Andrew Craig-Bennett with financial advice for shipowners amid the Trump market gyrations.
Donald Trump has just backed away from the abyss – denying, of course, that he is doing any such thing – and, while adding yet more tariffs to imports from China to the US, he has announced a 90-day moratorium on tariffs over 10% imposed on US imports from most other nations. The US stock markets rose on the social media post, or as Trump would have it, the “truth”, and everyone relaxed a little. But not much, and with good reason.
The insane gyrations in US trade policy, dictated as it is by one vain old man, who is prone to speaking in word salad, make it impossible for anyone to carry on international business – the business that we all rely on – in a normal way, and the China- USA trading relationship has become – at least until Trump changes his mind again – effectively impossible.
Meanwhile, 10% tariffs – with, by the way, little evidence of a fully staffed, trained, capable and reliable US government department for collecting them – are spread all around.
So, how worried should the shipping industry be? Are we headed for a crash? Are we intimidated yet?
James Carville, president Clinton’s election strategist, is famous for two remarks. One is “The economy, stupid!”, which carried Bill Clinton into the White House and George Bush out of it, and the other is, “I used to think if there was reincarnation, I wanted to come back as the president or the Pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
The bond market just intimidated president Trump.
We know how freight rate collapses start. I don’t mean mild corrections in the charter market; I mean collapses, like 1997 and 2008.
They start with financial collapses – in the case of 1997, the Asian financial crisis and in the case of 2008 the sub-prime crisis.
They start with financial collapses, because, if an importer cannot open a letter of credit – and trade finance is surely the simplest and most routine of all commercial banking activities – he isn’t going to buy whatever he wanted to buy, because he cannot open the letter of credit.
The seller isn’t going to be able to negotiate his bill of lading, so he will not bring the cargo forward for loading. The cargo isn’t going to move. Freight rate collapses happen overnight, when ordinary banks decide that they cannot afford to extend trade credit as they normally would do.
These crashes are not the same thing as gentle increases in the supply of tonnage; they are sudden events .
Of course, we are all wondering if we are about to see another freight rate collapse, brought on by all this tariff malarkey in the White House.
Is there a simple way in which ordinary shipping people, with no knowledge of finance, can look at the financial markets, and say to themselves, “This looks as if there might be a financial collapse, which is dangerous for my industry. Maybe I should ask my bosses to not order that new ship?”
I think there may be. Try this. As we all know, when economic conditions become more difficult, professional investors move some of their holdings out of equities and into government bonds. Bond prices rise; bond yields fall. Bonds are the safe haven.
As long as this goes on, there is no risk of a financial collapse that might affect our market – freight rates. This is just the financial world doing what it does. When economic conditions look more cheerful, the professional investors sell bonds, they buy equities, and bond yields rise. All simple.
Let’s suppose this doesn’t happen. Let’s suppose that equity prices fall and bond prices fall at the same time. This is an unusual event and it means one of two things, both of them extremely serious, one of which affects us.
One situation – the one that caused Carville to “want to come back as the bond market” – is the “bond vigilante” situation, in which big holders of government bonds express their dislike of a government’s financial policies by selling its bonds. We may consider for a moment that the three biggest holders of US government bonds are China, Japan and, more surprisingly, Britain. There is no sign of any of these holders selling their US treasuries. Yet.
Britain was on the receiving end of a bond crash when Liz Truss was, briefly, prime minister. This sort of action is rare; it affects one country, or two allied countries, at a time, and because it is so drastic, it doesn’t last long. We don’t need to bother our heads with that one; it affects governments, but it doesn’t affect freights.
The other case occurs when professional investors are selling bonds at a time when they ought to be buying them. They will only be doing that if they urgently need liquidity in order to cover their positions.
That’s a financial crisis. Banks are going to be affected, they will cut back, and trade credit will dry up. This is the rising bond yield situation combined with falling share prices that ought to scare us all silly.
We are not there yet, but we are close enough to it for financial people to be taking action, and for alarming headlines in financial reporting, including headlines suggesting that US treasury bonds might no longer be a safe haven.
So, if you are wondering what to do about that newbuilding order, I suggest that you look at the stock market and the bond market, together. Things could go over the edge. Or they might not. Keep watching the bond curve and the stock graph.
Good luck!
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