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The Blame Game: Revisiting “The Most Alarming Chart I’ve Seen All Week”

It’s Friday in the Wall Street Daily Nation!

What’s the big deal? Well, this is the day each week that I skip the longwinded analysis and instead let some carefully selected graphics do the talking.

Once again, I’m featuring the precipitous decline of the Baltic Dry Index. Why? Because last week’s column sparked a bit of controversy. And I feel the need to make some clarifications, as well as provide a rebuttal – with help from some new graphics, of course.

So let’s get to it…

Don’t Blame it All on Europe

Readers responded that I unfairly pegged the three-month, 54.4% drop in the Baltic Dry Index on Europe’s never-ending debt crisis. Instead, readers said I should have also pointed a finger at China.

Well, readers, I admit it: You’re right.

As I noted on Wednesday, China’s economy is decelerating. And as the biggest consumer of raw materials, it’s definitely having an impact on the Baltic Dry Index and global economic activity. In fact, the IMF cut its global GDP forecast this week from 4% to 3.3%.

Shame on me for not blaming China, too. Can you ever forgive me?

It’s All About Supply, Stupid!

While not challenging your thesis, I do wonder if lower rates are somewhat a function of more ships on the seas due to deliveries of brand new craft? – David L.

Let’s just say that of all the objections I received, David’s was the kindest. Other readers had no problem calling me an idiot for not realizing the drop in the Baltic Dry Index was caused by a massive increase in the supply of ships.

To which I now respond, “Really, smarty pants?” Take a look at these charts:

The supply of bulk ships only increased 8.9% over the last year and 2.8% in the last three months. Do you really think a 2.8% increase in supply is entirely responsible for a 54.4% drop in the Baltic Dry Index over the same time period?

Even if we look at the increase in capacity – which is up 12.7% in the last year and 3.9% in the last three months – there’s no way it’s the only factor sinking the Baltic Dry Index.

What concerns me most about the latest price action is that it’s not isolated. Other shipping indexes, constructed based on different variables, are similarly plummeting.

Take the HARPEX Index, for example.

It focuses on the changes in freight rates for container ships. Container ships typically carry a wide variety of finished goods from a multitude of sellers.

In other words, the HARPEX is an indicator of economic activity at the opposite end of the chain. (Remember, the BDI measures shipping rates for raw materials.) And it’s plummeting, too.

And don’t even try to blame this drop on supply!

In the last six months, the number of container ships only increased 0.3% and capacity only increased by 1.9%. Meanwhile, the HARPEX Index is down 46.9% over the same period.

Bottom line: Don’t be so quick to dismiss the sudden and severe decline of the Baltic Dry Index. Although shipping capacity is increasing, it’s not the only culprit.

Or, as BMO Nesbitt Burns’ Senior Economist, Jennifer Lee, told The Globe & Mail, “[The BDI] is a little worrying, and something to keep an eye on.” Precisely!

That’s it for this week. But before you sign off, let us know what you think about the BDI now – or any of our recent work at Wall Street Daily – by submitting feedback or catching us on Google+, Facebook, or Twitter.

Thanks and enjoy the weekend!

Ahead of the tape,

Louis Basenese