The week of February 7: ESG, net zero’s troubles, inflation, modern monetary theory, and much, much more.
The week of February 7: ESG, net zero’s troubles, inflation, modern monetary theory, and much, much more.
Before we dive into this week’s Capital Letter, a reminder: NRI’s biennial regional seminars are back, starting with Palm Beach (February 16), Newport Beach (March 2), and Menlo Park (March 3). Please scroll down for more details.
T he purpose of a pension fund (unless the pensioners actively choose otherwise) should be (on a risk-adjusted basis) to maximize financial return. The pursuit of a socio-political agenda should be no part of its managers’ mandate.
And yet (via Bloomberg):
New York’s $280 billion state pension fund will divest more than $238 million in shares and bonds of oil and gas companies including Pioneer Natural Resources Co., Hess Corp., and Diamondback Energy Inc.
The move follows an internal review that determined the companies failed to demonstrate viable net-zero transition plans, according to a statement from the state comptroller. The New York State Common Retirement Fund has holdings in 42 oil and gas companies.
Good luck with finding a “viable” net-zero plan, not just within oil and gas companies, but, well, anywhere.
Rupert Darwall, writing in Real Clear Energy a week or so ago:
Successful investing – the deployment of capital based on expectations of future returns – is grounded in realism, not make-believe. The failure of last year’s UN climate summit in Glasgow – the summit does not rate a single mention in Fink’s 3,000-word letter [the recent letter to CEOs by Larry Fink, the head of BlackRock, and a leading advocate of ESG and stakeholder capitalism] – makes it plain to any objective observer that the world will not reach net zero anywhere close to the prescribed date. Forcing companies to conform to a scenario that has virtually no chance of materializing destroys more than shareholder value: it makes all stakeholders worse off. In this respect, ESG investing is antisocial because it is detrimental to society.
And yet that is the direction in which New York State’s retirement fund is headed.
Darwall:
ESG investing won’t help the environment, either. Cutting off capital to publicly traded oil and gas companies will not reduce global greenhouse gas emissions. Fink knows this. “Any plan that focuses solely on limiting supply and fails to address demand for hydrocarbons will drive up energy prices,” he admits. Congress has not passed legislation to cap demand and is extremely unlikely to do so – a reality he is unwilling to accept.
But:
At some level, Fink seems to recognize the difficulty. Ensuring access to reliable, affordable energy is necessary, he says, “to avoid societal discord.” That means more investment in oil and gas.
That is reality that New York’s state comptroller seems unwilling to accept.
Bloomberg:
“As market forces and new policies drive the energy transition, we must align our investments with a profitable and dynamic future,” Comptroller Thomas P. DiNapoli said in a statement. “The shale oil and gas industry faces numerous obstacles going forward that pose risks to its financial performance.”
Market forces?
Bloomberg:
The divestment comes as oil and gas stocks lead market gains on the back of higher commodity prices and reduced spending. Hess and APA Corp., two of the fund’s divestment targets, are among the top 10 performers in the S&P 500 index this year. All 10 are oil and gas companies.
We don’t make stock recommendations here at Capital Matters. But if other investors continue, directly or indirectly, to cut off the flow of capital to fossil-fuel companies, there is at least an argument that DiNapoli should consider increasing the state pension fund’s investment in the oil and gas sector (perhaps avoiding new issues, if he’s feeling squeamish). What he should not be doing is automatically excluding an important area of potential return as a matter of ill-considered “principle,” rather than on — however much he may claim otherwise — any plausible investment grounds.
Not unrelatedly, Darwall takes a look at what’s being going on over at Exxon:
[Fink’s] letter did not explain BlackRock’s vote to put anti-hydrocarbon directors proposed by Engine No. 1 – a tiny activist fund claiming to use ESG to drive economic value – on the board of Texas-based Exxon Mobil. Commenting on Exxon Mobil’s recent emissions pledges, Charlie Penner, who led the Engine No. 1 campaign, remarked that the company should not pursue projects that “only make economic sense if the world fails to meet its climate targets.” The world is on track to miss these targets by a country mile. Engine’s activism is not about investing; it is politics by other means.
