Friday, 12 November 2010

Are Carbon Credits the next sub prime Crisis

Are Carbon Credits the next Sub Prime Crisis?

A recent Chartered Institute for Securities & Investment presentation "Is Carbon Trading and Investment the next Sub-Prime Crisis?" prompted the audience to revisit their belief in man-made global warming and draw parallels with the sub-prime crisis.

Structural incentives obscured the true value (or over value) of sub-prime mortgage backed securities. Until the 1970s investors paid credit rating agencies for due diligence. When rating agencies started charging Bond Issuers for ratings, their financial interests converged. Ratings agencies and issuing banks were perhaps too cozy and this led to optimising the risk profile of mortgage backed securities to achieve AAA ratings.

Carbon credits are ascribed value because they are the mechanism by which man-made or anthropogenic global warming (AGW) is being addressed. The AGW hypothesis that man’s CO2 emissions are causing runaway warming, is premised on climate models and claims of unprecedented temperatures. By the scientific method, the onus of proof is on those proposing the hypothesis.

The AGW theory proposes that increased CO2 in the atmosphere is absorbing more long wave radiation from Earth’s surface and this heat is radiated back, causing warming. Positive feedbacks are also claimed, suggesting that increased CO2 multiplies the greenhouse heating effect, creating a “tipping point” from which there is no recovery.

This additional heat should be observed in the mid-troposphere over the tropics because that is where most heat is emitted but satellite and weather balloon data reveal no evidence of this heat, contrary to climate model predictions. This one fact destroys the AGW hypothesis. As Albert Einstein said, “No amount of experimentation can ever prove me right; a single experiment can prove me wrong.”

During the Medieval Warm Period the Vikings settled and farmed in Greenland which, together with other evidence, suggests today's temperatures are not unprecedented. The settlements collapsed around 1400AD with the onset of the Little Ice Age which lasted until the 19th century. Pepys wrote of the Great Frost Fair of 1683 and skating on the Thames when the river and surrounding estuary froze for weeks over winter. That temperatures have been rising since is neither surprising nor alarming.

More than 700 international scientists made submissions to the US Senate, dissenting from the AGW “consensus.” Some wrote of the politicised environment in which scientists are afraid to speak out for fear of losing credibility and funding. John McLean analysed contributions to the IPCC's Fourth Assessment Report and found only 53 climate science authors and 5 reviewers explicitly support the claim of significant human influence on climate. 166 climate scientists have written to UN Secretary General, Ban Ki Moon, challenging him to provide proof of man-made global warming.

The IPCC exists to assess “human induced” climate change which has led to a structural bias in climate science funding and reporting. Earth’s climate is a natural, chaotic, cyclical system which responds to solar cycles and oceanic oscillations. Evidence of these cycles is suppressed or dismissed by the IPCC and
ignored by the media. Relying on third parties with a vested interest in, and prior commitment to, man-made global warming will not reveal the truth.

This week’s Thought of the Week is contributed by Clive Menzies. Clive is a director of Fund Building Limited, a third party marketing firm. Links to climate science information are available at together
with a podcast of the CISI presentation.

Monday, 18 October 2010

How To Save Higher Rate Tax and Keep your Child Benefit

There has been a peculiar unintended consequence to the Government’s new policy on child benefit. For a limited number of people who earn between the current higher rate tax threshold of £43,875 and approximately £47000 to £48000, there is a window of opportunity for people to save both higher rate tax and maintain their child benefit allowance which they would otherwise lose. Consider the following two examples:

John has earnings of £47,500 per annum. Anna his wife does not work and they have two children both of whom are under 18 and at school. Under the old rules, John would receive Child benefit of £1056 on his first child, Jack with a further £697 being payable to his second child Jill.

Under the new rules, John will lose both of those benefits because he is a higher rate tax payer. However, with some forward planning, it is possible for John to retain his child benefits and this is by use of ‘sacrificing’ some of his salary and paying more into a pension plan.

Consider the example as below:

Of John’s current salary, he has to contribute 5% to his company final salary scheme. Because these contributions are deducted through the payroll, this amount is deducted from his salary and reduces his salary from £47,500 to £45,125. Pension contributions are, of course, fully tax deductible.

