Friday, August 28, 2009

Global Economic Recovery or Chinese Stockpiling of Commodities?

To continue the blog thread here about the significance of the performance of the Baltic Dry Index, here are some excerpts from "Where's the Economy Headed? Insiders Watch This Key Index", Published: Wednesday, 26 Aug 2009, By: Jeff Cox, .

For some analysts, the shipping index's plunge is indicative that the slowdown in demand for shipping will mean more troubles for the US economy, despite its recent signs of growth that have led some to call the recession over. Thus, the increasing popularity of the BDI as a yardstick.   "The reason it's becoming more popular is it has been a very accurate indicator of recessions," says Tony Sagami, editor of Weiss Research's Asia Stock Alert newsletter.

Sagami sees the BDI drop as showing a fall in metals prices, which generally portends an economic slowdown; signal of a short-term correction in the Chinese markets; and a sign that the global economy remains in trouble.  "The US is headed for a Japanese-style recession," says Sagami, who recommends investors increase cash positions.
The rise in the U.S. stock market off it's scary March lows has been nothing short of phnenomenal.  Much of the increase that's been hailed as so promising is the bounce back of a lot of commodities, mostly not the agricultural kind, soybeans being an exception. Anyone could have thrown a dart at a group of steel stocks and had themselves a winner from April to August.  But is the rise in price of steel, copper, and other various hard commodities sustainable? 

As far back as at least June it was noted that China was actually stockpiling commodities, rather than buying them up for use in the normal course of the business of their once bustling economy. 
"Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil."  (Kieth Bradsher, The New York Times, June 2009)
There is lots of speculation as to why China is stockpiling these basic essential commodities.  The scariest reason proposed is that this hoarding of economic essentials is in anticipation of a drastic collapse in the value of the Dollar.  In effect, it is China's way of hedging against a possible collapse of the dollar.  If China, the largest foreign holder of our national debt, deems it prudent to hedge against the collapse of the dollar, it would be wise for the individual investor to take note and take care to have themselves hedged against the very real possibility.

But back to the Baltic Dry Index.  If you look at the chart of the BDI you see a blip upwards beginning early April and beginning to falter by the end of June, marking the beginning of a downward trend that continues today.  Despite this, the  Dow continued it's phenomenal run upwards, with only one barely noticeable blip down in July.  The HangSeng index on the other hand began a downward move toward the end of July, the beginning of which correlates well with that tiny little July blip down of the DOW.  Which market is living in the real world?  Your guess is as good as mine.

China's commodity stockpiling materially contributed to that blip up in the BDI.  Essentially, that makes it an articifical blip upward -- not a rise in shipping traffic and freight rates due to 'normal' rising global demand indicative of a recovering world economy.