Larry Siegel - Ideas Lab Series - July 13th, 2022

[00:00:07] Larry

The climate emergency is not that much of an emergency. We are making progress on carbon emission reduction much faster than anybody predicted 20 years ago. But yeah, we’re going to have some global warming. We’ve already had some, but the RCP 8.5 scenario, where basically all the ice caps melt and New York and Miami become oceans, it’s not going to happen.

[00:00:37] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions.

Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:33] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series, I have invited one of them, namely, Kevin Coldiron to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor. In this series, Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. With that, please welcome Kevin Coldiron.

[00:02:07] Kevin

All right. Thanks, Niels and hello, everyone. If you’ve been in the investment business at some point over the last 40 years or if you’ve just been interested in investment over that time horizon, there’s a good chance you’ve read an article by our guest today, Larry Siegel. He’s written over 300 articles since 1980. Now, my quant skills aren’t what they used to be but that works out to be an average of an article a month for over 40 years, which is truly phenomenal.

Larry is currently the director of research at CFA Institute Research Foundation and he’s also investment thought leader at Foundation Financial Officers Group, as well as being on the editorial board of the Journal of Investing and the Journal of Portfolio Management. So, Larry, it’s a real honor to have you tonight. Thanks for joining us on Top Traders Unplugged.

[00:03:10] Larry

Thank you, Kevin.

[00:03:12] Kevin

We’re here to talk about your book, Fewer, Richer, Greener: Prospects for Humanity in an Age of Abundance. I have to admit, I was attracted to the book because of the title, because it’s optimistic. When I read the book, the tone is optimistic, and the message ultimately is one of optimism. But I wanted to tell you that we’re operating a safe space here. So if at any point in time you want to say something pessimistic, you should feel totally comfortable doing so.

[00:03:45] Larry

Well, let me caution that I wrote the book in 2019 when the world was at peace. We were at the tail end of a long economic boom and things were frankly a little bit better than they are now. So it’s hard to be as optimistic as I was then about the immediate or short run future. But looking at the trends over centuries and decades, even looking at the last couple of decades just this century, I’m very optimistic about continued economic growth all over the world or in most of the world, and also about the progress that we’re making. It’s kind of unexpected in the environment.

[00:04:30] Kevin

Honestly, that’s one of the reasons I wanted to have you on the show is that you’re not making predictions about what’s going to happen 12 months out, 24 months out. No one can really do that with any accuracy. You’re looking at the data and you’re drawing longer run conclusions, and we all are going to have to live in the world that you’re talking about. I was curious, I wanted to just ask you a kind of personal question to start off with. Are you an optimist by nature or is your optimism data-driven? Do you look at the data and then decide to be optimistic or pessimistic?

[00:05:09] Larry

Well, my ground philosophy or personal point of view is a mixture of the idea of human progress over time and the tragic vision that was identified by the ancient Greeks and then the Romans and so on to medieval times, to the present. So I can see both sides of almost any question.

[00:05:33] Kevin

I have to start off by asking a question on process. My wife is working on a novel and she listens to a lot of interviews with authors. She says she’s more interested in hearing about their process of writing than the content. So she’s like, “Make sure you ask Larry about his process.” So I’m going to ask you about your process. We’re actually recording this at midnight or a little past midnight now, Chicago time, which is where you’re based. So I’m curious, are you a night owl? Do you write better at night?

[00:06:08] Larry

I write better at night. I like to do other things during the day, then my mind and body settle down and I can focus better on my thoughts, and I also don’t have as many distractions. I have gotten past the point in life where I have kids running around. One of them is in his 40s, another in her 30s. I am married so that’s a distraction that I very much welcome. But basically, at this time of night, I will do my best work.

[00:06:42] Kevin

Have you always worked that way? Were all 300 articles written at midnight when everything else was quiet?

[00:06:49] Larry

Well, when I had an actual job, I worked for the Ford Foundation which has an office in a building and a set of rules for 15 years, and before that, at Ibbotson Associates, which is now part of Morningstar. I did a lot of work during the day, but I didn’t really prefer to. I’m a musician too. When I was starting my career, I was a semi-professional musician. So if you’re going to go to gigs and then you have to hang around to get paid, the whole point of it is to meet girls, right? So you’re going to sometimes get to bed at 3 o’clock in the morning. You tend to move toward a later shift and that’s persisted with me.

[00:07:45] Kevin

Let’s talk now about the book. The title is Fewer, Richer, Greener, and you go into quite a lot of detail on the history and the future of demographics, wealth, environmentalism. People can and have written books on each of these themes separately. Why did you choose to link all three together?

[00:08:13] Larry

Well, they’re already linked together. I just wanted to do two things. One is to write about what I was reading. It’s a book about books, as well as about the topic. I talk about Matt Ridley and his economic history which leads him to have an optimistic bias about the future. Steven Pinker who has written extensively about the enlightenment and how the enlightenment in Europe (and to some extent, the Americas), 250 or 300 years ago led to a takeoff in economic growth that never stopped. Before that, there was economic growth, but then it would stop and go the wrong way. There’s certainly some evidence that the average person in the world didn’t live much better in 1750 than they did in 750.

