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Sexism and the Loss Aversion Heuristic

Men are physically stronger than women, respond quicker to physical training, and suffer less injury under physical stress. Men are more robust, suffer less morbidity than women in almost all phases of life. Obviously these things exist in a normal distribution, but men’s distributions are typically platykurtic – there are more men in the tails of the distribution than women. Thus, even where the means are near identical, such as intelligence, you’d expect to see more male geniuses, and imbeciles among men than women, who’re more concentrated around the mean. Feel like taking issue with any of these statements? Then you might as well be a creationist.

Men are more accepting of risk, and will prioritise pay over flexibility. So you’d expect men to make up the majority of soldiers and miners and race car drivers. It also means you’d expect to see more men make up corporate boards, everything being equal. More men are more drawn to the cut and thrust of business, and are more likely to prioritise work over other commitments. Women value stability and flexibility more highly than men. This means women, on average don’t choose to make the effort necessary to climb the greasy pole. Women (sensibly, in my view as I have done the same) are more likely to think other things more important.
Thus, the brute fanny-counting of media analysis of sexism and the “gender pay gap” ignores female choices and attributes, thus denigrating both women and men for the choices they make. Women for their part see their contribution to society in caring professions such as medicine (more doctors are now women, as well as nurses) and teaching denigrated because these women aren’t seeking to be at the top of BAE systems, or whatever. Likewise men, when they see women are going to hired so they form 50% of the workforce of a mining company feel devalued for their skills and attributes because the only way BHP Billiton could make 50% of its employees women is by discriminating against the larger number of men who will apply to drive a bloody great truck miles from nowhere in a bloody great hole in the ground in the middle of a bloody great desert surrounded by nothingness, and live in towns whose bars serve tinnies through wire grilles, and where kicking each others’ heads in represents the primary saturday night entertainment.
But worse, by forcing women into traditionally working class men’s jobs, you further alienate and disorientate a bit of society which already feels put upon, neglected, belittled and scorned. This is why they voted for Brexit in the UK, and in the USA, will vote for Trump. Working class men are lashing out, because their raison d’etre, to provide for their offspring, has been nationalised, and no other opportunity for them has been provided and they as individuals have too often been thrown on the scrap heap, derided as workshy deadbeats. The working class used to have pride in providing for their family and often doing dangerous, dirty jobs to do so. Opportunity isn’t “equal access to university”, for which working class men is a middle-class rite of passage, but decent jobs that will allow them to support their family, but which is blocked by the petty credentialism that values paper qualifications over experience and dumb diligence over inspiration.
That loss of pride is agonising. And people mourn loss far more than they celebrate gain. The aim of this post-modern obsession with equality of outcome therefore might as well be to make men despise themselves and women feel inadequate for the inclinations their biology and society has fitted them. Men become 2nd rate women, and women become 2nd rate men. By all means allow everyone to seek their own path, but to imagine men and women will sort 50/50 everywhere is totalitarian in its foolishness and cruelty.
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2015 Is Going to be the Best Year in Human History

Last year I wrote some predictions How did I do?

The FTSE100 will reach an all-time high, for the first time since 1999, and will continue the bull-run. 7,000 will be left behind.
Thanks to tightening money, The Oil Price will fall below $100 and stay there. The Brent/WTI spread will narrow from 99/111.

Yup, I spotted the fall in oil price. But I didn’t bet on it, nor did I expect so precipitous a fall. I think the FTSE will break out in 2015

The Labour lead will fall from 6-8%. UKIP will win popular vote in the European parliament elections, then their support will drift back to the Tories thanks to a strengthening recovery. Scotland will vote ‘No’ to independence. Ed Miliband will remain a worthless union stooge. The voter-repelling and emetic Ed Balls will remain shadow Chancellor, because his boss is a spineless dweeb, with shit for brains and “Red” Len McClusky’s hand up his bum. Tories will post a lead, but I doubt it will be done consistently.

Labour’s lead has fallen, UKIP did top the poll in the Euros and are now fading. Scotland voted ‘no’. Ed Miliband’s utter unsuitability for Prime Ministerial office continues to be displayed every day.

The Syrian civil war will not end, but Assad will regain control of much of the country, leaving an islamist insurgency. The world will continue to look the other way.
China’s growth will slow. The rumblings of dissent new riches have smothered will start to grow louder. The Communist Party may seek to use Sabre-Rattling with Japan to detract domestic opinion from the looming economic crisis.
Something dramatic will happen on the Korean Peninsula.

