Winston Churchill once famously said:
“If you have an important point to make, don't try to be subtle or clever. Use a pile driver. Hit the point once. Then come back and hit it again. Then hit it a third time - a tremendous whack.”
In that vein, we want to hammer home the price performance of the Baltic Dry Index over the last three weeks, which is outlined in the chart below.
The rates for shipping dried goods globally, as measured by the Baltic Dry Index and its derivatives, have close to doubled over the last three weeks. This is an important leading indicator for the sequential reacceleration of global economic activity, even if off of low levels. Based on our research, a large part of this recent surge in Baltic Dry Rates is a function of increased iron ore and wheat demand from China. While we were early, and non-consensus in our bullish thesis on China heading into 2009, that thesis is obviously less contrarian with the Shanghai Composite up 24.5%+ year-to-date.
Our view on the Baltic Dry Index as a leading indicator for the sequential acceleration in economic activity in H1 2009 versus Q4 2008, on the other hand, still appears to be contrarian, as the following two headlines appear to suggest:
• “Is the Rise in the Baltic Dry Index a Fakeout”, U.S. News and World Report, February 10th, 2009
• “Is the Rally in Baltic Index a Storm Surge”, Wall Street Journal, February 10th, 2009
The consensus financial media appears to be solidly in the camp that the stability in copper pricing, the increase in shipping rates, and the dramatic outperformance of the Chinese stock market year-to-date are a head fake. These facts tell a different story to us.
Auto-correlation amongst global equity markets is dead. China can power forward, leaving plenty of levered long investors both in the US and abroad behind.
Daryl G. Jones