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 www.outersite.org together
with a podcast of the CISI presentation.
Friday, 12 November 2010
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.
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.
Source:gstatic
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
Source:gstatic
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
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
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.
(Source: http://www.usoge.gov/training/module_files/oge450_wbt_06/debt.gif)
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.
(Source:http://jeffreyhill.typepad.com/.a/6a00d8341d417153ef010536c55fae970c-800wi)
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
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.
(Source: http://www.usoge.gov/training/module_files/oge450_wbt_06/debt.gif)
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.
(Source:http://jeffreyhill.typepad.com/.a/6a00d8341d417153ef010536c55fae970c-800wi)
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
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