The Baltic Dry Freight Index

Risk management is a practice that is perfect in hindsight.

Everyone saw the dot com crash after it happened; everyone could have avoided subprime if only.

That is not to say that risk management is not without its uses ... it just struggles to develop a consistent, universally agreed and applied early warning system of country, economy, market, corporation or product distress.

With that in mind, Honestly Lay Bare went looking for a risk management early warning signal.

The signal had to fit two criteria - firstly it had to be difficult (though not necessarily impossible) to manipulate either due to its size or complexity and secondly it had to be a concept / idea that was subject to ongoing and rigourous analysis.

We think we have found one such signal.

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The Baltic Dry Index (BDI - also sometimes referred to as the Baltic Dry Freight Index) is a composite of the Capesize, Panamax and Handymax Indices.

If, as Honestly Lay Bare was, you don't know what those Indices are ... they are the indicies for the different size of ships that are used for the transportation of bulk dry commodities such as coal, iron ore, wheat, soyabeans and steel products.

In essence it is a composite of global shipping costs on 26 shipping routes and it is based on a daily assessment from a panel of international ship brokers.

Why is the BDI important?

Well you can't just build a new cargo ship.

When demand for shipping goes up and the supply of boats remains constant prices will go up.

Hence the BDI index can be used as a gauge for the demand of shipping and a proxy for the level of international trade.

A historical review of the data shows a high correlation between global trade and the BDI.

Keep in mind other factors such as oil prices can affect the BDI, but at the same time shipping companies can mitigate these effects by hedging and reducing speeds to conserve fuel.

Most importantly the BDI is a daily index, so demand in the shipping industry can be tracked in real-time.

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This sounded very academic until we started thinking of its applications.

Lo and behold, Google had thought of it before Honestly Lay Bare.

They too were on the look out for an early warning system - and in doing so have developed the Google Flu Trends tool.

Turns out a lot of ailing Americans enter phrases like “ flu symptoms” into Google and other search engines before they call their doctors.


That simple act, multiplied across millions of keyboards in homes around the country, has given rise to a new early warning system for fast-spreading flu outbreaks, called Google Flu Trends.


Tests of the new Web tool from Google.org, the company’s philanthropic unit, suggest that it may be able to detect regional outbreaks of the flu a week to 10 days before they are reported by the United States Centers for Disease Control and Prevention.

In early February, for example, the C.D.C. reported that the flu cases had recently spiked in the mid-Atlantic states.

But Google says its search data show a spike in queries about flu symptoms two weeks before that report was released.

Its new service at google.org/flutrends analyzes those searches as they come in, creating graphs and maps of the country that, ideally, will show where the flu is spreading.


The C.D.C. reports are slower because they rely on data collected and compiled from thousands of health care providers, labs and other sources.

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As quickly as we thought there were no such things as an early warning system - we found two.

What we were not able to find, however, were reliable and universally agreed early warning signs for corporate or divisional distress.

What would they be if they did exist (and perhaps they already do).

How about the spend on information technology lawyers?

Well it is the theory (yet to be put to rigourous analysis) of Honestly Lay Bare that if there is a corporate distress moment looming one of the first things that goes by the wayside is major investment in information system upgrades.

For major information system implementations to take place you are going to need a contract.

A contract for a major information system implementations is likely to be complex so you are likely to need an information technology lawyer.

No information system implementation - no contract - no information techology lawyer spend.

(Thanks to Brett for the BDI idea Post based in part on Google Uses Searches to Track Flu's Spread by Miguel Helft, The New York Times, November 12 2008)