Indeed it is but, to be fair, the attempt to bypass the democratic political process is not just confined to the private sector. Note DiNapoli’s reference to “market forces” and (my emphasis added) “new policies.” To a degree, mentioning the latter as (if only implicitly, in this case) an added investment risk is a somewhat circular argument: DiNapoli is saying that the fund’s investments in fossil fuels are becoming riskier thanks to (and this is something that he doesn’t spell out) policies that he himself undoubtedly supports.
Nevertheless, those new policies are real enough even if, all too frequently, the vehicle for pushing them through is (or will be) via rulemaking by regulators’ moving into territory that had never been thought to be theirs, rather than by anything approved by a democratically elected legislature. That’s no coincidence. The fact that the transition “race to net zero” (as currently envisaged) risks economic and geopolitical disaster won’t make much difference: Central planners have a long history of pushing on with policies long past the point at which they made any sense (if they ever did). Electorates are unlikely to be impressed by what that entails and so every effort will be made to deny them a say until it is too late to change course. As the true cost of net zero is already beginning to come into view, that may be trickier than policy-makers had been hoping. Indeed, energy bills were already rising in some countries even before the current crunch, which has operated as a sort of preview of what lies ahead, even if climate policies are only just one of its causes. What’s more, people are coming to realize that net zero’s hit to the way they live won’t be confined to their wallets.
This explains why, after another round of infighting, the EU is likely to end up treating (under certain conditions) natural gas — sorry, comptroller — as “green” in its sustainable finance taxonomy. (Look, I don’t make up these terms.)
And it also explains this (via the New York Times):
President Emmanuel Macron announced a major buildup of France’s huge nuclear power program on Thursday, pledging to construct up to 14 new-generation reactors and a fleet of smaller nuclear plants as the country seeks to slash planet-warming emissions and cut its reliance on foreign energy.
The announcement represented an about-face for Mr. Macron, who had previously pledged to reduce France’s reliance on nuclear power but has pivoted to burnishing an image as a pronuclear president battling climate change as he faces a tough re-election bid in April.
And, if this report in the Daily Telegraph is accurate, it explains why senior British Conservatives are making use of the opportunity presented by the way that scandal has weakened Boris Johnson, a chameleon who has turned a very dark green:
Six North Sea oil and gas fields are set to be given the green light this year, The Telegraph has learnt, as Cabinet figures push back against “insane” demands to go further on net zero.
Is “insane” too strong a word? No. When it comes to climate policy, Johnson belongs in a straitjacket, not a suit.
But, but, going back to the topic of investment opportunity, doesn’t Greentech look like an area with immense potential?
Yes, but then so did the Internet at the beginning of this century. That potential was real, but so was the malinvestment as the dot-com bubble started to expand.
But that sort of thing couldn’t happen again, surely?
The chief investment officer of Schroders Plc says there’s now so much money chasing a limited universe of climate assets that clients need to be aware of the potential pricing risks they face.
“Clients want to decarbonize, but on the other side there are not many opportunities,” Johanna Kyrklund, group CIO of the $1 trillion London-based fund manager, said in an interview. “There are not as many places to invest, and this can create a bubble.” . . .
Good luck finding an industry hit as hard by inflation and supply-chain upheaval as wind-turbine makers.
Manufacturers like Vestas Wind Systems A/S have been blown off course by a perfect storm of transport snarl-ups and surging freight and raw material costs. Instead of raking in profits on soaring demand for clean energy, the Danish firm is struggling just to break even. Last week, loss-making European rival Siemens Gamesa Renewable Energy S.A ousted its chief executive officer — its second change at the top in less than two years. General Electric Co.’s renewables arm is also losing money.
This is a worrying turn for an industry with a vital role in helping the world decarbonize. For investors, it shows how betting on seemingly clear-cut “megatrends,” such as the rise of renewables, can backfire in the short-term. With oil prices rising above $90, oil stocks have massively outperformed clean tech in the past year. It’s a reminder, too, that even highly consolidated industries like wind-power machinery can struggle to pass on rising input costs to customers . . .
Or from Bloomberg last June:
The former head of the board of governors at the world’s largest pension fund said he sees signs of a “bubble” in environmental, social and governance investing, and said the Japanese fund needs to consider how much ESG assets contribute to returns.
Eiji Hirano, who was chairman of the board of governors of Japan’s Government Pension Investment Fund from 2017 until earlier this year, presided over a tumultuous period for the fund as it became a world leader in ESG investments. The fund now needs to reassess its approach to ESG, he said . . .
