InvestMacro

By George Prior

Markets are going to get volatile this summer as investors ramp up speculation about the US Federal Reserve’s interest rate policy as fresh inflation data is released, warns the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations.

The warning from deVere Group’s Nigel Green comes as the US government releases the consumer price index for April on Wednesday, showing that US CPI fell to 4.9%.

He says: “The US CPI data is out and, at 4.9%, came in lower than expectations.

“Investors will be asking ‘Where do we go from here?’

“Many senior analysts will now insist that this will be enough for the Federal Reserve to pivot at their meeting in June and pause the hiking agenda.

“Some will go further and argue that the central banks will cut rates as early as July.

“Others, however, believe that the Fed will remain cautious about inflation flaring up again and that officials will ultimately insist upon at least another interest rate hike. This could cause jitters in the markets as some investors, concerned about short-term profits, will move into panic-selling mode.”

He continues: “What we do know for certain are two things.

“First, speculation is going to increase and that this triggers market volatility. Investors should brace for a turbulent summer fuelled by uncertainty.

“Second, the US economy is cooling quicker than had been anticipated.  We put this down to the Fed being too aggressive with their rate hikes.

“As I said last week, the failing Fed made another mistake with the latest interest rate hike, which could push the world’s largest economy not only into a short-term but a longer-term recession. Clearly, this would not only be a huge issue for the US, but the global economy too.”

The deVere CEO goes on to add: “The reality is investors must be vigilant and not become complacent due to the potential of no more imminent hikes and/or the possibility of rate cuts.

“Plus, we have the Republicans and Democrats failing to agree on to how to deal with the major issue of the US debt crisis. Last time this happened we had a 20% drop in the market.

“It’s essential for investors to take good advice and realise that in a fast-changing world the underlying importance of being in the right sectors at the right time still applies, in fact more now than ever.”

He concludes: “We expect markets to be in for a wild ride this summer. But, as ever, where there’s volatility, there is also considerable opportunity.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of more than 70 offices across the world, over 80,000 clients and $12bn under advisement.

By Daniel Merino, The Conversation and Nehal El-Hadi, The Conversation 

When an unexpected rainstorm leaves you soaking wet, it is an annoyance. When a drought leads to fires, crop failures and water shortages, the significance of weather becomes vitally important.

If you could control the weather, would you?

Small amounts of rain can mean the difference between struggle and success. For nearly 80 years, an approach called cloud seeding has, in theory, given people the ability to get more rain and snow from storms and make hailstorms less severe. But only recently have scientists been able to peer into clouds and begin to understand how effective cloud seeding really is.

In this episode of “The Conversation Weekly,” we speak with three researchers about the simple yet murky science of cloud seeding, the economic effects it can have on agriculture, and research that may allow governments to use cloud seeding in more places.

Katja Friedrich, a professor of atmospheric and oceanic sciences at the University of Colorado, Boulder in the U.S., is a leading researcher on cloud seeding. “When we do cloud seeding, we are looking for clouds that have tiny super-cooled liquid droplets,” she explains. Silver iodide is very similar in structure to an ice crystal. When the droplets touch a particle of silver iodide, “they freeze, then they can start merging with other ice crystals, become snowflakes and fall out of the cloud.”

While the process is fairly straightforward, measuring how effective it is in the real world is not, according to Friedrich. “The problem is that once we modify a cloud, it’s really difficult to say what would’ve happened if you hadn’t cloud-seeded.” It’s hard enough to predict weather without messing with it artificially.

In 2017, Friedrich’s research group had a breakthrough in measuring the effect of cloud seeding. “We flew some aircraft, released silver iodide and generated these clouds that were like these six exact lines that were downstream of where the aircraft were seeding,” she says. They then had a second aircraft fly through the clouds. “We could actually quantify how much snow we could produce by two hours of cloud seeding.” That effect, according to research on cloud seeding, is an increase in precipitation of somewhere around 5% to 20% or 30%, depending on conditions.

Measuring the effect on precipitation – whether rain or snow – directly may have taken complex science and a bit of luck, but in places that have been using cloud seeding for long periods of time, the economic benefits are shockingly clear.

Dean Bangsund is a researcher at the University of North Dakota who studies the economics of agriculture. “We have a high amount of hail damage in North Dakota,” said Bangsund. For decades, the state government has been using cloud seeding to reduce hail damage, as cloud seeding leads to the formation of more pieces of smaller hail compared to fewer pieces of larger hail. “It doesn’t 100% eliminate hail; it’s designed to soften the impact.”

