How the Copenhagen Climate Treaty Will Affect Equity Markets 19 comments
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We don't know if the furor over climate, economic and sovereignty issues coming to a head over the impending December Copenhagen climate treaty is correct, incorrect, exaggerated or spot-on.
Obama on Cost Impact of Climate Policies (March 18, 2009):
Warren Buffett on Cost Impact of Climate Policies (March 9, 2009):
There is now concern that Obama will sign a treaty that will limit the options of our legislators or subsequent presidents to modulate our approach to the climate change issue. Whatever burden the U.S. may carry under domestic policies, we expect the burden would be greater under international treaty requirements.
We believe that the general direction of domestic policy in the U.S., and plausible international treaties the President may sign, will among other things:
- Limit manufacturing in the U.S. by cap and trade regulations.
- Limit personal consumption of energy by law and costs.
- Cause the cost of energy to increase.
- Cause goods and materials to become more expensive.
- Cause transportation to become more expensive.
- Prevent the U.S from growing out of its economic problems as effectively as it has in the past.
- Assure and accelerate the shift of economic growth and profitability from the U.S to emerging markets.
- Not limit the amount of stuff manufactured worldwide as global consumerism increases.
- Increase the percentage of stuff consumed in the U.S. manufactured in emerging countries (who will not be subject to the same carbon emissions limits).
- Cause the U.S. to become an even greater debtor while China becomes an even bigger creditor.
- Add momentum to the movement away from the U.S. Dollar toward an alternate single or composite world reserve currency.
- Increase the cost of Treasury borrowings.
- Increase the cost of commercial, mortgage and personal debt tied to Treasuries.
- Reduce the exchange value of the Dollar.
- Reduce home purchase and ownership affordability.
- Drive up federal and state taxes.
The pace and degree of these sorts of change is uncertain, but the direction of policy change is clear. Without commenting on the political or moral issues that are hotly debated, the clear implication of the direction is at least a reduced rate of improvement in U.S. standard or living, potentially an absolute decline, and adverse overall U.S. stock and bond consequences for a considerable time.
The political claims are that the conversion to alternate fuels and more energy efficiency will create a new and brighter economy -- only time will tell. However, we expect at a minimum a very bumpy transition that will be difficult for investors. Countries not going through that transition or exempted from the transition may have smoother economies as a result.
As a general proposition, we'd prefer to have a large slug of our money working in economies that are not going through the economic experiments, successes and failures, and trials and tribulations that we expect domestic laws and international treaties will impose on the United States.
The short story is that the domestic and international energy and carbon policies (with their stricter limits on developed countries and lower limits on emerging countries) are in effect China and India stimulus plans -- a wealth and wealth opportunity transfer from the U.S. to emerging countries.
The simplest investment response is to diversify cash, bonds and stocks more fully to other parts of the world, and to have a less U.S. centric portfolio. At least for now there are no significant currency controls, international investment limitations or tax surcharges on investment gains or income from non-domestic investments. For now, and we hope forever, you are free to invest your money globally. We suggest that you do so.
The logical investment responses would be:
1. Reduce stock allocations to the United States and increase emerging markets allocations.
2. To the extent you invest in U.S. companies, focus on those with low energy or materials consumption, or that will increase sales directly due to carbon or energy limits, or to those companies with substantial non-U.S. operations and sales.
3. Stay at the shorter duration on bonds, because Treasury interest rates are likely to increase and trend at higher levels than when the U.S. was less of a debtor and not limited in its ability to grow out of its debt.
4. Think through how decreased house affordability will ripple through various industries when investing domestically, because homes are likely to become less affordable as energy costs rise, mortgage rates rise, local taxes increase and construction materials cost more -- while at the same time the equilibrium rate of unemployment will be higher than in the past and the rate of growth of wages will struggle to keep up with inflation.
5. Diversify fixed income assets to include high quality international debt denominated in other major world currencies.
6. Consider holding part of cash reserves in multiple currencies.
7. Expect carbon credit investments to become popular with a proliferation of funds which may eventually become useful in portfolios -- not yet though.
8. Perhaps abandon the simplistic concept of developed and emerging markets (now cast in cement by index providers and index fund managers), and replace that with a differentiation between net creditor and net debtor nations, net importer and net exporter countries, resource exporters versus goods and services exporters, and low GDP growth versus high GDP growth countries. A simple way to monitor the shift would be to watch these three percentage performance charts:
- Three equity funds: VTI, VEA and VWO (for total U.S. stocks, total developed market stocks ex Canada, and emerging markets stocks)
- Three funds: BND, BWX and EMB (for U.S. bonds, local currency developed country bonds, and Dollar denominated emerging market bonds)
- Three indexes: oil (proxy USO), gold (proxy GLD)and U.S. Dollar index (proxy UUP).
You can get a pretty good idea of the global picture from those nine plots without spending too much time. You could track the oil, gold and Dollar proxy funds instead of the indexes, but at least for oil, the tracking is not necessarily good.
Short-term versions of those three charts follow:
Enjoy the U.S. and global bull of the moment, but think long-term by becoming more of a global investor.
Disclosure: We hold VTI, VEA, VWO, BND, BWX, EMB and GLD in some managed accounts.
