All Change for Employment?

Note: I have relaunched the blog under the new name The Rational Pessimist at For the time-being, I will post on both the old Climate and Risk URL and the new one. However, if you wish to follow the new relaunched blog going forward, please become a follower at Thanks!

Every month, the benchmark nonfarm payroll employment numbers are reported by the U.S. government and every month Bill McBride at Calculated Risk puts out a comprehensive post analysing the figures. The post (or rather posts) invariably include the following two graphs (click on either graph for a larger image):

Percent Job Losses jpg

Employment Population Ratio copy

Both graphs suggest that there is something about the current recovery that is different; in other words,the jobs are just not coming back at the rate they used to after past recessions. Continue reading

Links for Week Ending 5th January 2013

Note: I have relaunched the blog under the new name The Rational Pessimist at For the time-being, I will post on both the old Climate and Risk URL and the new one. However, if you wish to follow the new relaunched blog going forward, please become a follower at Thanks!

  • NYT dates the start of the Great Recession from Q4 2007 and 5 years on has a great graphic showing the current state of play. No recovery to pre-recession levels in Britain, Japan, France, Italy and Spain. Has the end of growth already arrived in these countries?
  • The knock-on effect of earlier-than-expected Arctic sea ice melt will be greater-than-expected absorption of sunlight and, therefore, higher Arctic circle temperatures and faster-than-expected permafrost thaw. NYT highlights a study (here) confirming the first part of this causation chain.
  • National Geographic has a nice piece all about methane.
  • Since the economist Robert Gordon came out with his technological stagnation thesis earlier in the year, the flood gates have opened for economic comment in this area. The FT’s Izabella Kaminska has put together a wonderful linkfest on the subject at her blog Towards a Leisure Society.
  • The Oil Drum (TOD) is reposting its top 10 articles for 2012. Among them, I recommend Art Berman’s take on shale here and Ron Rapier on tight oil, shale oil and oil shale here.

First Release on 2012 Global Average Temperature

Note: I have relaunched the blog under the new name The Rational Pessimist at For the time-being, I will post on both the old Climate and Risk URL and the new one. However, if you wish to follow the new relaunched blog going forward, please become a follower at Thanks!

There are five major global temperature time series: three land-based and two satellite-based. The most high profile satellite-based series is put together by the University of Alabama-Huntsville (UAH) and covers the period 1979 to the present. Like all these time series, the data is presented as an anomaly from the average, with the average in this case being the 30-year period from 1981 to 2010.

The official link to the data at UAH can be found here, but most months we get a sneak preview of the release via the climatologist Dr Roy Spencer at his blog here.Spencer, and his colleague John Christy at UAH, are noted climate skeptics. They are also highly qualified climate scientists, who believe that natural climate variability accounts for most of recent warming. If they are correct, then we should see some flattening or even reversal of the UAH temperature time series take place. To date, we haven’t (click for larger image):

UAH Satellite Temperture Chart jpg

Continue reading

Long-Term Interest Rates and Growth

Note: I have relaunched the blog under the new name The Rational Pessimist at For the time-being, I will post on both the old Climate and Risk URL and the new one. However, if you wish to follow the new relaunched blog going forward, please become a follower at Thanks!

Barry Ritholtz over at The Big Picture recently posted the chart below (click for larger image) detailing U.S. long-term interest rates (here). He then went on to draw the conclusion that it must be a golden time to make infrastructure investment at these yields.

Long-Term Interest Rates jpg

For myself, the chart calls forth an entirely different question: Why are long-term interest rates at their lowest level since the industrial revolution took off in America?

Deciding on the determinants of interest rates is a book-length topic, but I think most financial economists would agree that the long-term interest rate is composed of an expected inflation component, a required real risk free return (a bribe to get you to forego current consumption) and a return to compensate for the opportunity cost of not investing in a more risky asset.

Looking at the chart, the inflationary threat from the Federal Reserve printing massive quantities of money surprisingly appears a paper tiger.  Nonetheless, we have a little bit of inflation now, which indeed gives us a negative real rate of return for shorter rates. Could it be that investors get a positive rate of return over the longer term because prices actually start to fall? Given that the Fed has already shown itself ready to buy all and everything to ward off deflation, this seems unlikely.

