Fanatics Protest From a Steel Cell

You might think that using a crane to place steel boxes so as to block all the entrances to a global energy corporation might attract some attention before completed. Nonetheless, Greenpeace successfully demonstrated a gap in business continuity planning, just hours before BP’s annual general meeting. Even at 3am, BP’s global headquarters should have had some security staff on site. They might be expected to notice the unplanned delivery of five steel boxes so as to block access to the building. Perhaps they were taking a nap. It must have led to a lively exchange between the head of security and senior executives.

Greenpeace BP Protest

People sealing themselves inside a chamber with several days of food and water should perhaps be allowed to languish for somewhat longer. One imagines that, had this imaginative protest occurred in Houston not London, the authorities’ response would have been different.

The steel boxes and the fuel for the cranes were enabled by the type of petroleum products BP produces, but this well-worn criticism of environmental activists (do protesters ever cycle to their protests?) is not our point. The energy industry is under attack by a small but vocal group who deny science to try and impose their own quirky vision of 18th century living standards on the rest of us.

Enbridge (ENB) told us last week they would not attempt a new, “greenfield” crude oil pipeline in Canada given the unpredictable approval process. New York recently denied Williams Companies (WMB) permission to build a natural gas pipeline connecting the Marcellus Shale in Pennsylvania with consumers in New York City. Boston relies on Russian imports of liquefied natural gas in winter, because new pipelines to bring domestic natural gas have been successfully opposed.

80% of the energy that supports modern life comes from fossil fuels and it’s never been cheaper. Living standards and longevity in developing countries are improving due to greater energy use. In spite of this undoubted success, the energy sector has lost the PR battle. Providing the world with what it clearly wants draws the smug opprobrium of those whose fixation on solar and wind power includes opposition to nuclear energy. Bill Gates, who writes thoughtfully on big subjects, has questioned the focus on R&D for renewables instead of more on cleaner use of fossil fuels: “Should you really be funding the intermittent stuff with all the money and putting no money in the stuff that works all the time?”

The tobacco industry has no claim to improving well-being, but does share with the energy sector a constant need to apologize for its existence. 25 years ago, big tobacco was being sued by U.S. states and individuals for the terrible health outcomes caused by its products. In 1998 they entered into a Master Settlement Agreement with almost all U.S. states, agreeing to pay billions of dollars over many years.

We are no fans of tobacco companies and the morality of energy companies is wholly different. But it’s worth noting that much-reviled tobacco stocks have provided strong returns since, as shown in the chart. The Wall Street Journal has included Altria (MO) in its “30 best-performing stocks of the past 30 years”. It’s just behind Apple (AAPL). MO also made the top 25 S&P500 stocks of the past 50 years.

Midstream energy infrastructure offers predictable cashflows that are growing, and will always be out of favor with those who like to inhabit steel boxes. It’s a recipe for attractive future returns.

We are invested in ENB and WMB.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (

Why Keeping Up With Inflation Isn’t Enough

Cher wanted to turn back time to regain love lost. But economists are always turning back time to adjust prices for inflation, to calculate a measure in today’s dollars. This is to provide a relative price, comparable to current purchases.

Although mathematically correct, applied over decades or more it produces a misleading picture of what consumers were spending.

For example, in 1931 Schick launched the electric razor, going on to sell over a million over the next two years. Priced then at $25, there’s no need to convert to 2019 dollars — it was obviously a luxury good. Based on Consumer Price Inflation since 1931, Schick’s new product would now cost sixteen times as much, $412. Today, you can still buy an electric shaver for $25. It probably offers a better shave too.

Buying a shaver was clearly an expense requiring some thought. But by considering only inflation, this analysis assumes disposable incomes have risen by the same rate since then. GDP per capita was $623 in 1931. A razor therefore cost 4% of this measure of annual income per person. Today’s GDP per capita is $62,590, 73 times as big. Incomes have risen roughly four times as much as inflation since 1931, which reflects rising living standards.

If you really want to appreciate the comparative sacrifice required to be quickly clean-shaven during the Depression, Schick’s shaver today would have to be $2,500. That’s 4% of 2018 GDP per capita, the same proportion required in 1931. This more accurately translates the choice consumers made back in 1931.

In 1955 gasoline cost 29 cents a gallon. That’s $2.61 in today’s dollars as conventionally calculated, or $6.96 if we hold it constant as a proportion of GDP per capita. Transport takes up a smaller percentage of household budgets than in 1955. To the anguish of peak oil devotees, driving is cheap.

Incidentally, this is why home prices generally outpace inflation. Incomes, which heavily determine prices, grow faster than inflation. Unfortunately New Jersey, where I live, has denied homeowners this benefit by raising property taxes faster than inflation. But not every state is so poorly run.

