Negative sentiment: Short-sellers under ever closer scrutiny - FT.com

Summary:
Short-sellers are being accused of deliberately "bear raiding" financial services firms with the aim of push the price lower in the hope of triggering a raft of further selling and extending their profits. These accusations (typically by executives seeing their share price drop) are heard often in declining markets. Banks particularly susceptible to loss of confidence. Governments are introducing regulation to limit the practice. Evidence that practice has shifted from being merely a hedging strategy to a full-fledged investment activity.Short-sellers decry double standards: okay to buy company long and go on TV and ramp the shares all you like without anyone saying anything, but as soon as you short you're allegedly spreading false rumours and a danger to the whole financial system. (Published: 22/06/08)

Notes:

• short selling
• borrowing shares, selling them immediately, when price falls they are bought back and returned to the owner; difference between revenue from sale and price of buying them back is profit
• risky: if prices go up, however, a loss is incurred
• practice has long been used as a hedging strategy aimed at protecting "long" investors against the risk that prices fall and they lose money
• long investors: those who own stock in a company
• "Longs" take out small short positions so they can profit whichever way the market goes.
  
• others - mostly hedge funds - may "short" a stock simply because they see it as overvalued and due for a correction
• Short-selling is the single most popular hedge fund strategy, with long/short funds accounting for more than 40 per cent of the total $2,800bn invested in hedge funds.
  
• Over the past 10 years, long/short funds have produced slightly higher returns than the average hedge fund, according to Hedge Fund Research.
  
• technique has been around for about 400 years
• has been blamed for almost every market decline since and many difficulties encountered by individual companies; short-sellers were accused of
  
• bringing about the crash of the Dutch tulip market in the 17th century
• the Wall Street crash of 1929
  
• this year, for helping to bring down Bear Stearns, the New York investment bank

• concern about short-selling tends to escalate when markets decline
• executives blaming short-sellers for spreading inaccurate rumours that caused their shares to plunge
  
• issue is particularly sensitive right now because the most popular targets are banks
• banks are susceptible to a loss of confidence in a way that industrial companies are not
• Bear Stearns collapsed largely because other institutions stopped doing business with it, fearing it might be in trouble
• In the months before its fall, levels of short-selling in the company hit a record high - and this fact was widely known
  
• In recent weeks, financial services companies on three continents have been under siege from short-sellers.
• e.g. in London, shares in HBOS, the UK's largest mortgage lender, have dipped below its planned rights issue price of 275p
• prompted suspicions of a deliberate "bear raid" by short-sellers aiming to push the price below that level in the hope of triggering a raft of further selling and extending their profits

• Many countries are introducing tighter regulation
• moves come partly in response to a sharp increase in the practice as it has shifted from being merely a hedging strategy to a full-fledged investment activity
  
• late 2007 the US Securities and Exchange Commission introduced rules prohibiting short-selling during a company's initial public offering
• this month: UK's Financial Services Authority unexpectedly announced disclosure rules for anyone shorting stock in a company while it undertakes a rights issue
• any investor holding short positions in more than 0.25 per cent of stock in a company conducting a rights issue would have to own up to it
  
• India and several other Asian countries have restricted short-selling this year
• Arturo Bris (IMD):
  
• "This is the concern of regulators. Once short-selling becomes a profit-making strategy, it brings new risks to the market."

• Although more than 90 per cent of the world's stock can technically be shorted, in practice only a certain proportion of shares in a company is usually available to be borrowed.

• complaints about short-sellers fall roughly into two camps:
1. specific allegations about their motivations
2. an inchoate unease about the very idea of betting against a company's success.
   

• shorters are accused of preying on companies and driving down their stock through collusion, issuing negative research to manipulate the stock and spreading rumours
• these activities are in any event illegal

• short-sellers complain of a double standard:
  
• why should a view that a company's shares are likely to fall be inherently less valid, and more worthy of suspicion, than a view that the shares will rise?
  
• Arturo Bris: "This sort of market manipulation is no more characteristic of short-sellers than of bullish investors."
• typical short-seller: short-seller says: "I can buy GE long and go on TV and ramp the shares all I like and no one says anything, but as soon as I short I am spreading false rumours and a danger to the whole financial system? It doesn't add up."

• Short-sellers are frequently more rigorous and detailed in their research than long-only fund managers.
  
• That is in part because they need to be clever stock-pickers.
  
• Because markets rise over the long term, a short-seller needs to go against the tide.
  

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Green energy push planned for UK - BBC News

Summary:
As many as a quarter of British homes could be fitted with solar heating panels under new government plans for a "green revolution". Solar panels, wind turbines and household energy efficiency central. Price tag: £100b. Plan acknowledges green energy will cost more, will have transform large areas of British landscape and may have negative impacts on living standards. Plans due to be unveiled in coming week. (Published: 21/06/08)
Notes:

• plans due to be unveiled next week
• Malcolm Wicks, energy minister:
• the new proposals are "the most ambitious" such strategy that Britain has seen
• goal is to meet the EU target of 15% of energy from renewables by 2020
• call for 3,500 new wind turbines to be erected across the UK
• 30-fold increase in off-shore wind power generation
• quarter of British homes to be fitted with solar heating panels
  
• new loans and grants for businesses to increase green energy supply
• compulsory measure on households to boost efficiency
• total price tag: £100 billion.
• plan concedes that green power will cost more
• at a time of consumer anger over fuel prices
• plans recognise that the new energy policy could transform large areas of Britain's landscape and have a "significant impacts on all our lives...not all of these positive"
• Wicks:
  
• there is now a "huge momentum" in renewable energy provision;
  
• government would ensure that carbon emission reduction was the "core concept behind our energy strategy
• Britain currently gets less than 5% of its electricity from renewables, mainly wind.
• John Sauven, Greenpeace:
• "the plans for solar panels on seven million roofs and other steps to reduce the use of fossil fuels make sense regardless of the price of oil or the state of the climate"
• "We'll create jobs, reduce our dependence on foreign oil and use less gas, and in the long run our power bills will come down. Even if climate change didn't exist these proposals would be sensible."

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Business chiefs urge carbon curbs - BBC News

Summary:
A coalition of 99 companies is for the Kyoto protocol's successor to include targets for cutting greenhouse gas emissions and to establish a global carbon market. Coalition argues that cutting emissions must be made to carry economic advantages. Following Stern review and IPCC data, CEOs conclude that a responsible risk management approach to the issue requires political and business leaders to take action now. Government needs to create right environment. Environmentalists criticise lack of short-term targets and aspirational nature of targets, rather than being set in stone. Some companies are clearly in it for economic opportunities arising from climate change solutions. (Published: 20/06/08)

Notes:

• coalition of 99 companies
• includes: Alcoa, British Airways (BA), Deutsche Bank, EDF, Petrobras, Shell and Vattenfal
• companies involved span all of the G8+5 countries and virtually every major industrial sector
• ask political leaders to
  
• set targets for cutting greenhouse gas emissions and
  
• to establish a global carbon market
• argue that cutting emissions must be made to carry economic advantages.
• coalition believes that taking climate action now would be prudent
• based on scientific and economic evidence assembled by the Intergovermental Panel on Climate Change (IPCC) and the Stern Review
• "While recognising that there are still some uncertainties in the scientific and economic evidence available, these CEOs conclude that a responsible risk management approach to the issue requires political and business leaders to take action now"

• some key recommendations:

• All major economies, including developing ones such as China and India, should be included in the post-Kyoto deal, with richer countries committing to deeper and earlier emissions reduction
• Governments should aspire to halve global greenhouse gas emissions by 2050
• Governments and businesses should urgently explore bottom-up approaches to reducing emissions
• A global carbon trading system should be established as soon as possible
• Emissions caps should be applied flexibly across industry, with some sectors allowed leeway to preserve competitiveness.
• Willie Walsh, CEO BA
• "It's important that the business community demonstrates a desire to work with governments to tackle the challenge that climate change represents. But the report makes it clear that business can't operate in a policy vacuum - we need strong leadership from governments."