So if we assume that our ‘little bit of inflation’ continues (and we really only need a little bit to bring the real long-term return down close to zero) , then is the collapse in interest rates due to something else?

My own personal opinion is that both the other components of the long-term rate are undergoing significant structural change. First, I think some households are realising that they are going to have a terrible struggle locking in future income, particularly after retirement. The factors behind this include:

  • Negative growth in median incomes;
  • A drastic shortening of expected employment period at each employer (as you have to continuously reinvent oneself career-wise in the face of corporate downsizing, outsourcing and shortening industry life-cycles); and
  • Sharply higher event risk with respect to both pensions and healthcare (with respect to which in both cases risk has moved from employer to employee)

At its most extreme, I think individuals become willing to pay to lock in future consumption rather than get-paid to forego current consumption. (Yes, there is a lower bound since you can put your cash under the mattress, but this doesn’t protect you from inflation should it arise; moreover, inflation-protected bonds—TIPS in the US—do suggest investors are happy to get a close-to-negative return.)

Turning to the opportunity cost, no-one forces pensions funds, insurance companies or individuals to buy long-term government bonds. All these actors can choose to invest instead in private-sector bonds and equities. But they aren’t doing this. Why? Obviously, the additional return investors could get from assuming the risk of buying into an investment that is not backed by the government is not deemed sufficient. But with interest rates so low, why aren’t private sector companies bidding money away from the government by nudging up returns?

I think there are two reasons for this. First, the productivity led growth that does exist in the economy today is not capital intensive—it is knowledge intensive. Yes, Google may be building extensive server farms to further cloud-computing, but they are nothing compared with the types of investment required in previous generations of technology-driven change. So Google just doesn’t need the cash, unlike, say, General Motors back in the 1950s.

Second, resource depletion is driving up costs even as technology desperately tries to drive them down. For example, for all the talk of shale oil, the average price for benchmark Brent oil hit a new high in 2012. And within the aggregate output, you are seeing high-production-cost unconventional oil replacing low-production-cost traditional oil (that is being depleted). For Shell to explore for oil in the Arctic circle, it needs to keep its cost of capital down (since all its other costs are going up on such an inhospitable environment), while investors see a literal sea of risk. Therefore, capital-raising by Shell is constrained.

At the same time, higher resource costs are working their way through the cost structures of a range of secondary industries worldwide.

Overall, the growth outlook is struggling; and with lacklustre to zero growth, we lose the ability to secure a decent long-term real return on investment. As such, I wouldn’t assume that the collapse in long-term rates is an anomaly. From a risk, perspective, assume that low returns are here to stay when planning one’s financial future.

Top 3 Images for 2012: #3 U.S. Monthly Natural Gas Production

Note: I have relaunched the blog under the new name The Rational Pessimist at For the time-being, I will post on both the old Climate and Risk URL and the new one. However, if you wish to follow the new relaunched blog going forward, please become a follower at Thanks!

If nothing else, 2012 can be noted for the orgy of articles lauding the shale gas revolution. Suddenly, we are supposed to escape the energy constraint, whilst also being able to cut our carbon emissions at the same time. I never thought the numbers added us for such claims (see my posts starting here), but am still surprised how lacklustre U.S. production has been in 2012 (data released so far go up to September). Here is a chart based on the official numbers from the U.S. Energy Information Agency (EIA):

U.S. Dry Gas Production (Monthly) JPG

Obviously, within the aggregate numbers we have shale gas production going up but conventional natural gas production going down;but the net result is that we have been flat-lining for a year. Is this just a bump in the road to the shale gas nirvana? The yearly chart (click for larger image) up until 2011 certainly looks impressive (although not so impressive as to presage a surge of U.S. natural gas exports that will save world).

U.S. Dry Natural Gas Production copy

The monthly natural gas numbers going forward will certainly be critical data points and I will try to report them as they come out. In the meantime, my sense is we just have a typical market adjustment related to price and volume. Whenever you see the word ‘unconventional’ it is always worth replacing it with the word ‘expensive’; in other words, shale gas is unconventional gas, which in turn is expensive gas. Shale gas is costly to produce, so when the price drops, production will be pressured as it just isn’t economic to take it out the ground.