The purpose of this thought experiment isn’t merely to demonstrate that stuff used to cost more than you thought; there’s an important investment lesson here. Earning a return equal to inflation on a portfolio, enough to preserve its purchasing power, is every saver’s minimum goal. The point is to be able to maintain today’s standard of living in the future. The problem is that living standards themselves improve.

CPI vs GDP per Capita

A family who earns the median income, which supports an average standard of living, presumably wants that happy state to persist into retirement. In 2000, this average earner brought in $40,597 (median income per family). Correctly forecasting 2% inflation, she would anticipate that $50,000 would be adequate by 2018 to maintain that 2000 lifestyle. Meanwhile, median family income rose to $60,000, because of rising living standards on top of inflation. Following conventional advice, our average family has fallen from the middle of the pack to only 83% of the median income.

Economists retort that our saver can still purchase a basket of goods and services in 2018 with the same utility as she could in 2000. But she’ll feel poorer, because her friends who have maintained their incomes relative to the average will have moved ahead.

There are two points here. First, when it comes to inflation, economics measures what it wants to, not necessarily what non-economists think is being measured or what we want. Most of us care about maintaining our income relative to our peer group today, rather than constant utility.  John Rockefeller’s fabulous wealth couldn’t buy plane travel, internet access or TV during his lifetime. Many of us today enjoy a higher standard of living than the richest people did several decades ago.

The second point is that although investors can’t determine what set of investment returns are available, they should recognize that merely keeping up with inflation is going to leave them feeling poorer than they expected.  Over the past couple of decades, per capita GDP has grown at almost twice inflation. Savers looking to the long term should keep this in mind, and build a bigger nest egg.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (

A Slogan Not Science

JPMorgan’s recent Eye on the Market: Energy Outlook 2019 is the best analysis we’ve seen of the Green New Deal (GND). Author Mike Cembalest, whom I know from when I worked there, as always takes a balanced approach supported by insightful research.

Cembalest breaks down the challenge aided by figures and charts to pick the GND apart. Suppose for example, by 2030 the U.S. achieved:

  • Primary energy use back to 1988 levels
  • 11X more solar generation
  • 5X more wind
  • 90% decline in coal use
  • 40-50% of passenger cars being electric (today 1-2%)

These and related objectives would represent a “Herculean effort” that is unfathomable over the next decade. Even with the necessary political and public support, this would be a path to a 40% drop in CO2 emissions by 2040, versus the GND’s goal of 100% by 2030. If anything, the GND’s unattainability should drive support for significant spending on flood remediation projects, as Cembalest suggests.

Aspirational Goals of the Green New Deal

The conversion of electricity generation to solar and wind receives lots of attention. But electricity represents only 17% of primary energy use. A sobering related statistic is that 2/3rds of the primary energy used to generate electricity (coal, natural gas, renewables etc.) gets lost through thermal conversion, power plant consumption and transmission.

Greener Electricity Helps Modestly

The three big end user sectors of energy are industry, transport and residential/commercial buildings. Industry is more than half – production of cement, steel, ammonia and plastics are the “four pillars of modern society.” Many industrial processes require high heat and temperature, and while electricity can theoretically replace natural gas, it’s 3-5X more expensive. Moreover, that’s based on today’s electricity, which is itself 2/3rds derived from fossil fuels. A 100% renewable electricity supply would be even less competitive.

Fossil Fuels Are Industry's Main Energy Source

Lowering greenhouse gases globally can’t happen without China’s active participation. They produced more than half of the world’s cement in 2017, half the steel, and a third of the ammonia, all substantially used domestically. 85% of ammonia is used in fertilizer, without which the world could only feed half its current population. 40-70% of ammonia used in fertilizer is lost due to leaching or erosion. Its production causes 1% of global Greenhouse Gases (GHGs).

The world currently generates around 34 gigatonnes of CO2 annually (a gigatonne is a billion tonnes). The International Energy Agency (IEA) expects global GHGs to increase by a third over the next two decades with unchanged policies. Rising living standards in emerging economies, led by China and India, will swamp greater energy efficiencies in the developed world. Use of plastics (produced with methane, naphtha and ethane) is forecast to rise by 150% over the next thirty years.

The GND promotes planting more trees. U.S. forestland of 750 million acres captures 10% of emissions. A 2017 study found that replanting trees on 20 million acres of cleared land could offset almost 1% of U.S. GHGs. This would be challenging; current U.S. Forest Service efforts are 120 thousand acres, around 0.5%.

