Month: November 2015

  CLIMATE CHANGE  

The Paris conference on climate change begins this week and we are inundated with terrifying data, images and forecasts.

Bearnobull being an inherent sceptic (if you are not one you should not try your luck in the investment world), I offer a few links from the other side which get little media attention …(thanks Fred):

• This speech was given by Ivar Griaever, who shares a Nobel Prize in Physics, on July 1, 2015: https://www.youtube.com/watch?v=Dk60CUkf3Kw

• Just out: MATT RIDLEY: THE CLIMATE WARS AND THE DAMAGE TO SCIENCE

Actually, Ridley has a lengthy piece in today’s WSJ: Your Complete Guide to the Climate Debate

This is how he concludes:

(…) Yes, but if there is even a tiny chance of catastrophe, should the world not strain every sinew to head it off? Better to decarbonize the world economy and find it was unnecessary than to continue using fossil fuels and regret it. If decarbonization were easy, then sure, this would make sense. But the experience of the last three decades is that there is no energy technology remotely ready to take over from fossil fuels on the scale needed and at a price the public is willing to pay. (…)

Meanwhile, there are a billion people with no grid electricity whose lives could be radically improved—and whose ability to cope with the effects of weather and climate change could be greatly enhanced—with the access to the concentrated power of coal, gas or oil that the rich world enjoys. Aid for such projects has already been constrained by Western institutions in the interest of not putting the climate at risk. So climate policy is hurting the poor.

To put it bluntly, climate change and its likely impact are proving slower and less harmful than we feared, while decarbonization of the economy is proving more painful and costly than we hoped. The mood in Paris will be one of furious pessimism among the well-funded NGOs that will attend the summit in large numbers: Decarbonization, on which they have set their hearts, is not happening, and they dare not mention the reassuring news from science lest it threaten their budgets. (…)

So what will emerge from Paris, when thousands of government officials gather from Nov. 30 to Dec. 11 to agree on a new U.N. climate deal to replace the Kyoto Protocol, which expires in 2020? Expect an agreement that is sufficiently vague and noncommittal for all countries to sign and claim victory. Such an agreement will also have to camouflage deep and unbridgeable divisions while ensuring that all countries are liberated from legally binding targets a la Kyoto.

The political climate is conducive to such an ineffectual agreement. Concerns about the economy, terrorism and international security have been overshadowing the climate agenda for years. The fact that global warming has slowed significantly over the past two decades has reduced public concern and political pressure in most countries. It has also given governments valuable time to kick painful decisions down the road. (…)

Concerned about the loss of industrial competitiveness, the Obama administration is demanding an international transparency-and-review mechanism that can verify whether voluntary pledges are met by all countries. Developing countries, however, oppose any outside body reviewing their energy and industrial activities and carbon-dioxide emissions on the grounds that such efforts would violate their sovereignty.

They are also resisting attempts by the U.S. and the European Union to end the legal distinction (the so-called firewall) between developing and developed nations. China, India and the “Like-Minded Developing Countries” group are countering Western pressure by demanding a legally binding compensation package of $100 billion a year of dedicated climate funds, as promised by President Obama at the U.N. climate conference in Copenhagen in 2009.

However, developing nations are only too aware that the $100 billion per annum funding pledge is never going to materialize, not least because the U.S. Congress would never agree to such an astronomical wealth transfer. This failure to deliver is inevitable, but it will give developing nations the perfect excuse not to comply with their own national pledges.

Both India and China continue to build new coal-fired power stations. China’s coal consumption is growing at 2.6% a year, India’s at 5%, which is why coal was the fastest-growing fossil fuel last year. China has pledged to reduce energy and carbon intensity, but that is another way of saying it will increase energy efficiency—it doesn’t mean reducing use.

For the EU, on the other hand, a voluntary climate agreement would finally allow member states to abandon unilateral decarbonization policies that have seriously undermined Europe’s competitiveness. The EU has offered to cut carbon-dioxide emissions by 40% below the 1990 level by 2030. However, this pledge is conditional on all nations represented at the Paris summit adopting legally binding carbon-emissions targets similar to and as a carry-over of the Kyoto Protocol.

According to the EU’s key demand, the Paris Protocol must deliver “legally binding mitigation commitments that put the world on track toward achieving the below 2°C objective. . . . Mitigation commitments under the Protocol should be equally legally binding on all Parties.” The chances of such an agreement are close to zero. If there are no legally binding carbon targets agreed to in Paris, the EU will be unlikely to make its own conditional pledges legally binding.

Any climate agreement should be flexible enough so that voluntary pledges can be adjusted over the next couple of decades depending on what global temperatures do. The best we can hope for is a toothless agreement that will satisfy most governments yet allow them to pay lip-service to action. In all likelihood, that’s exactly what we can expect to get in Paris.

And in today’s FT:

France bows to Obama and backs down on climate ‘treaty’

France has offered a key concession to the US on the eve of historic climate talks in Paris, saying a new global climate accord will not be called a “treaty” and might not contain legally binding emissions reduction targets.

In a significant climbdown, Laurent Fabius, French foreign minister, said signatories to the planned deal would still be legally required to meet many of its terms but most likely not the carbon-cutting goals underpinning the agreement.

