November 2022 returns built solidly on October’s strength. Markets globally were relieved when Federal Reserve Chairman Powell confirmed expectations of slower rate hikes to the federal funds rate target. The November midterm elections concluded with a divided government, which makes it unlikely that any expensive major legislation will get passed. Black Friday as well as some positive retail earnings show that Americans are still spending, although they have clearly shifted from goods to services and are looking for bargains. The collapse of crypto so far has not spread to the general economy, although there are numerous CNBC guests with egg on their faces. On the other hand, it may be too soon to declare victory. Chairman Powell emphasized the FOMC may keep the policy rate at peak levels for longer. We haven’t changed our basic view that investors will want real returns for lending money, similar to the last 4,000 years with the exception of the period of 2009 to 2021. Employment remains strong, except for tech and finance.
As we write, the European sanctions as well as the price cap goes into effect. Looking at this week’s price action, markets are not expecting too much. Then again, a week ago on Saturday, we thought China was going to be in Covid-19 lockdown forever. Six days later, we seem to be certain that China is reopening at some point in the future. The first scenario was negative for shipping, while the second is bullish. The long-term fundamentals for tankers and dry bulk are the best they have been in years, but we only have limited future visibility, which means investors need to be flexible.
One of many unavoidable side effects of the Covid-19 crisis has been the empowerment of centralized government bureaucracies. They are superb at giving away money but have too high opinions of their competence in the other areas. The Federal Reserve drove interest rates to zero at the cost of significant asset inflation, such as housing. Now as the Fed attempts to rein in inflation, with higher interest rates and house prices, only 30% of Americans can currently afford to buy a home in their state. In energy, the Strategic Oil Reserve has been used to influence gasoline prices for the first time. Today the SPR contains the least amount of crude oil since March 1984, which is perilous if the SPR is needed for its intended purpose. The government has increased demand instead of allowing rising prices to destroy it. We are sensitive to these issues, believing the knock-on effects can make the original problems worse. Last year, Germany paid South Africa $800 million to stop using coal. Since then, German imports of South African coal have increased 8x. Today, Germany produces more carbon emissions per unit of electricity than South Africa. The road to hell, it is often said, is filled with good intentions.