The Losing Bet on Climate Change
Two recent articles with related themes caught my eye. They are important for anyone who manages money, either professionally or for themselves. Together, they may just indicate a turning point in the debate on what might be the response to anthropogenic global warming.
The first, from former Treasury Secretary and Goldman Sachs Chief Executive Officer Hank Paulson, was headlined ``The Coming Climate Crash.'' In it, Paulson observes: "There is a time for weighing evidence and a time for acting. And if there's one thing I've learned throughout my work in finance, government and conservation, it is to act before problems become too big to manage."
That posture comes from the rational wing of the Republican Party, an ever-decreasing niche. Despite the best efforts of the extremists, there are still some Republicans who believe in science. Many of these folks (regardless of their faith) do not think that the Bible was the literal word of God, and that humans were given a brain for a reason, namely, to think, to reason, to make judgments based on scientific evidence.
Paulson goes even further, drawing parallels between the recent financial crisis and a brewing environmental one in the near future:
For too many years, we failed to rein in the excesses building up in the nation's financial markets. When the credit bubble burst in 2008, the damage was devastating. Millions suffered. Many still do.
We're making the same mistake today with climate change. We're staring down a climate bubble that poses enormous risks to both our environment and economy. The warning signs are clear and growing more urgent as the risks go unchecked.
This is a crisis we can't afford to ignore. I feel as if I'm watching as we fly in slow motion on a collision course toward a giant mountain. We can see the crash coming, and yet we're sitting on our hands rather than altering course.
The politics of global warming are not where my interest lay. (See ``Profit From Global Warning or Get Left Behind.'') I am far more interested in your cognitive biases and how they manifest themselves in your investment portfolios.
Evidence of portfolio changes related to climate change abound. This morning, an Bloomberg article titled ``Hedge Funds Bet on Sugar as Dryness Threatens Crops'' discussed some of the wagers institutional investors have been making:
Hedge funds got more bullish on sugar before prices climbed to the highest since October as dry weather threatened supply from India to Brazil.
Money managers raised their net-long position for the first time in four weeks. A lack of rain in Brazil is compounding damage from the first-quarter drought and will cut yields, says Job Economia & Planejamento, a researcher in Sao Paulo.
Risks of crop damage are rising as an El Nino weather pattern threatens to reduce monsoon rainfall in India, the largest producer after Brazil. Global output will fall short of demand in the year ending Sept. 30, with the gap widening next season, according to Bruno Lima, a senior risk-management consultant at FCStone do Brasil.
Global warming and climate change are misnomers. What we are witnessing is rising global weather volatility. As I suggested a decade ago, ``Global Weather Volatility was a Strong Buy.'' There are a variety of ways to express this trade, such as the sugar futures trade discussed above.
But what we really need is a Volatility Index for Climate (VXG is my idea for the symbol). As I noted in 2005, "Global Warming is actually misnamed — it should be called Global Weather Volatility. Because of gulfstreams, ocean currents, etc., any overall increase in temperatures thermodynamically interacts with these other weather climatological elements and leads not only to a general warming, but to colder winters, stronger storms, etc." That turned out to be prescient.
None of this is especially complicated -- the physics of increasing energy in a closed system will introduce a range of variable outputs that can potentially be several standard deviations away from historical norms.
Which leads us back to the both the cognitive and investing aspects of this.
Changes in weather are going to be disruptive for investors. Opportunities and risks will abound. Your choices will be to either take advantage of these opportunities for your clients or your own holdings or let them pass by because you have come to the scientifically unsupported conclusion that there is no such thing as global warming -- or maybe there is, but it's only modest, and besides, it's natural and caused by sunspots and not human activity, or whatever slice of agnotology your cognitive dissonance has foisted upon you.
Regardless, this isn't going to be a political discussion. I am not remotely a "green," and you won't hear me lecturing people to drive a Prius or recycle or any other such environmental admonitions. My own household fleet of cars ands boats numbers many more than the number of people in our home, with no vehicle having any less than 300 horsepower.
This isn't about politics, this is about investing. That is something that the 2,000-plus people who commented on our first such discussion missed. In ``Global Warming Battle Is Over Market Share, Not Science,'' we looked at the market competition driven by climate change. The science is settled, with the debate left to the trolls, conspiracy theorists, and corporate shills who much prefer to repeat thoroughly discredited memes than to discuss market share or investment-related issues. As I am fond of pointing out, someone has to be on the money-losing side of the trade, and it might as well be the anti-science crowd. Call it Darwin's revenge: Ignorance as an evolutionary adaptive failure.
I have but two goals: The ability to bet on global weather volatility, and a way to express the trade I like to call "short unscience." As soon as I figure out how to do this, I am going to make a killing.
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