In The Headlines
Does the Melting of the Arctic Represent a $1 Trillion Opportunity?
The melting of the Arctic ice cap, and the unveiling of resources below it, presents mind-boggling opportunities for energy, shipping, fishing, science, and military exploitation. Energy and shipping have been first up. Norway made its national fortune drilling in northern waters, and Arctic fossil fuel exploration has become a more prominent part of U.S. energy policy. Melting ice means that in summer months, cargo can travel approximately 5,000 km from Korea to New York, rather than the 12,000 km it takes to pass through the Panama Canal. Warming waters also open up access to commercial fish stocks, making the Arctic a growing source of food.
Chairman of investments at Guggenheim Partners, Scott Minerd, is a member of the World Economic Forum (WEF) advisory council whose task is to develop guidelines for those nations looking to do business at the top of the world. That framework is to be released in the coming weeks. “The history of economic development in regions of the world has really been fraught with a mass of mistakes,” said Minerd. “It really seems that someone needed to start developing a minimum standard, as a guide for economic development in the region.”
The Arctic Investment Protocol, developed by a 22-member WEF “global agenda council,” puts forward sustainability principles similar to initiatives developed for mature economies in recent years. The focus is long-term: tap the expertise of indigenous communities and treat them as commercial partners, protect ecosystems (even as rising temperatures change them), and prevent corruption while encouraging international collaboration. The Arctic nations include Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and the U.S., so there is a lot of collaboration to be had. The WEF protocol seeks to address a region changing dramatically, and rapidly. The trick will be to avoid having the same thing happen to the Arctic.
Guggenheim has long provided infrastructure finance, because it is an area that can offer long-term, stable returns. That is partly why the firm was drawn to the Arctic. From there, researchers started looking into just what the region needed to become networked into the global economy. The financial measure of opportunities available there is difficult to estimate, but $1 trillion may be a solid first pass. That is the figure Guggenheim says may be needed to get the Arctic up and running in a manner that will not deplete it in the long run. The figure is based on a list of public and private infrastructure projects already being planned. Not all of those efforts will even need outside investment, particularly in the energy sector. The list is not meant to be an investment blueprint, but a research-driven assessment of what is needed, Minerd said. Its purpose is to provoke discussion in the region.
The Arctic guidelines are voluntary, like many other sustainable investment initiatives, including the Principles for Responsible Investment or even the WEF’s own work on “sustainable competitiveness.” How does anyone expect to protect the Arctic environment in such a gold rush? The project is designed to complement the United Nations Sustainable Development Goals, and while the earth is littered with the remnants of do-good business pledges, the notion received a shot in the arm recently.
In December, almost 200 nations agreed in Paris to adhere to the first-ever universal climate goals. How nations contribute to progress toward them is their call, since there are no binding demands to cut greenhouse gas emissions. The Paris agreement will work by relying on the ‘soft’ power of international political consensus to encourage change, in business and government. Laying waste to the Arctic would seem to contradict that agreement. The next step for the Arctic Investment Protocol, Minerd said, is to encourage national and local governments, and financiers, to sign on. If those responsible for infrastructure-permitting and investment are on board, perhaps there’s a chance to develop the Arctic without destroying it.
Such an effort will require significant scientific observation, especially given how little data there is, and how few have ever lived north of 66 degrees latitude. Jan-Gunnar Winther, director of the Norwegian Polar Institute and a member of the WEF group, said increases in shipping, mining or other natural resource harvesting will be at the mercy of a fast melting ice cap. The retreat of ice sheets has created a shifting seascape of shipping channels. Melting glaciers are spawning more problematic icebergs that can wreak havoc on container ships and drilling platforms. The Arctic is warming faster than any other part of the globe, Winther says: “These changes are like nothing we have seen. We don’t have anything to compare within history.”
Citations
1. http://bloom.bg/1RVzy7I – Bloomberg
2. http://bit.ly/1Qj9LTm – World Economic Forum
Beyond the Phone: Nokia Sees a Future in Virtual Reality
The New Frontier showcase, which runs during the last ten days of January in Park City, Utah, is celebrating its tenth year at Robert Redford’s Sundance Film Festival. The 10,000-square-foot exhibit features a record 30 virtual reality experiences across devices such as Facebook’s Oculus Rift and Samsung’s Gear VR. There is also a full schedule of panels focusing on virtual reality.
