February 17, 2014
Dear Clients and Friends,
Welcome to the new year. There’s plenty to talk about. I’ll get to thoughts about the economy and the markets in a minute, but first, what’s happening in SRI?
Historically a series of major issues have been focuses of SRI. The first, arguably the earliest reason for SRI, was the war in Viet Nam. The first socially responsible investing mutual fund was started with the Latin name for peace in 1971.
The next big issue was Apartheid. Nelson Mandela himself sent an envoy to the SRI trade association to thank us for helping end this racist dictatorship.
Some people were afraid that with the fall of Apartheid the dollars committed to SRI would shrink as people lost focus. But amazingly, the opposite happened. Once exposed to the experience of using their money to effect change, people added assets to a variety of SRI struggles.
The next big issue was tobacco, and now, partly as a result of the focused efforts of SRI, many state pensions have divested from tobacco companies, most media companies will not allow cigarette advertising, and the efforts are paying off with shrinking new teen addictions (but this struggle is far from over).
And now we are entering the next big struggle, and this time it’s for our survival. The fossil-fuel divestment movement is catching on world-wide. I expect that many of you have already heard of Bill McKibben and his non-profit, 350.org.
For years we felt that bringing investment capital to alternative fuels was the change we needed. Many SRI investors felt that switching power plants from coal to natural gas (as a transition until the infrastructure for renewables would be developed, and natural gas when burned releases fifty percent less greenhouse gasses than coal).
SRI has conducted numerous shareholder engagements with oil and gas companies. However, a few years ago, at our national conference, First Affirmative conducted a conversation with an executive of Exxon Mobil, who stated flatly that XOM is not going to make any substantial investments into sustainable energy. Period. Conversation over. This leaves little room for engagement, since the SEC will not allow investors to ask (or demand) that a company simply go out of business.
Meanwhile, state pension funds and foundations worry that divesting from oil, gas and coal companies will hurt performance and expose their portfolios to greater risk.
And now along comes Bill McKibben and 350.org. McKibben points out that if we burn more than one-fifth of the proven reserves of the oil, gas and coal companies still in the ground we will have exceeded the amount of greenhouse gasses we can put into the atmosphere and keep the earth in livable shape. However, “Those reserves may be below ground physically, but they’re already above ground economically and factored into the share price of every fossil fuel company.”
What does this mean to those investors and pensions who are frightened that divesting from fossil fuel companies will increase their risk and lower their return? It means that the opposite is true. The share price of all of these companies is based on their entire reserves. If the world will overheat once one-fifth of these reserves is extracted they can’t all be developed. Therefore, the real value of these companies is about one-fifth of the value the investment market gives them. Once investors (pensions, foundations and, yes, us) figure this out, the stock market price of these fossil fuel corporations has to fall unless these companies speedily adopt alternative sources of revenue (dare we say “renewables”?).
The obvious problem facing us is the political power the oil, gas and coal companies wield. “…we need to loosen the grip that coal, oil and gas companies have on our government and financial markets, so that we have a chance of living on a planet that looks something like the one we live on now. It’s time to go right at the root of the problem–the fossil fuel companies themselves–and make sure they hear us in terms they might understand, like their share price.” “We need to make it clear that if it’s wrong to wreck the planet, then it’s also wrong to profit from that wreckage.” (All the above quotes are from “gofossilfree.org”)
What is the strategy / are the strategies? As the organizing effort progresses, the strategies will change. But for now the core approach coming from 350.org is divestment. You can join the effort to encourage the institutions you are involved in to divest. You can write to your pension, you university’s endowment, your favorite foundation. You can divest for your own investments. First Affirmative Financial Network has numerous strategies which can simply remove offending corporations from your existing allocation or can build you a new allocation around a fossil-fuel-free structure.
What will be the “ask” from shareholder activists? As I stated above, the fossil fuel companies are not leaving much wiggle room so far. “Index” funds that must hold all of the companies in the index and can’t divest can argue in a proxy battle that the future is in renewables and encourage the companies in their portfolios to devote significant development capital to alternative energy. For a while it looked like Enron and BP were each taking the lead in this, and we all saw where that went. Still, if investors must own fossil fuel companies this is a strategy to adopt.
