This is not a political piece. As a libertarian I despise all politicians and parties almost equally - Ron Paul being a standout exception. This is a piece explaining the profound implications for your portfolio of an inevitable shift in the attitudes of the governing classes towards global warming.
I do not believe in man made climate change. I shall explain why and why I expect the argument to increasingly go the way of folks like me and against Al Gore and the current consensus. More critically I shall discuss recent events which show why government policies involving writing blank checks to tackle the perceived threat are starting to change and will change rapidly not only across the West but even in China.
And that leads me to the implications for your portfolio. I have in recent days written on three Chinese solar stocks you should short because in each case (here and here) the stocks in question have train wreck balance sheets and are burning cash at horrific rates. If one is prepared to accept that Global policy towards climate change must alter and will alter soon then the case against these companies moves from compelling to absolute. There are other stocks in a similar boat, that is to say ones whose economic case moves from dire to beyond hope if the current subsidy driven systems (prompted only by the current policy response to global warming) alter. I have highlighted a new short in this vein: Ming Yang Wind Power Group (MY).
Furthermore the fund management industry has jumped onto the green bandwagon with alacrity. Perhaps as a "hedge" you have a portion of your savings in green funds or ETFs. My advice is to dump the lot but I highlight three such collective schemes which are worthy of particular attention.
This is an investment article. That is my main interest. And in protecting your wealth it should be yours. But what needs to be appreciated is why the investment case has to change ( it disappears) if governments across the world alter their policies. And so I start with my basic premise: the case for man made global warming is very weak indeed.
I realize that being a climate change denier is rather like being a flat earth skeptic in the 1400s. The entire establishment is against you and, with an almost religious fervor, will aim to undermine your arguments. I am undeterred. For the avoidance of doubt, I do not pretend to have a scientific background (history, philosophy and economics is my area) but I am not paid a cent by big oil to write this.
I start with the scientists as we are always told that 99% of them believe on global warming. Back in 1973, after three decades of global cooling, the scientific consensus was that we were heading for a new mini ice age. Things change. According to a 2008 survey of US climate scientists, 97% do believe that global average temperatures have increased during the past century. I have no problem with that, I agree with them. However only just over half (54%) reckon that the warming is not "within the range of natural temperature fluctuations."
The 99% figure comes from research published on the matter which is subjected to "peer group analysis" but as the UAE email hacking scandal made clear those who control the climate change industry and agenda have gone to enormous lengths to ensure that only climate change believers are allowed to be accepted as peer group reviewers. The Bishop Bill blog covers this in detail.
Thus believers approve reports by other believers (not vice versa) and scientific opinion is shown to be almost universal. Those who dare to dissent face career threatening pressures.
Moving on (briefly) from science, I turn to history and the rather inconvenient truth that there is clear evidence that the world often warms up and then cools down again. The sixth to eighth century (the European dark ages) was a cool period. The years 1100-1400 saw the world get much hotter "The Medieval warm ages". Vines flourished in what is modern Greenland. There was a cooler period 1600-1800 and then the world got warmer. You might have realised that carbon emissions during the period 0 AD until 1900 were - compared to today's levels - trivial. But that did not stop climate change. As it happens ice core samples show that carbon levels in the atmosphere did rise after periods of global warming. In other words (to go back to my philosophy training) the events are conjoined but not connected (or not at least in the way Al Gore would have us believe).
And so to more recent history. The world did get warmer in the 20th century. But it was not a smooth line as those who would draw a link between carbon emissions and climate change would have us believe. The 1930s were a lot hotter than the 40s, 50s, and 60s. 1940-1976 was a global cooling period. But the rate of increase was no greater than that experience in, say, the 1100s. However on the basis of what did occur models were produced by scientists and accepted by the UN backed IPCC which showed that the 21st century would see significant increases in temperature. There were two problems with these models.
Firstly, as the emails hacked from the UAE demonstrate clearly, data was altered in order to deliver the right conclusion. That alone should discredit the models completely.
Secondly, the world temperature has actually not increased in the first decade of the 20th century at all. This is what Al Gore might term a very inconvenient truth. If a model is wrong for its first ten years how on earth can anyone place any validity on its 30, 50 or 100 year conclusions? This is discussed at length by Australia's leading skeptic Ian Plimer in his seminal book on the subject Heaven and Earth.
What about the ice caps and the poor polar bears? Some ice caps are shrinking. Others are expanding. In the Arctic this year 0.006% of the sea ice melted. Hardly a rate that should cause panic. Meanwhile as this chart shows Antarctic sea ice is barely changed (actually it is a tad greater) than it was in 1979 when satellite imaging began.
And so I am a climate change skeptic. Right now the political elites are still believers. That will change in time but what is already changing is the unquestioning assumption that hundreds of billions of dollars must be chucked at tackling climate change by the grateful taxpayers of the West. One of the first politicians to question the current approach in the UK was former Chancellor of the Exchequer (your Treasury Secretary) Nigel Lawson in his book An Appeal to Reason, a Cool look at Global Warming.
In the UK the policy response to the climate change consensus is based on a report by Lord Stern published in 2006 at the height of global warming euphoria. In such an atmosphere there was little scrutiny paid to his report and as a result policy initiatives were implemented which could, perhaps, have benefited from a little more thought. A devastating critique of Stern was published this week by another former UK minister Peter Lilley MP who is one of the more cerebral politicians in Britain today.
