Sic Transit Gloria Mundi

February was marked by declines in equity and fixed income markets. Compared to January, the S&P 500 declined by 259 bps from 628 bps to 369 bps, and the Bloomberg Barclays Aggregate Bond Index fell 287 bps from 328 bps to 41 bps.  In both cases, the root cause was the realization that inflation was still present, despite Jerome Powell encouraging markets that it had peaked by using the word disinflation during his February 1, 2023, FOMC press conference.  Investors believed he had advance knowledge, which recent data has clearly proven he does not. The economy is still strong with the impacts of higher rates experienced unequally by age, race, profession, and geography. Dallas is booming, while San Francisco is dying. There is still significant stimulus in the system from the 2021 American Rescue Plan Act, the bipartisan Infrastructure Bill, and the mislabeled Inflation Reduction Act.  We are positioned for inflation that will be present for longer.  We see market volatility as an opportunity to pick up assets.  We agree with the observer who said, we have gone from TINA in 2021 (There is no alternative to equities) to TATA (Treasuries are the alternative) in 2023.

We are towards the end of earnings season, where companies present their last quarter’s results and often offer guidance for the coming quarter or year.  We have seen in certain cases our holdings exceed consensus expectations and offer weaker than expected forward guidance.  Forward guidance ranks with long-term economic forecasting in uselessness. We look at the information signaling that the trading post-earnings provides.  If a company reduces guidance and the stock price doesn’t fall very much, it tells us that all of the bad news is likely priced in and vice-versa. Post-earnings we can speak to management teams.  We visited recently with the CEO of one of our holdings. In Norway, some of the best and the brightest go into shipping, as opposed to my fellow Wharton graduates who are pursuing careers in consulting, financial engineering, or even worse, social media.  Being a consultant is like owning a Ferrari but paying a chauffeur to drive while you sit in the passenger seat. Last, we find opportunities.  Overall, for shipping equity investors, it is the reopening of China that is supercharging demand. We have spent much time commenting on energy because current policies provide significant opportunities.  Recently, we read an insightful article in a liberal, Jewish publication that stated that rapid decarbonization was a post-Christian secular religion.  Perhaps that explains recent policy decisions.  For example, the Northeast, especially Connecticut, Massachusetts, and New Jersey have committed to offshore wind despite being physically close to 30% of the nation’s natural gas reserves in Appalachia.  Offshore wind is ruinously expensive when paired with the Jones Act.  The Jones Act requires using an insufficient fleet of vessels costing triple the world market rate to build with four times the operating costs. Given that Appalachia’s gas reserves are trapped due to pipeline capacity which the Northeastern and New England states refuse to build, the beneficiaries are primarily Louisiana and Texas.  Among the biggest political contributors to the robust Texas economy are Governor Hochul of New York and Governor Newsom of California.  On the other hand, Newsom and local San Francisco politicians are solving the apartment crisis in Northern California.  By significantly diminishing the quality of life in San Francisco on a range of metrics, rents have stopped rising.  One method of fixing an apartment shortage is to build more multifamily housing.  They have chosen another, causing citizens to depart, which is equally if not more effective. It may even be more politically advantageous as the most committed supporters remain. Since 2020, 32% more California residents have left the state than did Oklahomans during the Dust Bowl. As Texas residents, we directly benefit.  States are laboratories for various public policies, with the results plain for everyone to see.