The Pulse of the Global Market

"We have to choose between a global market driven by calculations of short term profit, and one which has a human face." - Kofi Annan

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable." - Adam Smith

With the world seemingly getting smaller by the day and global trade having an ever larger impact on local markets and economies I thought that this week I would revisit the pulse of the global market; that is to take a look at indicators that print the health of the global economy.  The three main indicators that I look at are the price of oil, the price of copper and the daily price of dry bulk shippers.  All three of these indicators are global in nature; oil is obvious, copper as I have mentioned in previous blogs represents industrial growth and dry bulk shipping rates show the level of international trade.  While all three prices are driven by demand and supply inputs they are more prone to demand side shocks than changes in supply making them as close to a perfect pulse on the global market as is available.

To rephrase the above comment while the number of say dry bulk ships can be reduced or not replaced, it takes years for this slow drip method to take effect.  Furthermore it takes at least a year or two to build a ship so some are still coming onto the market that were ordered years ago adding to supply even as demand falls.  The result is that the market slowly reduces the number of ships while demand quickly adjusts to changes in global growth or contraction.  This same equation holds true of copper and oil which is why these indicators contain within their prices the pulse of the global economy.

The first chart is the daily price change in Crude Oil.  As you can see crude hit a low around $39 a barrel in late August.  This was touted as the bottom of the market and a recovery was imminent.  Subsequently there was a trading rally but this was met with resistance around $51 a barrel and now it looks like lows are about to be broken.  Certainly not an indication of global demand and resilience.

The next chart is the copper price.  As you can see the price of copper, like crude tried to rally late August but not only has it rolled over it has broken below its August lows and appears to be heading lower.  This is a reflection in large part of the weakness in China but it is a clear indication of global economic weakness.

The final chart is the Baltic Dry Shipping Index.  This is the daily rate that dry bulk shippers can demand from their clients.  As you can see there is limited demand for dry bulk shippers and this index has not come close to recovering from its 2009 highs and is once again in a clear downward trend.

Based on the above snap shot of global trade it is clear that global economic growth is anemic and should make you wonder why the market will jump from here to new highs.  To me it seems obvious that earnings will remain lackluster for the foreseeable future keeping the Federal Reserve at bay in regards to interest rate hikes and could result in a significant contraction in the value of equities which have become increasingly expensive as earnings contract.  Until these indicators start to show signs of life my advice would be to remain on the sidelines.  As the old trading adage says, "Do not try to catch a falling knife!"