Some things were better, but not necessarily the number of calories. The number of hours worked was very high, lifespans were 30 or 40 years, although that includes a lot of infant mortality. A lot of people lived to an older age than that, but they also did in 750. After the enlightenment, the industrial revolution, the spread of democracy and the spread of capitalism, everything began to take off in an upward direction that has never really stopped. It started in northwestern Europe and the United States. After 50 or 75 years ago, it started to catch on in the rest of the world in a way that has brought China into the first world in a sense, not quite, but sort of.

India is making tremendous progress but way behind China, obviously, way behind Europe and the US. It’s the democratization of wealth and opportunity that impresses me the most. It didn’t just stay in the Netherlands and the north of England and New England in the US. It became a virus that took over the world. Only communism and fascism have been able to stop it and I want them to go away and stay away.

[00:08:15] Kevin

Yeah, and I think we all had thought they, or at least fascism, had been vanquished or nearly vanquished.

[00:10:42] Larry

I thought communism was too. China isn’t really communist. Vietnam isn’t really communist. North Korea and Cuba are but they’re tiny and eventually they’ll be absorbed into the world economy, Cuba first.

[00:10:57] Kevin

I want to spend the majority of the conversation on the last third of the book, the “Greener” portion, just because I feel like this is the area where we need the optimistic perspective the most. But let’s work our way there and start with the “Fewer” section. We actually did a podcast last week with Manoj Pradhan, who wrote The Great Demographic Reversal with Charles Goodhart. Their book is all about demography and really their focus is on how China and the demographic trends are going to influence inflation, create higher inflation. That’s not really a big part of your review of demography.

When you look at population trends over the long perspective, which is what you do in the first third of the book, what is it that you want people to take out of it? What are the messages that you think really ought to be absorbed?

[00:12:01] Larry

Well, the population explosion that we all grew up with as being the end of the world is over, even in Africa, which may continue growing for the better part of a century and it may get to 4 billion. I don’t think so. But it will get to 3 billion. Population is growing at a decelerating rate. In other words, it’s continuing to grow but more slowly and that second derivative has gone negative. So it’s more slowly each year than it was the previous year, and that has already happened in Asia. We already know about Europe and North America. In Latin America, actually, population growth is just as much under control as it is anywhere else.

So in Sub Saharan Africa, and to some extent, but not a very large extent, the Islamic Middle East, the population growth is a little higher, Africa a lot higher, but coming down. So this emergency has now gone away. The panic button, though, has been pushed. I forget what Charles Goodhart said and his co-author whose name I always mispronounce so I won’t try, but I think they’re concerned about a population implosion and that it’s a demographic reversal, right? So we won’t have enough young people to support the old ones, and frankly, a world full of old people is a little bit depressing.

[00:13:37] Kevin

Especially if they have my technology skills. Well, I think what they were saying… Their book is much more narrowly focused in the sense of it’s really on… I shouldn’t say it’s narrowly focused. It’s more narrowly focused than yours, and they’re basically saying that the dependency ratio (the ratio of inflationary, older, retired people versus deflationary workers) is going to increase and that’s going to put upward pressure on inflation, mainly because there’s going to be a shortage of labor and so wage rates are going to go up. So that’s, in a nutshell, a lot of what they’re talking about in the book.

[00:14:25] Larry

Yeah, I actually reviewed their book for Advisor Perspectives and you can find the review on my website, but I don’t remember exactly what I said. It was a while back. I believe that that’s a valid concern, but inflation is mostly a monetary and fiscal phenomenon. The money supply is controlled by various governments and fiscal policy is controlled entirely by governments. So, if relative prices change, let’s say, care workers who help old people do whatever needs to be done, that means they’ll get more expensive and something else will get less expensive in real terms, because there are only so many dollars to go around if the money supply is stable.

Now, if governments increase the money supply in an attempt to make this phenomenon easier for everybody, that’s going to backfire because prices will rise and it won’t be easy for everybody. We saw it in the ’70s and we’re seeing it again now. But I think that Charles Goodhart is usually right. His thesis that old people have to have production, in current time, in order to have their needs met is correct. You can’t just save a lot of money and have everything you want because if everybody saved enough money to have everything they want, there would really be nothing for them to buy, the prices would skyrocket, they’d be back where they started.

The idea that inflation is a problem has come back really with a vengeance and inflation is a tax on savers. Your savings are suddenly worth much less, but your labor probably isn’t worth much less and so it’s a transfer of wealth from older savers to everybody else. As an about-to-become 68 year old, I don’t like it. However, I am still working.