I didn’t really predict anything specific, nor was I far from consensus. But Korea? Was I prescient?

So onto 2015.

  • I think 2015 will be the year the FTSE breaks 7000. One day it will, one day I will be right.
  • Oil will fall to $40, and maybe below and stabilise in the $40-60 range. USA becomes the world’s swing producer
  • The Conservatives will win a thin majority in GE2015. There maybe 2 elections. Don’t ask me how. no polling backs this up. But the country doesn’t want Miliband, and Cameron’s actually done a pretty good job under difficult conditions and doesn’t deserve to be sacked. UKIP to win 3-5 seats, Farage to fail in Thanet, the party’s national vote share in the 10-12% range.
  • China’s growth over the past few years will prove to have been overstated. China’s slowdown to get worse. India to continue to develop rapidly. Modi proving his critics wrong: He may be the man to get India working and taking its rightful place as a major economic power.
  • Russia will try to save whatever face it can for Putin, as it withdraws from Ukraine in response to the falling oil price and continued sanctions. Russia will be set up to rejoin the world financial system in 2016.
  • IS will be reduced to a rump by the end of the year, as having been stopped in their tracks on a number of fronts, they will find the supply of jihadis will dry up.
  • Darfur will be the international flash-point to watch.

We live in a time of miracles. 3-D printed lungs, and people landing space probes on distant orbiting rocks. The benefits of these miracles are unequally distributed. But they do eventually benefit everyone. Luxuries once unthinkable even to Louis XV such as the world’s knowledge at the touch of a button, are available to most, through the miracle of stable institutions, and the creative destruction of free-market capitalism.

This provides opportunity for self-improvement, but also can be a productivity-sucking distraction. Who manages to make the most of the opportunities will set the agenda. Wars end, elections happen. The relentless search for better ways to do things however doesn’t stop. Nations hold elections. But policies can be reversed, or turn out to be right all along. But people keep passing on knowledge, which is accumulating at an ever-accelerating rate. We will work stuff out. In time.

Meanwhile a billion people still subsist by patchy subsistence agriculture. Between the relentless march of new miracles, and the acquisition of already acquired technology by new users, there’s centuries of improvement in the human condition, economic growth, right there. Meanwhile Britain is climbing UP the economic rankings. Real wages appear to be growing sustainably and the growth returns.

Signal to noise ratio, people. Neither the world, nor Britain is ‘going to the dogs’, there’s no need to vote UKIP. 2014 was the best year in human history. 2015 will be even better.

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Landing a Probe on a Comet vs Tackling Poverty

On March 2, 2004, an Ariane 5 rocket took off from French Guiana containing the Rosetta spaceship. A few days later, having escaped the earth’s gravity and put into a heliocentric orbit, Rosetta commenced a 10-year 6,500,000,000 km journey which involved taking slingshots off the earth (three times) and Mars (once) to rendez-vous  with a rubber-duck-shaped snowball the size of Cambridge 300,000,000 miles away, moving at 42,000 kmh, Having achieved the rendez-vous, a dishwasher sized probe with three harpooned legs was to be released to float down to the surface of the comet, as it hurtled through space. Touchdown was achieved on 12th November 2014. 