The failings of Stern (and thus the reason why the entire political class has got this one so utterly wrong) start with the fact that, as Lilley points out there are a series of errors and distortions in the Stern Review "any one of which would have caused it to fail peer review." That is Lilley's little joke as anyone who has studied UAE emails on how "peer review" is conducted will understand.
Moving on, Lilley views the whole Stern report as "policy based evidence" - that is to say its arguments for action are based on justifying pre-agreed ends. Thus it is argued that the government can no longer rely on it to justify expenditure of many billions of pounds and calls for a return instead to "evidence based policies".
The critical point is how global warming will affect GDP. Stern's central conclusion that:
If we don't act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year now and forever" whereas "the costs of action - reducing greenhouse gas emissions to avoid the worst impacts of climate change - can be limited to around 1% of GDP each year...
is found to be entirely fallacious. Lilley's study demonstrates that the benefits of curbing emissions now and henceforth will not be five times the cost of action, as Stern claims. Lilley points out:
It is achieved by verbal virtuosity combined with statistical sophistry. In fact, even on Stern's figures the cumulative costs of reducing greenhouse gases will exceed the benefits until beyond 2100.
Hence, Lilley continues:
If we continue to follow Stern's advice, the principal losers, apart from British taxpayers and businesses, would be developing countries who cannot raise living standards without massively increasing their use of fossil fuels and will therefore be responsible for most of the growth of carbon emissions." "Why should this comparatively poor generation make the sacrifices Stern demands to improve living standards of people in 2200 who, if we take no action to prevent global warming - even on the worst scenario depicted by Stern - will be 7 times better off than us?
Stern set the tone for Britain. But our response to the perceived threat of global warming has been the same as that of the rest of the European Union and, to a lesser extent the US. That is to say we have government backed loans for companies created to generate renewable energy and subsidies, tax breaks and grants for consumers to utilize renewable energy and for companies to produce it. In China the 5 year plans identified green energy as a key area for growth and as such billions was invested in building up productive capacity.
The net effect is that we now have entire industries which exist only as a result of subsidy (and the willingness of investors to chuck money at anything "green"). And we have chronic overcapacity in areas such as the production of photovoltaic cells.
The problem for these industries is that policy makers are already shifting tack. This is not because they have yet accepted either that global warming is a bogus science or even the Lilley type critique of our response to it but because most of the governments of the West are now running unsustainable budget deficits and have excessive debt. That has already caused something of a policy shift (hence the slump in EU demand for PV) but the process is far from complete. I do not expect this generation of politicians to can green subsidies and tax breaks altogether on the basis that man made global warming is fiction. That is for the next generation of leaders - they can blame their predecessors for this monstrous folly. But faced with enormous budget constraints and hard analysis showing that the cost/benefit trade off of the current approach does not stack up, there will be policy change and (given the deficit crisis) that change will happen soon.
As an investor how can I escape the fallout? There may be a long term case for solar and wind power as it becomes more efficient. But right now the math does not stack up without State support. On that basis I would take a play it safe approach of selling all stocks involved in the production of solar or other renewable energy equipment. As it happens companies such as LDK Solar (LDK), JA Solar (JASO) or Trina Solar (TSL) are financial train wrecks already so these are obvious shorts.
In wind I would draw your attention to two ETFs that there is no need to own, Powershares Global Wind Energy (PWND) at $5.56 and First Trust Global Wind Energy (FAN) at $6.63. Since I appear to have so many admirers in China, I may as well add to them by suggesting that Ming Yang Wind Power Group at $1.11, valuing it at $133.89 looks like a slam dunk short. Its second quarter numbers released on August 28th showed a balance sheet with cash of $164.4 million but short term bank debt due of $93.123 million. There is also a bond that needs repaying of $154.76 million. It reports current assets of $1.24 billion as at June 30th but current liabilities of $731 million. But of those current assets inventories are recorded at $279 million (six months revenues) and trade receivables at $729.184 million (five times the level of sales in the second quarter). Hmmm.
For what it is worth the second quarter saw sales plunge by 43.2%, compared to Q2 2011, to $125.6 million, gross profits collapse by 56.6% to $18.2 million and a net loss of $4.3 million reported.
And of course, holding any "green" mutual funds would seem like a recipe for disaster. The small Guinness Atkinson Alternative Energy fund caught my eye as one I'd dump right away. It has consistently lost money and seems drawn to non US enterprises of a generally smaller nature including our old pals at JA Solar. But having a zero mutual fund exposure to this sector would seem like a sensible call.
I expect that the comments section will rapidly fill with those wishing to flame a sceptic. I am braced for that. But if the flamers base their case on the flawed works of Al Gore I suggest that they read Lawson's book to understand the economic flaws in the economic response to date, Plimer's work or the definitive work by a British author on this matter The Real Global Warming Disaster by Christopher Booker, who (I should declare) is my Uncle. Read the Lilley report. Take a balanced view and then protect your portfolio accordingly.
This is a matter for making dispassionate investment calls. Try not to think about fluffy polar bears too much. You may read all three books I suggest and might still believe that Al Gore's assessment of global warming is correct but if you accept that governmental policy will have to change, or may change, that has material investment allocation implications for many of us.