However, this level is still above the higher rate tax threshold and as such, John would still lose his child benefit allowance. However, if John were to make additional contributions to his pension plan of £1250 gross this would bring his salary down to £43, 875 and he would then get his full child allowance for both children. Of course, he would get full tax relief on his contribution meaning that he would be entitled to a tax rebate of 40% on the contribution (1250 * 40% = £500). This would mean that for John’s pension contribution of £1250 would actually only cost him £750!

Therefore, in this instance, he would get back a further £1753 in child allowance and he would be better off by this amount less the net contribution to his pension (£1753 - £750). So, he would have an additional £1003 in the family budget plus a further £1250 going to his retirement fund of which the Government has contributed £500 in tax relief.

So, it is actually costing the Government £500 in tax Revenues they will not now receive together with the additional £1753 in Child allowance. I’m sure that they did not intend this when they drafted the legislation.

Wednesday, 22 September 2010

Tuesday, 10 August 2010

Thought of the Week- Love, Hate and BP

Hatred is the easiest of emotions. Unlike love, compassion, sympathy, charity or knowledge, it requires no application. Furthermore, it is infectious and inspires powerful group morale amongst the haters. In its more extreme forms think of the Reformation and indeed the sectarian differences which sadly persist to this day; the French and Russian revolutions, where a hatred of the middle class and aristocracy provided a common bond; Nazi Germany, where anti-Semitism and contempt for other “inferior people” provided a glue to hold the vile state together and other examples ranging from Balkan ethnic cleansing to Mao’s Cultural Revolution or Pol Pot. At a more modest level, school children find camaraderie in turning on the most unpopular child in the playground. It is particularly disappointing that President Obama should have deployed the cheap weapon of hatred in his response to the disaster at the BP Macondo well in the Gulf of Mexico.


Kassius absolutely does not prejudge what went wrong. Were problems with the blow-out preventer ignored? Was it wise to drill such a deep well without a relief well? At the worst there may have been “gross negligence” but not wilful default or aggressive action. Subsequent inquiries and the courts will rule on this. One notes, however, that BP appears to have been accident prone compared with the other oil majors. Despite an appalling public relations failure at board level, the BP technicians are to be applauded on their handling of the crisis, which has been at the cutting edge of technology. At the time of writing, God willing, it seems that the well has been plugged. Yet President Obama has severely criticised BP, emphasizing its Britishness, but according to a correspondent in America failing to stimulate any broader anti-British sentiment. Perhaps he needs to deploy the weapon of hatred in order to improve his prospects at the mid-term elections and to demonstrate his superiority over his predecessor in reacting to Hurricane Katrina, although the response to this tragedy was organized at a state not a federal level. Obama is considered to have handled the oil spill poorly and questions need to be answered as to why the standard procedure of burning off surface oil was not adopted earlier.

Source: gstatic

Playing the hatred card is in marked contrast to global reaction to the financial crisis which struck in 2007, which continues to cause infinitely greater damage than the spill in the Gulf of Mexico. Blame for the crisis has been variously allocated to President Carter’s misguided “Communities Rehabilitation Act” which was the genesis of sub-prime lending; reckless borrowers; sleepy regulators; feckless central bankers (the BIS thinking that mortgages were risk free) or complicit rating agencies who were paid to give favorable ratings to packages of debt, some of which were toxic. But the real culprits were the American investment banks, which packaged the sub-prime debt, in some instances as we now learn specifically so that it was designed to fail for the benefit of the packager and a particular client and to the detriment of the purchasing client. Yet there has never been a word of anti-Americanism. Total, the French oil company, has just been fined for Europe’s largest ever peace time explosion at the oil dump at Buncefield. But not a word has been spoken against the French. Of the negative emotions contempt, disdain and scorn are occasionally permissible. Amongst the positive we are told that charity ranks before faith and hope. But to see the hatred card played is not worthy of the President of the world’s leading nation.

Chirag Shah
Director, Kassius Ltd

Friday, 6 August 2010

Thought of the Week- Inflation

The German inflation of the early 1920's and the extreme difficulty of closing the inflationary Pandora's Box, once the money supply has been allowed to ride out of control and when velocity of circulation accelerates.

