Despite economic slowdown VC returns remain positive in Q1 2008 - NVCA

Summary:
Venture capital returns, as measured by the private equity performance index (PEPI), have been falling across all investment horizons ending Q1 2008, but still compare favourably to stock indices like the NASDAQ and S&P500 according to NVCA. The economy’s biggest effect on the venture market has been indirect — the IPO and mergers/acquisitions markets are hurting, which means VCs have to pump more money into later-stage companies. Causes lower returns. According to Mark Heesen, returns will fall even further if the exit market doesn’t improve. (Published: 29/07/08)

Notes:

• one-year private equity performance index (PEPI) showed the greatest change from
  Q4 2007
• 7.6 point decrease to 13.3% in Q1 2008.
• historically, short-term horizons show significant fluctuations quarter over quarter based on large exits impacting the return
• next largest consecutive quarterly change occurred in the ten-year time horizon
  
• PEPI decreased by 1.1 points quarter-over-quarter
• three year performance also posted a modest decline from the previous quarter
• decreasing .2 percentage points from 9.7% in Q4 2007 to 9.5% in Q1 2008
• five-year and twenty-year performance figures showed modest quarter-over quarter increases
  
• to 9.1% and 16.8%, respectively

• Venture returns across all horizons, except the five-year horizon, outperformed public
  market indices, NASDAQ and the S&P 500, through 3/31/2008

• Mark Heesen:
• "The IPO market has now been essentially shut down for venture-backed companies for over seven months. Combined with a skittish M&A market, shorter term performance returns are and will continue to be impacted."
• "Our asset class continues to out perform many other investment alternatives
  including the public markets over the long term. But we will need to see the exit markets improve dramatically to maintain that position in the coming year."
  

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Clean Energy Investments Charge Forward Despite Financial Market Turmoil - UNEP Press Release

Summary:
Overview of the "Global Trends in Sustainable Energy Investment 2008" report by New Energy Finance for UNEP's Sustainable Energy Finance Initiative. 2007 was a record year for investment in renewable energy and energy efficiency industries. Wind energy was most popular with investors, although the fastest growing sector is solar energy. Investment in energy efficiency technology also reached a record. Sustainable energy accounted for 23% of new power capacity added globally in 2007. The EU remained the leading region for investment, while in the US acceptance of sustainable energy is becoming more widespread. Mood slightly subdued in 2008, although in Q2 most areas of investment rebounded, despite the global turmoil in the financial markets. Also noted was that carbon trading is becoming more accepted, and that private interest in the post-Kyoto market is emerging. (Published: 03/07/08)

Notes:

• 2007:
  
• record-setting year of investment in the renewable energy and energy efficiency industries
• Total sustainable energy transaction volume: $204.9b
• $148.3b in new funding entered the sustainable energy sector globally
• up 60% from 2006
• $98.2b went into new renewable energy generation
  
• wind energy again attracted the most investment: $50.2b
• especially in the US, China and Spain
• installed capacity passed the 100 GW mark
• solar power: $28.6b
• grew most rapidly: at an average annual rate of 254% since 2004
• driven by the advent of larger project financings
• heavy investment to ease the silicon bottleneck and new thin-film technology beginning to reach scale
• $50.1b went into technology development and manufacturing scale-up
• Investment in energy efficiency technology reached a record $1.8 billion
• an increase of 78% from 2006.
• According to the International Energy Agency, each $1 invested in energy efficiency an average avoids more than $2 needed to create new supply.
• $56.6b changed hands through mergers and acquisitions.
• even as a credit crunch began to roil financial markets
• 31 gigawatts of new installed generation
• sustainable energy accounted for 23% of new power capacity added globally in 2007
• about 10 times that of nuclear.
• Sustainable energy companies accounted for 19% of all new capital raised by the energy sector on the global stock markets in 2007.
• EU: remained the leading region for investment
• European asset finance up to record level of $49.5 billion
• 62% of asset finance worldwide.
• particularly later-stage financing
• supportive policies, as well as an investor base that is comfortable with financing renewable energy projects and more intense competition for deals
• US: acceptance of sustainable energy becoming more widespread
• extending beyond its traditional heartland of California
• Texas leading the wind energy charge
• new administration in 2009 is expected to make renewable energy and energy efficiency a political priority
  
• recent uncertainty in the US (particularly over the possible introduction of a CO2 regulations) has put a significant number of coal-fired generation plants on hold
• China: "Beijing Olympic Games (2008) has sharpened the country's political resolve and strengthened programmes to promote cleaner generation and cut energy intensity."
• investment in non-hydro renewables capacity in China increased by more than four times, to $10.8 billion
• new wind capacity doubled to 6 gigawatts.
• surge of Chinese solar companies listing on US and European stock markets
• public market activity is also growing at home
• e.g. Chinese wind manufacturer Goldwind raised $243 million last year in the Shenzhen Stock Exchange's first IPO related solely to renewable energy.
• Brazil: world's largest renewable energy market
• thanks to its long established hydropower and bioethanol industries
• sustainable energy investment in Brazil continued to be dominated by ethanol
• investor interest shifted there from the beleaguered US ethanol market
• investment in sugar cane cogeneration, biodiesel production and wind generation are also picking up.
• India:
• asset financing grew significantly, to $2.5 billion
• mostly for 1.7GW of new wind projects
• these installations place India fourth in the world
• both in terms of new capacity added in 2007 and total installed capacity.
• funds raised on Indian stock exchanges reached $628 million
• although: companies increasingly looked to foreign markets for new capital,
• raised $1.4 billion overseas in 2007
• public market activity was marked by a series of Foreign Currency Convertible Bonds (FCCBs) from established Indian renewable energy companies
  
• e.g. Suzlon($500 million raised) and Moser Baer($150 million).
• 2007 also saw several aggressive cross-border deals involving Indian or Chinese acquirors
• e.g. Suzlon's $1.6 billion acquisition of Repower
• China National Building Material Group's purchase of German turbine blade manufacturer NOI Rotortechnik.
• $13 billion invested in carbon funds by the end of 2007
• important source of investment for "Clean Development Mechanism" (CDM) projects in developing countries
• most new investment was into private funds
  
• carbon trading becomes more established.

