The problems in Greece have roots that go back many years but the financial crisis that gripped the world in 2007 and 2008 hit the Greek economy especially hard because their most important sector, shipping, went into complete shock as global trade flatlined. Shipping rates, as measured by the Baltic Dry Index, have always fluctuated but they had never fallen as steeply as they did in 2008. Some daily rental rates fell from $240,000 to just $7,000 within a few months. So the public debt was the powder keg and this was the spark.
(It also didn’t help that the Greek banks were running around the Balkans taking on housing debt as fast as they could.)
Looking at the Athens stock market index, I couldn’t help but see the relationship it had with the Baltic Dry Index. Since I didn’t run a statistical correlation maybe my eyes are fooling me but it seems that the Greek equities manage to actually discount future moves in the Baltic Dry Index:
By the way, I was delighted when my previous foray into the BDI was picked up by Albert Edwards in a research note to clients. Let’s see if he ’steals’ this one as well
And here’s a chart of the Baltic Dry Index for the same period. I’ve marked the time periods that jumped out at me. For example, in early 2004 as the Athens Composite index managed to plateau before falling, the BDI was ahead of the curve, so to speak, by falling below its previous low. And to show the revers, in mid 2006 as Greek equities corrected sharply, the BDI kept rising, signaling healthy global trade demand for container ships and eventually, the equities reversed and went on to reach higher highs:
Finally, in late 2008 the BDI was first to firm up before the stock market. Of course, the relationship that I’ve outlined isn’t perfect. There are times when it does break down. But still, I think there is a rational link between the two.
But even if the Greek stock market does indeed act as a bellwether for the Baltic Dry Index, you might ask why in the world you would want to know where the BDI is heading to next? After all, unless you’re in the shipping or export business, it matters very little.
Not surprisingly, since the Baltic Dry Index basically tracks world wide trade, it is also highly correlated to recessions. When the annual rate of change of the BDI index falls below zero we usually see either a full blown recession or a slow down.
I’ve included the annual rate of change in the chart above and as you can see, it is crashing down mightily. A few more down months and it will easily slip below the zero line - especially since it will cease to be relative to the historical decline in late 2008. More proof then, that deflationary forces still have the upper hand in the global economy and monetary risks lie on the side of deflation, not inflation.
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