The trouble with volatility is it often proves volatile
There is a reason investors abhor uncertainty
Get ready to rock with Donald Trump, but shipping remains largely the sensible business of moving cargoes from port A to port B
IF YOU hold a chemistry degree, volatility is defined as the tendency of a substance to evaporate at room temperature. For those who went to business school, it is more commonly regarded as a chance to make a quick buck.
In the 21st century, it has even been commoditised. Since 2004, it has been possible to buy futures in the Chicago Board Options Exchange’s CBOE Volatility Index, which tracks expected movements in US stock markets over the next 30 days.
VIX, as it is known for short, is routinely described as the archetypal high-risk, high-return investment. Funnily enough, the “high risk, high prospect of losing your shirt” element usually goes unspoken.
Volatility is also celebrated in shipping, of course. Matthew McCleery’s novel, The Shipping Man, is premised on a run-of-the-mill Manhattan yuppie hedge fund manager witnessing the Baltic Dry Cargo Index plunge 97% from its all-time high in just six months and instantly falling in love with our industry.
A thinly fictionalised Norwegian tanker magnate is depicted as engaging in sundry dubious attempts to corner the tanker market. But hey, it’s only a story, right?
In the real world, many admire the ability of some Greek shipowners to play the secondhand S&P market with the kind of perfect timing elite jazz musicians would kill for.
Taiwan’s Nobu Su did rather nicely out of the twists and turn in both the wet and dry futures, which he was able to predict uncannily well.
In sum, volatility is a well-established aspect of how shipping rolls. As the world enters the era of Donald Trump’s second term in the White House, many have declared themselves ready to rock, in the hope of profiting from the inevitable turbulence ahead.
But there are significant shortcomings to any simplistic assertion that volatility should be seen as an untrammelled inherent good.
Shipping remains essentially the sensible everyday effort to load a cargo on to a ship at port A, sail it to port B, and discharge it at the other end. Your wish to see it continue to do so is why you became an operations manager rather than a hedge fund manager.
The relevant calculations extend far beyond the horizons of the kind of day trader who flunked high school and is now trying to make it big from the basement of mom’s house in New Jersey.
Shipowners must make responsible long-term decisions on the best way to utilise millions, and often billions, of dollars. The actions they take today, for instance on readying their fleets for decarbonisation, will have consequences for decades.
There’s a reason serious investors abhor uncertainty. If Trump upsets the apple cart, shipping will be among those sectors that will have to pick up the apples.
Many owners found last year’s drought-driven restrictions on Panama Canal transits seriously irksome. Any foolhardy attempt of the new administration in Washington to seize control of the key waterway would come as a serious pain in the backside.
But perhaps the biggest issue is the prospect of tariffs, which have been threatened against China, the EU, Canada and Mexico. At this rate, only Liechtenstein and Micronesia stand likely to remain exempt.
Bolder souls have ventured an alternative upside case. Major economies will naturally seek alternative markets for targeted products, which could even mean a boost for tonne-miles, they aver.
There are umpteen assumptions in that prognosis, not least that other countries do not respond with reciprocal tariffs and that they have the wherewithal to take up the slack that will follow the US economy’s turn to autarchy.
Auguries are readily available in the history books. The last global trade war was seen in the 1930s, resulting in generalised depression. Thereafter the trade war soon became an actual shooting war.
Sure, the smartest people in the room will no doubt even now be working on ways to short the prospect. But if Trump carries through on his threats, the damage to shipping’s health stands to be immense.
By all means take advantage of volatility if you think you can devise a foolproof way to do so. If you are on the cusp of making big bets, perhaps on a highly leveraged basis, all we can do is wish you luck and remind you of the inadvisability of betting the ranch.
But whichever side of the divide you fall on, do not forget the way chemists define the word. The risk of evaporation at room temperature is real.