Today’s Top 10 is from interest.co.nz’s own Gareth Vaughan.
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See all previous Top 10s here.
1) The decade we almost stopped climate change.
The New York Times has gone to town with this book length article tracing the history of fears human activity is changing earth’s climate. It kicks off with the efforts of Friends of the Earth’s Rafe Pomerance and geophysicist Gordon MacDonald to spread the word among the US elite in 1979.
To explain what the carbon-dioxide problem meant for the future, MacDonald would begin his presentation by going back more than a century to John Tyndall — an Irish physicist who was an early champion of Charles Darwin’s work and died after being accidentally poisoned by his wife. In 1859, Tyndall found that carbon dioxide absorbed heat and that variations in the composition of the atmosphere could create changes in climate. These findings inspired Svante Arrhenius, a Swedish chemist and future Nobel laureate, to deduce in 1896 that the combustion of coal and petroleum could raise global temperatures. This warming would become noticeable in a few centuries, Arrhenius calculated, or sooner if consumption of fossil fuels continued to increase.
Consumption increased beyond anything the Swedish chemist could have imagined. Four decades later, a British steam engineer named Guy Stewart Callendar discovered that, at the weather stations he observed, the previous five years were the hottest in recorded history. Humankind, he wrote in a paper, had become “able to speed up the processes of Nature.” That was in 1939.
It’s quite a tale and also features a young Al Gore, the CIA, various US presidents, big business, and of course, lots of talkfests. As you’d expect, given the subject, there’s plenty of depressing reading. Especially some of the epilogue.
More carbon has been released into the atmosphere since the final day of the Noordwijk conference, Nov. 7, 1989, than in the entire history of civilization preceding it. In 1990, humankind burned more than 20 billion metric tons of carbon dioxide. By 2017, the figure had risen to 32.5 billion metric tons, a record. Despite every action taken since the Charney report — the billions of dollars invested in research, the nonbinding treaties, the investments in renewable energy — the only number that counts, the total quantity of global greenhouse gas emitted per year, has continued its inexorable rise.
Like the scientific story, the political story hasn’t changed greatly, except in its particulars. Even some of the nations that pushed hardest for climate policy have failed to honor their own commitments. When it comes to our own nation, which has failed to make any binding commitments whatsoever, the dominant narrative for the last quarter century has concerned the efforts of the fossil-fuel industries to suppress science, confuse public knowledge and bribe politicians.
But some hope for the future is also seen.
Like most human questions, the carbon-dioxide question will come down to fear. At some point, the fears of young people will overwhelm the fears of the old. Some time after that, the young will amass enough power to act. It will be too late to avoid some catastrophes, but perhaps not others. Humankind is nothing if not optimistic, even to the point of blindness. We are also an adaptable species. That will help.
2) How America uses its land.
Bloomberg has put together a fantastic interactive chart showing how Americans use their land. Not surprisingly, it shows urban areas grow by about one million acres a year. This is well worth a look, and I’d love to see the same type of chart for New Zealand.
3) Debt piled on your children and your children’s children.
DC Report’s Stan Collender has a short but sweet take on burgeoning US budget deficits. Trillion-dollar-plus deficits every year of the Trump administration and beyond will force US politics and politicians to face challenges they’ve never had to face before, Collender says. He lists five.
- How will the federal government respond to the next economic downturn? Will Americans, who throughout U.S. history have expressed great anger about Washington’s red ink, decide that a deficit that approaches or exceeds $2 trillion is acceptable? Will policymakers have to limit their response to a downturn to show obeisance to the old limit-or-reduce-the-deficit mantra as they did in 2009 when the Obama stimulus was developed? Does this mean that the next economic downturn will be deeper and last longer than we’ve come to expect?
- Is the same thing true of future military contingencies? How will the U.S. respond if there’s less tolerance for even higher deficits?
- What will the need to finance a national debt that’s increasing by $1 trillion or more each year do to interest rates in the United States? How vulnerable will that make the American economy to the big foreign lenders like the Chinese?
- How will the U.S. be able to respond to the needs of the next generations of Americans such as infrastructure, retirement and healthcare?
- How will Congress ever agree to another budget if voting for deficits that are less than $1 trillion is politically unpalatable? Are threatened or actual government shutdowns even more likely now than they’ve been recently?
4) India on track to become the world’s third largest economy in the next decade.
ANZ economist Shashank Mendiratta and the bank’s head of Asian research Khoon Goh, have issued a useful report on India. It’s from an Australian perspective but is certainly relevant to New Zealand too. Ahead of his first trip to India in 2011 then-PM John Key was talking up the potential for a free trade deal. Key visited again shortly before stepping down as PM in 2016, when he and Indian counterpart Narendra Modi issued a joint statement including a commitment to continue to work towards a Free Trade Agreement. But, based on the Ministry of Foreign Affairs & Trade’s website, there appears to have been little to no progress since.
