Carbon is the $h!t

At the Ira Sohn conference in May of 2010, David Tepper bounded up on stage to give his now-legendary presentation to go long beaten down financials. He began with an anecdote from 19th century New York:

“In 1898, the first international urban-planning conference convened in New York,” he said. “It was abandoned after three days because none of the delegates could see any solution to the growing crisis caused by urban horses and their output. In the Times of London, one reporter estimated that in 50 years, every street in London would be buried under nine feet of manure.”

At the time, the looming threat that the world’s premier cities would drown under a tidal wave of horse manure seemed pre-destined. Historians estimate as many as 220,000 horses in New York City alone produced a total of 24,000 tons of excrement per week.

Substitute carbon for horse$h!t, and you have a sense for what the modern urban planning delegates are worried about. Greenland and the Antarctic are melting. Sea levels are rising. Climate Central estimates 147-216 million people are at risk and the most populated countries including China, Vietnam, Japan, India, Bangladesh and Indonesia top the most-impacted list.

COP21 is 2015’s version of the 1898 urban-planning conference. It will be held in Paris this December. You can read a bit about it here and here: Fossil fuel companies risk plague of ‘asbestos’ lawsuits as tide turns on climate change – Telegraph

There’s a lot in there, but investors in fossil fuel-related investments should focus on this: “Although contours are still unclear, Paris is likely to sketch a way towards zero net emissions later this century. It implies that most fossil fuel reserves booked by major oil, gas and coal companies can never be burned.”

The impacts of this statement are potentially so great, it’s hard to take it seriously. It’s like someone telling the 1898 version of you that modern sewers, trash collection and yes, the gasoline-powered automobile would save the day and all the horses around you and the countless piles of doo would be disappearing in just a few years.

But let’s imagine for a moment that COP21 might be real. The first derivative impact of can never be burned: all oil, coal and natural gas companies, their lenders and supply chains are immediately (or mostly) bankrupt.  (Market valuations, debt loads, credit risk, cost of capital, future revenue/profit projections can all trace their way back to discovered reserves…)

It’s the second derivative impacts where the real disruption might occur. Where does the cost of energy and carbon go, and how will it impact the economy?  What do the transports do, including trucking, railroads (most car volumes are coal/oil) and airlines? What happens to e-commerce if the cost of shipping changes? How are Utilities, Industrials and Consumer Discretionary impacted? What does a move away from fossil do to government budgets as tax revenues radically change?

In his presentation, Tepper’s point was that many of the popular fears of 2010 –hyperinflation, depression, bankruptcy– were improbable. His belief was that markets adapt and that most of what they worried about was never going to occur because the world is just too complex and dynamic a system to accurately predict. History has proven Tepper correct, markets and people do adapt. This first blog touches on just one major change that you and I are potentially about to live through, but it isn’t the only one. In future posts, I’m going to try to make my thinking process public in terms of how one might invest in an environment where even the solutions being proposed have the potential to reset a great deal of what we take for granted.

And as you know, Tepper has reigned in his bullish horns recently. More on that shortly.

My immediate takeaway: still wouldn’t buy energy here…

 

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