Ivory Towers and Inflation

No sooner do I publish than the New York Times publishes confirmation.  Someone has either read, or not read, my Stagflation blog, because in the USA they are again talking about excluding those pesky "food and energy prices" from the inflation calculator because of their "volatility".

Expect to read more and more of this in coming years, in my opinion.  The two most important costs issues for the general population - food and energy - will be manipulated out of reported inflation permanently for political purposes. 

Why?  Because the costs of each will continue to rise faster than income and other costs.  And there is not a lot than can be done in the short term although longer term there could be all sorts of responses to food price inflation, say, similar to those that occured during the food price crisis of 2008,  For example, closing trade borders such as Thailand did for its rice production, or forcefully stockpiling, or price fixing, or, as happened in Latin America, nationalisation of the food production chain.

Most of those actions are (for the moment) politically unpalatable as they affect international trade agreements and property rights.  But that may well change.

As we all know, Maslow's heirachy of needs put food, warmth and shelter up there at the top.  Nothing drives a populace to riot faster than not having enough of each at a reasonable price.  (Again, as happened in Thailand).

I was fortunate to hear a renowned geographer, Professor James Kirkpatrick AO from Australia, and he was explaining where the world is headed within the next two decades as a consequence of this massive food price inflation. He suggested that there will be reversal of the multi decade trend of people swarming to cities from the country to have a career, as people will rush to the country to obtain food.  All the secular indicators suggest this is true.  Taking that literally, people will abandon consumerism and culture and move closer to self reliant sources of food, shelter and warmth. 

Taking that argument further, it won’t just be people from London, New York, Paris or Beijing, say, it will be people from all over the world, leaving countries that have poverty and insufficient food, in their masses, on ships not boats, and moving to those that have food surpluses. Illegal immigrants.

And their origin may surprise you.  For example the USA presently has a reputed 50 million people on government funded food stamps.

Mass migrations, the Occupy groups, the slow manipulation of all appears to be heading in the direction of significant upheaval in the 99%ers. 

So to follow what is happening with inflation and therefore what investment decisions you make, first ensure it includes food and energy costs for the masses.  Otherwise you will be missing the real story.

Stagflation or Bust? Buy Farmland

The ol’ end of year outlook.  However the longer term trends really are the more important ones for longer term investors. Which we all are.  In June this past year, the following was published:

“Let’s talk about inflation. There are two types commonly spoken about and published:  headline inflation and core inflation.  Headline inflation includes goods and services that represent the total inflation in the economy.  For example, it includes the price of an Ipad, the cost vs quality of which has been falling over time, thus representing a fall in inflation for this product. It also includes food and energy costs, such as apples and electricity.

Then there is core inflation, which is what governments and market commentators prefer to use.  That is because it is less “volatile” they say, it theoretically provides a better measure because it excludes “volatile” components of inflation in the economy such as “food and energy”. Thus for forecasters and the elites that manage the economy [and any payment linked to RPI such as a pension] they say it is more “relevant”. 

Now if you are sitting at home and wondering which is the more relevant measure of inflation for you; what would you choose?  Headline inflation of course, after all, as one very wise person in Queens [USA] suggested, “I can’t eat an Ipad”. What concerns us is the day to day living, of which it is indisputable food and energy are critical cost factors.

And any person who shops, drives or gets cold will tell you, energy and food prices have soared.  That is why they have gone on a consumption strike that is hurting the retail sector everwhere. 

And it hasn’t really started yet.  The FAO reports that its global food price index has reached an all time high – a 39% price inflation year on year.  Its cereals index has inflated 71% year on year.  The list goes on and it is important reading. 

And it does not take much research to know that energy costs are going to increase dramatically.  It has been underpriced for decades and some catch-up is inevitable.  Indeed, for energy and food, many credible pundits are saying we have already passed the tipping point of continuous consumption growth in a finite world and it is all downhill from here [if you have to pay for it, that is, not if you produce it]. 

What will make it more difficult for the global baby boomers, is that just when their income becomes reliant on assets and income from those assets, rather than employment income, they are experiencing a period of stagflation – cost inflation whilst income and asset prices deflate.  And many won’t have allowed for it when calculating their savings for retirement because they have never experienced this high inflation for such a sustained period. 

This stagflation is likely to remain for a decade or more as internationally, over indebted people, companies and countries de-leverage and / or go broke.  The consequences of which is that as medical, food and energy costs soar, there are less and less in savings to meet those future expenses.  And generally speaking, people always underestimate their future requirements in any event.”