Every 10 years, the state of North Dakota does an analysis on the economic impacts of the cloud seeding program, measuring both reduction in hail damage and benefits from increased rain. Bangsund led the last report and says that for every dollar spent on the cloud seeding program, “we are looking at something that is anywhere from $8 or $9 in benefit on the really lowest scale, up to probably $20 of impact per acre.” With millions of acres of agricultural fields in the cloud seeding area, that is a massive economic benefit.

Both Freidrich and Bangsund emphasized that cloud seeding, while effective in some cases, cannot be used everywhere. There is also a lot of uncertainty in how much of an effect it has. One way to improve the effectiveness and applicability of cloud seeding is by improving the seed. Linda Zou is a professor of civil infrastructure and environmental engineering at Khalifa University in the United Arab Emirates.

Her work has focused on developing a replacement for silver iodide, and her lab has developed what she calls a nanopowder. “I start with table salt, which is sodium chloride,” says Zou. “This desirable-sized crystal is then coated with a thin nanomaterial layer of titanium dioxide.” When salt gets wet, it melts and forms a droplet that can efficiently merge with other droplets and fall from a cloud. Titanium dioxide attracts water. Put the two together and you get a very effective cloud-seeding material.

From indoor experiments, Zou found that “with the nanopowders, there are 2.9 times the formation of larger-size water droplets.” These nanopowders can also form ice crystals at warmer temperatures and less humidity than silver iodide.

As Zou says, “if the material you are releasing is more reactive and can work in a much wider range of conditions, that means no matter when you decide to use it, the chance of success will be greater.”

This episode was written and produced by Katie Flood. Mend Mariwany is the executive producer of The Conversation Weekly. Eloise Stevens does our sound design, and our theme music is by Neeta Sarl.

You can find us on Twitter @TC_Audio, on Instagram at theconversationdotcom or via email. You can also subscribe to The Conversation’s free daily email here.

Listen to “The Conversation Weekly” via any of the apps listed above, download it directly via our RSS feed or find out how else to listen here.

Daniel Merino, Associate Science Editor & Co-Host of The Conversation Weekly Podcast, The Conversation and Nehal El-Hadi, Science + Technology Editor & Co-Host of The Conversation Weekly Podcast, The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Sehoon Kim, University of Florida 

The Federal Reserve raised interest rates again on May 3, 2023, by a quarter point, making it the Fed’s 10th rate hike since March 2022 in an ongoing fight to tame inflation. These rate hikes have been reverberating through the economy, raising prospects of a recession amid heightened concerns about the fragile state of banks.

The rate hikes are also rattling sustainability-focused investing, better known as ESG investing.

The trend toward ESG investing, which puts pressure on companies to meet environmental, social and governance benchmarks, has almost redefined asset management over the past decade. ESG funds today are a multitrillion-dollar market.

However, the high uncertainty around interest rates today, along with the prospects of a looming recession and a political backlash, has put the future of ESG investors at a crossroads.

I specialize in sustainable finance, and my recent work has documented the impact that tough economic times can have on ESG investing demand. Investments into U.S. sustainable mutual funds have visibly slowed since 2022, suffering their worst net flows in five years. Here are how three critical factors can affect investors’ zeal for socially conscious investing going forward.

Interest rate uncertainty

One of the primary arguments that big institutional investors like BlackRock make for ESG investing is that it creates long-term value for shareholders. Companies that pay careful attention to environmental, social and governance issues are believed to be better prepared for distant future risks, including regulatory risks and physical risks from climate change.

However, heightened uncertainty about interest rates poses a challenge today. That’s because higher rates can disproportionately affect the present value that investors assign to long-term investment outcomes. Let me explain.

Within the past year, the Federal Reserve has raised its benchmark lending rate from almost zero to a target range of 5% to 5.25% to combat inflation. In financial markets, higher interest rates lead to higher discount rates. That means that future cash generated by long-term investments is considered to be worth considerably less at today’s higher interest rates.

The more distant an asset’s value lies in the future, the more heavily it will be discounted in value when rates are high. So, long-duration investments – like most ESG investments – are especially sensitive to changes in interest rates.

This economic mechanism was also part of the backdrop of the recent rout in tech stocks and the series of bank failures that started with the collapse of Silicon Valley Bank.

Looming recession

Another factor that could affect ESG investing is the potential for an economic downturn.

As research shows, investors do not necessarily make ESG investments for greater long-term returns, but often for altruistic reasons or due to personal preferences to hold greener assets. For these ESG investors, a looming recession could change their perspective on these “luxuries.”