This is, quite simply a technical and scientific achievement equivalent to putting man on the moon. To my mind it is enough that it’s there to do, but this isn’t just an everest for rocket engineers. We will get data on the origins of the early solar system, and possibly the origins of life on earth from this mission. We will know more about what comets are made of. Much of this is pure science of little immediate or practical use. Put charitably “Why are we firing rockets at snowballs in space?” is a question about opportunity cost. What did society forgo to achieve this soft landing on a comet. And the answer is “not much”.
There is a complaint that “we should be curing cancer” or “ending poverty” with the money spent on space exploration. “What good is it to me?” some ask. I’m tempted to dismiss such soulless utilitarianism as the bleatings of one who’s already dead inside. The point about pure science is that it leads to who knows what future advances that solve real problems. Perhaps vital resources can be recovered from comets cheaply. We might learn a bit about the composition of objects that might hit earth, potentially generating knowledge that saves life on earth from extinction. To ask “what is this for?” is to betray a total lack of imagination. If nothing else a nine-year old might be watching the probe land on a planet and be enthused to become an engineer, and go on to do something we haven’t even thought of yet.
“End Poverty”? Benefits paid to poor people are not where they are because they’re the most that can be afforded. We could afford to pay the unemployed more to live on, or top up low wages by more. The reason they’re low is because of the freeloader effect. The higher benefits are relative to work, the more attractive benefits become, and the lower the returns to work. People do not want to work hard to pay taxes to fund a comfortable life-style for those who don’t. More people would choose benefits over work. Thus benefits are set at a level which means live subsisting on them is pretty rotten. Any more would be politically impossible to sustain. Besides, poverty isn’t solved by cash transfers, but by work, and trade and free markets. This is the same thing that will ultimately cure disease. That and the application of pure science.
“Curing diseases?”Aids or Ebola will be cured by free trade with Africa, allowing their farmers access to our markets. Such trade will stimulate road building; roads, which unlike those to mines, go to where Africans live and work. Roads stimulate trade. With trade comes a cold-chain. That means vaccinations. Vaccinations mean healthier people. Healthier people do better in education, making them more productive. Being productive, means being richer, and being richer means people wear watches. And when people wear watches, they know when to take their anti-retrovirals. And if people take their anti-retrovirals, their HIV blood counts go down, making them less infectious. Less infectious means fewer infections. And fewer infections which become chronic rather than fatal conditions will lead to the steady decline in AIDS infection rates we’ve seen in the west. 
In developing all the above, a few decent health-centres and hospitals will mean Ebola will not spread when it’s first identified. How much will this cost us? Less than we spend stopping it happening now. (Farm Subsidies like the CAP are, you see, wholly, genocidally evil). Trade you see is not Zero-Sum. Africans get richer because the market for their produce increases. We get richer because more people are competing to supply our markets so we get things cheaper (and vice versa). We’re both richer. 
Cure cancer? It’s difficult to see how a rocket engineer could help there. There’s very little tangible that can be done in that regard that isn’t being done now. There’s already good money in curing cancer. So if we cannot give more money to the poor, cure Aids Ebola or Cancer with the money, why not give us something inspirational? To encourage us to let slip the surly bonds of earth and look out to the stars. That’s a public good, that is. But to cure poverty or whatever, we need to stop the Government doing bad stuff to Africans, not stop it doing wholly amazing, inspirational science.
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Gary Barlow, Pfizer & some Increasingly Common, but Stupid & Illiberal Ideas

Gary Barlow, formerly of take that invested in a scheme which has subsequently been ruled offside by HMRC. As did Jimmy Carr. Neither of these individuals is a finance professional. They were advised that these schemes were legal, followed advice which subsequently turned out to be wrong.

Upon losing the case with HMRC, the investors in these schemes will get presented with a bill for the tax they avoided. If they pay up, with interest, that is that. No criminal proceedings. Tax is complicated, and there are a lot of grey areas, especially when you have multiple streams of income from royalties, employment, investments and so-forth. This is why people employ accountants to ensure you pay the taxes you owe, and not a penny more.

Calls to strip Barlow by Labour MPs (including from Lady Margaret “the Dodge” Hodge, whose own tax affairs have been called into question) of his OBE are therefore grotesque and vindictive. I am sure this is entirely unrelated to the fact Barlow is a Tory supporter. Tax is not a moral issue. You pay what you owe, and if HMRC and your accountant disagree how much you owe, then the dispute is settled in court. This is what courts are for. Tax should always be seen as a strictly legal issue. Morality doesn’t come into it, however much lefties wish to invoke morality to ensure that more tax is paid (by other people).

Almost no-one pays extra tax voluntarily. But you can lefites; put your money where your mouth is or shut up.

Pfizer is attempting to buy Anglo-Swedish pharmaceutical company AstraZeneca, and they intend to move their Brass plaque to the UK too. Labour are worried about asset-stripping, amid high-minded waffle about something called “the UK science base”. AztraZeneca has about 15% of its people in the UK, and has itself been closing labs, due to the fact it faces a patent cliff. If you don’t know what a “patent cliff” is, then you shouldn’t be having an opinion on the takeover at all.

It is unlikely anyone buying AstraZeneca would close good, productive labs, especially ones close to a large and internationally respected university like Cambridge, at the hub of a Pharmaceutical and Biotech cluster called “silicon fen”. Indeed that lab, in which AstraZeneca has recently invested is one of the things that would be worth keeping. And if Pfizer don’t want it, if it’s that valuable, it can be sold to someone who does.

