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Guy Oppenheim – Financial Survival in a Finite World

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					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 world’s 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
world’s 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 post-
bubble 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 summer’s 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 America’s 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 one’s 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 risk-
taking 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 climate’s 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 naïve, 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 self-
sufficiency 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.

				
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Description: Guy Oppenheim is the owner of the world’s famous firms of the chartered accountants. This man has spent 25 years as the portfolio manager for various organizations and individuals.