TALLULAH GORGE, GEORGIA – Have you bought oil tankers yet?
My gut says we may have just seen the bottom of a 12-year bear market in tanker stocks…
From this point on, I believe tanker stocks will move significantly higher.
If you buy now – and you have the stomach for the incredibly high volatility of tanker stocks – you will make great returns… and dividends, too. (More below.)
Sheltering From the Rain in the Georgia Backcountry
Greetings from our campground in the Georgia backcountry…
It’s pouring rain, so we’re all sheltering in our tent.
Kate and Dusty are studying a textbook. Miles and Penny are watching a YouTube video. And I’m writing this message to you by hand in my notebook. Later, I’ll transcribe it onto my phone.
Nearly three weeks ago, my family and I broke quarantine. We hit the road with a car, a pop-up camper, and some sleeping bags to explore America and sleep in campgrounds.
We started in West Palm Beach, Florida. So far, we’ve spent time in Florida, Alabama, and Georgia.
Today, we head for North Carolina. Then next week, we turn west and head for the Great Lakes… and the Midwest… Final destination: Alaska.
In a minute, we’ll venture outside and begin the process of packing up our campsite.
We’ve done this so many times, we all know our roles now… and we all know where everything lives. We should be ready to pull out in about half an hour…
The next time you hear from me, we’ll be in North Carolina, at another campsite. I haven’t booked anything yet, so I’ll have to do some phone-work on the road.
As far as the lockdown goes, every state seems to be different. In Florida, many of the state and city campgrounds remain closed. In Alabama, they’re all open. In Georgia, some of them are open and some are closed.
We’re using an app called Campendium. It filters out all the campsites that remain closed from the government lockdown…
Here we are eating our supper last night during a break from the rain…
Our latest dinner table
The Only Investment I’ll Make Today That’s Not Gold
Back to oil tankers…
The global monetary system is terribly broken. We’re seeing greater and greater acts of desperation from the government and central bank to keep the bubble inflated and the banking system functioning.
The stock and bond markets have become completely divorced from reality.
And now we’re in a severe recession. I don’t know exactly how the economy will get healthy again, but it’s not going to be gentle or easy.
This is not a good time to be an investor.
Kate and I have withdrawn entirely from the stock market and we’ve put our entire retirement savings into gold, where we’ll remain until the stock market is a bargain again (in terms of gold).
Tanker stocks are the only investments I’m willing to make an exception for.
The Trick to Investing in Oil Tankers
The tanker thesis is pretty simple.
Transporting oil is a terrible business. According to one book on shipping I read recently, shipping has the lowest returns with the highest volatility of any “heavy” industry.
“How do you make a small fortune in shipping? Start with a large one,” goes the old shipping joke.
Brutal competition… chronic overcapacity… heavy capital reliance… and a never-ending flow of destabilizing events…
From my research, it seems tankers only make money for two or three years per decade. Then they lose money the rest of the time.
The trick to investing in tankers, therefore, is to hold them for the good years, and stay away for the bad years.
Seems obvious enough. But how do you know when the bad years are going to turn into good years?
How I Know It’s Time
There’s an old saying in the shipping business: “There are either too many ships or there are too few ships.”
Most of the time, there are too many ships. The shipping companies don’t make any money. But occasionally, there are too few ships. And that’s how you know it’s time to invest in shipping.
Between 2008 and 2019, there were generally too many ships. (There was a huge boom in new shipbuilding leading up to 2008, spurred by low interest rates and a flood of private equity money entering the sector.)
But towards the end of 2019, we finally entered a period of too few ships.
Over the last nine months, tanker companies have made fortunes. They’ve used this money to pay down their debts, increase their cash balances, buy back shares, and pay dividends.
They have completely transformed their balance sheets over the last nine months.
But will this situation last?
Investors Haven’t Noticed This New Supercycle
It’s easy to track how many ships are under construction in the shipyards of China, Japan, and South Korea. And it’s easy to track the ages of existing ships.
(Oil tankers have a lifespan of about 20 years. Then they get demolished.)
This chart shows the order book for new oil tankers, and the average age of the oil tanker fleet.
You can see that the order book is at the lowest it’s been in more than two decades (the blue line). There won’t be many new ships entering the fleet over the next couple of years.
Meanwhile, the average age of the oil tanker fleet is the highest it’s been in more than two decades (the red line). Many oil tankers will be retiring over the next couple of years.
In other words, the period of too few ships will continue for at least two more years. (Probably even longer… As I’ll show you in a second, it’s unlikely that ship owners will suddenly start ordering lots of new ships.)
Meanwhile, in the stock market, investors haven’t noticed the tanker industry just entered its next “supercycle.”
Why am I so sure?
The best way to judge how investors feel about the oil tanker business is to sum up the value of the oil tankers in a company’s fleet. (Its net asset value, or NAV.)
This is easy. There’s an active market for used oil tankers.
Then, you compare NAV to what the stock market says the business is worth. (Its market capitalization.)
Normally, these two numbers should be more or less equal. But sometimes, investors get either greedy or fearful, and the numbers diverge.
Like now, for example.
Some of the best oil tanker companies in the business have fleets worth, say, $1 billion, but the stock market says the businesses are only worth $750 million. Three of the tanker companies I recently recommended have Price/NAVs in this range.
In other words, they’re trading at a 25% discount to NAV.