The UK listing is another. The US charges tax is a perverse way – money earned overseas, on which tax has already been paid may face further taxes should the company wish to bring profits onshore. Broadly speaking No other countries do this. The US has been able to get away with this for now, because the US is so important. But companies like Pfizer, and Apple whose “problems” with their enormous pile of useless overseas profits will only grow may choose to move their head office to a friendlier regime in order to sidestep this problem.

This means US business will still get taxes charged in the USA. But all other profits will be charged and taxed in the non-US jurisdiction (in Pfizers case, the UK) and the movement of profits for investment will not face US taxes that no other jurisdiction would think to charge. Yes Pfizer is “tax-dodging” but the beneficiary of this is HMRC who’re simply less vindictive and stupid than the IRS.

Despite this vast inward investment (£26bn or so) that Pfizer is making in the UK, Ed Miliband invokes fears of “Asset Stripping”. Indeed all asset-stripping is, if done profitably, is selling assets to people who value them more. Being against this process is just left-wing flat-earthism. Much like the cant about Gary Barlow’s tax affairs.

There’s a kind of Hysteria in which anyone who gets into a dispute with the tax-man, or who seeks to quite legitimately reduce their tax bill is seen as a “tax-dodger” and so beyond the pale. It’s stupid, it’s illiberal and it harms business and prevents investment. A Miliband-led UK will be a great deal poorer as a result.

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The Post Office IPO

Most of the objections raised in the media concerning the sale of the Royal Mail are spurious. Most IPOs get away at a discount. Investors are taking on significant risk in buying a share for which there is no established market, and therefore price. Get it wrong, and your investors lose a great deal of money. No further money can be raised by the business in future except at high costs of capital.

A lot is being made of the advice as to the price range:

At the time of the flotation, and more specifically the book-building process, there were significant threats of industrial action. This faded as the floatation day approached. At 330p, the top end of the range, the shares yielded 6% or so, which appears about right for a floatation of a regulated utility the sale of which was driving the trades union movement nuts. SSE at the time yielded significantly more than that and 5% or so is about normal. 290p was cheap but 330 looked about right to me at the time.

Setting the price too high would ensure much less demand. And there are big magnifying effects at work.

There are known problems with the book-build process. The main one is that it is inflexible should demand prove higher than expected. And it was massively over-subscribed. Politicians running round telling everyone it’s undervalued might have something to do with this. There was an immediate buzz, as everyone tried to get as much as they can. This flattered the figures for demand. Once it is clear the demand is greater than supply, this creates more demand and so on in a virtuous circle. It became clear, as I endured my busiest week ever that everyone would get substantially less than they put in for. This in turn encouraged retail customers to bid for £20,000 in the hope of getting £3000 worth, further flattering demand.

So was the demand really 24 times over-subscribed by institutions as reported by the National Audit Office? No.

If the issue was priced at £5, just over 10% below the trading range it established following the flotation, it’s unlikely, at a yield of around 4% that I’d have been recommending it to clients. There would have been no politicians running round telling everyone how under-valued it was, and in the absence of the excitement, there wouldn’t have been people putting in for significantly more than they actually wanted. The issue may have been a flop, and been pulled. The Government would have been left with egg on its face, and the price it could achieve in future may well be worse than the 330p it actually achieved for the 60% of the company it sold, if it could get it away at all. This is of course the real objection from Labour and the Unions, who simply object to any and all privatisations.

Could the Government have got more than 330p? Yes, but not much more, and at significant risk to a successful flotation.

People are objecting that institutions which took part in the flotation have sold some or all of their holding. Well why shouldn’t they if they think as I do that at 560p, at a yield of 3.7%, Royal Mail is over-priced? I simply don’t understand this fetish for long-term holders. Royal Mail is a successful flotation with a deep and liquid market in its stock and so as a result, can if needs-be raise money at a low cost of capital. Those institutions which put in for the flotation early did so at some risk. They have been paid for this risk handsomely and early, as have the 600,000 or so retail investors, many of whose holdings of 227 for which they paid £750 are worth well over £1200. I don’t regard this as a bad thing. If you think the shares were sold off cheap, you could have bought some (unless, of course you were overseas, or an MP).

