Baltic Dry

The stock market continues to flirt with new record highs, but the signs that we could be on the precipice of the next major financial crisis continue to mount.  There are multiple warning signs that have popped up repeatedly just prior to previous financial crashes, and many of those same warning signs are now appearing once again.

"Some Shipping Folks Are Sinking..." South Korea’s Hyundai Heavy Industries, the world’s largest shipbuilder, has reported operating loss of KRW 3.25 trillion in 2014, or about USD $2.96 billion. The operating loss in 2014 is compared to a profit of KRW 802 billion in 2013. At 530, The Baltic Dry Index is at fresh record-erer lows...

The dominoes are beginning to fall. The initial spark in 2008 has triggered a series of unyielding responses by those in power, but further emergencies and unintended consequences juxtapose, connect and accelerate a chain reaction that will become uncontainable once a tipping point is reached. The fabric of society is tearing at points of extreme vulnerability, with depression, violence and war on the foreseeable horizon. Mr. President, the shadow of crisis has not passed. The looming shadow of crisis grows ever larger and darker by the day as this Crisis enters the most dangerous phase, where the existing social order will be swept away in a torrent of carnage and ferocious struggle. We are not a chosen people. We are not immune from dire outcomes.

"It's like a tax-cut for the world's freight shippers..." oh wait...

Are we on the verge of a major worldwide economic downturn? Well, if recent warnings from prominent bankers all over the world are to be believed, that may be precisely what we are facing in the months ahead.

Having fallen for 47 of the last 51 days, The Baltic Dry Index (tracking the cost of shipping dry bulk from iron ore to grains) has been collapsing in a well-documented manner by Zero Hedge (though not the mainstream media). With Cramer having told investors of its importance previously, it will be hard to ignore the fact that, as of this morning, the index of global shipping costs has never (ever) been lower at 554. We leave it to readers to decide what they think this means (but we already know what it means for shippers and ship-building companies).

Chinese imports collapsed 19.9% YoY in January, missing expectations of a modest 3.2% drop by the most since Lehman. This is the biggest YoY drop since May 2009 and worst January since the peak of the financial crisis. Exports tumbled 3.3% YoY (missing expectations of 5.9% surge) for the worst January since 2009. Combined this led to a $60.03 billion trade surplus in January - the largest ever. But apart from these massive imbalances, everything is awesome in the global economy (oh apart from The Baltic Dry at record lows, Iron Ore near record lows, oil prices crashed, and the other engine of the world economy - USA USA USA - imploding).

Most Americans just assume that the economic numbers that we are being given accurately reflect reality. That is why it is so refreshing to have men like Gallup CEO Jim Clifton step forward and tell the truth. Don’t be fooled by all the happy talk from the mainstream media and from politicians like Barack Obama. The truth is that the percentage of U.S. adults that do have “good jobs” is actually far lower than 44 percent.

At 559, The Baltic Dry Index (having now dropped 46 of the last 50 days and 12 days in a row) is just 5 points above its all-time record low from 1986. In fact, the global freight index has only been lower for 8 days during the July/August period of 1986 in its 30 year history... We are sure this is nothing to worry about and merely "transitory."

With one of the world’s leading dry bulk shipping companies, Copenhagen-based D/S Norden, having made huge losses for the last 2 years and expected to report dramatic losses in 2014 also, it is hardly surprising that the smaller bulk shipping firms are struggling as The Baltic Dry Index collapses ever closer to record all-time lows. As Reuters reports, privately-owned shipping company Copenship has filed for bankruptcy in Copenhagen after losses in the dry bulk market, with the CEO exclaiming, "we have reached a point where there is not more to do." We suspect, given the crash in shipping fees, that this is the first of many...

And the collapse just keeps going... since Thanksgiving, The Baltic Dry has fallen on 43 or the 47 days, down over 60% from the "China growth is back and all-is-well" hope-filled days of late October (when Jim Cramer "stressed the importance of watching the Baltic Dry Freight Index," as his bullish thesis confirmation). At 569, The Baltic Dry is inching ever closer to what will be the lowest level ever (554 on 7/31/1986) for the global shipping cost indicator...

How can traders position the oil trade in the current environment?

The Baltic Dry Index dropped another 3% today to 590 - its first time below 600 since 1986 and not far from the all-time record low of 554 in July 1986. Of course, the absolute level is shrugged off by the over-supply-ists and the 'well fuel prices are down'-ists but the velocity of collapse (now over 60% in the last 3 months) suggests this far more than some 'blip' discrepancy between supply and demand - this is a structural convergence of massive mal-investment meets economic reality.

Quietly behind the scenes - and not at all reflective of a collapsing global economy (because that would break the narrative of over-supply and pent-up demand) - The Baltic Dry Index plunged over 5% today to 632... That is the lowest absolute level for the global shipping rates indicator since August 1986...