Climate Change: How to Invest for the Possibility

Why is it that we don’t trust the TV weather man to accurately predict the weather tomorrow or next week, yet we are willing to swallow hook, line and sinker that we “know” that, 50 years from now, the earth’s coastal cities are all going to be under water? Because someone who plays a climatologist on TV told us so?

I am not a climatologist – just a rational man who respects the empirical process. Before I accept opinion as fact, no matter how many eminent scientists like Penelope Cruz, Tim Robbins, and Harry Hamlin present it, I need to see the facts. Then I can make an informed investment decision and be able to intelligently guide my portfolio.

Fact 1: The earth is getting warmer. Or at least it has been. Climatologists disagree on whether it is still warming or whether (as the data now suggest) that it has been warming but may have reached a zenith and is now declining. Let’s say it is still warming. As the ice core and sedimentary rock samples going back, respectively, some 400 thousand and 400 million years clearly show, “Inconvenient” as this Truth may be, there is little evidence this trend of warming and cooling is unique to this century, or the previous one, or the Industrial Age.

Fact 2: From 400 million years ago to the present: Paleoclimatologists study indicators from not hundreds, or thousands, of years ago, but from millions or hundreds of millions of years ago. In the graph below (click to enlarge), they studied sedimentary rock to determine CO2 levels for the past 500 million years. This may be inexact, but it’s considerably more rigorous than listening to someone with a vested interest in biomass companies screeching about what-ifs in sound bites on the evening news. These paleoclimatologists have concluded that this is one of the coolest periods in the last 500 million years.

Fact 3: From 400,000 years ago to the present: Below are the results from climatologists and paleoclimatologists who have studied ice core samples for trapped gases that correlate with atmospheric CO2. These clearly show the cyclic changes caused by who knows what – the Pacific vent, cloud formation, tilt of the earth’s axis toward the sun, periodic solar radiation, etc. – but certainly long before cavemen were ever on the scene (click to enlarge).

Fact 4, :Today. Man’s puny contribution to earth’s atmospheric greenhouse gases (and CO2) is “a drop in the bucket.” Dropping it 25% is unlikely to measurably affect the global climate (click to enlarge).

Just as with investing, I doubt anyone can predict the future of the world’s climate in a particular time frame.

Like investing, however, the past may offer clues to future performance.

Like investing, climate, like the market, seems to offer proof of cyclical, not linear, patterns. Temperatures move up a couple degrees from the mean, they move down a couple degrees from the mean. And they seem to do so based upon forces so much more powerful than mankind – one could note they are planetary and universal in nature.

With that in mind, we could invest in land that is 20 feet above current sea levels, as some have recommended. Or we could invest in cap and trade, as some have recommended. Or we could short fossil fuel companies like coal, oil and natural gas, as others have recommended.

Or we could apply a dollop of common sense and calm to the current shrillness. We could review the facts of the last 400 million years (via sedimentary rock), the last 400,000 years (via ice core samples), and our own short history on this earth showing variations in climate that span a couple of decades. And we could, based upon that empirical evidence, toss in a pinch of geopolitical insight that food, energy and health care are basic Maslovian needs that the part of the world that doesn’t get to dilly-dally in junk science cannot overlook.

So even if “global warming” were man-caused – and the empirical evidence does not support that opinion – will anyone outside Western Europe, Canada, Japan and the US actually do anything about it? My answer is no, absolutely not. It is nowhere near the top of their list. If the US, Canada, Japan and Western Europe spend upwards of $500 trillion over the next century (UN estimate for following the Gore prescription is $553 trillion) we may affect nothing and the rest of the world will use our folly to their advantage and our disadvantage.

Food, energy and health care will override all other considerations in that part of the world still growing dramatically. So that’s where I am investing.

To feed the world, grains, crops, livestock, fertilizer, and efficient irrigation all top my list. Deere (DE), Israel Chemicals (ISCHY.PK), Yara Intl (YARIY.PK), Nestle (NSRGY.PK) and Lindsay Mfg (LNN) are among my favorites.

