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WCM Chart of the Week for September 21, 2020

This week’s chart appeared in the Wall Street Journal via Germany’s Kiel Institute for the World Economy and shows the rapid rebound in global trade after the pandemic-induced economic stall.  As the Journal points out, World trade volume has regained half of the volume lost since the COVID-19 outbreak in three months whereas it took nearly 12 months for world trade to regain a similar drop in volume in the aftermath of the global financial crisis. While the rebound is not consistent across the globe, it is an encouraging sign that commerce is returning to normal.

What we find notable is the speed of the recovery in trade volume and consistency with our comments last week regarding the fast pace of US jobs re-creation. The causal nature of this recession was highly unusual, near universal global government-led economic lock-down, so it is not all that surprising that the recovery could be quicker than normal.  Several factors could disrupt the recovery including a potential second wave of viral infections, lack of an effective vaccine or therapeutics, and ongoing trade tensions.  But, improving macroeconomic trends are welcomed worldwide.

UN 75th, Oceans and Climate

“Global warming: the long-term heating of Earth’s climate system… due to human activities, primarily the burning of fossil fuels, which increases heat-trapping greenhouse gas levels in Earth’s atmosphere,” (Shaftel, 2020). The term coined decades ago has gained momentum in not only scientific communities and environmental organizations, but political campaigns and industry corporate governance policies around the globe. From polar ice melting and sea levels rising to extreme weather events, our changing climate has far reaching and compounding effects on the environment and ecosystems, our economies and industries, and our global food supply. One of the direct effects of climate change and global warming is ocean acidification.

To examine the process of ocean acidification and its impacts on human life, recall an adolescent science lesson on pH and water chemistry. The pH scale runs from 0-14, with 7 being neutral. Higher than 7 represents a basic or “alkaline” pH and lower than 7 represents an acidic concentration. For reference, household vinegar, an acidic liquid, has an average pH of 2.5, while tap water has an average pH of 7.5. The ocean’s current pH is approximately 8.1, which is basic (NOAA, 2020). How does the ocean’s pH tie into global warming and climate change?

The ocean naturally absorbs roughly 30% of the carbon dioxide that is released into the atmosphere.  When seawater and carbon dioxide combine, carbonic acid is produced, lowering the pH of the ocean and increasing the acidity. As levels of carbon dioxide increase due to human activity (burning of fossil fuels, land-use change and deforestation, agricultural industries) the amount of CO2 absorbed by the ocean also increases. Plainly speaking, the more CO2 we produce and release into the atmosphere, the more acidic our oceans become. Since the Industrial Revolution in the 1700’s, increases in CO2 have resulted in a 30% increase in ocean acidity (NOAA, 2020). This present acidification process is occurring ten times faster than any previous changes over the last 300 million years (IUCN, 2017). The rapid acceleration of CO2 production significantly jeopardizes the ability of ecosystems to effectively adapt to the changes in ocean chemistry.

Increased ocean acidity especially affects organisms with calcium carbonate shells or skeletons including shellfish like coral, oysters, crab, and lobster. A recent study performed by the National Oceanic and Atmospheric Administration on the pteropod, a small sea snail integral to the ocean food chain, showed that the levels of ocean pH projected for year 2100 dissolve the organism’s shell within just 45 days. Furthermore, researchers have already discovered severe shell dissolution in pteropods naturally found in the Southern (Antarctic) Ocean, indicating the process’ rapid progression (NOAA, 2020). The pteropod snail is a major food source affecting members of the food chain from krill and fish to whales and seals. When we consider how each organism is interconnected in the food web, the loss of one species creates a cascading effect. 

Unfortunately, the consequences do not stop there. Increased acidity has also been linked to a disturbance in scent transmission, inhibiting species from detecting predators and locating suitable habitats (NOAA, 2020). Acidification has also been observed to affect sound transmission, reducing sound absorption and increasing the ocean’s ambient noise (OAN). Increases in OAN can impair marine animals’ hearing and communication, increase stress and lower their immune systems, and even cause brain hemorrhaging or death in severe cases (Gazioğlu, 2015).

High Level Impacts

In 2018, the global fishing and seafood sector represented a USD 164 billion international trade industry employing 59.5 million people. 88% of the 179 billion tonnes of total fish produced in 2018 was for direct human consumption. Fish and fish products supply approximately 3.3 billion people with nearly 20 percent of their average per capita intake of animal protein. Furthermore, seafood provides many crucial nutrients to the human diet including long chain Omega-3 fats, iodine, vitamin D, iron, calcium, zinc, and other minerals. With key species like the pteropod in jeopardy, the entire seafood industry risks significant threat, exacerbating global hunger and malnutrition (FOA, 2020). Dying coral systems lack the ability to effectively buffer coastal communities from storm waves and erosion, and leave those communities to suffer consequences to tourism and commercial business (IUCN, 2017). Profits, careers, economies, biodiversity, ecosystem structure, shoreline integrity, and global food supply are all threatened if ocean acidification continues to accelerate due to increased CO2 production.