India is on track to become the world’s third largest economy in the next 10 years. India currently accounts for 3% of global GDP even as it constitutes nearly 18% of the world’s population. The country is expected to contribute more to global growth in 2018 than the entire euro area. According to the IMF, India’s share in global GDP will increase to more than 4% by 2023. India’s trend growth is nearly 2.8 times the world’s trend growth. Next year, the size of India’s economy is expected to surpass that of France and the United Kingdom, lifting India’s ranking to 5th from 7 th. At the current growth rates, India could overtake Japan and Germany to become the world’s third largest economy within the next decade (Figure 2).
India will grow above 7% in real terms on a consistent basis. Not only will it grow at a faster rate, but also consistently. Figure 3 below plots the bivariate time series of GDP growth rates and the GDP variance of countries with similar sovereign credit rating as India through 2023, based on IMF projections. India is expected to consistently grow at around 7.5% per annum through to 2023, higher than most of the other key economies in our sample.
5) Concerns about UK reverse mortgages.
New Zealand’s Heartland Bank is going gangbusters in the reverse mortgage market here and over the ditch in Australia. And according to the Financial Times the UK reverse mortgage market is growing fast. However, the FT is airing concerns – via Professor Kevin Dowd of Durham University – that insurers may be repeating a common error from the past by failing to price for, and hold sufficient capital against, idiosyncratic and complex financial products.
What has sparked Prof Dowd’s unease is one of the features of these products: the so-called no negative equity guarantee (NNEG). This limits the borrower’s repayment obligation to the lower of the compounded final loan amount or the value of the house – a safeguard against mis-selling. He worries that the insurers might be undervaluing what is in effect a borrower’s put option and overstating their equity as a result.
There are two key ways a lender can lose out on an equity release mortgage. The first is longevity. Because interest rolls up, and thus increases the total amount to be repaid at a compounding rate, the lender is exposed to the risk that the borrower lives much longer than expected. The other potential trap is house prices, should these prove lower than anticipated when the house is sold. These risks rise the more loan-to-value ratios go up.
So how could UK insurers be undervaluing their liabilities? According to Dowd and the FT, they might be computing the put option’s cost imprudently by inputting assumptions about future house price inflation into their models.
This approach has the effect of driving down the apparent cost of the option, suggesting the insurer must only retain a smidgen of capital against it. The prudent method is actually to ignore house price inflation entirely. That’s because what the insurer is in fact doing is agreeing a price today for the house, but only getting possession in future. Logically then, the so-called forward price the option should be priced off is lower than today’s, reflecting the fact that in the interim, it has not been enjoying the benefits (rents from the property, for example).
When the calculation is done this way the difference is startling, the FT says.
Prof Dowd has computed an illustrative case for a 40 per cent loan to value mortgage compounding at 5 per cent. Bolt-in future house price inflation of 4.25 per cent, as he believes at least one firm is doing, then the cost of the NNEG is just 3 per cent of the loan amount. Do it more prudently and the cost rises to a thumping 52 per cent. Apply that to the £10bn-odd of mortgages that have been written in the past few years at rising loan-to-value ratios and you get a potential capital shortfall of billions.
6) Bank robbery: the ‘theft of the century’ and a house in Fishponds.
Given my reporting on curious, dodgy and outright crooked companies registered at strange and surprising NZ addresses, this one piqued my interest. The Bristol Cable reports on chunky international money laundering scandals linked to companies registered at a Bristol address. The location in question is 1 Straits Parade in Fishponds. It’s home to a barber shop and next door to a KFC.
The Cable spoke to the owner of 1 Straits Parade, a Mr Erkan Cil, who runs a barber shop from the premises. He was shocked to learn that companies registered to his property had been used by fraudsters.
“When I bought it [1 Straits Parade], this guy called me from Latvia, and he said ‘I want to receive my letters there’.” Cil then named the caller as Vitalijs Savlovs, a businessman from Latvia.
The Bristol Cable reports that between 2010 and 2014 at least US$20.8 billion was moved by Russian officials and insiders into Europe, the US and other countries, in what became known as the Russian Laundromat. The story shows the extent to which random cities, towns and buildings can be used by organised crime.
Data from the Organised Crime and Corruption Reporting Project reveals that five of the companies involved in Laundromat transactions were registered to Fishponds. At least $18 million of dirty money was washed through these companies.
7) The 2000 dot com bubble versus tech stocks today.