For energy, I choose natural gas first, nuclear next, and then solar, wind, biomass, oil and coal – every single one of them. In the developing world, coal and natural gas are most abundant and cheapest and will therefore be the first choice of most users. While these have been well-covered in previous articles I will mention just a few representative issues: Exxon Mobil (XOM), BP, Conoco Phillips (COP), Royal Dutch Shell (RDS.B), Williams Partners (WPZ), Magellan Holdings (MGG), Boardwalk (BWP), OneOK (OKS), Chesapeake (CHK), EnCana (ECA), Imperial Oil (IMO), Natural Resource Partners (NRP), Penn Virginia (PVR), and Cameco (CCJ.)

In health care, the revolution in the West has come from ethical drugs, non-invasive technology, prevention and early interventions. That’s the way to invest. I like the biggies here: Roche (RHHBY.PK), Johnson & Johnson (JNJ), Merck (MRK) and Pfizer (PFE) come to mind.

Avoiding overpopulation, illiteracy, disease, and hunger never go out of fashion. Global cooling did. I imagine global warming will, as well.

Full Disclosure: Long DE, ISCHF, YARIY, XOM, BP, RDS.B, WPZ, MGG, BWP, OKS, CHK, ECA, IMO, NRP, PVR, JNJ and PFE.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – especially so you are not over-impressed by the fact that our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running. What if this is the year we under-perform it?

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Comments

[Chad Brown:]

"I am not a climatologist – just a rational man who respects the empirical process.

You say your are not a climatologist but that does not seem to stop you from knowing the answers to the questions that climatologists study. Can you do that also with medical problems? (Perhaps I could save on my medical bills with you.) How about foreign policy issues? Can you translate ancient languages? I guess scientific questions would be a breeze for you given your respect for the empirical process? Are there any areas where you don't have all the answers? Also, do you need to know the questions first, or is that just a waste of you time?

Sep 26 04:28 PM

[Bob55:]

When doctors tell you today that smoking is bad for your health, people listen without contesting the empirical evidence. Likewise, when the majority of the world's scientists say there will be very imminent consequences if we don't cut CO2 emissions drastically in our immediate future, we should listen seriously. This conclusion if from the vast majority of those who are climatologists who know their business far better than you or I.

Now getting back to my cigarette example, for decades cigarette companies try dismissing the validity of the health claims against them in fear of it cutting into their profitability and it wasn't till decades later that it can be accepted without a doubt that smoking cigarettes will kill you. The consequences of Global Warming may well be vastly more devastating. If the world could be at risk, I ask you why would you even risk it? Sure, there's the possibility decades from now that just maybe, just maybe, Global Warming may not be caused by humans, but I'm surely not going to wait decades as was done with cigarettes that it is, without a doubt, a danger. By then, it will be too late.


On Sep 26 04:28 PM Chad Brown wrote:

> "I am not a climatologist – just a rational man who respects the
> empirical process.
>
> You say your are not a climatologist but that does not seem to stop
> you from knowing the answers to the questions that climatologists
> study. Can you do that also with medical problems? (Perhaps I could
> save on my medical bills with you.) How about foreign policy issues?
> Can you translate ancient languages? I guess scientific questions
> would be a breeze for you given your respect for the empirical process?
> Are there any areas where you don't have all the answers? Also,
> do you need to know the questions first, or is that just a waste
> of you time?

Sep 27 02:34 PM

[DmPerignon:]

It's a joke, right? Your column cannot be for real, can it? You are not really as stupid as you publicly make yourself out to be, are you? Remember one thing, Mr. Shaefer - Nature bats last. And it will take no special pleasure when it terminates the current man-made world. Which is a shame, really - SOMEONE should gloat that you are gone!

Sep 27 10:04 PM

[concrete guy:]

The USEPA has publicly stated that without proportionate CO2 reductions by China and India, the proposed cap and trade legislation in congress will have no measurable impact on climate.

Regardless of which side of the AGW fence you are on, this statement alone should give everyone pause. Cap and trade will be economically ruinous (particularly in the current recession), and with zero potential to actually produce a beneficial climate result, the political agenda attached to it should be obvious to all.

Sep 28 12:42 PM

[Joseph L. S...:]

READY! FIRE! (Aim???)

The last refuge of the incompetent is – if you cannot dispute the facts, slander the messenger.

