Here’s a paradox of today’s market.
In the same week we get news that Indian banks are happy to finance Australian coal projects while Sweden’s central bank is dropping Queensland and WA bonds because of Australia’s large climate footprint.
Here is a perfect representation of the split forming across countries, generations and investment strategies. Where does this end?
I have no idea. All I know is the climate concerns are showing up all over the place and affecting behaviour and liquidity flows.
This is not simply a matter of a few funds dropping oil and gas stocks, either…
There is now a very real threat to diverse industries such as aviation, meat, fashion and any other sector that accounts for a large carbon footprint.
It could come via higher taxes or consumer boycotts. If this risk isn’t in your investing plan, then it should be.
Here’s another example. The Guardian reported earlier in the year that houses in Townsville could become ‘uninsurable’ because the risk of flooding was becoming too high. Property values will reflect this, and likely for good.
Here in Melbourne, The Age ran a piece saying that the people who continue to live and build on the city’s fringe are highly vulnerable to bush fires. It’s where the Black Saturday inferno happened in 2009.
This is going to pressure city planners to allow higher density to control urban sprawl and keep housing out of these kinds of zones.
Germany just passed legislation to raise taxes on flying, lower train ticket prices and further incentives to buy electric cars.
That’s not all…
The coming climate migrants
This dynamic is setting the stage for international conflict as countries wrestle over differing policies and national agendas.
For example, it’s perfectly acceptable for Western economies to wean themselves off fossil fuels over time.
However, a total ban on oil would remove almost the entire national income of countries like Saudi Arabia, Russia and Nigeria.
That means additional industries need to be established or the world will face a wave of migration out of these economic sinkholes.
The economies of the US and Australia are 70% consumption. This very lifestyle is now becoming hostage not just to the new social mores but, as we can see above, international sanction.
This is a major concern for Australia long term. Coal and gas account for a huge component of our export earnings.
Certainly, the income, royalties and jobs associated with coal are on borrowed time.
The choice will eventually be made for us as countries phase out coal use.
China and India may be the last big users, but they must surely be planning for the day they can’t. Or eventually renewable energy will make coal uncompetitive on cost, anyway.
This is why it’s a matter of urgency for Australia to create higher value industries and sectors away from mining.
Is it happening? Don’t make me laugh.
Australia: zero plan for the future
A Harvard Study recently exposed the Australian economy as having the same export complexity as Cuba and Iran.
70% of our exports are minerals and energy. The rest are food, alcohol, tourism and wool.
This hardly screams innovation as we move into the era of artificial intelligence, genetic editing, and space travel.
I happen to believe the commodity boom that began in 2000 still has about another decade to run.
However, even a brief glance of history shows that, like all booms, eventually they bust out. China will not need millions of tonnes of iron ore forever.
It is blindingly obvious that Australia should be investing for this future. Iron ore and gas royalties could fund it all, too.
Or perhaps even an Australian Investment Bank providing long term low financing. It’s what the originally government owned Commonwealth Bank of Australia did before it was turned into a property loan shop house.
The Swedes can go stick their financing. A sovereign country like Australia doesn’t need Swedish money.
We have the land, capital and resources to fund whatever strategy we damn well please.
But it does require a federal government with the brains and propensity to look beyond the next election cycle and a Reserve Bank willing to finance genuine industrial development instead of presiding over asset price inflation.
But you already know what we’re going to get. We’ll ride the boom until it’s over, then wonder why there’s nothing left except ridiculous property prices and a lot of holes in the ground.