Gil’s Musings

ESG Shortcomings Are Exploitable


The impending recession that the bumbling federal reserve seems intent on creating will present some risks and some opportunities. While they signal that they may be finished with hiking rates, current employment numbers are still too high, and the Fed will hike until they break something. One could argue that the first cracks are showing in the banking business. 

The Fed initially disavowed any responsibility for the collapse of Silicon Valley Bank. They have recently backtracked a bit and issued a resounding maybe. Since Barney Frank is on the board of the now-smoking-embers Signature Bank and was at the epicenter of policy leading directly to the 2008 financial crisis, who could have predicted? I plan on following Barney’s career more closely in the future, not out of curiosity, but to find securities to short. 

The next musing will explore the hapless Fed further, but for now, I want to focus on the opportunity set before us. Segment has done a pretty fair job of tactically allocating into and out of energy dating back to 2015. We’re batting about .750 on that. The Segment Rising Dividend Strategy has outperformed the SP500 in several recent years accordingly, but particularly in each of the past two years owing precisely to our timely energy overweights and underweights. We are currently underweight. This will hopefully change during the depths of the impending recession because the next energy rally should be a doozy. 

A confluence of several factors will drive the next rally: ESG and institutional abandonment of E&P and midstream, virtue signaling politics bent on starving producers of capital, misguided climate change regulations, power grid incapable of meeting incremental electric demand, teetering banks with reduced risk appetite, misguided EV policy and expiring incentives, highly disproportionate global natural gas prices, and forthcoming LNG exports robbing us of domestic supplies. These factors will conspire to reduce production resources at a time when the eventual economic rebound will demand higher supplies.

One of the ESG movement’s major drawbacks is that it favors non-economic factors over economic factors. Adherence requires investors to choose to leave money on the table. For non-participants, that’s a feature, not a flaw. Those opportunity dollars are available to the rest of us who can see through this nonsense. 

With natural gas prices dropping 60% in the past year, we are in the windup phase of a fat pitch. We believe it is too early to back up the truck on energy, but we are warming up the engine, and yes, it’s a diesel. 

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