March 11, 2009

What if THIS is right?

Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. He also runs the blog Carpe Diem. Yesterday, and again today he posted stories from Bloomberg and NPR's Marketplace about something called the Baltic Dry Index.

What is that you ask?
Essentially the Baltic Dry tracks the average daily price for shipping dry bulk like coal, iron ore, wheat and soybeans. There are three things that make itsuch a good leading indicator. One, the index looks at raw materials, so it captures activity at the very beginning of the production process. Two, it looks at ocean shipping, so it reveals what's happening to international trade -- the critical driver of global growth. And, three, the shipping business depends heavily on credit, so the Baltic Dry indicates whether credit is tight or loose.
What does it mean? Well, when the graph looks like this;

it certainly would look like a recovery is on the way. Or under way. The price of shipping dry goods has been rising since early January. Meaning more dry goods are being shipped so shippers can charge more. It also means that ocean shipping is up, which means international trade is rising. And since credit is required for shipping, clearly credit, at least somewhere, is loosening. All good news.

So an economic leading indicator is on the upturn. Does it mean the economy in the US is on the path to recovery? And does it mean Obama's plan is working? And more importantly does it mean the perception that his plan is working will change?

First question - Is the economy in the US is on the path to recovery?

Firstly, the indicator is a global indicator. So just because the indicator is on a serious uptick, does not mean that the recovery includes any specific economic region (i.e. the United States). For example, in a story reported in Bloomberg today, China's auto sales have risen 25% in February. It's not dry goods, but it shows that their economy is on a different footing right now than America's. So the Baltic Dry Index has the possibility of being good news for the US economy (given it's portion of world trade, some of that uptick has to impact the US economy), but it is not a guarantor of an uptick in the economy.

Secondly the indicator is a leading indicator. Just how leading is not clear. We're talking about raw materials which means production should follow and then purchases. So the impact may yet be several months away - 2, 3, 15 who can say for sure?

Finally, production does not equate to consumption. Just because suppliers have access to credit and can produce more does not mean that consumers have access to credit and can buy more. More employment is perhaps an outcome, but given the availability of credit for consumers, gun-shy banks, and the panic over depression causing savings to rise, the BDI may be less of a predictor than it has in the past.

So it's certainly a good omen that the BDI has risen. But it does not guarantee anything. On the other hand, many have indicated that steep recessions tend to be shorter recessions, so maybe the recovery has started already. Anyone who knows the real answer to that, let me know - I'd love to get some stock tips from you.

Second question - does it mean Obama's plan is working?

By his own words, "Americans know that our economic recovery will take years -- not months. "

The Baltic Dry Index started it's upturn before Obama was sworn in as President (in early January). So if they inherited a problem, perhaps they've also inherited a recovery thanks to Bush and Paulson's TARP package, or thanks more likely to the market itself. There is no way that anything President Obama has done since January 20th would cause the BDI to climb as it has to this point in March. Absolutely no way. The BDI does not respond to charm. It responds to economic activity. And if anything, until recently the President has been talking down the economy. So the BDI has risen in spite of President Obama and the mega-debt he's loading on America, not because of it.

Another point about the Obama recovery scramble, is that if all that money for government projects starts to kick in at the same time the real recovery starts to kick in then hyper-inflation becomes a real possibility. Clearly that would not indicate a successful plan, but an over-reaction to a recession. A deep recession.

Third question - Will the perception that Obama's plan is not working change?

This question is for conservatives, the most important question. The title of this post is "What if this is right?" This question comes down to politics. If the economy starts to recover, regardless of the reason, the President will get, and accept the credit. It would spell several years of doom for conservatism if that were to happen.

Conservatives need to stop falling for the Carville distraction and start pointing out that the recovery plan for Obama is months and months from having an impact, if it even does at all. There's the talking point. That way if a recovery comes before any money starts to flow out of President Obama's ever-full pockets, he gets no credit. Start to hammer that drum now. It's a potential double win for conservatives.

If the recovery does kick in before Obama's mega billions, the right has ammunition to ask the Congress and the President to repeal the billions that have been planned for later in 2009 and 2010. Especially in light of the Health Care funding that is going to get jammed through.

What other impacts might there be? Regardless of conservative efforts, any recovery will be trumpeted as an Obama success, and the MSM will do that to the maximum possible impact they can. The President may be emboldened to try to pile other socialist ideas onto the national agenda. The Democrats may pick up house and senate seats in 2010. Unless of course all of the green stuff, the tax stuff and the the anti-productivity stuff Obama is working on stifles the recovery as it begins to kick in.

These are indeed interesting times. Watch the BDI, but remember to keep your eye on the President. And start the talking up of a recovery that is pre-stimulus. Anything that defers credit where it's not due, is a good thing.


  1. it's hard not to "wish him to fail" upon reading this. good ideas presented about what Baltic index can reveal. Will take the stand to talk up recovery prior to porkulous

  2. Hmmm...the inverted yield curve has flipped "right-side-up", and now this piece of data comes along. Looks like we might be finding our way out of the weeds, if we can get the Feddle Gummint out of the way.

    But that's not gonna happen. BHO will take credit for any recovery whenever it happens. It doesn't matter what he says now; to quote Jim Geherty of NRO, "All statements by Barack Obama come with an expirtation date. ALL of them." The MSM will bow in adoration that BHO "led us out of the Greatest Depression EVER!"

    It won't matter what we conservatives say or do: most people, being uninterested in political and economic debates, will accept the meme presented by the lickspittles in the MSM. The Dems will have forced through an amnesty and cemented their hold on Washington.

    To quote another NRO writer: "We are doomed, doomed."

  3. There could be many factors involved. The hi-jacking of freighters has driven up the price of insurance. Many freighters are going an extra 3,000 miles to avoid trouble spots.


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