CMOS | On Writing

“In English, only nouns and pronouns have case.”

“English nouns have no true gender, as that property is understood in many other languages. Most English nouns may refer to either sex.”

 “Names of companies, institutions, and similar entities are generally treated as collective nouns—and hence singular in American English, even when they are plural in form.”

“Some nouns have only a singular form, and some exist only as plurals.”

“A noun or pronoun that follows a be-verb and refers to the same thing as the subject is called a predicate nominative.”

“A noun in an objective function usually follows the verb. . . . But with an inverted construction, the object can appear elsewhere in the sentence.”

“A noun serving an objective function is never the subject of the following verb and usually does not control the number of the verb.”

“The genitive case is also called the possessive case, but possessive is a misleadingly narrow term, given the seven different functions of this case—true possession, as ordinarily understood, being only one.”

The genitive of a singular noun is formed by adding -’s {driver’s seat} {engineer’s opinion}.”

“The genitive of a plural noun that ends in -s or -es is formed by adding an apostrophe {parents’ house} {foxes’ den}.”

“The genitive of an irregular plural noun is formed by adding -’s {women’s rights} {mice’s cage}.”

The genitive of a compound noun is formed by adding the appropriate ending to the last word in the compound {parents-in-law’s message}.”

“Proper nouns and nouns denoting people or things of higher status usually take the inflected genitive {Hilda’s adventures} {the lion’s paw}. Compare the perils of Penelope with the saucer of the chef. Nouns denoting inanimate things can often readily take either the inflected form or the of-genitive {the theater’s name} {the name of the theater}.”

“The of-genitive is also useful when a double genitive is called for—using both of and a possessive form {an idea of Hill’s} {a friend of my grandfather’s}.”

“If two or more nouns share possession, the last noun takes the genitive ending. (This is called joint or group possession.) For example, Peter and Harriet’s correspondence refers to the correspondence between Peter and Harriet.”

If two or more nouns possess something separately, each noun takes its own genitive ending. For example, Peter’s and Harriet’s correspondence refers to Peter’s correspondence and also to Harriet’s correspondence, presumably with all sorts of people.”

“If a noun and a pronoun are used to express joint possession, both the noun and the pronoun must show possession. For example, Hilda and Eddie’s vacation becomes (when Eddie has already been mentioned) Hilda’s and his vacation or (if Eddie is speaking in first person) Hilda’s and my vacation.”

“Commas frame an appositive unless it is restrictive {Robert Burns, the poet, wrote many songs about women named Mary [here, poet is a nonrestrictive appositive noun]} {the poet Robert Burns wrote many songs about women named Mary [Robert Burns restricts poet by precisely identifying which poet]}.”

Credit The Chicago Manual of Style 

Musing on UK Property Investments

The UK economy is facing a period of high uncertainty. The odds of falling in a recession (in the short / medium term) are significantly higher than average in my opinion.

For an investor / saver that would like to do something with savings, real estate investments on low/zero leverage are probably a good asset class at this point. A decent alternative to cash / fixed income.

For a developer that would have to borrow money in order to finish a project, the risk is that the economy would plunge into recession before the units have been sold, increasing bankruptcy risk in proportion with the debt load assumed.

A developer would do well to reduce the risk as much as possible: selling the underlying properties at the earliest stage possible, pushing therefore the risk on to the buyers and their creditors. Developing properties that have already been sold leaves the developer exposed only to the fortunes of construction development.

Once the clouds over the UK economy dissipate and the economic outlook is brighter, if yields in the real estate sector continue to be around the current levels (which is possible because prices depend to a big extent on salaries and income, which move slowly), then owning property (with leverage) and letting it will probably result in very good risk-adjusted returns.

The British economy at a crossroads

Defying the consensus of economists, the British economy didn't fall into recession following the Brexit vote. The British Pound seemed to do some of the adjustment to avoid it, but as it became clear during the first stint of austerity pursued by G. Osborne, the depreciation of the pound didn't help to improve the balance of trade (especially vs European partners).

The drop in the Pound Sterling might have been the catalyst to avoid the recession actually: the British consumers correctly anticipated a rise in inflation following the dramatic plunge in GBP and front-loaded purchases. The data from the balance of trade, and from private sector debt creation  --credit cards especially-- underpins this hypothesis.

In the GE of 2017 the Tories lost most of their majority. The electorate, as it had already done with Brexit, seemed to reject a continuation of the status quo. In my opinion, a reaction from the Government is needed just to maintain the status quo. These are the traffic lights for investment in Real Estate --at this juncture, as perceived by the writer.

***Red light: the UK economy is on a steady trajectory towards a recession within the next 6 / 12 months. The probability I assign to this scenario is 55 / 60 pct.

***Amber light: the Government realizes that the private sector is overwhelmed by credit and heading towards a recession. Westminster chooses to stimulate the economy via an increase in spending. Private sector balance sheets could be slowly restored over time. Interest rates could be raised somewhat without pushing the economy towards a recession. Probability around 40 / 45 pct. The economy would continue to grow between 1 and 2 pct pa.

