December 2022 results (As of 12/23/22) have reflected much of the same dynamics as earlier months such as August 2022. Markets focused on reductions in goods inflations (Used Cars, Rents and Energy among others) while ignoring wage pressure and other key service indicators. They believed that the Federal Reserve and other Central Bankers were wrong and were ready to pivot shortly. When the Fed and other major Central Banks confirm their strategy of higher rates for longer, the results were global equity sales. 2022 feels like being in an endless Road Runner Cartoon, with growth stocks taking the role of Willie E. Coyote. Even more difficult from the Federal Reserve’s perspective, labor supply seems to have changed during Covid-19. While there may be too many tech employees, it is far outweighed by significant shortages of blue collar and other workers. Inflation cannot be tamed unless wage increases decline. There are some benefits from these dynamics. Today we are getting a 4.24% yield in our prime money market fund with no duration risk. A year ago, one had to take significant risk to get a similar return, as the Bloomberg Barclays High Yield Bond ETF yielded 4.27%, a mere 3 bps higher than current money market funds. In terms of allocation, we are finishing the year close to the maximum of our fixed income allocation of 20% of our portfolios and the minimum of our equity band of 35%.
In shipping, the only known certainty is that we don’t know. At this time last year, no one was predicting the strength of tankers or the decline of container shipping lines and lessors. It should make one circumspect when examining industry projections beyond 30 days. We come away as investors believing that one buys when sectors are hated, and the stocks are expensive on a P/E or EV/EBITDA basis because there are no earnings or EBITDA. On the other hand, we sell when the stocks become cheap on a P/E or EV/EBITDA basis. It is the opposite of most growth investing, where one looks for increasing earnings momentum. The good news as active managers is that we don’t see a passive index threat to shipping equities.
Friends have accused us of being pessimistic, but we are optimistic. It is just that we are positive about different things then they are. There are those who are waiting for the decade of quantitative easing to start anew, while we are looking for upside from the beneficiaries in a new environment of higher interest rates, the use of traditional valuation metrics and management teams that focus on maximizing shareholder value as opposed to focusing on fads. That certainly includes asset managers and ESG investing. In 2022, the largest conventional energy ETF has outperformed the largest clean energy ETF by approximately 67%. So much for the dangers of stranded assets. Still, old habits die hard. As we write, the Senate has just passed the $1.65 trillion Omnibus spending bill, which continues to add unnecessary stimulus to the US economy. Investors have lost billions trying to fight the Federal Reserve and other Central bankers. When the Fed changes, so will we. In the meantime, we are focused as we have been since 2016, on buying when risk/reward favors us, and maintaining strict risk control. When the tide rolls out, you can rest assured we are wearing our bathing suits.