WCM Bonus Chart for July 23, 2021

Because we took a hiatus for the holidays, we have extra thoughts to share. The US Bureau of Labor reported that consumer and producer prices came in higher than the consensus last week and that may have been part of the reason why stocks retreated. We view the consolidation in US stocks as healthy at this point, especially considering strong corporate earnings momentum and analysts increasing their earnings forecasts rather than the opposite, which oftentimes occurs at this point in the year. Forecasters usually have a difficult job but given the condition of the world during the pandemic and the incongruent economic recovery so far, it makes now even more challenging. Global bond markets are suggesting a different read on inflation and the near-term outlook for monetary policy, both benign for risk assets. The benchmark 10-year US Treasury bond yield continues its decent after the near-term peak of 1.74% on March 31st and now at 1.28%. Interestingly, government bond yields in the developed world have also fallen with equivalent US interest rates suggesting that current inflation readings are more of a temporary condition rather than a long-term concern. Disinflationary trends are starting to emerge including declining commodity prices, benign capacity utilization rates and strong productivity levels. If bond yields were trending higher along with stronger inflation readings we would be more concerned about risk assets. [chart courtesy Bloomberg LP © 2021]

WCM Chart of the Week for July 20, 2021

And we’re back. Everyone here is hoping everyone out there has taken some time to breathe a little of the relatively COVID-free air and begin to think about what a return to (the new) normal looks like. In that spirit, this week’s chart is from data provided by Redfin, a national real estate brokerage, on Q1 2021 relocation searches. One of the consequential impacts of COVID and the shutdown was an acceleration of outward migration from major urban centers. We are at a point in the generational cycle where it was to be expected with Millennials anyway, but the urgency was ramped up considerably. With companies reimagining what a workforce and a workplace look like, many people with knowledge economy jobs are able to quite literally work from anywhere. Residential real estate in less urban, less expensive and more desirable areas like Denver, CO (this week’s chart) have seen a crush of interest from urban economic centers and a rapid rise in prices as a result. We envision some of this will reverse, but much of the population movement is likely permanent, changing the economics of numerous communities across the country.

WCM Chart of the Week for June 28, 2021

Since 2013, the NY Federal Reserve has been conducting a consumer survey focused on expectations for rental housing costs in the year ahead. The survey participants expect housing rental costs to soar a record 9.7% in the next 12 months, which is a major increase from the average of about 5.6% since the survey began nearly eight years ago. Survey data and other “soft” indicators, while useful, tend to lag hard data. Granted, there are also widespread reports of labor shortages and lack of transportation, but that is most likely a temporary condition. Taking this and other signals into account, we would be more concerned about inflation becoming a more permanent problem if the bond market was behaving as if the economy was moving towards that. But, the benchmark 10-year US Treasury bond yield, now standing at 1.47%, has descended from its peak of 1.74% on March 31st. Also, some key commodity prices are declining — the lumber crack spread (cited by WCM on June 14th) has fallen over 30% in two weeks. For now, we view these pockets of inflation as more of an adjustment from pandemic-created economic readings rather than a permanent progression towards higher consumer price levels. [chart courtesy NY Fed and Bloomberg LP © 2021]

WCM Chart of the Week for June 22, 2021

Those participating in the frenzy in crypto-related investing may be in for some more downside pain in the months ahead as a bellwether, Bitcoin, has formed the notorious “death cross”, which is when the 50-day moving average falls below the 200-day. So far it is approaching nearly a 50% drop since its peak in mid-April. Technical analysis may be more useful in evaluating the merit of such investments that have no or little fundamental data on which to base a decision. Part of the rationale for investors to acquire positions in Bitcoin and other related investments lies in the idea of using them as a means of exchange and potentially as a store of value. The latter dimension has been gaining credibility as major central banks continue to pursue aggressive quantitative easing, effectively debasing their currencies to one degree or another. We cannot divine where the trend in cryto investing is headed in the intermediate term, but there is no denying that interest is growing. If recent history is any guide, investors who chose to hold these investments need to be prepared for further losses. The previous two times when death crosses were formed in 2018 and late 2019, losses surpassed 64% and 30%. Not for the faint of heart. [chart courtesy Bloomberg LP (c) 2021]