• 2008: picture somewhat subdued across the sector
• only mergers and acquisitions up
  
• several substantial wind developers sold their portfolios
• many realising that with the tightening up of the credit markets they could not finance the growth themselves
• US ethanol industry undergoing restructuring
• But: Q2 2008: most areas of investment rebounded
• even as global financial markets remained in turmoil
• sustainable energy venture capital and private equity in Q2 2008 was up 34% on Q2 2007
• new build asset finance was up 8%
• public market investment showing a strong recovery with the IPO of Portuguese utility EDP's renewable energy business, EDP Renovaveis
• Q1 2008: emergence of private interest in the post-Kyoto market
• investors beginning procuring post-2012 CDM credits eligible for trading in the EU Emissions Trading Scheme.

• "Investment in the sustainable energy sectors must continue to grow strongly if targets for greenhouse gas reductions and renewables and efficiency increases are to be met"

• "Investment between now and 2030 is expected to reach $450 billion a year by 2012, rising to more than $600 billion a year from 2020. The sector's overall performance during 2007 and into 2008 sets it on track to achieve these levels."

• "Carbon Capture and Storage(CCS) is the only sector where we did not see as much progress as we had expected, with the regulatory and funding environments for these projects remaining murky and timelines for the first commercial projects being extended."

• Source: "Global Trends in Sustainable Energy Investment 2008" by New Energy Finance (UK) for UNEP's Sustainable Energy Finance Initiative

• Achim Steiner, head of UNEP, UN Under-Secretary General

• "Just as thousands were drawn to California and the Klondike in the late 1800s, the green energy gold rush is attracting legions of modern day prospectors in all parts of the globe. A century later, the key difference is that a higher proportion of those looking for riches today may find them. With world temperatures and fossil fuel prices climbing higher, it is increasingly obvious to the public and investors alike that the transition to a low-carbon society is both a global imperative and an inevitability. This is attracting an enormous inflow of capital, talent and technology. But it is only inevitable if creative market mechanisms and public policy continue to evolve to liberate rather than frustrate this clean energy dawn. What is unfolding is nothing less than a fundamental transformation of the world's energy infrastructure."

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China's Export Machine Threatened by Rising Costs - The Wall Street Journal

Summary:
Manufacturers in China are seeing their profits dwindle. Raw materials and energy are more expensive, the yuan has strengthened almost 20% against the dollar, and there is tougher protection for workers and the environment as the government tries to make the economic growth more sustainable. Price of Chinese goods in US have surged 4.6% in May from the previous year. Manufacturers of low-cost products, which have been a key engine of China's economic miracle, are hardest hit. Growing realization in China that the country has relied too much on cost-cutting and simple production models to boost exports. China entering a more mature phase in its economic development? Will nevertheless remain an export powerhouse for many years, as the country also supplies industrial machinery and other higher-value products (less vulnerable to factors such as rising wages), and possesses infrastructure that few other developing countries can match. (Published: 30/06/08)

Notes:

• Manufacturers in China say their profits have dwindled
  
• they pay out more for raw materials and energy
• China's strengthening currency has made products more expensive for important markets such as the U.S.
• In July 2005, China bowed to pressure from global trading partners to ease its rigid grip on the yuan's exchange rate
• currency had been effectively pegged to the dollar for a decade, despite China's bulging trade surplus
• had created stability for exporters and their foreign buyers
• but: also angered Western critics who felt it gave Chinese factories an unfair advantage by keeping their prices low in dollar terms
• yuan's appreciation was slow at first, but last year it accelerated
• currency has now risen 20% in value against the dollar
• yuan has been losing value against the euro, on the other hand, making Chinese goods more affordable in Europe
• but: the advantage hasn't been enough for many manufacturers to offset other difficulties.
• price of Chinese goods in US surged a record 4.6% in May from the previous year
• Foreign buyers, used to inexpensive Chinese products and nervous about economic weakness at home, are often refusing to pay more.
• government's tougher protection for workers and the environment has also made it more expensive to do business
• part of Beijing's plans to support economic growth that is sustainable and modern, not merely fast.
• introduced this year: labor law that capped factory overtime, limited temporary employment and raised the minimum working age two years, to 18
• blow to small operations that traditionally hired and fired with each production cycle
• environmental oversight tightened: dyeing companies must now pay to dispose of the chemicals they use, instead of dumping them into the creeks that run through town
• Foreign buyers say tighter visa policies have made it harder for them to visit Chinese factories or attend trade shows
• none have been hit harder than the companies that feed the vast global appetite for inexpensive goods such as toys, household goods, shoes and clothes
• manufacturers of low-cost products have been a key engine of China's economic miracle
• helping to turn the country into the world's No. 2 exporter after Germany
• for years, these companies continued to grow by expanding their volumes and trimming margins to undercut the competition
• as material and labor costs rise and China's currency strengthens, these manufacturers are among the least able to absorb the costs.
• many manufacturing centers have seen hundreds if not thousands of factories and workshops close in recent months
• While painful, such difficulties could usher in a more mature phase of China's economic development.
• e.g. country's sweater industry, like many others, is arguably overbuilt
• In such low-cost sectors, analysts predict a coming wave of consolidation that could boost efficiency.
  