Should more have been made available to retail investors? Yes. But at the cost of securing the IPO, when it was not at all clear what demand for the shares was out there. Could a different flotation mechanism be used in future – an auction perhaps? Yes but these are a great deal harder for retail clients to understand and access. And if there are to be privatisations in future, we want to allow retail clients – individual British people to take part.

These quibbles aside, the IPO was a great success, and most of the objections to it are mere left-wing cant. The risk of owning Royal Mail to the tax-payer has been reduced. You can still post a first class letter from the Scilly isles to Shetland. Private money now underpins the business, and thanks to a hugely successful flotation, the Government can, at a time of its choosing, sell some of the remaining stake for which it will get a better price. The National Audit Office made an estimate of the value to the taxpayer of keeping the company in public ownership of £1. Labour is not making much of this figure. It has been sold to people who value it significantly higher. This is why capitalist, free-market economies are richer than the kind of economy Labour MPs want: everyone is better off now the Royal Mail is privatised and no-one is worse off.

Isn’t capitalism marvellous?

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Why not Nationalise Grangemouth refinery?

Twice in the last couple of days, I’ve been asked to talk to the Media about Grangemouth. Twice I’ve been asked the same question by the BBC: Should it be nationalised? The first time I was surprised by the question, and answered with waffle about there not being a case for the refining business, but the petrochemicals plant is important as the centre of a manufacturing hub. The second time I ducked it completely. “not my area of expertise”.

Strategic infrastructure?

This is cowardice on my part. Of course Grangemouth shouldn’t be nationalised. The manufacturing businesses surrounding Grangemouth will have to find other sources of supply or close. Tough, but better than the alternative, even though this manufacturing hub makes up 10% of Scottish GDP. The problem is the refining and petrochemical business suffers from overcapacity accross the whole of Europe. This is in part because Governments sometimes have seen refineries as “strategic” and intervene whenever they get into trouble, and in part because of simple competition from newer, bigger refineries and petrochemical plants elsewhere, particularly in Asia and the USA.

You’ll see a lot of waffle in the media about “fuel security”. The best security is having multiple sources of supply, and being rich enough to afford the prices of market fluctuations. Of course it’s nice if your domestic supply can be exported, but even this has problems. You’ll also see fearmongering about petrol prices. There was little noticable effect on petrol prices from the strike in 2008. While there may be disruptions to supply to forecourts in remote areas of Scotland, the fuel companies are likely to have contingency plans, and any disruption is likely to be short-lived and local. Remember the biggest fuel store in the UK is that in everyone’s car. But the main reason this won’t affect prices is because we already import nearly half the UK’s diesel, and export 20% of petrol. The supply chain is already diversified and robust.

European refineries built after the war produce too much petrol, demand for which is falling thanks to more efficient cars, fewer miles driven and a switch to diesel. They produce too much fuel oil which no longer heats our homes and powers our industry, the cleaner, cheaper gas does. They produce too little diesel and aviation fuel, which the UK must import. We struggle to find a market for our glut of petrol and fuel oil, because everyone’s refineries have the same problem. And there are simply too many of them in Europe.

Grangemouth is not the only European refinery closing this week. Mantova in Italy has also been mothballed. European refineries, old, with a nameplate capacity of, in Grangemouth’s case, 205,000 barrels of oil a day, which is turned into stuff for which there is no market. It’s unsurprising they’re struggling against big, new American and far-eastern refineries which have capacities over twice that. American refineries pay (at present) $15 or more less for their crude (the WTI/Brent spread) too and produce the stuff the market (currently) demands.

If the plant is nationalised, the Government (whichever one, Scottish or British) will have to pick up the tab for a business currently losing £150m a year, with a pension fund £200m in deficit. The plant is said to need £300m in investment to set the plant running to produce what the market actually demands. So we’re looking at a measurable, whole-integer percentages of the Scottish Government’s budget of £27bn, when they’re already running a 10% deficit. Good luck sustaining that.

The difference between Ineos and the Scottish Government is the former has lots of experience in building, running and managing petrochemical plants. The Scottish Government has none. It’s impossible to conceive of Alec Salmond running a nationalised petrochemical business better and more profitably than private sector managers. I doubt the Scottish Government (soon to be independent?) could find the money to wear the inevitable losses in perpetuity without cutting back elsewhere. So everyone in Scotland will have to pay taxes to keep 800 people in jobs and be much poorer as a result of the direct transfers.