***Green light: the Government realizes that the private sector has no vision for an improved national economy; which on its own, is also unable to turn around the current account balance. After appropriately comprehending the situation, the Gov decides to implement a series of programs aimed at improving the prospects. Mariana Mazzucato might have been the most vocal among the economists about the kind of investments that would have high ROI (R&D in sciences. Increases labour rights: less full employability and more full employment'. In my opinion the current Government is very unlikely to change tack in such a manner. This agenda could be pursued  by a more progressive / socialist government led by J. Corbyn (chance 70  pct if he becomes PM. 15 / 20 pct chance his government focuses on price controls rather than stimulating demand)

Asset pricing on Real Estate

Real Estate is a real and tangible asset. However, depending on the area, the values of the

properties stem primarily from the value of the land rather than from the bricks and mortar.

**In a scenario where supply outstrips demand, be it because Brexit triggers a loss of jobs, or because people move from city Dear to city Cheap, housing prices can drop --without a bottom. Prices could be found at discounts relative to the perceived value by both buyers and sellers. It would be a buyers' market with low volume. Housing prices aren't volatile though: they are sticky; and sellers are reluctant to accept prices they don't like if they aren't forced to sell. The shared loss of confidence (and the deterioration of household balance sheets) would rapidly trigger a recession and this would require the Government to come to the rescue --with the automatic stabilizers and the chosen discretionary fiscal stance. Needless to say, house supply would be significantly reduced until confidence is restored.

**In a tight market where supply and demand are in equilibrium or demand outstrips supply, housing prices will move rapidly to the price range that reflects the costs of bringing new supply to the market. (Land + materials + labour + profit margin for developers). This is what sets long- term prices in a healthy market.

--

In relation to the components of the returns exhibited by real estate:

Materials and labour are the sources of the 'inflationary hedge' return. Those are very real assets and jobs that will go up in price in line with the costs at the time of development.

The value of the land is linked to the health of the economy; primarily to the path for Total Factor Productivity (meaning that if TFP raises quickly, one would expect land values to follow suit; and vice-versa).

Take-away message: The implication is that following the Brexit vote, demand might be subdued, and we aren't seeing a tight market driven by the costs of new supply. Total Factor Productivity doesn’t have great prospects, but the inflation hedge (provided by labour and materials) would kick in: developing property today costs more (in construction materials)  than it did before GBP depreciated.

Macro Musings

After having been below zero for several months, real interest rates are hovering around zero. This means that an investor can hope to get a return equivalent to the expected inflation avg. for the 10 years of maturity for a standard Treasury bond. Approximately four or five percent more if willing to take the risks associated with investing in the stock market.

It is not true that Central Banks implemented extraordinary stimulus measures following the GFC, that once reverted, will allow us to go back to 'normal' interest rate levels. What is true is that we suffered a big recession caused by the incompetence of policy makers (both at central banks and Treasuries/Govs); and that Central Banks had no option but to reflect the new equilibrium in the financial markets and the economy. Australia took appropriate measures and did not fall into recession. It still hasn't. The ECB raised rates in 2008 and twice in 2011. It lost its compass and the Euro-zone economy suffered the consequences. G. Osborne also flirted with austerity and the results were recreated.

So there is no 'policy normalization' to be expected. There is no normal level for a T-Bond; and just because the yields during the 90s were around the average yields had during the 80s & 2000s, it doesn't make the 90s normal. If one looks at the path of interest rates over the last 200 years they are all over the place. There is no signal in the noise. Capitalism tends to over-production and over-capacity. We have arrived (again). Interest rates will be very low for a long period of time (or until significant capacity production is destroyed). Borrowing makes sense (if spread is low).

The level for interest rates is set by the big economies; primarily the USA, JP and Euro-area in second term; and they put pressure to any economy that deviates (unless capital controls are erected (Iceland, China, Brazil). The bond market and the stock market already reflect the new reality internationally. It can be argued that Real Estate is the exception: it is the highest yielding asset. It continues to offer the risk/return tradeoff that it offered prior to the Global Financial Crisis. In my opinion, buy to let and build to rent are strategies with strong foundations. Taking debt exposes the investor to default risk; but it will likely be a yield enhancer as well.

My perception is that the UK has a high probability of recession, but that housing is a good asset class to own. European real estate investments offer similar yields (with differences); their economy has a much lower probability of recession, but the monetary experiment is dysfunctional. Countries like NL, DE, SE, DK have the best risk/return tradeoffs in my opinion. The UK would join that list as soon as it realized that, like the latter two, it is a currency issuer that isn't subject to financial constraints.

testing AAP on a Black Friday

Testing amazon links

*** for the Philips Lumea hair removal device

*** for wide mouth jar lids

*** for washing machine

*** and for bubble bags here and here

Universal Basic Income doesn't need financing

In my last blog entry there wasn't a financing section because there isn't any need for one: The UK Government could implement a UBI program to target a nominal GDP growth of 5 p.a., leaving the magnitude of the budget deficit as a residual.

Universal Basic Income doesn't advance welfare in a modern society directly. Job Guarantee Programs are superior for a variety of reasons. Bill Mitchell, Pavlina Tcherneva et al. have written extensively on the topic.

Bill's last book, Reclaiming the State 

On Universal Basic Income --from an MMT standpoint

Universal Basic Income has gained a lot of popularity recently. High-profile figures, like M. Zuckerberg and R. Branson and have supported the idea, and pilot programmes are being tested (or soon will be) in Helsinki (Finland), Utrecht (The Netherlands), Ontario (Canada), and Barcelona (Spain), among other places.