Nokia is one of the companies targeting the Hollywood executives, filmmakers, and actors who make the short flight to Utah. Nokia Technologies is hosting a party at the New Frontier VR Bar to showcase the capabilities of its new $60,000 Ozo 360-degree camera, which had its official Hollywood launch party in November. The cameras, which are available for preorder, will begin shipping in the first quarter of this year.
Ramzi Haidamus, president of Nokia Technologies, says Sundance is renowned for highlighting new and creative initiatives in storytelling through film. “Film has always had the power to entertain and transport people, and we think virtual reality will bring storytelling to the next level—enabling deeper empathy, and giving filmmakers more influence than ever,” Haidamus says. “We’ve really only just begun to explore the impact that Ozo and virtual reality will have on the film industry, so it’s natural to seek partners who defy limitations and push the boundaries of filmmaking to help bring Ozo to life.”
Haidamus and his team are demonstrating features of the camera to a wide range of filmmakers and artists. He says Ozo is the only camera that lets the director live monitor in full 3D 360 virtual reality during production, and with fully integrated spatial audio capture. They are also showcasing virtual reality content filmed with Ozo, including the debut of a pirate narrative experience called Mutiny, a NASA astronaut training clip filmed at the Johnson Space Center in Houston, and a clip from the live 360 concert Nov. 30 in Los Angeles featuring the band Best Coast performing at Capitol Records. “The Sundance New Frontier program sits right at the connection point between independent artists who want to experiment, and the cutting-edge technologies of filmmaking,” Haidamus says. “As these creators push the boundaries of traditional storytelling, Ozo is able to support their creative visions and immerse audiences in narrative worlds—elevating productions, increasing engagement with viewers, and defining the future of film and this new medium.”
Digi-Capital managing director Tim Merel says that while the 360-degree video market is in its early stage today, virtual reality video could grow to the $5 billion to $10 billion revenue range by 2020. Nokia worked with 20th Century Fox to develop the Ozo camera and that studio is already filming with it, although details on those projects have yet to be announced. Fox is separately showcasing The Martian Virtual Reality Experience at Sundance this week.
Most of the virtual reality content that is being shown at Sundance are short-form entertainment and interactive experiences. Haidamus says short-form is a natural way for the industry to start experimenting with virtual reality and to figure out how experiences translate in the medium. “They’re also the right length to give audiences as sense of the possibilities for VR, to encourage more excitement as adoption, particularly as the first headsets start to ship,” Haidamus says. “With long-form, especially in the near term, adding live broadcast capabilities dramatically increases the impact and draw for people. For example, the ability to experience an entire concert from your living room, and feel like you’re on stage surrounded by the band, is truly incredible. Or watch a playoff game and switch between traditional 2D broadcast and be on the sidelines whenever you want.”
Nokia does face competition from companies such as Bubl, Jaunt (a Nokia partner), GoPro, Lucid, Matterport, Otoy, and Lytro in the professional virtual reality camera market. Jaunt is also hosting filmmakers at Sundance. And there are other companies focusing on livestreaming virtual reality content, including IM360, NextVR, and Reality Lab.
Citations
1. http://for.tn/1Ujsy1W – Fortune
2. http://bit.ly/1jpjagg – Wired
The Good News Is . . .
• U.S. consumer prices unexpectedly fell in December as the cost of energy goods dropped and services rose moderately, a trend that if sustained suggests inflation could be slow to rise toward the Federal Reserve’s target. The Labor Department said its Consumer Price Index slipped 0.1% after being unchanged in November. The soft monthly inflation readings, together with further declines in oil prices suggest it could be harder for inflation to rise toward the central bank’s target of 2% this year.
