URSABLOG: Losing My Religion


The almost religious regard some brokers have for numbers and forecasts makes me feel like a crazy heretic sometimes, crying in the wilderness. This was not always the case however.


When I was working for HSBC and was first introduced to the wonders of forecasting and analysis, especially during the boom years of 2003-2008, they were wonders to behold. The advantage of working for HSBC was that as soon as someone wrote about something and pressed the HSBC imprimatur on it, we were able to go out and sell whatever we had to sell, treating the numbers as gospel when preaching the good news to the unbelievers. It absolved us from thinking, and there was always a bright future tomorrow. The excesses of the banks which came to light following 2008 were in many cases the bitter fruits of this proselytising, but of course we thought little about this as long as we were selling ships.


It was only around Posidonia 2008, when we were booking ridiculous amounts of commission, that I began to feel uncomfortable. It wasn’t meant to be this easy. I remember standing on the corner of Syntagma Square with a friend and colleague, where we were catching up between meetings. He had just come from the Hilton Hotel where he had agreed a newbuilding resale contract of over US$ 75 million, and was on his way to hopefully sign a newbuilding contract with another client around the corner. I was about to conclude a contract for 2 opt 2 kamsarmax newbuildings that morning having delivered a handysize bulk carrier for close to US$ 50 million that morning.


We looked at each other with bafflement. You would have thought we would have been overjoyed, but we were jaded, and tired. This was the new normal, and we had more work to do. Human nature such as it is meant we were complaining about our lives, and bemoaning the deals we had missed. There have been many times when I have looked back to that time. Were we really that stupid not to realise it could not last? Well yes, we were. Did we collect all the commission we booked at that time? Of course we didn’t. September 2008 changed the game completely.


Hindsight is a wonderful thing of course. But there was something else to this too. We believed in it, it was normal because our research department had told us it was true. We not only had the numbers, we had the story: China. This time it was different.


In a recent paper to clients, Howard Marks of Oaktree Capital, who writes very thoughtfully and well on cycles (and will be publishing a book next year on the subject) has identified nine “Seeds for a Boom”:


-         A benign environment

-         A grain of truth

-         Early success

-         More money than ideas

-         Willing suspension of disbelief

-         Rejection of valuation norms

-         The pursuit of the new

-         The virtuous cycle

-         Fear of missing out


June 2008 had all of these. All you had to do was be around shipping at that time, and there was money to be made. To be a shipowner was to be one of the golden, one of the chosen few. China was the new thing, the thing that pushed everything on, the thing that was so big it could never stop growing. We thought the party would never end.


In retrospect, the crash of 2008 was not a shipping crash but a financial crash. China still had some way to go before supply could catch up, but catch up it did. 2012 spelt the real end of the dry bulk shipping boom, and although a couple of dead cat bounces after that encouraged people to order more ships, it was the reaction to these bounces that drove the freight market into the abyss of 2016.


But the prior to Lehmann Brothers we had it all. We were gods, immortal, high on Olympus seeing everything clearly, and more than that seeing into the future too. We didn’t think we were lucky, we were there because of our unique skills and talents. Of course we soon realised that were just mere mortals living through extraordinary times. We were human. We believed what we wanted to believe.


Recent research by psychologistsBen Tappin, Leslie van der Leer and Ryan McKaylooked at political bias in the US Election, and wanted to tease apart two psychological tendencies that are often conflated: confirmation bias and desirability bias. Desirability bias is wishful thinking: we see what we want to see. Confirmation bias is our tendency to see what we expect to see. The problem with 2003-2008 is that both combined into a deadly bubble. Desirability bias led us to see the good times as never ending and we were proved right by the market rising higher and higher. The numbers proved what we wanted to see. When the numbers no longer proved our case, we were left with hope, and as we all know hope dies last. It took many of us a long time to readjust.


But because they were numbers and not feelings they were more dangerous because they had the appearance of science. We transposed emotion onto numbers and were comforted in our irrationality. I remember that meeting in Syntagma so well because of the uneasiness I felt even when the numbers were so good. My gut instinct told me something was wrong before the numbers did.