I personally think there are more merits to alternative programmes, such as Job Guarantee Programmes. Two of my favourite economists, Bill Mitchell and Pavlina Tcherneva, have written extensively about the greater capacity to advance social and economical prosperity by JGPs relative to UBIs. I won't repeat their arguments here, but will admit that basic income is a very simple, hands-off (laissez-faire) solution to the stagnant economies we have got after the global financial crisis of 2008.

One bad approach to develop a UBI program would be to use it as a substitute of the existing welfare systems that have been built over the previous decades. A meager basic income would be a cheap substitute for the comprehensive support that the estate offers in most of our nations today. It would be insufficient to adequately compensate the most disadvantaged groups in our societies, and just like our economic policy, would fall pray to the misleading household-budget analogies that neoliberalism touts. The program would be easily eroded because those that need it the most are less influential politically.

Alternatively, one good approach to develop a UBI program would be to use it as an economic tool to achieve real outcomes that are positive. For example: a nominal GDP growth, of say, 5 percent per annum; or a combination of low unemployment & underemployment, and a high labour participation rate.

Nominal GDP level targeting is itself a relatively novel idea in macroeconomics. Given the difficulty with which inflation and productivity are measured, nominal GDP targeting would be a simpler way to conduct monetary / econ. policy than inflation targeting. It would also be more straight-forward to measure and to use as a policy target.

The combination of NGDP and UBI couldn't be easier: The income payment level could be easily adjusted in real time depending on the state of the economy. If the economy was above full capacity and the readings came above target, the UBI payments could be dialed down. That would be noticed immediately by the population, and who knows ...  maybe rational expectations might hold --for once! Conversely, if the economy lost momentum and nominal GDP was falling below the 5% mark, the UBI payments could be increased until they average their intended average levels.

It would also have an additional advantage: to make economic matters more understandable by the many, and not only by the few -- the technocrats and experts. I think it is time for Real Economics: the trade-offs that our real resources face, to be one of the core areas of debate in a modern democracy. This should be open to feedback and scrutiny across the social spectrum. I mention this because economics has been captured by neoliberal ideas that have sought to obscure even the most basic concepts. It seems only technocrats can take economic decisions and even when their prescriptions err miserably, they take no responsibility. They argue that it's like blaming the doctor for not being able to predict when the patient would die (hats off for Ricardo Reis, for a great argument in defense of how contemporary economic models and equations have advanced our knowledge -of applied maths?-- and also welfare across the world.)

In summary, it's game over for the obscure neoliberal ideas that assume markets are perfectly and instantly elastic and always in equilibrium at full capacity. That looks nothing like the societies we live in. It's time for our democracies to demand a return to the Keynesian paradigm of full-employment (and more leisure time). Economics should be at the mercy of the preferences of our democracies, and not the other way around. A Universal Basic Income program that targets nominal GDP growth has the capacity to reduce the volatility of the business cycle, reduce the uncertainty of our financial lifes, and keep our economies around full-employment most of the time. But the private sector won't fix potholes or spend in clean-tech research. Those are much better uses of human effort than boosting farther the hospitality industry; and to really make progress in those it seems we need our Governments to create more jobs to that end. UBI targeting NGDP isn't bad at all, but JGPs look much more promising.

On the Productivity Puzzle in the UK

Abstract

We believe that the main problem in European economies post the GFC is lack of demand, which in turn is dampening productivity and putting a lid on supply-side efforts. Macroeconomic policy can indeed contribute to explain and solve the productivity puzzle, especially in the absence of expansionary fiscal policies. We believe that government creation of narrow money is a more appropriate tool for economic stimulus than QE; and that channeling such funds into research-intensive areas (high on human capital, low on capital expenditures) has the highest potential to raise productivity in the long term.

Introduction

This note is focused on the productivity puzzle of the UK. We will focus on the residual of Solow’s model, TFP ≅ GDP/h worked. A recent Q-Bulletin by the BoE (Barnett, Batten, Chiu, Franklin, & Sebastiá-Barriel, 2014 Q2) acknowledges that the:

• Labour productivity growth in the United Kingdom has been particularly weak since the start of the crisis.
• The recent strength in hiring and modest pickup in productivity growth suggests that spare capacity within firms is unlikely to explain much of the current weakness.
• Factors related to the nature of the financial crisis are likely to be having a persistent impact on the level of productivity.

We completely agree with these findings, and indeed believe that the circumstances around and reactions to the Global Financial Crisis (GFC) bear explanatory power.

Backdrop

The financial industry represented, and still does, a bigger proportion of the domestic economy in the UK than it does in most other developed economies (at both sides of the Atlantic). This obviously exacerbated the drop in economic activity during 2008-09. Given the fortunes of the industry since then (increases in capital standards and more stringent regulation), it’s not aided in the recovery either.

On the other hand, the UK benefits from having its own currency. The GBP depreciated significantly against all major currencies. Ceteris paribus this improved competitiveness and foreign demand for British products and services abroad, having a stimulative effect.

