Your author was fortunate enough to attend an excellent event last night. The Bavarian Permanant Representation In Brussels played host to WWF and ‘Make Space For Nature’ in this the International Year of Biodiversity.
The event had an excellent array of speakers. Hosted by HRH Princess Laurentien of the Netherlands were European Commissioner for the Environment Janez Potočnik, Jo Leinen MEP, Pavan Sukhdev and others.
The TEEB project offers a fascinating insight into the “value” of nature and biodiversity. Needless to say, we humans have ignored or not even considered the economic value of the world around us. As Mr Sukhdev says, we make economic decisions with much relevant information missing. In short, without considering the full cost over a cycle of our actions, we make poor decisions.
This means that while in the short-term, we may make rational decisions (to fish in a certain area, fell trees, farm one crop ahead of another, etc) based on which action brings a greater economic value, the long-term impact may mean that we are making a poor decision. For example, over fishing generally means that fish stocks reduce, thus generating smaller and smaller catches in the future.
The event made me think a little about what a huge decision making fault this clearly is of human-kind. Any sort of understanding of the financial crisis in 2008 shows just how rational short-term decisions can lead to unintended (or ignored) long-term consequences.
By lending money now to people with no jobs and / or income, a large commission can be generated. Woohoo!! We all love large commissions!! But by doing this, we cause financial pain for the borrowers, add risk to the mortgage book, slightly weaken the overall state of the national economy and (via slicing and dicing) manage to weaken investment funds and pension portfolios around the world. Each decision in the chain was rational with a short or medium perspective, but clearly questionable over the long-term.
But hey, we love that commission payment!
And so it seems that we do exactly the same when it comes to our use of the environment. Lets be honest, we knew that anyway, we just had not had it quantified before. Every time a car engine is switched on, or a tree is felled, or, or, or, we cause a tiny little bit of damage. This damage has no immediate economic cost to us, so we ignore it. Hey, it was free!
But with climate change becoming a very serious issue for many tens and hundreds of millions of people right now, that economic cost is becoming more visible and relevant by the day.
Can you give more thought to the full cost of decisions in the future? It is difficult, but we all need to try.
This is a pretty tricky time to work for a Central Bank, don’t you think? You spend years in the background, the national and international economy chugs along, and people forget you exist.
Perhaps once a month, when it is time to set interest rates, people remember faintly who you are and what you do. But things are so good that don’t even need to change interest rates for months at a time.
Life is good.
Then things go wrong. Your knowledge needs to be used to fix an economy. You need to prevent a recession. There aren’t many of you and yet you are there to hold back the tide of the global economy. Suddenly, you have the weight of the world on your shoulders and your ideas need to work. They were only theoretical before…
Now you need to try and explain words like ‘Quantitative easing’ to a sceptical public. Uh-oh. Trying to tell the world that fixing an economy with too much borrowed money by borrowing a much larger amount can’t be easy. It is like a pilot telling air passengers that this turbulence is normal. You hope, you want to believe, but you are still scared by it.
That Greenspan fella had it right. Get to the top. Stay there. Watch the bull market run and run. The world loves you. Then, see the problems coming on the horizon and retire quick!
Jumping in to rescue a bank is one thing, but a country? And the stakes are high! This isn’t about saving Greece. I doubt there are many European Finance Ministers that give a fig about the Greek economy. Their main interest will be in a nice summer holiday in Crete, not salvaging a nation. They have their own problems to ponder upon. No, instead, they are worried about the potential for the euro to become unstitched and the impact that will have on their own position.
Then there is Portugal, Ireland and Spain. Then Britain! Fixing this little lot won’t be easy. Can we all rely on the German economy? We don’t need a Central Banker, we need Superman!
Will the euro survive this? Or will other weak economies (the UK?) be forced to join for safety in numbers?
The UK, under the stewardship of New Labour has seen a massive increase in public sector employment. I can recall watching BBC documentaries in recent years where the scale of this expansion has been explained. It isn’t small.
It seems that the biggest beneficiary has been Scotland. I’m not going to go along with the conspiracy theorists that charge two Scottish Chancellors of the Exchequor of expanding their financial pie to secure votes at election time. But it is easy to see why such theories exist.
It is clear that the policy works however.
Your author has been to Scotland about 10 times, with another trip due this summer, and the transformation is clear. Glasgow is now a great place to visit with lots going on, great shopping, bars and clubs and a modern and cosmopolitan feel. Contrast that with the Glasgow of the 1980s! Finding links from the 80s isn’t easy, so instead I offer this link and picture as my poor attempt at proof. Needless to say, the Glasgow of the mid 1980s was a very barren place.
