If you’ve been following along, you know we’ve derived our trading theses directly from the data. Across the data streams, the same pattern is emerging throughout the commodity complex. With good reason.
You’ll recall that last week, we put a trade on the rising cost of diesel. Yesterday, it was fertilizer. Today, it’s shipping.
Each represents a different opportunity to trade. But the broad macro story reveals they are anything but independent causes…
Tariff restructuring, massive government deficits, the realignment of global military and trade alliances and the Trump administration’s aggressive reshoring campaign are all making the physical economy more expensive to run.
Add in the U.S. Treasury’s moves in the bond market to debase the dollar, and you’ve got a perfect storm for commodities.
Interpret the fact, politically, however you like. Just don’t ignore the opportunities that are being presented.
We’ve suspected since last year that costs would accrue. Now we’re getting a steady confirmation from one of the earliest indicators in the price chain: the Baltic Dry Index.
Unlike consumer prices (CPI), producer price (PPI) or the Federal Reserve’s preferred personal expenditures (PCE), the Baltic Dry Index measures the direct cost of moving raw materials and dry bulk commodities by sea. In a global economy undergoing massive realignment, those costs accrue earlier and affect all three of the mainstream media’s inflation measures. (Source: Baltic Dry Exchange)
The Baltic Dry Index (BDI) measures the direct cost of moving raw materials and dry bulk commodities by sea. Not finished goods. Not televisions, running shoes or patio furniture. It tracks the daily cost of chartering bulk carrier ships to move the heavy stuff that feeds the global industrial machine.
Iron ore. Coal. Steel. Grain. Fertilizer.
These are the raw materials that must move before factories run, crops are planted, steel is made, or power plants burn fuel.
The index covers more than 20 global shipping routes and blends rates from different vessel classes, including the enormous Capesize ships that haul iron ore and coal, Panamax vessels built around the old dimensions of the Panama Canal, and smaller Supramax and Handysize ships that serve more flexible routes.
The BDI is an important indicator of the costs shared by all finished goods. If fertilizer costs are rising, diesel costs are rising, commodity prices are rising, and now bulk shipping costs are rising, inflation is not confined to a single sector of the economy; it is embedded in the cost structure of the physical world.
Now add the sovereign debt crisis in the bond market.
Governments are borrowing heavily. Bond investors are demanding higher yields. Those higher yields raise the cost of financing the whole daisy chain of fixed goods: ships, cargoes, inventories, farms, mines, factories, refiners and governments themselves.
Every ton of grain, every barrel of oil, every shipment of fertilizer and every cargo of iron ore now moves through a world where capital costs more.
The Baltic Dry Index’s rise early in the chain of costs indicates that the inflation challenge now faced by the new Federal Reserve Chairman, Kevin Warsh, is not simply “sticky bouts of inflation” easily blamed on the monetary policy of the previous chairman or the pandemic “own-goal” spending of the previous administration.
What the Baltic Dry Index is telling us, as investors, is that we’d better be prepared for persistent long-term, systemic inflation. And pick the spots along the supply chain that offer the best opportunities for short-term gains, as Andrew has done for us this morning in today’s Grey Swan Pro.
Specifically, Andrew has found a shipping company trading at six times earnings, which can benefit from a rising Baltic Dry Index – and also has a tanker fleet for the ongoing challenges in the global energy supply chain.
~ Addison
P.S. Yesterday on Grey Swan Live!,we had a fantastic conversation with Jeff Opdyke.
A former Wall Street Journal writer, Jeff has been living and investing internationally for two decades. Jeff currently pens the Global Intelligence Letter from his home in Portugal.
Jeff has already joined our mission to create a global fraternity of thinkers, philosophers, and investors. He shared his unique view on America’s decline from abroad, providing critical insight ahead of the midterms.
The timing couldn’t be better, as yesterday also saw another massive “yentervention” to knock down the Japanese yen, and by proxy, protect the carry trade and U.S Treasury market.
If Japan is the canary in the coal mine for the bond market, America may be the canary in the coal mine for the political order.
The midterms are approaching. The debt burden is rising. The old assumptions about U.S. exceptionalism are being tested in real time.
A program note: We will also be speaking at Jeff’s Summit in Dublin in October. The theme: how Americans can think, invest and live with more freedom when the old home-country assumptions begin to fail. More details to come.