Unfortunately this demand was not expected to come from the Euro-zone, the UK’s biggest trading partner. In 2010 Greece lost access to the markets, and it was followed by Portugal and Ireland. The Troika was created to bridge these countries back to the financial markets, implementing deep cuts that would enhance the supply-side and improve competitiveness. The crisis heightened in 2011 and 2012 with the cuts that ensued, pushing the Govs. of Spain and Italy towards insolvency.

The UK elected a new government and also implemented austerity policies. (VAT rose from 17.5 pct to 20 pct; CGT rose; there were welfare cuts, and Whitehall spending restraint. Fortunately the cuts weren’t as deep as announced.) The rationale behind these was maybe best articulated by the Chancellor, in the 2014 January WEF debate at Davos on “The Future of Monetary Policy” were Osborne shared stage with Summers, et al.

The UK Government perceived and responded to the crisis very much as its stranded euro-zone neighbours. ‘Fiscal space’ was perceived from an accounting point of view; and fiscal discipline was the only medicine to fight off budget deficits and minimise the chances of recreating a Greek tragedy.

This was in stark contrast to the US and Japan, whose policymakers seemed to be more focused on the real economy. Fiscal space was seen through the prism of idle econ-resources, especially employment. Stimulating them would pay-off by itself by growing the tax-base.  (And idea that Summers later developed with DeLong (Summers & DeLong, 2012), highlighting that by 2030 the Debt/GDP ratio would have been lower, had a bigger stimulus package (deficit) been implemented. Data were run on the Fed’s model).

Future fiscal burdens were understood to be areas of under-investment / under-maintenance in the economy, such as poorly maintained infrastructure (which will require real assets in the future to be maintained. Hence competing with other real projects).

We believe that the pro-cyclical and pro-austerity behaviour of the UK Government, coupled with the depressed economy of the Eurozone are at the core of the output and TFP loss from the pre-crisis trends.

Fiscal multipliers, Hysteresis, and the MMT

The best data we had on fiscal multipliers came from the natural experiment post the Great Depression and WWII. Even if it was difficult to have accurate measures of the fiscal multiplier (during recessions), most analyses put it above 0.5. (Therefore discarding Ricardian equivalence, and crowding-out counter-arguments.)

Today, it is clear that the level is significantly above 1 (Blanchard & Leigh, 2013), and with the zero-lower bound constraint we believe that the case for state intervention mitigating the business cycle by counteracting economic downturns has been reinforced. We further believe that hysteresis, or inverse Say’s Law, is already detectable in the British economy: Lack of demand is creating lack of supply.

This idea was introduced by DeLong and Summers: Fiscal Policy in a Depressed Economy (2012), and was further contextualized by in Martin Wolf’s The Shifts and the Shocks (2014). To note:

If companies don’t hold prospects of selling new products and services, they will not develop the capabilities required to produce them. They are much more likely to hoard cash and/or reward equity-holders. As companies invest less in R&D and in building future capabilities, potential output decreases. (And indeed, estimates of potential GDP have decreased throughout the world since the GFC.)

We believe that economists solved this puzzle a long time ago. Fallacies of composition, and specifically “The paradox of thrift” are nothing new to Keynesians and Monetarists, and its solutions are also easier than enhancing the supply-side.

In particular, for a country that is leaking currency and demand (jobs) abroad through significant current account deficits, it is very difficult to keep full employment. In fact, using the sectoral balance sheet: (I-S) + (G-T) + (X-M) = 0 (Fetherson, Godley & Cripps); full employment will only be possible if either the private sector or the public sector accommodates. Hence, if the trade deficit is higher than the contribution (deficit) of the Government to the economy, the private sector must be dissaving, leveraging up its portfolio.

“In the real world, there is no deposit multiplier mechanism that imposes quantitative constraints on banks’ ability to create money in this fashion. The main constraint is banks’ expectations concerning their profitability and solvency.”
Quote from (McLeay, Radia, & Thomas, 2014).

Since all new money is created as a by-product of lending by banking institutions, and it is not limited or constrained on deposits (Money Multiplier from Monetary Base to M2 through RRR is not factual (McLeay, Radia, & Thomas, 2014), (Keister, Martin, & McAndrews, 2008)), the system is very exposed to rising asset prices (especially real estate), creating too much money and inducing the private sector to lever up its portfolio. Hence, Quantitative Easing, which mainly stimulates demand by the ‘wealth effect’ of lower rates at the end of the yield curve, just reinforces a trend that decreasing interest rates initiated in the late 1970s.

If Governments insist on running balanced budgets throughout the cycle, private debt has to grow faster than GDP for demand to be in line with potential growth, and that’s a fundamentally destabilizing process (Turner, 2015).

Modern capitalism is biased towards financing real estate financing rather than financing entrepreneurs, SMEs, or PPP; which bodes badly for TFP. Additionally, as per Piketty, the nature of the distribution of income and spending between capital and labour, and among labour (and across the world) is not conducive to sustaining aggregate demand. (Higher savings rate among those most able to support demand (Piketty, 2014))

Henceforth, for countries running current account deficits and output gaps, such as the UK, we believe that permanent money creation by the State (‘high powered’, or ‘narrow’ money) is the best solution to sustain GDP –which could have second order effects on TFP by simplifying the financial services industry and its money creation process. Releasing unquantifiable amounts of human capital now absorbed by the Dodd-Frank act and other regulations).