You can go to www.350.org and http://gofossilfree.org for the list of the 200 most egregious companies and for more information and ways to get involved. If you are not already a member of “Green America” (formerly “Co-Op America”), please join them. They are in the thick of it. http://www.greenamerica.org/fossilfree/ . And, of course, you can let me know that this is a direction you want to take in your investing. Backtesting indicates that there should be no harm to performance in eliminating fossil fuel companies from your portfolios, but we really don’t yet have any real data on this.
We’ve changed the world before. Each major wave of SRI has had some success. We can do it again. Only this time our quality of life and that of our children depend on it.
MARKETS AND INVESTING
From newsletter to newsletter I have responded to some investors’ fears that the market was about to tank yet again, repeating the debacle of 2007-2009. You may have noticed that this did not happen. If/when it finally does happen again the doom-sayers will still have been wrong. It didn’t happen when they said it would. Instead, the domestic stock markets have recovered and risen above their peaks in 2007. None of my investors got out of the markets and went entirely to cash (missing the recovery), and I hope nobody else reading this did. Will there be a downturn? Yes. When? We don’t know. So always keep your allocation invested in a diversified strategy that suits your needs and risk attitudes and allows for some growth or income or both.
Investor fears have tended to fall into two categories, big-ticket and small-ticket. There are the big-ticket fears that human misuse of our politics, our ecology and our currency will all come due and collapse our economy as we know it, taking us back to the middle-ages (or the bronze age). There are the smaller-ticket fears that the great inequality of wealth, the weakness in Europe, high unemployment, and any number of other smaller issues would cause a lesser, but substantial downturn. There is actually a third fear, and that is that the big-ticket issues are really imminent and will cause a crash soon.
This last one causes me the greatest angst because I think that these concerns are well-placed and legitimate, but don’t think that they will have all that much effect in the short-term. But it is true that if we don’t change our ways, the next hundred years could be pretty horrifying. Our currency is the strongest in the world, and all the concerns that it is a “fiat” currency, built upon debt, will not hasten its collapse. I expect that we will experience a series of “Katrinas,” droughts, currency emergencies, etc., rather than one big disaster. Each time we will rebuild and not really fix the problem.
For now we should focus on the smaller-ticket items.
The last two major downturns were based on the popping of bubbles and the discovery of massive corruption in those bubbles. The stock market fell in 2002 largely because the major accounting firms were cooking the books on corporate earnings. Investors, especially larger ones like pensions, had to sell their stocks until they had comfort that the data they were seeing about corporate earnings were reliable.
The stock market fell in 2007-2009 largely because the big investment banks had been slicing up mortgages in a real-estate bubble and selling their pieces, re-formed into new investments where the risks were hidden, to pensions, city treasuries, etc., as low risk investments. When the real-estate bubble finally burst it turned out that there was risk, after all.
There really is only one big bubble that I know of facing us right now (in the short-term), and that’s the bond bubble. It’s risks are well known to the investing public. I think that the bond bubble will deflate slowly and it is very likely to harm the economy temporarily, but I don’t see a crash in it. It will almost certainly cause a drawn-out, protracted downward slide in the fixed income side (the “safe” side of your portfolio), rather than a steep and rapid drop. There are ways around this which I will address in a future newsletter. Call me if you are concerned.
While there are currently short-term risks in the markets and in the economy (European debt, China’s weakening), our economy is actually getting stronger. The recent volatility in the domestic stock markets is a healthy symptom. It’s the opposite of a bubble and should make stock investors more comfortable, not less (unless they are day-traders). Remember, the market has to fall more than 10% to be considered a “correction” and 20% to be considered a “crash.” Recently the S&P 500 has not dropped much more than six percent.
All that said, we are approaching five years from the bottom of the last crash (March 9th, 2009) and a recovery can’t last forever. I believe that the stock market is going to continue upward for a while and bonds may lose some value on the way. Unless something unexpected happens, this could be followed by a stock market bubble, then another substantial downturn (but this may be a while out). My beliefs are not a guarantee, so if you are inclined to get more conservative as the markets rise and less conservative as they fall, then this may be a time to protect some of your gains. As always, keep the money intended for any short-term needs out of the stock and the bond markets. We can talk about what else there is to do.
There always is more to talk about, but it will have to wait for the next newsletter. I hope to make them more frequent from now on. If you would like to see a copy of my ADV federal disclosure document one will be sent to you upon request.
Good luck. Stay in touch. Please call if you have any questions about any of this.
Up the Rebels !!