A coffee house that never quite closed
The Baltic Exchange began in 1744, when merchants met at the Virginia and Baltick Coffee House in London to fix the price of carrying cargo by sea. Nearly three centuries later it is still doing the same job, and since January 1985 it has done it through a single daily number, the Baltic Dry Index, which tracks the cost of shipping dry bulk, the iron ore, coal and grain that the built world is actually made from. It is not a forecast and not a mood. It is the price a shipowner and a charterer agreed this morning to move a real cargo on a real route.
Why the number is so honest
That is what makes the index so hard to fake. A stock price is a story about years of profits that have not happened yet, and stories can be talked up. A freight rate is the cost of a voyage that starts next week, quoted by people who will actually sail it. When there are too many ships chasing too little cargo the number falls, and when the world suddenly wants to move more ore than there are vessels to carry it, the number leaps. There is no earnings guidance and no narrative to hide behind, only steel, distance and demand.
Which is why it swings like almost nothing else
The honesty comes at the price of violence. In the boom before the financial crisis the index peaked at 11,793 on 20 May 2008, and then collapsed 94% to 663 within seven months as world trade seized. By February 2016 it had fallen below 300 for the first time in its history. Those are not the swings of a sleepy backwater; they are what a pure supply-and-demand signal looks like when nothing is smoothing it.
The market behind the number
Underneath the index sits a real derivatives market that fewer still have heard of. Shipowners and charterers hedge their exposure to freight with forward freight agreements, cash-settled contracts on the rate for a route and a period, traded over the counter and cleared through a clearing house, with no ship or cargo ever delivered against them. It is the weather-derivative trick applied to the sea: you cannot standardise a voyage, but you can standardise a published rate and settle in cash against it.
The quiet handover
For a sense of how little attention this market draws, consider that in November 2016 the Singapore Exchange bought the Baltic Exchange, a 272-year-old London institution, for 87 million pounds, about 108 million dollars. One of the oldest names in the City changed hands for the price of a mid-sized office block, and it barely made the front page.
The point
The loudest markets price the future, which is another way of saying they price a story, and stories can run a long way from the facts before the facts catch up. The Baltic Dry Index prices the present, the cost right now of moving the raw material of everything, and it cannot argue with itself. That is exactly why so few people watch it and why it is worth watching. When you want to know what the real economy is doing rather than what a market hopes it will do, the honest reading is often not on the screen everyone is looking at. It is on the one almost nobody is.
Levanter Markets publishes for education. Nothing here is financial advice.