• They say companies will also be forced to innovate so they can compete on factors other than price.
• Many Chinese economists and officials think the country has relied too much on cost-cutting and simple production models to boost exports
• high dependence on foreign trade is not good for China
• for the U.S. and Japan, trade is equivalent to around 20% the value of gross domestic product.
  
• For China, it is about 75% of GDP.
• However: China is sure to remain an export powerhouse for many years.
  
• Export figures from China remain strong because the country also supplies industrial machinery and other higher-value products that are less vulnerable to factors such as rising wages.
  
• Plus, the country's roads and ports, and its spectrum of suppliers and businesses that support manufacturers, are a draw that few other developing countries can match.
• China's domestic market of 1.3 billion people is attractive for companies that want to both export and sell within China
• survey late last year by the American Chamber of Commerce in Shanghai and consulting firm Booz Allen Hamilton:
• 83% of the responding companies said they planned to keep their production in China.
  
• But: with rising costs weakening China's appeal as a manufacturing location, some 17% said they would shift at least some operations to other low-cost countries
• e.g. India and Vietnam

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Summary only...

Sustainable Energy: Without the Hot Air - David J.C. MacKay

Summary:
Book on the scale of the energy channels. Not sufficient to know that a source of energy is "huge". We need to know how it compares with another "huge", namely, our huge consumption. Comparing numbers for demand with numbers for supply using renewables. Because renewable energy is so diffuse (between 0.1 and 14 W/m^2), it takes an enormous area of land (or sea) to provide the required 125 kWh/day per person. Provides four different energy plans to meet this need, each with different emphases (no carbon emissions, strong nuclear, no nuclear, etc.).

Currently reading.

Notes:

Preface

• Three different motivations drive today’s energy discussions
• fossil fuels are a finite resource
• seems possible that cheap oil (on which our cars and lorries run) and cheap gas (with which we heat many of our buildings) will run out in our lifetime
• given that fossil fuels are a valuable resource, useful for manufacture of plastics and all sorts of other creative stuff, perhaps we should save them for better uses than simply setting fire to them
• security of energy supply
• using fossil fuels changes the climate
• Climate change is blamed on several human activities, but the biggest contributor to climate change is the greenhouse effect produced by carbon dioxide (CO2).
• Most of the carbon dioxide emissions come from fossil-fuel burning.
  
• main reason we burn fossil fuels is for energy. So to fix climate change, we need to sort out a new way of getting energy
• climate change motivation runs in three steps:
  
• one: human fossil-fuel burning causes carbon dioxide concentrations to rise;
  
• two: carbon dioxide is a greenhouse gas;
  
• three: increasing the greenhouse effect increases average global temperatures.
• fact: the burning of fossil fuels is the principal reason why CO2 concentrations have gone up
• critics: burning of fossil fuels sends about seven gigatonnes of CO2 per year into the atmosphere, but biosphere and the oceans send about 1900 gigatonnes and 36 000 gigatonnes of CO2 per year into the atmosphere!
• misleading because only quantifies the natural flows of CO2 into the atmosphere, not mentioning that approximately the same amount flows back out of the atmosphere into the oceans and biosphere
• the natural flows cancel themselves out; burning fossil fuels creates a new flow that is not cancelled
  
• consensus of the best climate models seems to be that doubling the CO2 concentration would have roughly the same effect as increasing the intensity of the sun by 2%, and would bump up the global mean temperature by something like 3 deg C
• there is no doubt that such a rise is a bad thing
• such temperatures on earth have not been seen for at least 3 million years
• conceivable that the ecosystem will be so significantly altered that the earth stops providing some of the goods and services that we currently take for granted
• In the year 2000, world greenhouse gas emissions stood at about 34 billion tons of CO2 equivalent per year
• about 5 or 6 tons per year per person
• equivalent to every person burning one and a half tons of coal per year
• but: We don’t all emit 6 tons per year
• US: ~25 ton/year/person; UK: ~12 ton/year/person; China: ~ 4 ton/year/person
• i.e. US: ~4 times average; China
• Historical cumulative emissions
• UK nr. 2!
  
• Some countries like Britain have committed to a 60% reduction in greenhouse-gas emissions by 2050
• with such a reduction, climate scientists reckon it’s more likely than not that global temperatures will rise by more than 2 deg C
• global emissions need to fall by 70% or 85% by 2050 to avoid such a rise
• means Britain needs to get down from its current 10 or so tons of CO2 per year per person to roughly 1 ton per year per person by 2050
• This is such a deep cut that the best way to think about it is ‘no more fossil fuels’
• Yardstick #1: average current emissions are 1 ton of carbon per year per person
• or roughly 4 tons of CO2
• note: a round-trip intercontinental flight emits nearly two tons of CO2 per passenger (which is about half a ton of carbon), i.e. half of the average person’s annual carbon emissions
  
• Yardstick #2: we need average emissions to be 1/3 ton of carbon per year per person
• i.e. more than one intercontinental round-trip
• Debates about energy policy are often confusing and emotional because people mix together factual and ethical assertions

1. The balance sheet

• energy and power - units used in book
• energy: kWh
• aka ‘one unit’ on electricity bills
• cost ~10p in 2007
• individuals typically use a few kWh/day
  
