New Decade – New Challenge…
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Global stock markets did well in 2019, led by rampant US markets. The outlook for 2020 is also encouraging. Yet the main investment theme of the 2020s will not be Wall Street but climate change – an issue dominated by two delusional opposing sides, writes Victor Hill.
American Exceptionalism
In January of 2019 I wrote that the bull run on Wall Street would most likely continue and that the Dow Jones Industrial Index could even reach 30,000 by year end. Well, I wasn’t too far out. The New York markets closed on Tuesday (31 December) at near-record highs as follows: DJIA: 28,535.66; S&P: 3,230.39; NASDAQ: 8,972.60.
The week before Christmas the NASDAQ had breached the psychologically significant 9,000 level for the first time. The recovery of the NASDAQ – so slow to recover from the dotcom bubble of 2002 and indeed from the financial crisis of 2008-09, yet up by 36 percent in 2019 – was one of the most prominent investment stories of 2019. A great December marked the end of a decade of global stock-market growth.
From its 2007 peak (before the financial crisis) the S&P 500 is up around 64 percent. By contrast, the Rest of the World Index (made up of all the major indices outside the US) is up by just 16.5 percent over the same period. The UK FTSE-100 index stood at just shy of 7,000 on Millennium Eve exactly 20 years ago – and closed at just 7,542 last Tuesday. (That’s less than eight percent in 20 years – though don’t forget the roughly four percent annual dividend yield.) What accounts for America’s remarkable stock market out-performance?
There are several reasons but the main one is a four-letter word: FANG. The US uber-dominant tech titans have swept all before them in the last decade. Netflix (NASDAQ:NFLX) is probably one of the best performers ever, up nearly 3,800 percent in a decade. How long can the tech boom continue to distort the US market? Well, you know our very own Jim Mellon’s view.
For now, I’ll just say this: the main investment theme of the 2020s will not be tech at all, but climate change. But there is a huge intellectual problem here. There are those who think it is a hoax. And there are those who think there is an obvious solution. Both sides are deluded. This stand-off will generate its own panoply of risks and opportunities.
Climate consciousness
The climate crisis is already shaping investment strategy. The outgoing Governor of the Bank of England, Mark Carney, made headlines after Christmas by predicting that almost £100 billion of UK pension holders’ assets could be made worthless by climate change. Mr Carney is in the process of being transmogrified from a high priest of central banking to a UN climate guru – a sort of Greta Thunberg in grey flannels.
Does Mr Carney really believe that the shares of the global oil and gas majors will fall to zero in the coming decade? I doubt that he does. There will always be an oil business, even if it is doomed to relative decline. We may well have overwhelmingly electric cars, solar powered ships and even (by the 2050s) electric-powered aircraft on short-haul routes. But space rockets (increasingly in demand to launch satellites) will always be fossil-fuel powered on the launch pad. That is just a matter of physics. The oil majors are already becoming diversified energy companies and will be around for a very considerable time to come.
Mr Carney cited figures to the effect that 80 percent of coal assets will never be mined and that half of all oil reserves will never be drawn. That is basically good news – and is the final rebuttal of the peak oil hypothesis hysteria which reigned in the late 1990s. Many institutional investors, however, are starting to examine the investment landscape through the prism of climate change.
Australia is a case in point. Despite the nonchalant stance of its government on climate change, the general perception on the part of the Australian finance industry is that large parts of the country are becoming uninhabitable – and unproductive. I received messages late last night night from Australian friends in normally temperate southern New South Wales. “Apocalypse” read one.
Electric cars are not a panacea
There seems to be an assumption on the part of commentators that the phase out of the internal combustion engine and the corresponding roll out of electric vehicles will enable countries like the UK and Germany to become net zero emitters of CO2 by 2050. In Germany, Frau Merkel’s government has actively backed electrification. The Volkswagen (ETR:VOW) Zwickau car plant will soon be making exclusively electric cars[i].