In an early warning about this possibility, a recent study I conducted with an economist at the Rotterdam School of Management found that retail investors showed signs of shying away from investing in sustainable mutual funds during the early months of the COVID-19 shock in 2020. This was a period when many households experienced layoffs and furloughs, which likely pushed them to set aside luxuries to prioritize protecting the values of their 401(k)s, IRAs and other investment portfolios.

In other words, investors may be all for ESG, except when times are tough.

Prominent economists, such as former Treasury Secretary Larry Summers, have warned of a likely recession as inflation and the Fed’s battle against it persist. The International Monetary Fund also lowered its global economic growth outlook from 3.4% in 2022 to 2.8% in 2023.

Political backlash

Finally, recent political friction and anti-ESG policies across states have started to create headwinds for pension funds and large institutions that serve them.

For example, Florida and Kansas passed laws in recent weeks and several other states including Texas and Kentucky have taken actions to restrict the ability of state public pension funds to invest in companies based on their ESG performance, citing concerns about fraudulent greenwashing and potential fiduciary duty violations, referring to the obligation institutional investors have to seek the highest returns for the lowest risk possible.

These restrictions can severely limit the capacity for ESG investing by institutional investors, which have played a significant role in driving the growth of ESG investing.

While concerns about greenwashing and high fees in ESG investing are not totally unwarranted, these political interventions can also have unintended consequences.

A recent study from economists at Wharton and the Federal Reserve Bank of Chicago found that a Texas law enacted in 2021 prohibiting municipalities from contracting with banks with ESG policies had a distorting side effect on those municipalities’ borrowing costs. The policy ended up raising the cost of public finance, meaning the law ultimately cost taxpayers.

Navigating the crossroads

As companies hold their 2023 annual meetings, the discussions among corporate officials, investors and stakeholders will serve as an important barometer for the current state and future of ESG investing.

Due to high interest rate uncertainty, prospects of a recession and political upheaval, ESG is under pressure. Perceived in recent years as a paradigm shift in how market mechanisms can address harms to society, stakeholders are now scrutinizing ESG investing with a critical lens regarding how strongly it can persist and how much impact it can have.

The next few years will be its most important stress test yet.

About the Author:

Sehoon Kim, Assistant Professor of Finance, University of Florida

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By George Prior 

The Federal Reserve has made a mistake by delivering a 25 basis-point interest rate hike amid ongoing financial market turmoil and recession red flags, warns the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations.

The grave warning from deVere Group’s Nigel Green comes as Fed Chair Jerome Powell at Wednesday’s meeting of the FOMC (Federal Open Market Committee) – the branch of the US central bank responsible for implementing monetary policy – confirmed a widely anticipated quarter percentage point hike, bringing the benchmark interest rate to 5-5.25%, the highest since 2006.

He notes: “The Fed failed early on with inflation due to its grand-scale inaction.  It was a hugely consequential miscalculation by the world’s most influential central bank.

“The Fed has now failed again, making another mistake, this latest interest rate hike, which could push the world’s largest economy not only into a short-term but a longer-term recession.

“Clearly, this would not only be a huge issue for the US, but the global economy too.”

The deVere CEO cites three primary reasons why he believes the US central bank is wrong to have raised rates this time.

“First, the crisis within the US financial system is still not over. There remain serious and legitimate concerns that after a string of bank failures, there could be more to come.

“The turmoil from the banking crisis is leading to a drop in bank lending, tightening the credit conditions for households and businesses. In turn, this will inevitably lead to a slowdown in economic activity and hiring.

“Chair Powell himself has said at a news conference that the bank turmoil had the equivalent impact of at least one quarter-point rate increase.

“The Fed’s interest rate hiking agenda has tightened financial conditions which, in part, led to the banking crisis, and now the banking crisis itself is going to put the squeeze on financial conditions even more.”

Nigel Green continues: “Second, the time lag for monetary policies is very long. It is said that it takes about 18 months to two years for the full effect of rate hikes to filter fully into the economy.

“Third, the bond market is suggesting a long and/or deep recession with its inverted yield curve. Yields are inversely related to bond prices.

“This is typically the sign of a coming recession – an inverted yield curve has emerged roughly a year before nearly all recessions since 1960.”

The chief executive says the Fed’s decision to hike rates is “set to deliberately plunge” the US consumer-led economy into a recession.

“It would appear that the central bank is prepared to increase its stranglehold on households and businesses and to “sacrifice parts of the economy” in order to tame inflation.

Nigel Green concludes: “The failing Fed has made another mistake.

“We can only hope now that this is their last rate hike for a while for the good of the real economy and to restore some of their own credibility.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of more than 70 offices across the world, over 80,000 clients and $12bn under advisement.