October 11, 2007
The Baltic Exchange’s Dry Freight Index was once termed, the “Best Economic Indicator You’ve Never Heard Of” by Daniel Gross. This index is closely followed by all Wall Street Insiders because it is a good indicator of economic growth and production. In a nutshell, the BDI reflects how much it costs to ship raw materials (like coal, iron ore, cement and soft commodities like grains and sugar) by sea. The level of this index is also impacted by fuel costs, fleet numbers and seasonality but if the index rises, it means that demand is generally strong causing other ports to be congested.
Yesterday, the Baltic Dry Index Surged Above 10,000 for the first time ever. As you can see in the chart below, the BDI has a very strong correlation with the S&P500.
Chart of BDI and S&P 500
Despite a slowdown in US growth, there continues to be huge demand for raw materials from China and India. China is awash with cash, so even though we may be having a slowdown here in the US, we may not see as significant of a slowdown globally. This could also suggest that the pullback in Australian growth may be limited as the commodity rich country continues to be a leading provider of exports to China.