The Financial Times (from January):
But as Davosians express their excitement about ESG, here is another question they should ponder that was not discussed last week: are we heading into a destabilising green bubble? Thus far, this has mostly been debated in relation to some single stocks that carry sky-high valuations — Tesla, say, or Scandinavian wind turbine groups.
The Bank for International Settlements, however, issued a very provocative report on this issue a few months ago, which attracted limited attention at the time but should be mandatory reading. This points out that the explosion of green finance incorporates features that look uncannily similar to earlier — overheated — bouts of financial innovation: a dramatic shift in public policy and social zeitgeist; a proliferation of new products amid label confusion; a level of opacity in this sector that makes it hard for outsiders to scrutinise what is going on; and, most importantly, an explosion of money flows.
Well, you get the picture. Does New York’s State pension fund?
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 53rd episode David is joined by Dan Clifton, head of Washington Research and Public Policy Outlook at Strategas Research. From the outlook for the midterms to the current impact of policy on markets, David and Dan go all over the policy landscape to look at what D.C. is doing to help — and hurt — the economy. Of particular interest may be a dissection of how things shook out in 2021 on Capitol Hill and what is driving decision-making from Senators Manchin and Sinema now. We would all be better off if D.C. had less to do with the economy. But as long as it does, this is a podcast episode for you.
The Return of the Regional Seminars
As briefly noted above, National Review Institute is back on the road with its biennial Regional Seminars. This year’s series, titled “Creating Opportunity,” will feature panel discussions and one-on-one conversations that make the moral and practical case for free enterprise.
Notable speakers include William B. Allen, David L. Bahnsen, Jack Brewer, Dale R. Brott, John Buser, Veronique de Rugy, Kevin Hassett, Pano Kanelos, Rich Lowry, Karol Markowicz, Andrew C. McCarthy, Andrew Puzder, Amity Shlaes, Kevin D. Williamson and, less notable, me.
The series of half-day conferences is slated for seven cities across the country: Palm Beach, Newport Beach, Silicon Valley, Dallas, Houston, Chicago, and New York City.
On February 16th, I’ll be speaking with Kevin Hassett, Jack Brewer, Karol Markowicz and Rich Lowry at the Sailfish Club, Palm Beach. More details here.
After that, the next seminars will be held in Newport Beach, California, on March 2 and Menlo Park, California on March 3.
We hope you will join us. You can learn more and purchase tickets here.
The Capital Matters week that was . . .
Inflation
Never has U.S. inflation exceeded 4 percent without incurring a recession. Never has the U.S. stock market been at its current valuation without incurring a recession. Never has the U.S. housing market been at its current valuation without incurring a recession. Never. Never. Never . . .
With winter in full swing across the Northern Hemisphere, the prices for energy and most other commodities in America and Western Europe are soaring. Meteorologists can tell us much about the weather ahead, but economists seem to be stuck in a rut.
Having assured us that inflation is not something to be feared, and then later labeling the inflation that followed as “transitory,” many of these same economists have also looked at Europe and the U.S. and concluded that these economies are not only recovering but will also enjoy decent growth in the years to come. Unfortunately, they have proven to be consistently wrong on the effect of “pandemic” economics . . .
The more significant underlying message is that if the cost of energy is increased on a more permanent basis as a result of climate policies (spoiler: it will be), aluminum will become more expensive, adding to cost pressures throughout the economy, and thus to greenflation.
And this is already not a hypothetical. The current rise in energy costs in Europe (and elsewhere) is at best only partly the product of climate policies (and the extent to which that is the case will vary geographically), but even so . . .
Did all of these industries become monopolistic at roughly the same time last summer and raise their prices out of greed, as Elizabeth Warren and other progressives apparently want us to believe? Or did the combination of a record increase in the money supply, an increase in personal income, disincentives to work, and supply-chain constraints make everything more expensive?
The price of services tend to be “stickier” than the prices of goods (for some rather antique research on this topic go here and here), and so this is not an encouraging sign.
It’s also interesting to note that the St. Louis Fed’s Sticky Consumer Price Index has been ticking up. The most recent published data refer to December 2021, when it was running at nearly 3.5 percent, the highest since February 2002 . . .
Corporate Purpose
Charlie is absolutely correct that Spotify’s staff needs to toughen up or find a new job if they can’t handle working for a company that carries Joe Rogan’s podcast.