This week's chart shows the extraordinary expansion of the
US monetary base during the financial crisis/recession.
Note that both the Fed. and the Bank of England now appeared
to be more concerned about a double dip than inflation.
If the concerns are justified, expect another dose of
monetary laxity. It is as though our Faustian central
bankers have signed a cunning pact with inflation permanently
to ward off a stagnant economy, which may well be the price
that should be paid for previous debt- fuelled excesses.

Chirag Shah
Director, Kassius Ltd

Tuesday, 13 July 2010

Thought of the Week- Silver Content of the Roman denarius

It was ever so,

Source: Hasley

" The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officaldom should be tempered and controlled, and the assistance of foreign lands should be curtailed kest the Republic become bankrupt. People must again learn to work hard, instead of living on public assistance"

Marcus Tullius Cicero, 55 BC

Thursday, 8 July 2010

Are we in for a suprise?

The subject matter of Today's blog is Are we in for a suprise?

In a World Full of Surprises the Double-Dip is no Surprise…at least to Friends of Kassius.

At the turn of the year we suggested that government bond markets may well unfold as the major source of financial anguish in 2010; as we reach the half way mark we take little joy in the correctness of our analysis. Recall the basic scenario - throughout the developed world we have witnessed a secular growth in the amount of debt relative to national output over the last 20 or so years; this has been mainly consumer debt in many countries. The idea that in some way the consumer debt can be ‘replaced’ by the government activities funded by debt leaving the whole financial system somehow in a better place is farfetched and repeated by the media picking and choosing from the writings of economists with no knowledge of financial history. We now have a far greater pile of debt to consider while analysing the economy; the word ‘replacing’ is totally incorrect.


The consumer is fatigued and has not saved at all at various times over the last decade in the US and UK; to reduce the burden of consumer overindebtedness requires a multi-year workout with reduced consumption, which, you may recall, is 60-70% of final demand in these economies. This is a very slow process unless we have wage inflation or debt forgiveness. One could argue that the Bank of England is sneaking in some RPI inflation and the bond vigilantes are being distracted by the World Cup and Wimbledon. Certainly the sterling decline is a subtle default for foreign investors. President Obama has encouraged debt forgiveness (reductions) for distressed home-owners; this is difficult to implement and has only partial success since 64% of those forgiven default on other debt (eg car loans) within a year.


Neither inflation nor forgiveness is likely at present; government bond markets are signalling default not inflation risk as it becomes apparent that the whole financial system is clogged up by excessive debt which cannot be serviced at ‘normal’ interest rates - and the mountain is set to explode further, especially in the UK. There will be quarters of decent retail or investment spending followed by negative surprises. Throughout the world demand will be sluggish; witness a slowing China this week. We see no possibility of sustained ‘healthy’ growth without debt destruction - think Japan for the last 20 years. Wage deflation is very bad news for this environment - think Southern Europe and Ireland; and how many analysts realise that 28% of employed US workers are working reduced hours, while 23% have had their pay cut? This all suggests a prolonged period of subdued growth - the fiscal and monetary nuclear experience cannot buy success in an overindebted world - see the chart on US monetary growth, a serious pointer to a subdued economy.

Double-dip may only be a prelude to multi-dip. This is a very difficult investment environment and the only message is to avoid big concentrated directional bets unless you are happy to lose. Casino investment should give way to thoughtful diversification.

(Source: Hasley Investment Management LLP. June 2010)

Chirag Shah
Director, Kassius Ltd

Tuesday, 29 June 2010

Gilts, Yields and Equity Bonds

This blog’s chart shows the ratio of the 15 year gilt yield to the yield on equities and implies, for those who like looking at the statistical tea-leaves, that equities are very cheap. As ever, there may be two jokers in the pack. Gilts have had a truly remarkable run since yields of well over 4% during the time of Gordon Brown as Prime Minister, when the talk was of a funding crisis, reoccurring inflation and even recourse to the International Monetary Fund, have now dropped to 3.93% at 15 years. Equally, the equity dividend yield (Internal Rate of Return) may be overstated since the data is historic and BP, which at the best will suspend its dividend, accounts for one seventh of all FTSE dividends. The historic data have also witnessed dividend disappointments and the dividend yield may not, therefore, need to be adjusted. Lest anyone, wrongly, thinks that Kassius is an anti-equity house, this is interesting food for thought.

