The Human Dodo Effect - It’s Do Or Dodo

What’s the single largest risk for global markets today?  Climate Change.

Call it what you like: Global Warming, Ocean Pollution, Species Extinction, The Human Dodo Effect.... the fact is, our ecosystem cannot sustain the current Western lifestyle for 7+ billion human beings living inside a closed system like the Earth. 

That’s hard, indisputable scientific fact.

We Are Not Dodos

And, faced with this fact, we are:

1. Doing very little to change things as fast as necessary to avoid catastrophe and/or,
2. Outright denying it (e.g. Donald Trump).

Add (1 + 2) to enormous global debt levels, zero/negative interest rates and equity indexes at historic all time highs, and... Pin and Bubble come to mind.

Markets are not even close to properly assessing and quantifying the risk of The Human Dodo Effect because traders and portfolio managers simply do not posses the necessary scientific background to understand, evaluate and quantify concepts such as tipping points, runaway reactions and  domino effects in the “real” physical world.  

They/we are wrapped up in a parallel, virtual reality where money - an artificial construct with a tenuous connection to physical processes at best - somehow matters (*). A little basic chemistry and thermodynamics would go a long way, indeed.

Energy and food are, by far, the two largest businesses in the world, and they are both impacted in extremis by Climate Change. The effect on fossil fuels is evident; the effect on the food business (also energy, but in different form) is not as evident until you discover that some 95% of grains such as soybeans are used to feed cattle and other animals.  They, in turn, produce so much methane that its CO2 equivalent is as large as that of all global transportation combined.  Consuming meat is as responsible  for climate change as all the cars, trucks, planes, ships and trains in the world.  Using palm oil, over-fishing, destroying rain forests and coral reefs are also links in the chain.

We are rapidly coming to realize that our Western lifestyle is leading us towards extinction.  Since we are definitely not Dodos or mindless enzyme bacteria, I am certain that we will change our behavior.  We will replace fossil fuels with clean ones and we will alter our food habits.  

Both are already happening.  In the US red meat consumption has come down sharply from 94 lbs/person in 1976 to 57 lbs in 2019 and, as you can see in the chart below, coal use is collapsing.  Petroleum is rising again somewhat and is still "king", but I think the rise in renewables is here to stay and probably accelerate. Other countries are much further ahead.

 
In my mind, the greatest signal that fossil fuels are headed for the dustbin of history to become the whale oil of the 21st Century, is what is happening in Saudi Arabia.  The Aramco IPO (if it happens) and, even more telling, the relaxing of anachronistic laws regulating everything from dress to marriage.  Saudi leaders are even talking about attracting tourists!

Yet, change to our Western lifestyle is still too slow to avert catastrophic consequences - and that's where the Pin will meet the Bubble: I am of the opinion that enough people in the West will rapidly change their day-to-day habits towards eco-sustainability that the economic impact will be felt in ALL sectors, not just energy and food.  Retailing, travel and tourism, construction, services... In fact, it may eventually become the norm to consume less of EVERYTHING.
 
Surely, you say, social changes of this magnitude only happen slowly. 

History says otherwise: remember the French, American and Russian revolutions, the abolition of slavery in the US, the demise of McCarthyism, the collapse of the Soviet Empire, acceptance of same gender marriage and child adoption, a black President.... Ideas circulate, recognizable patterns emerge and when the conditions are right... wham!  Change happens seemingly overnight.  

Sometimes all it takes is just one person to focus attention on the issues (Greta, anyone?).

And if this happens, then what is the proper P/E on equities???

 (*) Ok, Ok.. yes, money outside of flash/quant/black box trading, etc is connected to the "real" world. Witness Miami's $400 million bond program  to finance climate change resiliency projects such as seawalls and pumps.