I just want to highlight Spotify CEO Daniel Ek’s note to staff. He opens by saying, “There are no words I can say to adequately convey how deeply sorry I am for the way The Joe Rogan Experience controversy continues to impact each of you.” Aside from the fact that opening a letter that’s hundreds of words long by saying “there are no words I can say” is objectively funny, and aside from Charlie’s point that nobody is actually “impacted” by the podcast, Ek is demonstrating he doesn’t understand his job . . .
Ukraine
How is Moscow planning to protect this $1 billion-per-day haul when the West tries to retaliate against its aggression in Ukraine?
Well, to state the obvious, it is banking on European dependence leading to European fecklessness. Europe imports over 40 percent of its gas and 25 percent of its crude oil from Russia. Without viable alternative markets, the Europeans will be hard pressed to do more than tongue-lash over Russia’s coming Ukrainian incursion — Putin having taken the EU’s measure through Gazprom’s aforementioned machinations.
As for likely U.S. retaliatory steps, Russia has been thinking ahead. As Forbes explains, “It is no longer apt to refer to Russia’s fossil fuel income as ‘petro-dollars,’ as Putin has been working hard to ‘de-dollarize’ the Russian economy.” In less than a decade, Russia has reduced the percentage of its dollar-denominated receipts from 95 percent to just 10 percent.
The Pandemic
The pandemic produced an abnormal number of deaths among people who did not have the virus. Through the first 15 months of the pandemic, U.S. deaths from drugs and alcohol were almost 50,000 above the corresponding months in 2018 and 2019 and 40,000 above the prior trend. Drug and alcohol deaths have never increased so much over such a time frame and may be the single greatest driver of recent declines in American life expectancy.
The people who died from substance abuse are a lot younger than people dying from Covid. One measure is life years, which counts each death according to the remaining years of life expectancy for people that age. More than 7 million life years were lost from drugs and alcohol during this time. For men, their part of the 7 million is more than the life years they lost from Covid . . .
Climate Policy
Time will tell whether Boris Johnson will be able to hang on in office. My own (not particularly original) guess is that a disaster in the local elections in May will end his stint at 10 Downing Street, but between now and then he is likely to be a revelation away from a (Conservative party) parliamentary revolution.
Obviously, the row over the lockdown parties/social events, and the way that it resonates so dangerously, is the immediate cause of Johnson’s difficulties, but the U.K.’s energy crunch, which is both a partial consequence of the Tories’ climate policies — and a preview of where they are going to lead — is making matters worse. Voters don’t like what’s been happening to their energy bills, and there will be worse to come. Meanwhile many on the Tory party’s free-market right, admittedly a rather smaller constituency, but one that could have, perhaps (it’s far from straightforward) have been helpful, are unlikely to be too enthusiastic about coming to the aid of a prime minister who has embraced the reckless “race” to net zero (greenhouse-gas emissions) with such gusto . . .
Modern Monetary Theory
In an attempt to defend the travesty that is “Modern Monetary Theory,” Peck ignores the substance of the debate completely, and focuses instead on sex. “Male economists,” she writes, “are freaking out over a NYT profile” of MMT’s chief evangelist, Stephanie Kelton. “The gender dynamics,” she adds, “look terrible here.”
Do they? We are not expected to believe, I hope, that women cannot be wrong, ill-informed, or even stupid. And, if women can be wrong, ill-informed, or even stupid, then we should surely expect that they will be criticized — by men and women alike — in the same way as everyone else who is wrong, ill-informed, or even stupid. In her piece, Peck provides just two examples of men “piling on” and “freaking out” about the Times’s profile in particular and Kelton’s ideas more generally. The first comes from former secretary of the treasury Larry Summers, who wrote on Twitter a couple of days ago that he was “sorry to see the @nytimes taking MMT seriously as an intellectual movement” because “it is the equivalent of publicizing fad diets, quack cancer cures or creationist theories.” The second comes from Noah Smith, “a well-known economist and former Bloomberg columnist” who “wrote a Substack post calling the article ‘bad.’”
Bad? Well, knock me over with a feather! . . .
Modern Monetary Theory (MMT), a fringe framework for understanding our money system, is on a charm offensive. The government spent trillions of dollars over the past two years, real bond yields are negative, and inflation is running hot, but MMT’s proponents are apparently taking “something of a victory lap,” according to a glowing new profile of the face of this theory, Professor Stephanie Kelton, in the New York Times.
