Thursday Night Links

• Tesla still trades on a significant premium to other car brands on the basis of best-in-class growth and gross margin. Both these metrics may well experience significant pressures in the next two years. We do not think the premium is warranted – Tesla is not the Apple of cars as posited by a number of analysts. Apple holds a 55% share of the smartphone market in the US; the biggest car manufacturer holds just 10% and that manufacturer is Toyota. The network effect that binds so many to the Apple ecosystem just does not exist with Tesla; granted it has the network benefits of a huge database of EV miles driven but that is not enough on its own. It seems to us that first mover advantage is really the only true benefit that Tesla had. Its market share is declining rapidly as competition ramps up. According to S&P Global Mobility, its market share in North American EVs has fallen from 80% in 2020 to 64% in 2022, with a forecast 20% in 20255. Will we look back in five to 10 years from now and see Tesla not as the Apple of the car industry but perhaps the Nokia, Ericsson or even Blackberry, the first mover beneficiary but not the final dominant winner? [GAM Investments]
• The magnitude of today’s debt levels must greatly reduce the central bank monetary policy options. This is the central difference between the prior inflationary period and the current one. If the inflation cannot be controlled by interest rate increases, perhaps it cannot be controlled. One policy solution is to control inflation via money supply, meaning actually reducing the money supply. The last time that was tried was during the Great Depression. It did not work out as well as the theoreticians might have hoped. That idea has since become anathema to the point of taboo. The usual choice in such circumstances is to do the opposite of the Great Depression approach, namely to tolerate or even encourage inflation, using time as tool. Over time monetary inflation diminishes the relative value of the debt liabilities (more dollar bills in the economy per unit of bonds). That is the mechanism at the government’s disposal. The central bank might already be trapped into a long-term strategy of inflationary money printing. [Horizon Kinetics]
• Whereas in his early political and military career all of Napoleon’s strengths proved to be an uncannily perfect fit for the weaknesses of his opponents, the environmental factors shifted such that Napoleon faced a political-evolutionary dead end. Having mistook his earlier luck for fate, he mismeasured (or was simply unaware of) the enormous risks he was taking in this new, hostile environment and committed himself in such a way that he was doomed to be defeated. [A House Rises]
• We generated approximately $4 billion of free cash flow and returned $3 billion of capital back to our shareholders. We reduced our outstanding share count by 15% through accretive share repurchases, contributing to significant growth in per-share metrics, and we raised our base dividend three times. [Marathon Oil Corporation]
• In 2022, Suncor returned over $7.7 billion of value to its shareholders, compared to $3.9 billion in the prior year. Record shareholder returns in 2022 included $2.6 billion of dividends paid and $5.1 billion in share repurchases. In 2022, the company repurchased a record 116.9 million common shares at an average price of $43.92 per common share, or the equivalent of 8.1% of its common shares as at December 31, 2021. [Suncor Energy Inc.]
• Cenovus Energy Inc. delivered strong operating and financial performance in 2022, with $11.4 billion in cash from operating activities, $11.0 billion in adjusted funds flow and $7.3 billion in free funds flow, enabling more than $3.4 billion in shareholder returns. In the fourth quarter, reliable upstream operating performance drove nearly $3.0 billion in cash from operating activities, $2.3 billion in adjusted funds flow and $1.1 billion in free funds flow. [Cenovus Energy Inc.]
• Well, that's always the key from a levered investment perspective is making sure that you have enough unencumbered capital in high-quality assets that allows you to withstand the adverse scenario so that you're not forced to delever. It doesn't mean that you're not going to make decisions to increase your leverage or to decrease your leverage, but you want to make those decisions when you want to make those decisions on your own time. You don't want to -- we are a permanent capital vehicle with mark-to-market liabilities. And so, we don't want to have -- be put in a position where we're forced to delever. I'd would never want to do that. So, you're always thinking about preserving enough unencumbered capital to make sure you can withstand the most severe scenario when it comes to both interest rates and spreads moving in a way together in a very adverse way. [AGNC Investment Corp.]
• Back in August the Biden administration claimed that this summer's refined fuel demand was lower than it had been in July 2020. (When fuel prices spiked in June, the EIA did not publish their data for two weeks because of a "voltage irregularity," then claimed that demand had fallen to below pandemic levels.) [CBS]
• It was always a special treat when Paul took me out to his painting studio in the backyard. His father was an artist and the head of an art school. Paul, an accomplished watercolorist himself, had contemplated a career as a painter. His father, though he acknowledged Paul’s skill as a draftsman, put him off art as a career. “I can see bad times coming for art,” he told his son: “Frauds like Picasso will rule the roost for the next half-century. Do something else for a living.” Paul took the advice to heart in two senses. In his professional life, he exchanged paintbrush for pen (or typewriter), and he nurtured his father’s animus against Picasso. Many readers will recall that there was a period when Evelyn Waugh ended his letters with the cheery valedictory, “Death to Picasso!” Paul came from a kindred school, as the title of his 1996 collection To Hell with Picasso and Other Essays reminds us. In his book on the history of art, Picasso emerges as an archetype of what he called “fashion art, as opposed to fine art”—that is, art as a species of hucksterism. [The New Criterion]
• In the first century B.C., Rome’s political system changed drastically, and the state ceased to be led by elected magistrates serving for brief terms of office. The change was traumatic, costly in lives and prosperity, and permanent. When Caligula was murdered in 41 A.D., the Senate debated whether to restore the republic. Within a few hours, that idea was rejected, and instead they tried to pick someone to become emperor, although in fact the decision had already been taken out of their hands by the Praetorian Guard who had raised Claudius to the imperial purple. The Roman Republic—as we understand the term as a political system—was already long dead, and men like Caesar and Cato had contributed to its death by their actions. None of them appears to have wanted to do this, but that is what happened. It is a warning to all of us that radical change can happen and political systems can fail even when no one is consciously trying to destroy them. [The New Criterion]
• Moreover, all men are husbands, if not to our wives then to creation and society, to institutions that we must care for and protect. Husband, from the Old Norse, meaning “master of a house,” was also used as a verb to mean “to till, cultivate.” (Nor has this latter sense entirely disappeared, as in husbandry.) Virgil writes at length about this latter role in the second book of his Georgics. Far from the battlefield, a farmer knows how “Earth brings forth from herself ample justice/ the simple means of life, simply enjoyed.” Farmers know the pleasures of the simple life, its stability secured not by “faithless brother fighting faithless brother” or under a justice imposed by the sword. So too is it with a husband who loves the nuances and secrecies of a certain woman. In obscurity he loves her and delights in the simple life that is found with her. Or in the case of society, men are husbands of a similar kind. They till and cultivate institutions and professions with a quiet discipline. In a way that is unique among these roles, a husband cannot be created without a vow. It is a role that a man enters into with a promise incorporating reason, volition, emotion, and, in most cases, religion. Even the Spartans in the example mentioned earlier, who practiced a kind of marriage much different than Christianity does, sacralized the bond of marriage by the highest power that they recognized: the state. [The New Criterion]
  
• After a decade of being the only game in town, Tesla is entering a new era of the EV wars, which started in earnest in 2022 but will only intensify in 2023. Tesla still dominates the EV market in the U.S. today, but its lead has consistently dropped—and is expected to quickly dwindle—as legacy automakers roll out their own electric models. The onslaught of choice around EVs will no doubt amplify Tesla’s fundamental shortcomings, many of which stem from poor design and terrible customer experience choices. In the meantime, the BMWs, Fords, and Kias of the world have arrived, ready to raze Musk’s beleaguered company faster than you can turn a hyperloop tube into a parking lot. [Fast Company]