The Scottish economy isn’t the most well diversified on earth. At least not to the poorly informed naked-eye of a tourist like me. Now that North Sea Oil is slowing down, tourism and agriculture appear to be the mainstays. Well, that isn’t quite true or fair. Edinburgh has a financial services industry of some note. And Glasgow now has a number of call centres for nationwide UK companies.
But somehow, somewhere - and it seems reasonable to presume that the NHS and education are the locations - taxpayers money is really being spent. This post from the SNP in December is trying to highlight just how badly impacted Scotland would be if the Conservative spending cuts were implemented.
But the recent news ( here on the BBC ) suggests that there will be significant cuts in public sector positions in 2010. With public debts rising out of control, changes are inevitable - so inevitable that even President Sarkozy is having to discuss pension reform with the unions! - but the outcome of the changes may be felt much more in some places than in others, making this recession much deeper in these areas.
My fingers are crossed that Scotland fares well. But I fear that my finger crossing may not be enough.
This morning I spotted a story on the BBC website about jobless statistics in the United States. You might recall that unemployment in the US hit 10% a few months ago.
Well the story explains a little of the real numbers. As we must all have - at a minimum - suspected by now, governments have a habit of reporting nmumbers in the best possible light. With inflation we have RPI, RPIX, ‘Core’ rates and more. Over time, the subtle changes in methods of calculations make these numbers meaningless to most of us. This post by Greg Hunter suggests that US inflation - if calculated using the same method as in 1980, it wouldn’t be 2.7% but 9.7%.
Well it is the same with US jobless numbers. As you will see from the story, and from Greg Hunter’s post, the real number is likely to be much higher. The BBC thinks more like 17%, while Hunter (via shadowstats.com) thinks 21.9%.
(It is worth pointing out that while some statistics may change in the level of their importance, when they were first invented, it was with a reason. That reason was to measure something. It seems reasonable to presume that they were invented to measure that thing as accurately as possible. Therefore, most changes probably reduce the ability of the numbers to measure accurately. So when something is compared to the (for example) 1980 method, that method is probably a much purer reflection of the underlying number. End of rant.)
There are two factors that make such statistics really meaningful. Firstly, we all know just how important the US economy is to the global economy. The longer and deeper this recession lasts for America, the longer and deeper it will be for all of us. This will not be easy to shift.
Secondly, there are many developed nations that ‘massage’ their economic statistics like this. If I happened to speak several languages and read several different nations major newspapers each day, I could probably quote similar situations in many European nations. But I don’t so I can’t. But there have certainly been changes to the way numbers are calculated in the UK.
How we - and I include government - are meant to deal with the debts of the world and this economic crisis if we don’t really understand how bad the problem is, I have no idea. Confronting the problem is the first step in dealing with it. But still, around 2 years in, we are unable to see the real numbers. It seems that we are still hiding behind lies and statistics.
The first major shot in what will probably become a global political war to reduce deficits has been fired. President Obama has announced a new budget which contains cuts to many areas. While the obviousness of reducing debt levels is hard to deny, personal and corporate interest will create mass cries of ‘not this’ to many of the proposed reductions.
The fact that President Bush’s proposals to get NASA really moving again are for the chop is being criticised, for example. It is hard to deny that no further space flight can be seen as a disappointment. But really, when you are forecast to owe US$1.56 trillion, do you really need to send Man back to the Moon? Aren’t there more important things to do with the money?
To make this seem a little more real, an example would be a family on the verge of bankruptcy, with a massive mortgage and other unsustainable debts. The husband has just been asked to take a pay cut by his employer and to celebrate, he bought a Porsche!
If your neighbour were in such a situation, you would - rightly - blame them for their financial demise. When they ought to be switching off the cable channels and looking for additional part-time work, they are spending big money on an unaffordable luxury.
Is it really so much different on a national level?
But this is the easy end of the scale. With such high national debts, there will be many more important projects that will need to be cut. In time, a couple of years perhaps, there will be medical projects, childcare, road safety and much more that will be dumped to stave off national bankruptcy. This will be happening in many Western democracies.
And in those same democracies, there will be political argument after political argument.
Of course, this will all be very tough for private investment. When state plans change, so will personal circumstances - possibly removing vital capital from stock markets - leading to knock on effects in areas I dare not try to forsee.
This is - to my mind - the real start of the hang-over after the party. So far, we have simply been getting home to bed. But the spiral down of reduced spending from governments, causing reduced spending from corporations and the public, leading to further reduced spending from all three will take a long time to balance. Just as the party was pushed upwards by ever increasing public sector spending - based in large part on borrowing - the recession will be exacerbated by it.
