Baltic Dry Feb15aThe world’s major shipping index, the Baltic Dry (BDI), has collapsed by 2/3rds since November, and by 80% since its earlier December 2013 peak, as the chart shows.  It is now at an all-time low of 509, almost half of its initial 1000 level when established in January 1985.

Shipping is the major mode of transport for world trade, so this sudden collapse is potentially very worrying.  Reuters reports 2 shipping companies have already gone bankrupt.  No doubt, more will follow.

The key to the collapse, of course, is China’s move into the New Normal.  Shipping markets were slower to wake up to the implications of this than oil markets, but the BDI’s collapse shows they are now making up for lost time.

As with energy, mining and chemicals, the shipping industry wanted to believe in the myth that China had suddenly become “middle class” by Western standards, and was about to deliver perpetual growth.  So it has vastly over-ordered new capacity, with brokers Clarkson estimating 39% will be added to fleets over the next 3 years.

In the very short-term, of course, the developing port strike on the US West Coast is also a negative influence.

But the core issue is the collapse underway in China’s trade.  January data showed China’s exports were down 3% versus 2014, and its imports down 20%.  Whilst Q4 data showed China suffered its largest capital outflow on record, with $91bn leaving the country.

THIS TIME, THE COLLAPSE MAY BE FOR REAL
Long-term readers will remember we have been here before, only for policymakers to introduce major new stimulus measures:

  • The BDI fell 90% from its May peak by October 2008, but then recovered after the G20 summit in April 2009
  • It fell sharply again in Q1 2010, before China and the US both increased their lending
  • And it fell sharply again in late 2011/2012, before Japan added its Abenomics stimulus to the US Federal Reserve’s Twist programme

So is the BDI’s collapse simply the prelude to another, even larger, stimulus effort?

We cannot rule this out.  But the Fed at the moment is trapped in a web of its own making:

  • It has boasted for months that its policy has proved successful and restored the US economy to health
  • Intensive planning is now underway about the timing of its expected interest rate rise
  • So it seems most unlikely this policy could suddenly be reversed

Instead, it seems more likely that the Fed is repeating its mistake of July 2007, and believing its own propaganda.  Then Chairman Bernanke was insisting the cost of any sub-prime housing problem would only be $100bn at most.

It also seems unlikely that China will change course from its New Normal, with its main policy conference next month.

So this time, the BDI’s fall may not be countered by more stimulus aimed at producing another ‘wealth effect’ in financial markets.  After all, debt has already soared to 3x global GDP as a result of all these stimulus efforts.

Instead, policymakers may begin to realise how difficult it will be to repay all this debt, as deflation causes its value to rise day-by-day.