Then there’s the precedent. Having secured nationalisation for “key infrastructure”, which is what the unions want, they will want to get the same result for every other big business which starts to find the competitive pressures of the Global economy a bit much. With the back-stop of nationalisation for any factory employing 500 or more Scots, unions will be tempted to drive a harder bargain. Scotland becomes a little less profitable, and receives less and less investment each year as a result.

Because investment drives productivity, and productivity drives wages, Scots will find themselves getting poorer if the Government caves in to Unions’ demands. The laws of compound interest mean this happens slowly at first. But Scotland lacks the resources of the UK’s diversified, trillion-dollar economy to stand the pressure for long. Even with the resources of the UK, it took massive “nationalisation of the means of production” less than 30 years to cripple Britain. The Scots are far, far to the left of the rest of the UK, and British business after the war was profitable to start with. If they get what they, and the BBC appear to want, nationalisation, the Scots will see why nationalisation doesn’t work much, much quicker than that.

So next time I’m asked “should Grangemouth be nationalised?”. I’m going to say “No. Of course not, though there’s a case for helping with the investment needed, but I don’t think even that’s a good idea”.

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“Save our Shops”

With Mary Portas’ recent review, the news that the
high-street is obviously shrinking isn’t ‘news’ any more. The British
are the most enthusiastic online shoppers in the world, it’s difficult
to see a future for the high-street as a purely retail environment. Everything
perishable is dealt with by the super-market. What’s left – goods you have to
touch: some clothing, but even ladies’ clothes will struggle
against the choice available online, A few artisan specialists such as Delicatessens and Butchers, and services. It’s not about parking, it’s about changing habits.
Get ready for
high-streets containing even more by Accountants and Solicitors. Above all –
leisure will dominate the future high-streets. Pubs, bars, restaurants,
coffee-shops, bookies and casinos (have a look a this handy infographic – there will be a variety of provision for people wishing to gamble, especially in big destination towns like London) will replace shops as the dominant lessor of ‘high-street’ space. Towns will have to provide an appealing environment (and that, basically
means no inner ring-road or 60’s architecture) to attract visitors who’re
spending their time and money on themselves. For those towns lucky enough to retain a pretty mediaeval centre, and have sufficient property, there will be boutiques for tourists but they will be an anachronism. 
Necessities will be sought from
the super-market and online – the high-street of local shops is probably no-more.
“Save our shops”. No more viable than save
our coal-mine. The world, and technology has moved on.
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Twitter’s first Flash-Crash

Yesterday, some jolly trickster hacked into the Associated Press’s twitter account (@AP) and tweeted

“Breaking: Two explosions in the White House and Barak Obama is injured”

Predictably the market collapsed 0.8%, before rallying on the news that it’s a hoax.

It would be so easy to earn serious money, with almost no chance of getting caught. You need the password. You need to open a trading account for CFDs or Spread-Betting. You need to establish a pattern of trading. You need to have a situation where a $100 a tick position would be entirely normal. You need to open just such a position, shortly before your associate, working from an internet cafe elsewhere, logs into AP’s Twitter and tweets the bogus bomb story.

The fact this happened shortly before the market close suggests the plan was to go long in the final seconds of trading, ensuring another big profit, when the markets open up today on news of the hoax getting around.

As it happened, the hoax was spotted quickly, and the Markets recovered before the close of play. Still, it would be quite possible to make hundreds of thousands of Dollars in a couple of minutes work. This post is of course, an elaborate double bluff.

“Of course I’d do no such thing. Look, I’ve written about it, yer ‘onner.” 

Can anyone get me Reuters’ twitter password?

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The Hows and Whys of the End of the Commodity Super-Cycle

I remember Oil at $14 a barrel back in the early noughties. The conversations I was having then were about the roof in the price due to Canadian tar sands, the world’s largest hydrocarbon repository, which became economic to exploit at $40. The Oil Price, in response to shortages, and anticipated shortages caused by rapid Chinese growth, rose rapidly from 2002 or so. In the short run, the supply of oil is fixed. So, for a decade or so ever cheaper money was chasing a short-run fixed supply of oil. One of the effects of the “Greenspan put” was to raise oil prices. The Oil Price spiked in response to the financial crisis in 2008 to its high and has remained persistently over $100 since. Just as it seemed logical back in the 90’s, following two decades of sub-$40 oil that this was indeed a ceiling through which Oil prices would not go; people though $100 looked like a floor below which the price wouldn’t fall. In markets, the consensus is usually wrong.