I expect personal attacks when reporting facts that make some people uncomfortable. But to those who wished me dead above, the reports of my death have been greatly exaggerated.

I’m just reporting facts here – UNLIKE the “computer models” (garbage in – garbage out?) that some scientists have put together to push the agendas of their employer or to get grants or sell books.
“Computer models” are as good as any other prediction about the future. (i.e., flip a coin.) But the past, both distant and recent, provides incontrovertible evidence of what has already occurred.

Fact: Global warming (some 5 degrees Centigrade) over the past 15,000 years) is what allowed man to exist on this planet.

Fact: Science is quite clear, based upon sedimentary rock samples going back 400 million years before the evolution of mankind, let alone the first automobile, and 400,000 years based upon ice core samples, that CO2 levels have been WAY higher in the past, long before man arrived on the scene. They fluctuate, as does the temperature at various points on the earth.

Fact: We have a massive body of research showing what factors really can control cycles of climate change. As reported in the article, global warming and cooling cycles are controlled primarily by cyclical variations in the sun's energy output , eccentricities in Earth's orbit, and the "greenhouse effect," caused by atmospheric moisture and gases like water vapor, carbon dioxide, methane, and nitrous oxides, which help to trap radiant heat which might otherwise escape into space. This greenhouse effect is by far the weakest of all the factors -- and regular water vapor makes up 95% of the greenhouse effect!

Even if The Big Lie were true and man somehow caused all this even though we weren’t even around yet, no developing nation is about to let its people starve and die in the dark because they stopped growing food and using heat in winter.

Bottom line? Living on this planet involves choices. It would be nice if we had unlimited money to do everything. We don’t. Some people and some governments need a cause to feel worthwhile. This one flies in the face of empirical evidence, would bankrupt us to execute it, will not be agreed to by most other – and all fast-growing, thus carbon-emitting – nations. Even if we had unlimited resources and all nations act angelically, the best estimates are that we might affect climate by as much as 3/100 of 1%, a virtually undetectable amount.

Now if you want to argue that we should stop carbon emissions because they add to pollution, you have a case – and a point on which you and I agree. But buying and selling emission allowances controlled by Big Government and profiting only Wall Street in order to “stop global warming”? Get a grip. We are simply one species walking a planet that would exist and warm and cool based on the factors above whether we were here or not.

Sep 28 02:59 PM

[Bob55:]

A huge danger when an article like yours come out is when it makes the suggestion that we should do nothing to stop global warming, that it is simply a natural cycle of warming and cooling throughout the Earth's history, and mankind has neither the resources nor the true volition to do anything about it. The arguments bear similarities to when cigarette companies deny claims that their product cause everything from emphysema to cancer. They might try modifying their products a little like suggesting low-tar cigarettes, but in the end, their products is just as dangerous. I hope very much the same ploy is used here regarding global warming. Today, cigarettes are forced to have health warnings on their label, and after adding all the tax surcharges the cost of a pack of cigarette is close to $10 a pack. The same can be applied here. Yes, there will be a cost to world governments and industry to combat the problem, but if left unchecked, I foresee the cost in the future will grow substantially. We have the technological means to reduce greenhouse gas emissions and if survival is at stake, I believe mankind will be more resilient than you give them credit for.

Sep 28 07:44 PM

[Bob55:]

Sorry, a typo:
" I hope very much the same ploy is not used here regarding global warming. "

Sep 28 07:47 PM

[concrete guy:]

"that it is simply a natural cycle of warming and cooling throughout the Earth's history"

Bob55...why is that such a difficult argument for you to confront? That is in fact what the credible evidence is pointing to. Some indisputable facts for you:

-In 2008 arctic sea ice extent returned to 1979 levels
-In 2008 the largest annual average temperature change ever recorded for the earth was documented and the change was a DECREASE in average temperatures.
-In 2008 the USEPA squashed their own internal report by two senior scientists (thankfully it was leaked) that stated the foundation for AGW is based on outdated faulty data and that the current concern for AGW is nothing more than speculation with no credible scientific foundation.
-In 2009 33,000 scientists across the world signed a petition submitted to the journal Nature that stated there is no credible scientific basis for the idea of AGW (so much for the debate being settled).
-The last interglacial period is universally accepted as having been much warmer than the interglacial period we are currently in.