Hold on to your hats…
No, sorry. I didn’t make it to Davos 2010 - I wish. After Copenhagen, this would have been an event too far…
In a blog post from Davos, the Beeb’s Robert Peston discusses the thoughts of some of the world’s top bankers about the state of things now.
I’d like to bring your attention to points 1 and 2. “prospects are particularly poor for the heavily indebted economies of the west” and “a meaningful risk of sovereign debt crises in economies with large and rising deficits“.
Why do I do this?
Because I am mean and like to write depressing things? Because I like poking fun at politicians and their lies? Because I like to delude myself that I understand economics?
Well, yes, all of those. Of course!
But this blog is aimed and written for investors. To be an investor - especially a successful one - requires a mindset that is realistic and sees the world as it most likely is.
Making poor judgements about economic conditions or business and market reality will most likely lead to buying the wrong asset or company and - sooner or later - losing money.
Therefore, we need to see the reality. And the reality is that more and more of the people that really ought to know, are starting to say that this will be a very long recession.
It is almost a year ago that I was involved in interviewing Paul Krugman where he called it ‘The Mother of all Recessions’. Despite being a Nobel Prize winning economist, the tide was against him - as he has published a book about depressions (a clear bias). But now the world is agreeing more and more with him.
In between then and now, just about every politician in the world has seen ‘green shoots of recovery’, ‘an end in sight’ and all sorts of other hopeful things. They can’t really say much else, of course. But as an investor, it is our job to see through the smoke and past the mirrors to get to the underlying reality.
What is that underlying reality?
It seems clear - at least to this amateur economist - that real GDP growth in major economies will be hard to find and that this recession will last and last. It also seems clear that we as investors need to think very deeply about how to best manage our finances. In a world where either inflation or deflation takes hold, the correct decisions will make or break family finances.
The low interest rate ‘stimulus’ environment ought to have a finite lifespan and has probably built something of a bubble in stock markets. When cash on deposit earns less than 1% pa gross, why keep money in the bank? When governments are borrowing like a drunken Admiral, why buy or hold bonds? That, in combination with quantitative easing (I suspect) has pushed money into global markets when the majority ought to be selling.
We all need to be thinking deeply and clearly about our financial positions right now.
Back at the end of July 2009, your author wrote a post titled: ” 2016: The End Of This Recession? “. At the time I felt a little bonkers, it was the out-loud musings of an amateur economist and nothing more. But the tide of economic thought seems to be moving in this direction…
In The Economist this week (16th January 2010 - Economics Focus | Digging out of debt) is analysis and opinion of the analysis and opinions of another. The other in this case is a report about debt and global deleveraging by the McKinsey Global Institute. No lightweights here then.
Both report and article are worth the read if you have any interest in the medium-term economic future of the world.
As The Economist notes, there are only three ways to reduce the debt levels of us all (government, corporations and individuals) to a sensible level. They are default, inflation and a prolonged period of belt-tightening.
As you might imagine, both report and article focus on prolonged belt-tightening as the preferred route out of debt. It is fair to say that the prospect of countries such as Spain, Britain, the US, South Korea and Canada choosing default - and the consequences for us all thereafter - is not an appealing one. However, the elected officials of the day may well choose inflation as their preferred escape hatch. While this is obviously unappealing to economists and the general public, it may prove to be popular with government officials. Regrettably.
When looking at past examples of deleveraging, The Economist tells us that, “Typically deleveraging began about two years after the beginning of the financial crisis and lasted for six to seven years. In almost every case output shrank for the first two or three years of the process.”
It continues, “big increases in public debt, while cushioning demand in the short term, increase the overall debt reduction that will eventually be needed. Once private deleveraging is done, the public sector will need to cut back.” And closing with, “Investors may worry about the sustainability of public debt long before private-debt reduction is over, forcing a lot of belts to be tightened at once. The most painful bits of deleveraging could well lie ahead.”
Thus, it seems that more respected voices than mine fear that this recession could run and run.
The part of this that never ceases to amaze me, is the capacity of politicians to avoid the reality. The pronouncements about the recession being over have slowed a little to my mind in recent weeks, but that might simply be a change in focus to Christmas and climate change. Of course, the sales numbers on the high streets of the world have had their temporary December fix and so consumer spending has - at least in the very short-term - come to the rescue.