Thursday, 24 June 2010

Friday, 18 June 2010

Distressed Debt Purchases & Other Strategies

In keeping with our strategy of presenting new ideas to clients and professionals, Kassius are pleased to present to you our FREE Investment Seminar featuring: ‘Distressed Debt Purchases & Other Strategies’. Presenting this event is Mr Simon Armstrong, Founding Partner of Saltus, Fund Managers. CPD points are available for Professionals. Spaces are limited and will be allocated on a first come first served basis.

Event Details:

5th July 2010. Registration is at 12:30pm and seminar shall commence at 1:00pm prompt. Light lunch shall be provided.

14th July 2010. Registration is at 5:30pm and seminar shall commence at 6:00pm prompt. Light refreshment shall be provided.

The event shall be held at the Saltus Partners LLP office: 18 Derling Street,
London, W1S 1AQ.

To register for this event or for more information, please contact at Kassius on 020 8445 0246 or email us at

Chirag Shah
Director, Kassius Ltd

Thursday, 10 June 2010

Thought of the week- Law Makers Strangled

It is good to see that Michael Gove, the Education Secretary, has already got down to work by abolishing three quangos (quasi non-governmental organisation, quasi-autonomous non-governmental organisation, and quasi-autonomous national government organisation): The General Teaching Council for England, characterised as a “bureaucratic siphon” of money away from teaching; Becta, which advised schools on the purchase of IT equipment and the Qualifications and Curriculum Development Authority, about which a teaching trade unionist said, “I frequently said that if the GTCE was abolished tomorrow few would notice and even less would care.” Let us hope that along with a bonfire of quangos, we will also witness the repeal of some of the 3000 laws passed under the Blair administration with many more under Brown. We should not forget that the quickest route to reducing crime is to reduce laws. And this is the theme of Philip Johnston’s “Bad Laws” (Constable).

In his “On Liberty”, published in 1859, John Stuart Mill defined the point at which legislation becomes oppressive to liberty: “The only purpose for which power can rightly be exercised over any member of a civilised community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.” Since 2003 it has been illegal to own a horse, donkey or a Shetland pony without obtaining an identity card for the animal to ensure that it does not poison anyone who eats it. Letting off a firework after 11 p.m. can be punishable by six months in prison. The Sexual Offences Act 2003 criminalises “canoodling” by teenagers below the age of sixteen. Section 44 of the Terrorism Act 2000 has given the police authority to stop and question anyone within designated areas. It has been abused by councils. The police and other state agencies now have 266 separate powers to enter a home, often using force to do so. There has been a proliferation of databases ranging from ContactPoint with details of every child in the land, the NHS database and the largest DNA database in the world with profiles of a million innocent people. Council officials can examine phone and email details. The Licensing Act 2003 has produced many solid absurdities: when Zippo’s Circus arrived in Birmingham in 2008 the licensing officer declared that if the three Spanish clowns announced their act with a trumpet, tuba and exploding horn, it would be a live music performance and the big top would require a licence. The circus’s proprietor commented, “I am a big fan of silent comedy, but this is ludicrous.” Health and Safety is another area where government intrusion has become absurd with conker fights and cheese rolling banned.

Big government must cease. It cannot be afforded. It is a step towards a senseless & disorienting state. It saps the role of the individual. It is time wasting and deadens the economy. Perhaps the traditions of paternalism and liberalism which lie at the historical roots of our present coalition government can reverse the tide – as is already happening with the cancellation of ID cards.

A more extreme solution would be that practised in the Greek colony of Locri Epizefiri in Italy in 660 BC. “A Locrian (politician) who proposed any new law stood forth in the assembly of the people with a cord around his neck and if the law was rejected the innovator was instantly strangled.”

Wednesday, 9 June 2010

The Euro - We've been here before!

The subject matter of Today's blog is The Euro- We've been here before!

