Blain’s Morning Porridge: 5 Jan 2021 – When Green Goes Mouldy

Blain’s Morning Porridge – 5th January 2021: When Green Goes Mouldy

“Flash, I love you, but we’ve only got 15 years to save the planet…”

Interesting day’s play here in prospect for global financial markets as the Coronavirus crisis deepens. A third Lockdown in the UK. The two new mutant strains have turned into a race between vaccinations versus health services collapsing. Markets were expecting a stronger 2021, but it looks like things get much worse… and will they then get any better? 

Potentially not… I’ll explain why below.  

In The News: 

Before I turn to today’s lecture on the instability of the ever-so-fashionable Green Economy – which is likely to get me banned as Fake News on all the social media sites for the sheer temerity of suggesting it – let’s cover the rest of the current news: 

The OECD is warning nations not to pile on austerity too early as the globe emerges from the Pandemic meltdown – at least they have learnt something since 2008. 

Did the 11% tumble in Bitcoin y’day represent some of the Whales who manipulate the market deciding $30k was the point to bale-out, and let the greater fools take the pain? Sure, it recovered later in the day… but why? A horde of even greater fools thinking it was a cheap buying opportunity? (Be warned: Bitcoin is a tiny, volatile and highly manipulated “market” where a small number of very loud shills make their money promoting it, generating FOMO, and preying on vulnerable marks.)

It’s the end of the World for London as the Hub of European finance – apparently. All the trading in European stocks apparently overnight to Europe. Er… not quite. Most traders don’t give a fig for where their bonds or equities are matched, be it Frankfart, Paris or Amsterdam. The margins are insignificant. What matters is where the fees and commissions are earnt, which is largely based on expertise and experience. If Europeans want to deal with Deutsche Bank’s Duesseldorf desk – their call.  The Europeans can close their doors to London’s investment community, but I know where I’d be going for advice, and who will be losing out…. 

Back in the USA, whatever happens today in the Georgia Senate elections, or Republicans voting against the election on Wednesday, Joe Biden will be the next President – which will have all kinds of consequences. But, these will likely pale into insignificance compared to Trump’s indelible legacy – the destruction of trust in the Democratic process and growing US instability. The dollar may be down as a result of ultra-low rates, but global confidence and trust in US exceptionalism is evaporating. 

Trump’s plan is dead simple: if he shouts Fraud loudly and often enough his credulous supporters will believe it. Republican legislators hungry for re-election are pandering to him to harvest that support. The long-term consequences of a significant minority of Americans who increasing believe Trump is still their rightful leader are frightening. There is zero chance of political accommodation is such a polarised environment to solve Americas’ deepening crises in health, wealth, education and jobs. Trump beggars belief – he’s the dying emperor who’s determined to take his entire nation with him. 

And with that, let’s look at why markets are likely to have a shocking 2021… 

Will the Green Economy Trigger the Next Meltdown?

Back in the last century, I spent a large part of my investment career packaging up financial assets, like mortgages, into bonds – securitisation. I was heavily involved with the acquisition financing of a US home lender… which went spectacularly wrong a few years later when we discovered to our shock and absolute horror – about the same time everyone else did- that all assumptions behind sub-prime mortgage lending were pants. Pretty much ended my career in big banks…

Sub-prime was a small, but very significant part of the ABS market. When it tumbled it shook markets to the core.

Everyone believed securitisation worked because it did. The arbitrage for smart players was that very few people actually bothered to check or do the due diligence on the piles of ABS cack they bought. The book, the film (and I am sure there is a probably also a pie), The Big Short, summed up the delusional madness of believing complex investment instruments don’t go wrong because they have been so carefully planned, constructed and trust. They don’t ever go wrong… right up to the moment they do. And once you realise it, you also realise it was blindingly obvious from the get-go just how flawed they were…

I suspect it’s all about to happen again. All it takes for a financial crash is a couple of snowflakes to roll down the hill and trigger an avalanche.

One sector it might start is in renewables. 

I absolutely believe Climate Change is the biggest challenge humanity faces, and if we address it badly we really are rubber-ducked. But, if you we’re trying to get to a truly green, sustainable global economy – you would not start from here!

Let’s consider Wind Power. We’re all familiar with modern wind turbines. They have proved popular investments, and the spreads are so tight no one is particularly minded to regard them as high-risk. Investors believe they are licences to print money. The government tells us the UK is blessed by costless wind-power, and in a few years’ time we’ll be getting most of our energy for free from UK’s abundant wind. 

