Ethics: Investment implications

April 10, 2008

The following is a quote from an article which discusses the current disruption in the airline industry in the USA, as the FAA moves to enforce its rules:

The FAA and airlines are responding, in part, to heightened scrutiny by Congress, led by Representative James Oberstar, Democrat of Minnesota and chairman of the House Committee on Transportation and Infrastructure, who is a longtime activist on aviation safety.
Congress's stance toward the industry has shifted from benevolence after the terrorist attacks in 2001 to a more combative approach after a string of passenger disruptions and recent revelations about lax oversight.
Oberstar said on Wednesday that his criticism was "an effort to get them back on course, to being the gold standard in the world for aviation safety oversight and maintenance oversight, and to re-establish a safety mind-set and culture with the agency, instead of this coddling of the industry." Source:http://www.iht.com/articles/2008/04/10/business/10safety.php

Readers please note the words "gold standard", which have been highlighted.

  • What is the principle which underlies this change of attitude by Congress? (Note that this is but one example of changing attitudes)
  • What are the implications from an investment perspective?

In this analyst’s view, the principle is this: The pendulum has swung too far in the chase for the buck. The end (higher profits) no longer justifies the means (cutting corners at the cost of greater society). In my view, what we are witnessing is the beginning of a trend towards a higher level of ethics in politics and business which, at the extreme (when the pendulum has swung too far in the other direction) will lead to a stifling of creativity. But we are a long way away from that extreme.

Right now, recognizing that this trend is in its embryonic stage, the primary implication is that we are at the bottom of the “buy low/sell high” cycle of ethically oriented investments, and we are the top of the buy/low sell high cycle of “profit at any cost” investments.

Let’s look at the oil industry for the moment; as an example.

Unfortunately, I don’t have accurate numbers readily available (having done this exercise about 8 years ago) but at the time that I did the exercise, it was possible to produce synthetic diesel from coal, and compete in the open market against oil when the oil price was around $45 - $55 a barrel. (I know this, because SASOL in South Africa was already doing it).

It is my understanding that the Fischer Tropsch conversion technology requires a piece of equipment called a “gasifier” and that there are very few organizations in the world which have access to the Intellectual Property relating to this gasification. It is my understanding that all of these organizations have some links with the oil industry.

Now, with this in mind, the question needs to be asked: “Why is it that, at $100 a barrel for oil, there is not a frenzied scramble to build Fischer Tropsch coal-to-diesel plants?

“Ah! That’s an easy one to answer,” I hear you say. “Carbon dioxide is a greenhouse gas, and we have a proven link between carbon dioxide in the environment and global warming. Coal is the worst pollutant of all. We can’t allow FT plants to be built because of global warming. We will destroy the planet.”

Hmmm!

I read a recent quote by Al Gore to the effect that anyone who doesn’t believe the linkage between CO2 and global warming may be categorized as a flat earther.

Readers should recognize that this is an argument which is specifically calculated to demolish the integrity of the arguer; as opposed to his argument.

Here are a couple of dictionary definitions of the meaning of the word “ethics”

A set of principles of right conduct. A theory or a system of moral values: The rules or standards governing the conduct of a person or the members of a profession.

Question: In context of these definitions, how “ethical” is it to attack the arguer as opposed to his argument? And, just to allay any fears that I am favoring the political right wing over the left wing, I invite readers to contemplate the tone of the interviews one watches on commercial television – where the interviewer (who is an employee of the TV network which might have a right wing editorial bias) basically sits there attacking the interviewee who, in turn, spends most of the interview defending himself, as opposed to his views.

The problem of the exaggerated lack of ethics is not confined to one individual or group of individuals; it is an outcome of attitudes which came to permeate society since the Federal Reserve Board moved to open the spigots to the monetary feeding trough – as far back as World War I.

So, moving right along ….