The convention of 23rd December 1865, which established the Latin Monetary Union, was a triumph for Napoleon III. It was not, however, the creation of a new fiat currency, as was the Euro, but rather mutual adherence to bimetallism, with France, Belgium, Italy and Switzerland tying their currencies to a standard of 4.5 grams of silver or 0.290322 grams of gold, crucially a ratio of 15.5 to 1. Greece formally joined the system in 1867 and Spain, Romania, Austria, Finland, Venezuela, Serbia, Montenegro, San Marino and the Vatican effectively became associate members. The Latin Monetary Union survived at least in name until 1927. At this time, when the tectonic plates of the Eurozone grind against each other (basically the prudent, competitive German creditor agonizing over its profligate and over-indebted Mediterranean neighbours), it is instructive to look at the history of the former Latin Monetary Union. Giacomo Cardinal Antonelli, the administrator of the Papal Treasury, was the first to break the rules by issuing silver coinage without the adequate silver content to the benefit of the Holy See and the detriment of those banks in the Union who were obliged to accept the debased coinage. The Papal States were expelled from the Union. Silver was a problem of the early days of the Union, both because small denomination and often sub-standard silver coins were allowed to circulate and silver itself was depreciating against gold. During the 1870's the Union became exclusively tied to gold.

The ultimate demise of the Union was based first on the financing needs of the First World War, which was the death knell of gold convertibility, but also with members of the Union finding themselves on different sides in the conflict, reinforcing the argument that monetary union is impossible without political and fiscal union. Contrast this with the situation in Bismarck's Germany, where after the Franco-Prussian War, political union was achieved in 1871 by force (as in the USA six years previously) and the chaotic multiple currencies such as the Thaler and Gulden were replaced by the Mark. Importantly, Germany had fiscal union through the federal collection of tariffs though the less important direct taxation was only collected centrally at the time of the First World War. Germany also toyed with a gold standard, transferring the gold element of the £200million reparations into its reserves (incidentally making the reparations agreed at Versailles in 1919 look not so unreasonable). And thus, with gold convertibility proving too burdensome, national competitiveness to mint debased coinage and the lack of political union, the Latin Monetary Union came to its end.

Tensions within the Eurozone are becoming fraught. Manual Barroso, the President of the European Commission, has called the German Chancellor, Angela Merkel, naïve (never a good policy towards one's paymaster) in respect of her efforts to save the Euro. Whether German aid is ruled illegal by the constitutional court in Karlsruhe; the markets rebel and refuse to finance the Eurozone or the citizens of Southern Europe refuse to accept the austerity imposed on them from Brussels and Berlin, the Euro experiment in its present form is looking less sustainable by the day.

Have you got anything to add?


In this Blog, I look at regular savings options in a changing taxation landscape, consider how to ensure effective gifts are made for minors and explain what rules apply when determining which investments can he held in particular tax wrappers.

The topic covered in this Blog is:

Gifting for Children - Designated Accounts

I often receive questions on the subject of account designations and whether or not they enable a child's tax allowances to be used rather than those of the investor (usually a parent) in respect of income and capital gains. This all depends on whether the investor is willing to give up the beneficial ownership of the investments held in the designated account and if this can be proved to the satisfaction of HMRC.

By giving up the beneficial ownership of the investments in the account, the investor is effectively creating a bare trust that will allow the child full access to the account once they attain age 18. The initial gift is normally exempt for Inheritance Tax purposes, although it will be a potentially exempt transfer to the extent that it is not exempt. Children have tax allowances in the same way as adults so any growth can be offset against the child's Capital Gains Tax allowance while income can be offset against the child's personal allowance (although if the investor is a parent, and the income generated during the tax year exceeds £100, the tax due will be charged to the parent).

However, the investor may not want the child to have unrestricted access to the account at 18 in case it would not be in his/her best interest at that time. In this case the aim is therefore just to set up the account for the child and nominally set aside the funds for investment, but not to give up the beneficial ownership. When the account is actually assigned to the child it will be treated as a disposal for CGT purposes and all gains and income will be assessed on the investor up to the point at which the account is transferred to the child.

If the aim is to use the child's tax allowances by making an outright gift, this would need to be fully documented to confirm this intention to HMRC. Any account designation would therefore need supporting evidence. Alternatively, a bare trust could be established with the deed providing the documentary proof of the gift. Where neither of these approaches is used, any designation could be challenged by HMRC as not being a true gift so that the child's allowances would not be used and any tax liability would fall on the person making the gift.