Back in the 19thCentury Charles Darwin caused uproar by suggesting that there was no absolute intelligence out there creating the world. Instead this beautiful place in our universe was created by absolute ignorance. Although we want to believe in the absolute intelligence of the market, in fact it does not have any intelligence of itself. It is the product of many different inputs and influences, all of which affect the market, in unpredictable ways.  


I am not for one minute suggesting that we should all retreat into blind ignorance, but that markets are not driven by an intelligent, i.e. controlling force. We cannot see the whole picture. Imagine working on the Manhattan Project for the first nuclear bomb. How many people knew what they were actually working on? How few knew the whole picture?


We, being humans, therefore tend to anthropomorphise the markets; when we describe markets as being firm or soft, we are describing feelings, literally how something feels.


So how do I as a broker, making money on the back of these feelings, make sure that I do not lead my clients into black holes? Well I have taken some steps, one of the most important being to make myself responsible for my own opinions. By becoming partner responsible for sale and purchase at Ursa Shipbrokers I am free to say what I think, not repeat the dogma of the bottom line. When I started the S&P desk four years ago, I was one of the few brokers at the time who said that the end of 2013 and the beginning of 2014 was a selling, not a buying opportunity. It was not a particularly lucrative opinion, but it was correct. A ship I sold then for over US$ 10 million is now being negotiated at around US$ 4.5 mill, and even that is a 100% improvement over 18 months ago.


Another important step has been the consequent evolution of my thinking of what a broker is. I have come to think of broking as a craft, and brokers as craftsmen. There is a theory that about 10,000 hours of experience of a certain activity will provide a master craftsman. Think of cabinet makers, or jewelers. They require competence and engagement to become masters of their craft, but also need a lot of time to develop it. For a broker I think this is actually a bit harder, because there are many different skills involved, one of the most important being the area of human engagement, which is always fluid.


According to Richard Sennett,ProfessorofSociologyat theLondon School of Economics,there arethree abilitieswhich should form the foundation of the craftsmanship: to localize, to question and to open up.


The first involves making a matter concrete; the second, reflecting on its qualities; the third, expanding its sense. The carpenter establishes the peculiar grain of a single piece of wood, looking for detail; turns the wood over and over, pondering how the pattern on the surface might reflect the structure hidden underneath; decides that the grain can be brought out if he or she uses a metal solvent rather than standard wood varnish. To deploy these capabilities the brain needs to process visual, aural, tactile and language-symbol information simultaneously.


The broker needs to do this in many different areas, gathering knowledge, interpreting it, marketing, negotiation, execution as well as servicing relationships themselves. The best brokers can do this without consciously thinking of the process: visually, in conversation, and as Professor Sennett says, processing language-symbol information (words and numbers), simultaneously. Less experienced brokers struggle, naturally. Training is therefore extremely important.


Over the next few weeks I will be exploring the likely prospects of the dry sale and purchase market as we move into a critical period, i.e the consolidation (or otherwise) of the new cycle which started early last year. This will not be exclusively a numbers exercise, in the traditional sense of bank or brokers reports, although I will be using the opportunity to mock and criticize them as usual. Instead I want to see if through a synthesis of various points of view I can convince myself, and therefore you, of my present gut feeling which is that the window for buying is narrow and closing, but also that the window for profit taking, either through the freight or the S&P markets, will be limited too.


This will result either in a self-fulfilling prophesy or turn into a crisis of faith. I am open to either eventuality because in the end my self-respect as a broker, depends on the quality of work that I do, and I should make the effort to do so. And as Professor Sennett says:


The self-respect that people can earn by being good craftsmen does not come easily. To develop skill requires a good measure of experiment and questioning; mechanical practice seldom enables people to improve their skills. Too often we imagine good work itself as success built, economically and efficiently, upon success. Developing skill is more arduous and erratic than thisthe abilities to localise, question and open up problems that can result, eventually, in good work….in the end, they can achieve a sense of self-worth - which is reward enough.


Through this work I hope to be better able to identify opportunities for my clients, which are, after all, the people that matter most.


Simon Ward