This high price led to talk of the “end of the Oil economy”. High prices became built in to people’s thinking, just as low prices had for the decades before that. Soon, Oil executives started to give the go-ahead to projects in deep water or held in deep rocks which are costly and difficult to reach based on higher returns. The result of this is an increase in supply. North Dakota for example is benefiting from an Oil Boom due to rock-fracturing technology, better known for disrupting the Gas market. New technology was developed to extract oil cheaper and more efficiently from where it had been un-economic to extract previously.

This extra capacity in the Oil industry was matched by a focus by the consumer on demand. People started insulating their homes to use less heating fuel. Cars and Air-conditioners became more efficient. People are driving slower, as cars now show the point fuel consumption and people see how much more fuel they use at 85mph compared to 70mph. Remember how cars on motorways used to drive at 80-90mph in the fast lane, and now there are few people breaking the 70mph limit? Accidents have fallen. In the UK, petrol sales have fallen by over 20% from their peak in 2008 thanks to these effects.

So supply has risen in response to high prices, and use has fallen. What’s going to happen to the price? You’ve got bankrupt oil states who are no longer beholden to OPEC, like Venezuela who will need to sell every drop they can produce if their economy isn’t to collapse. So the fall in price may, in the short run lead to MORE production, as desperate producers try to meet forecasts based on higher prices creating a rapid fall in the price, even from here.

Industrial metals are showing the same story. There are no primary smelters of Iron in Europe because we’ve got all the Iron we need, and simply recycle existing metal. China will develop its car economy based on Aluminium chassis, not steel and will demand less steel than did Europe at the equivalent stage of development. Yet there are vast open-pit Iron-ore mines in Australia with robotic 400-ton trucks pulling ore that few will need. The price of Iron and steel are falling.

The writing was on the wall. The top of the market indicator for Metals is AIM-listed start-ups going after “rare-earth” elements in slag heaps. We had plenty of those. Obvious, really, in hindsight.

The point is that a price mechanism in a free market has worked to ensure that there was never a shortage of  Oil or industrial metals. The price rose, capacity rose to take advantage of the high price, supply rose, consumption fell and eventually the price collapses. This is also why free-market systems don’t have famines, as the same thing happens with food. And do you know who prevents famine? The speculator, and most especially the hoarder. As it’s his store that keeps everyone alive. And also why anything a government provides, (Schools, Hospital beds, building permission for houses etc..) we will always be short of, because there is no demand/supply mechanism to allocate resources. There’s no signal saying “invest here, not there” in a planned system.

So. Are the prices of Oil and Metals going to continue to fall? Yes. Probably. But the confidence interval on that statement is no more than 51%. Are we ever going to run out? No. Of that I am certain. Don’t get me started on Gold-Bugs except to say

“Bwahahahahaha. Told you so” 

having been wrong for, um, about a decade.

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“The Crisis” was caused by Preventing Recessions.

What’s to blame for “the crisis”? 

By “the Crisis” most people mean, when they ask that question, the recession and financial market crash which started in the USA in 2008 and spread like wild-fire round the world’s financial systems, and is still smouldering in places like Cyprus and Slovakia to this day.
Most people blame “deregulation” by which they mean shouty, shirty men shouting down phones into screens. Poor regulation did play a part, but the financial markets weren’t deregulated, and often the unregulated bits performed best. Certainly much of the ‘deregulation’ happened post Thatcher, where the (Ed Balls-designed) FSA focused on nit-picking about how quickly banks picked up the phone, thinking this was more important than Bank capital adequacy which the Bank of England used to focus on. This blaming of Capital markets is often just fear of that which is not understood. 
Many blame “greed”. It’s comforting to have a deadly sin as one of the reasons for discomfort. But we’re all “greedy”. There’s no blame in responding to incentives. Others blame “neo-liberal economics” because anything prefixed with “neo” becomes the devil’s work. Of course it’s Liberal economics which has brought the world’s poor out of poverty in their billions over the last thirty years.
The real reason for the extent and depth of “the crisis” is the “Greenspan Put”. A ‘put’ is a type of option which gives the right to sell at a given price, thus, for a premium, you can use them to insure an underlying asset. During the 1990’s & 2000’s, following the .com bust, interest rates were repeatedly cut. Every time the housing market wobbled, the markets fell, or GDP growth stalled, the interest rate was cut, aggressively.