• Environmentalist criticisms
  
• EU's ambition is to make cuts of 20% from 1990 levels by 2020
• shorter term targets are needed
• progress towards them is easier to gauge and backsliding more obvious
• business coalition decided against setting a short term figure
• promoting a 2050 target that is "aspirational," not set in stone
• will allow wiggle-room for high-emitting industries
• may lead to a relatively weak post-Kyoto deal

• Steve Lennon, managing director of the South African energy giant Eskom
• "Creating an environment that will encourage people to do things differently is more important than setting a global target."

• some of the companies see economic opportunities arising from climate change solutions
• Caio Koch-Weser, vice chairman of Deutsche Bank
• "We see enormous opportunities for the financial industry, beyond the challenge we face as global citizens. If leadership is there to create a Kyoto successor that is based on cap and trade, then it creates a global carbon market - and then we are in business."

• blueprint for tackling climate change handed to Japanese Prime Minister Yasuo Fukuda
  
• ahead of next month's G8 summit in Japan
• aim of which is to produce a successor to the Kyoto Protocol
  
• current targets expire in 2012

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The Incredible Shrinking Venture-Capital Industry - Wall Street Journal

Summary:
US Venture industry is still downsizing as a result of the tech bubble in 2000. Of the remaining funds, many only did a few deals, and 27% didn't back any new companies. It takes about a decade for fund to die (long after they have run out of capital to back new companies). The NVCA foresees a 15% decline in the next two years in the total number of venture firms investing in the U.S. (Published: 19/06/08)

Notes:

• 2007: 844 venture firms investing in U.S. companies
• 2006: 884
• 2000: 1200
  
• i.e. down 30% from the bubble year of 2000
• source: VentureSource
• Many of the active investors in 2007 did only a few deals.
  
• 45% completed four or more investments.
  
• 29% made just one investment.
  
• About 550 firms have made at least one investment in a U.S. company this year, according to VentureSource
• 224 (27% of the total) didn’t back any new companies last year
• indication that the ranks of active investors will continue to thin
• list of firms who made only follow-on investments
  
• contains some well-known players who have disbanded
• e.g. as St. Paul Venture Capital,
  
• or who have dropped plans for a new fund
• e.g. Worldview Technology Partners
• along with small firms who have not raised a new fund in years
• National Venture Capital Association (NVCA) is starting to see member firms drop out because they aren’t raising another fund
• Mark Heesen, president: “We are finally seeing what in our view is the beginning of the impact of the bubble.”
• Venture funds typically have a life of at least a decade and firms can soldier on long after they have run out of capital to back new companies.
• Heesen foresees a 15% decline in the next two years in the total number of venture firms investing in the U.S.
• many of them too small to meet the NVCA’s membership threshold of $5 million under management.
  
• NVCA has about 470 member firms representing 90% of the venture capital under management in the U.S

Comments

• "Unless the retail sucker market is there to allow for the fabled Exit Strategy, or perhaps the dumb money of a corporate acquirer, the VC is frozen in place. So as the macro market is reduced, the VC market attracts less and does less."
• "I think as growth is slowing in the developed world and is increasing in India, China, other Asian countries and Africa, VC’s are better off investing there. It does not make much sense to invest in a slow market."
• Did the change in options accounting or SarBox (Sarbanes-Oxley) have any impacts on the VC’s inability to drive an exit strategy?
• This subject merits more attention and I’d suggest the journalist focus on a firm such as Worldview to understand and report what’s really going on in the venture industry. Partner conflicts, pressure to ride with the herd (of other VCs all pouring money into the same companies), lack of respect for entrepreneurs, assuming “we know better than the entrepreneur”, killing the golden goose, hubris, etc. [...] That’s the Worldview story–most general partners left and are still leaving, most entrepreneurs were sold down the river and scarred, limited partners heard about all this and when performance lagged they refused to invest anymore. Talk to GPs that left, founders and founding CEOs of companies like Force10, Mirapoint, Cemaphore, PostPath, OnStor, CommVerge, ...
  

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British biotech struggles with the quickening onset of decline - FT.com

Summary:
UK biotech sector in dire shape. High-profile drug failures and share prices plunges. Companies being bought up rather than listed. Does not create a sustainable sector. Problem is lack of financing, management and commercial savvy, combined with deteriorating macroeconomic environment. Not enough venture capital around and people taking risks in UK. Makes it difficult for companies to move to the later, more expensive stages of drug development. By the time economy picks up again, biotech may be eclipsed as a favoured high-risk investment by other sectors. Incentives by the government needed, but this might encourage academics to spin out more companies to add to the already large number that have yet to gain critical mass. (Published: 22/06/08)

Notes:

• past 12 months have been miserable for the UK's biotech industry
• sector has witnessed a string of high-profile drug failures
• share prices have plunged
  
• have been almost no public listings
• sector is shrinking as private biotech companies are bought by cash-rich pharmaceutical companies, most of which are based abroad
  
• Glyn Edwards, CEO Antisoma:
• "While there are some very strong companies developing - including Oxford BioMedica, Acambis and Protherics - the sector is really in dire shape"
• "We really need a biotechnology success. We have had some but in general they have been bought up"
• Celltech by UCB for GBP1.53bn ($3.03bn, C1.93bn)
• Cambridge Antibody Technology and KuDos Pharmaceuticals by AstraZeneca, for GBP702m and $210m ( GBP106m, C134m) respectively
• Piramed by Roche for $160m this year
• quality of British science not in question
• UK is currently producing more than one-third of the European Union's total drug pipeline
• Commercial biotech's perennial problem is a lack of financing, management expertise and commercial savvy
• on top of this comes a weakening macroeconomic climate in which fund managers are increasingly risk-averse
• William Powlett Smith, partner at Ernst & Young:
• "The UK has always laboured under the yoke of not having enough venture capital around and not having the people prepared to take risks"
• UK must create a better environment for companies to get their products to market and stay visible
• Aisling Burnand, chief executive of the BioIndustry Association:
• "There is a role for government to be doing more to support things at an early stage and getting companies investor-ready. Venture capital should be encouraged to come in earlier. There should be an incentive, from a tax perspective for example."
• Biotech companies are characterised by their high risk and cash burn.
  
• Drugs can cost $350m-$800m to develop.
  
• Operations must endure a series of financing rounds - from seed funding to venture capital - to move through this process.
  
• While many have come to the Alternative Investment Market, London's junior stock exchange, few have been successful.
  
• Returns have generally been so bad that investors are unwilling to finance early-stage listings.
• has made it difficult for companies to move to the later, more expensive stages of drug development
• Thus the sensible exit for private biotechs is to be acquired by a larger group.
  