• power: kWh/d; occasionally Watt or kiloWatt
  
• rate at which we use or produce energy
• 1 kWh/d is roughly the power you could get from one human servant
  
• 40 W ~ 1 kWh/d
• i.e. a 40W light bulb left switched on all day uses about 1 kWh/d, costing the consumer about 10p/day
• i.e. a 1000W toaster uses 1 kWh/h, or costs about 10p/hour, or 240p/day
  
• 1kW ~ 25 kWh/d
• Joule: standard international unit of energy
• too small to work with: 1 kWh ~ 3.6 MJ
• 1 W = 1 J/s
• most commonly used units in public documents
• terawatt-hours per year (TWh/y)
• 1000TWh/y per United Kingdom is roughly equal to 45 kWh/d per person
• gigawatts (GW)
• 2.5GW per UK is precisely 1 kWh/d per person
• million tonnes of oil equivalent per year (Mtoe/y)
• 2 Mtoe/y per UK is roughly 1 kWh/d per person

2. Cars

• power consumed by daily car user
• energy used (50km) = 40 kWh/d
  
• km travelled per day * energy per litre of fuel / km per litre of fuel
  
• energy per litre of fuel, or calorific value of petrol
• 10 kWh per liter
• km per litre of fuel
• 12 km/l (33 mpg)
• km travelled per day
• e.g. 50 km

3. Wind

• maximum conceivable wind power per person = 200 kWh/d
  
• assuming 100% coverage
  
• = wind power per area x area per person
• power per unit area of windfarm is about 2W/m^2
• for average windspeed of 6m/s (22km/h)
• population density
• 4000 m^2 per person
  
• 8 kW per person = 200 kWh/d per person
• more realistic: maximum conceivable wind power = 20 kWh/d per person
  
• assuming 6m/s and 10% filling
• conclusions:
• if we covered the windiest 10% of the country with windmills, we might be able to generate half of the energy used by driving a car 50 km per day each
• Britain’s onshore wind energy resource may be “huge,” but it’s not as huge as our huge consumption
  
• windmills required to provide the UK with 20 kWh/d per person are
  
• fifty times the entire wind hardware of Denmark;
  
• seven times all the windfarms of Germany;
• double the entire fleet of all wind turbines in the world
• Whitelee windfarm being built near Glasgow in Scotland
• has 140 turbines with a combined peak capacity of 322MW in an area of
  55 km2
• that’s 6W/m2, peak
• if we assume a capacity (load) factor of 33% then the average power production per unit land area is 2W/m2

4. Planes

• assuming one intercontinental round-trip per year (2 x 10,000 km):
• average energy consumption per person per day = 30 kWh per day
• i.e. flying once per year has an energy cost slightly bigger than leaving a 1 kW electric fire on, non-stop, 24 hours a day, all year
• would air travel consume much less energy if we travelled in slower propellor-driven planes?’
  
• no: planes are already almost as efficient as they could possibly be

5. Solar

• 
  

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The euro: how happy a birthday? - FT.com

Summary:
Mike Wickens (York). Argues introduction of euro has not achieved its goals. Inflation rates have not diverged, but ouput and inflation are not converging. Problem with a one-size-fits-all policy. In part due to inflexibility in fiscal policy imposed on members, in part due lack of labour mobility. Single market legislation has produced single market in goods and capital, but little progress in single labour market. Main difference with US or regions within e.g. UK. Need single labour market. But movement of labour in Europe causes tensions. Completing single labour market controversial and may deter countries like UK from joining. (Published: 05/06/08)

Notes:

• ECB has maintained average eurozone inflation between 1.6 and 2.5 per cent since 2000
• growth of prices and output
• for EU as a whole: both about 15%
  
• but: wide discrepancy among member states
• Ireland: 31% and 44%
• Germany: 5% and 11%
• UK: 18% and 20%
• the higher a country's inflation on joining the euro, the greater has been the price level rise thereafter
• inflation convergence observed before the euro has not therefore continued since
• How much of this is due to the "one-size-fits-all" monetary policy?
• setting a single nominal interest rate for all eurozone countries implies that high inflation countries have a low - even a negative - real interest rate, while low inflation countries have a higher - and positive - real interest rate
• the lower the real interest rate, the higher is economic activity and hence inflation
• therefore, we would expect output levels and inflation rates to diverge
• But as inflation rates have not diverged either, this explanation cannot be the whole story.
• Having a more rapidly growing price level implies a loss of competitiveness.
  
• This, together with higher output, may be expected to raise exports from lower to higher inflation countries, thereby reducing economic activity in high-inflation countries and increasing it in low inflation countries.
  
• conventional view is that these effects will be strong enough to act as an automatic corrective to the divergence otherwise inherent in having a common monetary policy
• has not happened
• may have prevented inflation rates from diverging, but it has not resulted in inflation and output growth rates converging as required in a successful currency union
• not fault of ECB: remit is aggregate euro area inflation, not that in member countries
• what can be done?
  
• short-term and long-term solution
• short-term: countries need more flexibility in the conduct of their fiscal policy
• only macro-economic policy instrument left to stabilise their economies in the short term is fiscal policy
• control of their interest rate and their exchange rate given up
• need ability to adopt different rules from those in the stability and growth pact
• correct framework for fiscal policy is to tax-finance permanent expenditures and debt-finance temporary expenditures
• non-cyclical expenditures, such as those on health and education, should be financed through taxation, but additional cyclical expenditures, like unemployment benefits, should be debt-financed
• no matter the size of deficits in business cycle slowdowns, countries should be allowed to finance them through debt
  
• provided the additional debt is paid off during the good times
  
• long-term: raising productivity and completing the single market
• more difficult to achieve and more controversial
• Improving productivity requires using the eurozone's advantages in human capital to innovate in new products and processes.
  