Natural Carbon Capture_U.S. Forests

Germany’s “Energiewende” has impressively lifted their renewable share of electricity generation to 38%. However, emission reductions are disappointing. Phasing out of nuclear power, and renewables intermittency (it’s not always sunny and windy) have increased use of coal. Further use of wind requires substantial investment in transmission infrastructure to link the windy north with population centers in the south.

The report is full of fascinating facts like these. Vaclav Smil is JPMorgan’s technical advisor. Smil is the author of 40 books, such as Energy and Civilization: A History. He’s a highly regarded thinker and his writings on energy development and use are absorbing. Smil, who is Bill Gates’ favorite author, describes the GND as “…not a useful foundation for a serious policy discussion.”

Energy Outlook 2019 ranks among Mike Cembalest’s best pieces of work. It’s highly readable.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund, please click here.

SL Advisors is also the advisor to an ETF (

Energy Infrastructure is Results-Based ESG

Investing based on environmental, social and governance principles (ESG) is intended to make the world a better place. It’s a loosely-used term, and definitions vary widely. Seeking companies with good governance seems so obvious that it scarcely belongs in ESG. But environmental and social principles carry the suggestion that investment return shouldn’t be the only criteria. If ESG policies were as reliably profitable as, say, intelligent capital allocation, there would be no need for their own category. Yet some argue that selecting investments based on ESG criteria delivers better results, which is a tautological argument.

ESG funds are gaining assets, thereby drawing the attention of executives. It can be amusing to watch the hoops companies jump through to claim they’re ESG-worthy. Most attention is focused on the environmental aspect, given the ongoing debate about climate change. The aspirational Green New Deal (see The Bovine Green Dream) sets such impossible objectives that even its Uber-using author AOC allows that, “Living in the world as it is isn’t an argument against working towards a better future.” (see The Green New Deal’s Denial of Science).

America Runs on Fossil Fuels

Most companies are sensibly aiming a little lower. Apple claims that their company is “globally powered by 100% renewable energy.” Such claims involve sleight of hand – since they can’t control how the electricity they use is generated, they purchase renewable credits to get their energy sums to foot. In any case, their employees mostly don’t walk or cycle to work, and iphones are made of plastic which comes from petroleum products, or (increasingly in the U.S.) ethane.

Tesla has pulled off a marketing coup by associating its electric vehicles with clean energy. Two thirds of U.S. electricity is produced from fossil fuels. Some states, such as Wyoming, rely 100% on coal because it’s locally abundant. Is a Tesla buyer in the Cowboy state helping? Does Tesla merit support from environmental activists?

Moreover, countless consumer electronics use cobalt in their batteries, the mining of which should put any ESG claim to shame.

The climate change debate is littered with good intentions and burdened with bad ideas that mostly won’t get done. Although most Americans believe humans are warming the planet, two thirds wouldn’t even pay $10 per month to combat it, a statistic that should give GND supporters with their unlimited spending goals something to consider.

Results are what count. America has achieved a 14% reduction in CO2 emissions from 2005 levels, largely through the substitution of natural gas for coal in electricity generation. America’s energy business, powered by the Shale Revolution, has achieved this, against widespread wrongheaded opposition from environmental activists. Other countries that rely more heavily on renewables, such as Germany, have moved backwards because their intermittency has increased reliance on coal. Germany’s decommissioning of its nuclear energy plants hasn’t helped.

If results matter more than intentions, America’s pipeline companies have probably contributed more to reduced emissions than any other sector. Moreover, if you supply an ESG-rated company with its energy, shouldn’t that by definition qualify the supplier to join the ESG category?

Virgin Atlantic Airlines has a sustainability program (Change is in the Air). If an airline thinks it’s an ESG member, the pipeline that delivers its jet-fuel must surely belong.

America’s energy infrastructure is boosting natural gas production, so much so that we’re increasingly exporting it. As a consequence, coal use is being constrained around the world from what it would otherwise be. This sector is leading successful efforts to fight global warming. Its ESG credentials are as strong as any.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund, please click here.

SL Advisors is also the advisor to an ETF (

The Green New Deal’s Denial of Science

Environmental activists who are against all fossil fuels often accuse their opponents of being “climate deniers”. They claim a scientific basis for their often extreme views, asserting that rejecting their solutions for climate change is to reject science.

In fact, the Green New Deal (GND) and its supporters use science selectively to support their objectives and reject science where it suits them. The GND has been widely criticized for its extreme and implausible call for the elimination of fossil fuels (the House resolution calls for, “eliminating pollution and greenhouse gas emissions as much as technologically feasible” (italics added). Note there’s no mention of economic feasibility or any consideration of cost/benefit tradeoffs. It seeks, within a decade, “meeting 100 percent of the power demand in the United States through clean, renewable, and zero-emission energy sources” which isn’t technologically feasible today, and certainly is economically implausible.