And I see no reason to change my outlook.  And I have been amongst good company.  PIMCO, the world’s largest money manager went short the long bond because they expected inflation to rise due to the massive printing of money around the world. The inflation outlook is usually priced into the long bond and therefore causes its value to fall. They then admitted their error and unwound their positions earlier this year, and just as well, for the USA bond market has had a huge rally.  Gold itself soared, as punters were waiting for inflation, but is now down 19% since the peak - 1% off a bear market. 

On CNBC an interview of Jim Rogers was also forecasting stagflation in October.

When I wrote that last May, the FAO price inflation data was shocking at 39%.  Here we are in December, and its Food Price Index stands at 215 (Nov) compared to 213 mom a year ago.  Slightly less than 1% inflation month on month.  However if you look at the average for the year, then the index is up 24% compared to the average for 2010.  

Also it is interesting to cross check data.  Food prices received by farmers in the USA, say, are on the whole higher year on year in December when looked at in individual categories.  The Farmers Price Received Index as at December 2011, have averaged 3.7% (simple) over the last 20 years for all products, but 15% year on year.  So if farmers are receiving more for their produce, then that must eventually flow into the cost of food as recorded in inflation.

All over the world central bankers and financial institutions are forecasting lower inflation next year.  And this is the conundrum for investors.  Because when global central banks print money (as the ECB, Fed Reserve and Bank of Japan are doing etc)  that money has to be going somewhere.  And where it usually goes is into an inflationary bubble.

We know it hasn't been going into loans for the masses, or small business who are having a credit crunch.  From the UK, to the USA, to Australia. This report in The Telegraph shows that M3 money supply is contracting in the EU. 

In the end I think all those great investment minds have got it wrong because of Quantitative Easing which is being used by central banks along the yield curve, and a flight from risk by global investors into the USA bond market.  So that instead of bonds spiking in price (losing value as their yields rise to reflect rising inflation), with government money buying up bonds (equivalent) at the three year for EU and long term for the USA, inflation expectations are no longer represented accurately, or is being subverted, in the bond market.  So investors into this market are investing into a manipulated market, manipulated by their own central banks.

On the ground, for the general population, consumption (food, health and energy) prices appear to be rising, whilst jobs are lost, fiscal austerity kicks in, assets prices continue to deflate, and interest rates on deposits is near zeor (negative in real terms).  Whether it is shares, gold, real estate or commodities.  And GDP is in basic contraction just about everywhere.

I see no reason to change my outlook.  How to invest into that outlook.  Buy a farm!!

This is how the USDA reports it:  "Between 1994 and 2004, real values increased between 2 and 4 percent annually, and in 2005 and 2006 increased by 16 percent and 10 percent respectively. Since then, real growth in farmland values has slowed, but is still increasing by 3 to 5 percent annually." Farmland prices since 1969 have achieved an all time high in 2011.  Reuters is reporting that in the 3rd quarter, farm values in the US surged to the highest levels in more than three decades. 

In the UK, farm land values have tripled in a decade, as reported by the Financial Times. 

So where is all that money going?  Where is the bubble?  Maybe it is in farmland.  Or maybe, they are investing because they know that food prices are going to continue to rise as the world meets the challenge I outlined in Peak Food.   That is, stagflation.  No growth, inflationary prices.

The Euro Crisis and the Media Exposed

Any attempt to wade through the media reports and political quotes on the Euro crisis would have left you more befuddled than ever.  As I wrote Will Someone Please Inform British Prime Minister Cameron, the terminology used, and media reporting, was almost unintelligible for any senior banker.  Let alone the general populace.

And when the various EU governments had a final crisis meeting in November, I all but gave up.  

My favourite self exposing quip was President Sarkozy suggesting that banks could borrow from the European Central Bank (“ECB”) at 1% and lend to Euro governments at 6%.  Like he had just invented the wheel.  I mean that’s what banks do for goodness sake.  Maybe he had only just realised it? 

In my blog I diagnosed the Euro problem as “This is a global sovereign and systemic liquidity crisis.  Underlined individually because each word has a specific meaning in finance.”

First up, Mario Draghi, the new President of the ECB made an announcement of a major bail out for the banks on 8 December; due to commence on 22 December.  He didn’t call it that, but that is what it was as I will explain later.  He at least understands the issues.  And he did confirm my diagnosis as this being a liquidity problem;  without the correct diagnosis, you cannot fix it. He said:

“In its continued efforts to support the liquidity situation of euro area banks, and following the coordinated central bank action on 30 November 2011 to provide liquidity to the global financial system, the Governing Council today also decided to adopt further non-standard measures. These measures should ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market.”

His speech in full is here, and for anybody interested in the facts as opposed to what has been reported, it is well worth a read.  The actual ECB press release is probably too complex for non bankers, but it is here.  