• This must be coupled with moving out of economic activities in which competitiveness has been lost and into new activities that give a temporary monopoly that is exploitable in world markets which would result in benefits to all countries.
• single market legislation has helped produce a single market in goods and capital, but there is little or no progress in creating a single labour market
• problems brought about by a one-size-fits-all monetary policy also apply to the states of the US and the regions of the UK but, because of labour mobility, are manageable
• recent tensions brought about by recent movements of labour in Europe show that completing a single labour market would be highly controversial and might further deter the UK and other countries from joining
  

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Summary only...

Britain is Better Off Outside the Euro - FT.com

Summary:
Martin Wolf giving some reasons why Britain is better off outside the euro. Whether the UK meets arbitrary economic tests at a particular moment is irrelevant. What is right today may be wrong tomorrow. Britain needs the ability to increase short term interest rates in order to restrain the growth of credit. Exchange rate flexibility has not led to price instability. There is no evidence that being outside the eurozone has imposed a performance penalty upon the UK economy. Argument against joining mainly economical, but also part political. (Published: 29/05/08)


Notes:

• Lex column last week: UK close to meeting the economic tests for joining; only obstacle to entry is political
• Martin Wolf disagrees:
• Whether UK meets arbitrary tests at a particular moment is irrelevant
  
• What is right today may be wrong tomorrow.
  
• If country is to join eurozone, its people must be willing to cope with the consequences forever, however unpleasant they may sometimes be.
• At present exchange rates, entry looks more plausible than for the past 12 years
• implied rate of old D-Mark against the pound was 2.46 on May 23
• well below the rate at which sterling was put in the old exchange rate mechanism in 1990
• Proponents of joining claim UK is paying price for staying outside euro zone
• real central bank intervention rate has averaged 3.2 per cent in the UK since 1999, against just 1.4 per cent in Germany or even negative levels in Ireland and Spain
• these relatively high short-term rates have also pushed longer-term rates above levels in the eurozone
• Arguments not compelling
• not long ago some argued that the fact that sterling had been so stable against the euro from early 2003 to late 2007 was a reason for joining
• now people argue that sterling should join the eurozone because it is weak
• all this shows is that the equilibrium exchange rate varies
• the rate that made sense when the world was willing to finance the UK's property-related borrowing spree no longer does so today
• high short-term real interest rates were needed to contain the growth of credit
• if UK had been a member of the eurozone, with lower interest rates, both credit growth and the economy would have been stronger, domestic inflation higher and real short-term interest rates possibly even negative
• would be no offsetting stimulus from the fall in the exchange rate as there is at the moment
• sterling has fallen by about 14 per cent against the euro since last August
• to achieve the same gain, Spain, now struggling with the end of a far bigger property-related boom, would need an annual rate of increase in unit labour costs a percentage point lower than in its eurozone competitors, for a good 15 years
• advantages of exchange-rate flexibility need not go with worse price stability
• between 1998 and 2008, consumer prices will have risen by just 18 per cent in the UK, the same amount as in Germany and below the 20 per cent rise in France and 26 per cent in Italy
• because sterling has fallen against the euro, the domestic price level will rise in the UK relative to the eurozone
• provided the Bank of England is determined to prevent pass-through to domestically determined prices, this should not endanger low inflation to any significant extent
• no evidence that being outside the eurozone has imposed a performance penalty upon the UK economy
• between the first quarter of 1999 and the first quarter of 2008, UK economy expanded by 28 per cent, against 21 per cent in the eurozone as a whole and 16 per cent in Germany
• no evidence that Emu has improved the economic dynamism of its members
• if anything, membership seems to have reduced the pressures for reform.
  
• The proposition then is fundamentally an economic one:
  
• remaining outside the euro preserves the safety valve of currency flexibility, while losing nothing in aggregate economic performance.
  
• Being outside has not even hurt London's position as a financial centre.
• Big proviso is that the Bank of England continues to fulfil its mandate
• might now require a period of much slower growth, or even a recession.
  
• but long-lasting slowdowns in particular economies are just as likely (probably even more likely) inside the eurozone
• Proposition is also political:
  
• inside a currency union, years of slow growth will occasionally be needed if relative costs are to come back into line
• there are countries in which it is possible for politicians to sell this proposition.
  
• Spain and Italy may be among them.
  
• Not UK.
  

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Solving Pump Pain - New York Post

Summary:
Jerry Taylor (Cato Institute) suggesting four things the US Congress could do in order to bring down the price of oil: 1) Opening up key areas for oil and gas exploration and development; 2) Opening up the West to oil-shale development; 3) Emptying out the Strategic Petroleum Reserve; and 4) Suspending (or ending) federal rules that force refiners to use only low-sulfur oil to make gasoline and diesel. (Published: 02/06/08)


Notes:

• skyrocketing energy prices:
  
• gasoline price at pump, now: $3.94/gallon; 5 years ago: $1.43/gallon
• home electricity, now: 10.31c/kWh; 5 years ago: 5.43c/kWh
• "we'll keep on finding ways to save as prices stay high"
• driving less, buying fuel-efficient cars, ...
• demand side: should government mandate more conservatism?
• No
• too much" conservation is as economically harmful as "too little"
• only thing government should do is ensuring that prices are "right"
  