The Entrepreneurial State

If minimising output gaps is the low-hanging fruit in order to increase TFP, to achieve meaningful and sustainable improvements of the standard of living over time, we believe that further nudging by the state could have beneficial effects.

Besides smoothing the business cycle, we believe that the state should play a role in minimising loss of applied knowledge and know-how. This builds on Kenneth J. Arrow’s 1962 “Learning by Doing”. More recent work by Stiglitz & Greenwald (2014) suggests that market economies alone typically do not produce and transmit knowledge efficiently. Adoption and diffusion of knowledge takes place within institutions; and bigger firms are more stable, and therefore better at preserving it than smaller.

Similarly, Mazzucato’s “The Entrepreneurial State” (2012) defends that the state should regain a more central role in the economy, targeting areas of the economy where the expected return on invested capital is higher. As an example, the US Government through DARPA (at the DoD), ARPA-E (DoE) and NIH created the foundations for the technologies behind the internet, the smartphones’ Artificial Intelligence systems, and a myriad of other technologies in Tech, Green-Tech and Healthcare, respectively.

The tech hubs born in California and Boston owe most of their successes to these programs she argues; but additionally, there are important externalities to these efforts in R&D: an important proportion of the benefits are not purely economic and/or captured by the companies that develop the technologies commercially. They benefit the environment, and/or communities at large, sometimes at almost zero additional costs.

Conclusion

We believe that having a vibrant economy –growing at full capacity– underpinned by state institutions that aren’t scared to respond boldly and counter-cyclically to negative shocks, minimises loss of applied knowledge in the economy, and spurs investments in R&D and technology-enhancement projects.

Bigger corporations generally are more efficient than small: productivity is correlated with organization size. But research activities are often more fruitful and efficient at smaller institutions: more nimble and able to adapt to the new technologies, apply them in new areas, and develop them commercially.

We believe that the government should take a leading role in paving the way an R&D intensive economy comprising both small and big companies; while allowing some degree of market consolidation in mature industries where innovation is difficult to come by.

The retail banking industry is an excellent case in point: the UK Government has encouraged competition and an increase in the number of banks for years. However, an improvement in the customer’s service is much more likely to come from the Fintech startups recently originated in London than from duplicating roles at corporate offices.

Works Cited

Barnett, A., Batten, S., Chiu, A., Franklin, J., & Sebastiá-Barriel, M. (2014 Q2). The UK productivity puzzle. Bank of England.

Blanchard, O., & Leigh, D. (2013). Growth Forecast Errors and Fiscal Multipliers. IMF Working Paper.

Godley, W., & Lavoie, M. (2007). Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. Palgrave.

Keister, T., Martin, A., & McAndrews, J. (2008). Divorcing Money from Monetary Policy. Federal Reserve Bank of New York.

Mazzucato, M. (2013). The Entrepreneurial State: Debunking Public vs. Private Sector Myths.

McLeay, M., Radia, A., & Thomas, R. (2014). Money creation in the modern economy. Bank of England.

Piketty, T. (2014). Capital in the 21st Century.

Stiglitz, J., & Greenwald, B. (2014). Creating a Learning Society.

Summers, L., & DeLong, J. (2012). Fiscal Policy in a Depressed Economy.

Turner, A. (2015). The Case for Monetary Finance: An Essentially Political Issue.

The Eurozone Dystopia

The economic deterioration in Europe has accelerated substantially since the process of fiscal consolidation started in 2010. The Bundesbank, the most influential member of the ECB system, has enforced an agenda of austerity and strict price control that is at clashes with what peripheral countries need. 

This sequester orchestrated by the creditor nations runs contrary to the lessons learnt during prior crises and to the consensus of the international community –as even the IMF scaled back from expansionary fiscal consolidation theories and supports some of the most progressive views among the FED’s . The situation is such, that not even the most optimists among economists believe that structural reforms and Ricardian equivalences will re-ignite the peripheral economies. The periphery has suffered deflation since starting the crisis, yet, none of these countries have made any meaningful effort to achieve a more balanced position with their creditor counterparts, such as a dual mandate for the ECB (incorporating employment / GDP) or some form of solidarity-compensation stemming from Germany’s ever growing trade surpluses. 

These Governments (Ireland, Italy, Greece, Portugal and Spain) face stratified societies: senior citizens have all their assets denominated in Euro and don’t want to suffer the devaluation associated with leaving the common currency. Younger citizens, whether employed or not, would probably be better-off with the flexibility that a 'devaluable' (able to being devalued) currency would offer, but only the radical political parties echo such views, while the most highly-educated and entrepreneurial of them emigrate to northern latitudes. 

This framework has worked beautifully for the German exporters: not only they benefit from the undervalued domestic currency, they also extract rents from the subsidised labour and the strict anti-inflation mandates embedded in European institutions. 