The bare trust approach should be used where such investments are held by us as it is only possible to report income and capital gains tax in respect of the portfolio owner which, in the case of an account designation, is the person making the gift.

Did you know in 2009 the Government had received over 2 Billion Pounds from IHT alone?

European Debt Contagion

Above is diagram of the European Debt Contagion. Have a quick look at it and decided whether the European Debt matters are spiraling out of control or whether the financial position of Europe can be prospered.

It may well be that the EU's "rescue package" has merely managed to institutionalise problems
which would otherwise have been localised or related to specific financial institutions.

What is your opinion on the matter?

Tuesday, 18 May 2010

Thought for the Week - The Global Crisis of Legitimacy

Financial panics are an important part of capitalism as are economic recessions. The system creates them and it becomes stronger because of them. Like forest fires, they are painful when they occur, yet without them, the forest could not survive. They impose discipline, punishing the reckless and rewarding the cautious. Political crises - as opposed to normal financial panics - emerge when the reckless appear to be the ones who benefit from the crisis they have caused, while the rest of society feels the repercussions. At that point, the crisis stops being financial or economic. It becomes political. The financial and economic systems are subsystems of the broader political system.

The State both invents the principle of the corporation and defines the conditions in which the corporation is able to act. The State defines the structure of risk and liabilities and assures that the laws are enforced. Emerging out of this complexity - and justifying it - is a moral regime. Poor decisions will be penalized by losses, while wise decisions are rewarded by greater wealth. Because of this, society as a whole will benefit. The entire scheme is designed to increase the general wealth of the nation.

The greatest systemic risk, therefore, is not an economic concept but a political one. The crisis occurs when it appears that the economic elite use the law to enrich themselves in ways that undermined the wealth of the nation. Put another way, the crisis occurs when it appears that the financial elite used the politico-legal structure to benefit themselves through systematically imprudent behavior while those engaged in prudent behavior were harmed, with the political elite apparently taking no action to protect the victims.

In the crisis of 2008, we saw behavior that devastated shareholder value while appearing to enrich the management - the corporation's employees. In this case, the protections given to shareholders of corporations were turned against them when they were forced to pay for the recklessness of their employees - the managers, whose interests were not aligned with shareholders. The managers in many cases profited personally through their compensation system.

Therefore, we now have a political, and economic crisis for two reasons. First, the crisis has moved beyond the boundaries of a normal economic cycle.. Second, the crisis is rooted in the political legal definitions of the distribution of corporate risk and the legally defined relations between management and shareholder. In leaving the shareholder liable for actions by management, but without giving shareholders controls to limit managerial risk taking, the problem lies not with the market but with the political system that invented and presides over corporations and allowed the debacle to occur.

This is a political crisis in that through change of law (think removal of Glass Steagal and other bank lobbyingl) the political elite allowed it to happen without thinking things through. There is even a sense with the public that the political elite together with the financial elite acted together to enable this to happen. It doesn't matter whether they did actually conspire - the impression within the public that they did is enough to undermine public confidence in the political system which in turn undermines the economic system.

The public expects elites to work to benefit themselves. But at the same time, there are limits to the behavior the public will tolerate. That limit might be defined, as the point when the wealth of the nation itself is endangered, i.e., when the system is generating outcomes that harm the nation. In extreme cases these crises can delegitimize regimes. This is not something that is confined to the United States by any means, although part of this analysis is designed to explain why the Obama administration must go after Goldman Sachs, Lehman Brothers and others both on a corporate basis and individual basis. The symbol of Goldman Sachs (and it's managers) profiting from actions that wrecked national wealth creates a crisis of confidence in the political and financial systems.

With the crisis of legitimacy still not settling down after nearly two years, the reaction of the political system is predictable. The political goal is not so much to achieve something as to create the impression that it is achieving something. Using words like 'we must never allow this to happen again' when history demonstrates that it has happened before and probably will happen again, and trooping out that other old chestnut 'Restoring Confidence'. In other words, to demonstrate that the political system is prepared to control the entities it created.