Freedom? Markets and Climate Chaos

Its “Freedom Day” in the UK, but it feels same as, same as. Bond markets look stressed, but freak weather is raising the probability government intervention dwarfing the scale of the pandemic may become necessary. There will not be a gradual, ordered progression to a new higher temperature climate.  Instead… the reality looks like high-cost chaotic freak-weather events becoming increasingly common.  The cost could hit trillions.

Blain’s Morning Porridge, 19h July 2021: Freedom? Markets and Climate Chaos

“Nobody is going to buy their way out of the effects of a climate catastrophe…”

This Morning: Its “Freedom Day” in the UK, but it feels same as, same as. Bond markets look stressed, but freak weather is raising the probability government intervention dwarfing the scale of the pandemic may become necessary. There will not be a gradual, ordered progression to a new higher temperature climate.  Instead… the reality looks like high-cost chaotic freak-weather events becoming increasingly common.  The cost could hit trillions.

Its Freedom Day here in the UK… but it doesn’t feel like much has changed. Like millions of other UK citizens She-who-is-Mrs-Blain found herself on the receiving end of a instruction to isolate after she had a coffee (sitting on the street) at our local café, and someone else who was there at roughly the same time tested positive for Covid.

Oh dear. We would go get a test – but the only way out of village is blocked by roadworks but no workmen because they also got messages to isolate. Even if I could get to the train station to catch the rail to London… well forget that.. they’re cancelled because of Covid related staff shortages.. And my broadband still isn’t working and Virgin can’t send anyone till later this week because of staff availability issues.

Not a problem. We’ve dismantled the coms unit on the boat and discovered it works better in our house than Virgin ever did. (After a stroppy Virgin telesales employee threated us with termination costs a GFY letter will be sent telling them just how pleased we will be to see them in court.)

The UK’s test and trace app…. A new way to commit national economic suicide? Congratulations to whom ever came up with it… Did we buy the software from China perchance?

On the other hand.. the UK Covid numbers are shocking… 50,000 new infections.. and 25 deaths.. Hang on… 25 deaths out of 50k? That’s a roughly 0.05% likelihood of death. The average mortality rate of the standard flu (and, yes, Covid is not flu) is also around 0.05%. Hmm…. Just saying… But it is worrying Sajid Javid, the nominated Adult in the Room overseeing Boris’ cabinet while providing much needed common sense, has apparently come down with Covid – despite being double vaxxed.

The markets remain as contradictory as ever.

  • On one hand there is the reflation trade, expectations of a gold-plated earning season, and the apparent resolution of OPEC disagreements to stabilise oil prices is stock positive.
  • On the other, data watching analysts are saying the economic recovery has already stalled, the likelihood is for lower-for-longer rates, thus bonds have rallied.

Hmm… rising inflation and slowing economy..? 1976 all over again and the word is stagflation. Time to put the Sex Pistols on the record machine..?

There were definite signs of wibble in markets last week. Suddenly US stocks weren’t making record highs every day…

I can’t help but think bonds are a seriously bad idea. Real interest rates are well below inflation – meaning you start losing money the microsecond you even contemplate buying bonds – it’s an opportunity cost! Digging down the credit curve in search of returns just makes it worse – returns that simply don’t reward the additional risk. Junk debt yields are a record lows – but I read reports from bond funds saying these are great value as default rates have never been so low.

Er… Default rates are artificially low because no-one is paying a proper rate for money. Interest rates are repressed and distorted, companies aren’t defaulting because money is too cheap while government pandemic stimulus schemes are proving additional life support. Companies only open because of cheap debt and stimulus are “Zombies” in today’s economic parlance – and they block the Darwinian evolution of the economy by taking niches more nimble, newer firms should take.

And then there is government debt. Are spiking bond issuance volumes creating an unsustainable debt midden, set to cause chaos?

Perhaps. But…. Monetary Sovereign Governments can print as much money as they care to – the only constraint is confidence. Any monetary sovereign issuer will always repay their debt by pressing the print option on the money machine – the question is.. what will it be worth?

The bond won’t default. Confidence in the currency might crash. If confidence in, say, in the US collapses because its democratic systems looks impossibly compromised, it’s losing the trade war to China, and folk want to switch from Treasuries to CCGBs (China Central Government Bonds), then the dollar crashes and holders of Treasuries lose. They will still get their dollars back – but these dollars will be worth a lot less. (And the economy will be further ravaged by a weak dollar driving massive inflation – but that’s just another symptom of collapse..)

But.. if we are worrying about bond markets this morning.. we might well be worrying about the wrong thing completely….

Freak weather around the globe is frightening, but the biblical floods sweeping away villages in the Low Countries and Germany were just one manifestation of growing crisis. Warm oceans are powering catastrophic chaotic events around the globe. Wildfire season is staring early in the Western US after the Heat Dome event. New Zealand is experiencing record winter temperatures. The Siberian Taiga is burning, and melting permafrost will release a surge of greenhouse gases – methane and Co2, further speeding up warming.

We’re suddenly waking up to the new climate change reality. It is not a gradual process, where the world changes in a predictable, measurable, and ordered way. Instead the increasing number of chronic climate instability events highlight rising chaos. 2 inch higher sea levels over 80 years doesn’t mean 0.016 of an inch each year – it means storm surges suddenly washing past the sea defences, flooding on a massive scale, and massive clean-up costs.

The costs are going to be enormous. Trillions per annum. Who pays? Weather events will become uninsurable. Governments will have to step in with immediate emergency support, reconstruction costs and building new infrastructure for a long-term accommodation with powered up oceans fuelling climate-change events. As the planet warms, the refugee crisis will get quadratically worse with folk trying to flee warmer zones to temperate areas. Access to basic commodities like food and water will become critical. Scarcity will feed conflict.

The countries most able to cope with chaotic climate change will be those with:

  1. Financial monetary sovereignty and able to keep borrowing
  2. Effective Government willing to make tough decisions
  3. Defendable Borders
  4. Temperate climate, sustainable agriculture and water
  5. Strong Currency – a function of the previous 4 points.

Island nations like the UK may be better placed than most…

Five things to read this morning

BBerg – Jeff Bezos and Star Wars Inspire Hunt for $1 Trillion Space Unicorn

Torygraph – Time has come for the Bank of England to raise rates and stop buying bonds

FT – The two big reasons to doubt the global boom

FT – Fed’s tilt towards tighter policy unleashes dollar bulls

WSJ – Don’t Believe the Inflated Yields on Inflation-Protected Bond Funds

Out of time and back to the day job..

Bill Blain

Strategist – Shard Capital

2 Comments

  1. That’s a great post Bill. You’re right about the chaos. It will not be gradual and the chaos will likely accelerate the action. Chilling really no pun intended.

  2. I’d also add Russia and Switzerland to my favorite safe countries (for purely personal reasons) ,both have nice low debt, Russia is a decent military threat and Switzerland.. well who would invade them.

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