The “oil industry”, in context of a yardstick of ethics, is at the high end of the buy low/sell high cycle. Their profits are at historically obscene levels, flowing from the unarguable fact that that they are taking shameless advantage of the absence of competition such as, for example,  synthetic diesel. (And whether or not they had a hand in this is moot. It is a fact.) On the other hand, there are alternatives to oil – which will take some time to evolve, because the Kyoto Protocols effectively blocked their march-to-market for around a decade. These alternatives are at the lower end of the buy low/sell high cycle. Arguably, they are now starting to see the light of day because of Al Gore’s efforts to get the world to focus on climate change – whether or not he is right in his conclusions regarding the cause of global warming – and he is to be commended for that.

But investors will need to be patient; and also recognize that this type of investment carries with it a higher than average risk. The issues here extend beyond technical risks. The primary issue revolves around the quality of the management team.

Now, where does gold sit in this buy low/sell high equation?

On a yardstick of “integrity” (which is a way of measuring a predisposition to behave ethically) it is arguable that gold is the quintessential ethical investment. But it is also unarguably true that the gold price is at historically high levels – or at least “appears” to be.

Here is a chart published by gold-eagle.com It shows that, in current day dollars, the gold price has risen from $300 to $1000 dollars since the beginning of the current move. $1,000 was an all time high

Now, just for the fun of it, lets assume that inflation has been running at 4.5% p.a. (even though its very difficult to know what the inflation rate has actually been given the lack of integrity of the cpi numbers published during the regimes of various succeeding governments).

According to the above chart, gold “bottomed” at around $300 an ounce some time in 1982. Here’s how the price should have grown if all it did was keep pace with inflation:

Inflation

4.50%

 

Year

Opening

Closing

1982

 $     300

 $     314

1983

 $     314

 $     328

1984

 $     328

 $     342

1985

 $     342

 $     358

1986

 $     358

 $     374

1987

 $     374

 $     391

1988

 $     391

 $     408

1989

 $     408

 $     427

1990

 $     427

 $     446

1991

 $     446

 $     466

1992

 $     466

 $     487

1993

 $     487

 $     509

1994

 $     509

 $     532

1995

 $     532

 $     556

1996

 $     556

 $     581

1997

 $     581

 $     607

1998

 $     607

 $     634

1999

 $     634

 $     663

2000

 $     663

 $     692

2001

 $     692

 $     724

2002

 $     724

 $     756

2003

 $     756

 $     790

2004

 $     790

 $     826

2005

 $     826

 $     863

2006

 $     863

 $     902

2007

 $     902

 $     942

As these words are being written, in an environment where the world is now demonstrably beginning to once again embrace the concept of ethics; and in an environment where gold is arguably the quintessential ethical investment, the price of gold is $929.50 per ounce, as measured in current day dollars.

Conclusion

Taking a long term view – i.e. Ignoring the vagaries of day-to-day and week-to-week trading, the gold price is at the low end of the buy low/sell high cycle when measured in deflated dollars

Brian Bloom

www.beyondneanderthal.com

Australia, April 11th, 2008

Author’s comment

Beyond Neanderthal is a factional novel, the edited manuscript of which is now complete and has been sent in for layout and design. The storyline essentially puts together a jigsaw puzzle of seemingly random facts and the picture which emerges places the following issues in context of more than 5000 years of history: Peak oil and alternative energy paradigms, clash of civilizations, world economy, climate change, “apparent” world overpopulation … and it also points a possible pathway forward through all these landmines. 

In researching Beyond Neanderthal the author paid particular attention to society’s attitudes to gold, going back 5,000 years in time.  As Sir Isaac Newton apparently discovered way back in the late 1600s, there is far more to gold than meets the eye. Since June 2007, the author has been inviting people who may be interested in acquiring a copy of Beyond Neanderthal to register that interest at www.beyondneanderthal.com  Within 2-3 weeks, when the layout has been checked and sent to the printers, I will be personally emailing all people who have registered their interest and inviting them to place order/s via the publisher’s book distributor. (It is the largest independent book distribution company in Australia, and it has a high level of integrity). In the meantime, if you have an interest to acquire a copy, please register than interest now. Deliveries will be made on a first-come-first served basis, and it is starting to look like we might have to go to a second edition. At this stage there is still time to change the print-run order on the first edition.

The King James Bible mentions gold 417 times. Not once does it mention a paper currency.

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