

Indeed, report released today:

AAR Reports Weekly Rail Traffic Continues to Reflect Sluggish Economy
Intermodal Traffic Closes in on Pre-Recession Levels

WASHINGTON, D.C. – July 22, 2010 – The Association of American Railroads today reported that rail traffic continues to reflect the sluggish economy with U.S. railroads originating 282,199 carloads for the week ending July 17, 2010, up 5.5 percent compared with the same week in 2009, but down 13.8 percent from pre-recession levels in 2008.

Thu, 07/22/2010 - 11:34 | 483587 Flyingtrader
Flyingtrader's picture

You have to PAY for that, a "premium subscription", making each one of MHFT's posts nothing more than a glorified advertisement for his website,  imagine that.  

Thu, 07/22/2010 - 11:28 | 483564 obewon
obewon's picture

Yep!

I noticed it too, furieus. No beef.

Thu, 07/22/2010 - 11:13 | 483522 4shzl
4shzl's picture

BDI is in the midst of a blistering hundred point rally -- booyah.

Thu, 07/22/2010 - 12:46 | 483804 Brutlstrudl
Brutlstrudl's picture

buy Bear Stearns

Thu, 07/22/2010 - 12:21 | 483747 traderjoe
traderjoe's picture

Cramer was pumping the BDI 3-day 1.6% move up as a sign that the China economy has now nicely soft-landed. No mention of the context of a 30+day straight decline. 

Could the containers be bringing in Christmas/back-to-school goods for some peak shopping periods, and the BDI showing the slowing thereafter?

I'm not a fan of the inflation/deflation discussion in the aggregate. You can have both in different categories. Used car prices are up because there was no production for a period of time and the rental car companies didn't buy many cars in 2009. There were 16 million cars being sold (and eventually turning into used sales), and now new SAAR is only 10-11 million, meaning lowing used car supply down the road. It sounds like the same for containers. They were so plentiful for awhile that no one paid attention to supply. All of sudden, the market is out of balance due to the prior contraction. 

Just like how it might get more expensive to hire a contractor in 2 years, since all of the weak players will be out of the business. Now, you'll get 10 bids at prices that are just trying to keep the lights on. 

Thu, 07/22/2010 - 16:06 | 484244 Ragnar D
Ragnar D's picture

I read the other day that the ratio of used to new car sales is 2.4 to 1.  I'm not sure if that's an average from the past few years (meaning the last year or two has shifted it some) or what, but that struck me as incredibly low.

I wouldn't have guessed 10:1, but 5:1 seems much more reasonable.  2.4 to 1 seems nuts.  With how long cars last these days, it leaves a ton of room for movement, if people simply start driving their cars for 3-4 years instead of 18-24 month leases.

Thu, 07/22/2010 - 11:20 | 483531 Zina
Zina's picture

Maybe the FED is secretly giving some of its newly printed money to Wal-Mart, so Wal-Mart buy a lot of stuff from domestic and foreign factories and burns all the stuff in a secret underground giant incinerator.

Thu, 07/22/2010 - 11:44 | 483621 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

Didja just go see Toy Story 3 or sumthin'?

Thu, 07/22/2010 - 11:12 | 483515 Zina
Zina's picture

BDI tracks the commodities market. The iron ore and copper that will be used to produce the goods transported inside the containers.

BDI's fall means well less goods are going to be produced in the next few months. A few months in the future there will not be so many goods to be transported in the containers.

Thu, 07/22/2010 - 14:14 | 484006 airedale02
airedale02's picture

what is the best way to trade BDI ?

Thu, 07/22/2010 - 11:07 | 483503 Kreditanstalt
Kreditanstalt's picture

"...diverting its fastest ships to return empty containers from the U.S. to China."

Who exactly in the U.S. is buying all this stuff?  With what money? With what credit?

Were they all full of iPods coming from Shenzhen?  Or plastic salad shooters and nylon pot scrubbers?

I'm having some difficulty with this... 

Thu, 07/22/2010 - 17:04 | 484308 Freebird
Freebird's picture

Good to get a discussion going Madhedge but you are a little short on substance here.

The container story is very simple and happens time and time again at an end of a business cycle or with this Grand Regression. However, this time it is worse.

The shipping lines regularly end up with boxes in the wrong places which is what originally gave birth to container leasing companies. Given we are at the end of the great re-stocking & global trade has also been pretty much one way in 2009, there is a significant shortage of TEU's in Asia especially the PRC.

A source reveals that the major lines have dusted off their mothballed vessels sitting idle in places like Singapore for global tours to collect empty boxes and slowboat them to China. Literally. Crusing speed 10 knots rather than the usual 25 knots to burn less fuel.

Back-up to early this year and it is still happening, the lines are consolidating vessels, retiring excess capacity, extending transit times due to subsequent logistical delays & sticking it up anyone, rates wise, who needs to ship a container.

Aside, anyone interested enough to check out a container terminals' box movements, See if you can ascertain how many of these registered moves are empties...

Anyone buy a new TV to watch the world cup? Most key shipping lines gave preference to Asian consumer electronic factories to ship their merchandise to hit the distribution channels before the South Afican kick off. The price?  - 50% loading on the normal rate and literally fuck everybody else. This with some is now a new sales strategy...a premium for a confirmed slot.

Yes rates have generally increased, seasonal uplift & high bunker fees even when the fuel bill comes down, but imo the Maersks of this world have changed their business model from  a volume one to a margin one. Check out their latest results after last year's red ink.

Things are not getting any better apart from a few balance sheets.

 

Thu, 07/22/2010 - 13:22 | 483892 Noah Vail
Noah Vail's picture

This is kind of a no-brainer question, is it not? The BDI is raw materials, containers are finished goods. One leads, the other follows.

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