But what does it all mean?    Well the only media report that I read that made sense and was accurate was by Floyd Norris of the New York Times.  And I would highly recommend it.  He wrote ”It would do only what central banks normally do. It would lend to banks. It turns out that may be enough to stem the European crisis for at least a few years, and go a long way to recapitalizing banks in the process.”

And I agree with his conclusions.  This action has pretty much finalised (wrong word), stabilised the Euro crisis as it has become known; for a period.  

Mr Norris did make one error however; he referred to this as “normal”.  It is not normal practice.  Banks should not be bailed out for liquidity purposes.  The raison d’être of the entire financial regulatory system is to ensure that there is not a liquidity problem.  Ever. From risk management, through to all the capital and liquidity ratio hurdles banks are meant to maintain.  

And there is another issue.  Bloomberg has battled with the Fed Reserve to obtain full disclosure on how much that central bank used to liquefy its banking system (including off-shore banks – European).  During 2007-2009 crisis, at its peak it lent a total of US$1.5 trillion to 407 banks.  That is an average of US$3.7b per bank.  Although the calculations are more complex than this simple averaging and the full article should be read.

The ECB’s offer is for unlimited funding up to a maximum of 3 years maturity.  And on the day it commenced it gave 523 banks a total of US$640 billion.  Or a simple average of US$1.2 billion each.  Not a lot frankly, but its scale as in the number of banks who tapped the borrowing is frightening.   

But the bad news is this.  Despite bailing out the banks, and the mini boom (or dead cat bounce as it is called) the Fed’s response did not save the economy.  It went on to use Quantitative Easing – dancing up and down the yield curve on a further two occasions during 2010 and 2011; and still people are only talking of a green shoot economic recovery.  Hardly encouraging for Europe. 

What is most extraordinary about the Euro bailout though is that it did not happen before it reached the critical stage.  I mean, it is not as though they were re-inventing the wheel.  It has been done recently, by the Fed Reserve.  That is in recent memory exactly the same bailouts occurred.  In fact, the solution is so obvious in banking terms, it beggars belief.  

Bumper corn crop equals more overweight

The blog I wrote on peak food looked at a number of issues, and suggested that maybe we had reached peak food some time ago.  This was based on a billion people hungry, and more on the way.  

Have you watched the movie Food Inc?  One of the issues about which I learnt in the movie is the overwhelming number of cattle feed lots that produce the meat for America.  A vast majority of them use corn as the main feed.  The biological structure of cows is not intended to be fed grains, and especially corn, which is high in sugars.  E-Coli has been linked to these feed lot animals as a direct consequence.

Cattle are intended to forage in grassland, or grazing lands.  That is how their bodies have evolved.  

There are other problems such as corn fed to the cattle may have chemical residue from production.  Or who can forget the widespread BSE [mad cows disease] from other non forage feed.  Ruminants (that is, cows or cattle) are less likely to experience digestive problems (e.g. acidosis and enterotoxemia) if they are consuming high forage diets rather than grains.

Rumen acidosis is also called grain poisoning, and can cause death or at least as a subclinical condition causing lost productivity [growth of meat for sale to you the consumer] and unhealthy cattle.  Enterotoxemia in cattle is also known as pulpy kidney, and occurs with excessive grain and insufficient forage.  The flow of food through the intestine [eq.] slows down or the bacteria living in the intestine multiplies and produces more toxins than the animals antibodies can cope with.  The outcome of this awful problem is often death with 24 hours.

Of course, for both these problems, there is a preventative measure:  vaccinations.  As it says in Food Inc, I recall [from many years ago]:  first we create the problems by feeding ruminant animals the wrong food, then rather than going back to the correct food for their biological structure, we invest in ever more ways to prevent the problems created by us in the first place.  This then, again, leads to more problems. 

As this United States Department of Agriculture reports, the cow cannot directly utilise most feed components, even simple sugars.  It relies on rumen microbes to convert feed.  And each cow has its own population of rumen bacteria. Good old trusty Wikipedia gives a good and detailed description of the process here.

Some feed lots “finish” the cattle on corn.  Actually it is not uncommon for many animals to be fed grains for fattening purposes.  Or during severe droughts, when there is no other fodder available. However, one of the consequences is that there is marbling of the fat throughout the beast.  This, it  is suggested, makes for a better tasting steak, for example, as the fat softens and moistens the meat during cooking.

It also adds unnecessary fat to the diet, a diet that the First Lady is trying to change. As the Food Inc story unfolds it makes clear that one in two Hispanics will have diabetes within a few decades, and one in three caucasian Amercians, from poor diets.  Lean meat, without the fat marbling,  is far superior in terms of protein benefits and health.

