Well, I missed it. I was probably too busy. But I noticed that Bloomberg had a briefing entitled Will Dry Bulk Finally Deliver? yesterday and its very existence is significant to our market. One of the graphs that I look at again and again is the following by transport geographer Jean Paul Rodrigue:
Now granted, Bloomberg are not exactly The News of the World or even the Financial Times but they do come under the heading of media attention, media attention outside shipping anyway, so is this any indication of where the market is heading, or where we are on the curve?
It has been a very interesting first quarter, and now that the dry market has paused, if not stalled, it is probably a good time for reflection. I am not going to dwell too much on the technical aspects of what has happened in the last few weeks, but I am indebted to an article by Morgan Housel of Collaborative Fund that caught my eye recently for his insights, some of which I will now shamelessly steal for my own ends to explore a little bit further what is going on in the dry bulk carrier sale and purchase market:
The end of a speculative boom can be inevitable but not predictable.
I think we can safely say we are in a speculative boom at the moment, if only for the reason that investment in dry bulk carriers is by definition speculative, and there has been a lot of investment recently. Very few recent buyers of secondhand tonnage were investing to carry their own cargoes, they were investing to take advantage of improved freight rates. Is the market sustainable? Ultimately no, but as Housel points out, unsustainable things can last for a long time, and are sustained when enough people think it will. Or:
If enough people think it’s true, it’s just as powerful as actually being true.
This is part of the nature of speculation – and dry bulk shipping – that frustrates those of us trying to look beyond the emotion and the narrative to see the real picture. Unfortunately emotion and narrative do not just influence the market, they are hard-wired into it. And it is very hard to argue against the wisdom, and emotion, of crowds.
Every investor is making bets on the future.
This is so obvious as to be almost banal, but it is worth restating. Ships are being bought on the expectation of making a positive return, either in terms of increased freight revenue, or higher prices. No-one know what the future will bring, so it is probably wise to concentrate on minimize all elements of risk in a shipping investment, not just price. By this I mean, age, where built, design, equipment, delivery range and dates and so on. But, as they say, a rising tide lifts all boats.
Optimism always overshoots. It has too.
The correct price of any asset is what someone else is willing to pay for it, because all asset prices rely on subjective assumptions about the future.
Consider this for a second when contemplating a fairly large and illiquid asset like a supramax bulk carrier. The price you are willing to pay for a vessel is not determined by your rational choices, but by the subjective assumptions of others. This is not a criticism, just an observation.
Investors play different games.
Let me put it a different way. The reasons behind the purchase of one vessel will always be different from the reasons of another. Every buyer has a different philosophy, background, history, fleet, cash reserves, availability and style of management. I was reminded of this during a recent discussion. The ship sale and purchase market relies and willing buyers and willing sellers, I was told, and I agreed. Obviously therefore someone thinks now is the right time to sell? I was asked. I replied that there are as many different reasons for selling as there for buying, and the market today may be characterised as having very keen buyers and surprised sellers.
I did not repeat then what I keep on saying internally, which is that S&P is not a ship supermarket where you can buy what you want off the shelf. If there are more buyers than sellers in any market at a particular time values will move upwards, and the same applies vice versa. This can be forgotten in the heat of the moment.
“You only live once” is just as compelling a reason to not do something.
That this should be obvious to us all in shipping does not mean it always is. “Wait and see” is as useful a tactic – and as infuriating to brokers – when the market is hot as when it’s not.
Investing is not the study of finance. It’s the study of how people behave with money.
It is too soon for the freights earned in the last few weeks to make that significant a difference to investing behaviour. And most of the ships sold at ever increasing prices have yet to be delivered. Behaviour will really change when more money starts swilling through the system and if other, outside money comes pouring in. There are many other distractions for that money for now, notably green and sustainable investments. But once media attention increases, and if not the News of the World but the Financial Times picks up on the increasing earnings of listed companies, then this outside money shall surely follow. But for the now, the money available to investors is restricted to the money that usually available, i.e. shipowners’ own resources, and unexotic finance.
And this, combined with the correction in the freight market will give buyers pause for thought too. Contrary to popular opinion, shipowners are generally not in the habit of swimming in money, and if they do, they tend not to stay shipowners for long. Shipowning requires a long-term investment horizon combined with flexible and nimble decision making, with a forensic eye for detail, and a strong stomach to deal with a hyper-cyclical market which they can’t control or even influence. If this sounds challenging, then, yes, you are right. It’s certainly not for everyone.
Where do I think we’re on Rodrigue’s curve at the moment? I don’t know. Ask me when we’re all in despair again. In the meantime, I leave the last word to Mr Housel:
Correlations go to one during wild times. Everything goes up regardless of merit, then everything goes down just as indiscriminately. So everyone feels like a genius on the way up and a moron on the way down. But neither is true…. “It’s never as good or as bad as you think.”