The problem with this approach is that by 2007, when the wheel came off the economy, lowering interest rates was, to use a cliché, pushing on string.
So why did the wheel come off the economy in 2007? The reason is that there had been 16 years of uninterrupted growth beforehand. The problem Brown, who’d apparently abolished boom and bust, faced is that recessions are when growth happens. In the run-up to the .com crash, there was an enormous explosion of investment in Internet stocks. Shares would fly out of brokerages because the company announced they were opening a website. Companies in the new .com business were being valued on multiples of ‘EBITDAM’ (Earnings before interest, tax, depreciation, amortisation and …. marketing…). So sales less wages then? This was pure bubble stuff. And there was a massive over-investment in nonsense websites. The .com crash which came with the millenium hangover and lasted for 3 years however did NOT result in a recession. Why? because interest rates kept being pushed down, from 7% just before the bubble burst to under 4 in 2003. 
As the mal-investment was shaken out of the lastminute.coms, and the share-bubble unwound, another was being stoked up in property and debt. One of the effects of lowering interest rates is an increase in the cost of debt securities. (you can argue about cause and effect…). Thus, it became more efficient as interest rates dropped with shares’ Price to earnings ratios, to finance a company through debt rather then equity. This is called “gearing up”. Meanwhile, governments responded to the booming property market by… relaxing controls on how much, and to whom banks could lend. “Getting people on the property ladder” became more important than bank capital adequacy. The laws and rules by which this was done on the two sides of the pond differed, but the effect was the same. Banks were actively encouraged to “innovatively” lend more to people backed by less, and less equity in the home, and less and less tier-one capital in the bank.
Risk compensation ruled the day: When banks were ruled by the Governor’s eyebrow, and the Old Lady of Threadneedle street kept an eye on the balance sheet, banks were safer. In the days of Basel II captial regime, RBS thought it could get away with a Tier one capital ratio of 5%. Nowadays 10-15% is more normal. This was acceptable because “Value at Risk” was calculated with reference to volatility. As volatility falls, the acceptable level of capital needed fell, leaving the system ever more vulnerable to systemic shocks such as the absolutely unlikely event of …. property prices falling….
Banks, which had got used to their being bailed out by the state by means of an interst rate cut, effectively outsourced risk regulation to the regulatory authorities. Whatever the regulator said was OK was OK. The banks then got on with lending “innovatively” to people with products like 105%, self-certification mortgages. Politicians encouraged this. Homeowners are more likely to vote, and vote for the party they credit with their “investment” in housing.
So. One bubble replaced another in the property market. And property market eventually popped, taking the banks with it. This led to the bubble ending up in the last place it can: Sovereign debt which is now so expensive, it’s paying a negative real yield.
Ultimately the reason for the crisis is that the USA and the UK did not have the recession which was needed in 2000. The mal-investment wasn’t purged, just moved. For recessions aren’t things to be avoided. They are inevitable and necessary. Like Eucalyptus needs the fire to germinate, recessions clear dying businesses and free the resources of capital and labour to new, more efficient, faster-growing businesses. The longer you prevent this process from happening, the more zombie companies you have lying around, able to service their debts, but holding onto Labour and capital which could be better used elsewhere. This has been Japan’s curse for twenty years. It remains to be seen whether this round of monetary cocaine (abenomics) will work. Without a cleansing recession to clear the mal-investment out of the economy, mal-investment just builds up until it becomes an intolerable burden of companies doing things of limited use, propped up by the state and banks.
This is ultimately why planned economies fail. Mal-investment can be sustained by political will until the economy’s making steel no-one needs in a gargantuan make-work scheme. This is the reason the USSR measured tractor production by … weight…. Even in the worst free-market system, there’s only so may places it can hide before the wheel comes off. The economic cycle is around 7-10 years. Even the Bible knew this. Mr Brown should have realised, as a son of Presbyterian preacher, he hadn’t abolished the seven fat and seven fallow years (Genesis 41:30) but instead put off the day of reckoning. (Isiah 10:3). It certainly wasn’t Margaret Thatcher’s fault, however fervently lefties wish it. It wasn’t only Gordon Brown’s fault, however much I wish it. The crisis did start in America, but the main people to blame for the crisis, however are idiot regulators and central bankers, who followed Mr Greenspan’s example.
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