But it is difficult to argue against the meat industry, as Oprah Winfrey will tell you.  Is America the only country in the world where a company / association can sue for defamation?  

Just as we keep drilling and mining unsustainable sources of fossil fuel, so we are seeking and producing unsustainable sources of protein.  Unsustainable at both ends of the value chain, at production and at the consumption end.

Bloomberg is not the only news outlet that I read, but it is often interesting.  This article on a record corn crop to feed cows, reminded me of the problems we have and the links between food, water, oil, and carbon.  That record corn crop would be better placed being used for ethanol to replace oil.  Let the cows roam free and improve everybody’s health. 

The Elite’s Thoughtful and Erudite Response To Occupy

Well the elite in the USA have kindly responded with some well researched and thoughtful rebuffs to the issues of Occupy Wall Street in a Bloomberg article.  Mainly being about the enormous wealth disparity between the have’s and the have nots, the latter being the 99%ers.  So lets run through it.

Jamie Dimon, CEO JP Morgan Chase, says “Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it,” is at least honest.  He clearly doesn’t get it.

Bernard Marcus, co-founder of Home Depot Inc, says “Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”  Again, another honest statement.  He doesn’t give a stuff, about the 99%ers, of which thousands upon thousands would be his own staff. This is clear in the company’s Chairman’s statement for fiscal 2010, where the staff are not mentioned once.  Not even a thankyou for the first year of profit growth in 4 years.

Stembourg (BB&T Corp) and Allison (Winston-Salem) said the new S.953 (b) of the Dodd-Frank Act – disclose ratio between CEO and employee median salary – said this was wasteful and also insane.  The first is false, as any management data is always useful,  and the second is clearly based on extensive research.  I wish he would publish it. 

Then there is Schwarzman (Blackstone Group) who says that “attacking the banking system is a mistake because it contributes to a healthier economy”. Err, I think that is clearly overwhelmingly false.  We have been in the middle of a global banking crisis for four years.

But my favourite is Golisano (Paychex Inc, and billionaire) who is going to “vomit” if he hears a pollie say “paying your fair share” one more time.  I don’t know why this was in the article, because clearly the poor chap has a medical condition.  After all I have listened to all their crap for decades and it doesn’t make me vomit.

Then another referred to the elite as job creators; err, no.  Consumers are and they are the 99%.

Last but not least there is Cooperman (Omega Advisors and ex Goldmans), who says “capitalists “are not the scourge that they are too often made out to be” and the wealthy aren’t “a monolithic, selfish and unfeeling lot,” Cooperman wrote. They make products that “fill store shelves at Christmas” and provide health care to millions.”

Truth antenna?  Partly true, clearly false, wrong point – see comment on consumers above, and finally absolutely true.  They do provide health care to millions – the 1% elite.  It is the 99%ers that Obama was trying to include in health care that got the elite all riled up earlier this year.

Honestly if this is the best they can do makes you wonder how they got where they did in the first place.

Thanks to Bloomberg:  http://www.bloomberg.com

Don't Publsh This Post

Don't Publsh This Post.  Don't Publsh This Post.  Don't Publsh This Post. Awwww, here goes!!

Staying at yet another place in the world, this time in the Southern Hemisphere.  So it is late Spring.  As opposed to the late Autumn I have been experiencing in the UK.

What's that regular noise, I ask.  "Oh that is the frog that moved into the library a few months ago."

Whenever there is a ray of light, this frog every 23 or 30 seconds lets out a little croak.  Hello!!  I am sexy!! Come meet me and mate. I'll be a good provider!!  Or whatever it is frogs say to each other.

It is now four days for me, and really the pathos is horrible.  I want to take this little frog and talk to him / her and say, "could you please just leave the library, could you please go outside and enjoy the open air and meet your mate. You are not going to meet any mate in here".

What are the odds another frog will venture into the library in this huge house?  What to do?  Move it outside.  But I cannot find it.  And then I realise I am probably losing my mind.

Then I know I am losing my mind because I start to think maybe this frog is just doing an Occupy Library; imitating humans.  Sick of you stuffing our environment, so I am coming in to Occupy yours, you elite!!  Okay, now I have totally lost it.

But his / her day is extended because the lights are on in the evening.  And it starts at 4.30am, first glorious nearly summer light.

That is, about 20 hours per day for the last three months each and every day. 

And I think investment bankers have it tough.  Good luck buddy.

Californian Refiners and Mammon

It is going to be interesting to watch the writhing and squirming over the next few decades, as companies and countries lobby fiercely to avoid the reduction in the use of fossil fuels.