Before we hurl ourselves off a green cliff with cap and trade we must vigorously debate the issue and arrive at a better understanding of climate dynamics. The health and welfare of our economy depends on it.

Sep 29 09:03 AM

[Bob55:]

Strange isn't it that other countries across the globe are willing to hurl themselves off this green cliff (as you put it) because the leaders of their countries see global warming as a very credible threat with very serious consequences. Or perhaps these leaders are misguided as those of us who put Earth and the environment first and foremost over corporate profits and the economy? We, in the U.S., can continue debating this till the cows come home while the glaciers continue to melt and world water levels rise.

Sep 29 09:31 AM

[concrete guy:]

Bob: When CFCs were shown to be depleting the ozone layer, every country on the planet immediately discontinued their use. Why?....because the science behind the concern was compelling and indisputable. So why then are the vast majority of these same countries not responding to the AGW concern? Because the science is anything but compelling. AGW is not science, it's religion.

Sep 29 10:00 AM

[biomedlives:]

I recognize that there are trained scientists on both sides of the argument. My point is that the mere fact that celebrities with no scientific credentials endorse a particular position is not a reason to dismiss that position.

I'd be interested to know what data you would regard as convincing evidence that global warming is real.


On Sep 25 10:44 AM Jimbo wrote:

> Biomedives: there are also a large number of trained scientists who
> are skeptics about AGW. Astronomers at a well known observatory (Lowell
> in Northern Arizona) told me several years ago that they believe
> the main driver of global temperature, and much long term wet/dry
> cycles, are due to solar activity. My fear is that the Utopian movement
> has emerged from the ashes of the Soviet Union, the People's Republic
> of China, Cambodia, etc. to seek to seize control of all human activity,
> in the name of "science" of course. There has always been a delay
> effect in the seasons: Summer warmth persists into the Fall and Winter
> cold persists into the Spring. The recently reported melting of glaciers
> could be reversed by the now observed significant drop in sunspot
> activity. We need more data and not breathless speculation. To access
> the scientists who are AGW skeptics, see the Heartland Institute.

Sep 29 10:02 AM

[Bob55:]

Perhaps it is for the same reason that the U.S. have not committed for so many years and why China and India have yet to agree to commit. Growth of the economy at all cost.

At least in the last summit, China has taken some steps in the right direction by announcing concrete investments in renewal energy, a large-scale tree-planting project, etc. but it is a mere first step. Should the U.S. finally make a commitment, it would be a huge step towards acknowledging that the science is real and not mere religion as you say and it will be a matter of time that other uncommitted nations will follow. We just have to say which way the wind blows in Washington this time around.


On Sep 29 10:00 AM concrete guy wrote:

> Bob: When CFCs were shown to be depleting the ozone layer, every
> country on the planet immediately discontinued their use. Why?....because
> the science behind the concern was compelling and indisputable. So
> why then are the vast majority of these same countries not responding
> to the AGW concern? Because the science is anything but compelling.
> AGW is not science, it's religion.

Sep 29 10:30 AM

[Bob55:]

Very sorry - correcting another typo.

"We just have to see which way the wind blows in Washington this time around."

Sep 29 10:32 AM

[concrete guy:]

Bob: You keep sensationalizing you point with statements like: "Growth of the economy at all cost". We have constrained the growth of our economy in numerous ways out of concern for the environment (e.g. USEPA, RCRA, NPDES, endangered species act, etc). We will continue to find compelling reasons for further constraint as our knowledge improves.

Just because an increasingly small percentage of our population has breathless concern over AGW is no reason to embrace bad science and faulty reasoning and implement catastrophic legislation.

Sep 29 11:59 AM

[HardwoodFlo...:]

I think that the debate about if Global Warming is real or not is stupid. Of course global warming is happening. The question is why is it happening?

Is all because of human cause? No. is it part. Yes. There are parts of Europe where the timberline has moved up 50 meters. Doesn't sound like a lot does it? But it does have an effect on animals, flora and fauna etc.

I think we are right to continue to try an minimize our, human, global impact on the environment.