Most of these cars will be powered by lithium batteries – but there are huge environmental issues surrounding this. Most lithium and cobalt is mined in desperately poor countries such as the Democratic Republic of Congo (DRC) and Bolivia where child labour is common and working conditions are appalling. Such mining activity often has a devastating impact on the local environment and in Chile is leading to a shortage of drinking water. Forests – which are natural carbon sinks, i.e. they suck CO2 out of the atmosphere – are being cut down in order to obtain the raw materials used in car batteries.
Furthermore, recycling these car batteries – which will have an economic life of only ten years or so – will present formidable challenges. The materials in question are toxic and, if not treated correctly, could contaminate the water table.
For these reasons some campaigners in Germany are promoting the use of synthetic and biofuels. Crop-based biofuels do emit some CO2 when burnt, though less than hydrocarbons, but to the extent that the next crop planted will remove CO2 from the atmosphere, they can be said to be carbon-neutral.
Disruptive energy
One of the big stories of 2019 was that the cost of renewable energy – of each kilowatt hour of electricity produced by solar panels and wind turbines – fell substantially. According to some estimates, renewable energy is now cheaper than fossil-fuel generated energy (coal, gas, oil etc.).
I have to warn readers that these numbers can be misleading. These estimates do not take into consideration the cost of maintaining a legacy back-up network within the grid which must kick in when the wind does not blow or the sun does not shine (the latter being quite common in the UK) – or, indeed during the night. Nor do they take account of the CO2 emissions generated by the construction, installation and maintenance of renewable plants.
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On Christmas Day last week, just as the British were cooking their festive dinners, the entire UK wind turbine network collapsed, supplying barely 4 percent of total demand to the National Grid. By teatime, as the mince pies were served, this had fallen to under one percent. The slack was made up by gas, nuclear – and coal.
While solar arrays and wind farms have stolen the limelight in recent years (and, to a lesser extent, tidal-power, which is still pretty much unviable) a much less glamorous eco-power source has been gaining ground in the UK. This is waste-to-energy (WTE). Essentially, this is turning the contents of our household dustbins which cannot be recycled into electricity through incineration. I know that incinerator is a dirty word for many people; but new plants coming on-stream actually emit air which is cleaner than the atmosphere in which they operate.
An incinerator is any device that uses combustion to convert one form of stored energy to another. This has been highly regulated over the past thirty years as our understanding of emissions has developed. Operators are required to meet ultra-low emissions standards under pain of massive fines and imprisonment.
A significant part of the construction cost of WTE is spent on so-called emissions abatement involving several stages of scrubbing, filtering and cleaning emissions so that what eventually goes up the chimney is within the permitted emissions limits, regulated by the Environment Agency. Failure to comply could result in the plant being shut down. Operators spend millions of pounds each year on abatement chemicals such as hydrated lime which absorbs particulates.
The energy input to run the incinerator comes from the waste itself. This is combusted over a grate and superheats water in a boiler. The resulting steam travels through a turbine, generating electricity. WTE does produce CO2 emissions (from burning plastic etc.). But one has to compare that with the alternative. Household waste dumped in landfill sites produces about seven times the carbon emissions that are produced from modern incineration. Moreover, landfill sites effectively take valuable land out of use – generally, you can’t even grow trees on them. While excusable in the developing world, they have absolutely no place in an advanced economy.
We have to get rid of that wretched plastic which cannot be recycled, anyway – before it gets stuck in a wild animal’s gullet. (Has anyone else been appalled by the Babylonian detritus stacked outside people’s homes in the UK, post-Christmas? But waste reduction is another topic with investment potential which I hope to discuss in 2020.)
Getting to absolute zero emissions is an admirable notion but it might not actually be possible this side of Paradise. The name of the game right now should be emissions optimisation on an economically feasible and sustainable scale. I believe that many high-profile UK institutional investors, including pension giants, understand that very well – and are allocating to WTE accordingly.
Will we ever get to net zero?
Let the hysterical children bunk off their Friday-morning sex-education and diversity awareness modules in order to glue themselves to the bicycle sheds. They are deluded because their deluded parents (and teachers) have encouraged them to believe that where there is a scientific problem, there must be a simple clear-cut solution. But life (and certainly economics) doesn’t work like that. Global warming stroke climate change is one of the most subtle and intractable problems that mankind has ever faced: it cannot be fixed without irrevocable unintended consequences.
