The Return of El Niño

"Humanity is sitting on a time bomb. If the vast majority of the world's scientists are right, we have just ten years to avert a major catastrophe that could send our entire planet's climate system into a tail-spin of epic destruction involving extreme weather, floods, droughts, epidemics and killer heat waves beyond anything we have ever experienced - a catastrophe of our own making." Al Gore

El Niño? Again?

I am fully aware that quite a few readers of the Absolute Return Letter do not subscribe to the consensus view that the current climate crisis is manmade and, for that reason, I may be about to upset one or two of our readers.

I also know that I cannot mathematically prove that the ongoing climate crisis is indeed manmade. Having said that, when my chances of winning €10,000,000 in the euro lottery are bigger than the probability of the temperature exceeding 40°C in April in the Mediterranean (which is what happened about six weeks ago), I need no more convincing.

Let me share with you why I think we are in for more extreme weather later this year. Even if nearly everyone thinks the last few years have been characterised by unusually warm weather, average temperatures have actually been held down by an exceptionally long La Niña – El Niño’s cooling opposite. In other words, had it not been for La Niña, it would have been much warmer since 2020 when she first arrived. The bad news is that La Niña has left us now and will soon be replaced by El Niño. This spells much warmer weather later this year and next. The extreme temperature in the western parts of the Mediterranean in April were only the first sign that La Niña has now left (see the story here); however, El Niño is yet to arrive (see here), so things can get a great deal worse than what we experienced in April.

The main causes of extreme weather

El Niño is not manmade. Both El Niño and La Niña are natural weather phenomena in the global climate system, resulting from variations in ocean temperatures in the Equatorial Pacific. One could therefore argue that the extraordinary few days in the Mediterranean in April were a result of a natural weather phenomenon and that one shouldn’t overreact.

The problem with that argument is that El Niño also existed in pre-industrial times; however, temperatures of 40°C or higher in the Mediterranean in the month of April happened less than once every 40,000 years back then (such things can be measured very accurately). And, in the last 2-3 years, La Niña has cooled down the entire planet; yet, it has been extraordinarily warm pretty much everywhere. For those reasons, you will struggle to convince me that it was all natural.

Several greenhouse gases contribute to global warming with the biggest culprit being CO2 (Exhibit 1). As the most significant source of CO2 is fossil fuel use, it is fair to say that the problem will never be properly addressed until fossil fuels have been completely faced out, and that is still (most likely) decades away.

Having said that, CO2, and the use of fossil fuels, is far from the only problem. Take for example methane (CO4). It is a biproduct of agricultural activities, waste management and energy use, particularly biomass burning. Or take nitrous oxide (N2O) which is also, first and foremost, the result of agricultural activities, e.g. fertilizer use (source: EPA).

Sector-wise, the agricultural industry (including forestry and other land use) is one of the biggest emitters of greenhouse gases worldwide (Exhibit 2), i.e. you won’t entirely fix the problem by eliminating the use of fossil fuels. This must not be used as an excuse to continue burning fossil fuels, though. They are a very clear number one on the list of offenders.

What to expect this year and next

With the arrival of El Niño, certain things are likely to happen (source: Leeds University). First and foremost, the +1.5°C degree cap set by the UN could be exceeded for the very first time. We are already 1.2-1.3°C above pre-industrial temperature levels, and the average El Niño raises the mean temperature on Earth by 0.2°C. If this El Niño turns out to be above average (El Niños are not equally powerful), the average temperature rise could be 0.3°C or 0.4°C, in which case we will exceed +1.5°C for the first time ever.

This will unquestionably create a great deal of panic with political leaders all over the world likely to gear up their combat against climate chance. Stocks positively exposed to the green transition will probably respond in kind.

The weather in Australia is likely to be greatly affected by El Niño, as it always is. Australia has ‘enjoyed’ three years of La Niña conditions. That brought plenty of rain and severe flooding to many parts of the country. With El Niño about to return, the rain and floods will be replaced by drought, excessive heat and increased fire risk.

Another problem in El Niño years is that the Amazon rainforest becomes drier; thus, the vegetation growth slows. This has the effect of reducing the uptake of CO2 all over South America, which will again send the alarm bells ringing.

Europe will also be affected. El Niño almost always led to drier and colder winters in Northern Europe, while Southern Europe is usually wetter. If El Niño arrives in time for the next skiing season, you should drop your plans to go to the Alps and maybe head for Lillehammer instead. I was there during the 1994 Winter Olympics and can vouch for the place.

How it could all pan out

Not all El Niño years are identical, as some El Niños are more powerful than others, but the overall picture is pretty clear. After a few years of benefitting from the cooling effect of La Niña, we are now in for a few years of above-average temperatures caused by the arrival of El Niño. Precisely how much we can expect is difficult to say, though, for the reasons mentioned earlier.

Given the added impact of human behaviour, the combined effect of El Niño and rising CO2 levels will probably lead to an uncomfortable rise of average temperatures and an unpleasant increase in the number of natural disasters. This could again turn all the red warning lights on in the political corridors around the world. Politicians don’t always understand the finer details, and neither is it always their job to do so. This implies that we could be in for a massive overreaction later this year and/or next year if things develop as I predict.

Petrol and diesel cars could be banned altogether. So might heating your home with oil. And the biggest sinner of them all – coal-fired power plants – could be facing early retirement. Who knows? I can think of half a million different ways politicians may choose to tackle the rising CO2 problem. It is not that simple, though. The EU and North America account for only one-quarter of global CO2 emissions from fossil fuels (Exhibit 3), and it is largely irrelevant what we do, if China and other large emerging economies do not comply.

Final few words

Many countries in the western world have committed to going net zero by 2050. That said, as China, India and a few other sizeable EM countries do not intend to do so, a continued rise in CO2 levels well beyond 2050 is all but certain. As global warming is the result of cumulative CO2 emissions since the early days of the industrial revolution, this can only mean that the average temperature will also continue to rise well beyond 2050. Effectively, this means that we will, sooner or later, breach the +1.5°C threshold level, El Niño or not.

So, how do you position your portfolio for a warmer future? UK laws prevent me from making specific investment recommendations in a free publication like The Absolute Return Letter but, fortunately, we have found a solution to that. In ARP+, an add-on service which costs a few hundred pounds a year, we can be as explicit as we wish. If you subscribe to that service, expect to receive a research paper in a few weeks. That paper will contain plenty of advice as to how to prepare your portfolio for El Niño.

Niels C. Jensen

Niels Clemen Jensen founded Absolute Return Partners in 2002 and is Chief Investment Officer. He has over 30 years of investment banking and investment management experience and is author of The Absolute Return Letter.

In 2018, Harriman House published The End of Indexing, Niels' first book.

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