Corporations like Cargill are sure that Global warming is real. Now, who are you going to bet against, one of the most sophisticated companies in the world that relies on natural resources (grain, sugar etc) who are betting billons on the reality of global warming or the nay sayers?

Sep 29 12:39 PM

[HardwoodFlo...:]

China is an environmental disaster...I can't stand the whole "China" is ahead BS. They are still making AC on a Freon(sp) platform. Have people that bang on about China's environmental record actually been there? They are a g-damn disaster.

Sep 29 12:42 PM

[HardwoodFlo...:]

Bob55

F- China's tree planting paltform. the US is home to some of the most forested areas in the world- we just need a commitment (e.g. Carbon Credits) to keep them sustainable.

Sep 29 12:44 PM

[Bob55:]

And labeling global warming as "bad science and faulty reasoning" is not sensationalizing? Let me ask you something. You admit that it is important that decisions be made "as our knowledge improves" meaning global warming "could" exist but so many like yourself would not admit to it at the current time. Likewise, an increasing (not decreasing contrary to some's belief) number of AGW-believers could change their views in the future if the scientific community could prove undeniably that its cause is not man-made. You're not going to convince me and I'm not going to convince you, but in the meantime, real things are happening in our environment that will have dire effects on humankind. I don't care what's causing it right now. It's happening. Do we take the approach of doing nothing and watch the coastal areas of the world sink to rising waters or do we try implementing something on a worldwide scale and see if it makes a difference? I take the approach of doing something because to do nothing especially if we have the means to is to give up and accept disaster.

Sep 29 12:53 PM

[Bob55:]

It's precisely because China is an environmental disaster due to industrialization that they have to do something soon on a grand scale. Think their growing economy doesn't have a price? Look at the smog and polluted rivers that is decimating their people and landscape.

Like I said, it was a first step. A first step is better than not taking a step at all.


On Sep 29 12:42 PM HardwoodFlooring wrote:

> China is an environmental disaster...I can't stand the whole "China"
> is ahead BS. They are still making AC on a Freon(sp) platform. Have
> people that bang on about China's environmental record actually been
> there? They are a g-damn disaster.

Sep 29 01:02 PM

[dabard:]

Joe,

a thoughtful article demands a thoughtful comment. I tend to agree with your investment conclusions although not your premise about AGW. I started out as a skeptic about AGW, but after some serious study, think the scientists have it right.

Fact 1: without the trace amounts of greenhouse gases, the planet would be 30 degrees colder. Science observed this out about 100 years ago. It is very well understood now, although it takes some fairly rigorous math and physics. Nature is clever.

Fact 2: Measurements indicate that CO2 levels began to rise in the middle of the 19th century, corresponding with the increase of substantial fossil fuel usage and decrease in forest cover. More in, less out. There is excellent data supporting the position that MOST of the new CO2 comes from burning coal.

Fact 3: Recent measurements indicate that average planetary temperature has gone up faster in the last 30 years than any time in the last 100000 years. This shows up in data like decreased polar ice cap coverage, shifts in what plants grow at what latitudes (check out the USDA Hardiness Zone maps for the past 50 years), and observations of melting permafrost (which releases lots of methane, as another poster commented, as an even more potent greenhouse gas).

Conclusion: On top of natural climate variability, man-made influences have become significant in the past 100 years.

Climate models now get the direction and major features right. Every model points to warming. Any argument is how much and how fast, but warming is in the pipeline.

Human civilization is (best guess) 10000 years old, and the USA is 250 years old.
Humans live 60 to 100 years.

In geology, 1000 years is really fast. A century is a geologic eyeblink.
In your first figure, the thickness of the line is a couple million years.

For an investor, what is the right timeframe?

Opinion: It is okay to ignore climate change if the investor time horizon is 1 year.

It becomes a factor thinking 5 years or so out, on the scale of presidential election cycles.
Or gnerations, leaving something to the kids for when they grow up.

Examples: I would not want to be a holder of coastal property insurance companies.
Fact: it's tough to get property insurance around some coastal areas of Florida.

It's a fair argument about investment amongst the geopolitics of doing something (or not) about mankind-induced climate change. What will, and won't, be done, by whom, and what will it cost.

Thanks.

Oct 02 01:39 PM