Mid-Year Economic Update
ESG + Covid Induced Stagflation
It’s earnings season:
Winners: Chipotle, Hilton, Louis Vuitton
Losers: Google, Wal-Mart, Facebook, Amazon
The consequences of the Covid shutdown and the money printing in response to it continue to accumulate. We stopped the supply of economic goods for a virus with a 0.2% IFR, allowing narrowly trained, single-variable-optimizing, tunnel-vision medical technicians to run the world’s most complex economy into the ground.
Essential commodities are showing double-digit inflation. In addition, the Bubble economy, which is perhaps only in the earliest stages of unwinding, diverted the efforts of some of our most talented people into unprofitable malinvestments (Uber, Lyft, DoorDash, Snapchat, Peloton, Airbnb, Dropbox, Pinterest, Zillow, Casper, the list goes on and on), all the while critical infrastructure was ignored. The poor suffer the most, struggling for the necessities of life, while the middle and upper classes desperately seek some outlet to spend their rapidly deflating currency. There are hardly any homes, cars, or other durable goods available, so the money is spent on travel, restaurants, and luxury baubles.
Meanwhile, people in honest businesses that serve as the base of our prosperity can’t get financing due to the ESG racket. In this, Clown World, not satisfied with denying human nature, has aligned itself against the laws of physics, and there is an opportunity for profit in their error.
On the latter, a friend recently shared an amazing paper on ESG investing. Interesting quote:
In conjunction with that idea, sin companies will have a higher cost of capital because they will trade at lower P/E ratios, the flip side of which is a higher expected return to the providers of that capital. The hypothesis is that the higher expected returns(1) are required as compensation for the emotional cost of exposure to offensive companies. On the other hand, investors in companies with higher sustainability ratings are willing to accept the lower returns as the cost of expressing their values.
This religious language in a supposed secular movement is striking. In this case, “sin” means, among other things, investing in companies that develop fossil fuels and thus have a higher carbon footprint.
This reminds me of a dictum of the presuppositionalist school of theology that man is everywhere and always a religious creature. We must worship something and develop a system of moral values. The secular world, in an amazing transmogrification, has turned petroleum, one of God’s most generous blessings, into a curse, and His intended beneficiaries, humanity, into a cancer on the planet. That this is coincident with the accelerating moral degeneration of the broader culture brings to mind a quote from one of the more controversial presuppositionalists, who called man’s alternative efforts of self-atonement a manifestation of masochism:
The guilty person conceals a greater crime by open profession of a lesser one. For the Christian, the truest definition of sin is that it is “any want of conformity unto, or transgression of, any law of God, given as a rule to the reasonable creature.” Masochism is guilt atonement, but it is an atonement that both pleads guilty to the lesser crime and seeks refuge at the same time in self-justification.
…
The more a [secular] civilization advances, the deeper will its sense of sin become, because the increase of prosperity and cultural advantages will only increase the masochistic desire to pay for progress, which the individuals unconsciously believe requires atonement before enjoyment. As a result, the very liberating forces of civilization themselves call into existence the forces of enslavement. The citizens of the civilization progressively demand political enslavement as their masochistic price for advancement.
ESG, then, represents an attempt at self-justification by turning virtues into sins to atone for sins now considered virtues. It is an alternative religious order. Those who reject this moral system in favor of traditional views will have an advantage in investing and won’t have to bear any “emotional cost” for doing so.
Even if we accept the premises behind their weather models, reducing carbon emissions enough to move the needle on climate change would result in the impoverishment if not starvation of billions of people over several decades. Whatever climate effects might occur from higher CO2 concentrations are small compared to the geopolitical risks involved in reducing them. I don’t think meaningful reduction is politically possible, which means ESG is not an evil genius conspiracy theory but rather a pathetic act of religious devotion to a false god, i.e. a status display.
Thus, investment in essential commodities, especially fossil fuels, should continue to produce outsize returns, without guilt, to those who can see the world clearly. My many friends in the petroleum industry do noble work, partnering with Providence in liberating humanity from its entire previous history of poverty and privation. Petroleum almost alone is the basis of our modern prosperity, a divine gift for mankind, the only creatures who could make use of it.
That we seem to have just enough of it to bring us into a nuclear age, an advance of energy production 60,000 times as rich per pound of fuel as petroleum, further demonstrates the role of common grace in enabling humanity’s material progress. That ESG zealots are almost universally hostile to the further development of zero-carbon clean nuclear power gives away the game: their “sustainability” is really anti-humanity.
Unfortunately for average investors, who have been told to invest only indirectly in mutual funds, there are indications that the larger energy companies may be forced to self-sabotage due to ESG pressures. In a mutual fund, proxy votes for board members of the underlying securities are often outsourced to third-party firms that purportedly vote in the investor’s best interest. Increasingly these third-party firms are using ESG as a fig leaf to support board nominees who are politically rather than financially motivated.
The recent bullying of ExxonMobil, where advisory firms voted with BlackRock on behalf of millions of investors to install ESG activists into two board seats, is worrying. Exxon will now be pressured to waste significant shareholder money on renewable energy boondoggles while being constrained in its capacity to expand badly needed and highly profitable petroleum production and refining. This demonstration of ESG political power will have downstream effects on the managers of other large energy companies, who ultimately care more about job security than shareholder returns. Royal Dutch Shell, for example, is being kneecapped by the Dutch government.
Better bets are likely found in smaller companies with heavy insider ownership that are not typically part of larger mutual funds. Another idea would be to follow Warren Buffett in buying shares of Occidental Petroleum, which appears likely to fall under his substantial control and is still very attractively priced. Ever the sly fox, Buffett dismisses ESG as just too much paperwork for his aw-shucks “little” $600 billion company in Omaha to worry about.
It will be interesting to observe how far ESG parishioners will take their new religion. The reaction to the Orange Man purged the Left of its highly functional hypocrisy. Gone are the Michael Bloombergs who catered to left-wing social preferences but governed as conservatives on law and order issues (I respected his anti-soda regulation and propaganda campaign). Now, blue cities are occupied by the homeless and overrun by criminals as their reforming prophets demand their religious creeds be rigorously practiced. On the infrastructure side, places under their control from Germany to New England are shuttering “dirty” power plants without adequate renewable replacements.
Part of the hostility to petroleum comes from the Eastern Establishment, which has always shown the highest contempt for the Texans, Louisianans, and Okies made wealthy by its development. In the Establishment caste system, these were the wrong kind of people to have money and power, the descendants of Scots-Irish pioneers whose job, as they saw it, was to scratch out a living farming and ranching and provide cannon fodder for their wars. That they were, at least in their public professions if not always private behavior, largely evangelical Christians was further galling to the Eastern elites (both Billy Graham and the anti-communist movement were largely funded by oil money).
The contempt ran both ways. During the 1970s energy crisis, when Texas, booming from high oil prices, was threatened with national price controls on petroleum, a popular bumper sticker on many pickup trucks in the oil patch proclaimed “Let the Yankee Bastards Freeze in the Dark.” This sentiment was a cheap shot during the Arab oil embargo, but who could have predicted that, eventually, they might choose to freeze themselves? Given the region’s penchant for legalistic Christian heresies, perhaps only a particularly astute historian of American religion.