• ie. reflecting total costs
• mainly an issue for electricity, where retail power prices typically bear little relation to wholesale prices
• governments need to encourage real-time pricing of electricity - so that consumers will get the signal to, for example, run the clothes dryer at night, when power is cheaper.
• supply side: four things government could do:
1. Open up key areas for oil and gas exploration and development.
• Arctic National Wildlife Refuge and 85 percent the outer continental shelf are currently stated "off-limits" by Washington
• absurd and hypocrytical for our politicians to fulminate about the need for more oil production from OPEC when they won't lift a finger to increase oil production here at home
• will take years to get these fields on-line: all the more reason to start now
  
• by the time those new fields would be producing, global oil production will probably be about 100 million barrels per day
• optimistically, the fields would yield about 3 million more barrels a day - for a long-run cut in the price of crude of about 3 percent.
• however, will do more for natural-gas prices than for oil
• gas prices are highly sensitive to regional (rather than global) supply and demand issues, so we'd likely see far greater reductions in electricity prices
2. Open up the West to oil-shale development.
• US has three times more petroleum locked up in shale rock than Saudi Arabia has in all its proved reserves
• costly to extract
• oil prices need to be at at about $95/barrel to allow a reasonable profit from extracting oil from Rocky Mountain shale
• probably profitable now
• problem: mostly on federal land; Washington has so far said, "Hands off!"
• Environmentalists object to both these first two ideas
• insist that the wilderness that would be despoiled by energy extraction is worth more than the energy itself
• nonsense - faith masquerading as fact
• How much something is worth is determined by how much people are willing to pay for it
3. Empty out the Strategic Petroleum Reserve.
• holds 700 million barrels of oil
• draining it could add add up to 4.3 billion barrels of crude a day to the market for about five months
• if the theories of a speculator-created "oil bubble" are true, it would pop the bubble and send prices tumbling
• national-security risk is myth
• as long as we're willing to pay market prices for crude oil, we can have all the oil we want - embargo or no embargo.
4. Suspend (or end) federal rules that force refiners to use only low-sulfur oil to make gasoline and diesel.
• best short-term fix for high gas prices
• refiners once relatively free to use heavy crude to make transportation fuel
• today: environmental regulations make it difficult and costly
• there's a (relative) glut of heavy crude right now
• light-crude oil markets are incredibly tight, with no real excess production capacity.
  
• heavy-crude markets are robust, with plenty of crude going unsold for lack of buyers
• suspending low-sulfur rules would bring those heavy crudes into the transportation fuels

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The oily truth about America’s foreign policy - FT.com

Summary:
Gideon Rachman editorial in the FT. American presidents and candidates have been pledging energy independence from Middle-Eastern oil since Nixon (first oil crisis). In reality dependence has increased. Competition for oil increasing. Biggest challenged posed by globalisation not outsourcing of jobs or influx of cheap goods, but globalisation of Western consumption patterns. If Chinese and Indians eventually drive and eat as Europeans and Americans, current oil and food crisis is just the beginning. New technology and change in lifestyle will be required. (published: 13/05/2008)


Notes:

• Iraq: largely war over oil, despite opposite claims
• has backfired; price of oil gone up, per barrel:
• 2003: $26; 2008: $126; 2008-end: $200 ?
  
• Calls for energy independence in US
• universal: McCain, Obama, Clinton, Bush, Nixon
• US foreign oil imports increasing, rather than decreasing
  
• 1973: 33%; 2008: 60%; 2020: 70%?
• money poored into production of biofuels
• has pushed up food prices
• no leading politician yet prepared to call for change in lifestyle to adapt to world of permanently higher energy prices
• Americans little power over OPEC
• plenty of customers for oil
• over 50% of oil exported to Asia
  
• Competition for oil supplies intensifying
• Chinese oil consumption doubled between 1994 and 2003
  
• will have doubled again by 2010.
• China's foray into Africa largely driven by its search for energy security
• IEA: China world's largest consumer of energy by 2010
• IEA: world will need 50% more energy than today by 2030
  
• At present about 10 cars in China for every 1,000 people;
  
• compare: 480 cars per 1,000 people in the US
• by 2015, China could be the world’s largest market for new cars
• Globalisation of Western consumption patterns is the challenge
• greater challenge than outsourcing of jobs or influx of cheap goods
• current inflation in oil and food prices just the start: Indians and Chinese will eventually drive and eat like Europeans and Americans
  
• Energy security now central to American and European foreign policy
• but also to that of main Asian powers
• no real foreign policy fix for problem
• Only solution is new technologies and change in lifestyle
  

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Why oil is so expensive - De Standaard (in Dutch)

Summary:
Three years ago, when oil reached $50, economist's were already saying that price was too high. Today, oil costs two-and-a-half times as much. An analysis of what has happened. Factors considered are: inflation, dollar exchange rate, institutional investors, supply and demand, OPEC, refining capacity, alternatives. (published: 10/05/2008)


Notes:

• inflation
• after correction for inflation, the price of oil only recently exceeded that of April 1980
• dollar
• oil is paid in dollars
• dollar has dropped 14% against the euro in last 12 months
• price of oil for non-American buyers not as high as for Americans
• institutional investors
• eg pension and insurance funds
• hedging themselves against inflation, declining US interest rates and falling US dollar by investing in commodities, including oil
• a strategy that has been successful in the last couple of decades
• drives up price of oil
• demand side
  
• industry has become far more energy efficient since oil crisis in the seventies
• has slowed down increase in price of oil for a long time
• no longer possible to reduce consumption at the same rate (already near maximum efficiency)
  