The problem is to imagine how/when/where this race to the bottom converges with the views of a prosperous Europe that policy-makers had in mind when they designed the grandiose experiment. Sooner or later, the automation of the manufacturing sector will put German’s economic model in jeopardy (Productivity in the manufacturing space will keep raising higher than demand ever does). Equally, South-Europe cannot and should not survive by exporting tourism and olive oil. (There is a better way, even

Now, as the Euro approaches the average life expectancy of monetary unions (not followed by Political and Fiscal unions), the literature to help our ailed Euro-area policy-makers has expanded. Several books point out to the dangers of austerity, advocate for economic stimuli until economic health is restored, and for a new (social) contract between creditor and debtor nations. But perhaps more suggestive for those more strained at home is to dream about Mariana Mazzucato’s “Entrepreneurial State”. She advances that the fiscal multiplier, or the elasticity from the Governments spending in the economy, is greater when the investments are made in value-added sectors, such as research in life sciences, technology, clean-tech energies, etc. With a lion in the cover of her book, she ironizes that it has been Government funding schemes that have paved the way for the private sector to reap the benefits when these technologies have matured. For example: had it not been for the entrepreneurial, dynamic and creative role of the US Government through the DARPA and NIH programs, it would be difficult to imagine such thriving technology and biotech sectors as we know them today in the US. 

In summary, European policy-makers risk falling victims of complacency as sovereign risk premia decrease, but European institutions and R&D intensive SMEs are lagging the progress of international counterparts –sadly, cannot expect that to be reversed through a combination of price controls 

--written in Feb 2014 - Peter Martin fellowship at the FT

The Oil slide. Chapter II: winners and losers

We've had an oil price drop that almost no-one anticipated. Brent now at $60/bl from an avg of $110 in the last few years, WTI at $56/bl.

This has taken the Russian Rouble to the doldrums, and Nicolas Maduro (Venezuela's President) calling former Spain's President Aznar a bloody assassin.

We've seen the first attempts for consolidation:  Halliburton and Baker Hughes on the services side (a $34.6bn deal). Repsol just agreed to buy Talisman for $8.3bn this week, a deal that would double their upstream exposure. Maybe the more exciting, if not desperate attempts have been found among the pure-players in exploration: Ophir managed to get their hands on Salamander after being rebuffed by Premier Oil.












They haven't fared particularly well as a group. Tullow, the European bellwether for the African explorers has under-performed Exxon by almost 50%.  Those geared to high-cost barrels, whether shale oil in the States, arctic or deep-water, or to riskier production areas in Africa have been the biggest losers. The oil majors have held significantly well: Exxon has only lost 15 pct from its peak at 104.8 (adj for divs.). I assume this means there is some level of optimism among investors, probably anticipating that oil prices will be roaring back higher within the next couple of years after having fixed both sides of the equation:

On the demand side, a lower oil price is as good a stimuli as anyone can ask for: it goes directly to consumers' pockets. The biggest economic beneficiaries will be the found in Japan (highly geared to energy prices since shutting down its nuclear plants), Europe, Turkey, India and China. This is also the perfect opportunity to slash subsidies wherever they exist: India, Brazil, Indonesia, etc.

On the supply side, the cost of production has creeped up materially in the last few years. The cheap barrels are long gone even for the most advantaged countries. The Ghawar oil field in KSA has a breakeven price of ca $80/bl. The production curves in the shale oil fields in the US are steep: those production tails don't last more than a couple of years, and in practical terms they need continuous drilling.

My belief is that both of these sides will be fixed within the next two / three years. What will not revert is the level of technology: self-driven cars should be significantly more fuel efficient than human-driven cars, both in the city as in the high-ways  --where they will drift as cyclists in the Tour de France.

The manufacturers will not get any tailwinds from technology: the sharing economy should also allow consumers to achieve higher usage and occupancy rates from our car parks. I believe that the winning bet will continue to be the american and the international consumer.

The Oil slide. Chapter I: looking for shorts

On August 19 2013, OMV announced it had bought Statoil’s stakes in Gulfaks, Gudrun, and Rosebanks fields. The final consideration for the deal was $2.65 bn in cash. The biggest acquisition for OMV in its history.

WoodMac’s valuation of these fields is approximately 20% below. The disparity is driven mainly by Gulfaks and Rosebank: both have significant upside potential. Additionally, OMV hinted in the conference call that their underlying oil price assumption is $100/bl (while WoodMac assumes a price decline to real $85/bl within four years, staying constant at that level). Additionally, there are fiscal synergies when these assets are brought into a producing portfolio --compared to their value on a stand-alone basis.

In this insight, we aim to shed light on these three variables that drive the price disparity and our take on the transaction.

Sources familiar with the matter mention that it was a competitive sale, with many firms interested in the portfolio of assets on sale; which reflects the scarcity of high-quality assets in the market place. OMV rationale for over-bidding was a drive to diversify their above-ground risk mix towards geographies and fiscal regimes of stability/visibility/certainty.

Prior to the transaction, OMV had a portfolio of producing fields and E&A acreage that spans the MENA region 'and beyond'. This year the firm has over-performed all other European O&G firms.

In the last months we've seen investments retrenching from emerging markets and flying back to the US. As the US Treasuries come back to more palatable yield levels for investors (on the back of an earlier taper off of the Fed’s stimulus program), we've seen EM currencies depreciating against the greenback. Additionally, we have seen an uptick in the political uncertainty in the MENA region: Egypt, which had been among the most stable countries in the region for decades, saw a coup last month. This adds significant political and economic risk to the area.

Of course, nobody wants to see layers of financial leverage overposed to operational leverage; but if events in the MENA region continue to be so constructive, or if the oil price loses some ground, OMV has positioned itself ideally to enjoy the winner's curse in all its forms and shapes. "buena suerte amigos".

