A couple of months ago, I spent the day at a climate change conference at Columbia Business School, my alma mater. Columbia has more than a couple dozen professors, backed by scores of data scientists and McKinsey-type advisors using the latest supercomputers from Nvidia to plot of the impacts of climate change over across the planet.
The conclusions that these professors and data scientists are drawing are scary. They cannot be denied.The impacts of climate change are already here and the projections show further definitive, widespread and severe impacts on our climate and ecosystem over the next five years. The impact over the rest of this Century if we continue to pump carbon into the atmosphere could be catastrophic for human life on Earth.
As I looked at the attendees, it was clear who is funding all of Columbia’s research and who is benefiting from it. A few companies like Toyota and the major oil producers are still trying to use Ivy League research to tailor to their own climate-denying narrative, but the balance of Columbia’s participants are the country’s largest financial institutions.
These banks and insurance companies are using this research today to make key credit decisions – deciding which farms can survive a 30 degree change in temperature, which residential areas can survive the wildfires and rise in sea levels that are coming immediately, etc.
Their senior employees cannot consume this information without recongizing clear that Earth is at a turning point, and there are broader conclusions that need to be drawn and actions to be taken.
More than 18 months ago, I wrote an article indicating that the climate crisis could lead to a banking crisis. Schools like Columbia Business School are now giving them the raw data upon which they can stress test their exposures and see that it may even be too late to preserve their portfolios.
Brian Moynihan and Jamie Dimon have been going to Davos and speaking with climate leaders for years now. They are smart leaders and have said the right things to buy the time they need.
Their people now have the tools. Wind, water and solar are so cheap that they can still, if quickly and effectively deployed, save us and future generations from the worst outcomes. Studies at Stanford show that investments in these technologies have short and effective payback periods.
The time is now for them to direct their staffs to devote all of their resources to funding these technologies and to even abandoning of their most detrimental investments (banking syndicates have the power and the tools to close down the carbon projects they fund). Acting now is not only in the interests of the globe, but also their shareholders.
Today's FOMC statement says that the Fed is holding its target Fed Funds rate at 5% to 5.25%. The decision was unanimous among voting members.
While today's action marks the first Federal Reserve meeting in this cycle to end without a rate increase, the Fed is now decidedly hawkish. The committee sees more inflation than it did previously with the 12 month change in core inflation well above 4% and core PCE inflation (exclude food and transportation) closer to 5.50%. It also sees a tight labor market with low unemployment that is causing outsized wage inflation.
Chairman Jay Powell's statement says that the Fed remains very concerned that inflation remains on the high side of expectations. In addition to eroding purchasing power, inflation is undermining confidence in the economy and the burdens of higher prices are falling more heavily on the working and middle classes. The Fed's dual mandate requires that it achieve not only its maximum employment goals but also its price stability goals.
A majority of the members now see at least two more quarter point hikes this year. At least a few see three hikes and one committee member favors a full 1% increase before the end of the year.
Chair Powell said that further rate decisions will continue to be made meeting by meeting. A Fed pause today gives it time for more information to come in, but also gives troubled banks more time to work through the balance sheet and avoid more failures like Silicon Valley Bank and First Republic.
The hawkish message about further rate hikes may cause analysts to question whether we are going to get a soft landing or whether a recession is still coming in late 2023.
Bottom line: Believe the Fed when they say rates will be higher for longer. Prepare for still higher interest rates. We'll see still more competitive savings rates and CD rates in the second half of the year. We may also see a more difficult mortgage environment.
It has been a difficult few days in New York as the air quality has been the worst in the world for most of the last 48 hours due to the wildfires in Quebec.
The City of course has seen tougher days, much tougher. It has also experienced climate-induced disasters before, including Superstorm Sandy in 2012 and catastrophic flooding that killed 14 across the City and left much of Central Park underwater less than 2 years ago.
Unfortunately, this event, like the last two, is not likely be the wake up call that will drive the world’s financial capital to close down its investments in fossil fuels and commit to a transition to wind and solar.
We want to believe that action will be taken in NY and DC to make the necessary investments in wind and solar so that mankind will finally act (already very late), but this is unlikely to do it. I find myself asking whether anything will change until it hits the pocketbooks of the wealthiest banking leaders. A flooding even on Dune Road in the Hamptons is more likely to result in action than a couple days of bad air quality.
I have said before that the four largest US banks – Chase, Citibank, Wells Fargo and Bank of America – need to perform stress tests in which they mark to zero the values of their fossil investments. The results of those test need to be balanced against real tests showing whether they – and the economy, writ large - can survive a massive disruptions to the functioning ecosystem. (https://www.bestcashcow.com/could-the-climate-crisis-lead-to-a-banking-crisis.html).
After accounting for the dramatic decline in the costs of wind (offshore wind and onshore wind), of photovoltaic cells and of lithium production – much of which we have seen in just the last year – it is clearer now that the transition is not just necessary, but cost-effective for those willing to fund it. A 2022 Stanford University study outlines the reality that a transition to wind, water and solar will cost $62 trillion globally, but will have a payback period of 6 years with $11 trillion in direct and indirect benefits annually. If not the current roster of major banks, then some other institutions needs to form or be former to make this investment and reap this reward.
Meanwhile, New Yorkers continue to suffer through lightheadedness from the smell of burning maple and just hope for an end to this.
