Guy Oppenheim Financial Survival in a Finite World

By Guy Oppenheim & Toby Birch Oppenheim & Co. Limited Given that this is the inaugural issue of HEIR magazine it would be appropriate to highlight the theme of inheritance from one generation to the next and examine the legacy bequeathed by the baby boomers. They are the bulge bracket born from 1946 -1964 who are fortunate enough to be retiring, having enjoyed unprecedented access to free education, healthcare and guaranteed pension schemes, be they public or private. While an entire generation cannot be blamed for the worlds financial and environmental woes they were ultimately the group that voted-in decade after decade of extravagant political policies. The party was funded by never-ending fountains of credit created out of thin air by banks, lacking both regulatory restraint and stewardship. Why should endless credit be a big deal? The reason is threefold: first, the process is inflationary making food, energy and house prices escalate, second, the next generation is forced to take out greater mortgages simply for a place to live, thereby exacerbating the problem and third, it leads to a widespread debasement of currencies which inevitably end in trade wars and military conflict. Our banking system is much like a casino, not because of the outrageous speculation conducted by its dealers and high frequency trading systems, but because the house always wins. Credit creation quite literally comes at a price, which in this case is the interest bill. By creating more credit than

exists in the money supply the interest charged by banks will suck the lifeblood out the economy. Bankruptcy is inevitable and financial crises are the end-product of a highly leveraged and volatile market. There is paradoxically a plus side to the on-going crash and credit crunch. What we are seeing are the death throws of a failed financial system. Whether it is through familiarity or fear of the unknown we continue to cling to this lousy mechanism, not least because its lobby groups are so endemic and the propaganda oft-repeated. To achieve reformation we must first have deformation which is why the current transition feels so painful. It is nevertheless a natural and necessary metamorphosis which like any birthing process entails an inevitable agony. Sustainable behaviour be it financial, commercial or personal, is not simple, nor can it be coerced through yet another round of legislation. It is a process that is learned out of necessity and adaptation to reality. The combination of ethical and environmental investing is of course a familiar theme of recent years. However, the unspoken association with green investing is that of underperformance, high volatility or at best one that carries an opportunity cost. In extreme cases, such as the Chinese company Sino Forest, it may even encompass deception leaving the worlds greatest investors shame-faced following its stock market suspension. Since abandoning the Gold Exchange Standard forty years ago we have pursued a futile philosophy of chasing infinite growth on a planet with finite resources. Few in the investment community comprehend that exponential activity is not a panacea but pre-cursor to collapse, as evidenced in nature by yeast and cancer cells. The so-called credit crisis may prove a blessing in disguise as we are yanked from danger like a disorderly dog on a leash. We strain against restraint without recognising the ultimate benefit. Many green investment products carry overtones of guilt, with the emphasis on obligation rather than satisfaction. Human beings may well be motivated by noble deeds and duty but the pursuit of gain is undeniable and it is disingenuous to ignore one of our foremost emotions. While it is fashionable to flagellate banks, they do at least know a thing or two about marketing. Through credit cards, loans and speculative products they are tapping into our desires for the accomplishment of dreams and aspirations. While we are not endorsing principles that promote selfishness and consumption there is nothing to stop investment being lucrative, fulfilling and fascinating. New funds are emerging that are not just about sustainability can offset risks that are endemic in this postbubble economy. They provide leadership by example through investment in areas that are beneficial to humankind today and more importantly for generations to follow. This need not be sentimental or socialist; it is using a key component of capitalism whereby price changes spawn solutions that can rarely be achieved politically. Rising energy prices will act as a catalyst for alternative energy, like a flash flood in a desert; technology that once seemed barren and hopeless will be given life. While Peak Oil is hotly debated it appears unlikely that we will run out of black gold any time soon; it will just be far more expensive to extract, process and distribute fossil fuels in future. Commodity protectionism is already with us only it is taking the form of local taxes on multinationals rather than outright trade tariffs. Nationalism has most clearly been shown with last summers wheat shortages in Russia when exports were banned as the fires blazed. This is a