Sohn Investment Conference 2013

Read in FT's Alphaville:

3) Global figure most associated with negative views: the one and only Ben Bernanke.

My view: to compare their (Sohn's puppets) understanding of the trade-offs in today's monetary policy environment is like comparing Einhorn's tie knots with those of Bernanke ...

(Better don't do it).  Of course we would all like to live in an easier world: one with lower debt, higher expected returns; one where we all can be successful HF managers leaving office at 5 pm and running triathlons on weekends.

Alas, it turns out that the cocktail of low inflation and a reach for yield have sent risky asset prices soaring, depressing future expected returns. Now Wall Street blames Ben Bernanke for making their job a tad more difficult. They say it's distorting the economy and the financial markets.

Well, the truth of the matter is that the Fed's actions weren't that hard to anticipate. There are only two metrics in their dual mandate: full employment and price stability. Both have been lagging the targets for some time. Inflation has been incredibly subdued and there are no signals of any dramatic change. Wall Street's mandate was to position itself to benefit from the world that was coming. They, the asset owners, should have benefited the most from the new normal of lower nominal rates. They chose to be cautious and have lagged the indices since the market bottomed; that's fine, but it just doesn't feel right to hear these guys putting blame on Bernanke because they don't know what to buy now.

The decisive action taken by chairman Ben Bernanke and his FOMC colleagues has been fundamental to underpin this recovery. It only takes a peek outside the US to know that it feels good to be an asset owner in the US. Maybe our super-investors should invest in Europe instead, who could not but admire the rectitude and righteousness of the Bundesbank?   "buena suerte amigo"

SRI - Social Responsible Investing

Topics of Interest:

- Nocera's artificial photosynthesis
... and how chemical fuels could not only substitute oil and gas (e.g. for transportation purposes), but go further and supply energy in scattered geographies like ElectroPS.it is doing in Asia and Africa.

- Fracking Could Work If Industry Would Come Clean
Companies like Baker Hughes and Schlumberger are developing technology to overcome many of the current problems mentioned.

It is quite certain that gas will be a game changer, and therefore substituting coal by gas seems like a good idea. But SWITCHING FROM COAL TO NATURAL GAS WOULD DO LITTLE FOR GLOBAL CLIMATE, STUDY INDICATES. Where they note that methane leakages have stronger greenhouse effects than CO2. Furthermore:

- Climate change may not be that related to CO2 emissions --but rather, to solar activity. Hence, carbon sequestration may not be a technology worth developing.

Published in the blogosphere: Omitted variable fraud: vast evidence for solar climate driver rates one oblique sentence in AR5

- Quantum physics could help minimize energy consumption by electronic devices. NYT reports that Physicists Create a Working Transistor From a Single Atom

- Examples of efficient buildings from p.70.
Which companies would benefit the most from the potential growth in this area? Schneider, GE, Sylvania?

More to come.
In the meantime, keep wired (to) Watts Up With That?
Boing Boing, Wired Science, Women in Planetary Science, David Robertson.

Meeting with Sven de Causmaecker

Meeting with Sven de Causmaecker in KL, Malaysia.
He is a graduate in Chemistry from Germany. We chatted about possible breakthrough technologies within the renewable energies world.

He talked about Daniel Nocera, a Massachusetts Institute of Technology professor whose recent research focuses on solar-powered fuels.

2 H2O >> 2H2 + O2

Hydrogen, used as a chemical fuel, has much higher storage capacity than the lithium batteries (there is not enough lithium for widespread transportation usage. H2 has also zero emissions; and the chemical reaction can be reversed with sun power at relatively high levels of efficiency.

There are several interesting videos of this technology in youtube. I would highlight his lecture in the Brookhaven Science Associates titled "Harnessing Energy from the Sun for Six Billion People -- One at a Time."

Oil is a very efficient form to store energy because its chemical union has little mass: Carbon - electron - Carbon, while for Lithium, the lightest metal, the density of energy that you can store is much lower. The nuclei are very light in atomic weight. But it is less common than 25 of the 32 chemical elements.

Uranium: 20 Terajoules/kg

Hidrogen condensed at 700 bar): 123 MJ/kg

Gasoline & Diesel: 47.2 & 45.4 MJ/kg

Fats / Carboydrates / Proteins: 37 / 17 / 16.8

Lithium air battery: 9

Lthium battery: 1.3

Lithium-ion battery: 720 kJ/kg.

Sven also mentioned cyano-biofuels, a small biotech firm based in Berlin, born from the university entrepreneurial lab of the German university of xxx, doing research on cyanobacteria and how to obtain cheap ethanol from algae and CO2.

We also talked about other technologies other than sun, which are clearly insufficient to meet the energy demands of the global population for the next decades.

[Current population: 7bn people. Energy consumption: 14TW.

Exp. population in 2050: 9bn people. Exp. energy demand in 2050: from 30 to 50TW]

Wind (farms) could yield up to 3TW of energy, which falls much short of demand growth. Onshore wind is the cheapest of the renewable energies. It is already pretty developed, with most of the best areas in many countries already exploited. Furthermore, aesthetic considerations will probably curb future development (as WT are growing bigger and taller, and therefore they can be seen from larger distances.