WCM ESG Week — Theme 5: Climate Justice

Climate change has pervasive and profound consequences for our planet, economies, and cultures. The systems of climate do not discriminate across racial lines, income levels, or geographical locations, nor abide by governmental policies and regulations. But it is important to draw a distinction between the worsening storms, sea level rise, drought, fire, ice loss and mass extinctions that occur on a planetary level, and the injustice of more prosperous businesses, communities, and nations driving that climate change and imperiling already marginalized communities at home and abroad. We lay witness to social, economic, public health, and environmental effects disproportionately impacting vulnerable and underprivileged populations. We acknowledge these inequalities of influence, largely on minority and low-income communities, as climate or environmental (in)justice.

Continued increases in global warming contribute to already existing challenges in eradicating poverty, reducing inequalities, and ensuring healthy individuals and ecosystems due to higher food insecurity and reduced water supply, community income losses, lost livelihood opportunities, adverse health impacts and population displacements, and increased competition for arable land. Poverty and disadvantage are projected to rise in some populations due to increased global warming. Some of the most severe impacts of climate change and a lack of climate resiliency are expected to be felt among agricultural and coastal dependent regions, indigenous people, children and the elderly, poor laborers and urban dwellers in African cities, and people and ecosystems in the Arctic and Small Island Developing States (SIDS), dryland regions, and least developed countries (IPCC, 2018).

For example, land degradation refers to the deterioration of soil quality due to both natural and anthropic impacts, accelerated during the 20th and 21st centuries as a result of increasing agricultural and livestock production, urbanization, deforestation, and extreme weather events such as droughts and coastal surges. Land degradation occurs over 25 percent of the Earth’s ice-free land area, affecting 1.3 to 3.2 billion people, the majority of whom are living in poverty in developing countries (IPCC). Land degradation and climate change, both independently and in conjunction, have severe consequences for natural resource-based regions including higher threats of malnutrition, increased risk of water and food borne diseases resulting from poor hygiene and lack of clean water, increased respiratory diseases due to atmospheric dust from wind erosion and air pollutants, and spread of infectious diseases as communities experience lack of food production and are forced to migrate to more hospitable regions (WHO, 2020).

Furthermore, increasing global warming intensifies the exposure of small islands, low-lying coastal areas, and deltas to the hazards related to rising sea levels including increased saltwater intrusion, flooding and damage to infrastructure, loss of coastal resources, and a reduction in the productivity of fisheries and aquaculture. One global fishery model projected a decrease in global annual catch for marine fisheries of about 1.5 million tonnes for 1.5°C of global warming, with a loss of more than 3 million tonnes for 2°C of global warming. The risk of irreversible loss of many marine and coastal ecosystems escalates with global warming, specifically coral reefs which are projected to decline by a further 70–90% at 1.5°C and larger losses (>99%) at 2°C warming. Furthermore, changing ocean biochemistry due to increased acidification adversely affects marine species’ physiology, survivorship, habitat, reproduction, and disease incidence, and increases the risk of invasive species. Risks from vector-borne diseases, such as malaria and dengue fever, are projected to increase with warming in addition to potential shifts in their geographic range (IPCC, 2018).

In addition to global warming and changing ecosystems, global industries also contribute to environmental injustice. Oil exploration and drilling fields have produced severe impacts on indigenous peoples and vulnerable communities around the world who depend on healthy ecosystems to survive. Oil drilling in the Amazon basin spurs deforestation of the land, introduces toxic pollutants impacting indigenous peoples’ health and wellness, and allows for hazardous working conditions for local employees. Incursions into indigenous lands are frequent and have been recorded in more than 20 communities in at least 10 countries including the United States, Australia, Bolivia, Brazil, Ecuador, and Peru (UN, 2021).