• Aisling Burnand:
  
• "The trade sale route should be seen as a sign of the strength of the UK in terms of science. But it is a short-term fix that does not necessarily fit with creating a sustainable sector."
• can be argued that the only way for the industry to grow is to build up its own companies
• money from trade sales not being recycled back into the sector
• returned to their investors while others put into lower risk sectors
• Paul Cuddon, analyst at KBC Peel Hunt:
• "The UK's most prized biotech assets are being sold off to foreign companies because we cannot afford to retain them. That is not acceptable. The foreign companies get the UK science and labour force. The early-stage investors make money. But this is short term. The UK loses the ability to develop a greater labour force and profit from potentially blockbuster drugs."
• i.e. lack of commitment to commercialise has meant Britain has become a supplier of low-cost biological intellectual property to other countries
• UK biotech sector remains the largest in Europe
• second place in the world after the US
• almost 500 companies
• earnings of GBP2.6bn in 2005
• sector will no doubt stabilise when the state of the financial markets improves
• but: some analysts say it is being eclipsed as a favoured high-risk investment by other sectors
  
• e.g. emerging markets and commodities
• "If the market rebounds there will be a general uptick but I do think people are weary of management and weary of business models not delivering"
• UK could learn from the US experience
• biotech in US has been much more commercially successful
• US biotech companies have produced nine drugs that each sell over $1bn annually
• Liquidity is deeper, the investment community is considered to be more sophisticated and the talent pool wider
• Glyn Edwards: "In the UK we need to be able to raise substantial amounts of money when the IPO window is open. Unlike in the US, the UK tends to do smaller amounts of fundraising that allow companies only to get to the next milestone. When the window closes, they can run into real trouble."
• other initiatives Britain could consider
• Belgium has earmarked C260m ($406m, GBP206m) for early-stage research
• to nurture IP so a company is ready for the commercial process by the time it is formed
• "[In Belgium] companies are nurtured and given extensive mentoring before even reaching the public markets. As such they present a much more attractive investment proposition" (KBC's Mr Cuddon)
• danger in UK is that additional incentives might encourage academics to spin out more companies to add to the already large number that have yet to gain critical mass
• What is needed instead, say some observers, is sectoral consolidation
• This would create entities that were potentially more attractive to financiers.
  
• "We must make these companies more robust, so they can move along. Otherwise we are building a cycle of failure," says Ms Burnand.
  

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Exploding commodity prices, lax monetary policy, and sovereign wealth funds - VOX EU

Summary:
Guillermo Calvo (Columbia) argues that the high commodity prices are not the result of speculation, but of fundamentals. Disagrees with Krugman however on the nature of these fundamentals, and instead believes it is due to a portfolio shift against liquid assets by sovereign wealth funds, partly triggered by lax monetary policy, especially in the US. This could be a harbinger of higher CPI inflation if interest rates stay low. An effective anti-inflationary battle will involve a sharp rise in interest rates, which will enhance the risk of deepening recession. Policy makers should start worrying about inflation and stop chasing imaginary destabilising speculators. (Published: 20/06/08)

Notes:

• rise in oil, metals and food prices
• hard to rationalise on the basis of world output growth
• not even on the basis of China's and India's fast growth, let alone the expected global slowdown
• phenomenon has been accompanied by much higher transaction volumes in the forward markets
• analyst and policy makers pointing accusing finger at speculators
• Calvo's thrust:
• we are not going through another self-fulfilling bubble
• today's explosion of commodity prices is the result of a very real financial storm associated with large excess liquidity in several non-G7 countries and nourished by low G7 central banks' interest rates
• this price explosion could be a leading indicator of future inflation driven by fundamentals
• Wolf, Krugman: absence of substantial increase in physical commodity inventories is evidence of absence of speculative activity
• Calvo: this is not valid
• incentives to stockpile commodities stem from the combination of low central bank interest rates (esp. in the US) and the growth in sovereign wealth funds
• SWFs have been created partly with the intent of switching the composition of government wealth from highly liquid but low-return assets to more risky but much more profitable investment projects
• Fed's rate has been sharply lowered and market does not expect expect that it will be raised with equal impetus within a year
• must add to SWF's determination to switch away from US treasury bills
• portfolio switch implies higher prices
• not all prices have same degree of flexibility
• commodity prices are at the high end of the flexibility spectrum
• wages at the low end
• i.e. price rise phenomenon will bring about a change in relative prices in favour of commodities
• however: eventually the slow-moving prices will catch up and these sharp differences across prices will disappear
• a much more uniform price rise phenomenon will materialise
• when analysed from the perspective of some future time, this whole episode will look very much like a bubble in the commodity market, even though what is behind it is a fundamental factor
• i.e. lower demand for liquid assets by sovereigns like China, Chile or Dubai
• conclusion
• high commodity prices are not the result of speculation, but of fundamentals
• namely a portfolio shift against liquid assets by sovereign wealth funds,
  
• partly triggered by lax monetary policy, especially in the US.
  
• this could be a harbinger of higher CPI inflation if interest rates stay low
• an effective anti-inflationary battle will involve a sharp rise in interest rates, which will enhance the risk of deepening recession.
  
• Policy makers should start worrying about inflation and stop chasing imaginary destabilising speculators

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Summary only...

The Oil Nonbubble - New York Times

Summary:
Paul Krugman denouncing the idea that speculators are behind the rise in oil prices. Evidence for this is that there is no physical hoarding: inventories have remained at more or less normal levels. Instead, it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. Doesn't mean that prices won't fall again (they probably will, as demand adjusts), but era of cheap oil is over. The claims that speculation is the cause is largely wishful thinking on the part of the political right, i.e. that we can somehow return to the good old days of abundant oil. (Published: 12/06/08)

Notes:

• many voices declaring that rising oil price is a bubble, unsupported by the fundamentals of supply and demand
• two questions:
  
• Are speculators mainly, or even largely, responsible for high oil prices?
  
• If they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble?
• speculators do sometimes push commodity prices far above the level justified by fundamentals
• but: when that happens, there are telltale signs that just aren’t there in today’s oil market
• what would happen if the oil market were humming along, with supply and demand balanced at a price of $25 a barrel, and a bunch of speculators came in and drove the price up to $100
• would have major consequences in the material world
• Faced with higher prices, drivers would cut back on their driving;
  
• homeowners would turn down their thermostats;
  
• owners of marginal oil wells would put them back into production.
• As a result, the initial balance between supply and demand would be broken, replaced with a situation in which supply exceeded demand.
  
• This excess supply would, in turn, drive prices back down again
• unless someone were willing to buy up the excess and take it off the market
• i.e. the only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk
  
• this actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling
• stockpiling hasn't happened this time:
  
• all through the period of the alleged bubble, inventories have remained at more or less normal levels
• tells us that the rise in oil prices isn’t the result of runaway speculation;
  
• it’s the result of fundamental factors
• mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China.
  
• The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.
• Saying that high-priced oil isn’t a bubble doesn’t mean that oil prices will never decline
• a pullback in demand, driven by delayed effects of high prices, may send the price of crude back below $100 for a while
• it does mean that speculators aren’t at the heart of the story
• Why, then, do we keep hearing assertions that they are?
• Part of the answer may be the undoubted fact that many people are now investing in oil futures
  
• feeds suspicion that speculators are running the show, even though there’s no good evidence that prices have gotten out of line
• also a political component
• Traditionally, denunciations of speculators come from the left of the political spectrum.
  