As managers of sustainable and responsible investment portfolios, our passion lies not only in providing ethically sourced returns for our clients, but in supporting positive impact-driven companies and communities. Conscious investing is achieved through selective avoidance of institutions that harm ecosystems or using the allocation of capital as a lever to change those institutions, in conjunction with focusing on institutions that provide regenerative and resourceful solutions to humanities’ needs.

Sources

Food and Agriculture Organization of the United Nations. (2020). The State of World Fisheries and Aquaculture 2020. Www.Fao.Org. http://www.fao.org/state-of-fisheries-aquaculture

Gazioğlu, C., Müftüoğlu, A. E., Demir, V., Aksu, A., & Okutan, V. (2015). Connection between Ocean Acidification and Sound Propagation. International Journal of Environment and Geoinformatics2(2), 16–26. https://doi.org/10.30897/ijegeo.303538

International Union for Conservation of Nature. (2017, November). Ocean acidification. IUCN. https://www.iucn.org/resources/issues-briefs/ocean-acidification

National Oceanic and Atmospheric Administration. (2020, April). Ocean Acidification. https://www.noaa.gov/education/resource-collections/oceans-coasts/ocean-acidification

Shaftel, H. (2020, September). Overview: Weather, Global Warming and Climate Change. Climate Change: Vital Signs of the Planet. https://climate.nasa.gov/resources/global-warming-vs-climate-change/

WCM Chart of the Week for September 11, 2020

August’s labor market statistics were encouraging and suggest that the US economic recovery is far from normal. According to the BLS, Nonfarm Payrolls expanded 1.37 million in August, slightly above expectations, and the unemployment rate dropped by more than expected to 8.4% versus consensus expectations of 9.8%. While the number of unemployed dropped by 2.8 million, there are still 13.6 million Americans out of a job, which is 7.8 million more than in February.  The nature of the recession, which appears to be largely behind us, is like none ever experienced because it was government induced nearly worldwide. Governments across the globe intentionally suppressed economic activity rather than act in their normal supportive role. Recessions are often caused by structural imbalances such as excess leverage in the financial sector, over-accommodative monetary policy causing hyper-extended stock market valuations, overvalued currencies and commodity price shocks.  These types of imbalances did not exist in the US for the most part prior to the pandemic and that may have set the conditions for a faster recovery. One dramatic example — over 10 million jobs have been recovered since April. By comparison, it took 54 months, from October 2010 to March 2015, for an equivalent number of jobs to be recreated in the aftermath of the Financial Crisis. [data from the US Bureau of Labor Statistics]

New WCM monthly newsletter format

We are pleased to present the last stage of our updates and improvements to our monthly newsletter. You will now find a greater emphasis not just on our views of where we just were, but on where we are and where we are headed, with a deeper discussion of the episodic and structural risks we see driving our investment decisions. We also now include a topical discussion of ESG considerations that have emerged as priorities over the period covered by the newsletter.

As always, you will find our newsletters in the Library, available to all.

WCM Chart of the Week for August 28, 2020

The US stock market continues to rebound from the pandemic panic-driven lows, with the NASDAQ and S&P 500 continuing to post new all-time highs over the past several weeks. This is prompting investors to question if the current rally can last, or even if it marks the beginning of a new bull market.  There are risks that could derail the stock market’s advance ranging from tensions with China, resurging virus hot spots, social upheaval around the country, and the upcoming national elections. The US labor market is also a persistent drag and will not likely have recovered until well into 2021.

There are several factors that are supportive of asset prices including unprecedented fiscal and monetary support, and mounting positive momentum in key economic sectors such as manufacturing, housing and the consumer.  As previously mentioned in our COTWs, in the US personal savings rates remain elevated and personal balance sheets have been de-levered, suggesting the consumer has the ability to spend if they wish.  This week’s chart highlights total assets in money market funds, which remain near peak levels suggesting private investors have been underexposed to equities during the stock market’s historic recovery rally.  This is a condition many cite as additional evidence that equities could continue to advance higher in the months ahead. [chart courtesy Bloomberg LP © 2020]

WCM Chart of the Week for August 21, 2020

A few weeks ago we discussed US consumer trends, citing the elevated personal savings rate as reported by the BEA, in addition to citing expanding personal consumption. The relatively high personal savings rate suggests that there could be pent-up consumer demand to put that money to work. This week’s chart highlights total consumer credit outstanding, which has declined considerably since its pre-pandemic peak at the end of February. The decline in personal balance sheet leverage suggests that American households can access credit as needed or desired. This data is not very timely as June 30 is the most recent report, but it does suggest that the consumer is not as distressed as in previous recoveries.