[00:16:34] Kevin

Yeah, and I think part of what they’re also saying is that, ideally, governments would have run tighter fiscal policies; that taxes would have to go up to finance some of that. They think that’s unlikely, therefore, there’ll be, essentially, government issuing debt, which the central bank will have to finance and that will also add inflationary pressure. But I don’t want to get into a big fiscal monetary policy discussion here.

[00:17:03] Larry

One sentence.

[00:17:04] Kevin

Please, go ahead.

[00:17:05] Larry

At 1%, that’s fine. At 15%, it’s a catastrophe.

[00:17:13] Kevin

You’re talking about inflation?

[00:17:16] Larry

No, the amount of government debt. At a 15% inflation rate which means a 15% interest rate, governments simply cannot pay the service on their debt, so they won’t and there’ll be defaults all over the world. So they won’t allow it to happen. So we will get higher taxes, we will get fewer government services. The budget has to balance, but it doesn’t have to balance in the same place every time. You can only take money away from savers for so long before, as Margaret Thatcher said, you run out of other people’s money.

[00:17:52] Kevin

So are you in general agreement that the demographic trends are inflationary long-term? You don’t sound as convinced as they are.

[00:18:04] Larry

I’m not convinced. There’s a risk that governments will play this game in such a way as to think they’re solving the problem by having inflation, which does nothing but impose a tax on savers to subsidize borrowers, and that never ends well. If that’s what governments around the world do, then they’re right, this is not going to be good. But there are other ways to manage the problem. Fiscal responsibility would be the two-word answer.

[00:18:41] Kevin

Well, let’s hope we get some of that. I want to talk about a couple of interesting things that you point out. You mentioned the scare story about population growth is not going to turn out to be true and you actually mentioned a factlet that I hadn’t really fully appreciated about India, where you said, actually, the birth rate in over half the states there is below replacement rate.

[00:19:18] Larry

It’s changed since I wrote it. Now the birth rate for the whole country on average is below replacement rate. When I wrote it, it was 2.5 or something. Now it’s 2.0. So it may have been over half the states, but they don’t all have the same population. But the bigger states like Bihar, it’s come down so fast that now the average for the country is below replacement rate.

[00:19:44] Kevin

That’s truly astonishing what is happening there. Is it the same story in India as we’ve seen played out in other countries?

[00:19:52] Larry

Well, there are really two factors. One is economic incentives built into the structure of society. You’re better off having fewer children these days because you have to educate them, feed them, clothe them, and after you send them off to the city and they earn a living, they don’t even call you. Whereas they used to work for you for free and then support you in your old age.

So, the economic incentive to have a lot of children has gone away, not in all the little villages in India, but obviously more so than not. The other thing that has happened is the spread of contraceptive technology to people who either didn’t have access to it or didn’t want to use it. So they’re obviously using it.

[00:20:40] Kevin

So the falling birth rate in India, is that something that people actually predicted would fall as fast as it did?

[00:20:51] Larry

No. The UN Population Division forecasts were for a much slower decline in the birth rate and they’ve had to update the forecast many times to reflect that they expect population stabilization to take place sooner and sooner and sooner. They did revise it the other direction once, but they were talking about Sub Saharan Africa, where I think they thought it was going to follow the Asian pattern more quickly than it has, but Asia really has become fantastically rich relative to its own history and Africa hasn’t.

[00:21:31] Kevin

Let’s talk about Africa then. Do you see a prospect of economic growth leading to a quicker than expected fall in the birth right there or is it too difficult to really make that kind of prognosis?

[00:21:49] Larry

No, we’re seeing it already. I have a chart in my book which I obviously can’t show you in an audio recording, which shows the Asia curve and then the Africa curve. I think it also shows Europe and some other places. The Africa curve is in the right direction, and it looks like the Asia curve did, until about 1980 or 1990, and then in Asia the birth rate just plunged. That has not happened in Africa. Will it? Africa has a lot of bad governments. I don’t think there’s anything different about African people, but because of the relationship between leaders and the electorate, democracies have not functioned particularly well there. You might blame colonialism.

There’s a little evidence that that may be true because the former British colonies have done much better than the former French, Belgian, German, Italian, and so forth colonies. We know that the British were more effective administrators of colonies so I’m pretty optimistic. But I want to check back in 75 years and see if Africa, in 2100, looks like Asia did in 1980. If it does, we’re fine because Asia was starting to be a pretty nice place in 1980.

[00:23:22] Kevin

I’ll talk to Niels about scheduling you for that follow up podcast in 75 years.

It’s interesting though, you also make a more sort of general point about African population growth, where you say, “Hey, that’s where the bulk of global population growth is going to be.” You’ve got this huge center of population growth and if you can generate some economic growth, the combination of genetic diversity and growing wealth could mean that in 50 years, the majority of the world’s scientists and artists are African.