This tweet, comparing the dot com bubble at the turn of the century which I was covering in London, with the recent on-steroids run of tech stocks is interesting. Who’d have known back then that something would happen within a couple of decades to make that bubble almost look small…
2000 Dot Com Bubble vs 2018 – which is more parabolic for Infotech companies? Coincidence? [hint: the Dot Com Bubble didn’t have $15T in global QE, 0% rates for 10 yrs, US nat’l debt $10->$21T]
H/T: Silicon Valley Bank @DiMartinoBooth @neelkashkari @RobSKaplan @RaphaelBostic pic.twitter.com/4y0sutSYsr
— M/I_Investments (@MI_Investments) August 12, 2018
8) Electric cars a job killer?
Bloomberg takes a look at what the rise of electric vehicles and the gradual demise of the combustion engine could mean for workers in Japan who make engine parts, and the regions where they live.
The issue for Japan’s Aichi prefecture, where Toyota and hundreds of suppliers including Kimura’s Asahi Tekko Co. are located, is that electric vehicles use about a third fewer parts than today’s average car. Here’s a sample of what you won’t find in an EV: spark plugs, pistons, camshafts, fuel pumps, injectors, and catalytic converters. For the prefecture’s 310,000 autoworkers, retooling would mean painful downsizing, with far-reaching effects for Japan’s industrial heartland.
“It takes out whole geographical areas,” says Rob Carnell, chief Asia-Pacific economist at ING Bank NV in Singapore. “The hairdressers and the local mom and pop shops, and all of the businesses where the autoworkers would have spent money—they all get hit, too.”
No economist has conducted a formal study of the possible effects of an EV revolution on Aichi. But a recent analysis of Germany’s car industry by the Fraunhofer Institute for Industrial Engineering showed that, if just a quarter of all vehicles were powered by electric motors, the country would lose 9 percent of its auto jobs. And that was after adding all the employment that EVs would create.
9) Easy access to debt & a declining ability to think long-term.
In an interview with RNZ’s Kathryn Ryan, Retirement Commissioner Diane Maxwell spoke about New Zealanders on decent incomes struggling with debt. Commission for Financial Capability research shows 27% of people with household income over $100,000 reporting high interest debt to third-tier lenders, ie, finance companies, hire-purchase companies or payday lenders that may charge interest of 50%.
Aside from high housing costs, some of this seems to come down to debt-fuelled consumerism, which Maxwell contrasts with the frugality previous generations were prepared to live by.
“What we’re seeing very, very clearly is that we are spending more on stuff. We are buying more stuff. Our expectations of what we should have in our kitchen are much higher and credit is quite readily available. So at any given moment if we want something we can borrow and have it. And one of the things we’ve been looking at is how life has changed and thinking about what our grandparents and parents spent. And we do things like just look at your kitchen and think about what is in your kitchen. And we have coffee makers and sandwich toasters and normal toasters, we have knife racks, we have multiple chopping boards for different purposes, we have a variety of peelers, we have coffee grinders, we have sets of frying pans that have six different pans for different things. We have many, many things that our grandparents just never bought. They will have had a pan and a good knife and a good board.”
“We tend to be running two cars, we tend to have two to three flat screen TVs, we have an expectation of an ensuite in the bedroom,…we tend to think we’re going to have an international holiday at least once a year, and we have very demanding children. Our children convince us that they need stuff and our children unfortunately increasingly have iPhones and iPads and $120 pairs of shoes. Our children are quite an influence when it comes to what we should be buying.”
Maxwell links the easy availability of debt to people losing the ability to think long-term.
“I think there’s a group that have been hit hard by housing costs, increased petrol costs particularly in Auckland, and a couple of other things. But even if you take that group out, there’s still a sizeable group who aren’t being hit by those but are spending more.”
“The availability of credit is huge in this conversation. I talked to people in my grandparent’s generation who would talk about buying their first home and some of them, for the first year, they sat on packing cases. For the first year your house was pretty sparse because you had just got into your own home and you didn’t have a lot. People didn’t have a fridge for one to two years, they didn’t have a car. They caught the bus everywhere, or maybe as a family they managed one car. And that was normal, that was seen as very typical. If you buy a new house today you can go into a place and look at a couch and get interest free credit and go home with the couch. You can equip your house with everything you need today. So our ability to forgo those things for a period of time, our ability to say ‘we’re going to save and then spend,’ is greatly reduced. And one of the things I say is the irony is we’re living so much longer, we’re around for so much longer, but our ability to think long-term appears to be decreasing.”
10) As we fret about weak business confidence in New Zealand, this Chris Slane cartoon puts it in a broader context.
11) (A late and sad addition). RIP Aretha Franklin.