Closer to home, labor groups in Louisiana have reported dangerous working conditions in oil refineries, as they emit numerous types of toxic chemicals including benzene, formaldehyde, hydrogen sulfide, sulfur dioxide, and sulfuric acid. Oil production companies, although permitted to release these chemicals to the environment in designated amounts, are plagued with accidental spills and leaks often exceeding the allowable volumes. This toxic contamination puts nearby communities at high risk of environmental health problems. Additionally, in regions where fracking is used as a method to extract shale gas, such as Pennsylvania, surface and well waters are continually contaminated with the toxic chemicals used in fracking fluids and petrochemical run-off including salts, heavy metals, and radioactive chemicals. Oil pollution contaminates both drinking and agricultural water supplies for livestock and irrigation, which has been found to be particularly detrimental in the Melut Basin of South Sudan in Africa (UN, 2021).

Oil refineries and other chemical releasing facilities are predominantly surrounded by minority populations. Communities located in close proximity to such facilities, coined “fenceline communities”, are exposed to various kinds of toxic pollution, and in the U.S. are disproportionately composed of African Americans, Latinos, and low-income groups. The highest concentration of U.S. oil refineries is located in the Gulf of Mexico, with one of the most notable fenceline communities residing outside Houston, Texas. Three quarters of the city’s residents live within three miles of the 191 hazardous chemical facilities and are known to be at higher risk for heart disease, cancer, and respiratory problems related to poor air quality, such as asthma and emphysema. The combination of lack of access to healthy food, high poverty rates, and increased exposure to deadly contaminants makes for a serious problem in fenceline vulnerable communities, especially African Americans. Fenceline communities are found in many states across the U.S. as well as globally (UN, 2021).

We have also observed a trebling effect with fenceline and other economically disadvantaged communities when climate change and environmental pollution collide. Storm surge, inundation, flood, and wind often cause this pollution to breach containment and further toxify neighborhoods and cities, waterways and water supplies, and farmable land as with Hurricane Katrina in 2005in Louisiana and Harvey and Imelda in 2017 and 2019 in Houston, TX. These types of climate-related disruptions cause communities to fracture as vulnerable people move to seek cleaner, safer, healthier, more sustaining situations. This destabilization can lead to diasporas, conflict and even war, as well as the disintegration of cultures and art. From port cities to open grasslands to the frozen tundra, the ability to be resilient and adaptive in the face of these environmental and climate forces requires access to capital and opportunity. Even better, developed economies taking their collective foot off the literal and figurative gas pedal will help to manage down the risk and give these at-risk communities a shot at better outcomes. Climate justice involves doing both. Less extractive and more regenerative. Systems that work on a global level for the benefit and welfare of all.

Climate justice gives us the words and concepts to frame and then address countless intertwined challenges that affect access to nutrition, access to clean water, access to education, access to economic opportunity, an expectation of peace and prosperity, and the ability and in fact the right to care for our collective legacy and culture and gift it to the generations that come after. Our final discussion for ESG Week is with Professor Warren Senders of the New England Conservatory of Music. We explore the interconnectedness of climate science, indigenous wisdom, and world art and culture, and our collective responsibility to care for the planet we have, and to care equitably and justly for the people on it.

https://www.who.int/news-room/q-a-detail/climate-change-land-degradation-and-desertification

https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_Full_Report_High_Res.pdf

https://wedocs.unep.org/xmlui/bitstream/handle/20.500.11822/35417/EJIPP.pdf

WCM ESG Week — Theme 4: The Business of Human Trafficking

“It’s really important that people begin to understand and have transparency when making purchasing decisions as consumers… what high-risk businesses are. When you are paying X, Y, or Z for a shirt or an outfit, there are people sacrificing their lives to bring it to that cost level.” (Bongiovanni, WCM ESG Week, 2021). In 2016, an estimated 40.3 million people were living in some form of modern slavery, whether through sex or labor trafficking or domestic servitude. Although declared illegal in almost every country, human trafficking or modern slavery persists at deplorable rates, even within developed nations like the United States.  No community is immune, and no age, race, gender, or nationality is exempt from being exploited. Traffickers often use violence, manipulation, or false promises of high-paying jobs or romantic relationships to entice victims into trafficking situations. They target vulnerable individuals who may be experiencing economic hardship or emotional or psychological distress, or who may live in areas of natural disaster, political instability, or civil unrest (Homeland Security, 2020). In the United States alone, the FBI estimates over 100,000 children are victims of sex trafficking. Children in the foster care and welfare system are particularly vulnerable due to a lack of family support and stability. 60% of child sex trafficking victims recovered through FBI raids in 2013 were found to be on record in the foster care or group home systems (NFYI, 2015). But, our youth are not the only individuals at risk.

