Investors’ Worldview

A picture worth, if not a thousand words, at least a blog post or two.

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Starbucks makes one of the emptiest threats in the history of business

Starbucks must think the British government is incredibly stupid. This is not necessarily a crazy assumption, but it’s hard to believe that David Cameron is going to abandon his mission to tackle tax-avoidance in Britain by large multinationals just because Starbucks threatens to suspend millions of pounds of investment in Britain, as the Telegraph reports.

Even if Starbucks threatened to pull out of the UK entirely it still wouldn’t be a threat. Obviously, as long as there is a market for coffee chains in Britain, a competitor would simply take their place.

It is time to call Starbucks’ bluff and send them packing. Its troubles are only a sign of things to come for corporate tax avoiders, as George Osborne, Britain’s chancellor of the exchequer is likely to find the G8 countries receptive to the idea of a war on tax havens, given the state of their finances.

Something tells me though that Starbucks won’t abandon the UK market to the competition, come hell or high water.

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Fossil Fuels and Nuclear are the Only Ways to Satisfy Global Electricity Demand

The good news is that emerging economies in Asia, Latin America, and Africa are set to boom in the coming decades.  The bad news though – if you’re a deluded environmental activist – is that their growing energy needs cannot possibly be met by renewable energy, as their large and growing populations invest in infrastructure and housing. The world’s “insatiable demand” for energy will instead have to be met by an increased use of coal, the International Energy Agency admits. Coal’s share of the global energy mix will continue rising, with coal closing in on oil as world’s top energy source by 2017.

Going “fossil free” is mathematically impossible. Electricity consumption has increased by an average of 450 terawatt-hours (a terawatt-hour is one trillion watt-hours) per year, over the past two and half decades – equivalent to one Brazil (which used 485 terawatt-hours of electricity in 2010) to the electricity sector every year. And global electricity use is expected to continue growing at this rate until 2035.

But all the wind turbines in the world produced only 437 terrawatt hours of electricity in 2011. Just to keep up with demand means would mean that the world would have to install the total existing wind-generating capacity every year – which means there would be no agricultural land left before long.

Solar is even more useless. Germany only produces 19 terrawatt-hours of electricity. To keep up with global electricity demand the world would have to install about 23 times as much solar-energy capacity as now exists in Germany, and it would have to do so year after year.

Given how impracticable and expensive renewables are, it’s not surprising the IEA forecasts that Asia’s demand for coal will rise by 1 billion tonnes each year by 2017; equal to the entire consumption of the US and Russia today.  China generates 83% of its power from coal. India, whose coal use is rising 6.3% a year, will be the world’s largest importer of seaborne coal by 2016.

Unencumbered by green notions and fallacies, China is also investing heavily in nuclear power, besides hoping to replicate America’s shale gas revolution, which has enabled the US to significantly reduce coal consumption. It is building 197 new nuclear power plants in the next decade.

At least the US is not hellbent on pricing itself out of manufacturing, as Europe is, and will be able to compete with countries like Indonesia and Mexico, which will have outstripped Germany and the UK by 2050, according to PricewaterhouseCoopers. Many of its “Next 11″ are among the most populous countries in the world: Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam. They will all be building a brighter future using fossil fuels.

Posted in Commodities, Economy, Global Warming Scare | Tagged , , , , , , , | 1 Comment

A Series of Unfortunate Events: Scenario planning in an uncertain world

I wrote a white paper for Aberdeen Asset Management’s investor conference in October 2011, on the big four themes dominating investor’s thoughts: An American revival, a Chinese hard-landing, the West’s lost decade, and the prospect of a euro-zone break-up. Still makes compelling reading a year on:

A Series of unfortunate events: Scenario planning in an uncertain world

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Could the US cut retail investors out of commodities?

How a Wall Street elite contrived to turn the physical commodities market into a casino, and trigger damaging “spikes” in everything from oil to foodstuffs was beautifully reported on by Matt Taibi of Rolling Stone Magazine in 2010. But the food riots last year may be spurring politicians on both sides of the Atlantic to take action. Retail investors, the “long only” bettors who have for years forced prices upward, are seen as part of the problem. So the Democrats are proposing rule changes that would force small investors in the US to divest themselves of the $50 billion they have tied up in commodity derivatives – if Obama wins the election.