World Energy by Source

The GND also threw in a socialist economic agenda, including a Federal job guarantee. Its critics seem far more numerous than its supporters, and include us (see The Bovine Green Dream).

Any serious effort to limit Greenhouse Gases (GHGs) must incorporate nuclear energy. The GND House resolution is silent on the topic. The infamous FAQ document that was released and then disowned by Bronx Congresswoman Alexandra Ocasio Cortez (AOC) called for decommissioning nuclear power.

Nuclear's Share of the Energy Market

The scientific evidence supporting greater use of nuclear energy is strong. The world has built a powerful safety record. Accidents at Three Mile Island (1979), Chernobyl (1986) and Fukushima (2011) promote widespread public fear of nuclear reactors. But per Kilowatt Hour (kWh) of energy produced, the European Union and the Paul Scherrer Institute, the largest Swiss national research institute, found that nuclear power is safer than coal, oil, gas and even (by a slight margin) wind as a cause of deaths.

Coal power stations, for example, expose the public to nuclear radiation because coal ash typically contains uranium. The journal Science noted that living near coal-fired power stations exposed people to higher radiation doses than experienced living near nuclear power plants.

Because a nuclear accident carries such potential for devastation, the industry has developed a culture of redundant safety and continual improvement. Knowledge is widely shared within the industry globally, and the record bears this out.

A nuclear incident provokes images of Hiroshima, with enormous loss of human life and widespread radioactive contamination. But nuclear physicists argue, with plenty of evidence, that the process by which nuclear energy is harnessed doesn’t involve this risk. Apparently, during the Cold War neither Russia nor the U.S. targeted the other’s nuclear power plants because the likely damage would be modest.

The main risk with a nuclear accident is the release of radiation. Any death is tragic, but all energy production carries risks and a dispassionate analysis must consider the benefits and risks of any fuel source in combination.

Those who claim to care about climate change but reject increased use of nuclear power are rejecting science. Mike Shellenberger, who writes thoughtfully about such issues, has said, “The problem with nuclear is that it doesn’t demand the radical re-making of society, like renewables do, and it doesn’t require grand fantasies of humankind harmonizing with nature.”

Radioactivity occurs naturally all over the world. Embracing sunlight and wind as more natural than uranium is a belief system but isn’t a scientific solution to meeting the world’s need for power.

The GND has probably set back serious efforts to address climate change, because its wild extremism shows its supporters to be more interested in demagoguery than solutions. It may fire up a minority, but it betrays little interest in debate.

The Sierra Club, which also opposes nuclear energy, continues to work against any fossil fuels. Over the last decade, the U.S. has achieved a greater reduction in CO2 emissions than any other country (see Guess Who’s Most Effective at Combating Global Warming) because of power plants switching from coal to natural gas.

Growth and Declining Emissions

AOC’s hypocrisy is on full display, as she shuns the New York subway and defends her frequent Uber use: “Living in the world as it is isn’t an argument against working towards a better future.” The GND’s main author lives Animal Farm egalitarianism (“some…are more equal than others”).

At SL Advisors, we are helping finance America’s use of cleaner fossil fuels like natural gas in favor of coal, which we avoid. We are doing our bit to lower GHGs and make a better planet. We’re doing more than the Sierra Club, AOC or the GND supporters, because we’re focused on solutions that are effective today. The debate about climate change would benefit from more scientific rigor.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund, please click here.

SL Advisors is also the advisor to an ETF (

Here Comes The Sun: The Bright Future of Oil and Gas

The United Nations Human Development Index (HDI) combines life expectancy, education and income to provide a more complete picture of well-being than simply considering GDP per capita. If one chart can illustrate the global challenge of combatting climate change, it might be the scatterplot below.

United Nations Human Development Index

HDI is inextricably linked to energy consumption. 100 Gigajoules (GJ) per head is approximately where improvements in HDI begin to flatten out. 80% of the world’s population lives below this level, and presumably aspires to it. Much of the developing world is in this category. The UN recently recommended the adoption of policies to limit global warming. The Green New Deal went further, with highly impractical solutions (see The Green Bovine Dream).

The world wants more energy and reduced emissions. The 2019 BP Energy Outlook acknowledges these conflicting goals. Its base case (called Evolving Transition) predicts that by 2040 two thirds of the world’s population will still be under the 100 GJ threshold, while CO2 emissions will have grown. This compromise will satisfy few, and it’s their central forecast.

