Blain’s Morning Porridge – Dec 12th 2019

Blain’s Morning Porridge – Dec 12th 2019

“Vote early, and vote often….”

Its Election Day here in the UK. Whoop Whoop Whoop! Why do I think its going to go horribly wrong? I’ve just been shown a photo of my colleague Julian’s polling station – there are queues round the block.  Is a high turnout good or bad? We simply don’t know. We will get a first inkling at 1 minute past 10 tonight!

The Porridge will be up running through the night. I will be making wild guesses at what it means for markets as the evening progresses…. See UK ELECTION PAGE on www.morningporridge.com Do feel free to email your thoughts…

Back to the real stuff… .

The Green Economy and the Dangers of Regulatory Capture

Delighted to see Greta Thunberg has been named TIME Person of the Year for 2019.  She has changed the world and put Climate Change at the top of the agenda.  She got her slot at the UN COP 25 conference in Madrid, (despite the fact global oligarchs conspired to keep her out, even kicking off riots in Chile so they could get the original venue moved to Spain in the hope Greta would not be able to attend. Nope, she hitched a lift on a yacht… at least that’s what some of the office Gen Z’s believe … They may have a point.)  She made some great points about doing stuff rather than just talking about it.

Its great Greta has shocked us into finally talking about climate change, but this is a dangerous moment. Everyone, from bankers, investors, regulators and politicians, has caught the new Green vibe. Everyone is desperately keen to be seen to be embracing the new agenda and to strut their green credentials. Every investment bank has Green Bond groups, Sustainability Teams and Green Investment objectives. It’s the same on the buy-side – ESG is the new religion…  The new consensus is Green – and to question it is heresy.

Greta is quite right to wonder how much of it is just patronising bollox and trend following..

There is also real and serious danger of Regulatory and Bureaucratic capture of the Climate Cure narrative! If you want to ensure the future is about extended Jaw Jawing about the Climate rather than doing stuff, then give responsibility to a committee of regulators. As I’ve said many times: There are No Statues of Committees!

Regulators may consider themselves enlightened and good-intentioned visionaries, but let’s get real. Too much regulatory interference could drive us down some massively distorting market avenues. We’re seeing it happen already – regulators trying to define what is good and what is bad. We could well end up in a world where its government regulators telling the “free markets” how to invest in “Green” to meet their environmental goals.  They justify it all under the banner of ESG, but it’s likely to cause massive future market distortions.

Talks within the EU on setting a “Taxonomy for Sustainable Finance” are struggling to agree a common proposal. EU member states are, as usual, demanding national interests take precedence. Guess which country wants a break for using Lignite, the worst quality coal, and which wants breaks for its Nuclear industry? The rules are intended to replace the plethora of Green labels randomly applied to all kinds of investments – like Green Bonds – and replace them with common and enforceable Green regulations.  Companies will be forced to disclose exactly how green their business activities are.

Is your heart sinking as you read that… ? Mine did…

The EU intends to lead the world in Green regulation by categorising investments.  At the top table will be a “green” label covering renewable activities. There will be a level of “enabling” activities that get second billing, and, at the bottom, investments in transition technologies. Enabling investments would include areas like Steel and cement.  Coal investments won’t figure anywhere. If you can figure out how to produce either without Coal please let me know, the engineering and the scientific community know how. (And don’t tell me about making steel with Hydrogen… you still need carbon, and nothing beats Met Coal to produce it.)

The whole point about efficient markets is minimising proscriptive and distorting nonsense. Each investor needs to satisfy their “green” and sustainability objectives, rather than ticking off the boxes provided by a Central Bank/Financial Regulator that has managed to grab responsibility for Green Policy.  It’s exactly what we’re seeing at the ECB, where political appointee Christine Lagarde’s first decision was to make a landgrab for the ECB to police Green Investment. The Brussels regulatariat makes noises about the need to mitigate “greenwashing” and directing green investments, but it’s basically Economic Maximisation 101 – the economic objective of any bureaucracy is to maximise the range and depth of the markets they regulate!

We all understand, although some still deny the science, the need cut emissions. But it would be much better to find genuine market driven solution. Element of coercion – like polluter pays, genuine carbon taxation, etc, are better than setting rules. It terrifies me that even sophisticated investors and leading bankers look to be accepting that “regulators” will set the rules and timing.

Climate change presents massive challenges for investors – how can you embrace index based investment if they don’t factor in the E of ESG? Or how much will investments declared outside of regulatory defined “good climate” businesses suffer?   It’s potentially a massive arbitrage opportunity: we’re working on a climate cure fund, but I’m also thinking returns from a “Dr Evil” fund could be massive: any firm crippled by a regulatory carbon bad rating will be forced to tighten its belt, operate efficiently and maximise returns, while seeing its share price drop as investors stay away. The result is a strong company at a cheap price – what’s not to like?

Conversely, give firms with a pristine green rating as much gold as they can eat, and you get flabby inflated soft companies more likely to over promise and underperform.

This could get very messy….

Five things to read today: 

Thunderer – Tories Face Last Minute Threat From Brexit Party

Bberg – Boeing’s Timeline on 737 Max Return Foiled Again

WSJ – Federal Reserve Keeps Interest Rates Steady, Sees Long Pause

WSJ – Internal FAA Review Saw High Risk of Boeing 737 MAX Crashes

FT – Splits over climate policy threaten to detail UN summit in Madrid

Out of time.. back to the day job…

Bill Blain

Shard Capital