[00:24:12] Larry

I’m going to ask for 120 years. Deirdre McCloskey is older than me, and she’s the person that pointed it out. She’s right. Eventually, when you have a rich, growing continent full of young, ambitious people who are absorbing influences from everybody in the world, there are some advantages to being a follower rather than a leader. Eventually, half of the accomplished people in the world will be African. But the amount of accomplishment in every field, whether it’s the sciences, the arts, technology, that’s taking place in Asia right now, is so huge that it’s a high bar. It’s just the way Europe and North America was a high bar in 1950.

These things move slower than you think they’re going to, until they start to move fast and then it happens all at once, and all of a sudden, everybody comes out with a book on it.

[00:25:16] Kevin

So it’s going to happen, it’s just a matter of time. I don’t know. I just thought that was kind of cool, given that civilization started in Africa, that things will eventually come full circle and our scientific and artistic future resides ultimately in Africa.

[00:25:37] Larry

By the way, I need to walk back something I just said a few minutes ago. By 1980, China had not made the capitalist transformation that it had made by the 1990s. So I would say that by the 1990s (I’m not sure when in the 1990s), it was obvious that China would become prosperous, and essentially, middle class. India went through its transformation around 1993, so it’s a little more recent than I was suggesting for Asia.

[00:26:13] Kevin

I actually remember, when I was working at Barclays in London (this was actually right around the early 1990s), and they introduced a fund in India, a dedicated fund, with the pitch that it was going to have the biggest middle class of any country in the world. They were a bit early on that, but in the end, the thesis was right.

[00:26:34] Larry

I think that’s right, or it will be tied with China, but they’ll have more freedom, unless something happens in politics in China that we don’t expect, and freedom means a lot. When I look at the Indian people, in our field, in finance, also in technology, they’re like Jews in the 1950s. They just run everything, and they run it better than anybody else by such a large margin. There’s no comparison. Sorry, if I offended anybody.

[00:27:07] Kevin

A lot of my students come from India, and they’re not only incredibly well trained technically, but they bring an enthusiasm and an energy that really just blows my mind every year when I see it.

[00:27:27] Larry

I know. Where do you teach, by the way?

[00:27:31] Kevin

I teach at Berkeley at Haas Business School. I teach a graduate class in financial engineering. So actually, I’d say about half the students are Chinese and a third Indian, and then a smattering of Europeans. Larry, you mentioned a few minutes ago about the importance of freedom. What’s your view? Do you think there will be more freedom, more liberty in China over time?

[00:28:02] Larry

I think so. First of all, the amount of liberty in China has increased almost monotonically, straight up from 1976-ish to a couple of years ago. The output of Chinese academics in the sciences and technology is the equal of anybody in the world. In finance, it’s really not. They haven’t had a financial system to study, and there’s a language barrier (It’s hard to read stuff they write), but sciences are more of a universal language. So, they’ve had the freedom to produce pretty much what they want.

In terms of the ordinary people (it’s in my book) Johan Norberg, who’s a pretty popular author, he is a Scandinavian, obviously, and a student of social and economic trends. He said, basically, being unfree (he calls China unfree), isn’t what it used to be. You can get a job, you can quit your job, you can move, you can marry whom you want, including someone of the same sex. Nobody’s going to have anything to say about it. You can almost publish anything you want. What you cannot do is criticize the government. You can do almost literally everything else.

So this is a different world than the China of Mao Zedong’s China in 1976. He still thinks it’s unfree, so I still think it’s unfree, because he’s spent a good chunk of his life there and I spent two and a half weeks. But one thing I could do when I was there was wander around by myself and not tell anybody where I was going. I was afraid that I would be subject to a police state type of surveillance as a tourist. If I was, I never knew it.

[00:30:00] Kevin

Yeah, I had a similar experience. I was there in 2018. I taught a two-week course in Qingdao in the north and it was funny because I went out to a cafe and basically, I was able to, via my phone, get into the New York Times and read a series that they had produced on how China had walled off the internet. I was sitting in China reading about how you can’t get on the internet in China. What I kind of took away from that was that an educated 5%, maybe 10% of the population can sort of do it at once. They all have access to VPNs, and I think as long as that doesn’t spread to the masses, I think they allow a certain amount of almost complete freedom of information.

[00:31:01] Larry

I think that’s right. But I don’t think that you have a free society until you get past 5% or 10% by a lot. In the United States, it feels to me like 60% of the people are somewhat well-informed. When they go to the voting booth, they don’t act like someone well-informed. But if you just sit and talk to them, talk to people in small towns across the Midwest, the south and so forth, our working class isn’t composed of idiots. I think in China, you’d find the same thing. They’re pretty well-informed but there’s some things they haven’t been exposed to yet but will be.

[00:31:52] Kevin

Let’s pivot a little bit and move on just to talk about the “Richer” segment of the book. As I said, there’s so much in this book, it’s impossible for me to get to all of it. But I want to ask about a quote or a comment you have where you say, basically, the history of economic growth is in large part the history of achieving better and cheaper sources of energy. I like that, because obviously, it links to the last part of the book on Greener. But can you just explain what you mean by that?

