Sailing Ships in Inflationary Storms

By Marius-Cristian Frunza
Weekly Briefs

Markets hold central bankers responsible for the money printing machine and the resultant inflationary regime. While the link between inflation and the increasing monetary mass seems trivial, we ignore the lack of any “proof of work” in the process of fiat currency distribution. Printed money flows freely into consumers’ pockets that spend it unthoughtfully on various gadgets. But, how do these gadgets arrive at the end buyer?  

Shipping and road freight are facing unforeseen pressure that generates breakouts in the supply chain. Increased demand for transportation is counter-intuitive amid a global pandemic with several lockdowns that should lead at least in theory to lower consumption. In reality, the stimulus checks that arrived to end consumers without any “proof of work”  generated an increased demand for products. In addition, governments with the support of central bankers distributed free cash to households amid lockdowns. While those funds were aimed to ensure subsistence, they fueled massive demand for gadgets boosting retailers’ sales. With such big demand, suppliers needed to ship more merchandise from abroad, mainly from China, thereby increasing the pressure on sea freight.

The shipping sector is going through a massive transformation. It was probably the last silo of the economy, whereas digitalisation was present to a lesser extent. The Baltic Dry Index, the world’s leading proxy for dry bulk shipping stocks and a general shipping market bellwether, increased more than 12 times since the pandemic outbreak. The last time, markets witnessed such an exponential increase in shipping price was before the 2008 crisis. Will the shipping bubble burst as it did more than a decade ago?

There are few industries as defiantly opaque as shipping. Even offshore bankers have not developed a system as intricately elusive as the flag of convenience, under which ships can fly the flag of a state that has nothing to do with its owner, cargo, crew, or route. Rose George, British journalist

Market overview

Banks’ balance sheets in the United States (bln USD)

Dow Jones, the leading stock index, delivered positive results and climbed to a new intraday all-time high, finishing the week near 35,700. When the Fed begins the announced tapering, the market reaction will confirm whether the current gains reflect hyperinflation or real growth. Banks’ balance sheets in the United States reached 22,274.10 USD Billion in October, representing a 10% increase compared to the beginning of the year. Banks are ballooning with money from central banks and hyper-inflated assets. This position makes them particularly vulnerable in the perspective of a slowdown in the Fed’s interventionist policy.

Bitcoin ceded the gains accumulated over the last week but remained above 60,000 USD.

Focus:

Maersk

While big retailers like Amazon and Tesco are building up their own logistics networks with lightning speed, Maersk,  the Danish integrated shipping company, aims to consolidate its historical position as the world’s largest container shipping line and vessel operator. As a result, since March 2020, Maersk’s share showed a strong positive drift, the investors tripling their value.

Maersk aims to become an integrator of the seas and provide a single platform that will allow shippers to manage their logistics and bypass intermediaries. In addition, Maersk should announce soon that it will only handle cargo from direct shippers from November, cutting out freight forwarders. This move would reinforce the leading position of the Danish carrier and drive out of business smaller maritime freight companies.

Focus:

Nippon Yusen Kabushiki Kaisha

The world’s second shipping company had a good year retrospectively despite a late correction over the last month. Throughout the pandemic, Kaisha’s share price had a 10x effect. What makes the stock even more appealing to investors than the big tech firms is its price to book and price to earnings ratios that are relatively close to normal levels. The Japanese company delivered this week a brand new liquefied natural gas carrier, LNG Endeavour. Kaisha aims to fortify its positions in the bolstering Pacific LNG carriers markets. Moreover, the company launched an ambitious program to align its business with ESG principles, which would make its shares more attractive for engaged investors.

Commodities:

Gold

On Friday, Federal Reserve Chair Jerome Powell said that it is time to taper for the U.S. central bank, but it's time to raise rates. According to the latest prognosis, high inflation will likely not fade away before the following year, assuming the pandemic will not have a fifth wave. Gold prices are on ludicrous low levels amid rampant inflation. Institutional investors were expecting transitory inflation and a foreseeable long term deflation. Therefore, Wall Street was not keen on hedging its exposure to inflation risk. Nevertheless, the ounce price enters slowly into positive territory, so the move north above 1,800 USD is noteworthy.

Market outlook

The Dow Jones Index ended the week on a bullish trend, surfing above 35,600. The Fed tapering may be a game-changer in the stock market. The worst-case scenario is rampant inflation and asset price contraction.

Bitcoin’s price climbed to near 67,000 USD but retreated to 61,000 amid technical sales. Nevertheless, the leading crypto could enter a new rally boosted by the perspective of a Bitcoin ETF getting regulatory approval.

The energy crisis triggered by a bubble in power, gas, and coal prices impacts oil prices. Thus, there are sound reasons to believe that Brent could climb above 100 USD before the end of the year.

The Gold ounce started to move North ending the week around the 1,790 mark. Thus, the long-awaited gold rally may be closer than one could think.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.