But the article seems to suggest - though not actually say - that this process of debt repayment will have the effect of dragging the recession out for more years than we are currently hoping for. Of course, the economists are saying something slightly different, “If history is a guide, many years of debt reduction are expected in specific sectors of some of the world’s largest economies, and this process will exert a significant drag on GDP growth.” which I think is the same thing…
Thus, my thoughts remain the same, if slightly enhanced. I know that recommending yourself is no recommendation at all, but I shall end this post as I ended the previous post, “What this all means is that we all ought to be managing our finances as if we may never see the good times again and that things are going to get much worse before they get any better.”
After almost two weeks in the Bella Center for the Copenhagen Climate Conference, money is still one of the main issues. The lack of financial aid for poorer countries is being addressed, but slowly and in parts.
From the perspective of an investor, there has been some interesting ideas floating around though.
A couple of days ago, your author sat in on a side event arranged by the Club de Madrid. As ever, the CdM had a number of high-profile and interesting speakers and guests, including the former President of Chile, Ricardo Lagos.
This session contained the usual smattering of former Presidents and Prime Ministers, but also included an address from Tracy Wolstencroft from Goldman Sachs.
If you want to hear interesting things about markets, listen to the guy from Goldman Sachs!
The overall message from the session was that the Copenhagen process is focusing on public money, but the sums required are so huge that hundreds of billions of dollars of private money will be required as well. It isn’t all required tomorrow, but much of it will be required in the coming three to five years or so.
Mr Wolstencroft suggests that the sums required to avert a global climate disaster are so large that they will essentially become the world’s largest ever emerging market. You hadn’t thought of it like that, had you?
Having seen a report a few months ago from the European Climate Foundation called Project Catalyst, it is reasonable to suggest that the coming ‘green’ energy gap is enormous and will take monster amounts of private investment to fill.
But this energy gap is only for energy production. The total numbers include emissions reductions and technology (known as clean tech), upgrading the insulation (for energy efficiency) of public and private buildings and the entire housing stock of the world and much more.
However, the point being made was that this investment will need to be global, simply doing this in the developed world will not be sufficient. But, for developed world investors, much of the developing world is an investment no-go area. Without vastly improved legal protection of property rights, transparency and clear governmental policy making, this is unlikely to change. This suggests that new democratic policies are required in many nations to enable the capital to flow.
As was pointed out - and every investor knows - “capital wants to find a way to invest”.
So here is the point: can you, as a private investor, find a way to invest in this emerging market, make a profit and be doing good for society and humanity?
My travel plans seem to be firming up and my sleeping space on the floor of an appartment hardening. It seems that every hotel room within about 100kms of Copenhagen is now fully booked. But my invite from the Committee of the Regions is in hand and it seems day by day to be more likely that I’ll be posting live(ish) from the centre of the world next week!
Without putting too much emphasis on this, the UN Climate Conference in Copenhagen which opened this morning has the potential to be one of the defining moments in human history.
Sounds like hyperbole to me…
Your author has a quite fortunate position in the media which allows access to all sorts of experts, politicians and events. Having spoken to some very knowledgable people about climate change, humanity is essentially doomed unless we do something quick-smart to change our ways.
You may have seen in the news stories that discuss aims to keep temperature rises to a maximum of 2 degress celcius within the next 100 years or so (the dates tend to vary). You might have also have read other experts state that we are almost certainly going to miss that target.
2 degrees does not sound like much. It probably isn’t in the grand scheme of things. Well, 4 degrees is a bit of a nightmare that has the potential to unleash all sorts of problems as sea-levels rise, methane levels rise, more species are wiped out yada yada yada. We have heard it all before…
Well the thing you don’t hear so often - and has been said to me independently by three different and very knowledgable people - is that 6 degrees of temperature increase will equal, err, umm, phew, well, probably the extinction of mankind.
In short, if we don’t try and sort this out, within about 150 - 200 years, there might not be humanity. A pretty sobering thought I think you will agree.
150 years sounds like a long way away, but it isn’t really. Why? Because the effects will be being felt a long time before then. Somewhere in the region of 1 billion people live within 1 metre of sea-level. This could wipe out the population of places like Bangladesh with storm surges every time there is poor weather. And this could be happening with 50 - 100 years - it could be argued that it is happening already.
So we all need to make changes to our lifestyles if we - or our children or grandchildren - are to have a fighting chance at life. This means less trips in the car, eating less red meat, less flights, switching to energy efficient appliances and lighting, switching things off that are not in use, recycling and much more besides. Are you up to the challenge?
As a part of my work, it now seems highly likely that I will be in Copenhagen for the last few days of the summit. These will be the Ministers Days and Leaders Days. I will be there to try and obtain as many interviews as I can for my employer with my camcorder and microphone in hand, to be added to our blog platform. I’ll do my best to blog here about it as well.
Are you up to the challenge?