Despite pervasive optimism that the global economy has left the recession behind and is poised for solid future growth, the Baltic Dry Index (BDI) continues to trend lower. Recall, the BDI is a price index which tracks the cost to ship dry commodities.

Iron ore and coal have been the two large swing commodities in recent years. These are the main products carried by the Capesize ships (the largest ships which are too big to pass through the Suez or Panama canal and must therefore go around the Cape of Good Hope or Cape Horn), represented by the blue line in the chart above.

The stockpiling of iron ore by the Chinese in the first half of 2009 led to a very nice rebound in Capesize rates (following a 96% collapse), but virtually all of the gain since the beginning of the year has now been given back. Capesize rates are now nearly identical to rates for the smaller Panamax and Supramax vessels. This seems to confirm the anecdotal evidence we've seen of pig farmers stockpiling copper as well as recently declining steel prices in China.

This weakness in the BDI does not support a resurgent global economy thesis, but it's just one variable. New ship deliveries, the rate of mothballing, and product stockpiling will all impact shipping rates along with demand. So, we must be careful not to read too much into it. Still, it would be foolish to ignore this real-time indicator of economic activity which has now been steadily falling for nearly 4 months.

The stock market is now pricing in a vibrant recovery and strong earnings growth. If this rally is to continue or if the gains are to be held, it's now "show me" time. Indicators such as the BDI which rely on more than just government stimulus to move their needle will need to start registering some impressive gains to substantiate the stock market rally. I suspect that investors will soon be forced to recognize that a deleveraging private sector won't be contributing much to economic growth any time soon. The question then turns to how long the government will be willing or able to sustain its immense stimulus measures.