Have you noticed recently that, compared to a few years ago, very few people have any money? Of course, the astute reader will say, that’s because we’re coming out of the Great Recession; unemployment is 9%; and Americans no longer have, or are no longer using, that great cash-printing machine called their home-equity loans to buy expensive purses and extravagant dinners and new cars. Furthermore, I have noticed that people, even people with well-paying jobs, seem to have much less money than they did a few years ago. Recently, I have been out with friends who are well-paid professionals in stable jobs, and even they claim not to have any money. What’s happening to their money? Are they burning it at night? Are they saving it? Are they paying down debt? The financial media claims that even high-end consumers are getting crushed by rising inflation owing to an over-accommodative Federal Reserve, which is a fancy way of saying that the Federal Reserve is printing too many dollars. What’s the correct answer? The money went to money heaven.
In general, the U.S. Economy toggles between periods of varying degrees of inflation and deflation. Inflation results when assets go up in value, and deflation is when asset values go down relative to the underlying currency. We just endured an extreme deflationary period, the Great Recession, which resulted from a global financial crisis. Remember that? My claim is that the reason so many Americans have so little money, even those who are still earning it at the same rate as before the financial crisis, is that the economy is still leaning more toward deflation than inflation, despite the Federal Reserve’s attempt to replace the money that went to money heaven. Most think that inflation is bad because the word connotes some of the hyperinflation catastrophes that you might remember from your middle school history classes: governments inflating their way out of debt until their currency is worthless, and then printing ridiculously high denominations of their currency. But a little inflation is necessary to keep an economy afloat; inflation helps your money grow in value, unless you have it parked in U.S. Treasuries or in cash. No, we’re definitely still feeling deflationary pressures. That’s why there’s not enough money around.
There may be enough money in the system now after the Fed’s action during the past few years, but the cash certainly has not made its way to the consumer or even to many businesses. When the money does make its way thoroughly into the monetary system, there will be a re-inflation of the currently deflated economic balloon. That re-inflation is called reflation. I would now like to suggest a stock for your portfolio for the future reflation that must occur after a deflationary period or, indeed, for inflation, when we finally see some growth in the global economy. Baltic Trading (BALT) is a global shipping company that transports dry-bulk around the world by sea using large container ships. BALT currently trades at about $5.50 and recently has seen its share price dip to a 4-handle. This week BALT raised its dividend from 6 cents to 10 cents, which has given the stock some buoyancy in an otherwise sinking market. A few years ago, when China was buying everything that wasn’t nailed down, dry-bulk shippers were making loads of money. Companies like Baltic Trading, the most-followed being Dryships (DRYS), saw their shares skyrocket to near $120 or more and then plummet to single digits after the global financial crisis.
Baltic Trading is only a few years old, so the company missed the last boom-bust cycle. That’s good for us, inasmuch as BALT did not do what almost all other companies do at an economic top: expand. Most of the shipping companies added vessels during the economic expansion. It’s a natural reaction to want to expand your business during good economic times; the only problem with adding container ships is that when demand dries up for shipping goods globally by tanker, there are too many ships, which drives down the rates that shippers like BALT can charge for their vessels. What’s the good news? BALT has virtually no debt and a brand new fleet. When the larger companies start to shed their aging fleet to the scrap yard, Baltic Trading will see its profits rise. Also, when the world economy reflates, dry-balk shipping rates will increase again. Baltic Trading is kind to investors with its dividend. The dividend may fluctuate from quarter to quarter, as may the stock price from day to day, so this investment is not for the timid; nevertheless, over the long term, BALT should do well.
And for those of you who might believe that the current shortage of money in the system is a modern phenomenon, I leave you with the following quotation from I, Claudius by Robert Graves, which was first published in 1934. The passage refers to an event that occurred in 32 A.D, which we just went through again in 2008.
The result was that all debts were at once called in, and this caused a great shortage of current coin. Tiberius’s great idle hoards of gold and silver in the Treasury had been responsible for forcing up the rate of interest in the first place, and now there was a financial panic and land-values fell to nothing. Tiberius was eventually forced to relieve the situation by lending the bankers a million gold pieces of public money, without interest, to pay out to borrowers in exchange for securities in land.
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