• In the case of oil prices, however, the most vociferous proponents of the view that it’s all the speculators’ fault have been conservatives
  
• people whom you wouldn’t normally expect to see warning about the nefarious activities of investment banks and hedge funds
• explanation of this seeming paradox is that wishful thinking has trumped pro-market ideology
• realistic view of what’s happened over the past few years suggests that we’re heading into an era of increasingly scarce, costly oil
• but: they want to believe that if only Goldman Sachs would stop having such a negative attitude, we’d quickly return to the good old days of abundant oil

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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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Speculative Bubbles and Overreaction to Technological Innovation - FRBSF Economic Letter

Summary:
Paper by the SF Fed on the relationship between speculative bubbles, technological innovation, and capital misallocation. History tells us that periods of major technological innovation are often accompanied by speculative bubbles as investors overreact to genuine advances in productivity. Excessive run-ups in asset prices can have important consequences for the economy as firms and investors respond to the price signals, resulting in capital misallocation. On the one hand, speculation can magnify the volatility of economic and financial variables, thus harming the welfare of those who are averse to uncertainty and fluctuations. On the other hand, speculation can increase investment in risky ventures, thus yielding benefits to a society that suffers from an underinvestment problem. (Published: 20/06/08)


Notes:

• Greenspan (2002):
  
• "Bubbles are often precipitated by perceptions of real improvements in the productivity and underlying profitability of the corporate economy. But as history attests, investors then too often exaggerate the extent of the improvement in economic fundamentals."
• Numerous empirical studies have shown that stock prices appear to exhibit "excess volatility"
  
• i.e. prices move too much to be explained by changes in the underlying fundamentals, such as dividends or cash flows
• difficult to reconcile with framework of rational, efficient markets
• Another prominent feature of asset prices is the intermittent occurrence of sustained run-ups above estimates of fundamental value
• so-called speculative bubbles
• can be found throughout history in various countries and markets
• e.g. dramatic rise in U.S. stock prices during the late 1990s
• was accompanied by a boom in business investment
• e.g.U.S. house prices during the mid-2000s
• was accompanied by a boom in residential investment
• Both booms were later followed by falling asset prices and severe retrenchments in the associated investment series
• as firms and investors sought to unwind the excess capital accumulated during the bubble periods
• Shiller (2000): argues that investors overreact to technological innovations
• shows that major stock price run-ups have generally coincided with the emergence of some superficially plausible "new era" theory in the popular culture that extols the virtues of new technology
• new era economic thinking is then used to justify a meteoric rise in asset prices and the abandonment of traditional valuation metrics
• four major run-ups in the real (inflation-adjusted) S&P 500 stock index
• Shiller associates each run-up with the following technological advances that contributed to new era enthusiasm
1. Early 1900s: High-speed rail travel, transatlantic radio, long-line electrical transmission.
2. 1920s: Mass-production of automobiles, travel by highways and roads, commercial radio broadcasts, widespread electrification of manufacturing.
3. 1950s and 60s: Widespread introduction of television, advent of the suburban lifestyle, space travel.
4. Late 1990s: Widespread availability of the internet, innovations in computers and information technology, emergence of the web-based business model.



• Compare Business Week:
  
1. September 7, 1929: "For five years at least, American business has been in the grip of an apocalyptic holy-rolling exaltation over the unparalleled prosperity of the 'new era' upon which we, or it, or somebody has entered."
   
1. March 8, 1999: "The high-tech industry is on the cusp of a new era in computing in which digital smarts won't be tied up in a mainframe, minicomputer, or PC. Instead, computing will come in a vast array of devices aimed at practically every aspect of our daily lives."

• Caballero et al. (2006): argue that rapidly rising stock prices provided firms with a low-cost source of funds from which to finance their investment projects
• resulting surge in capital accumulation served to increase measured productivity growth
• in turn, helped to justify the enormous run-up in stock prices
• Alan Greenspan on January 13, 2000, near the peak of the stock bubble
  
• raised the possibility that investors might have overreacted to recent productivity-enhancing innovations
• Feldstein (2007): argues that the rapid growth in subprime lending from 2001 to 2006 was driven in part by "the widespread use of statistical risk assessment models by lenders."
• Greenspan (2005): offered the view that the financial services sector had been dramatically transformed by advances in information technology, thus enabling lenders "to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately."
• In retrospect, enthusiasm for a "new era" in credit risk modeling appears to have been overdone
• Persons (1930 pp. 118-119), describes the fallout from an earlier era of rapid credit expansion as follows:
  
• "It is highly probable that a considerable volume of sales recently made were based on credit ratings only justifiable on the theory that flush times were to continue indefinitely….When the process of expanding credit ceases and we return to a normal basis of spending each year...there must ensue a painful period of readjustment."
• Conclusion
• History tells us that periods of major technological innovation are often accompanied by speculative bubbles as investors overreact to genuine advances in productivity.
• Excessive run-ups in asset prices can have important consequences for the economy as firms and investors respond to the price signals, resulting in capital misallocation.
• On the one hand, speculation can magnify the volatility of economic and financial variables, thus harming the welfare of those who are averse to uncertainty and fluctuations.
  
• On the other hand, speculation can increase investment in risky ventures, thus yielding benefits to a society that suffers from an underinvestment problem.
• financial fraud has typically accompanied historical bubble episodes
• Meeker (1922, p. 419), regarding the merits of speculation
• "Of all the peoples in history, the American people can least afford to condemn speculation....The discovery of America was made possible by a loan based on the collateral of Queen Isabella's crown jewels, and at interest, beside which even the call rates of 1919-1920 look coy and bashful. Financing an unknown foreigner to sail the unknown deep in three cockleshell boats in the hope of discovering a mythical Zipangu [land of gold] cannot, by the widest exercise of language, be called a 'conservative investment."

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Why Inflation Matters - Fidelity.co.uk

Summary:
Tom Stevenson giving reasons why inflation matters to investors and the economy, and what one should do to protect himself against it. Notes that the present situation is different from the 70s (some prices going up fast, others falling). Inflation matters because it acts as a tax on savers and investors (cfr. Rule of 72), and because it has a negative impact on corporate profits (when the rising costs of inputs can't be passed on to the customer due to competitive environment). People must save more, assess the extent to which stocks in portfolio enjoy pricing power, and older investors should consider extending the time they remain exposed to assets that traditionally perform better in inflationary periods, rather than move into less risky assets like bonds and cash as they approach retirement. (Published: 19/06/08)

Notes:

• Inflation at 3.3%
• Governor of BoE had to send explanatory letter to Chancellor
  
