Not Just Any Port in a Storm


Licker talks mighty loud w’en it git loose fum de jug.

Uncle Remus

You might be wondering…what’s our choice for the Desert Island Challenge?

Today, Tom Dyson, our Investment Director at Bonner Private Research, comes forward.

But first we confront the possibility that there is no Big Gain to be had… not between Heaven and Earth…neither today…nor ten years from now.

For every action there’s an equal and opposite reaction.

But when the Fed began intervening heavily, after 2000, the ‘licker got loose fum de jug.’ Things got weird. And now we face the shocking disappearance…of nothing. With nothing to rise up to take its place.

What happens when you subtract zero?

Take the $Trump coin. Suppose it goes pffft... and vanishes? Holders will lose money. But who will make money? Nobody?

Fat Tail Investment Research

Source: CoinMarketCap

Official Trump Coin, Market Capitalisation $5.48 billion

Let’s say, we launch a new coin. We limit the number to one million. And, like Trump, we make some available to buyers, while retaining 900,000 for ourselves in our own ‘wallet.’ If one person buys one coin for 1 penny, all of a sudden, our cache is worth $9,000. And if someone buys a coin for $1… we’ve got $900,000 — on paper!

The trouble is, there’s nothing there. Which doesn’t mean it is worthless… but that its value could be a billion dollars… or absolutely nothing. The beauty of this boat is in the speculators’ eyes. There is no safe harbor of goods or services to moor it safely. Instead, it floats on an ocean of mist and mood swings.

If the Donald falls out of favour…and the meme loses its magic…in the space of a few days, the coin could drop back to a penny. Wealth disappears. But there was never any way to realise the gain that Mr. Trump supposedly made anyway. Had he tried to ‘cash out’…his own selling would have quickly collapsed the price.

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Real companies produce real wealth, which we use to determine how much they are worth. Imagine a builder who puts up ten houses a year…and makes a 10% profit on each one. Investors think he can keep it up, and buy shares priced at 10 times his annual gain…or the equivalent of ten complete houses.

So far, we are on solid ground. But along come Br’er Rabbit…and Br’er Fox from the Fed…‘sassy ez a jaybird’…an’ fetching up al’ kynz o’ mischuf.

As the Fed manipulates interest rates to the downside, the P/E of the builder goes up. Instead of being worth the profit on 10 houses per year…it might be worth 20.

Today, according to the CAPE ratio (cyclically adjusted price earnings), the average P/E is over 37. Whoa, the builder is now worth 37 houses. But there are still only 10 new houses per year being built. So, as many as 27 out of 37 of the houses in the P (price) don’t exist. They could go pffft at any moment.

There’s the potential Big Loss. Where’s the Big Gain? Where’s the home builder priced at less than it is worth? Where’s the industry that the Fed’s interest rate manipulation missed? Where is a stock that might go up… even if the rest go down?

The secret, says Tom, could be…

Aging fleets. There are enough [tankers and bulkers] now. But over the next decade, many need to be scrapped and we just aren’t building enough new ones to replace them. And the surviving fleet will require heavy maintenance…Assuming no gigantic market or economic collapse, as the old vessels get scrapped, dry bulk and tanker vessels are going to become scarce…and command freight rates that will likely be much higher than they are today….It’s why I want to visit the Alang shipbreaking yard in India next month.’

Tom says tankers may likely float higher in the next storm, rather than sink to the bottom:

The shipping industry has been traumatized by a decade of over capacity following the financial crisis. There’s a palpable reluctance to invest in new vessels because a) they’re expensive b) they take a long time to build c) it’s not clear what fuel the ships of the future are going to burn and d) it’s not clear that China will ever grow again and e) it’s not clear we’re going to need a bunch of new ships for transporting old-economy materials like oil, coal and iron ore.

It all points to the conclusion that the industry is going to kick the can on fleet renewal for as long as possible…until rates rise high enough that shipping executives can overcome some of these objections. Fortunately, no one’s asking us to pull the trigger on a brand new $125m VLCC that won’t be delivered until 2027 at the earliest. All we have to do is buy into the existing fleet and collect dividends (and maybe benefit from some consolidation as most of the stocks are trading at sharp discounts to NAV and it’ll be easier for shipping executives to buy other shipping companies than buy new ships.)

Looking for an investment that might bob when others weave?

Shipping stocks have a history of underperforming the broader markets (12 of last 15 years have been down), they are not in any indexes or benchmarks, they don’t receive any passive investments, they’re blacklisted in Europe for being dirty. They’re maddeningly volatile and have a reputation for fleecing investors.

But what if a $100 trillion meltdown sinks the customers?

Tune in next week…

Regards,

Bill Bonner Signature

Bill Bonner,
For Fat Tail Daily

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All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.



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