Don’t Look Now

April was characterized by significant volatility driven by inflation. I attended a panel on housing demand and the single-family rental market in Dallas on April 26th. One speaker noted his architectural firm had 700 employees and 70 open positions. A developer on the same panel pleaded for resumes, noting they had 46 unfilled spots. The consensus was that if the Federal Reserve succeeds in making housing even less affordable by raising interest rates, they will shift potential buyers to the single-family and multifamily rental markets where occupancy is already tight.  In any event, while the CPI may have peaked, the level of annual inflation is unlikely to revisit 2% or 3% any time soon for Americans. I have often spoken of analogies between the 1970’s and the current economic environment. The last time we had similar negative year-to-date returns for the major benchmarks was in 1974.  Luckily for us, shipping equities have been the best home in a bad neighborhood, with positive performance year to date.

There have been multiple catalysts in shipping, from high energy prices driving slow steaming to new build inflation to investors switching from growth to value. These conditions were all present at the beginning of the year, but current geopolitics are acting as an accelerant. Ton miles are increasing, speeds are decreasing, and new trade routes are being born. There are short term disruptions, such as the Covid-19 lockdown in China negatively impacting VLCC’s but it is offset by increasing port congestion that will ultimately benefit the dry bulk and container trades.  Meanwhile, the issues of power and new builds continue to play out. Dual fuel LNG ships don’t make sense for dry bulk or containerships in an environment where LNG will be scarce for the foreseeable future. Splash noted “Vessel newbuilding prices have been rising for over a year, and the overall Clarkson Newbuilding Price Index now stands at 158 points, up 26% since the November 2020 low, indicating the highest prices – in nominal terms – since 2009.” Ordering new ships has never been as difficult nor owning secondhand ships been better.

I am approaching the second anniversary of my biweekly blog post. I have enjoyed writing it and find benefit in laying out my thoughts.  Usually, as a contrarian, I buy when the news is awful and sell when the news is good. However, we are potentially entering a new and longer upcycle for tankers and dry bulk, driven by multiple factors. It may even be a super cycle. Stay tuned for more thoughts, as they say, same time, same station in two weeks.