As we write, we are on our way to Manhattan for the 16th Annual Capital Link New York Maritime Forum at The Metropolitan Club. First, we want to begin by focusing on interest rates after the FOMC reduced the Fed Funds rate in September to 475 bps. Never before has the Federal Reserve reduced rates when markets are at historic highs. There is little financial distress as evidenced by tight fixed income spreads, and no evidence of layoffs. Furthermore, the federal government has poured significant liquidity into the economy, with August federal outlays of $688 billion and federal revenues of $307 billion at a time of full employment. There is a high probability that the Federal Reserve rate cuts will reignite inflation in the coming months. Fixed income investors are beginning to price in such impacts, with the 2/10 yield curve steepening since the rate cut. We would not be surprised to see long-term interest rates and the yield curve higher and steeper in 2025, no matter who wins the US presidential election. Indeed, the US 10 Year Note is yielding more today than it was prior to the Federal Reserve’s September actions.
As to shipping, we, like others, are waiting to see more details on Chinese stimulus. After speaking to Chinese experts, we believe it is a 4 to 6 on a scale of 1 to 10, with 10 being 2008. We remain fanatical about risk control. Overall, this process has served us well, although from time to time it has resulted in us selling a stock or a group of stocks at the bottom. We have significantly reduced our exposure to the offshore oil industry. We still believe in the long-term viability of the industry given that we are nowhere near peak oil and replacement values are significantly higher. However, the pace of rig employment has slowed, and for the stocks to work, we need to see the number of idle units/white space shrinking. We are now looking for the point when estimates and guidance comes down, and the stocks are up to buy more.
We came away from a recent trip to London believing that under the guise of EU industrial policy, Europe is slowly committing energy and economic suicide. However, the UK under its Labour government is becoming the clear leader in the European degrowth movement. Labour is reinstituting stringent net zero rules, which will leave the UK without a reliable energy grid. Under the direction of Ed Miliband and Keir Starmer, they are ramping up offshore wind and other renewables, while accelerating the closure of their North Sea fields. At the same time, Labour is targeting AI for investment with a planned data center building blitz. However, the electricity in the West London cluster, home to the biggest collection of data centers outside of the US, is at full capacity and unable to connect any more sites. Also, the industrial cost of electricity in the UK is the highest in the developed world, 50% more expensive than Germany and France, and 4.0x US rates, which makes the UK’s AI initiative even more likely to fail. The new government is preparing to introduce an Employment Rights Bill next month. Flexible working will become a default right for staff from day one, with employers only able to refuse if working from home is not practical. Workers wouldn’t have to check emails or take after hours work calls, and bosses would not be allowed to pester them. Americans shouldn’t feel smug. As Texas residents, we see the political leadership of New England, the West Coast and Illinois following similar paths to great success, if their goals are to lower economic growth and increase the number of young professionals departing for the South and Southwest.
