Chris’ note: One of the biggest worries on your fellow readers’ minds right now is the threat of inflation. Folks are concerned that record government spending mixed with unprecedented stimulus from the Fed will trash the value of the U.S. dollar.

That’s why today, I’m sharing with you a conversation with one of my favorite investment thinkers, Tom Dyson. Tom writes our Postcards From the Fringe e-letter. And he’s been warning his readers about a coming inflation and a crackup of the dollar-based money system.

Tom has been pounding the table on a way to not only preserve your buying power… but also increase it… through the troubling times he sees ahead. It’s all to do with what he calls “steel that floats” – the cargo ships that form the backbone of global trade.

Q&A With Tom Dyson, Editor, Tom’s Portfolio

Chris Lowe: Let’s start with the 30,000-foot view. What is it about today’s market that got you interested in shipping stocks?

Tom: It all started from the same big-picture insight that motivated me to get into gold. The international monetary system is broken.

The U.S. has far too much debt. There’s no way of rebalancing the economy without inflation and a major devaluation of the U.S. dollar.

And this isn’t happening just in the U.S. The euro, renminbi, yen, pound… they’re all going to become glorified Monopoly money.

I was looking to diversify out of my core position in gold, without moving away from my core insight about the fate of paper currencies. Shipping fit the bill.

Chris: What is it about shipping stocks that makes them a good place for folks who are worried about inflation?

Tom: Ships are hard assets. They’re made of steel. It’s hard to produce more of them. That gives them scarcity value compared with U.S. dollars, which the Fed and Congress are producing in record quantities.

Also, as inflation brings up the cost of commodities – especially steel and scrap steel – ships become more expensive to build. So supply stays low. Shipping companies can keep the rates they charge high, because competition is limited.

And you get more for selling old ships for scrap. That puts a floor under the asset values of shipping companies.

Another thing is shipping companies use a lot of debt. They borrow a lot of money from banks. And inflation is great if you owe money, because the currency you’re paying back the loan in is worth less.

As the asset values and earnings rise, and the dollar depreciates, it’s great news for shipping stocks.

Chris: So many stocks today are selling for nosebleed valuations. Where are valuations for shipping stocks right now?

Tom: That’s what I love about shipping stocks. They’re great value. Especially when you compare them with a bubble stock such as Tesla (TSLA). It sells at 964 times earnings. Shipping stocks sell closer to 24 times earnings. And in some cases lower than that.

Chris: What’s made these stocks so cheap?

Tom: Shipping is a cyclical business. When times are good, and the money is rolling in, shipping companies order lots of new ships. Eventually, this destroys the market with oversupply.

Shipping rates fall, and none of the shipping companies make any money. After a while, they scrap the ships, and they don’t order any new ones. The market rebalances, and then you get the upcycle again.

The whole cycle typically takes about 20 years.

The last years when shipping companies ordered tons of new ships were from 2005 to 2008. China had just emerged on the scene as a big importer and exporter. It was sucking up all the commodities… then exporting finished goods to the U.S.

There was a boom in shipping… but there weren’t enough ships to carry all this stuff. So companies ordered more ships – too many of them.

Then you had the Great Financial Crisis in 2008. Shipping rates plunged along with global trade. And for the last 15 years, except for a couple of blips, it’s been a very weak market.

Chris: That covers the supply side. What about demand for shipping?

Tom: There are different subsectors in shipping. But if we look at container shipping, demand has gone through the roof.

Thanks to COVID-19, most folks aren’t spending so much money on restaurants or holidays. Instead, they’re spending on imported goods such as home furnishings. There’s been an acute shortage of shipping containers… and of capacity to transport containers… as a result.

This pushed shipping containers up threefold over the course of just a few months recently. That makes it difficult for supply chains – especially for smaller businesses – to bring their goods into Europe and America.

I’m bullish on container ships. I’ve recommended a couple of container shipping companies in my premium advisory, Tom’s Portfolio. [To find out how to sign up for Tom’s Portfolio, go here.]

They’ve done very well. One of them was up 158% in just three months.

Chris: Do you have a recommendation for a shipping stock you’d like to pass on?

Tom: Sure. But it’s tricky. Container shipping is doing very well right now. But typically, in shipping, you do best if you buy when the rates and cash flow are at rock bottom.

What I’m most excited about is what they call “clean” products – refined petroleum products such as gasoline, diesel, and jet fuel.

There’s a trend of developed countries shutting down their oil refineries. Refineries are dirty, and they pollute. With the environmental movement, these refineries are closing in Europe, Australia, New Zealand, and America.

They’re moving to places that are more laissez-faire when it comes to pollution, places such as Saudi Arabia, the Gulf, China, and Nigeria. India has a big one.

It makes sense also because many of these places are where the oil is. That way, you don’t have to transport the oil. You just take the oil to the refinery. Then you turn it into the value-added product, like gasoline. And you ship the gasoline to the USA.

I’m simplifying. But that’s basically the trend. And it affects the shipping industry big-time.

You see, ships that carry crude oil are completely different ships from the ones that carry gasoline. And they can’t swap. To transport gasoline, you have to keep the tanks really clean. You can’t have other substances getting in there and ruining the product.

I believe we’re heading into a bull market for shipping of these refined products, as places like Saudi Arabia start shipping them to the U.S. and Europe.

Right now, the rates for shipping clean products and crude are low. The ships are hardly making money. But as I said, that’s the time to buy.

So look at Scorpio Tankers (STNG). It’s a product tanker company. It ships refined products from refineries to railcars, trucks, and pipelines.

It’s a good place to start your search if, like me, you want to bulk up your inflation protection… and make some strong returns along the way.