There is a lot of confusing news & information swirling around regarding the markets these days. Depending on who you listen to either the U.S. economy is recovering or Ben Bernanke is the ultimate asset bubble creator. In China some see the economy in a state of planned transition whereas others (including myself), see it as a command economy fuelled by unsustainable credit growth. Meanwhile in Australia there appears to be some confusion regarding if the mining boom is over or just having a rest?
Rather than deal with all the various interpretations of what various economic indicators may or may not be telling us, I am going to focus on just a few which refer I refer to fairly often.
First up a favourite of mine – the Baltic Dry Index.
Baltic Dry Index – 1 Year Chart
I often mention Baltic Dry Index although many economists & market watches don’t seem that interested in it these days. One reason it has fallen out of favour is because it doesn’t correlate well with other market indicators which means it doesn’t make “nice” charts.
But my point of view is we shouldn’t ignore data or statistics just because they don’t trend the way we want or think they should. In fact, when an economic indicator starts to behave out of character then that attracts my interest even more.
Clearly as the one year chart of the Baltic Dry Indicator (BDI) shows below, it has has surged since mid August and is now above the 2000 level – a rise of around 100% in around a month. That sort of movement even attracts the interest of the mainstream finance media!
But we have seen similar rises (and falls) before as the 5 year chart below shows.
Baltic Dry Index – 5 Year Chart
The BDI tracks shipping rates for ships that carry dry bulk cargoes (such as iron ore, coal &wheat) and one major influence on the indicator over the last few years has been the over-supply of ships. In the years prior to the GFC hitting the markets shipping companies ordered a record number of ships which in turn created a classic over-supply situation.
Older ships have been scrapped, some ships laid-up and measures to reduce capacity (and costs) such as slow steaming have been implemented but alas, there are still too many ships out there.
Gradually the excess in supply will be worked out of the system and I have heard some in the shipping sector say the worst may be over. But it remains to be seen if the latest bounce in the BDI can be sustained or if it will fall back near 1000 again.
Overall I would say the the Baltic Dry Index does suggest that the global economic growth is still patchy and downside risks remain. The worst may be behind us, but the days of solid global economic growth have not returned either.
Next let’s have a look at gold.
ETF GOLD vs ASX All Ordinaries Index – 5 Year Chart
As usual I am using the chart of the ASX Exchange Traded Fund (ETF) GOLD and I have charted this along with the ASX All Ords Index. This chart is a little misleading since is starts when stocks were falling during the height of the GFC and gold was of course on the way up. However what it does show is that for around a year now gold prices have been slipping back while the All Ords (XAO) has been on the rise.
To me this suggests that investors are a little less fearful then they were a few years ago. It also seems to me that we won’t be testing again the GFC low we hit back in early 2009 although on the flip side, it’s also unlikely we will hit the pre-GFC high any time soon either.
In regards to gold & silver in general let’s have a look at the AMEX Gold & Silver Index versus the All Ords.
ASX All Ords vs AMEX Gold & Silver Index – 5 Year Chart
As this charts shows, gold and silver prices (as reflected by the AMEX Oil & Gas Index – XAU) have been slipping back for quite a while and it looks like the downwards trend is still intact. My view has been for some time (years) that gold prices were in bubble territory and it appears that the bubble has finally popped. Some market watchers and analysts are talking gold prices up again but my guess is (and it is a guess) – that we will see further weakness in gold and silver prices in the months ahead.
Finally a quick look at the AMEX Oil & Gas Index. (XOI)
ASX All Ords Inded vs AMEX Oil & Gas Index – 5 Year Chart
My only comment regarding this chart is that the ASX All Ords Index (XAO) and AMEX Oil & Gas Index (XOI) seem to be back in sync. If this trend were to continue then it may set up a good year for the Australian stock market in 2014.
However I expect both the All Ords & AMEX Oil & Gas Index will get a shake-up before the year is out.