[00:32:26] Larry

Well, energy is kind of a master resource. That’s a phrase that Julian Simon used 50 years ago or 40 years ago, he’s long since passed on, when he was explaining how he thought the economy worked. Basically, what people did for a living, for all of human history, is first of all, look for food, which was a search for energy. We now, in the United States, spend 6% or 7% of GDP on food. In Europe, it’s a little more. But it leaves a lot of money for other things. So that search for energy has become radically cheaper in terms of the amount of effort that you have to expend in order to get what you need and do what you feel like with the rest of your time.

What I’ve studied most carefully is lighting. It took something like 50 hours of labor for an ancient Babylonian to get one hour of illumination for reading a book. I think they had scrolls, but the equivalent of a book. But by Shakespeare’s time, it was down to a few hours. Thomas Edison, of course, made the biggest difference, not in the securing of energy, but in the efficient use of energy. The light bulb was something like 1000 times as energy efficient for output of light as the carbon arc lamp which had existed for most of the 19th century, which was many, many times more efficient than candles and that sort of thing.

So, now it takes just a few seconds of labor for an hour’s lighting. An hour’s lighting is worth $.15 or something like that. So, if the national average wage is $30 an hour (which is roughly what it is, you can do the math), it takes almost no effort to get those kilowatts. So that’s what economic growth is. Now, there are other things you want besides energy. This computer is more powerful than all the computers in the world added together in 1950. I think there were five of them. My phone has more computing power than existed in 1980 in the space program. So computing power isn’t energy, it’s something else.

It’s become radically cheaper, so quickly that you kind of forget what life was like before that change. For example, to have this conversation, I don’t have to get on an airplane and fly to Switzerland, and I don’t have to run up a long-distance bill of $500 or $600, which is how I would have had the conversation 50 years ago. We’re doing it I think almost for free. I’m not getting a bill, only for the electricity that my computer uses. That’s what economic growth is. We think of it in terms of increasing GDP per capita, but it’s really things you want getting cheaper and cheaper to the point where there are other things you didn’t even know you wanted, and those are getting cheap.

[00:36:02] Kevin

You talk about Vaclav Smil a fair amount. Could you explain? I know he’s one of Bill Gates’ favorite authors, and I’ve read a little bit about him. Could you tell the listeners who might not know who he is, who he is and why he’s important?

[00:36:21] Larry

Vaclav Smil is a professor of Czech origin who lives and works in Canada. He’s an old guy probably pushing 80, and he writes about two 600-page books a year on energy. It’s a tough read, he is very technical, but he brings together, in his work, all the research that other people are doing (obviously, it’s not all his) on progress or lack of it in energy production, energy transitions such as from fossil fuels to something else. He has made the point that energy transitions take a long time. The wave seems to be about a 60-year wave, wood to coal; coal to oil,\; oil to natural gas; now fossil fuels to renewables/nuclear.

Nuclear is easier because we already have it, but it’s harder because people hate it. But when push comes to shove, when the lights start to go out or their electricity bill turns out to be bigger than their income, they’re going to support nuclear. The French have the best system, which is small, identical nuclear reactors all over the place selling and producing locally with the main advantage being interchangeable parts, like every other manufacturing process in the world, except for power plants. So the crew that runs them and fixes them supports them, if they’re trained in one place, their training is good everywhere else.

It’s what I call the Southwest Airlines system. They have one kind of plane so they only have to hire one kind of pilot and that pilot can fly every plane in the airline.

[00:38:18] Kevin

I’m not sure the Southwest analogy is going to bring a lot of comfort for those who worry about nuclear power, but I take the point. Well, let’s talk about nuclear power because you basically say, in the “Greener” section, that really there’s four things we can do that have a big environmental impact. There’s urbanization, moving people to cities; there’s new nuclear power; there’s genetic engineering; and there’s ecosystem engineering. Time permitting, I want to ask you, certainly, about those last three, but let’s talk about nuclear power. Here’s my perspective.

Now, this is coming from someone who grew up in Harrisburg, Pennsylvania. I was living there in 1979 and we were taken out of class and almost everyone but my family evacuated. My dad was one of these guys who always thought the media was exaggerating. So we stayed in town and I showed up for baseball practice and I came back and was like, “Dad, there’s no one here. Maybe it’s more serious than you think.” But it’s not really my experience, so much growing up growing up in Harrisburg, that makes me worried about nuclear power.

I feel like (to use a financial markets analogy), there’s tail risk, and the tail risk is difficult to evaluate and price. I listened to this podcast called Hidden Forces. I heard a good show about a year ago about the solar winds hack, and I just remember listening to that and thinking if that ever happened at a nuclear plant, then all of a sudden, you’ve got a source of energy that’s turned into a potential weapon. Maybe that’s not possible, I don’t know. But how do you react to something like that?