I tried to explain in these pages last year why veganism and vegetarianism are not the grand solution that naïve greens think: they require massive changes to land use with deleterious effects. Nor is a reversion to organic farming a solution: it entails higher CO2 emissions because more land is required; thus inter alia, reducing forest cover. I now fear that electrification is unlikely to be a catch-all solution either (though it will substantially cut air pollution).
Bluntly, there are only four over-arching solutions to global warming/ climate change caused by anthropogenic greenhouse gas emissions. (And, by the way, a lot of carbon emissions are natural rather than anthropogenic.) They are all near-impossible – so there might not be a solution at all.
The first is to encourage the reduction of the human population on this planet. (Just writing that last sentence will have some people branding me a fascist.) There are currently 7.8 billion people alive. As I have been writing this piece, the population of the world has increased by over 250,000 new-borns. We shall most probably reach >9 billion by 2050. Aggregate global carbon emissions are still rising. The chance that we shall reduce them globally to net zero by 2050 with 1.2 billion plus extra people (who will live overwhelmingly in developing countries where environmental standards are much lower) is very slim.
Secondly, we could embrace universal nuclear power generation – as the French have (and as the Germans haven’t). The issue of the disposal of nuclear waste material would move centre stage. There are probably determinable limits as to how much waste could be handled in a world where everyone went nuclear. But it is unlikely that we would ever get there.
Thirdly, we could imitate our ancestors and just drastically reduce our energy consumption – stop washing, eat berries and travel only by train. I very much doubt that modern people would put up with that. It’s all very well wanting to imitate our ancestors, but the old country survival skills and the social support structures which saw our ancestors through their extreme hardships have gone, never to return. It’s not going to happen.
Fourthly, we might make a breakthrough in carbon capture and storage (CCS). I explained last year why this is a very important new industry. But it is very unlikely that any human technology will be an improvement on the humble tree.
I’m sorry to start the new decade on a dour note – but, what we can be sure of is that if there is no economic solution, then in the long-term, there will be a Darwinian one.
***
2019 was the year I lost two beloved dogs, two close relatives and several old friends. I suppose the pace of attrition accelerates as one grows older. After turning 60, life gets more intense: one has a sense that there is no time to lose, while there is so much more yet to do. My resolution for 2020 is the same as last year: to live a simpler, healthier life with zero food waste and minimal plastic; to work more efficiently. Happy New Year!
[i] See: https://www.cnbc.com/2019/11/04/volkswagen-starts-factory-production-of-electric-car.html
Maybe add ‘no more dogs’ to your 2020 resolution. I like them and interact with a number of them [none of which are mine]. However there are far too many of them and other ‘pets’ on this small island.
We must learn to be good obedient children and obey Mr Carney!
Oh and cheer on our betters as they jet off to Davos!
Long live the good people!
I agree with the summary in general terms, particularly the need to reduce population and the unlikelyhood of people to actually be prepared to ‘suffer’ in any way, however minor, for the sake of the planet, e.g. even getting them to travel less will be difficult. However there are other ecological energy transfer/storage processes worth considering for investments. Fuel cells may be more appropriate in the long term for transport rather than batteries, therefore waste to Hydrogen for instance is a good way of generating the required fuel. Alternatively fuel cells can run on ammonia, which looks as if it could be generated by solar energy and sea water and then, as it is a dense energy product, can be transported like oil currently is. Or solar and wind energy can be stored in vanadium oxide batteries rather than lithium ones, these are bulkier than lithium, but are fine for static use in time shifting the energy from when it is produced to when it is needed.
Happy New Year Victor, and thanks for your weekly dose of reality. Long may it continue.
If you think life gets more intense at 60……..wait till you get to 70!
Victor, you list four unlikely solutions, but I think only the first, population reduction, would work long term, and that solution is impossible. The other three would encourage further population growth which would eventually lead to a Darwinian solution.