It seems like the global economic slowdown reached all corners of the world already. Situation is unique. Both recessions 2000-2001 and 2008-2009 had a ‘green island’ that drove the world demand up. Today you cannot see any country being a global demand savior
Trade has been slowing down for 3 years now and what an economic data is painting is a very gloomy picture of depression. In the last six months most container vessels shipped at 30-50% of their capacity. Fast forward to today and majority of ships stay in harbours awaiting any available contract. Maritime transportation became a deficit business.
The Baltic Dry Index perfectly confirms this. It gives an outlook of the price of a maritime transport. For years it has held between 3000-5000; with maximum in 2008 at 11500. Due to the 2009 meltdown the BDI touched for a moment 665. Today it is at 293. If this ain’t bad I cannot imagine bad!
Railroad transport also experiences hardly its best days in the history. Looking at pure data one could actually say that the global trade just crashed.
Who can answer ‘why’?
Global debt – government, corporate and consumer together– plateaued despite historically low interest rates. Hunger for a debt is satiated. Below you can see a cumulated debt in relation to the GDP.
Source: Institute of International Finance
Consumer who spends all his money just to get by will not increase his spending. Credit is also not the best option as he can barely handle his expenses now. This is how it looks.
Developing countries – an engine that helped going through recessions – also have to deal with their liabilities. Their nominal debt is obviously on lower levels than in developed states but here is the kicker - those liabilities are mostly denominated in dollar. As a result of local currencies falling and USD appreciating the servicing of the debt surged significantly in the last two years.
Economic decline is clearly visible in China. Until now China has been a locomotive pulling global development. The biggest loser is the commodity market itself. The CRB index is a price gauge of 19 most commonly used commodities.
You can see from the chart above that commodity prices in the USD fell back to the levels seen last time in 1974. The difference is that today’s dollar is a shadow of the USD was worth back then.
Accounting for a heavily underestimated CPI inflation dollar lost 75% of its value. However, basing our calculation on methodology from 1980’s – still published by ShadowStats – American currency lost nearly 94% of its worth. You can think of it as unbelievable and improbable but take a closer look at S&P index. It is 19 times higher than three decades ago. I would like to be wrong on this one.
Point I am trying to emphasise is that commodities are overlooked by many. Significant chunk of investors have their tunnel vision set on stocks, bonds or precious metals. Negative sentiment among traders dealing with commodities is similar to what we have seen in 1999, 2002 and 2009. It is then we recorded new minimums in commodity price.
My forecasts already pointed out to cheap commodities several times but I have not presented the whole background. Today I believe economic downturn is already seen in prices of commodities and in the near future they will slowly climb. We should be prepared for several negative months in the financial markets but the capital printed for years finally can be aimed at physical assets – e.g. very cheap commodities.
I will pay more attention to commodities in the future. For now gold and silver have gained 12% and 11% respectively since beginning of the 2016. Both metals are expensive (short-term futures) but soon it may change.