Submitted by Allen on Mon, 02/02/2009 — 11:50

Most of the economic news in recent weeks has been dismal, although some investors welcomed the preliminary fourth quarter of 2008 U.S. GDP estimate of a decline of only 3.8% as a positive because it wasn’t the 5% or 6% declines expected by most economists. The latest data from the International Air Transport Association (IATA) said that while international passenger traffic grew 1.6% last year, down from the 7.4% growth of 2007, it fell in December by 4.6%. The shocking statistic, however, was for air cargo, which fell by 4% during 2008; but collapsed in December by 22.6%. Giovanni Bisignani, IATA’s CEO, said, “The 22.6% freefall in global cargo is unprecedented and shocking. There is no clearer description of the slowdown in world trade. Even in September 2001, when much of the global fleet was grounded, the decline was only 13.9%.”

With air cargo trade collapsing, and according to IATA it accounts for about a third of the value of goods traded internationally, we were surprised to see that the Baltic Dry has been on the rise. The index fell some 94% from its high in May 2007 to its low in early December. Since then it has climbed 65% from its 650 low to a current reading of 1070.

The Baltic Dry Index is a measure of freight rates for ships hauling raw materials in bulk. Some might say that shipowners have taken vessels out of service thereby tightening the market, but from anecdotal evidence we have received, it seems that possibly China, and maybe several other countries, have worked through much of their raw material backlogs. That would seem to fly in the face of reports of factories shutting down in China due to a lack of orders, but often times markets turn well before the mass of statistics and other evidence supports the move.

While the rise in the Baltic Dry Index doesn’t mean there is an impending recovery in global economic growth immediately ahead, it offers the hope that commodity markets might be coming closer into balance such that only small increases in demand will trigger price recoveries. We think that may be part of why oil prices are holding up better in late January, even though they declined 14% during the month. That decline probably says more about traders having driven the price up to high during the holiday rally taking advantage of an illiquid market and short-covering by traders at year-end. We will be watching the Baltic Dry Index for further signs of confirmation of a nascent trade recovery.