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October 14, 2018 | The Future

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

James, brilliantly, sold his house last year and invested the money – about a million. Since then the value of the old digs has gone down and his portfolio’s gone up. “I’m okay,” he says. “Even learned to live with that up-down stock market volatility thing. Selling was the right move.”

In fact he and his partner now lease a better place than they owned. The portfolio pays the rent. Live for free. But James is starting to worry about larger and darker things than the real estate market or the VIX. I received this letter over the weekend:

Climate change and its effect on markets in the next twenty years (my own personal drop-dead date) and how to protect one’s income from looming disaster have me up at night. It is pretty clear from the latest IPCC offering that unless we do something big soon humanity is doomed and with Trump types driving the bus we are going over some form of cliff very shortly.

In my view:

  • Tropical zones will be uninhabitable perhaps within 15 years.
  • Mass migrations will occur (This is excluded from the IPCC report but its obviously going to happen as the tropics heat further and the sea rises. Bangladesh will disappear for instance.)
  • Manufacturing and trade will be massively disrupted.
  • Financial markets will suffer. (Note I didn’t say “crash”.)

Even if we do all the right things and limit emissions that will still on its own have a massively detrimental effect on markets. We can’t achieve a limit on warming emissions while continuing business as usual without curtailing fossil fuel use. Manufacturing will decline, shipping will decline, all forms of business that currently depend on fossil fuels will decline. Global tourism will decline as jet air travel is curtailed.

You tell me what the effect of all that will be on financial markets but I think values will decline and we will enter a planetary depression that will dwarf 1929. I am not sure we can fix this with more solar panels especially with people like Ford throwing sand in the gears.

So what does the small investor like me do to survive? I have one and a quarter million dollars invested, much as you suggest, we own no property, its all paper. I have never been a doom and gloomer nor a nuclear-apocalypse homesteader type but I am now worried that the proverbial will hit the fan long before I expire.

Staying invested is clearly sensible for the next decade but beyond that good planning would suggest thinking up a parallel plan B. Buying a small farm in Northern Quebec isn’t my gig and I would be too old to work it by the time I needed to but maybe my grandson could survive there?

Cheerful aren’t I? What are your thoughts? What can I do?

Well, first, if you’re a rednecky reader, think Trump’s a deity, believe carbon taxes are theft, the Paris Accord was a trap, the UN scientists are bogus and climate change is a hoax, just ignore this post. Go hunting. Or bowling. Under-oil your truck before winter. Teach your dog to fetch beer. Rest your knuckles. Generally stand down and let the lefties worry that hurricanes, drought, temp changes, wild fires, mud slides, typhoons and rising seas are, like last week’s international report claims, actually related and portend the future. After all, if you think climate change is bogus, you’ve nothing to fret over.

But if, like Jim, you see scary decades ahead and a retirement running smack into an environmental crisis, how might you prepare?

He’s not alone. A Global Investor Survey discovered almost 70% of professional money managers think climate change is “a material risk or opportunity across their entire investment portfolio.” The IPCC report last week figured this could cost the world $54 trillion (yeah, with a T) in lost economic activity and damage globally. It’s estimated retail investors (like us) will be dinged $4.2 trillion over the next five or six decades as the world heats, melts, floods and changes. A Stanford U report says world income could fall 23% during this century, and storm damage be epic (as with Michael, a few days ago).

Here’s an interesting quote from Henry Paulson, the guy who was Bush’s Treasury Secretary during the Lehman Brothers collapse and former CEO of Goldman Sachs: “As someone who has spent a good deal of time assessing risk and dealing with crises, I’m struck by the similarities between the climate crisis and the financial crisis of 2008. The greenhouse-gas crisis, however, won’t suddenly manifest itself with a burst, like that of a financial bubble. Climate change is more subtle and cruel. It’s cumulative.”

What to do?

The best strategy at this moment is to maintain a globally-diversified portfolio. You have no real idea where changing weather will have the greatest impact, so why try to guess? Every serious investor should have exposure to Canada, the US, Europe, Asia and emerging markets.

Second, understand why balance will help mitigate risk. Maintain a small pile of the right kind of bonds to dampen stock volatility plus own preferred shares for tax-efficient income and to offset rising rates (they are inevitable). Invest in REITs because they’re not correlated to stock markets and can provide return-of-capital distributions. And keep a little cash at all times, since it’s a defensive asset and can almost pace inflation now that HISA yields are rising. Use ETFs – don’t try to pick individual stocks. Elon Musk may be a visionary, for example, but he’s just a toke or two from blowing up Tesla. Of course, stuff your TFSA and mainline RRSPs as well if you don’t have a DB pension.

It’s probably a safe bet this portfolio will protect you and (hopefully) double your money over the next decade, six-tenths of which could be Trump years. If that’s the political reality, you can be sure zip will be done about climate change on a global basis.

After that, harder choices.

A decent idea will be to start dumping investments in companies and industries that feed climate change and will inevitably be punished for it. Coal’s a good example. Conversely, you can invest in industries that will be pushed to the forefront by government regulation, like wind and solar. Meanwhile don’t get too excited about so-called ‘ethical’ or ‘green’ strategies or funds – most of them give a dismal rate of return and do nothing to save the world.

Green bonds are an option. The market is small in Canada, but promising. So far Ontario and Quebec have issued them, along with one federal government agency, TD Bank, CoPower and Manulife. Returns aren’t bad – in the 3%-4% range – and the capital raised is used to fund environmentally-sustainable enterprises. Jut relax for now, and expect many more of these climate change assets to materialize.

As for have a stash of cash, Winchester Defender, months’ worth of food, a kick-ass vehicle, self-sufficient homestead, safe perimeter, survival skills and tasty beasts in the barn, well, you’d better befriend a redneck. Just don’t tell her why.

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October 14th, 2018

Posted In: The Greater Fool

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