[November 1, 2023]
In October, equity and bond markets were negatively impacted by rising rates, resulting in the worst October for stocks in 5 years. Many investors and CNBC commentators have acknowledged they have been wrong in their predictions of lower rates and a recession for the last 12 months. They note however, that a recession is coming soon and will force the Federal Reserve to cut rates in 2024. They cite rising subprime auto delinquencies of 6.1% and other traditional signs of economic weakening. We remain skeptical. These commentators are missing the impacts of Congressional and Federal policies that have turbocharged the wealth of large US population segments, mainly college-educated middle age individuals who own their homes. Since 2019, US housing prices are up approximately 20%. These increases have been driven by demand for housing by millennials and were exacerbated by interest rates that were too low for too long and local regulations that stifle new building. These interest rates inflated home values and allowed 80% of homeowners to lock in borrowing rates of 5% or less, dampening turnover at a time of 8% mortgages. Today 45% of US college graduates ages 55 to 64 are millionaires compared to 1% of families under 35. Home equity is one of the main reasons. Boomers are still spending, boosting the economy, and causing the US to avoid a recession. Barron’s in this week’s issue declared it is the time to buy US ten-year treasuries because 5% is historically a fair rate given that we are headed for a slowdown. They may be right, but as we don’t see a recession, we hesitate to extend the duration of our fixed income investments, although we continue to upgrade their quality.
We continue to remain optimistic about our shipping portfolio. Some of it is short-term seasonality, in other cases various sectors are benefiting from more fundamental constraints. In a meeting with the CEO Sam Norton in October, we learned the US Jones Act Fleet is protected from overexpansion not only by a lack of shipyards and new ships, but also by a shortage of able-bodied seafarers. Given that US merchant mariners work 70 days on, 70 days off, it would take at least two years under current regulations to qualify a seaman. Personnel issues also impact global shipyard capacity. Not only are there half the shipyards in business today as there were 15 years ago, their employees are also aging. The average Korean shipyard welder is 57 years old. Shipowners are like real estate investors. If they receive $1.00 in equity, they will try to buy $10.00 in new ships, even if the returns are substandard. Given that the order books for crude tankers and dry bulk vessels are at record lows, the yards are full, and prices are high, we don’t worry about a supply of new ships arriving and destroying the market as they have in the container trades.
In October, we continued to travel extensively, attending conferences both in New York and Monaco. While we are saddened but not surprised by current events, we came back with some key insights:
- In the sphere of economics, income inequality is accelerating in the US. In 2021, when Joe Biden assumed office, he brought with him a cadre of academic and progressive economists who he charged with changing the economic paradigm. “We want to reward work, not just wealth.” As Elizabeth Warren aptly noted, “Personnel is policy.” He took the policy prescription “to go large” and to spend aggressively, justified by now discredited modern monetary policy and formerly discredited Keynesian economics. He has succeeded, establishing a large deficit at a time of full employment. Between the Infrastructure Bill, the Inflation Reduction Act, the cancellation of $127 billion of student loans and his refusal to address entitlements, he has created more millionaires among the older upper middle class than any President in recent memory, at the expense of the majority of less affluent Americans. Those who rent, borrow to buy cars, don’t own stocks, or are not public employees are significantly worse off today than in 2019. They have seen their living standards decline significantly.
- Politicians are discovering the costs of thoughtless decarbonization, although the rhetoric and policy prescriptions remain unchanged. There are unfortunately numerous examples. On Thursday, October 26, the shares of Siemens Energy fell 39% as it was reported that they were seeking German Government guarantees after big setbacks in their offshore wind unit. It is another sure-fire bet on the surging appetite for carbon-free energy that went bad, due to faulty turbines and cost overruns. On the same day, Hertz Global Holdings, Inc. (HTZ) on their Q-3 ’23 earnings call, noted that “Collision and damage repairs on an EV can often run about twice that associated with a comparable combustion engine vehicle.” In the UK, average EV insurance costs rose 72% in the 12 months ending 9/30/23, while John Lewis, a major British retailer that also sells auto insurance to its shoppers, has suspended sales of its EV policies as its underwriter is reassessing the costs of repairs. In the US, auto insurance premiums are up 30% since 2019 and adding to inflation and misery, with rates likely to continue to rise as EV sales increase.
If you read the New York Times or listen to National Public Radio these days, you are dismayed. Economic inequality is getting worse, not better, pushing many Americans to look to populists to address their declining standard of living. They ignore President Biden’s and Paul Krugman’s exhortations that they are better off today than in 2019. You embrace the New York progressive agenda, and don’t understand why 546,000 residents in 2022 ignored the increasingly conservative politics of Florida and Texas and have moved there to take advantage of a much lower cost of living. You are aghast when Marc Rowan, Apollo’s CEO and a major donor to Wharton and the University of Pennsylvania, my alma mater, spearheads an alumni revolt against a tone-deaf University leadership that has attracted thousands of participants. We see analogies in equity and fixed income markets. We hear investors say markets are unpredictable. On the other hand, it is clear that today many issues we face such as income inequality and inflation, are the logical outcomes of policy choices made one and two years ago. We don’t know if and when they will be rectified, only that we will be surprised if it is quick. As Mark Twain wrote, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”