The world relies on fossil fuels for 80% of its energy. Critics will claim BP sees their continued dominance because their entire business locates, extracts, processes and sells them. But BP’s outlook forecasts a 20 year penetration rate for renewables of 15%, around triple that experienced historically by oil, gas, hydroelectric or nuclear power as their use ramped up.

Renewables Outpaces Other Energy Sources

BP’s report includes many interesting conclusions out to 2040:

  • Global energy consumption for road use will fall
  • Aviation energy use will rise
  • Developing world energy use will rise sharply, led by China and India
  • Electric vehicles will represent 15% of the global fleet and 24% of vehicle/kms driven
  • Renewables will be the biggest source of electricity generation
  • Coal will be #2, above 25%, because of continued increasing energy demand
  • 53% of EU power supply will be from renewables

The report considers other scenarios, including public policies that accelerate the move away from fossil fuels. If this led to a sharp drop in crude demand, the report speculates that low-cost oil producers might react by ramping up production to avoid having stranded assets. It’s thought-provoking — sell now or miss your opportunity. Such a price collapse would stimulate demand, slowing the energy transition.

Renewables Fastest Growing Energy Source

Returning to the base case, renewables will gain market share in developing countries faster than in the OECD. It may surprise to consider rising energy demand lifting renewables penetration. But energy use is capital-intensive.

Today’s gasoline-burning automobiles last over ten years; power plants can run for 30 or more, and energy inefficient buildings can have many decades of useful life. It’s hard for a new solar farm to compete on economics with an existing natural gas burning power plant.

OECD energy consumption looks to be flat, as population growth is offset by efficiencies. This means renewable infrastructure is replacing something older, and wholesale decommissioning of assets with years of useful life left is an extreme, unlikely solution. By contrast, growing energy demand in emerging economies allows renewables to gain market share. Rising living standards in developing countries will reduce bus use in favor of private cars, hence the jump in vehicle/kms and, most likely, epic traffic jams.

Aviation Biggest Source of Transport Demand

Overall, the report’s central forecast for a substantial increase in renewables and in electric vehicles should be welcomed by those environmental activists who acknowledge the enormous challenge in such an energy transformation. BP’s conclusions are broadly echoed by other long range forecasts, including those from the U.S. Energy Information Administration, the International Energy Agency, Exxon Mobil, IHS Markit and CNPC Economics & Technology Research Institute. This is not a radical outlook.

Nonetheless, natural gas demand is expected to grow at 1.7% annually. Crude oil demand growth of 0.3% reflects rising non-combusted demand, such as for plastics and lubricants offsetting less from private vehicles. Aviation demand will grow.

The U.S. is supremely well positioned for these long term trends. Production costs are falling, and the short-cycle nature of shale (see The Short Cycle Advantage of Shale) continues to attract capital at a time when 20 year investments in oil and gas projects are exceptionally hard to assess.

U.S. midstream energy infrastructure will remain vital to meeting the world’s growing demand for oil, gas and natural gas liquids, even while the multi-decade transition to non-fossil fuels is underway. The sector remains attractively valued after a strong couple of months, with distributable cash flow yields above 10%, substantially higher than REITs’ equivalent funds from operations yields of around 6%. From our vantage point, rising dividends are drawing in new investors.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund, please click here.

SL Advisors is also the advisor to an ETF (

Buffett Rethinks Brands; He Should Consider Pipelines

Like Warren Buffett’s legions of followers, we enjoy reading his annual letter. He writes as clearly as he thinks. Buffett’s also a great interviewee, and his TV appearances with Becky Quick on CNBC are engaging – although it’s quicker and almost as illuminating to read the transcript.

Buffett is quick to admit mistakes, which simply highlight how few he makes. Overpaying for Kraft was a recent, big one. The company was combined with Heinz in 2015, creating Kraft Heinz Corp (KHC). Berkshire (BRK), in partnership with Brazilian investment firm 3G, had taken Heinz private two years earlier. Buffett still thinks it’s a great business, but what caught our attention was his comment on brand erosion. In Buffett’s own words, from his CNBC interview:

“Heinz was started in 1869. So it had all that time to develop various products, particularly ketchup, things like that.

“They’ve been distributed worldwide through tens and hundreds of thousands of outlets. They’ve had hundreds of millions…they spend a fortune on advertising. And their sales now are $26 billion. Costco introduced the Kirkland brand in 1992, 27 years ago, and that brand did $39 billion last year whereas all the Kraft and Heinz brands did 27– $26 or $27 billion. So here they are, a hundred years plus, tons of advertising, built into people’s habits and everything else, and now Kirkland, a private label brand, comes along and with only 750 or so outlets does 50% more business than all the Kraft Heinz brands. So house brands, private label, is getting stronger.”