Globally, 46% of human trafficking victims are adult females, 19% young girls, 20% adult males, and 15% young boys. Human trafficking can take on many forms including forced marriages, prostitution, and domestic servitude. Trafficking even infiltrates private and public supply chains through forced labor and debt bondage, many within the sectors of construction, manufacturing, agriculture, mining, fishing, and forestry. Collectively, G20 countries (the intergovernmental forum comprising 19 countries and the European Union aimed at addressing major global issues) are responsible for importing $354 billion worth of at-risk products each year. The top products, by each country according to US dollar value include apparel and clothing accessories, sugar cane, coal, fish, timber, and laptops, computers, and mobile phones. Disappointingly, only seven G20 countries have formally enacted laws, policies, or practices to halt business and government sourcing goods and services produced by forced labor (Global Overview, 2020).

So, what can we do as consumers and investors to ensure that we do not contribute to or support the exploitation of “human capital”? “One of the most important first steps to addressing the problem is discovery and disclosure. Transparency will assist a variety of stakeholders, from customers and business partners to investors and lenders, to make more intelligent decisions about deploying capital. The end goal is to change how companies build those supply chains and wring slavery out of the system” (Sloss, 2019). Tune into our podcast WCM ESG Week Day 4: The Business of Human Trafficking with Michele Bongiovanni of HealRWorld and Distributed Data Network as we discuss the issue of human trafficking, its widespread and fundamentally objectionable consequences, its interwovenness in the Developed West, and what actions are being taken to weed out and eliminate trafficking within our supply chains.

https://nfyi.org/issues/sex-trafficking/

https://www.dhs.gov/blue-campaign/what-human-trafficking

https://www.unodc.org/unodc/en/data-and-analysis/glotip.html

https://regenerativeinvestmentstrategies.com/wp-content/uploads/2019/11/Citywire-USA-September-2019-Breaking-Free.pdf

https://www.globalslaveryindex.org/

WCM ESG Week — Theme 3: Medical Justice and Access to Healthcare

In 2021 when we think of justice we may think of our court system, the disproportionately high incarceration rates of African Americans and Hispanics, inequalities of pay for women vs men, or a significant lack of funding for minority-owned small businesses amongst financial institutions and investment funds. One theme that may not be at the forefront of our word association is medical or healthcare justice, which refers to the opportunity for all to live a healthful life and access equitable and affordable quality care when it is needed.

In 2015 the United Nations launched the 2030 Agenda for Sustainable Development; a plan of action to address universal peace and prosperity for people and the planet by 2030. In it, the United Nations outlined 17 Sustainable Development Goals to address and measure progress on our world’s most pressing issues threatening a healthy and prosperous future. Goal 3, “ensure healthy lives and promote well-being for all at all ages” outlines 13 healthcare targets for equitable global health including reducing maternal mortality rates and ending the epidemics of AIDS, tuberculosis, malaria, etc. (UN SDG, 2015). For a large percentage of the population in the United States, healthcare is an assurance provided by parents, universities, employers or government programs.

However, a study conducted by the Commonwealth Fund in 2020 found that 43.4% of adults aged 19 – 64 were inadequately insured; 9.5% were insured but had a gap in coverage within the last year, 21.3% were fully insured, however out-of-pocket or deductible costs were so high relative to annual income they were considered underinsured, and 12.5% were completely uninsured. Inadequate healthcare coverage exposes individuals and families to high health care costs which often accumulate into medical debt. Among those who reported a medical bill or debt problem, 37% said they had used all of their savings to pay their bills, 40% received a lower credit rating as a result of their medical debt, 31% were forced to transfer medical debt to their credit cards, and one-quarter were unable to pay for basic necessities such as food, heat, or rent (Commonwealth Fund, 2020). 