[00:40:08] Larry

There is tail risk. The materials used to power a nuclear plant can be further refined to weapons grade. You have to really be a good nuclear engineer to do this and have a billion dollars worth of equipment, but there are state and non-state actors in the world who conceivably could, but they’re not going to do it that way. They’re just going to build a nuclear weapon without running it through a nuclear power plant first, and there are some pretty bad guys who have nuclear weapons already. But the real tail risk is more likely Fukushima or Chernobyl.

At Fukushima, the tail risk was that you put a nuclear plant in a seismic zone and then have a tsunami. Something like this will happen again. Is it a true human catastrophe? We don’t know the extent of the damage, but the public imagination is that thousands or hundreds of thousands of people were killed, displaced from their homes or so forth. Obviously, thousands were displaced from their homes and they’re not coming back for many years.

[00:41:31] Kevin

You’re talking about Chernobyl?

[00:41:33] Larry

No, Fukushima.

[00:41:34] Kevin

Fukushima.

[00:41:35] Larry

Fukushima, I believe one person was killed and then a number of old people died because of the way in which they were moved out of harm’s way. So those are casualties too.

[00:41:49] Kevin

So you don’t see the risk that I just talked about of a state actor, let’s say Russia hacking into a nuclear plant. As a risk, you don’t think that’s something that should prevent us from pursuing…?

[00:42:05] Larry

I think it is a risk, but that the consequences are not that severe. Nuclear plants are not built in such a way that they can be turned into thermonuclear weapons. The worst thing that can happen is they can melt down and they just don’t build them that way anymore. Chernobyl was built that way, for two reasons. One, is that was the technology available in the Soviet Union at the time; and two, the Soviets didn’t care enough to update the technology to something safer by 1986. They just let nature take its course and it was terrible.

But Fukushima is a much better example because it’s in a first world country. It was the worst possible (that I can imagine) combination of circumstances, and yet one person was killed with the concern that a few thousand might die sooner because they had to be moved out of the way quickly, because of radiation, because of something. Now, in the United States alone, coal mining has taken 11,000 lives since 1900. Nobody talks about that. It’s just normal. You go into a coal mine, you might die. Oil is not as dangerous until you put the oil on trucks and start driving the trucks around. Then the trucks get in crashes, the oil catches on fire.

I don’t know how many people have died in the oil industry since 1900. I think it’s less than 11,000, but it’s a bunch. None of these are anywhere close to the record of safety of the nuclear industry. So yes, there’s tail risk. We have to manage that risk better. There are incentives in countries like the United States to do that such as insurance rates and regulation by the Nuclear Regulatory Authority, whatever it’s called this year.

In a country with no freedom, let’s say North Korea, you could conceivably build a nuclear plant that is so dangerous that a lot of people get killed and nobody in the government cares. It’s not going to destroy the world. It’s terrible for the people who were affected, but so is a coal mining disaster.

[00:43:59] Kevin

Right. Nuclear energy, if we decided, hey, this actually has to be front and center of our clean energy strategy, how quickly can it make a difference, let’s say in the US?

[00:44:44] Larry

Probably 20 years. The US has a lot of red tape that can be eliminated by a government that’s bound and determined to get it done. In 1960 or ’61, John F. Kennedy said we’re going to the moon by the end of the decade. That was the most ridiculous claim that I’ve ever heard any politician make. The moon has been up there and we’ve been down here for a long time and all we had ever done at that point was to shoot rockets into what we called space, meaning 100 miles, not 250,000 miles and there were no people on the rockets. So when they came crashing back down to earth, we just made sure they landed in the ocean. Yet, in 1969, eight or nine years after that, two men walked on the moon.

This was 66 years after the first people flew (Wright brothers flew) a little airplane a very short distance in North Carolina. Sixty-six years is a microsecond in human history. If we want to get it done, it’s not that hard. But you have to get the real estate, you have to get the materials, you have to train the people, you have to get the regulatory and legal structures changed so that it begins to generate power. First thing, don’t turn off the Diablo Canyon reactor. It’s working fine. They don’t have any other source of power for when wind and solar don’t produce anything other than to buy it from states that have nuclear reactors to sell the power to California.

[00:46:36] Kevin

Yeah. California is a maddening place in a lot of ways. I wanted to ask you before I talk about genetic engineering and ecosystem engineering, your list of four things that we can do to have a big environmental impact didn’t include carbon pricing. I’m curious as to why. You’re an economist, you’ve studied economics, pricing matters. Why did you not have that on the list?

[00:47:06] Larry

I kind of took it for granted. There’s nothing interesting to say about it.

[00:47:11] Kevin

You took it for granted in what sense? That it’s just going to happen?