• Mervyn King: “there are good reasons to expect the period of above-target inflation we are experiencing now to be temporary”
• While the headline inflation figure might exceed 4% later this year, King predicts, an already slowing economy will soon bring headline inflation lower again.
• argues that we are seeing a one-off step change in commodity and energy prices, but that this should not be confused with inflation because there is no generalised rise in prices and wages
• situation is more complex than a simple return to 70s
• Fuel prices may have risen by 19.5% year-on-year in May and vegetables by 7.2%, but audio-visual equipment fell by 14% and clothes were 6.7% cheaper
• Input prices for manufacturers may be surging but house prices are falling.
• "All of us must hope that the Chancellor’s reading of the prices outlook is on the money, because the inflationary genie is notoriously difficult to squeeze back into the bottle once it has escaped. The economic, and social, pain of doing so is heavy."
• Why inflation matters
1. Acts as an insidious tax on savers and investors.
• From Barclays Capital’s Equity-Gilt study:
• between 1972 and 1981 the cost of living rose three and a half times as inflation ranged between 7.7% and 24.9%
• even between 1982 and 1991, when inflation moved in a much lower range between 3.7% and 9.3%, prices rose by 64%
• Rule of 72:
  
• divide 72 by the expected growth rate to see how many years it will take to double a given sum. Conversely divide 72 by the expected inflation rate to see how many years it will take to reduce by half the purchasing power of a given sum
• shows that a 4% rate of inflation will reduce by half the value of a given sum of money in just 18 years
• at 6%, that erosion of value takes just 12 years
• If you are retiring on a fixed income and live for another 25 years, you might therefore expect your purchasing power to fall by three quarters over the period of your retirement if inflation is allowed to return to 6% and stays there
2. Negative impact it has on corporate profits
• increasingly competitive global marketplace
  
• companies struggle to pass on higher costs
• recent rise in raw material costs poses a serious threat to margins
• In May, factory gate (output) prices rose by 8.9% but input costs soared by 27.9% ^(5).
  
• manufacturers caught in the middle (and their shareholders) are being forced to swallow the difference.
• What should investors do to protect themselves from its insidious effects?
1. save more
• although the spiralling cost of filling the car and the weekly shop makes this increasingly difficult for most people.
2. assess the extent to which stocks in portfolio enjoy pricing power
• ability to pass on input costs to the end customer will be a key determinant of earnings and dividend growth if we return to a more inflationary environment
• e.g. infrastructure: can offer predictable cash-flows from non-cyclical services
• e.g. water supply
• toll-roads and bridges
• can be a hedge against rising prices because people who have to use these facilities are unlikely to stop just because the price goes up a bit
• other traditional inflation hedges are utilities and tobacco.
• mining and oil companies?
  
• might seem an obvious play in light of high commodity and energy prices
• but: if King is right and the economy does slow significantly, the outlook for those prices might not be as secure as some hope.
• Sectors that are likely to underperform against an inflationary backdrop
• those trapped between rising prices and powerful customers
• e.g food producers
• won't receive much sympathy from their customers
  
• e.g. the supermarkets
• operate in a cut-throat competitive environment
• e.g. clothes retailers
  
• especially at the low-cost end
3. older investors should consider extending the time they remain exposed to assets that traditionally perform better in inflationary periods
   
• in particular equities and property
• rather than move into less risky assets like bonds and cash as they approach retirement, as is tradition
• fixed income is a bad idea in inflationary times
  
• "If the Bank of England is really suffering from the delusion that a little bit of inflation won’t hurt, then fixed incomes are going to look progressively unattractive. Just ask the tanker drivers."

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Clone cell cancer 'cure' hailed - BBC News

Summary:
Scientists claim they have cured advanced skin cancer for the first time using the patient's own cells cloned outside the body. A 52-year-old man involved was free of melanoma two years after treatment which consisted of selecting a number of cancer-fighting immune cells, making five billion copies, and putting them back in the body. Two months later, scans showed the tumours had disappeared. The researchers focused on melanoma because the disease was well understood compared with other cancers, but other cancers could potentially be targeted. (Published: 19/06/08)

Notes:

• Scientists at the Fred Hutchinson Cancer Research Center in Seattle, led by Dr Cassian Yee
• selected CD4+ T immune cells from a sample of the man's white blood cells which had been specifically primed to attack a chemical found on the surface of melanoma cells
• were multiplied in the laboratory, and put back in their billions to see if they could mount an effective attack on the tumours
• two months later, scans showed the tumours had disappeared
• after two years, the man remained disease-free
• The new cells persisted in the body for months after the treatment.
• Authors point out that their technique applied only to a patient with a particular type of immune system and tumour type, and could work for only a small percentage of people with advanced skin cancer.
• Karol Sikora, a cancer expert at Imperial College in London:
• described the research as "pretty exciting" with potentially wide application
• said the researchers had focused on melanoma because the disease was well understood compared with other cancers, but other cancers could potentially be targeted
• "I think we will be able to harness the power of the immune system. Eventually we will learn how to control cancer, in other words we will suppress it. Patients will live with their cancer, and die with their cancer, but not of their cancer - it will be like diabetes today."
• spokesman for Cancer Research UK:
• said more research would be needed, adding: "This is another interesting demonstration of the huge power of the immune system to fight some types of cancer. Although the technique is complex and difficult to use for all but a few patients, the principle that someone's own immune cells can be expanded and made to work in this way is very encouraging for the work that ourselves and others are carrying out in this field."

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UK renewables policy 'inadequate' - BBC News

Summary:
Committe of MPs conclude that there appears to be a lack of urgency with the government and electricity which could prevent it from achieving its 10% renewables target for 2010. According to the committee, 35% of the UK's electricity will need to come from technologies such as wind, wave and biomass. They found that the wait for planning consent was "too lengthy" and access to the national grid was "too limited." technologies are unable to commence electricity generation due to a poorly conceived transmission access regime: there is a backlog of projects to be connected to the national grid. There is also a shortage of skills needed to construct installations. Committee calls for the government to take steps to "support the widespread deployment of renewable electricity generation technologies as a priority, both at a level of macro and microgeneration" (Published: 19/06/08)

Notes:

• UK target: 10% of electricity being generated by renewable sources by 2010
• 2006: 4.6% of the UK's electricity came from renewable sources
• March 2007:
  
• EU adopted a common energy policy, which committed the bloc to generating 20% of its total energy consumption from renewable sources by 2020
• beginning of 2008: the European Commission proposed that in order to meet this goal, the UK needed to derive 15% of its energy from renewables by 2020
• Innovation, Universities, Science and Skills Select Committee
• committee of MPs
  
• calls UK renewables policy inadequate to achieve target
• disappointed by an apparent "lack of urgency" expressed by both the government and the electricity industry
• wait for planning consent was "too lengthy" and access to the national grid was "too limited"

• committee chairman Phil Willis: "It is immensely frustrating that, on the one hand, the government is encouraging the deployment of renewable technologies, but on the other, these technologies are unable to commence electricity generation due to a poorly conceived transmission access regime.
  

  • already a waiting list for projects to be connected to the national grid
  • e.g. in Scotland, there is a 9.3 gigawatts of wind energy capacity waiting to be connected.

