Tell tale signals of global economic slowdown By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

November 27, 2015 | Posted by bobbysrinivasan << back to blog

This is a conversation between a student and his professor.

Student: Professor, you are mentioning in the class that the global economy is rapidly slowing down and this time it is not going to be a short-term inventory built up recession but a serious deflation which is going to rock the global economy. Professor, honestly I hope you are wrong but I am sure you have reasons to reach this conclusion. Can I know what they are?

Professor: Yes I will. The global GDP even as per the IMF estimates which often always begin the year with optimistic projection only to change at the financial year end. In the past decade we had a CAGR of 5.4% but currently it is estimated to be 3.1% and is expected to go to 2.8%. Next the global indebtedness had reached 225 trillion dollars, while the nominal GDP is currently around 77 trillion dollars. The mighty US Fed Reserve is carrying 77 debt equity ratio. During 2008 crisis Merrill Lynch, Bears and Stearns, Lehman all had debt equity ratio of around 35 to 40. You know all of them perished. So the US Fed has probably reached its limit in debt creation.

Japan has now announced recession with a quarter negative growth. The euro zone growth is around 0.3%. Both these economies are facing severe economic crisis for different reasons. China’s GDP is currently at 6.9% and is likely to drop to the low 6% level. For all these countries there seems to be no light at the end of the tunnel.

The industrial commodity prices have dropped in value by more than 50% while the agriculture commodity prices have taken a similar beating. But there is one index which in my opinion is a leading index which in the past has successfully predicted the global economic slowdown. That is the Baltic Dry Index (BDI).

The Baltic Dry Index measures the price of shipping materials such as Iron, coal and grains. It accounts for 23 different shipping routes and four ship sizes. It is one of the most widely watched indicators for the global economy. This week the BDI closed at 498. This is the lowest in the 20 year history. Let us look at some data, the BDI hit a high of 12000 in May 2008. It has been falling ever since. The index is down 96% from that point. It plummeted 50% in August alone. Two things determine the shipping rate namely the number of ships and demand for shipping. Even as it is dropping the Forbes magazine reports that it is still 30% excess capacity.

If we are looking for a telltale signal of the upcoming global deflation we don’t need to look beyond the BDI. What is happening to global trade? Why is it dying so rapidly. Shipping industry employs a very large number of people in the ship building, Cargo operators and agency services.. Many agencies are already folding their operations with many more to follow.

Therefore what can I conclude from the foregoing discussion,

The global trade is shrinking.
For the raw materials like coal, oil, grain, the global demand is literally dying.
Too many ships waiting for cargo and poor utilization rate.
Finally the credit contraction is about to begin in the world. This will be a painful way to adjusting to the new economic reality. All asset bubbles will burst eventually paving the way first for the collapse of the global economy and later on followed by new monetary reform like the Bretton Woods.

Student: Professor, even though you are convincing. I don’t want to believe it. But thanks any way.

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