[00:47:15] Larry

Everybody knows about it. It may not happen, but it’s not a new technology that has to be developed over a period of time to put in place. I can buy and I can trade carbon credits right now (even though it’s a holiday here) using Richard Sanders’ technology. He wrote a book on it for the CFA Research Foundation about 10 years ago. It’s a tough sell to people who depend for their livelihoods on cheap transportation. A lot of people live 50 miles from their jobs and make $17.93 an hour. They will simply not be able to get to work at today’s carbon prices without the tax. There’s some taxes already.

So it will require a certain amount of restructuring of the geography of our industrial life, which we should have done anyway. It makes no sense for people to live 50 miles from their jobs.

[00:48:23] Kevin

I think that yeah, that’s your point about urbanization and cities actually being green. Genetic engineering, this suggestion really appealed to me because, as my wife and kids will tell you, any kind of fad diet out there, I’ve tried. I was on the Paleo Diet way before it was popular. One thing I remember reading about, while I was on it, is that the scientist who had written this paper was like, “There’s nothing you can eat now that would have been available to cavemen. Any food we have today has been modified, genetically engineered in such a way that it just didn’t exist 20,000 years ago.”

I think you make that point about corn in your book, that the corn we have today looks nothing like its ancestral beginning. So genetic engineering, I think, is something that sounds scary to people, but really, we’ve already adapted and we’re living with it. In what ways can genetic engineering, in your view, make the most difference in terms of climate change? Is it modifying trees to suck up more carbon? Is it feeding cows seaweed to reduce methane? Where do you think the biggest bang for the buck is in genetic engineering?

[00:49:50] Larry

I don’t know. Maybe Vaclav Smil knows and I can read his book and write about it. But my main point about genetic engineering was in agriculture and medicine. We have just begun to scratch the surface of the application of genetic engineering in medicine. The Coronavirus vaccine is genetically engineered. They had been working on mRNA, messenger RNA, vaccines for about 20 years, but we didn’t need any. But then when we did need one, we were able to produce one in a few months, three or four months from discovering what the virus was that was causing the disease. It wasn’t released for a while because it had to go through clinical trials to see if it was safe and effective, but we had the mRNA vaccine by late spring, early summer 2020.

Do you know how long it took to develop a vaccine for smallpox? The ancient Chinese were working on it in the 10th century. We finally got one that worked in the 18th century. That’s a long wait. We didn’t wipe out smallpox because of access to the vaccine until the middle to late 20th century. We can’t really wipe out COVID because unlike smallpox, it has reservoirs in animals where it produces new variants, but it’s become so much milder so quickly, partly because of the vaccines, because people aren’t catching the worst kind and passing it on, that it already is essentially endemic. Charity Dean may argue with me on that, but I don’t think so. I think she’s with me. I wrote an article on my website about that process. The next disease is going to be much easier because we know everything we did wrong with COVID.

[00:51:55] Kevin

Just looping back though, because you list genetic engineering as one of the biggest things we can do for the environment.

[00:52:05] Larry

That’s agriculture. Using less land, less fertilizer, fewer pesticides, less sunshine, you could probably turn northern Russia into an agricultural region, northern Canada, through growing crops that have been custom designed by us to thrive in those environments. We’ve already done it through cross hybridization backcrossing and all these mid-scale technologies. They’re not primitive, they’re not advanced in the sense of manipulating the genes directly using CRISPR/Cas9. They’re technologies that were based on the discoveries of the 19th century, Darwin and Mendel.

We’ve produced increases in wheat yields, corn yields, soybean yields, that are so huge that the main concern in most countries has gone from famine to obesity, and very quickly, in less than a century or about a century. Is this going to continue? Yeah, I think it will actually accelerate. We have not reached peak food but we’re about to reach peak population. This is a good thing.

[00:53:28] Kevin

There was just an article in Bloomberg the other day on seawater rice, where the Chinese have developed a way to basically grow rice in water that’s basically salty and alkaline and that there’s potential to make China much more self-sufficient in food, which in turn improves global food security. So, that was just something that I just happened to take note of because I knew I was going to talk to you today. Let me ask you about your last point, ecosystem engineering. This is where you talk about some of the more science fictiony ideas, including I think there was one idea and I don’t think you put a whole lot of credence on it, but basically putting a giant shield in space to block out some of the sun. If you had to bet on one of these crazy ideas taking hold, which one would it be?

[00:54:32] Larry

It will not be putting sunglasses on the earth. What could possibly go wrong? You put a tree in little reflectors, each one with an intranet address and some kind of a solar powered motor and one error in the software code and the thing odds out the sun for 300 years. Bill Gates has written about it. Al Gore spoke about it favorably. I don’t think it’s going to happen. The climate emergency is not that much of an emergency. We are making progress on carbon emission reduction much faster than anybody predicted 20 years ago.