Pension funds, insurance companies and other institutional investors have been making massive bets on commodity prices, as have retail investors through mutual funds and structured notes. It all started in 2006, when the IRS allowed funds to sidestep the law established in 1936 and revised in 1954, which restricted mutual funds from owning more than 10% of total assets as commodities, through 72 private letter rulings (PLRs). Exceeding that limit would have previously made mutual funds liable for corporate income tax.

One after another mutual funds requested an exception from IRS that allowed them to set up commodity investments using derivatives. To meet the guidelines for the special tax treatment, the funds set up “sham” companies in the Cayman Islands. But they are now at the mercy of an IRS which may revoke previous rulings that have allowed mutual funds and structured notes,

The mutual fund industry has built a major new asset class “on a surprisingly thin legal basis” says Reuters. If Congress confirms that the IRS acted legally – in which case every mutual fund is automatically going to be able to exceed restrictions on commodities ownership – or it is going to eliminate the mutual fund exemption, and reverse the existing PLRs.

Judging by the political mood in Washington, in which the mutual funds’ controlled foreign corporations are “corporate fictions, offshore shams, paper exercises whose sole purpose is to make an end run around the legal restrictions on commodity investments by mutual funds,” it would be foolhardy to think things are going to go the mutual funds way, especially as this would only send another wave of money into commodities markets.

Assuming Congress is determined to restrict the speculation which now dominates commodity exchanges, then the secret “Bona Fide Hedging” exemptions that Goldman Sachs and 14 others have obtained from the CFTC since 1991, and which allowed them to masquerade as physical hedgers and escape virtually all limits placed on speculators, could be the next to be addressed.

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US droughts of 1930s, 1950s, 1980s eclipsed 2012

This summer’s North American weather is just… weather. It says nothing about longer-term climate trends. The US experienced years of drought in the 1980s, 1950s, and 1930s, which were worse than the current one. As we can see in the attached chart showing 112 years of June ‘drought’ conditions, there is no discernible  trend.

112 years of droughts in the US

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Is a Global Aviation Trade War About to Break Out?

The EU’s emissions trading scheme could trigger a full scale global aviation trade war within weeks. A total of 30 countries which signed the Moscow Joint Declaration in February – including Russia, India, and the US – have threatened to retaliate. But China has upped the stakes by warning that it is prepared to impound European aircraft, if the EU punishes Chinese airlines for non-compliance, according to Reuters.

China says it wants to avoid a trade war. But as Chinese airlines only have until mid-June to submit carbon emissions data – having failed to meet a March 31 deadline – a trade war looks certain, unless the EU Commissioner for Climate Action, Connie Hedegaard, backs down and agrees to negotiate a global agreement.

European airlines could face the closure of Russian, Indian, and even US airspace. This would probably force European airlines to close most of their routes to Asia – or incur considerable extra cost diverting flights. Less drastic measures include imposing levies on EU carriers using the airports of the Moscow declaration signatories.

A trade war would come at the worst possible time for the European airline industry, as the euro-zone crisis comes to a head. Already under threat from punitive taxes and rising airport and air navigation charges, many airlines were already expected to go bust this year – as Spanair and Malev have already done.

European airlines could lose $1.1 billion this year, says the International Air Transport Association, which had forecast $600 million of losses only three months ago. But unless the EU reigns in the fanatical Hedegaard, it’s not far fetched to imagine that the whole sector could be wiped out.

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The EU Dumps the Green Agenda And Embraces Gas

Europe’s cash-strapped governments can no longer afford to prop up renewable technologies, or fund the environmental gravy train that developing countries have been hoping to climb aboard. As the economy slumps, subsidies for costly clean energy are being scrapped, and the EU is diverting €80 billion intended to develop renewables into cheap ‘low carbon’ shale gas, as a horrified Guardian reports.