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This article has 19 comments:
I am surprised your list of "logical investment responses" does not include investing in alternative and renewable energy companies where the U.S. and investors stand to benefit greatly from such climate legislation.
this wil not be lost as consumer expenditures are. china and india
will require some international encouragement like a tax on goods exported until climate legislation is adopted.
we are cooking ourselves to death with the c02 emissions. something globally has to be done.
On Oct 21 08:49 AM bartpr wrote:
> the goal of cap and trade is to force fuel users to use les polluting
> ng, solar, wind, etc. some are making changes now to anticipate
> the changes coming. change will require cap ex to make the conversion.
>
> this wil not be lost as consumer expenditures are. china and india
>
> will require some international encouragement like a tax on goods
> exported until climate legislation is adopted.
>
> we are cooking ourselves to death with the c02 emissions. something
> globally has to be done.
anyway, i love international bonds.
The reason is that Copenhagen is quite simply nonsense, and its purpose is to convince the television audience that it will save their climate bacon - if, indeed, it needs saving. The people who go there also need to drink some Danish beer, and I hope visit those marvelous jazz clubs - if they are still open. And Mr Steve, the next president is NOT going to withdraw from that silly treaty because politically it would be the wrong move. The wrong move for him. that is.
As for more Green investments (i.e. renewables), those are needed. If it means playing along with foolishness like the Copenhagen meeting, then so be it. The thing that needs to be stopped though is cap-and-trade. Who came up with that crazy idea?
I did include alternative and green companies indirectly by this comment "or that will increase sales directly due to carbon or energy limits".
I chose not to specifically say "alternative" or "green" because so many are immature companies.
Technology history shows that most new technologies leave many dead companies along the path of development (check back on dot.com phase, or railroad phase in a prior century).
Large companies tend to be the winners. They buy up or start entities that carry the new tech forward after the first movers and pioneers take the biggest risks to find out what works.
Clearly, there will be winners among alternative fuel and green companies, but also many duds or failures.
For those who are willing and able to do the difficult research and buy sufficiently diversified holdings, alternative and green may prove rewarding -- I just don't want to be seen as promoting that route. We are conservative investors and new technology is generally not a place for conservative investors.
Your suggestion that a subsequent president simply withdraw from an international climate treaty may run up against a Constitutional provision that could prevent that. There was an important attempt in Congress in 1953 to deal with the question. It was covered by Time Magazine -- you can read the article at:
www.time.com/time/maga...
Mr Shaw, Your arguments against GHG is completely wrong. Facts are if we go on as now not including CC, we would be far worse off anyway. Why is whether or not we we do CC the price of fossil fuels are going up with a bullet. Notice oil just hit $80/bbl?
Facts are lowering GHG is cheaper that using fossil fuels. RE is or will be shortly the low cost energy source. As fossil fuels rise in cost and RE drops, it really is a no brainer.
We need to cut fossil fuel use for economic and national security. GHG reduction is just a good benefit.
It's all basic Econo 101. RE, conservation/eff is the cheap energy source of the future, deal with it. Or pay far more to use fossil fuels.
On Oct 21 08:26 AM The Green Investor wrote:
> Thank you for listing all the reasons why climate legislation might
> be bad for the United States.
>
> I am surprised your list of "logical investment responses" does not
> include investing in alternative and renewable energy companies where
> the U.S. and investors stand to benefit greatly from such climate
> legislation.
should such a treaty gain USA approval, will it be as successful[worldwide] as OUR non proliferation treaty for nuclear weapons? should we expect better compliance? how will it be enforced?
i believe history sends a message to us here in the USA. we should not "screw ourselves to the wall" in the belief that other's national interests will reflect our own. CAVEAT EMPTOR!!
If you want to get a read on where the U.S. voter is on the fantasy of global warming, go to rasmussenreports.com and search on "climate change". Here are the headlines.
--29% Say Americans Selfish For Putting Economy Ahead of Global Warming (47% reject this idea).
--56% Don’t Want To Pay More To Fight Global Warming
--42% Say Climate Change Bill Will Hurt The Economy (19% think it will help)
The U.S. voter is overwhelmingly opposed to this global warming nonsense and will become more so if the Leftists actually do anything other than talk about it.
Politically it would be the right move for the next president, except if he is looking for a Nobel Peace prize.
You folks can complain all you want. Personally, my portfolio is centered around a low carbon energy future, and it's way up. It's also more responsible to future generations.
Lastly, those hysterically decrying "the final destruction to our constitution [sic]" simply don't understand the Constitution.
On Oct 21 09:40 AM history repeats wrote:
> one thing is clear, the extreme right reacts to climate science like
> a religious zealot having his faith questioned.
>
> anyway, i love international bonds.
it not my experiment . the industry would not use it unless it served a purpose. you sound like one who does not believe the global warming
occurring.
the presidents position is irrelevant when utilites are beginning to switch to nat gas from coal in prep of carbon cap on their own. check out the business week article of oct 19. the bill has already passed the house. oboma sounds like he is in bed with the coal industry and the chamber of commerce. some big compaines have withdrawn form this organization because of its blind resistance to emission caps.
also, the recent supreme court decision ruling the epa the riight to
limit CO2 emissions will put further pressure on polluters to change.
you doubters of warming are far right lemmings. al talk but no facts.
bring on alternative fuels.