Part of Buffett’s success has been improving upon the Graham and Dodd principles that defined his formative investing years. He recognized that demanding a discount to intrinsic value overlooks the intangible value of brand. His 1988 purchase of shares in Coke (KO) was an early example of this. KO currently trades at 11X book value. Their consistently high return on equity supports this high multiple. The brand is KO’s “moat”, generating far more profit than an unbranded carbonated, sugary beverage would.

Kraft Heinz has iconic brands too, but they’ve turned out to be more vulnerable to low cost competition than many expected. Buffett’s overpayment for the Kraft Heinz combination was in some ways caused by the enduring success of the Coca Cola brand.

Kirkland leaves its mark on Heinz

Buffett again:

“Now, the interesting thing about Kraft Heinz is that it’s still a wonderful business in that it uses about $7 billion of tangible assets and earns $6 billion pretax on that. So on the assets required to run the business, $7 billion– they earn $6 billion– roughly after depreciation pretax. But we and certain predecessors, but primarily we, we paid $100 billion more than the tangible assets. So for us, it has to earn on $107 billion, not just on the $7 billion that the business employs.”

KO has unrivaled distribution — think of all the places you see bottles of Coke on sale. And tastes are shifting away from some KHC products, such as Oscar Meyer hot dogs which countless households ban because they regard as containing carcinogens. But the broad success of Costco’s Kirkland shows that brands can be more vulnerable than previously thought.

3G’s reputation for aggressive cost cutting led some to suggest they’d damaged the KHC brands. But Buffett noted that cuts were mostly overhead, “… they cut costs not in innovation, or in product quality, or anything like that. They just took it out of SG&A basically.”

The erosion of KHC’s brand value reflects the growing power of WalMart, Costco and Amazon. It didn’t just happen during the 4Q18 period for which KHC took its write-down, but the issue just gained more attention. It’s probably altered Buffett’s thinking too. Moats need to be harder to breach.

Energy infrastructure is one sector that’s invulnerable to brand erosion from new competitors, which ought to make it appealing to Buffett. An installed pipeline is unlikely to be threatened by a new one. Tomorrow’s winners in this sector will come from today’s big firms.

Climate change is the big uncertainty hanging over oil and gas pipelines. Buffett believes electric vehicles are, “…very much in America’s future.” While the energy sector grapples with the consequences of these shifts, U.S. energy infrastructure enjoys three benefits:

  • increased electricity generation will drive demand for natural gas
  • uncertain long term demand for crude oil is reducing the capital invested in big, conventional projects in favor of short-cycle, precisely what U.S. shale offers
  • U.S shale produces a lot of natural gas liquids, approaching 5 million barrels a day, used as feedstock for the petrochemical industry

U.S. energy infrastructure has an enviable moat. Rising dividends, for the first time since 2014, are drawing new investors.

We are invested in KHC.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund, please click here.

SL Advisors is also the advisor to an ETF (


ETFs: Business Could Not Be Better

At the InsideETFs conference in Hollywood, FL, author Michael Lewis outdrew the many luminaries on hand offering investment advice. From Liar’s Poker to The Fifth Risk, Lewis has honed his ability to identify a story and recount it engagingly. Interviewer Barry Ritholtz provided thoughtful questions that allowed his guest to enlighten and entertain.

Michael Lewis at ETF Conference

The book you write isn’t what people read. Liar’s Poker was intended to turn young graduates away from Wall Street. After all, Lewis abandoned a sharply rising $250K annual income for a $40K book contract, only to receive over 100 letters seeking career advice in banking.

Two of Lewis’s books have been made into movies. Tom Wolfe offered memorable advice — when Hollywood, CA offers a movie deal, drive fast to LA; hurl the script over the wall; grab the cash they toss back, and drive very fast east. Bonfire of the Vanities, Wolfe’s novel which caught the 1980s Wall Street zeitgeist only preceded Lewis by a few years. It might be the worst movie ever made, deeply disappointing to Wolfe’s readers and no doubt the author himself. Lewis invests his personal assets in index ETFs which drew a hearty round of applause.

On the more prosaic topic of ETFs, business continues to grow strongly. NYSE executive Doug Yones reported that ETFs have reached 40% of exchange volume. Christmas Eve, normally one of the quietest days, was a record as stocks plunged before January’s rebound. Yones is relieved that this happened without NYSE making headlines. Many have predicted volatility would expose flaws in the structure of ETFs. Criticism is diminishing, as the market keeps working. Pressing the advantage of momentum, Yones expects ETF volumes to double.

