THE SIGNIFICANCE OF THE BALTIC INDEX CANNOT BE DOWNPLAYED

The significance of the data from the Baltic Index cannot be overlooked. The index measures dry bulk shipping, which means shipment of raw materials if the index falls, it means that less raw materials are being shipped across the globe. Here's what at stake:

1) Shipping companies will be hit hard. Ships are not cheap to build, and are heavily financed. So this could hit the banks too. As the index hovers at record low levels, heavy industries involved in the ship building industry will also be hit, that means more people being out of job which affect future consumption.

2) This leads to lower port activities, which impact upon the ports revenue. Ports are not cheap to build either. Like the ships, they are heavily financed and could hit the banks too. In, fact Maersk reported that they are also shipping less container goods compared to previous years. Look at the US and China export and import data which confirm Maersk's report.

3) Low shipment of raw materials means poor manufacturing. Poor manufacturing is due to poor consumption. This is reflected in the US and China ISM and PMI manufacturing data which have all fallen to disturbing levels. In fact, manufacturing is in recession in both the US and China.That means more people are out of job in the manufacturing sector, which affects future consumption

4) Lesser raw materials shipped means demand for commodities is low. That means agriculture, mining and resource industries are facing tremendous headwinds. All these industries are in deep recession; for example copper, iron ore, coal, precious metals and oil to name a few. Many employees int his sector have been laid off, again this affects future consumption.

Since many of these companies are laden with debts, expect many more debts to be rated junk, and more defaults in the months ahead. There will be a continuation in sell off of high yielding junk bonds, which leads to putting banks at risk. Think Glencore and Noble.

5) Most, if not all of the people who lost their jobs have personal debts of their own. Without a job how can they pay their debts? While the debt per se is inconsequential, taken as a whole when millions are without a job, and multiply it with tens of thousands of dollars in debts, you can guess the impact.

This is a vicious circle which will continue to turn until it exhausts itself.

The record low Baltic Index is not a small blip on the radar screen, it is an explosion that has just erupted on the radar screen.