As it starts to dawn on them that the carbon assets on their balance sheets aren’t assets at all, but weapons of mass destruction.  They are in fact great big fat losses.  In this blog, we referred to oil shale and how its extraction uses more carbon than it does to burn it.

And in this blog, about how we cannot burn all the known fossil fuel reserves that we have anyway, as that will take us past a 2^oC tipping point and we will all die from the effects of climate change.

And yet the fossil fuel companies (oil, gas, coal) continue to spend tens of billions every year researching and attempting to extract ever more untenable sources of fossil fuel.

One of my favourites a few months ago was the announcement of BP and its partners [remember Mexico?] about a GBP10 billion investment in the UK North Sea.  On the day it was announced in the newspaper, a cartoon was published with a pair of seagulls on the edge of a cliff looking out over the North Sea at an oil rig and ordering futures in detergent.  BP reports it is its biggest investment ever.

I mean, how dumb are its shareholders?  This oil cannot be burnt according to Carbon Tracker. So that would be GBP10 billion for what?  Money that could have been returned to shareholders so that they can financially prepare for the new carbon burning reductions.

And today a Bloomberg report reveals that the Californian government has passed rules discouraging the states [oil] refiners from processing types of crude that produce high levels of carbon during production, such as those pesky oil sands in Canada.  Already banned in Europe.

And I am delighted to inform you that the Californian Air Resources Board spokesman refers to it as “stuff”.  

The refiners complain, calling the rules anti competitive, writhing and squirming, lobbying and lying, and generally trying to overturn the rules.  We lost our moral compass to mammon years ago, but even I am embarrassed for them.  

Love those good news bad news days

Methane, hey!  Just can’t pin it down.  After writing about the horrors of nature unleashing her methane plumes in Alaska and the Siberian Ice Shelf, a flurry of new information has become available. 

Recently I have been focussing on the substantial fossil reserves shown as assets on the balance sheets of both listed and private companies.  Carbon Tracker estimates in its report Unburnable Carbon, that 80% of this is impaired.  This is because, only 20% of those reserves may be used before the carbon in the atmosphere tips us into catastrophic weather patterns. Therefore, these reserves should not be considered assets at all and should be written off the balance sheet.

Then news in The Independent suggested that the amount of methane in the Arctic and Siberian Ice Shelf was being released at a much greater rate than previously thought, as the ice melts faster than ever.  Methane of course as a carbon equivalent of ~25 times carbon.  It is ugly stuff.

Now we have the counter argument.  Although I don’t really see it as a counter argument, because it seems to me we are all in agreement about the methane, it just seems to be about the quantity and timeframe.  

So that’s the good news.  The New York Times reports that although methane releases may be quickening, it won’t occur for some time.  And it directs you to a website that then discusses a research publication by Igor Dmitrenko of the Leibniz Institute of Marine Sciences in Kiel, Germany, who says it won’t be a problem till the end of this millennium or the next.  

The bad news is there is a lot more methane / carbon than the calculations in my blog on methane, where it was ascertained that 40 – 72 GtCH₄  (that’s methane) was trapped there.  Equivalent to the entire carbon reserves allowed to be used before the proverbial 2 degrees centigrade tipping point.  In the NYT article however it reports that the amount of carbon in this permafrost contains about 2.5 times the amount of carbon in the entire atmosphere.  They refer to the Arctic et al methane emissions as one of the biggest wild cards in climate science.  And the Tundra is burning!!

Now I don’t know how you feel about this debate; it is not happening as fast as thought, and it is twice the existing carbon in the atmosphere and a wild card.  But I know how I do.  Can we please just stop arguing about the timing and do something about the problem!!

Based on what I have read so far, should this methane be released, even an itty bitty bit, you can bet your life that you won’t have one.  

Oh, and it is still bad news for fossil fuel companies and their impaired balance sheets. Nature is now your competitor and she ain’t for negotiating on cutting her emissions and reserves.

SELL argument stronger on methane news

Carbon derived from fossil fuels is a major portion of the total global greenhouse gas (GHG) effect causing our climate problems.  In my prior blog Peak Carbon, we looked at what gases exist, and included the concerns about the melting Arctic. 

One of the worst GHG gases is methane.  Produced by animals and also from deep wells beneath the sea, for example.  And there was very bad news today, exclusive to Steve Connor of The Independent.

Dramatic and unprecedented plumes of methane – a greenhouse gas 20 times more potent than carbon dioxide – have been seen bubbling to the surface of the Arctic Ocean by scientists undertaking an extensive survey of the region.

The scale and volume of the methane release has astonished the head of the Russian research team who has been surveying the seabed of the East Siberian Arctic Shelf off northern Russia for nearly 20 years.