• also warned that there was a shortage of skills needed to construct installations
• could also threaten efforts to have 10% of the UK's electricity coming from renewable sources by 2010.
• Dr Mark Williamson, director of innovations at the Carbon Trust
• "The UK, while currently at a low base for renewables, has a fantastic opportunity to fast-track the development of a number of key technologies, such as offshore wind and marine energy. Not only will this deliver significant carbon reductions but it should also deliver significant economic returns."
• MPs said that if the government was to meet its target, then about 35% of the UK's electricity would have to come from technologies such as wind, wave and biomass
• "It is therefore critical that the government takes steps to support the widespread deployment of renewable electricity generation technologies as a priority, both at a level of macro and microgeneration"

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Carbon nanotubes interfere with protozoan function - R&D Magazine

Summary:
Study by a Canadian group found that carbon nanotubes may be toxic to microorganisms. When cultures of a certain key protozoan, a single-cell organism, were exposed to the nanotubes their ability to ingest and digest bacteria was hindered. Protozoa exhibited clumping. If such exposure ever occurred in the wild, there is a possibility that the nanotubes move up the food chain, with impossible to forsee ecological effects. Study illustrates need for research into the health and environmental impact of nanoparticles. (Published: 19/06/08)

Notes:

• Nature Nanotechnology link
  

• Univ. of Waterloo group exposed Tetrahymena thermophila to single-walled carbon nanotubes
• exposed to different concentrations of nanotubes in solution and monitored them for three days using video microscopy
• found that the protozoa unnaturally clumped together initially and then ingested SWNTs and bacteria alike
• additionally, the protozoa's ability to ingest and digest their prey bacteria species was compromised
• control cultures remained healthy while the nanotube-exposed cultures exhibited various negative responses depending on the concentration
• ranging from diminished mobility to death, with the most prevalent effect being cell clumping
• one potential positive effect of Tetrahymena thermophila nanotube uptake
• the protozoa released extra “exudates,” fluids rich in proteins and cellular debris
• help solidify impurities in the wastewater
• could make the protozoa more efficient water-cleaners.

• implication: if such exposure ever occurred in the wild, the nanotubes could move up the food chain
• additionally, because the protozoa's ability to ingest and digest their prey bacteria species was compromised, certain bacteria populations could balloon
• could have untold ecological effects
• pressing need for research into the health and environmental impact of nanoparticles
• Part of the reason for the lack of studies on carbon nanotubes effects on microorganisms is that scientists generally believe that the nanotubes are insoluble in water.
  
• However, at least one recent study challenges this belief.
  
• “We hope that our work will stimulate a line of research towards better understanding of the effects of nanomaterials on diverse organisms, especially on single-cell organisms that are ecological important,” says Tang.

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Manufacturers plan to outsource more R&D - Economist Intelligence Unit

Summary:
A survey reveals that an increasing number of manufacturers are keen to outsource R&D and innovation. The main motivation is skills shortage in design and engineering. To keep pace with the breathtaking pace of product innovation, outsourcing elements of research and development may be the only viable way forward. The biggest barrier to outsourcing innovation is trust, i.e. losing IP to partners or competitors. Better IT technology is needed to prevent this, as well as better communication and an open culture. (Published: 16/06/08)

Notes:

• new paper by EIU suggests manufacturers are increasingly keen to outsource R&D
• "Outsourcing innovation: A manufacturer's perspective"
• outsourcing was pioneered by manufacturing companies
• especially in automotive sector
• two top motives:
1. cut costs
2. focus on core competences
• survey:
• 22% of manufacturers use outsource-providers as a source of innovation
• product design or process improvement
• 41% admits that, in past three years, little or no innovation has been derived from external partners
• 37% says only about one quarter of innovation has been derived from external partners
• respondents clearly see a benefit in seeking innovation outside the organisation's R&D laboratory
• skills shortages in design and engineering
• 58% of the survey sample said that, in the past three years, it has become somewhat harder or much harder to hire talented employees who can deliver innovative ideas
• “With the war for talent intensifying, especially in the design and engineering arena, manufacturers can no longer rely on finding all the best ideas under their roof. To keep pace with the breathtaking pace of product innovation, outsourcing elements of research and development may be the only viable way forward.” (Robin Bew, EIU)
  
• biggest barrier to outsourcing innovation: trust
• companies fear losing IP to partners and competitors
• most physical products start life as a blueprint on a computer
• is when they are most vulnerable
• 5 years worth of R&D can be loaded onto a memory stick in seconds
• IT security can go some way to preventing this from happening
• 51% of respondents feel their firms need to invest more in technology in order to facilitate the outsourcing of innovation from external partners
• more openness needed
• most respondents believe that establishing better communication channels with partners—both face-to-face and virtual—would make capitalising on their ability to innovate easier
• majority of companies believe that having an open culture in which knowledge is shared is essential to capitalising on innovation from external partners.
• note on measuring innovation:
• counting the new products and businesses they launch (64%)
• calculate the proportion of revenue growth that is attributable to these new products and businesses (54%)
• counting the number of patents filed comes in a distant third (32%)
• not measuring innovation at all (8%)
• related links:
• In the Pipeline: More on Outsourcing
  

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Summary only...

All Biofuels Are Not The Same - Washington Post

Summary:
Vinod Khosla arguing that a ban on all biofuels would be a mistake. There is room for biofuel crop production without affecting food supply or the environment. E.g. waste from forestry operations, agricultural crop waste, municipal organic waste and sewage. Winter cover crops would use land that sits idle during winter. Reducing the renewable fuel mandates would reduce investment in these alternatives and in improving the quality of cellulosic biofuels. Instead he proposes a policies and an impact rating to incentivise the production of biofuels that are environmentally beneficial. (Published: 16/06/08)

Notes:

• biofuels: refers to a variety of products that vary dramatically in their environmental impact and effects on food prices
• cellulosic ethanol production can reduce carbon emissions 75% while producing ethanol at a lower cost than corn ethanol and gasoline
  
• concerns about amount of water and corn required to produce a gallon of ethanol
• 16-ounce steak takes about the same amount of corn and more water
• ban steaks?
• cellulosic fuels mandate:
  
• congress has required oil refiners and fuel blenders to use up to 36billion gallons of renewable fuels produced in America annually
• attacked by critics
• but: reducing it could be disasterous for energy security and the environment
• better: build flexibility into the standard related to price and availability of cellulosic biofuels
  
• sufficient biomass exists as waste from forestry operations to meet the cellulosic fuels mandate (21 billions) in the 2007 energy bill
• if we include agricultural crop waste, municipal organic waste and sewage, all 36 billion gallons could be produced within 10 years
  
• approaching $1/gallon
• adding winter cover crops to land that sits idle during winter (about half of the land used for agriculture)
• could replace most of our gasoline imports
• could produce 450 million tons of biomass a year within 10 years, and more than 750 million tons by 2030
• not an additional acre of land being used for biofuels
  
• Ed Shafer (US Agriculture Secretary):
• "On the international level, only 3% of the more than 40% increase we have seen in world food prices this year is due to the increased demand on corn for ethanol"
• LECG analysis:
  
• Oil prices affect the US consumer price index for food two to three times as much as corn prices
• Merril Lynch:
• If biofuels were taken off the market, oil prices would climb 15%, putting further upward pressure on food prices
• source of corn and cellulosic ethanol matters
• if ethanol is produced on lands that displace food production into rain forests, its environmental effect will be negative
• need national and international policies that create incentives for countries such as Brazil and Malaysia to preserve their rain forests through carbon credits while banning biofuels from countries that do not meet rain forest deforestation reduction targets
• incentivise production of biofuels that are environmentally beneficial
• e.g. carbon/land/air quality/water impact rating
• if we reduce renewable fuel mandates, we are likely to reduce investment in next-generation cellulosic biofuels
• need to focus on improving the quality of biofuels and reducing our oil dependence
  

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The Bank needs a stronger role in the City - FT.com