• Bassett Furniture Industries, Inc., a leading manufacturer of furniture, reported earnings of $0.52 per share, an increase of 48.6% over year earlier earnings of $0.35 per share. The firm’s earnings topped the consensus estimate of analysts by $0.04. The company reported revenues of $115.5 million, an increase of 22.0%. Management attributed the company’s results to strong comparable store growth and robust sales in its upholstery division.
• Microchip Technology agreed to acquire a fellow chipmaker, the Atmel Corporation, for about $3.6 billion, part of a wave of mergers and acquisitions within the semiconductor industry. Stockholders of Atmel will receive $7 per share in cash and $1.15 per share of Microchip stock in the deal. Chip makers have been combining to cut costs and build scale for their customers. The deal is estimated to create $170 million in cost savings and revenue growth in the year that begins April 1, 2018, according to a statement from Microchip.
Citations
1. http://bit.ly/1W7pWpk – HousingWire.com
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1lGfFmI – Bassett Furniture Industries, Inc.
4. http://nyti.ms/1ZVb6rw – NY Times Dealbook
Planning Tips
Guidelines for Indexed Universal Life Insurance Policies
Indexed universal life (IUL) insurance policies are cash value policies that can be allocated into a fixed interest or equity index account. These types of policies have a number of tax benefits compared to traditional retirement accounts that investors should consider. Below are some guidelines to help you better understand how these policies work and some of their advantages. Be sure to consult with your financial advisor to determine if these policies are appropriate for your situation.
Tax deferred growth – Indexed universal life account values grow on a tax-deferred basis, which means that policyholders can benefit from triple compounding. This means they earn interest on the principal, interest on the interest, and interest on the money that would have gone toward taxes. For example, suppose that you invest $10,000 in a mutual fund that grows at 5% per year over the next 20 years. The sale of the mutual fund would generate $26,533 in capital gains and $3,978 in taxes at a 15% tax rate. The same $10,000 invested in an IUL policy would result in potentially higher gains (no losses during down years) without any taxes, since the policyholder would simply take out a “loan” from the policy rather than a distribution. (For more, see Indexed Universal Life: Cash, Flexibility and Safety.)
No contribution limits – Indexed universal life policies have no limitations on annual contributions. By comparison, individuals under 50 may only contribute $5,500 per year to an IRA, while those over 50 may only contribute $6,500, which may not be enough for their retirement. For example, suppose that you start investing late in life at age 50 and max out a Roth IRA over the next 10 years. A 5% annual return would yield an account value of approximately $81,756 over that timeframe, which is not enough to finance a full retirement. The same person could contribute a lump sum of $65,000 in year one at the same market return and make $105,878 over the timeframe due to the effects of compounding.
Easier distributions – The cash value in indexed universal life policies can be accessed at any time without penalty regardless of a person’s age. By comparison, those taking money out of a Roth IRA before age 59 ½ are subject to a 10% penalty and must pay ordinary tax on the income. For example, suppose that you require $25,000 before the age of 59½. Taking the money from a Roth IRA would result in $2,500 in penalties and an additional $7,500 in income tax at a 30% tax bracket, whereas the same $25,000 could be loaned from an IUL policy tax and penalty free.
Better for heirs – Indexed universal life policies are not subject to income or death taxes, while they sidestep probate and go directly to the named beneficiaries. The same cannot be said for other retirement assets that may be subject to these taxes and a lengthy probate process. IUL policies are not subject to state estate taxes and can help lower a person’s total asset base, or at least exclude the policy amount.
Passively managed – Indexed universal life policies purchase call options on equity indexes to gain exposure to the upside without the risk of a downside. Since they are not actively managed, there are no year-end distributions, and returns may be higher than many actively-managed funds. According to Barron’s, on a ten-year basis ending in 2013, only 45% of active managers outperformed their benchmarks, and most of them only did so by less than 1%. These dynamics suggest that passive investing may provide the best returns.
Citations
1. http://bit.ly/1WFy9kI – The Motley Fool
2. http://fxn.ws/1ZVbbvt – Fox Business News
3. http://bit.ly/1ZJRm4K – Investopedia
4. http://on.wsj.com/1Fk3f7Q – Wall Street Journal
5. http://bit.ly/1QYybkI – MainStreet.com