Following this logic, we may also be disappointed over the degree to which shale gas displaces coal going forward (and thus helps reduce CO2 emissions) because producers are not able to deliver enough gas at the right price to the electricity generators. And as for fleets of LNG tankers heading from the U.S. to Europe—in your dreams. For the time being, let’s just let the monthly numbers of volume and price do the talking.

Top 3 Images for 2012: # 2 Hurricane Sandy

While the unprecedented retreat in summer Arctic sea ice extent was by far the most shocking event of 2012 in terms of climate risk, Hurricane Sandy (and the images of a flooded New York subway system) did more to raise consciousness with the general public. Bloomberg Businessweek summed up the sentiment nicely:

Hurricance Sandy JPG

From a scientific perspective, of course, you can’t actually say that Hurricane Sandy “was solely due to global warming stupid”. However, Continue reading

Top 3 Images for 2012: #1 Arctic Sea Ice Extent

1. Arctic Sea Ice Extent for Summer Melt Season

By far the most disturbing image of any I saw in 2012 was that for Arctic sea ice minimum summer extent. Indeed, the chart below is nothing short of shocking. Sea ice extent plummeted to 3.4 million square kilometres compared with the previous low of 4.2 million square kilometres in 2007, an 18% decline.

Arctic Sea Ice Extent

In the Intergovernmental Panel on Climate Change’s Assessment Report 4 published in 2007 we saw this statement: Continue reading

Links for Week Ending 29 Dec 12

Articles and posts that caught my eye over the last week:

  • John Mason over at Skeptical Science gives us a current state of play with respect to climate change and food production. The mid-term outlook here looks horrible and rising food prices will tell the story.
  • Ugo Bardi, author of the excellent book “The Limits to Growth Revisited“, reflects on the threat of climate change vis a vis peak oil. This is a topic close to my heart and one I have posted on regularly including here.
  • Dr Jeff Masters puts in perspective another year of weather extremes in the U.S. on his wonderful blog here.
  • In the NYT, Tom Friedman looks at the disastrous anti-science stance that has been adopted by the Republican party and much else: “It can’t win with a base that is at war with math, physics, human biology, economics and common-sense gun laws all at the same time.”  In my humble opinion, climate change should not be a wedge issue. I am glad that I live in a country where you can adhere to either the right or left in politics but still believe in climate change. This used to be true in the USA, and I hope will one day be true again.
  • Much chatter about leaked drafts of the new Intergovernmental Panel on Climate Change (IPCC) report suggesting a bigger role for the solar cycle. Real Climate sees this as nothing but a storm in a teacup.
  • Prof Hamilton highlights a Post Carbon Institute presentation that questions the hype surrounding shale oil production at his Econbrowser blog  here.
  • The “end of economic growth” has been a major concern of many non-economists for decades but only a heretical few in the economics profession have given the idea much serious thought. Recently, the famed, and very much mainstream, growth economist Robert Gordon came out with a paper supporting the idea. We now have a lively debate on the subject that can be easily followed on Economist’s View, such as this contribution from Paul Krugman here.
  • Chris Giles in the FT addresses the collapse in UK productivity since 2007 (here).   Not sure if his advocacy of the German model to restore growth makes any sense though.

Blog Back (Soon)

After a hiatus of around six months, I aim to restart the blog in the New Year. I am looking to create is a successor blog to Climate and Risk called The Rational Pessimist. The aim of The Rational Pessimist is to cover a wider range of risk issues than just climate change in a more explicit manner. Watch this space.

Blog on Hold

Apologies for the lack of posts for some time. The one common theme of all the best blogs I follow is their consistency in posting. That is something that I have been unable to achieve for a variety of reasons: a number of deaths of near relatives in my family, two moves between countries, a series of changes in accommodation and a general lack of stability in my life. I believe that for me to achieve a consistent level of posting requires a lot more stability and that won’t happen for another six months or so at least.

In addition, through writing posts for this blog I have become more aware that climate change risk can’t be separated from a variety of other risks we face: technology led economic instability, demographic transitions and resource depletion in particular. This nexus of risks really need to be dealt with in a unified manner.

With all this in mind, I hope to relaunch the blog in 2013 (potentially with a new name) explicitly dealing with a wider theme than was my original intention with Climate and Risk.