Summary:
David Lascelles (Centre for the Study of Financial innovation) wants Bank of England to be returned part of its supervisory role (now role of Treasury and the FSA). BoE needs to act as counterweight to both FSA and Treasury. Field of banking supervision currently open to the political and bureaucratic forces of the Treasury and the FSA. Need for an independent and trusted body in banking supervision. BoE is uniquely placed to understand banks and markets, and to provide guidance to both of these, as well as to advice to its official partners. A purely monetary role for the BoE would be a huge wasted opportunity. (Published: 15/06/08)

Notes:

• Northern Rock fiasco blamed on confusion over roles Treasury, Bank of England and FSA
• roles Treasury and FSA are clear:
• Treasury: makes decisions about the use of public resources to keep the financial services sector in order
• FSA: day to day supervision of the financial services sector
• role of Bank of England?
• aid and admonish banks? (Treasury's preference)
  
• watch over them with wise detachment while it gets on with job of running monetary policy? (Bank's preference)
  
• no clear answers
• strong case against banking supervision by BoE:
• always a potential conflict between the objectives of monetary and financial stability
• one may call for higher, the other for lower rates
• when BoE acted as supervisor, more often a cause of grief than congratulation
• e.g. Johnson Matthey, BCCI and Barings affairs: drained its reputation and morale
• BoE was relieved when that responsibility was transferred to the FSA in 1997
• argument that Bank's most suitable role in financial stability is simply as a purveyor of liquidity and emergency cash to the financial system, as and when required by the FSA or Treasury
• i.e. a purely mechanical function, cost and responsibility for which are borne by others
• however: such arrangement would probably not succeed
• would leave the field of banking supervision open to the political and bureaucratic forces of the Treasury and the FSA
• Bank's role of counterweight to both would be lost
• Bank's understanding and feel for the condition of the markets would be wasted
• probably superior to both the Treasury's and the FSA's
• need for an independent and trusted body in banking supervision
• one to which bankers can turn in times of trouble without being hit with a fine or a political stick
• one to which non-bankers can look for an informed but impartial view of what's going on
• need to restore some of the features of City management by the BoE that have been lost
• including giving the Bank a more explicit role
• Bank need not be in direct supervision, but is uniquely placed to understand banks and markets, and to provide guidance to both of these, as well as to advice to its official partners
• to retreat into a largely monetary role would be a huge wasted opportunity
  

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Summary only...

What is Free Trade? - Cafe Hayek

Summary:
Free trade is an institutional environment in which adult buyers and sellers are free to deal with each other without regard to their nationalities, physical locations, religious affiliations, or any other criteria that officious third-parties would elevate into significance but that the buyers and sellers themselves find irrelevant (or at least sufficiently insignificant so as not to affect their desires to trade with each other). (Don Boudreaux)

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The Manhattan Project Is Underway - Energy Tribune

Summary:
Robert Bryce noting that a Manhatten Project appears to be underway, except that there are no government mandates: huge investments are made in renewable technologies by private investors. Two main difference between previous energy crisis (70s) and now: huge amount of venture capital available, and the amount of new technologies that are being brought to the market as a result. Far better that these risk be taken by the private sector. No government agency can react as quickly as the private sector can. Markets, not governments, are going to determine the pace of our transition to alternative and renewable fuels. (Published: 12/06/08)

Summary:

• Manhatten Project underway as a result of higher energy prices
• huge investments in renewable energy technologies
• but without government mandates
• New Energy Finance Ltd., London-based research firm:
• 2007: $148.4b invested globally in "clean energy technologies, companies and projects"
• four-fold increase over 2004 levels
• Mark Mills, Digital Power Capital (PE fund)
• two critical differences from the 1970s:
• huge amount of venture capital now available to energy entrepreneurs
• several thousand firms providing venture capital or private equity
  
• "the phenomenal new suite of technologies that are being brought to the market that can address the problem"
• from nanotechnology to high-bandwidth wireless communications
• energy technology companies booming with oil selling for more than $130
• First Solar Inc.
• makes thin-film solar panels
  
• best-performing stock in US in 2007
• up nearly 800% last year
  
• stock has increased some 12 fold in value since IPO in 2006
• trading at $300/share, P/E of about 124, market cap of $25b
• Broadwind Energy
  
• builds towers and other equipment for the wind energy
  
• June 2006: shares selling for about $1.30
• May 2008: $26/share
• whether current investment trend is a bubble remains to be seen
• but: far better that these risk be taken by the private sector
• no government agency can react as quickly as the private sector can
• Carlos Ghosn, Nissan CEO in New York Times: "the shifts coming from the markets are more powerful than what regulators are doing"
• central point: markets, not governments, are going to determine the pace of our transition to alternative and renewable fuels
• the length of that transition, which will likely last several decades, depends almost exclusively on how quickly those new sources can become cost-competitive with fossil fuels

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The Return of Stagflation? - Reason

Summary:
Steve Chapman believes talk of stagflation is misplaced. Although US economy is practically stagnant, contrary to what most people seem to believe, inflation is not out of control. Rise in inflation solely due to rise in food and energy prices. Inflation has not spread to other areas of economy: core inflation been very constant Food and energy are notoriously unpredictable: can suddenly climb or plunge for reasons having nothing to do with how much money is in circulation. Food and energy prices due to supply and demand, which tends to be self-correcting. Note: not due to weakening dollar: dollar has remained stable for last three months, during which we have seen the sharpest rise in energy prices. (Published: 12/06/08)

Notes:

• economy can already be described stagnant, given negligible growth
• but: to get stagflation, also need inflation
• contrary to popular impression, has yet to show itself
• for months, Fed has been trying to stimulate lending by cutting interest rates
• in normal times, that can be inflationary
• but: these are not normal times
• because of mortgage crisis, banks are inclined to cut back on loans
• means shrinking money supply
• Fed has to use expansionary tools to counter that contractionary effect and try to avert recession
• if it's got the balance right, result will be that inflation won't rise or fall but stay the same
• critics say Fed has surrendered on inflation:
• pumping money out in a desparate attempt to prevent a full-fledged downturn
• see weakness of the dollar
• critics say Bernanke has let the dollar sink
• has in turn pushed up the price of oil and doomed us to the sort of inflation we haven't seen in a long time
• but: theory and evidence at odds:
• dollar has actually been stable over the last three months, both agains the euro and other currencies
• three months ago: price of oil below $100; now: above $130
• a dollar that's not declining can't explain why oil prices are rising
• if the dollar were steadily losing value, gold should also be soaring in price
• but: gold been trading well below $900 (versus close to $1000 in March)
• also: inflation has not spread across to the rest of the economy
• core rate (excludes food and energy) has been constant for a long time
• note: main reason for leaving out food and energy is that they are notoriously unpredictable and can suddenly climb or plunge for reasons having nothing to do with how much money is in circulation
• you can get high energy or food prices even when inflation is in check
• but: you can't get high prices everywhere else unless the Fed is pumping too much money into the economy for an extended period of time
• rising costs of food and energy are a major problem
• but the problem is not inflation
• worldwide demand for some key commodities has risen faster than supply
• unlike inflation, which tends to feed on itself, supply and demand changes tend to be self-correcting
• therefore: makes sense for Bernanke not to get too wrought up about $4 gas
• Fed's job is not to maintain price stability in any specific good or service
• it is to maintain general price stability
• preferably while keeping the economy at a healthy pace
• so far the Fed has managed to keep inflation in check
  