In an exclusive interview with The Independent, Igor Semiletov, of the Far Eastern branch of the Russian Academy of Sciences, said that he has never before witnessed the scale and force of the methane being released from beneath the Arctic seabed.

"Earlier we found torch-like structures like this but they were only tens of metres in diameter. This is the first time that we've found continuous, powerful and impressive seeping structures, more than 1,000 metres in diameter. It's amazing," Dr Semiletov said. "I was most impressed by the sheer scale and high density of the plumes. Over a relatively small area we found more than 100, but over a wider area there should be thousands of them."

As far as I can assess this, it means that the negative pressure on the balance sheets of our listed fossil fuel companies (coal, gas and fuel) just became far worse. 

As reported in the Independent,  "We carried out checks at about 115 stationary points and discovered methane fields of a fantastic scale – I think on a scale not seen before. Some plumes were a kilometre or more wide and the emissions went directly into the atmosphere – the concentration was a hundred times higher than normal."

Although The Independent suggests that the damage to the environment from methane is 20 times the equivalent of carbon emissions (usually referred to as (GtCO₂eq)), elsewhere it is widely referred to as 25 GtCO₂eq. The equivalent measure enables us to consider apples with oranges so to speak, so that we can consider the global warming potential (aka GWP) of a particular GHG such as methane to the effects of carbon.

With this conversion factor of methane (CH₄), we can then return to the excellent work of the Climate Tracker report which I covered in this blog, explaining why all our fossil fuel companies should be on a SELL.

Based on a 25 GtCO₂eq for methane, and the Carbon Tracker report I calculate -

·         111 GtCH₄ methane equals 2,795 GtCO₂ all known reserves of fossil fuel

·         70 GtCH₄ methane equals 575 GtCO₂, the known amount of carbon left to be burnt before we pass the agreed 2^oC tipping point of catastrophic climate events. 

Now there is a fair bit of research that suggests that there is about 45 to 50 GtCH₄ (methane) in the Arctic and East Siberian Arctic Ice shelf. However there is other commentary that suggests that it is more than all known reserves of coal.  Again, according to Carbon Tracker's report, coal is 65% of all know reserves.

So we can do some cross referencing to get a reasonably robust adjusted figure for the amount of methane in the Arctic and Siberian Ice Shelf.  The greater than coal reserves suggests that there is 72 GtCH_4.

So where are we?  It is either 45, 50 or 72 GtCH_4, which is the equivalent of nearly all available carbon from fossil fuels before we hit catastrophic weather events.  That is, as Carbon Tracker says, before we hit the Unburnable Carbon threshold.

What is interesting about this argument, if there is one because so far my research suggests the argument is all one way, is that – Governments and listed Companies who own and sell the present fossil fuels, no matter what they do, nature can do its worst, possibly bigger and better, with methane.

I can see a day, when shareholders in listed companies that own their reserves (still on the balance sheets as unimpaired assets) will be fighting with governments (think sovereign, eg the middle east oil reserves on their balance sheets) about who has to write off their assets first.  And in the meantime, the melt in the Arctic wipes us all out anyway whilst Rome burns.

So that it is clear.  The methane is starting to gush from the melting Arctic. There is enough methane in the Arctic / Siberian Ice Shelf to equal the remaining limit of fossil fuels we can use before we hit a catastrophic limits on warming. 

This adds considerably more weight to the argument for impaired assets, as the Carbon Tracker report suggests.

To end on a different but related note.  As I was thinking about this issue, I was sitting in a sunny but cold park in London watching two gentlemen mowing the lawn on XX stroke fuel.  And I was thinking soon we will have to return to the times that the commons kept their grass down with sheep agistment.  And then I got thinking about the methane that sheep emit, and indeed would their methane GtCO₂eq be greater or less than the carbon from a lawnmower burning fuel. 

And then this brought me back to another blog, Peak Food, which showed that the aspiring and new middle classes in emerging nations are shifting their dietary wants to meat as opposed to grains, and this demand was placing increasing demand on the production of beef et al, all of whom produce methane. 

Still a SELL I am afraid.

Dubious branding

Strolling around Edinburgh in the latest gale force winds last Thursday, the streets still seemed packed with shoppers.  Some of them being knocked to the ground with the force of the winds.  You cannot help noticing that climate change is here.

Passing the large John Lewis store I notice on its window what appears to be its present slogan.

Never knowingly undersold
on quality - on price - on service

I do a double take.  Surely the converse of that is, Always Knowingly Oversold on Quality, On Price, On Service; and for the first to be true the second converse one must be as well. Not a slogan I would choose.

