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WCM Chart of the Week — Summer-End 2021

This will be our last chart before Labor Day. The US Federal Reserve’s preferred measure of inflation, the YoY rate of change in the Personal Consumption Expenditure Index (PCE), has been exceeding its 2% target rate since April making investors concerned that we may be approaching a monetary tightening cycle. That fear was escalated by this week’s release of the Fed’s July 28-29th meeting minutes that indicated they may begin to wind down the current $120 billion monthly asset purchases by the end of this year or the beginning of 2022. The Fed has expressed its view that current inflation trends are transitory and are likely due to temporary factors such as supply chain bottlenecks and a strong rebound in demand from last year’s lull in consumption. As of June 30th, the current annual rate of the PCE was 3.54%, well above the Fed’s target, but in June 2020 the reading was 1.13%. Since the Fall of 2008 during the Financial Crisis, the PCE has been stubbornly below 2%, averaging 1.59%. Over that period of nearly 13 years, the PCE has been over 2% only in Q1 2012 and for most of 2018.  Inflation has been undershooting for a long period leaving aggregate price levels far below the Fed’s ideal. This suggests to us that the Fed will likely tolerate inflation until the PCE normalizes.

WCM Chart of the Week for August 18, 2021

The Intergovernmental Panel on Climate Change (IPCC) released the Working Group I contribution to the Sixth Assessment Report which will arrive fully in 2022. Among the reaffirmed findings in the report is that we are already most of the way to the 1.5 degree Celsius threshold over pre-industrial global temperatures where climate-related damage becomes more widespread and harder to turn back. We wanted to examine what that means in practical human terms. According to NOAA (R. Lindsey, Jan. 25, 2021), we have seen 8 – 9 inches of sea level rise since 1880, and in some ocean basins nearly that much just since the beginning of the satellite record. Taking the IPCC findings into account and with NOAA’s own models, sea level could rise another foot over 2000 levels by the end of the century. The two images provided are from NOAA’s Sea Level Rise Viewer. The first is a view of the heart of the Northeast Corridor from Long Island Sound down to the Chesapeake at the current “Mean Higher High Water”. The principal shading illustrates the population vulnerability to sea level rise. The second is the same view under a 1 foot MHHW scenario. Note the amount of coastal inundation, particularly around high density and vulnerable populations. The amount of property and population at risk in human and dollar terms is staggering in this relatively concentrated area, and has implications for municipalities, commercial real estate, infrastructure, corporations, maritime interests, tourism, and residential neighborhoods, and all the supply chains and institutions elsewhere like banks and insurance companies that are exposed to that risk. Smart investing requires thinking about mitigation, resiliency, and adaptation, hallmarks of ESG investing and increasingly becoming part of mainstream investing.

WCM Chart of the Week for August 9, 2021

Investment Grade and High Yield bond spreads have been edging higher since reaching their tightest levels ever at the end of last quarter. Admittedly, the spread widening may have more to do with the decline in Treasury yields since June 30th than an indication of any deterioration in the credit markets. What is interesting to us is that this has been occurring while broad stock market indices in the US and Europe are hitting all-time highs. Equity market valuations are full, particularly in the US, but according to Bloomberg consensus earnings are expected to grow by 11.8% over the next 12 months, putting the forward PE ratio of the S&P 500 at 20.3x, lofty yet not extreme. Our sense is that, barring a major surprise or a misstep by the US Fed, the positive tone in equities in the Western world will continue. The outcome of the Fed’s September meeting will be highly scrutinized but the likelihood that they will surprise markets is low. [chart courtesy Bloomberg LP © 2021]

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

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