Of course, this is hardly surprising, given that natural gas promises an economic golden age – while renewable energies like wind, wave, and solar power are wildly unviable. Without subsidies – which were eliminated in January – the Spanish renewable energy market has ceased to exist. Similarly, Germany has put an end to its solar industry, which was in the process of turning electricity into a “luxury good” (see Solar Power Has Been Totally Eclipsed By Gas).

The green-energy revolution was always a boondoggle from the start, in which taxpayers money was lavished on green jobs. So we can thank the shale gas revolution for overthrowing the green agenda.

Of course, global warming alarmists are up in arms, because switching to gas will make it impossible for Europe to meet its binding targets for emissions reduction. However financial expediency means that adapting to climate change – that is if humans even have a measurable, or worrisome, impact on global temperature – is now the order of the day rather than preventing it.

With China and India rejecting a new climate treaty, countries like Canada, US, and Japan, are opting out of a new Kyoto protocol. It cannot be long before the EU follows suit.

This more pragmatic approach can also be seen in the UK, which is running out of time to build new generating capacity. A new generation of coal-fired power stations will be built without curbs on emissions, in its Draft Energy Bill – provided they merely “trial” a carbon capture and storage system.

Meanwhile, following a discordant UN climate conference in Bonn, climate change is slipping off the agenda of the Rio+20 summit.  The European Parliament is not bothering to send any members. Those poor countries still demanding that the rich countries pay them a fortune to cut greenhouse gas emissions better not hold their breath.

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Christine Lagarde’s Leona Helmsley Moment

Displaying a shocking lack of empathy for ordinary suffering Greeks, Christine Lagarde, the managing director of the IMF, says she “thinks more of the little kids from a school in a little village in Niger, because they need even more help than the people of Athens,” in an interview in the Guardian.

Ordinary Greeks can hardly be blamed for an economy that tolerated a large degree of tax avoidance. That was an equilibrium that somehow worked for Greece – before members of the euro-elite, like Lagarde, encouraged the country to join the euro.

When Lagarde says it’s payback time, she doesn’t have the rich Greeks – who have stashed their dosh in Swiss banks and London property – in mind. It’s the little people, who are unable to obtain life saving drugs, who have to pay taxes; as Leona Helmsley might have said.

Regardless, the Greece’s balance sheet isn’t going to look healthier if Greek parents, whose children are being affected by spending cuts, “pay their taxes.” This money would be spent bailing out French bankers who speculated on Greek debt – just like the so-called ‘bailout’ funds.

Under Lagarde’s leadership, the IMF has effectively become part of the EU’s machinery (see The IMF is Turning Into A Monster). Its usual policy prescriptions for a country in Greece’s position – lending into a devaluation and structural adjustment – have been thrown by wayside. Instead the IMF is merely financing a German and French bank rescue.

The IMF would also be expected to promise to assist whatever decision Greece comes to, even if it means exiting the euro. But Lagarde, an unapologetic fan of the euro – who only the other day was wittering on about how the concept of a single currency dates back to Charlemagne – has nothing to offer but spiteful threats. Sounding like a fully signed-up member of the nasty party is hardly going to endear the Troika to the Greek electorate, but maybe that’s the point.

She’s miffed that untaxed Greek capital will flood back into the country, seed a rapid recovery, and show her up. As recently as last September, when Europe’s financial system was about to go off the rails, Lagarde was clownishly assuring the world that everyone’s “anxieties and fears are overestimated,” and that “analysts need only look under the skin of budgets and economies to appreciate their solidity.”

It’s Lagarde that has been overestimated – and not least by airheads like Judith Woods, writing in the Telegraph. She has chosen a most inopportune moment to adulate Madame Lagarde, who she’d like to be “when I grow up”. Indeed, imagining that the IMF needs leaders who are silken, silver, seductive, and foxy is unbelievable childish – even if ‘seduction’ is an integral part of the IMF’s culture.

Personally, I think Lagarde bears more resemblance to tanning mom. Though I’m guessing that tanning mom has more integrity than the pampered Marie Antoinette guiding the EU’s vanity project onto the rocks.

(On Twitter @TheAngryAnalyst)

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Bloomberg Businessweek’s Brilliant Cover

Enough said.

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