The other ubiquitious sign is:

No Smoking Permitted

Which of course means smoking and non smoking are both permitted.

And approaching the elevators, the sign:

In Case of Fire, Do Not Enter Lifts

Which to me appears to mean, do not take the lift in the event that there is a fire whilst you are in it.

There must be a thousand others, of small daily abuses of our sign language. Know any?

The carbon investment conundrum. SELL

At last, a deal at the UN Framework Convention on Climate Change (COP17).  More than 190 countries accepted the "Durban Platform for Enhanced Action" that commits all of them to cut carbon for the first time through a legal treaty. Including the world’s three biggest emitters: USA, China and India. Although not universally loved, it is now all nations on board.  However, it is an agreement to reach an agreement.  Further, it delays real action.    Time which my prior blogs suggest that we do not have.

In substance this is how the Guardian is reporting it…

“……..that would deliver a global, overarching legal agreement to cut emissions…………. more or less agreed on a series of measures aimed at protecting forests, widening global markets and establishing by 2020 a $100bn fund to help poorer countries move to a green economy and cope with the effects of climate change………. The treaty will be negotiated by 2015 and coming into force from 2020. The deal also paves the way for action to address the "emissions gap" between the voluntary emissions cuts countries have already pledged and the reductions experts say are needed to effectively tackle climate change”

However, from where we are today, it would take about 100 years for carbon dioxide (CO₂) to disappear [to sustainable levels] from the atmosphere if emissions stopped completely.  I do hail the fact that something is being done and there is renewed impetus.

Quoting Tessa Tennant on the UN outcome, co founder of the Carbon Disclosure Project, “It is great to see all countries back on track in recognising the material implications of carbon”.

And the first task of this new impetus should be to establish a global taskforce to examine the massive reserves of oil, gas, and coal on our listed and unlisted companies.  It should be an imperative that this is the single most important issue.

Quoting the CarbonTracker report, Unburnable Carbon, in my earlier blog I wrote…..

They report that the global carbon budget for 2000-2050 is 886 GtCO₂.  In the first decade alone we have used 321 GtCO₂ already, or 36%.  This allows only 141 GtCO₂ for each of the next four decades. That is a big drop from 321 GtCO₂. 

They then report that all known fossil fuel reserves are 2,795 GtCO₂ (65% coal, oil 22% and gas 13% - in both listed and non-listed companies). Three times the aforementioned carbon budget.  And for Directors and Officers, this becomes even more alarming (especially to an ex global equity analyst) when the top 100 listed coal, oil and gas companies are reported to have reserves on their balance sheet of ~745 GtCO2. They go on to say “if the 2C degree target is rigorously applied [on a blended basis across both listed and private companies], then up to 80% of declared reserves owned by these companies …..are subject to impairment.” Thank goodness I am not the auditor or Director and Officer signing off on those balance sheets as true and fair. This report makes clear the systemic risk from not understanding more about Directors and Officers near term risks.

To re-iterate that point.  Of the listed companies today, with oil, gas and coal reserves [assets] on their balance sheet – and off – 80% must be written off.  You know, like when a bank makes a massive loss due to write-offs of their assets.  With respect to (carbon) fossil reserves, think Anglo American, BHP Billiton, Xstrata, Rio Tinto, Exxon Mobil.  Frankly their share prices are all doomed.

 

Is your fund manager investing in these companies with your lifetime savings?

 

The report suggests that it requires “unprecedented intervention” to co-ordinate how these global companies manage these reserves; however it also provides the blueprint within its recommendations for action.  To me this suggests only the UN Environmental Commission has the resources and global reach to effect change.

The work has been done by Carbon Tracker, so let’s act.

However, the outstanding issue for me is that credit [debt] and equity analysts around the world have not picked up on this.  Where are they?

Why have they not got a "sell" on every bond and share issued by these companies when we know with a high probability that they will suffer severe impairment of their assets?

Why are the Directors and Officer not writing off their reserve assets as unusable?  Under existing regulations they are required to do so by law.  Maybe they are relying on the now obvious delays incurred with the global call to action on carbon.  However that has changed overnight, and you cannot walk around any country without the populace knowing that climate change is occurring from their own experience.

Why would anyone want to invest in companies whose assets are highly likely to be impaired, and whose product is also killing their children and grandchildren.

It is a conundrum!

IMPORTANT DISCLOSURE:  This blog is not licensed to given investment advice.  You should not rely on anything published in this blog.  If this blog sparks an interest, then you should seek advice from a licensed investment advisor.

President Obama backs the “trickle up” economic theory

Well I did not think my new economic theory would win such international renown in such a short space of time.  I wrote about the economic theory of the trickle down effect from tax breaks for the rich, and how it had without doubt failed completely as an economic policy.

