It’s Not You . . . It’s Them

May 3, 2022

In the 80’s we had ‘Tears are Not Enough’, ‘Do They Know It’s Christmas’ and ‘We Are The World’, to spur civilization to make the world a better place. Now 40 years later it doesn’t seem to be working.

It is easy to consider the Russian invasion of Ukraine and the cost to human life (about 14,000 people so far) and property, because those images are on television screens daily, at least for now. But the number of tragedies around the world is increasing rapidly and many are a direct result of human activity.

India is already in the grips of a heat wave, the worst it has ever recorded, and scientists say the conditions are reaching the limits of survivability. It is more than a little ironic that the country’s ability to produce electricity is being hampered by bad planning, rapidly rising coal prices and difficulties with transportation. Yes, the country relies on coal to keep things cool.

Meanwhile closer to home, the Lake Mead reservoir in Nevada is at it’s lowest level ever, and the dam may be unable to provide power to homes and businesses before the end of the year.

The Western USA is in desperate need of water

There are similar issues in the Middle East and Africa, although they have been ongoing for decades, so they get a lot less attention. (Most of the songs mentioned in the opening paragraph were related to the drought and famine in Ethiopia.)

Through it all, we haven’t really changed our behavior as a society for the better. In the 1980’s Americans used about 320 mmBTUs of energy per person, and today that number is about 310 mmBTUs. With the growth in population, the total amount of consumed energy has risen by 20%. During that period however the cost of energy has been cut almost in half.

Think about that for a few minutes. Policies and technology continue to make it less and less expensive to produce and use the energy that is killing the planet. Other parts of the world are far worse of course. China’s total consumption has risen by ten times. [Note: The world has outsourced production of millions of widgets to China since the early 1990’s, including some of the most environmentally damaging activities such as steel production, plastics, effectively transferring the energy consumption and related pollution to a part of the world with fewer regulations and lower costs.]

Politics is a big issue in all of this, as it relates to infrastructure, energy policy, trade policy and more, but the problem is global and its effects on markets may start to impact investment far more than many realize.

There are four major threats here and none are easy to quantify, although many are actively trying to do that, but they are just guessing at this point. The threats are well known:

  • Rising Water Levels – could wipe out significant portions of habitable areas. Estimates suggest 400MM to 1.8 billion people may be affected.
  • Rising Temperatures – the human body may not be able to function in consistent heat over 37C or 99F. This will be made more acute if there is little or no water available for cooling. Estimates suggest 1.7 billion people at risk.
  • Disease – While COVID has awakened an understanding of the impact of disease, the threat of disease cannot be predicted, and the outcomes can vary widely, but high temperatures are thought to increase disease transmissibility.
  • Food Scarcity – war, heat, and disease may make the production, harvesting and distribution of food far more difficult than many imagine.

As the lucky members of the first world, we have access to a lot of tools to fend off these risks. That isn’t the same as being immune from them. For now these risks are mostly impacting others, in other parts of the world, but a water shortage in Los Angeles can cause significant human damage very rapidly as could a lack of wheat or chicken.

While in many parts of the world, there may not be ANY access to fuel, food or water, in the first world the core problem may become one of rising costs pushing a vast number of people into starvation via poverty. Prior posts have discussed the lack of financial flexibility, and in the USA particularly, where most households cannot forego a single paycheck.

There is a good chance that these issues facing humanity are not currently impacting any reader here, however the social upheaval that may rise if and when the population goes hungry and thirsty will rival any in history. It might be a good time to pay attention to the little guy.

As always, these risks present challenges to investing. A vast sum of money is spent on non-productive consumption, and some of the leading investment themes rely on this consumption (social media, media/entertainment, fitness, restaurants, and much more). Many companies in these areas have already experienced a major revaluation, making them relatively attractive. Before jumping in, remember that many of these companies provide products and services that are not essential. If there is a breakdown in societal norms (like what happened with COVID or the invasion of Ukraine), assessments of future demand and profitability becomes increasingly difficult.

These ‘once in a generation’ events keep happening rapidly and repeatedly for the last few years, suggesting the statistics guiding their analysis is wrong. So too may be the valuations. While the events are currently somebody else’s problem, that may not remain true over a reasonably long period.

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