Tuesday, January 31, 2023

Eric Lonergan on decarbonisation and macro investing: 5 takeaways

Eric Lonergan discussed his work as a macro hedge fund manager and policy economist in episode four of the AFI podcast.

The episode centred on themes from his latest book, SuperCharge Me, which provides a policy action plan to speed up decarbonisation and can be seen as something of a manifesto for Extinction Rebellion. Lonergan also gave his thoughts on the ESG debate and macro environment.

Lonergan helps oversee more than $4bn in the long-running Episode macro strategy at M&G Investments.


 

1. Countries can decarbonise much faster — and it won’t cost

SuperCharge Me, which Lonergan co-authored with sustainability expert Corinne Sawyers, argues there is a popular misconception that going green will cost individuals money. Full electrification of energy supply alone would cut three-quarters of emissions, says Lonergan.

“So 75% of emissions really have nothing to do with any individual or household change in the way they live, nor should their costs go up.”

He advocates policy based on investing in climate infrastructure, encouraging more “mini-Musks” to pursue long-shot technological innovation and providing strong substitutes like electric vehicle subsidies to incentivise change. It is decidedly not a book offering advice about re-using carrier bags.

2. In fact, faster decarbonisation is preferable in financial terms

One of his central arguments is that the historically low cost of capital makes investment in green infrastructure a form of wealth creation for societies. The assets created — wind or solar farms, for instance — will provide a return and add to the wealth of nations. That remains the case despite this year’s rate rises, he says, but the situation will not last forever as tightening continues.

The only losers from this process will be the owners of the older energy sources generating dirty emissions. “Rather than fearing for our children and grand-children’s future, why don’t we create green assets to provide them with an inheritance?” Lonergan writes.

3. An unofficial manifesto for Extinction Rebellion

Lonergan and Sawyers use their expertise in policy, markets and sustainability to promote an action plan to accelerate change, which critics often say is missing from a debate historically stronger in terms of targets.

Has a hedge fund manager written a manifesto for Extinction Rebellion and other campaign groups? 

“Part of the reason we wrote the book is that there isn’t a manifesto,” says Lonergan. “There is nothing that says, if Greta Thunberg was in power, what would you actually do. This is a starting case for what you would do, and you could have a dramatic impact within a five-to-ten year time horizon.”

4. Maybe all economists should be macro hedge fund managers too

Economists are magnets for scorn, particularly during turbulent times, but Lonergan isn’t writing from an ivory tower. He believes his day-job as a hedge fund manager gives his policy recommendations an edge.

“The advantage of being an economist in financial markets, where you are putting on positions, is that you cannot pretend to be right in the face of evidence that is strongly to the contrary; you are [put] out of business. So it makes you very humble and it makes you very empirically oriented.

“As a market participant and hedge fund manager I have access to knowledge, information and expertise that can also be applied to areas of public policy. It gives a different perspective. I am not an academic economist, I don’t have a political axe to grind, but I know an awful lot about market pricing, how policy affects things and how human psychology and behaviour works.”

The policy work helps his hedge fund management, too. “Through writing these books I have learnt a huge amount and have to interact with a much more diverse group of people, than I might do if I was stuck at my Bloomberg screens the whole time.”

5. An “unambiguously bearish” environment despite rally

Lonergan describes the current environment as “unambiguously bearish,” an opinion not changed by the summer rally. “The Fed is going to continue to raise interest rates until the US economy goes into recession,” is his bottom line.

“Markets are not forward looking. That’s really become clear to me in the past four or five years. I really felt this with the pandemic, how late the market reaction was. And I went back to look at 2008 — it’s fascinating. The US economy had already contracted before the big falls in the S&P 500.

“It doesn’t surprise me that although it is obvious there is very bad news coming, there is a collective denial of it. At some point there will actually be an over-reaction to it.”

You may also be interested in: “This job’s not easy; you need emotional resilience” – Lonergan’s colleague, Dave Fishwick, on global macro, markets and mentality