Fixed income is a big source of growth. The yield curve offers around 2.5% at every maturity. One dimensional but finally a return of sorts, there are many opportunities to restructure indices that afford quite precise portfolio construction.

ETFs are now offered that mimic structured notes, with capped upside and limited downside. Doug Yones expects actively managed ETFs that don’t provide daily position transparency to be available soon, bringing in some new proprietary strategies.

Bitcoin, last year’s fad, has been replaced by marijuana ETFs. No matter that farming relies on extensive government support, weed believers note huge paper profits for early investors. No more articulate response is required.

As in the past, we derived most value from scheduled and impromptu meetings. S&P is our partner for our ETF,  so Michael Mell kindly endured a photo with your investment management team.

SL Advisors with S&P at ETF Conference

The ETF business has never looked so strong.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (

The Bovine Green Dream

To slow global warming, we should phase out cows. Bovine flatulence is often a source of scatological humor for those making light of greenhouse gas emissions (GHG). However, cattle generate 5 gigatons of CO2 equivalent, annually. More precisely, they produce methane. A chart used by Bill Gates reveals that cattle produce almost as much in harmful emissions as the U.S., and half of China.

The global cattle herd wouldn’t have to be summarily executed – simply allowed to die out with no new replacement cows. On average, cows live about twenty years. If the world could eliminate an America’s-worth of 2018 GHG emissions by 2039, why isn’t that a reasonable option? The U.S. has 6% of the world’s cattle. As with many issues of global warming, the problems are elsewhere. Based on headcount, 35% of bovine emissions come from Brazil, India and China.

The Green New Deal

The proposed Congressional resolution that incorporates the Green New Deal (GND) doesn’t include the end of cows. Curiously though, a Q&A was posted on the website of Representative Alexandra Ocasio-Cortez (a co-sponsor) that implied the eventual elimination of “farting cows and airplanes,” although this was soon taken down (still available here). This is what making policy on the hoof looks like. The sponsors also considered a twelve year deadline for the elimination of fossil fuels in America, but omitted it from the final language. This is more disruptive and expensive than dealing with cows, and happily even less likely. The Green New Deal is hopelessly unrealistic. Even Nancy Pelosi referred to it as the “Green Dream”.

The GND doesn’t address agriculture, other than advocating “family farming,” to promote healthy soil and food. This sector generates a quarter of global emissions.  Industry and manufacturing account for 20% of GHGs.  While the GND calls for “removing pollution and GHG emissions from manufacturing and industry as much as technologically feasible,” there isn’t a zero emission way to produce plastic, steel, cement, chemicals, medicines, electronics and all the carbon based products that make up modern life. Buildings directly contribute another 6%, and the GND requires “upgrading all existing buildings in the United States and building new buildings to achieve maximal energy efficiency, water efficiency, safety, affordability, comfort, and durability, including through electrification.”

The document’s solutions are neither realistic nor practical.  The country can’t start producing more of everything, with no negative externalities, at lower cost.  Electric engines won’t power airplanes or cargo ships anytime soon. Given current technologies, electricity generation and light duty vehicles (around one third of GHGs) are currently the only plausible targets. Only a small portion can be converted economically.

Like much else in politics, extreme views are adopted to motivate core supporters. Socialist ideas in the GND, such as free college, “high-quality union jobs” as well as Federally guaranteed jobs are not related to the environment. Including a grab-bag of left wing ideology adds a juvenile feel.

Last year’s report from the UN’s Intergovermental Panel on Climate Change (IPCC), warned of the planetary risks from increased GHG output, which is caused by humans. Its most famous soundbite is its call to limit future global warming to 1.5 degrees C above pre-industrial levels.

The science around the climate is complicated. Scientists have been predicting catastrophe from rising GHGs for years. You can find serious forecasts from the 1980s showing New York City submerged by now. The IPCC seeks to aggregate the best scientific analysis. It shouldn’t be dismissed out of hand, even though like past efforts, it could be overstating the problem.

So far, planetary warming is noticeable to some but not that disruptive. Nonetheless, most people would agree to some reduction in GHG emissions, if the cost/benefit trade-off was acceptable. The GND doesn’t speak to them. It seems you have to be aligned with the extremists, or you’re opposed.

Cheap, accessible energy is a key driver of rising living standards. The planet may be warming somewhat, but so far the benefits to humankind have been enormous. Put aside for now our energy-dependent lifestyles in developed countries – in emerging economies, there’s a direct link between increasing energy consumption and longevity. Alex Epstein’s The Moral Case for Fossil Fuels defines the issue around what’s good for humanity. Indonesia is just one example of a country where energy has led to cleaner water and better hygiene, leading to longer, healthier lives (see Guess Who’s Most Effective at Combating Global Warming).

