Pen Meets Paper July 19 '10

Opinion by Helge Nome
I know that many of you readers keep an eye on stock market indexes as they bounce around from day to day. The DOW Industrial, NASDAQ, etc. And stock market indexes overseas in Asia, and down under in Oz. What do these indexes tell us about the economy? Not a lot. They say something about what is happening in the speculative economy where people try to multiply their money as quickly as possible, with little regard for consequences in the real economy, but that’s about it.
So, are there any reliable indicators of what is going on in the real economy where goods and services are produced and exchanged, as opposed to simply zipping computer generated numbers across the oceans? Indeed there are, and I have come across three of them so far: The Baltic Dry Index or “BALDRY” (nothing to do with champagne), the copper index and the “HARPEX” (Harper Petersen Index). These are all leading economic indicators, as opposed to trailing ones like unemployment numbers, for example.
The Baltic Dry Index(BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index tracks worldwide international shipping prices of various dry bulk cargoes. The index provides an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain. This index is way down right now, indicating a slowdown in the real (productive) economy.
Copper prices are also way down and copper is used in an awful lot of manufactured goods, so it is a good indicator of economic activity.
In contrast to the BDI which typically measures bulk cargoes – ore, crude oil, coal and grain, the HARPEX typically measures finished goods – the containers of electronics from Taiwan, toys from China, textiles from Italy and so on. Accordingly it is a good indicator of global consumer activity and value-added conversion activity – which for a consumer-driven and high value-added conversion economy such as the US, it is a critical indicator. The HARPEX is way down as well. While the economic stimulus money that has been poured into the world economy from central banks has put a breath of life into these indexes recently, that appears to be a temporary phenomenon. So, if you are one of those placing your money on the horses, these indexes should be very useful because they are predictive of real economic activity, as opposed to reflecting the day to day whims of gamblers like the DOW and others indexes do.