I recommended that the USA adopt  my theory, which has been proven to work in boosting economic prosperity.  I termed it the Trickle Up effect. 

Obama, reaching back to Roosevelt, has come out in favour of removing the squeeze on the middle class, and taxing the rich.  Two days after my blog posting, maybe he is reading my blog, huh!

As the Guardian reported

“… Obama's broader message was a sweeping call for the working class to get a "fair shot" and a "fair share" as he pushed for wealthier Americans to pay higher taxes and demanded that big corporate interests play by the rules.

"This is the defining issue of our time. This is a make-or-break moment for the middle class," Obama told a cheering crowd in a high school gymnasium in Osawatomie, Kansas.

"At stake is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home and secure their retirement."

This is an important point, the financial and fiscal support for the middle class and lower earners.  It is they that make an economy work efficiently.  It is they that create jobs.  Companies don’t, rich people don’t, spenders do.  As I discussed in this blog.

It is not brain surgery.  You give the relief to that part of the demography that is most likely to spend it, thus encouraging growth in the economy, which drives more jobs for the un / underemployed, who because they too are in the lower income demographic will spend all their earnings as well. The rich [elites] benefit because the tide is rising for all.  It is a very simple cycle. 

And it works.

Directors & Officers, Bloomberg has arrived!!

It was several years ago now, I can’t even remember if it was pre or post GFC.  Maybe 2008.

On the front page of the Wall Street Journal, reporting about the lack of liquidity in the markets, it quoted a prominent investment banker as saying “all the brains are in Wall Street, and all the money is in China”. 

Overlooking the complete disgust in this racism, and narcissism, and ignorance, it was a fascinating comment for many reasons.  But the main one was the complete ignorance of this prominent investment banker representing his entire professional community on Wall Street about a country that is now a critical global player. 

I felt the shame he failed to recognise. 

I had just spent many years as a global equity analyst covering China (amongst others of course).  One report in particular that I wrote, in January 2000:  China:  From Command to Demand, China’s Century  was about China’s financial services sector.  It proved very popular I recall, as there had been little written to that date.  Most data was in Mandarin and my trusty team helped me translate and analyse it. A decade later so far so good; the Chinese banks are now listed and the largest in the world and the insurance companies are up there also.

My clients were the top 200 investors internationally; which included of course the largest fund managers in the United States.  So I was fortunate in meeting some very smart people.

But it also included a long period with the heads of some of the China’s largest financial institutions, doing due diligence, writing reports, and as a team leader on large scale transactions. In so doing I met some of the smartest people that I had met anywhere.  Including Wall Street.

Of course Wall Street is listening now, as China continues to exercise its significant strategic skills.

Why I am telling this story, is to illustrate the enormous gap in knowledge that can occur between “Wall Street” and a particular current and relevant subject.  A subject that is vitally important, as China was at the time [as an emerging power] but completely ignored by investment bankers.  And Bloomberg for that matter.

The same applies to the subject I have covered in the series of blogs on Directors and Officer and Peak Everything, about climate change.  I mentioned in this blog,  that Bloomberg was now gathering, analysing and reporting data from companies with respect to Sustainability. 

That information is likely to only be available on its Professional service on a screen that sits about three feet from every fund manager and investment banker around the world.

I now note that Sustainability is on the front page of Bloombergs Public website, with a big heading “New” [sans the analysis, which you have to pay for].    Can’t miss it.  By gathering the data from companies, and in the face of disparate reporting, it will be exposing those companies that are not reporting sufficient information, and those not reporting at all.  That’ll get the companies moving, and over time there will be convergence in standards and compliance which is critical for relative analysis.

[As an aside for those not in the "know".  Bloomberg offers a Professional service with almost unlimited analytical data and comparability for about US$5,000 per month per screen.  However you can view its 'free' website without those facilities on the net.]

This is of course magnificent news.  And I see two clear outcomes.  First, despite the best will of the organisation I covered in this blog to standardise reporting on climate change issues, Bloomberg’s data collection, analysis and reporting will, I am suggesting, have the greatest impact. 

Second, the reputed lack of fund manager interest and the ignorance in Wall Street, will disappear.  As the desk jockeys in the investment banks and fund managers around the world sit on their hands during this liquidity crisis, what better way to fill the time than to open up the new Bloomberg Sustainability site and have a look around.  A bit of analysis here, and bit of analysis there, and before you know it they will have invented a climate change CDO Swap product that will turn everybody into Sustainability experts.  Maybe even Moodys and S&P will rate it. 

Bloomberg setting up this site may well be one of the most critical tipping points in Sustainability.