“The accord needs to be legally binding. It’s not just literature,” Mr Fabius told the Financial Times. “But it will probably have a dual nature. Some of the clauses will be legally binding.”

Mr Fabius, who is to chair the UN climate conference, added: “Another question is whether the Paris accord as a whole will be called a treaty. If that’s the case, then it poses a big problem for President Barack Obama because a treaty has to pass through Congress.” (…)

“It would be pointless to come up with an accord that would be eventually rejected by either China or the US.” (…)

However, he said there would be a debate over whether a mechanism to review the targets every five years should be voluntary or obligatory.

Many companies say it is imperative for countries to agree to the five-yearly reviews so that investors get clear, long term policy signals. (…)

Michael Levitt, excerpted from Be Careful Out There (itself a good read)::

Climate Change and Your Investments

While politicians and political commentators debate whether climate change is a greater strategic threat to the United States than radical Islam or Vladimir Putin (it is not), investors need to take the regulatory response to this issue seriously. While the precise impact of climate changes is still being debated, two recent regulatory moves signal potential trouble ahead for investors in industries such as energy, industrials, autos and any other activity that politicians decide has a negative effect on the environment.

The first move occurred in New York where politically ambitious Attorney General Eric Schneiderman invoked the controversial Martin Act to subpoena records of Exxon-Mobil going back thirty years related to the oil giant’s response to and public statements regarding climate change. News of the subpoena was leaked to The New York Times, which reported on November 5 that the New York Attorney General had “begun a sweeping investigation of Exxon Mobil to determine whether the company had lied to the public about the risks of climate change or to investors about how these risks might hurt the oil business.” The Martin Act was enacted in 1921 to prosecute stock boiler rooms. It doesn’t require prosecutors to prove intent to defraud and in this case would not require proof that any Exxon investor was harmed. The law also doesn’t require probable cause to commence an investigation. The Martin Act was a favorite tool of Mr. Schneiderman’s predecessor Eliot Spitzer. One would think that the types of disclosures the AG is asking about fall within the purview of securities regulators, not the state attorney general. I would advise Exxon Mobil to the subpoena by informing Governor Andrew Cuomo that it will begin moving as many of its offices and other facilities outside of New York State as possible and by refusing to cooperate with this unlawful investigation.

The second move came when the Department of Labor issued new regulations on October 26 that affect the law governing how fiduciaries manage pension assets. Amending a 2008 interpretive bulletin that it now believes “unduly discouraged plan fiduciaries” from considering environmental, social and governance factors in their investment decisions, the Department of Labor issued new Interpretive Bulletin 2015-01 that now requires managers to take such factors into account. Under the new guidelines, while fiduciaries cannot accept lower return expectations or greater risks, they are required take environmental, social and governance factors into account at “tiebreakers” when all other factors are equal. “Environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tiebreakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.” Wall Street is objecting to this intervention into the investment process by the government. By warning fiduciaries that consideration of the environmental factors is required in cases where they have a direct impact on the value of an investment, the Department of Labor is effectively intervening in the investment process.

If an investment is in fact affected by climate change and a fiduciary fails to factor that into the analysis, he or she could now be deemed to be violating his fiduciary duty. On the face of it, there is nothing unreasonable about including such factors in one’ investment analysis. Investors are wise to consider whether companies are subject to environmental risks, for example. The problem is that with the hammer of potential liability hovering over their heads, this type of vague guidance could lead large fund managers to start avoiding investments in sectors such as energy, utilities or autos. Whether that will happen until the Department of Labor starts taking action against fund managers for violating this new guidance remains to be seen. But the guidance alone is a roadmap for political activists and their attorneys to pressure pension funds to steer away from such investments. As I write in my new book The Committee to Destroy the World, much of the law that governs fiduciaries is outmoded in today’s world. Concepts such as the efficient market hypothesis and diversification that govern fiduciaries have been repeatedly discredited. The last thing we need is the government telling investors what factors they should and should not consider when they allocate capital. This is an inappropriate intervention into free markets.

COMMODITIES

In the Nov. 23 NEW$ & VIEW$, I wrote a short note on commodities, historically the worst “asset class”, which continue to attract much investor and media interest because of their volatility and their “spectacular” cyclical moves. For those of you who are not familiar with the mining process, this video will be of interest: The Mining Process at Copper Mountain Mine.

And here’s a great interactive model if you wish to play with various assumptions relevant to the future of Glencore (but which format also applies to most mining companies):

• A Glencore-o-meter, courtesy of Liberum  Click to play.

I hope you will appreciate the numerous and rather difficult (i.e. low probability) forecasts (assumptions) that need to be made and, for the most part, that need to be quite right, far into the future, in order to have decent returns on commodity investments. Good luck if you dare, you will need much of it, repeatedly.

BRAINY STUFF

This TED presentation is fascinating: why is the human brain so much more developed than animal brains?

 Weird facts about the human body The workings of the human body? An absolute marvel. And yet, kind of bizarre. The facts in these talks point to both conclusions. Watch »

 

 

 

CARRY-ON BANKING!

Dodd-Frank will impact the U.S. and the world in ways yet to be discovered.