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Diesel Fuel, China and the Great Blue Beast
“A man can be destroyed, but not defeated.” Santiago, The Old Man and The Sea
Good day members,
We woke early in the morning, well before the sunrise; packed our cooler with sandwiches, beer and ice. The plan was to shove off just as the sun peeked over the horizon, run out to the edge of the coral reef to catch baitfish then steam out to the deep blue waters of the Gulf Stream to hunt down big gamefish.
The captain, a salty, deeply tanned and somewhat pudgy fellow had already been aboard rigging the gear when we arrived at the bight. He was a spark of energy early in the morning, the rest of us barely awake. “Mornin’ boys, hop aboard.” He told us. “There’s coffee on in the galley and yesterday’s Wall Street Journal, help yourselves.” I like smoking cigars too, I told him, but not at 6:30 in the morning. He gave an assuring wink.
After a few minutes of settling ourselves, the mate untied us and off to the reef we headed. On our way out through the channel there were a dozen or more boats behind us, all heading to the same bait spot. Sitting up in the fly bridge, I asked the captain if it was going to be crowded out on the fishing grounds today. He replied “not where we’re going. The only thing we’ll see out there is miles of weeds, birds and fish.”
After half an hour or so catching bait, the captain told us to “enjoy the ride” as he opened up the engines and steamed southward towards Cuba. A full hour and a half later, at least 40 miles offshore now, we found the spot where we were to fill our holds with sweet mahi-mahi meat, with hopes of hooking a billed sea monster.
He was right; there were no other boats around, just enormous floating islands of Sargasso weed, diving birds and lots of fish. Even though it was still fairly early in the morning, the sun was cooking us in the breezeless flat ocean. I asked him why no other boats had come out here, where there was obviously a great abundance of life. “They’re all running on rec-90, I’m eating diesel. They’re paying a buck-thirty more per gallon. I can afford to go further out where the fish are, that’s why you hired me.”
Diesel prices at the marina were much lower than the Rec-90 (recreational 90 octane, ethanol free fuel), and dropping. The recent re-collapse of crude oil prices has been a boon for charter captains down here in Key West.
In fact, diesel prices haven’t been this low in over 5 years. The last time a captain took us this far out to sea was in fact 5 years ago. So the price of fuel does indeed dictate where your boat will fish. And right now, we’re half way to Havana.
Off in the distance we see a large cargo ship moving northeast with the gulf current, perhaps coming from South America to make port in Miami. With fuel prices so low now, shippers could be on the verge of a rebound. Of course, besides cheap fuel, they need demand to make money. Demand will only rise on a strengthening global economy.
Looking at the 5 year chart of the Guggenheim Shipping ETF (SEA), and comparing it against the 5 year diesel chart (although most cargo ships run on bunker fuel, a dirtier cheaper fuel), you can see that the ETF could run much higher if, and only if, shipping demand begins to take off. Prices for fuel are much lower than 5 years ago when SEA was trading nearly 10 points higher.
But where will that demand come from? How can these shipping companies take advantage of low fuel costs?
Could it be China?.. the country experiencing a strong economic pullback.
As we trolled past one of the giant weed mats, our left outrigger popped and the rod began to zing. Twenty five yards behind the boat, a huge mahi had taken the dead ballyhoo and began leaping in the water like a bucking bronco. 15 minutes later we had the big bull boat side. With him sitting there in the water, we pitched live baits on spinning rods to a dozen other fish that had followed him in. In no time, we had 7 fish in the boat, the biggest weighing 40 lbs. The others refused to bite, so back on the troll we went.
As the giant freighter came closer we could see it was Chinese and not South American. It probably came through the Panama Canal with its cargo of cheap, shoddy goods. It’s these crappy products from China that could reignite the shipping ETF.
The Chinese stock market is in full bear mode, and their economy is contracting. To battle this, the Chinese have put restrictions on stock selling and just announced they have devalued their currency. On Tuesday, the yuan had the largest single day drop since 1994. This means our US dollar can now buy more Chinese garbage than we could yesterday. For the Chinese, they’re hoping for a manufacturing surge to rev up their economy.
It’s this devaluation that could eventually trigger stronger demand for the shipping industry, but consequently hurt American manufacturing. We’re in a currency war, just like Donald Trump keeps telling us.
According to an article in Bloomberg “The unexpected move by China’s policy maker’s bolstered speculation the Federal Reserve may delay raising interest rates as a slowdown overseas could hurt America’s economy, while lower commodity prices damp inflation.”
The US stock market fell sharply. Gold, however rose somewhat, up $5 an ounce. Since our last article, gold has moved upward nearly 3%. The market is now betting against a Fed hike, as we predicted. The lack of inflation, especially in the commodities market has Yellen worried. In fact, deflation/stagnation could very well be on the horizon (and could be here already depending on which economic “facts” you believe). The remedy lies in corporate taxes… cutting them drastically and bringing the $2 trillion of overseas held cash back to the US.
A $2 trillion cash infusion into the American economy would surely produce a boatload (pardon the pun) of real American jobs, consequently raising inflation. This would give the Fed real reason to raise rates as the economy actually grows. It’s a non-governmental stimulus package that costs tax payers zero.
As the saying goes, if America sneezes, the world catches a cold. America has been sneezing for years now. China finally caught the bug. Although we’ve been piling up our “God bless yous” we do have the medicine… if only politicians would stop playing to emotions and get those tax dollars back here so business could expand faster. A strong US economy leads to a strong global one.
We were trolling along a weed line that stretched as far as the eye could see when the captain yelled down to us “blue marlin! 200 feet out on the long right rigger.” The reel on the big Penn rod began singing a furious high pitched song. The monster pulled off over 200 yards of line in less than a minute. Strapped snugly into the fighting chair, It took me over an hour to get the acrobatic purple creature boat side. She was a 350 pound fish of a lifetime. The huge plastic lure (Chinese made) was removed from the behemoth’s mouth, and she was released back into the deep blue to grow to a thousand pounds.
China, like the rest of the world needs and craves a strong US consumer based economy. Devaluation of their currency may help in the short term, but it’s our own growth that China desperately needs. While cheap fuel and even cheaper Chinese junk may help shippers temporarily, it’s the expansion of our economy that would really move those ETF’s. So let’s get those taxes cut already.
As I removed the lid of my cheap Chinese cooler to pop a beer with my cheap Chinese bottle opener, I wondered if these items had come across the Panama Canal in a freighter just like the one we saw earlier. That bottle opener took a long journey to fulfil its destiny. The beer only traveled from Milwaukee for its.
The voyage back to the bight was wonderful with high fives and bottled beers all around. The sky was baby blue, the light cross breeze drying the salty sweat off our backs. With the exception of the low priced diesel fumes straying into the cockpit, it was a perfect day.
“The difference between death and taxes is death doesn’t get worse every time Congress meets.”
Until next time…
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