It’s a great and compelling message. We desperately want to believe that wind is the solution because we are, deep down, all green… Windpower, Lithium batteries, and solar farms in the Artic circle all make perfect sense… (You can probably sense a sarcasm warning looms..)

If you believe in Wind-power then don’t – whatever you do – read The Costs of Offshore Wind Power: Blindness and Insight.  Although it was written way back in Sept 2020, the report might make you quite unhappy about the current direction and prospects for the Green Economy. The authors describe how costs are escalating rather than declining as promised. Operating and maintenance costs have risen even faster than they were anticipated to fall! Gas prices will look impossibly cheap compared to renewables if the true facts are ever revealed.

How about this for a quote from the report: “This leads to the prospect of what is not so much a car crash as a motorway pile up in the fog of ignorance.” 

The report suggests the narrative that “Wind power is getting cheaper and more efficient all the time” is complete nonsense.  The majority of the 350 odd UK wind farms will need a bail out. The government’s approach to green power completely underestimates the long terms O&M costs and drop-off which means most wind projects are massively overpriced, and we’re still years away from carbon neutral.

If author Professor Gordon Hughes is correct – and I see no reason not to believe him – then the UK will be in serious crisis over it carbon neutral green energy costs. The knock on in terms of future decarbonisation efforts will be huge, it will change the maths for a “green hydrogen” powered future, and change the pricing and timing outlook for gas and even coal-fired power. 

I’ve done my own digging, and wind investments just don’t perform like promised in the fancy brochures. 

If you maintain a very traditional windmill very, very carefully it might last a couple of hundred years. If you build them quick out of plastics, keep them light and pump them out vast numbers, then you are going to spend lots of time and money maintaining them… Checking and replacing bearings gets more and more difficult the bigger they get. You need to check for hairline stress fractures on the blades. Because of the rotational movement, they put additional pressure on the foundations and sink into the bottom. And all these things get much, much more difficult if you stick the thing in the middle of the English Channel, North Sea or Atlantic approaches where salt-water literally eats them. 

The brutal reality is off-shore wind is far less efficient than promised and requires much more expensive maintenance. They break down, sink into their foundations and don’t generate anything like the power expected. For all the due-diligence, they simply won’t ever make any money unless the price at which they sell energy is dramatically increased – at which point they make zero sense.

This will feel very familiar to many investors who’ve seen all the blithe assumption about O&M costs on all kinds of technological green marvels fail to meet expectations. Biowaste generators, Biomass, thermal pellets – you name it, and the rosy assumptions failed to materialise because the difficulties in making them work and keeping them working were glossed over by the promoters. 

Most of the smart money already knew that about renewables and is deeply sceptical. The not-so-smart money still laps the deals up! Sadly, renewables is likely to become another charming but flawed investment thesis. I am no stranger to investment madness… three times I’ve invested in Airships and lost my dosh every time… 

The problem is: we really do need to address climate change… which means energy prices have to rise to keep the inefficient windfarms working… meaning a less efficient economy.  

And its not just renewables that are attracting big bids because someone else is assumed to have done the work to check they work. There are a host of other Green assumptions that are unlikely to stand up to rigorous testing. Whatever you believe about recycling Lithium batteries, its challenging. They are toxic to mine, toxic to process and toxic to dispose of.  As the surveys now share, if you diligently use you EV for 300k miles it will achieve carbon neutrality – as long as you don’t worry about how the electricity is made or how the batteries will be recycled. 

Let me stress.. I absolutely believe in climate change and the imperative to improve the global environment, but I suspect our current approaches will prove about as resilient as chocolate teapots to the reality. Let’s have a rethink before its too late.

And… if renewables and green investments wobble on the back of rising questions, what happens to everything else proudly displaying its ESG credentials… and if they wobble…? 

Where would it end… ?

Five Things to Read This Morning

Bberg – JP Morgan Sees $146K+ Bitcoin Price as Long-Term Target

FT – Distressed Debt Specialist Howard Marks warns on corporate borrowing burden

FT – New Covid variant will increase stress on global economy and widen inequality

WSJ – Economists expect tough sledding in Winter, then a rebound

NYT – US Mired in Vaccine blame Game

Out of time, and back to the day job… 

Bill Blain

Shard Capital