Science is driving the concern about global warming. A serious effort to limit GHG emissions also accepts the science-based limitations around relying exclusively on renewables. Most obvious is the inability of batteries to efficiently store the energy produced by intermittent solar and wind for later use. Estimates of the GND’s required investment run into the trillions of dollars, and rely on advances in technology not currently in sight.

“From a vantage point like mine, they’re certainly outside the realm of what is achievable, and I’m not sure that by putting those proposals forth, we’re actually really moving the ball forward for the agenda,” said Francis O’Sullivan, head of research at the MIT Energy Initiative.

Away from the extreme fringes of debate, nuclear power is recognized as part of the solution (including by IPCC). Natural gas is a cleaner alternative to coal, and in being available when solar and wind are not, it improves the utilization of renewable supply.  Environmental activists oppose these and other plausible strategies to advance their goals.

Pipeline opponents cause Canada to move its crude oil by rail (see Canada’s Failing Energy Strategy), and Boston to import liquefied natural gas from Russia instead of Pennsylvania (see An Expensive, Greenish Energy Strategy). Today, fossil fuels provide around 80% of the world’s energy. Inflexible opposition to what works without practical alternatives risks enormous disruption, more expensive energy and lower living standards. In America, the pursuit of extreme solutions risks provoking opposition to even reasonable ones. For poorer countries, it means giving up aspirations for healthier lives.

We invest in energy infrastructure, and we care about the environment. It’s our planet too. The issues are too important to be left to extremists.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (

The Trump Put

Last week President Trump tweeted, “Dow just broke 25,000. Tremendous news!” It wasn’t the first time the Dow had risen through that threshold. On July 14th, the President tweeted, “The Stock Market hit 25,000 yesterday.” A year ago, on January 4th, 2018: “Dow just crashes through 25,000. Congrats! Big cuts in unnecessary regulations continuing.”

The Trump Put

This president probably cares more about short term moves in stocks than any predecessor. He has adopted it as a report card of how his administration is doing. Past presidents have generally positioned themselves above the fray, concerning themselves more with economic data such as GDP growth and unemployment. These are important to President Trump too, but the Dow provides a real-time gauge of his performance, reflective of today’s social media supported news.

His cabinet colleagues clearly recognize this. We winced at Treasury Secretary Steve Mnuchin’s comments in December that banks had “ample liquidity”. Stocks were very weak, largely because of problems caused by the government. The trifecta of growth –inhibiting tariffs, a looming federal government shutdown and Fed chair Powell’s communication missteps were the main cause (see Problems Made in DC Can Be Fixed There). But nobody had questioned banks’ liquidity until Mnuchin’s amateurish intervention.

Compared with the Goldman colleagues who preceded him, this betrayed the absence of a deft touch, and briefly raised more concerns than it settled. But it reflected the attention this administration pays to any substantive moves in equities.

President Clinton’s former campaign manager, James Carville, once commented that in his next life, “…I would like to come back as the bond market. You can intimidate everybody.” He also coined “The economy, stupid.” This phrase came to symbolize Clinton’s campaign singular focus and its improbable victory over George H. W. Bush.

GDP reports are too slow in providing feedback, so movements in the Dow offer more immediate information. Given the Tweets that follow when it reaches milestones (even if those milestones have been reached before), you can assume Trump badly wants to brag about the market going into next year’s election. Policies that are good for the economy must be good for stocks; therefore, when the Dow signals dismay, it’s likely to draw a reaction.

That doesn’t guarantee economic policies that will support stocks – the trade frictions with China are an example. But it does mean that there’s limited overall tolerance for pursuing policies that damage the market. The federal government shutdown lasted longer than expected.  It quickly ended, without the wall that was its purpose, once a major airport had to shut because of missing air traffic controllers. This likely won’t be repeated, and emergency action to build the wall will be tied up in the courts where it’ll be symbolic and harmless.

Trade friction is taking its toll. U.S. objectives are broad but not specific. We are approaching March 2nd, when the U.S. is set to impose additional import taxes on $200 billion of Chinese exports. As the deadline nears, expect Trump to find a way to claim victory and avoid the inevitable market swoon that would otherwise follow.

For years, the ‘Greenspan Put’ provided investors some comfort that the Fed would rescue them from economic weakness. Much of what moves stocks today emanates in Washington DC. As attention turns to the next presidential election, equity investors are likely to see the ‘Trump Put’ become the ultimate arbiter of what is administration policy.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (