Editor's note: Even if rate cuts can head off problems in the U.S., the financial media is full of uncertainty about a global recession. But one indicator is telling us we don't need to worry right now... and that the global economy is actually far stronger than some might think. In this piece – adapted from the August 29 issue of the Chaikin PowerFeed e-letter – Vic Lederman of our corporate affiliate Chaikin Analytics shares a key sign that the economy is humming along...
This Key Indicator Says to Keep Calm About the Global Economy By Vic Lederman, editorial director, Chaikin Analytics
International trade and shipping are inseparable... In fact, about 90% of international trade goods are transported by sea. At any given time, more than 50,000 cargo ships of varying sizes are in operation. Some are docked at ports. Others are under repair at shipyards. But most are in the water – steadily moving toward their destinations. And today, one indicator connected with the shipping industry is telling us we don't have to worry about the global economy...
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The image below is from an interactive online map of commercial shipping movements in 2012. Each tiny yellow dot represents one cargo vessel. It shows the sheer scale of modern shipping... These ships are massive... A typical ultra-large container vessel ("ULCV") is about four football fields long. Its beam (or width) is the length of about two basketball courts. And it can be as high as 11 stories from the water. One of these typical vessels can hold up to a staggering 20,000 20-foot equivalent units ("TEUs"). The largest ones in the world can hold even more. But not all traded goods are put inside shipping containers... Resources like grain, fertilizer, oil, iron ore, and coal are considered loose cargo. These need specialized containers in ships when transported as bulk cargo. And the ships carrying them are almost as long and wide as ULCVs. Now, the Baltic Dry Index measures the shipping costs for these kinds of commodities. It changes depending on demand for goods and the available ship capacity. In other words, the index rises when shipping rates rise on strong demand... and vice versa. As such, the Baltic Dry Index can be a leading indicator of economic activity. And right now, it's telling us to keep calm about the state of the global economy... When the index rises, it's usually a sign of a stronger global economy. If it falls, it can be a sign of a weak global economy – or even a recession. Lately, we've heard plenty of talk in the financial media about a possible recession in the U.S. and across the globe. And weaker-than-expected U.S. employment data has made these fears worse. In fact, last month, financial-services titan JPMorgan Chase (JPM) hiked the probability of a U.S. and global recession before the end of 2024 from 25% to 35%. Weaker business activity in other major economies has already led to some interest-rate cuts... The latest was when the Federal Reserve finally cut the U.S. federal-funds rate by 50 basis points last week. That could mean the central bank sees risks brewing ahead. But a look at the Baltic Dry Index shows us that things aren't as gloomy as they may seem. As you can see in the chart below, the index has been trending up overall since early 2023... The index is also nowhere near as high as it was in 2021. That was shortly after the world exited the pandemic lockdowns. Back then, shipping was slow to come back fully on line. That created a temporary supply shortage of cargo vessels. But this time around, the Baltic Dry Index has been rising... even with the supply of cargo ships operating at a healthy rate. That's an indicator of a global economy in decent shape. So if you're worried about a recession happening soon, don't be too quick to panic. And don't assume the Fed is going to continue cutting rates aggressively... Cutting rates by too much could have the undesired effect of stoking inflation once again. That would make the job of lowering it again much more difficult. Investors shouldn't think that rate cuts alone will keep stock prices going up. We need a growing economy to achieve that... And the Baltic Dry Index shows us that economic activity is healthy today. Good investing, Vic Lederman
Editor's note: You still have time to catch one critical warning about this bull market – one you're not likely to hear from the financial media... Marc Chaikin – founder of Chaikin Analytics – went on camera last week to reveal why the Fed's rate cuts aren't as straightforward as you might think. Investors could be in for a serious shock over the next 90 days. For some, this shift will create opportunities for spectacular gains... while others will experience devastating losses. Don't miss Marc's critical message. Watch the replay of his special briefing here. Further Reading "Expectations can be wildly wrong at extremes," Brett Eversole writes. Folks are near the most bearish on oil that they've been in 15 years. But history shows this pessimism could be a great opportunity to set yourself up for profits... Learn more here. "When things change, you see the fear come out," Marc Chaikin writes. Without fail, you can depend on volatility. We see it in the markets every year – but it doesn't mean you should let your emotions drive your investing... Read more here. |
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