Why did the Fed Ease?

Last night’s Fed decision was anything but unanimous with 10 of the 17 members dissenting – views ranging from no cut to a larger ease.  Powell described a “solid outlook” for the US economy but warned of “weakness in global growth and trade policy”.  On balance, it looks like a slightly hawkish Fed (which is why stocks wobbled), making the gesture of easing to an unimpressed market.  The question is now – will they ease again?  Consensus seems to be for a further ease in December.  Much could change by then.  While Powell mumble-swerved about remaining data dependent, Trump immediately weighed in with: “Powell and Fed fail again! No guts, no sense, no vision.” 

More Green

Apologies for writing again about Green Investments, but I got a massive response and lots of emails from readers y’day.  There was 100% agreement the environment and climate change is the most critical issue in terms of long-term investments, but also 90% agreement that Green investment labels are distractions. 

Among the many comments was one from the CFO of one of the world’s largest debt issuers.  He told me he expected to be forced to issue Green bonds in the future, even though: “A fancy green bond at a premium to my regular borrowing costs is simply a gift from our shareholders to some fund manager looking for a higher return.”  A fund manager told me he’s stopped going to Green conferences because they’ve been “hijacked by consultants, advisors and other parasites”.

But perhaps the most worrying response came from an old chum of mine – he got into serious Economics, and is now a very senior professor in a proper US university.  He mailed me y’day to say he was at the OECD conference and was “terrified” by what the engineers and scientists are demonstrating to be fact.  It puts Greta Thunberg’s comments to Congress y’day into sharp relief. She told them – “If you want advice for what you should do, invite scientists, ask scientists for their expertise. We don’t want to be heard. We want the science to be heard.”

To give the Green bonds credit, they have raised awareness among the investment community of the need to do something.  Bloomberg writes often about Green Bonds. A recent article seemed to be equivalating rising Green bond issuance with turning back climate change.  They cite the growing number of investment banks that have set up “sustainable finance teams” to “find ways to address demand”… which means “to make money by inventing a whole new market segment we can persuade clients to issue and invest in”.  Cynical, but that’s the way investment banking works.  I know. I did it for years… and I was good at persuading issuers they had to tap some new (and largely imaginary) new investor base.

Perhaps a better way of greening finance would be for investors to work the other way around – turn down or demand higher returns from investments in anything non-green, taking positive actions against polluters rather than investing based on labels. (Of course, such action might just push up returns for funds deliberately making investments decisions based on how much Bad Stuff borrowers do!) 

According to BBerg numbers, HSBC dominates the issue of green bonds – its’ “sustainable finance team” is leading the league tables, and its’ head describes it as “a new battleground” in finance.  It certainly is.  Mighty battalions of “sound-bite” armed salesmen are persuading investors to buy – “look, how beautifully green it is.”  (Great quote on Bloomberg: “I’ve looked at deals that claim to be green, and I would just say they are less brown.”)

Despite their being no agreement on what constitutes a green bond, the issuance of so-called Green bonds has quadrupled over the past five years, according to Bloomberg, hitting $135 bln in 2018.   The French government has issued over €4 bln of green bonds this year…  Give them a coconut..

Telecoms companies are at the forefront of Green issuance, saying their green financing will allow them to reduce energy consumption. (Really? In what way would normal financing disallow them from controlling energy costs?) Other corporates are finding a ready market for their Green Bonds as Chief Investment Officers look to tick their ESG and Green boxes to show their investors what environmentally aware investors they are. Aw, bless them..

Problem is – it largely bollchocks.  It’s the “let them eat cake” moment.

For all the Green Bonds that have been issued… in science there is truth:

• Co2 levels have not dropped. 
• Temperatures have not fallen. 
• Not a single polar bear is better off. 
• No matter how many virtue signalling Green Bonds and conferences take place, the brutal reality is that Co2 Levels continue to rise. 
• The scientific evidence (from a half-million years of ice- cores) suggests Temperature lag Co2 by around 50-years. 
• Even if we stopped 100% of Carbon emissions today, we won’t stop it. There is no global reset on Carbon Dioxide emissions. 
• Temperatures and sea levels are going to rise.

Yesterday, new numbers from France suggest it’s happening faster than we thought – their projection now show its up from 3 degrees to 5 degrees in the next 80 years. That is really bad news.  Ice sheets will melt, sea levels will rise, and much of Europe will overheat.  On my recent walk round the South Downs even I noticed the beech trees dying. Trees across Europe are massively stressed from drier hotter conditions.  Weather patterns have changed.

While companies excuse themselves by flouting their self-appointed green credentials – the reality is everything pollutes.  For instance, were you aware the global IT business creates twice as much Co2 each year as Aircraft?  Alongside cutting back on unnecessary flights, if you are serious about reducing your personal Co2 – then don’t change your phone, use smaller laptops and tablets, and don’t even think about changing them.  And don’t believe any of the crap you get told about recycling… the occur in trace amounts in your phone and go into landfill.  Mining the 40 or so rare metals in your phone is another major contributor to global warming.

However, warmer temperatures and rising sea levels are not going to be the problem in themselves.  The climate changes that are underway, and are now unstoppable will lead to massive competition for resources – for food and especially water.  Global tensions are going to rise.  The chances of conflict will rise.  And its right on our doorstep.

Let’s not panic.  The big question is can avoid resource conflict, still have growth and constrain Co2? 

Yes. Maybe.

While we can’t afford to underestimate the effects, neither should we be hysterical about it – the reality is its happening, so let’s be pragmatic, address it and plan it carefully.  We can’t just abandon the current economy and create a new one overnight.  It will need a managed shift into new clean growth tech. That’s the massive challenge of coming years.

These are areas and opportunities I reckon are going to prove critical – and thanks to a number of clients who’ve contributed ideas on this:

• Water – this is going to be the greatest challenge and the largest driver of conflict – there are solutions and alternatives to depleting aquifers and desalination.
• Agribusiness – food scarcity demands new solutions and approaches, while adding soil degradation to the equation.
• Storms and weather instability – massive population movements
• Carbon Pricing and Carbon Offset – forcing polluters to pay and building carbon markets to punish and encourage…
• Recycling and Waste Management  – new businesses that are ripe for AI and Robotics
• Bio-engineering and nanotech – new approaches to addressing pollution and the environment

Sorry if I’m writing too much on Climate Change.. I know I really should be commenting more on markets, stocks and bonds, but this is important stuff..

Out of time and back to the day job…

Bill Blain

Shard Capital