Said another way, you can buy oil tankers at a 25% discount by buying them through the stock market instead of in the real world.
Worst of the Selling Is Over
Soon, investors will notice how much money oil tankers are making, and how the fleet is about to shrink, and they’ll close the gap between NAV and market caps. They may even send it to a premium.
There could even be some consolidation between companies. Why pay full price for a new oil tanker from a shipyard when you can buy an entire fleet from a competitor at a 25% discount?
And finally, companies are starting to buy back their own stock. Why spend money on new oil tankers when you can buy your own tankers at a 25% discount by buying back your own stock?
And of course, the oil tankers will continue earning big profits as there won’t be enough ships in the fleet for the next few years.
Over the last month, there’s been a bloodbath in oil tanker stocks. Some of the tanker stocks fell nearly 50% in the last four weeks. It’s been brutal.
My feeling is, that was the climax of the 12-year bear market, and the worst of the selling is over. We’ll see…
– Tom Dyson
P.S. Oil tanker stocks are very volatile. That’s why I see them more as call options and less as stocks. Except they have three advantages: They never mature, they pay large dividends, and they buy back stock.
Either way, oil tanker stocks sometimes move up and down by 10% for days in a row. If you get your timing wrong, you can quickly lose 30% of your investment. So if you’re going to get involved in oil tankers, you must expect extreme volatility and proceed accordingly.
Like what you’re reading? Send your thoughts to [email protected].
FROM THE MAILBAG
One reader asks about the ideal portfolio allocation for gold… another about investing in silver…
Reader question: You are convinced that gold is THE solution… Me too. But I always read that the ideal proportion of gold in your total assets shouldn’t be more than 10 to 20%. You almost invested 80 to 90% of your total assets. Where is the right percentage?
Tom’s response: You’ll have to decide that percentage for yourself. Personally, I view gold as money. It’s the only money that hasn’t been inflated and debased throughout history. So I’m quite happy keeping 100% of my savings in gold (minus what I need for day-to-day transactions).
The bigger risk, as I see it, is keeping money in anything but gold.
If you don’t see gold as money, then I can understand not wanting to keep your savings in it. Many people see gold as insurance, for example. And if you see gold as insurance, then a 20% allocation makes more sense.
Reader comment: I have followed your Postcards From the Fringe with high anticipation. Thank you. I was hoping you could address a little more about silver. I have been trying to find someone who could honestly explain its relationship with gold. It’s often mentioned as a sidebar in most gold presentations, but I don’t ever seem to get a good rundown on it.
Thank you for coming back to us and giving us the opportunity to learn from all your expertise. We wish you and your family continued happiness and success.
Tom’s response: Silver is a tricky commodity to analyze… far trickier than gold. For three reasons. 1) It’s money, so it responds to the same macro trends as gold. 2) It’s an industrial metal and has other uses besides money. And 3) It’s produced as a byproduct of mining other metals, which means its supply doesn’t necessarily respond to changes in its price.
Personally, I don’t feel I have a good understanding of silver. But I want to own it anyway, just not as much as I want to own gold. Silver is so volatile, I find it harder to own than gold. And it’s bulky and heavy, too. Kate and I have about 500 ounces of physical silver and we also own some shares of a silver ETF.
Meanwhile, other readers talk about Tom’s recent Emergency Investment Summit… why billionaires seem to support socialism… and the Dow-to-Gold ratio…
Reader comment: I, too, am in the process of rediscovering my marriage with my wife. We reached the edge of separation but just had our first therapy session today and it was very helpful and hopeful. It’s a very special day for me. Not only have I started to repair and rebuild things with my wife, I also gained more knowledge on how to prepare, and protect my family’s future wealth from your Emergency Investment Summit presentation and insight. Your family story is inspirational and the timing of your return was perfect! Thank you again.
Tom’s response: Good luck!
Reader question: I watched your Emergency Investment Summit and signed up to come on board your new advisory. I have money being managed by Wells Fargo advisors, and will have to break the relationship and act on what you recommend. (Wells makes money no matter how my portfolio performs, BUT they send me a big box of sticky buns every Christmas time. Will Rogue Economics do that?)
Reader question: Can you explain why the billionaire class in the western world votes for socialism? Warren Buffett, Jamie Dimon, Lloyd Blankfein, Ray Dalio, and most of the billionaire friends in western Europe support liberal/socialist candidates. This seems to be against their capitalist interests.
Tom’s response: My guess is, once you feel like you’ve got more money than you could ever spend, you turn your attention to trying to improve the world… to preaching… to patronizing the rest of us with your ideas for making society more fair and equal and environmentally friendly. It’s hubris, basically.
Reader question: Hello! I am new to your newsletters and find them very interesting. I am puzzled about why you would sell your gold when the ratio hits 5 or less and put the money in stocks, if, at that time, you are also predicting our monetary system to be crashing and the value of the dollar also crashing. Why would you put money into the market?
Tom’s response: The ratio will reach 5 because of the failure of the current monetary system.
But anyway, my strategy is not based on predictions, or untangling the future, or the end of the monetary system, or anything like that. It’s based on history and my understanding of cycles.
If I wasn’t so fascinated by economics, I probably wouldn’t even watch the news while I waited for the Dow-to-Gold ratio to fall to 5.
As always, please keep writing us at [email protected]. Your notes are integral to these Postcards.