By Ben Turney | Tuesday 5 August 2014
Over the last few days, I’ve written a series of pieces identifying potential points to go long the Dow, FTSE100 and German DAX. Further selling yesterday afternoon and evening has pulled the three indices closer to my targets. However, it is another index which is flashing a warning sign that all is not well with the story of global growth; the Baltic Dry Index.
Above is a five year chart of the Baltic Dry. I’ve written about the Baltic Dry on this site several times before, but this piece, written in December, best explains the importance of the index and the readings I associate with genuine, healthy economic growth. Cutting to the chase and the current reading of 755 has to be a big concern for anyone remotely interested in the fundamentals of international trade.
Unless there is a new method of the large scale transportation of goods and materials, of which I am not aware, the relative lack of activity across the world’s major shipping lanes is an obvious sign that global trade isn’t as buoyant as improving GDP figures suggests.
Over the last few years, the persistent weakness in the Baltic Dry has had little bearing over equities. Thanks to the far-reaching effects of quantitative easing, financial asset prices have been on a one way trip to the moon. Genuine fundamentals have taken a back seat, as policy makers have moved heaven and earth to convince markets to keep calm and carry on. However, this could all be about to change now that the Americans are on the verge of bringing their bond-buying programme to an end.
As I said in my piece on the DAX, I still believe the money printing party has some life in it. We are likely to see new records set in irrational exuberance, as investors take ever greater risks, safe in the knowledge that friendly central bankers will always come charging to the rescue if things ever turn a bit nasty. Eventually this hubris will exact a heavy price. It has to, but so long as everyone keeps believing all is well, there is no reason asset prices can’t continue moving higher.
The problem will come when old fashioned fundamentals reassert themselves. Unless there is a genuine and marked improvement in global trade, in the absence of funny money, we could all very quickly be confronted by the emperor’s bare arse!
But let’s not get too downbeat just yet. As weak as the Baltic Dry is at the moment it is prone to sudden, pronounced spikes. I’ve covered this aspect of the index in past commentary and you can clearly see what I mean on the graph above. Perhaps the growth story will turn out to be genuine and by the end of the year the Baltic Dry is back up past 2,000. It happened in 2013.
If we see a repeat of last year’s second half rally be sure to buy mining stocks.
Tom and I have just published a new e-book, “The 49 Golden Rules of Making Money from oil, gas and mining shares” and it is now available on Amazon for £6.25 or you can order a FREE copy HERE
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