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The new stagflation: an Asian export - FT.com

Summary:
Stephen Roach (Morgan Stanley) acknowledges the US economy is at risk of stagflation, but believes the situation now is fundamentally different from the 1970s because 1) today's wages are delinked from prices; and 2) the threat emerges from inflationary pressures in Asia. China's inflation has had its sharpest rise in the last 4 month's since the early 90s. Not just due to food and energy prices rising, but also to wage pressure. Hyper-growth is seen as the panacea for the aspirations of Asia's growing middle class. China's central bank interest rates too low. Such monetary accomodation in an increasingly inflation-prone developing Asia spells a persistence of elevated price pressures in this vital segment of the global production chain. Threatens not only living standards of the newly-propserous in Asia, but will take an especially severe toll on those on the lower end of the income distributions. However, will also result in a price shock to imported goods in the developed world. (Published: 12/06/08)

Notes:

• risk of stagflation
• today very different from 1970s
• today's wages delinked from prices
• practically eliminates the automatic indexation features of the once dreaded wage-price spiral
• slowing economic growth in the industrial economies (cfr surge in US unemployment figures)
• opens up further slack in labour markets, putting downward cyclical pressure on wages over the next couple of years
• new threat to global inflation, not present in the 70s:
• price pressures in Asia lurching out of control
• consumer price index for developing Asia as a whole hit 7.5% in April 2008
• more than double the 3.6% of a year ago
• not without serious risks to the global economy
• Asia's now the world's producer
• globalisation of trade flows is a new transmission mechanism of worldwide inflation that was not evident in the 70s
• Chinese inflation: 8.3% average annual rate over the 4 months ending May 2008
• sharpest sustained increase on a year-on-year basis since mid 90s
• China's inflation problem much deeper than the food and energy price shocks that thus far have played a disproportionate role in driving its CPI higher
• also at work: serious wage pressures
• reflecting, in part, increases in minimum wages associated with new labour reform laws
• meanwhile, People's Bank of China has held its policy lending rate below headline inflation, resulting in negative real short-term interest rates
• result has been ominous increase in Chinese inflationary expectations
• strikingly reminiscent of similar occurrences that plagued the developed world in the 70s and 80s
• the longer such a trend persists, the more wrenching the monetary tightening required to arrest it and the greater the risk of a subsequent hard landing
• China not alone in its reluctance to take firm action against worrying build-up of inflationary pressures
• true throughout most of developing Asia
• hyper-growth is viewed as the panacea for the aspirations of a growing middle class
• throughout the region, central banks are keeping short-term interest rates far too low to combat these inflationary pressures
• such monetary accomodation in an increasingly inflation-prone developing Asia spells a persistence of elevated price pressures in this vital segment of the global production chain
• not only does that threaten living standards for newly prosperous households in the developing world
• also takes an especially sever toll on those at the lower end of the income distribution
• also provides a price shock to imported goods in the developed world
• these now play a much greater role in meeting the demands of domestic production
• World remains largely in denial over the outbreak of a new strain of stagflation
• the hopes of "core inflationists" depend on a reversion in food and energy prices to take headline inflation lower in the developing world
• but: this will be the sixth year in a row when that has not happened
• "market purists" are counting on currency adjustments, especially sharp appreciation of currencies in developing Asia, to temper the transmission of price pressures from these export-led economies
• but: these are not economies that want to use the currency lever to put their growth imperatives at risk
• note: "core inflationists"
• those analysis that look at core inflation rather than headline inflation
• i.e. without food and energy, resulting in a "cleaner" read on the underlying inflation
  
• Roach does not believe one can ignore food and energy price inflation because they are critically important components of household budgets, especially in poorer countries
  

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Too hot or too cold? - The Economist

Summary:
The outlook for the economy in 2008 and beyond has changed dramatically in the last 6 months. At the start of 2008, investors assumed that interest rates would fall or at least be kept on hold, due to the lingering effects of the credit crunch. Analysts forecast 15% profits growth for European countries in 2008. Now interest rates are expected to rise, and growth forecast has been revised to 4%, and dropping. The problem is inflation and inflation expectations. The essence of the current crisis is that the global economy has received two shocks in the past 12 months: the credit crunch and higher commodity prices. Those shocks have made the outlook more uncertain. Investors fear that central banks, in their zeal to prove their anti-inflationary credentials, may inflict some severe damage on economic growth. Combination of higher interest rates and lower profit margins makes it difficult to see how stockmarkets could advance much during the rest of the year. As one analyst put it: "Recent years have seen the world get all the benefits of globalisation without the costs. Emerging markets got growth, developed countries kept the lid on inflation." (Published: 12/06/08)

Notes:

• start of 2008: most investors assumed lingering effects of credit crunch would allow interest rates to fall, or at worst be kept on hold
• but: over past week markets have priced in a number of rate rises later in the year from the Fed, ECB and BoE
• has caused turmoil in short-term government-bond markets, as yields have been forced sharply higher
• problem is inflation
• central bankers know that higher inflation expectations, once entrenched, are difficult to eliminate
• sounding as tough as they can
• lack of co-ordination between central banks
  
• 3 Jun: Bernanke tried to talk up the dollar
• a falling currency adds to inflationary pressures
• 5 Jun: Trichet gave strong hint euro-zone rates were soon to rise
• sent euro sharply higher
• 6 Jun: unexpected rise in American unemployment + $11 gain in price of oil
• combination pointing to higher inflation and slower growth
• DJ Industrial Average tumbled nearly 400 points on the day in response
  
• investors fear that central banks, in their zeal to prove their anti-inflationary credentials, may inflict some severe damage on economic growth
• house prices falling in Britain and America
• consumers struggling to cope with the impact of that on their wealth and with the effect of higher fuel and food prices on their wallets
• a rise in interest rates may push them over the edge
• balancing of inflation and growth not confined to the developed world
• China: central bank raised amount of reserves banks must hold against their loans in an effort to restrain inflation
• India: central bank raised interest rates for the first time in over a year to stem inflation
• essence of the crisis
• global economy has received two shocks in the past 12 months:
• credit crunch and higher commodity prices
• those shocks have made the outlook more uncertain
• not just for the economy but for monetary policy
• uncertainty makes investors nervous
• not least because it comes after a long period when markets seem to have underpriced risk
• Peter Oppenheimer, Goldman Sachs:
• "Recent years have seen the world get all the benefits of globalisation without the costs. Emerging markets got growth, developed countries kept the lid on inflation."
• higher commodity prices are a zero-sum game: for every winner there is a loser
• many of those losers are likely to be companies
• profit margins have been at historic highs in some big countries
• in large part because businesses have been succesful in controlling labour costs
• but: higher raw-material prices present firms with a problem:
• pass those costs on, and not only will consumer demand falter, but central banks may raise rates
• so they may have to accept lower margins instead
• start 2008: analysts were forecasting 15% profits growth for European companies in 2008
• revisions have brought that number down to 4%
• largely because of problems in the finance industry
• Goldman Sachs thinks still too optimistic
• predicting an earnings decline of 12% this year
• combination of higher interest rates and lower profit margins makes it difficult to see how stockmarkets could advance much during the rest of the year

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