The labor market continues to be the most restraining issue facing the economy — 14.8 million continuing jobless claims with initial claims amounting to 1.1 million this past week. But, the Bureau of Labor Statistics reported July payroll jobs expanded in 40 states, declined in one and were essentially flat in the remaining nine. We do need a broader and more inclusive jobs recovery because, as the BLS reports, the large increase in average hourly earnings is not good news — It reflects lower-paid workers being pushed out of the work force due to COVID-19 related business suspensions and closures. Strengthening trends in housing and manufacturing should spur further job growth and help restore this disenfranchised segment of the workforce. [Chart courtesy US Federal Reserve, Bloomberg LP (c) 2020]

WCM Chart of the Week for August 17, 2020

Over the last several months we have cited several factors that, in our view, explain why the US stock market indices have been rising and may continue to do so. The most significant contributors are measures being undertaken by the US Federal Reserve and Federal government to support the labor market. The US consumer has been responding by increasing consumption, and so we see core components of the US economy like auto purchases and manufacturing rebounding. The official unemployment rate is still terribly high, measuring 10.2% in July, but that is a significant improvement over 11.1% in June.

Pandemic-related government-mandated lockdowns are being lifted (although in some areas of the country those being reinstituted) and economic trends should continue to improve as people return to work and to consumption.  Critically, there are encouraging signs related to COVID-19.  According to the National Center for Health Statistics (part of the CDC), weekly total provisional deaths as of August 8th registered 438, lower than the pre-surge figure registered on March 21st. These totals are significantly lower than figures cited by media outlets and Johns Hopkins University, a consequence of how deaths are verified and reported, but most importantly we are seeing improving trends regardless of methodology, and that is a relief.  Very well known yet still necessary to point out, this week’s chart demonstrates the concentration of fatalities for those age 55 and older, showing the terrible risk to and impact on the elderly. But, by contrast, the low concentration and declining trend among the young may alleviate concerns about the upcoming school year and broadening re-openings across the country.

WCM Chart of the Week for August 7, 2020

According to the Bureau of Economic Analysis, Americans are saving their disposable income at unprecedented levels. The savings rate is persisting well above previous peaks reached during recessionary periods spanning nearly 35 years. Americans are sitting on their wallets for obvious reasons – fears of the coronavirus, government mandated lock-downs and broad feelings of economic insecurity. The overall rate, while declining steadily since its April peak of 33.5%, stands at a level that is two to three times the percentage of previous recessions. That suggests to us that there is pent-up demand that could help bring the economy out its current nadir. Personal spending has been rebounding, with June’s monthly figure climbing 5.6%, building on May’s 8.5% advance. We call attention to the fact that the June report beat expectations while May was revised upward. There is still a tremendous amount of uncertainty related to COVID-19, terrible stress in the labor market and the upcoming national elections in the US, but the American consumer is a powerful economic force that may prove to be spring-loaded. [chart courtesy BEA and Bloomberg LP © 2020]

Updates to our monthly newsletter format

WCM has made some changes to our monthly newsletter to make it more engaging and useful for our readers. First, we have moved our interpretive analysis of the month gone by to the front and expanded it. We follow that with our current portfolio positioning and what we see as the capstone risks to our stance. Lastly, we close with a performance survey of capital markets for the prior month, calling out what we see as the most consequential returns which played into both our thinking and our results.

As always, you can find our latest newsletter in the Library, along with an archive of prior newsletters. Thank you for reading!

WCM Chart of the Week for July 31, 2020

Over the past few weeks, corporate earnings across the globe have been showing signs of recovery.  Citigroup’s Global Earnings Revision Index has been climbing for three weeks in a row, encouraging given the economic challenges facing the world.  While this trend is positive, its path will be unpredictable due to COVID-19 related shut down and re-openings in several key economies. The recovery in corporate earnings, if it persists, could alleviate the tragic stress in labor markets and help reinvigorate economic activity heading into 2021. Fiscal support is building momentum with the European Union’s 750 billion Euro stimulus plan (discussed last week) and the anticipated fourth phase of US stimulus.  It does remain to be seen if the enormous amount of spending, both fiscal and monetary, will have a lasting impact.

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