• new growth markets: eg China; huge increase in demand for oil
• against expectations, Americans still not changing oil consumption patterns
• political promises to lower tax on oil contributing to this
• supply side
  
• difference between supply and demand too small
  
• supply still greater than demand, but difference is becoming smaller
• difference now so small that least disruption is driving prices up rapidly
• most known oil reserves depleted or past maximum capacity
  
• no significant new discoveries
  
• despite oil firms trying hard to discover new reserves in order to keep total oil production constan
• new wells increasingly difficult to exploit
• eg. oil from desert: $10/barrel; oil from North Sea: $25/barrel (up from $15, 3 years ago)
• increased demand for oil platform and personnel also driving prices up
• OPEC
• Secretary-general of OPEC (Abdalla Salem El-Badri) thinks current level of production is high enough
• Iraq: trying to pump up production again, but plagued by attacks
• Iran: not a reliable producer in eyes of West; oil as political weapon
• Nigeria: 8th largest producer; supply has dropped by 564,000 barrels a day since February due to attacks on installations
  
• refining capacity
• one thing to dig up oil, another to refine it to petrol, heating oil, diesel, kerosine, etc.
• underinvestment in refining capacity in the US
• solution: oil refined in Europe, then shipped to US
• very expensive solution for Americans
• labour more expensive than in US
  
• exacerbated by very weak dollar
  
• alternatives
• no alternatives in the near future
  

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The financial system: What went wrong - Economist.com

Summary:

Economist special briefing looking at Wall Street near-collapse and future changes in financial system; financial services industry racing ahead when economy slowed down; causes and consequences; incentives and regulation (19/03/2008)

Facts and Figures

• American financial services industry
• share of total corporate profits
  
• 1980: 10% ; 2007: 40%
• share of stockmarket value
  
• 1980: 6%; 2007: 19%
• accounts for 15% of America's gross value added
• accounts for 5% of private-sector jobs
• value of outstanding credit default swaps: $45tr (2008)
  
• financial sector debt vs. non-financial debt
• 1980: 1:10; 2008: 1:2
• Leverage of banks
  
• Goldman Sachs: $1.1tr assets on $40bn equity
  
• Merrill Lynch: $1tr assets on $30bn equity
  

Notes:

• American financial services industry from early 1980s to 2007
• share of total corporate profits from 10% to 40%
• share of stockmarket value from 6% to 19%
• account for only 15% of America's gross value added
• account for only 5% of private-sector jobs
• 1982 to 2000, unparalleled bull market for shares and bonds
• something changed in 2001, after bursting of dotcom bubble
• America's GDP growth since then been weaker than in any cycle since 1950s
• growth in consumer spending, total investments and export been correspondingly feeble
• but financial services industry did not slow down; raced ahead of real economy ("as ground beneath it fell away")
• industry been able to boost income and profits by using debt, securitisation and proprietary trading
• investors (hungry for yield) went along
• industry has further combined computing power and leverage to create burst of innovation
• value of outstanding credit default swaps at $45tr
• financial sector debt vs. non-financial debt
• 1980: 1:10; 2008: 1:2
• investment banks trading heavily on own debt accounts
• Goldman Sachs: $40bn equity as foundation for $1.1tr assets
• Merrill Lynch: $30bn equity for $1tr assets
• "In rising markets, gearing like that creates stellar returns on equity. When markets are in peril, a small fall in asset values can wipe shareholders out."
• Banks' course made possible by cheap money, in turn facilitated by low consumer-price inflation
• central banks have conspired with banks' urge to earn fees and use leverage
• previously, credit controls or gold standard restricted creation of credit
• as result of liquidity and "financial firms' thirst for yield," boom in American subprime mortgates
• tendency for financial services to go over cliff is accentuated by financial assets' habit of growing during booms
• by lodging their extra assets as collateral, intermediaries can put them to work and borrow more
• since 1970s, debts have grown faster than assets during booms
• banks using borrowed money to buy more of the securities they lodged as collateral; raises prices of the those securities; enables banks to raise more debt and buy more securities
• "pro-cyclical leverage" feeding on itself
• banks get punished by shareholders if they sit out next round
• "bank trapped in a dance it cannot quit; but sooner or later music stops"
• mechanisms that create abundant credit will eventually also destroy it
• "most things attract buyers when price falls, but not necessarily securities"
• financial intermediaries need to limit their leverage in falling market; sell assets; lowers price of securities; puts further strain on balance sheets leading to further sales; continues until those without leverage will buy
• cycles not necessarily result of poor monitoring or huge incentives; human nature; competing with star trader next door
• but pay and lack of regulation probably made this crisis worse; proper incentives needed
• prediction that in future senior executives will face prospect of some of their bonuses being contingent on bank's performance over several years
• but is already the case: many senior bankers paid in shares they cannot immediately sell
• e.g. Bear Stearns' employees owned third of company; already looking to longer term
• more regulation?
• regulation does not just offer protection, but also clever ways to make money by getting around it
• capital reserve requirements set up incentive to create structures free of capital burden (e.g. 364 days credit, "not permanent")
• hundreds of billions of dollars in SIVs and conduits to get round the rules
• reformed capital adequacy rules needed, monitor this shadow banking rigorously
• gaming on boundary between AAA and other bonds, passing off poor credit as AAA, making a lot of money, for a while
• financial industry likely to stagnate or shrink in next few years
• partly because last phase of its growth was founded on unsustainable leverage
• partly because value of underlying equities and bonds unlikely to grow as in 1980s and 1990s
• foolish regulation may make it worse

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Horrors of a 'Crisis' - Washington Post

