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Shipping Industry Hinting at Severe Slowdown in Global Economy Lombardi Letter 2022-11-04 04:14:05 global economy shipping industry Baltic Dry Index global shipping rates financial system Key shipping industry indicators and related data show that the global economy could be headed toward a severe economic slowdown. This could mean more misery for investors, but it could also bring out great opportunities. Analysis & Predictions https://www.lombardiletter.com/wp-content/uploads/2022/11/shipping-cargo-container-lost-in-the-sea-or-ocean-2021-09-22-23-50-32-utc-150x150.jpg

Shipping Industry Hinting at Severe Slowdown in Global Economy

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Global Shipping Rates Collapsing Could Mean More Misery for Investors

If you want to know where the global economy is headed, look at the shipping industry. It’s one of the best indicators of global economic health. Sadly, as it stands, the shipping industry is hinting that a severe recession could be in the making.

A worldwide economic slowdown could mean more misery for investors, but first, here’s some perspective.

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Look at the Baltic Dry Index (BDI) chart below. The index tells us the shipping rates of dry goods. The higher the BDI, the higher the price of shipping and, one could assume, the higher the demand in the global economy. If the index is dropping, it suggests that the economy is struggling.

In October 2021, the BDI stood at around 5,500. As of this writing, it’s at 1,377. This represents a drop of close to 75% in about a year. In other words, the BDI has collapsed, which says a worldwide economic slowdown could be imminent. Scary.

Chart courtesy of StockCharts.com

Shipping Data Makes It Very Clear That Global Economy Is Slowing

Now listen to those who are closest to the shipping industry—shipping companies—to hear the data firsthand.

In September, when FedEx Corporation (NYSE:FDX) reported its financial results for its most recent quarter, the company’s president and CEO, Raj Subramaniam, said, “We’re moving with speed and agility to navigate a difficult operating environment, pulling cost, commercial, and capacity levers to adjust to the impacts of reduced demand.” (Source: “FedEx Corp. Reports First Quarter Results,” FedEx Corporation, September 22, 2022.)

In FedEx’s earnings statement, the company said its financial performance was “adversely impacted by global volume softness that accelerated in the final weeks of the quarter due to weakening economic conditions.”

More recently, A.P. Moller – Maersk, the world’s largest container shipping firm, is ringing alarm bells of a slowdown in the global economy. The company’s CEO, Soren Skou, recently said, “With the war in Ukraine, an energy crisis in Europe, high inflation, and a looming global recession[,] there are plenty of dark clouds on the horizon.” (Source: “World’s Largest Container Shipping Firm Maersk, a Barometer for Global Trade, Warns of ‘Dark Clouds on the Horizon’,” CNBC, November 2, 2022.)

Skou added, “This weighs on consumer purchasing power[,] which in turn impacts global transportation and logistics demand. While we expect a slow-down of the global economy to lead to a softer market in Ocean, we will continue to pursue the growth opportunities within our Logistics business.”

There’s also something interesting happening at U.S. ports. According to the Marine Exchange of Southern California, in January, there was a queue of 109 ships waiting to be unloaded at the Los Angeles and Long Beach ports. Now that queue is down to just four ships. Not too long ago, these two ports were notorious for having big holdups amid all the noise about supply chain disruptions.

Here’s something more troubling: the Los Angeles and Long Beach ports handled 686,133 loaded import containers in September. This was down by 18% from a year ago, and its lowest level since June 2020. In August, imports to those ports were down by 12% year-over-year. (Source: “Southern California’s Notorious Container Ship Backup Ends,” The Wall Street Journal, October 21, 2022.)

On top of that, just over a year ago, the average cost to ship a container from Asia to the U.S. West Coast had surged to $20,000. Recently, it went down to $2,720. In other words, the shipping costs plunged by 84% year-over-year.

Why Should Investors Care About the Global Economy Slowing?

Dear reader, paying attention to the global economy might sound like too much work or outright irrelevant. But ignoring what’s happening on the world stage could be a big mistake. The financial world is very interconnected. For example, a problem in the European banking system quickly becomes a problem for the entire global financial system. Problems at ports in China cause havoc at ports in the U.S. and other countries.

A slowing global economy could have negative impacts on the financial performance of companies that have business globally. In the grand scheme of things, as an economic downturn picks up speed, it could create even more volatility in the financial markets than we’ve seen so far in 2022.

On the other hand, if volatility appears as the global economy slows down, it could open doors of opportunity to investors.

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