Investing in the face of five megatrends

April 29th, 2011 by Toby Birch

As human beings our brains are hard-wired to pigeonhole data for ease of storage and subsequent recall. Perhaps this compartmentalisation is why many find it hard to see the big picture and seem shocked by black swan events.

Free-thinking entrepreneurs are different because they observe opportunities and connections that others fail to appreciate (known as ‘joining the dots’).

It may also explain why academics are so specialised and focused on narrow remits, albeit hidebound by budget constraints and pressure to publish their research quota.

As someone from an academic family I am often struck by the seemingly irreconcilable differences between the likes of financiers and scientists. This is especially the case where environmental issues are concerned. For many sharp-suited City types, any mention of climate change conjures up images of killjoy bearded lefties; just another impediment to endless earnings growth from an unlimited money supply.

To be fair to financial folk no ‘green’ solution ever seems to satisfy the scientific community, apparently beset by internal turmoil and point-scoring counter-claims that confuse rather than clarify.

As someone with sympathies in both camps allow me to put these issues into perspective in five simple, empirical points:

  • the climate is changing
  • the population is growing
  • resource scarcity is escalating
  • currencies are devaluing
  • prices are rising.

It would be terribly neat and in the finest traditions of silo thinking to treat these topics as separate, discreet entities.

Instead, we believe that unbridled credit creation, environmental degradation and population growth are tightly coupled and correlated. Many investors do not yet appreciate the necessity for protection against this wide range of natural and man-made threats.

The typical reaction is to (a) deny there’s a problem (b) hope for the best or (c) ignore it altogether.

We are witnessing an unprecedented confluence of factors contributing to climate change and commodity scarcity, exacerbated by currency devaluation.

Investors face severe inflationary pressures from diminishing supplies of raw materials combined with the dilution of mainstream currencies. Worse still, rampant price rises are increasing the speed and scale of resource extraction and subsequent destruction of the environment. In one-dimensional economist models the supply should eventually increase to match demand courtesy of the pricing mechanism. This is the ultimate clash between theory and reality; where infinite money creation meets finite supplies of natural resources.

While impossible to prove, it seems more than coincidental that concentrations of atmospheric carbon dioxide began to intensify when the Gold Exchange Standard unravelled in the early 1970’s.

In other words there appears to be a link between the freedom to fuel false growth through deficits and the escalation of greenhouse gases.

Statisticians will no doubt jump on this comment as being a classic case of correlation without causation. Nevertheless it is a striking pattern, especially when population growth has been exhibiting similar exponential behaviour.

Politicians and portfolio managers love these seemingly positive charts that feed directly into the tax-take and corporate profitability, creating apparent prosperity for all concerned. By now we should have all realised that this path has led to technical bankruptcy for many western countries and penury for the public through loss of purchasing power.

For anyone with a scientific bent, exponential or parabolic charts induce fear rather than fervour. Be they yeast cells or cancer cells, pandemics or populations, high growth rates carry the seeds of their own destruction by over-consumption of the host’s supplies and substrates followed by terminal self-pollution.

It is typical for those with revolutionary resolve to overturn ‘the system’ little knowing how to replace it with any viable alternative. A far more subtle and successful method is to use what we already have and modify it. This is not the cue for yet more pointless and unworkable legislation. If anything it is the rise of endless procedures that has exacerbated risk through greater complexity, creating a financial and legal industry hell-bent on wriggling around the rules. We must first address the philosophy from which the mechanisms follow.

A Biblical phrase springs to mind which encapsulates this approach with the quote ‘swords to ploughshares’. In other words we can convert our existing infrastructure for constructive rather than destructive use. This is all well and good in theory and noble-sounding. One can be accused by both sides of hypocrisy or deception but this is a small price to pay to benefit future generations who will no doubt judge us with disgust in decades to come, should we choose the default option of doing nothing. The trick here is to emphasise that climate change is a way to make money for those from the agnostic or sceptical school of thought.

So for those in the latter camp this is the sales pitch for investing in the interconnecting themes related to climate change and inflation:

  • Natural Resources: commodities, rare earth metals, forestry, water
  • Food Chain Disruption: fertiliser, agriculture, soft commodities, infrastructure
  • Population Growth: healthcare, biotech, waste management, emerging markets
  • Currency Devaluation: precious metals & mining stocks to offset currency dilution
  • Green Revolution: clean technology, renewable energy and strategic assets

If, like us, you believe that climate change has a financial element within the cause and effect then one can propose that the problem is also the solution. What we need across this range of industries is long-term capital investment. This will not come from governments (other than China) but from financial markets. After all, this used to be the whole point of stock markets; to match entrepreneurs with money. This ‘wisdom of crowds’ generates the most efficient form of pricing and allocation of resources.

In the past speculators were a necessary evil for liquidity. Now that volume is dominated by High Frequency Trading it is clear that markets have mutated with their decade-long lame performance. Nevertheless they are not beyond repair.

In an environment of sound money backed by precious metals, equities became dividend machines and show their worth through compounding, like the fable of the tortoise and the hare. It is still possible, even preferable, to aim for stability over growth as equity investment offers transparency and sustainability over the falsehood of interest-bearing credit.

There still remains a credibility problem when investing in these areas as one could potentially be ramping up prices, albeit indirectly. There are three aspects to this (a) investors have to hold real assets including food and fuel to protect their capital from inflation (b) in the field of renewable energy with limitless supplies the price mechanism still has a role to play as spiralling oil prices foster innovation (c) one needs to show leadership by backing the right companies.

One could still be accused of profiteering so we have decided to act as a role model. Instead of hoarding profits we will recycle capital by investing a significant portion of the management fee into sustainable communities, especially in those countries that will suffer further from climate change in future. At the risk of sounding naïve, this is no marketing ploy but a genuine attempt to prove that financiers can be positive contributors and not simply speculators in others’ misery.

—–

Toby Birch (t.birch @ oppenheim.gg) is the Managing Director of Oppenheim & Co. Limited.

He is also the lead manager of the new Gaia Opportunities fund, a multi-asset, long-only macro fund. It aims to achieve long-term growth of capital by taking advantage of what the Manager views as megatrends related to climate change, population growth and inflation, investing in asset classes and specific sectors linked to these themes.

 

  1. No Comments

Have your say