Fernan, working in SG for Gamesa pointed out that for strong winds it is better to have a high density net of smaller WT. While for milder winds it is better to have fewer but bigger WT.

Sven also said that offshore wind farms provoke vibrations that affect the bio-diversity of the area. Although few decision-makers will care about it.
Onshore WT also have collateral damage for the biologic fauna: they kill birds.

Offshore wind farms slightly lowers the load factor in the onshore wind farms. As you harvest the wind in the sea, the load factors inland will be reduced because the total quantity of wind energy generated by the sun is limited.

Peter Gleick is a PhD from UC Berkeley. His area of research is centered around freshwater.

All-Europe Equity Research Teams

Participants in the 2012 All-Europe Research Team were asked to rate, on a scale of 1 to 10, the importance they attach to a dozen sell-side equity research attributes. Industry knowledge receives the highest rating, followed by integrity/professionalism; accessibility/responsiveness and local market knowledge/country knowledge tie for third. Earnings estimates is deemed the least important of the attributes.

2012's ranking:
DB 117, BAML 77, UBS 52, MS 49, JPM 54, Citi 30, CS 25, Barcap 17, Stanford C. Bernstein 32, Exane 15, Nomura 10, RBS 4, CA 10, SG 3, Kempen 4, GS 3, Redburn Partners 3, Goodbody 3, Handelsbanken CM 3, MainFirst Bank 3, Rabobank 4, Davy 4, Santander 4, SEB 4, Equita S.I.M. 3.

2011's ranking:
DB 74, UBS 77, BAML 56, CS 49, MS 47, JPM 58, Citi 17, CS 49, Barcap 20, Stanford C. Bernstein 37, Exane 11, Nomura 31, RBS 6, CA 6, SG 5, GS 4, Kempen 2.

Musing on 2012

12 month performance chart from the FT macromap:

Looking ahead to 2012 and 2013, I think that equities and equity-like products will benefit from a lower equity risk premium once the European debt crisis stabilizes. Damodaran calculates it on a monthly basis, and according to his calculations -for which I would give full credit- it finished the year at 6.04% (up from 5.2% at the beginning of the year, but down from a max of 7.64% during the market jitters of the summer).

The improvement in the (attractiviness of) valuations has been supported by a good year for corporate america. With earnings up 16% for the year, and cash flows to investors (dividends and buybacks) yielding 5.9% -significantly higher than the 10y UST yield at 1.87%, but also higher than the 10 year average at 4.72%.

Treasuries had indeed a very good year. With returns above 16% for 2011 there is not much more upside potential. Higher economic growth or higher inflation expectations would drag the prices lower, to yields that would be more aligned with historical measures (like those for the end of 2010, above 3%).

This analysis, in combination with the exploration of the supply and demand prospects in some specific markets that have called my attention recently translantes into some more specific trading ideas:

Longs of early cyclical companies. Including:

- Soft commodities -potash and phosphates. I am an avid reader of Jeremy Grantham's publications; and I think he is right in his call about the increasing scarcity of soil for feeding an ever increasing global population. The “finiteness of natural resources is simply ignored, and pricing is based entirely on short-term supply and demand.

Therefore I like potassium and phosphorus, which are necessary for all life and cannot be artificially manufactured or substituted by other products.

- Hard commodities, especially physical ownership of PGMs (rather than miners) via ETFs. i.e. Palladium and Platinum; and in a second order, Rhodium and Iridium.

- Energy-commodities like Uranium. Again, global energy demand is expected to double in the next two / three decades. Even after Fukushima's disaster, nuclear energy stands as one of the most reliable, cheaper and cleaner sources of energy in todays' world. Demand continues to be strong, outpacing global supply, and the depletion of the Russian nuclear reserves is coming to an end.

For uranium you may understand that the investor community is not interested in ownership of the physical asset -but rather, equity exposure through miners. After a very bad year in 2011 in which the sector was battered by investors, junior miners like Fission and Ur-Energy can yield better results (adjusted for risk, although it is the market who will determine that).

URA is the most popular ETF in the industry. Apparently it was the worse performer ETF in 2011; which was what initially called my attention ...

And lastly, digging a bit into the fundamentals of the companies; I like some metals and mining companies like BHP, automotive companies like Volkswagen, BMW and Hyundai motor; and Korean exporters like Samsung.

As said before, I would open shorts on AAA Sovereign bonds (US, UK, DE, JP). Yields are so low that they can only go high. And if they go lower ... what? At these levels there is not much room for higher bond prices and therefore losses are fairly limited. On the other hand, the downside potential (for the underlying prices, and therefore to make money) is much greater. Besides, since we are experiencing a collateral crunch, these assets are priced at a premium vs fundamentals. If I would have a bigger portfolio, not only I would not hold them, I would short them.

I am also quite bearish about the wind energy industry.

I think that there is still money to be made shorting Gamesa, Acciona, Vestas, EDPR (in this order).

Eq long/short spreads:

Long companies with no dividends, short companies with high dividends (since it seems that are priced at a premium up and above their supposed smaller risk exposure).

Long Hang Seng (from 2H2012), Strait Times, short Dow Jones

Long MXP, EUR, GBP, short JPY

I also like an assymetric bet in precious metals: short gold and silver and long palladium and platinum -physical rather than equities.