In response to the victory-less victory lap, the economic problems with MMT have been spelled out over the last few days by eminently qualified academics (for a good summary of the objections to MMT, it’s well worth reading this piece by Noah Smith). The first among its problems is that MMT has no rigorous economic models or schematics attached to it. To say that it is ill-defined is an understatement. Advocates of MMT, for example, use a different definition of “savings” than all other economic schools (not counting investment), and they play games with the notion of the “natural” rate of interest. They make large claims about the long-run non-neutrality of money. Economists from Michael Strain to Paul Krugman have been scratching their heads trying to figure out what exactly it is the MMT crowd believes.
Supply Chains
President Biden likes to tout the $17 billion for ports in the bipartisan infrastructure law as helping supply chains. But remember, spending numbers from that legislation are totals over ten years, and there’s an arduous grant process through the Department of Transportation to apply for and get the money. Private investors, with no central direction, spent $7 billion more in three quarters of one year than the federal government will spend over the next ten.
The money from private investors will almost certainly be better spent as well. It doesn’t come with strings attached by the federal government that make the money virtually useless. The Freightos report highlights investments in software, e-commerce, and last-mile solutions that aren’t touched by government spending at all.
Government spending also suffers from focusing on things that already exist instead of spurring new technologies . . .
FreightWaves asks the question we’ve all been wondering — or at least, I’ve been wondering: “Has the ship gridlock off ports finally peaked?”
For the first time in a while, the line of ships waiting for berths at Los Angeles/Long Beach has seen a steep decline. Since peaking at 109 ships on January 9, it was at 78 ships yesterday, according to the Marine Exchange of Southern California’s official tally . . .
The National Association of Chemical Distributors (NACD) wants you to call your senator and ask him or her to support the Ocean Shipping Reform Act (OSRA) to address the shipping crisis. The bill passed the House in December and has yet to be voted on in the Senate.
The OSRA will not help the shipping crisis. If it has any effect at all on port congestion and delays, it might make them worse. But overall, it’s non-responsive to the problems our ports face . . .
Regulatory Policy
The Securities and Exchange Commission (SEC) released a new proposed rule on January 26, seeking to substantially change reporting requirements for private funds of capital — that is, private equity, private debt, hedge funds, and other asset managers.
While the proposal did not capture a lot of press attention, it should have. The scope and implication of the proposed rule ought to concern defenders of free enterprise and coherent capital markets . . .
Trade
Bown demonstrates that China was never at any point on pace to meet its commitments under the deal; U.S. manufacturing exports suffered under the deal; agriculture exports only did well because of billions in federal subsidies; and U.S. exports to China overall probably would have been higher without the trade war . . .
ESG/Stakeholder Capitalism
If stakeholder capitalism were nothing more than capitalism (as it is traditionally defined), then there would be no need to embrace a new approach. That ESG proponents advocate adopting new governance and investing paradigms contradicts their assertions that stakeholder capitalism is just like shareholder capitalism of the type with which we are all familiar.
It is true that many customers do want to purchase products consistent with ESG principles. Others may like to as well but find that the products are too expensive or inferior. Others may find no value in these products at all. Under free-market capitalism, businesses and entrepreneurs are empowered to satisfy these diverse wants and needs.
Yet Larry Fink and other ESG proponents aren’t advocating this sort of arrangement. Instead, they’d like to command a coercive exchange wherein activists define what will be produced and who will benefit from that production . . .
Antitrust
The bill that Cruz voted to forward in the Senate Judiciary Committee is Senator Amy Klobuchar’s American Innovation and Choice Online Act. Despite Klobuchar’s breathless references to her bill as being “sweeping,” she did not allow it to be subjected to a committee hearing and expert witnesses. If Klobuchar had, other senators would have learned just how sweeping it is.
If Senator Klobuchar’s bill is passed with Cruz’s help, it will decouple antitrust law from the consumer-welfare standard — the governing standard of the last four decades, by which courts and regulators act only when a merger, an acquisition, or a corporate practice harms consumers. Klobuchar would subject Google, Apple, Facebook, and Amazon to fines of up to 15 percent of their annual revenue for vaguely defined offenses unrelated to any specified harm . . .
Please note that travel plans may mean that there is no Capital Letter next week.
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