When we consider health and wellness on a global scale, we must consider all the variables that comprise good health including access to quality nutrition, clean water, sanitation facilities and supplies, basic medical services, and education for disease prevention and treatment. 36% of the world’s population, roughly 2.5 billion people, lack access to improved sanitation facilities, putting them at risk of several preventable diseases including dysentery, cholera, and typhoid (WHO, 2015). Furthermore, nutrition-related factors contribute to approximately 45% of deaths in children 5 years and under. Malnourished children have a higher risk of death from common childhood illnesses such as pneumonia and malaria. Children in sub-Saharan Africa are more than 15 times more likely to die before the age of five than children in high income countries. In addition, 94% of all maternal deaths occur in low and lower middle-income countries. In 2017 alone, 810 women died each day from preventable causes related to pregnancy and childbirth (UN SDG, 2021).  Focusing on what is just in terms of access to basic needs but also access to a clean, safe environment and workplace improves overall wellness and with it productivity and prosperity while reducing the social and economic burdens that come with unwell communities.

Tune into our Wilde Capital Management ESG Week podcast 3: Medical Justice and Access to Healthcare where we discuss the structural challenges to achieving a global basic level of wellness, and how companies both in and out of the broad medical industrial complex can contribute to achieving greater global health with Ingrid Dyott, Managing Director and Portfolio Manager at Neuberger Berman.

https://www.un.org/sustainabledevelopment/health/

https://www.commonwealthfund.org/publications/issue-briefs/2020/aug/looming-crisis-health-coverage-2020-biennial

https://www.who.int/publications/i/item/9789241564977

WCM ESG Week — Theme 2: Banking the Un(der)banked

Deposits in the United States are insured by one of two federal agencies: the Federal Deposit Insurance Corporation or the National Credit Union Administration. In the first quarter of 2021, the Federal Deposit Insurance Corporation reported 4,978 current FDIC-insured commercial banking and savings institutions in the United States providing banking and credit services. In addition, the FDIC acts as the federal supervisor to another 3,209 state-chartered banks and savings institutions in the United States that are not members of the Federal Reserve system. These FDIC-insured and supervised institutions serviced in total over $22 trillion in assets as of quarter one 2021 (FDIC, 2021). In the same time frame, the NCUA reported a total of 5,068 federally insured credit unions servicing $1.95 trillion in assets to over 125 million customers (NCUA, 2021). So, what does it mean to be underbanked or unbanked in one of the richest and most prosperous countries in the world?

Every two years since 2009, the FDIC conducts a household survey in cooperation with the U.S. Census Bureau on the use of banking and financial services in the United States. The survey collects responses from approximately 33,000 households to analyze trends in the financial services industry by geographical, demographic, and economic factors.  The last survey, conducted in 2019, estimated 5.4% of U.S. households were unbanked, meaning that no household member had a checking or savings account at a bank or credit union. This percentage represents approximately 7.1 million households.  Unbanked rates were higher amongst lower-income, less-educated, and Black, Hispanic, and American Indian or Alaska Native households. Among households reported as unbanked, 48.9% cited the reason for not having an account as, “don’t have enough money to meet the minimum balance requirements” (FDIC, 2019). Furthermore, according to a survey conducted in 2019 by the Federal Reserve, an additional 16% of adults are underbanked in the United States, meaning they have a bank account but still use other alternative financial service products such as money orders or pawn shop loans due to lack of affordability or access to traditional and more secure products (Federal Reserve, 2017).

On a global scale, 1.7 billion adults are reported as unbanked in 2017, with China and India accounting for almost 325 million unbanked individuals alone. Women disproportionally represent 56 percent of all unbanked individuals globally (Findex, 2017). Lack of access to traditional banking services hinders individuals’ ability to build emergency funding, execute financial transactions such as paying bills or cashing checks, and results in a lack of access to credit.

Tune into our Wilde Capital Management ESG Week podcast Day 2: Banking the Un(der)banked where we explore financial services trends with Justin Conway, Vice President of Investment Partnerships at Calvert Impact Capital.

https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-banking-and-credit.htm

https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf

https://www.ncua.gov/files/publications/analysis/industry-at-a-glance-march-2021.pdf

https://www.ncua.gov/files/publications/analysis/industry-at-a-glance-march-2021.pdf

https://www.fdic.gov/analysis/quarterly-banking-profile/statistics-at-a-glance/2021mar/industry.pdf

WCM Chart of the Week for June 14, 2021

Consumers of lumber products may finally see an end to soaring prices. Lumber crack spreads (the difference in prices of finished lumber and raw timber) have been rapidly falling since peaking in early May. Specifically, the measure on this week’s chart uses the CME futures spot rate of random length softwood 2x4s used in construction minus the Timber Mart-South US Louisiana Pine Sawtimber spot rate. Both indices are falling with finished board prices falling at a faster pace.