Summary:

George Will calling talks of "crisis" exaggerated and typical for presidential elections (need dragons to slay). Early retirement should not be considered a given; Q1 2008 drop of 9.9% in S&P500 not alarming; drop in house prices allows first-time buyers onto ladder (13/04/2008)

Facts and Figures:

• S&P500 contractions:
  • 2008 Q1 : 9.9%
  • 1998 Q3: 10.3%
  • 1990 Q3: 14.5%
  • 1987 Q4: 23.2%
  • 1932 Q2: 39.4%

Notes:

• percentage people working aged 55 to 64 rose 1.5% from April 2007
• Wall Street Journal: "prospect of millions of grandparents toiling away in their golden years doesn't square with the American dream."
• Will: "idea that protracted golden years of idleness are a universal right is a delusion of recent vintage."
• Congress, 1935, enacted Social Security; retirement age set at 65, then life expectancy of average male
  • compare life expectancy today: 75 years
• standard definition of recession: two consecutive quarters of contraction
  • 9.9% first quarter decline of S&P 500 not remarkable
  • Q3 1998: 10.3%, Q3 1990: 14.5%, Q4 1987: 23.2%; all without long-term trauma

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China raises GDP growth to 11.9 percent - Boston Globe

Summary:
National Statistic Bureau report; China's GDP ($3.61tr) and growth (11.9%) in 2007; price inflation at 8.7% (10/04/2008)


Facts and Figures:

• China
  
• GDP in 2007: 24.95tr yuan, $3.61tr
• GDP growth
  
• 2007: 11.9%
• 2006: 11.6%
• 2008: 9% (forecast)
• Price inflation Feb 2008: 8.7%
• Highest in 12 years
• Germany's
  
• GDP (2007): $3.8tr
• GDP growth (2007): 2.5%

Notes:

• China's GDP growth in 2007 revised upwards to 11.9% (11.6% in 2006)
• China (GDP $3.61tr) close to overtaking Germany (GDP $3.8tr) as world's third largest economy
• China remains much poorer per person
• China's growth been greater than 10% for last 5 years
• 2008 forecast: 9% due to global slowdown and falling export growth
• Beijing concerned with slowing down growth
• Central bank raising interest rates to cool price pressure (February inflation 8.7%, highest level in 12y)

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Cultivating a Global Mindset - The Globalist

Summary:
Excerpt from "The Quest for Global Dominance," by Anil Gupta, Vijay Govindarajan and Haiyan Wang. Not sure what the global dominance is about, but discusses some interesting concepts. Cultivating a global mindset (vs. parochial and diffuse mindsets). Update: global dominance refers to companies wanting to become global market leaders (02/04/2008)


Facts and figures:

• Mobile subscribers in China (2007): ~500m
• Internet users in China (2007): >200m

Notes:

• Global mindset: "combines an openness to and awareness of diversity across cultures and markets with a propensity and ability to synthesize across this diversity.
• Global manager: open-minded; respect how different countries do thing and understand why they do them that way; however, don't passively accept it, push the limits of culture; finding opportunities to innovate through "the debris of cultural excuses"
• Diffuse mindset: some people in firm may have global mindset, but is not philosophy of the whole firm; behaves parochial.
• Microsoft in Chinese market: example of global mindset
• China promises huge market but is accompanied by perils (e.g. software piracy, unpredictable public policy, local enterprises favoured)
• Sophistication level Chinese market in many respects lagging behind, but leading in some (e.g. 2007: mobile subscribers, 500m, and internet users, 200m)
• Global mindset enables company to outpace rivals in assessing market opportunities, establishing market presence necessary to pursue worthwhile opportunities, converting presence across multiple markets into global competitive advantage
• central value of global mindset: enabling the company to combine speed with accurate response; having an insight into the needs of the local market + being able to build cognitive bridges across these needs and between these needs and the company's own global experience and capabilities
• prisoner of diversity: intimidated by enormous differences across markets and staying back
• companies that stay local (eg. nursing homes, hospitals, radio stations, cleaning services, ...) may benefit from global mindset, too: 1) benchmarking and learning from product and process innovations outside domestic borders; 2) alertness to entry of foreign competitors in local market (eg. a global consolidator acquiring a local competitor and changing the rules of the game)
  

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Globalisation generates dark thoughts - FT.com

Summary:
Chris Giles discussing FT/Harris opinion poll. Public sceptic about globalisation. Want competition among rich countries but feel threatened by emerging countries. Perceived unfairness of corporate executive rewards. Support more taxation for highest earners. (23/07/2007)

Related article Globalisation backlash in rich nations - FT.com (22/07/2007).


Notes:

• FT/Harris opinion poll: more people in rich countries believing globalisation was having negative effect than positive; Britain, US, Spain: less than fifth think globalisation beneficial
• contrast, most economists believe globalisation has been boost to economic performance of rich countries as well as poor
• public feeling gap between rich and poor in their countries getting larger, that inequality is rising
• majority of respondents in all countries (except Italy) think greater rewards for corporate executives are unfair; Britain and UK least likely to respect corporate bosses
• large majority in most countries support more taxation for highest earners
• strong transatlantic divide concerning executive pay; most of Europe, 2/3 of respondents think governments should set pay caps for executives, vs. 1/3 in US
• many studies have shown that childeren of poor are much more likely also to be poor in US and UK; yet according to poll, US and UK citizen's have the opposite impression
• across Europe, large majority thinks free competition should be one of EU's objectives
• message clear: public want competition among rich countries but feel threatened by emerging countries

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