Investing with Global Warming

I usually keep a file with random ideas I come across as I’m reading. I use these ideas to try to create two mental frameworks:

  1. How the world works; and
  2. How the world could work.

Simply understanding how the world works is hard enough. Trying to understand how the world could work, and successfully capitalizing on those insights is brutally hard. The reason it’s brutally hard is because we have a difficult time thinking past the next couple of decades let alone the next century or two.

But just because it’s difficult doesn’t mean that some people aren’t trying. As I was reading through Josh Brown’s notes on Jamie Dimon’s Q&A at JPMorgan’s Asset Management shindig in NYC one of the comments caught my eye:

“Dimon thinks China will retaliate to anything Trump does but that the response will be measured and appropriate. “They don’t lose their cool. A senior trade official there told me last year that this period of time is just a fleck of dust’ in history’” (emphasis mine).

This excerpt was saved to the file because it’s a good reminder that the greatest strength of the Chinese is their ability and willingness to endure temporary setbacks in pursuit of their long-term goals. Compare that to political movements that want things now and consider which economy will be stronger 100 years from now. From a world stability perspective the biggest threat is China’s need to increase resource consumption as it lifts a greater share of its 1B+ population into the middle class. Imagine the resource consumption of the United States but at a scale four times bigger. That’s China in fifty or a hundred years.

What happens in the interim? Resource exploitation, greater economic activity, and the resultant increase in global temperatures that potentially turns into a vicious cycle.

Some investors are already thinking about what happens to their investments when sea levels rise. Investors who think long-term are already pricing global warming into the properties they buy in Florida. A recent research paper by economists Asaf Bernstein, Matthew Gustafson, and Ryan Lewis show that houses exposed to sea level rise of zero to six feet have been selling at a 7 percent discount relative to houses a similar distance from the beach that aren’t exposed based on sales between 2007 and 2016. Another study came to a similar conclusion for properties in Miami-Dade county that compared higher elevation properties to lower elevation properties. Since real estate is fairly illiquid with high transaction costs it makes sense that this group of investors would take a longer-term view on a property’s value and its prospects. Their assessment of likely outcomes has to take into account a rise in sea levels, especially given the topography of Florida.

Investing with Global Warming

This brings me back to my comment about keeping a file of interesting things I come across as the specifics often eventually tie into broad themes that become more readily apparent as you go back and look through what you’ve kept.

Parag Khanna published a map from the British Journal New Scientist at the beginning of 2016 that projected what the world would like if average temperatures were 4 degrees warmer.

This map raises some interesting questions:

  1. What is the probability that this map comes to pass?
  2. Where would you want your investments located?
  3. Where would you want to live?
  4. Where would you want your children and their children to live?
  5. Most importantly: what can you do within the next decade that makes any of your answers to the above a possibility for the future?

With a large enough portfolio it is possible to address potential outcomes that have smaller and smaller probabilities. Ultra-wealthy tech workers have purchased property in New Zealand to use as their personal bolt-hole for Doomsday. For most of us, given our more limited resources, maintaining a diversified portfolio and taking the job offer in Cleveland versus Tampa is the best we can do.

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