clear dress-rehearsal of things to come when national interests are put before an out-dated ideology of globalisation and liberalisation, so aggressively promoted by the World Bank and supposedly respectable institutions designed to promote Americas self-interest. This is one of the most overlooked aspects of climate change, population growth and resource scarcity which when combined creates a highly inflationary cocktail. Most green funds invest heavily in equities related to specific topics such as solar energy or in illiquid (albeit vital) private equity projects. These can be very volatile areas of the market leaving investors with positions that are too concentrated. They should also be holding natural resources that offer long-term protection against inflation and currency debasement; namely precious metals and commodities. While mining may not be the cleanest activity on the planet, investors have little choice in protecting their wealth other than buying bullion. It is one of the many dilemmas of living and investing in modernity; no one is entirely innocent and no solution is perfect. The past few decades have been all about high leverage and management fees that have haemorrhaged investors assets. Modern money management will evolve into one of balance and equity that shares risk and reward. This is not a touchy-feely philosophy but one that meets two natural human desires as the yin and yang of investment activity. The first is to endow the fruits of ones labour into new ventures to yield greater returns. The second is to act communally which has been repeatedly witnessed in studies of behavioural finance. Investing in earth-related activities enhances the positive aspects of trade that rewards measured risktaking while combining it with our innate sense of stewardship. This may sound noble in theory but one could still be accused of hypocrisy by died-in-the-wool capitalists or ecologists alike. This is a small price to pay to benefit future generations who may judge us with disgust in decades to come, should we choose the default option of doing nothing. The topic of climate change is one that generates fierce debate and disunity on both sides of the divide. There is an overtone of the Spanish Inquisition for scientists who dare to challenge the accepted dogma of a direct correlation between atmospheric carbon concentrations and temperature change. Many vested interests and research budgets rest on this hypothesis. Likewise the pro-growth camp and capitalists believe that the whole movement is a left-wing scam and conspiracy. They would still not believe in climate change even if the Thames was flooding their City offices twice daily. The trick here is to step back and look for commonality. While we can disagree about the cause and effect of the climates activity we can all agree on one thing; weather patterns are changing. If one cannot accept that then it must be a case of sensory depravation or obstinacy or both. If in doubt just ask a farmer for their opinion as they experience the elements first hand. The so-what of this argument is simple; if the weather is changing then food production will be affected. This has huge implications for inflation, potential unrest or even revolution. If we can all agree on this one point then that would be true progress. If we can channel capital to the right areas to help with food production then that would be a significant result. It is a highly fragmented industry where farming is a labour of love and is desperately short of funding. For those in the agnostic or sceptical school of thought they can simply view the themes as a way to make money.

Either way a beneficial result is the end product for all. For those in the latter camp this is the sales pitch for investing in the interconnected themes related to climate change and inflation:

Natural Resources: commodities, rare earth metals, forestry, water Food Chain Disruption: fertiliser, agriculture, soft commodities, infrastructure Population Growth: healthcare, biotech, waste management, emerging markets Currency Devaluation: precious metals & mining stocks to offset currency dilution Green Revolution: clean technology, renewable energy and strategic assets

If you believe that climate change has a financial element within the cause and effect then one can propose that the problem is also the solution. What we need across this range of industries is long-term capital investment. This will not come from governments (other than China) but from financial markets. After all, this used to be the whole point of stock markets; to match entrepreneurs with money. This wisdom of crowds generates the most efficient form of pricing and allocation of resources. Now that half of share transactions are sourced from High Frequency Trading it is clear that markets have mutated with their decade-long lame performance; evidence that money is generated for investment banks rather than investors. Nevertheless they are not beyond repair. In an environment of sound money backed by precious metals, equities became dividend machines and show their worth through compounding, like the fable of the tortoise and the hare. It is still possible, even preferable, to aim for stability over growth as equity investment offers transparency and sustainability over the falsehood of interest-bearing leverage. Money managers could do themselves a favour as role models of philanthropy. Instead of hoarding profits they can recycle capital by investing a significant portion of management fee into sustainable communities, especially in those countries that will suffer further from climate change in future. After all it is better to help people in their own backyard than be faced with mass migration through resource scarcity. At the risk of sounding nave, this is no marketing ploy but a genuine attempt to prove that financiers can be positive contributors and not simply profiteers. This can be achieved through interest-free loans to stimulate work and selfsufficiency rather than microfinance and charity. In summary, the solution to climate change lies in correct allocation of capital away from speculation, consumption and debt-fuelled growth to useful production and economic equilibrium. Government intervention and regulation is a poor substitute for the wonders of the price mechanism that draws investment to areas that are profitable. A sustained rise in the oil price will be the tipping point for better things to come. In the meantime investors will seek protection from the continued dilution of paper money which will in turn impoverish many through inflation.

Guy Oppenheim is the Chairman of the Oppenheim Group with over 25 years experience as a portfolio manager, investing globally in all asset classes. Guy Oppenheim has managed assets well in excess of $1 billion for institutional clients, sovereign wealth funds, and private families. Guy Oppenheim has been registered and authorized by Financial Services Authorities and served also as Compliance and MLRO Officer. Guy Oppenhiem was educated in Geneva and holds a BA in Business Administration majoring in Finance from the University of Geneva.