There are a variety of reasons why finished lumber prices surged, ranging from a beetle infestation in western Canada and the US Pacific Northwest, strong pandemic-stimulated single family housing demand, glue shortages related to the storm-induced petrochemical plant shutdowns in Texas earlier in the year, and a lack of truckers and workers for sawmills. This confluence of events may be playing out in other industries and be part of why the Fed considers rising key consumer and producer prices transitory and not permanent. Nonetheless, inflationary concerns that recently unnerved the capital markets will likely continue to arise for some time to come. [chart courtesy Bloomberg LP © 2021]

WCM ESG Week — Theme 1: Regenerative Agriculture

Between 21–37% of all greenhouse gas (GHG) emissions are attributable to our global food system, from agriculture and land use, storage, transport, packaging, processing, retail, and consumption. As increased GHG levels further accelerate climate change, warming over land is occurring at a rate faster than the global average, with observable impacts on the land system. Traditional agricultural practices and arable land misuse have contributed to the degradation of roughly 75% of the Earth’s land area.

In addition to land degradation, the European Commission Joint Research Centre estimates 36 billion tons of soil is lost every year (Moyer, 2020). Depletion of soil nutrients, due to various natural and anthropogenic activities, affects people and ecosystems throughout the planet, and is both influenced by climate change and contributes to it. Warmer temperatures and changing precipitation patterns alter the beginning and end of growing seasons, contribute to regional crop yield reductions, reduce freshwater availability, and push biodiversity toward an unforgiving cliff (IPCC, 2019).

Recent studies indicate we are facing a biodiversity catastrophe, with 1,000,000 species at significant risk of extinction due to the climate crisis and habitat loss (Moyer, 2020). The frequency and intensity of extreme weather and climate events have also increased due to global warming and will continue to increase under medium and high emission scenarios (IPCC, 2019).

That is not to say that all hope is lost. Amid an abundance of dismal facts and figures, our species maintains both the responsibility and the capacity to discontinue extractive and degrading land use practices and implement large scale restorative and sustainable processes. Regenerative agriculture is a systems approach to farming that builds soil health by supporting biodiversity to return carbon and nutrients back to the soil. It is a holistic land use practice that can involve diversifying crop rotations, planting cover crops, green manures and perennials, retaining crop residues, using natural sources of fertilizer such as compost, employing highly managed grazing and/or integrating crops and livestock, reducing tillage frequency and depth, and eliminating synthetic chemicals (Moyer, 2020). Agro-ecology systems (systems that incorporate natural ecological processes with agricultural production) have many rewards to society, including increases in local income and nutrition, as well as a drawdown of CO₂ back into the soil (Chainlink, 2021). Regenerative agriculture focuses not only on reducing the carbon footprint and ensuring sustainability, but also on going beyond conventional practices to reverse the effects and progression of climate change. Indigenous and local ecological knowledge often contribute to the development of restorative agricultural practices and can enhance resilience against climate change and reduce land misuse (Moyer, 2020).

Tune into our Wilde Capital Management ESG Week podcast: Day 1 – Regenerative Agriculture to learn more. In this interview with Marc Ian Barasch, author and filmmaker, we discuss the ideas behind applying regenerative principles to the business of agriculture, providing for greater abundance for a population of nearly 8 billion people, caring for climate, water, and other systems that are failing as we speak.

https://www.ipcc.ch/site/assets/uploads/sites/4/2020/07/03_Technical-Summary-TS_V2.pdf

https://rodaleinstitute.org/wp-content/uploads/Rodale-Soil-Carbon-White-Paper_v11-compressed.pdf

https://blog.chain.link/reversing-climate-change-how-hybrid-smart-contracts-incentivize-regenerative-agriculture/

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