Forty years ago, we didn’t know it was a problem. We thought global cooling might be a problem, which is worse everywhere. I live in Chicago. I was under two miles of ice. It’s hard to live under two miles of ice. But yeah, we’re going to have some global warming, and we’ve already had some, but the RCP 8.5 scenario, where basically all the ice caps melt and New York and Miami become oceans, it’s not going to happen. It’s partly not going to happen because of our response to the concern. Partly also, I believe, because the concern was overstated. We were using a 1 in 10 to the n. I don’t know how big n is. Worst case scenario is always the expected scenario. You may want to do that. That isn’t a bad idea for certain kinds of planning and analysis.

What happens if the world comes to an end tomorrow? But it scared people into two things, one which is good, which is supporting the action needed to mitigate climate change. The other is terrible, which is basically to teach our children that they’re all going to die. I run into a lot of people, parents, children, teachers, and I actually want to write a book for young people about this who believe that they are the last generation of people on earth and that they won’t make it very far into their lives. You know Jason Zweig, right?

[00:57:06] Kevin

Yes, I do.

[00:57:07] Larry

Yes. All of us investment types know and love the Wall Street Journal columnist Jason Zweig, who is probably the wisest newspaper columnist on investing that ever lived. He had a young person, young woman, very bright, college graduate, ask him, “Why should I take your advice of investing for retirement, funds I’m not going to be allowed to touch? You say they’re going to grow to a lot of money in 40 or 50 years when the earth is going to be a rotating cinder.” So Jason called me and we had a nice discussion. He wrote it up and it was a fun piece. The Earth is not going to be a rotating cinder. Minneapolis may have the climate of Kansas City and Kansas City may have the climate of Atlanta, but that’s not a catastrophe. It’s a change we can adapt to.

Yes, if you are in the Maldives or Nauru, or some other place where the average altitude is eight feet, you may have a problem. The ocean isn’t going to rise eight feet, but in the worst storm of the year, you’re going to get wet. The ocean has been rising at about a foot every century and a half. Let’s triple it. Three feet every century and a half. Can we plan ahead well enough to deal with that? The dikes around Amsterdam have been there, some since the 12th century. They have been in good shape since the 15th century. Yes, there have been accidents. There was a bad flood only 70 years ago. But we know how to avoid that now. The dikes around Dhaka, Bangladesh that haven’t been built and the dikes possibly around Saigon, I think it’s a little far.

I think the problem in Vietnam a little farther south, but I’m not sure. They will be as much a part of what we understand to be our built environment as the dikes in the Netherlands are today. It’s expensive, but it’s worth it. That mitigation has been oversold. We should do it. But adaptation has been undersold. We need to be putting a lot of energy and thought and effort into figuring out how to have the damage from potentially catastrophic anthropogenic global warming be as non-catastrophic as possible. I don’t think it’s reflectors in space. I think it’s dikes around Dhaka. I think that thing on the Thames-

[00:58:29] Kevin

The Thames barrier.

[01:00:05] Larry

The Thames Barrier, that’s the word I’m looking for. It’s going to get bigger. It may get closer to the ocean because you’re going to need more than one barrier, but this isn’t impossible.

[01:00:24] Kevin

I think that’s a good place to wrap it up. I appreciate the thoughtful optimism, the data-driven optimism, and I totally agree that’s a message that we have to get out there more widely. So, Larry, I appreciate you taking the time to come and share your thoughts on really just a phenomenal range of topics. It’s been great chatting to you.

[01:00:50] Larry

It’s my pleasure. Thank you for having me. May I mention that my book Fewer Richer, Greener, and my second book, Unknown Knowns are available on Amazon. All you need to do is type in the title because the first title Fewer, Richer, Greener, is unusual and the book will just come up. If you want to read all of my articles through the last 10 or 15 years, that Kevin was so excited about, type in “unknown knowns” and then the word “folly”, because that’s in the subtitle. I love to talk about folly. I like to make fun of people who are doing stupid things. So that’s my commercial. Thank you for the opportunity to be here.

[01:01:31] Kevin

Well, that’s great. We’re happy to have you and with that, I’m going to pass it back over to Niels.

[01:01:39] Niels

Thank you so much, Kevin and Larry, for a very astute conversation on such a broad range of topics. Fewer, Richer, Greener touches on some of the most important topics that we’re facing right now. Having a good understanding of both the history of demographics, wealth, and the environment, as well as a view of where we’re heading is vital, not least for us as investors, let alone us as humans.

I like that there was a sense of optimism in what Larry shared, even if some people may not share his view that the climate emergency is not so much an emergency. But let’s face it, there are a lot of unknowns in any of these predictions so we should leave room for some disagreements along the way. The demographic changes in places like India and Africa were quite eye opening and the comment that Larry made about half of the world’s accomplished people at some point will be African is also something that nobody talks about.

Make sure you go and follow Larry and Kevin’s work as well as getting a copy of their books because as you can tell from today’s conversation, some of these ideas and topics are not being discussed on mainstream media. From Kevin and me, thanks so much for listening, and we look forward to being back with you on the next episode. In the meantime, take care of yourself and take care of each other.

[01:03:05] Ending

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