US Monthly Shale Gas Watch: Jan 2013 Release

I have relaunched this blog under the new name The Rational Pessimist. I am currently only posting the headlines for new posts at this, my old Climate and Risk, URL.

The rest of each post is available at http://www.therationalpessimist.com

Further, if you are a follower of Climate and Risk, could you switch to The Rational Pessimist at http://www.therationalpessimist.com.

Thanks!

Dec 2012 CO2 Data Release: Implications

I have relaunched this blog under the new name The Rational Pessimist. I am currently only posting the headlines for new posts at this, my old Climate and Risk, URL.

The rest of each post is available at http://www.therationalpessimist.com

Further, if you are a follower of Climate and Risk, could you switch to The Rational Pessimist at http://www.therationalpessimist.com.

Thanks!

Atmospheric CO2 Data Watch: Dec 2012 Release

Note: I have relaunched the blog under the new name The Rational Pessimist at www.therationalpessimist.com. 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 http://www.therationalpessimist.com. Thanks!

Atmospheric CO2 concentration is the world’s leading risk indicator.

Every month, the National Oceanic and Atmospheric Administration (NOAA), a U.S. government federal agency releases, releases data on the concentration of atmospheric CO2 as measured by the Mauna Loa Observatory in Hawaii. This is the longest continuous monthly measurement of CO2 and dates back to March 1958, when 315.70 parts per million (ppm) of CO2 was recorded.

The Intergovernmental Panel on Climate Change (IPCC) uses the year 1750 as the pre-industrialisation reference point, at which date the atmospheric concentration of CO2 was approximately 280 ppm according to ice core measurements.Key numbers relating to release:

  • December 2012 = 394.39 ppm, +2.60 ppm year-on-year
  • Twelve Month Average = 393.84 ppm, +2.19 ppm year-on-year
  • Twelve month average over pre–industrial level = +40.7%

Decadal CO2 Change jpg

Atmospheric CO2 displays annual seasonality: concentrations decline in the spring during the growing phase of terrestrial vegetation and rise in the autumn as vegetation dies and decomposes. The cycle is dominated by the northern hemisphere growing season since the northern hemisphere contains over 65% of the globe’s land mass. The cyclical pattern can be seen in the following chart (red line). The black line is the adjustment for seasonality.

The official NOAA CO2 data source can be found here, but a slightly more timely release is made of the same data by the Scripps Institution of Oceanography here.

Monthly Mean CO2 at Mauna Loa jpg

The rise in annual CO2 is due to fossil-fuel emissions and land-use change. However, there also exists some minor non-seasonal year-to-year variation related to weather, drought, fire, volcanic eruptions and ocean current changes.

All Change for Employment?

Note: I have relaunched the blog under the new name The Rational Pessimist at www.therationalpessimist.com. 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 http://www.therationalpessimist.com. 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 www.therationalpessimist.com. 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 http://www.therationalpessimist.com. 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 www.therationalpessimist.com. 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 http://www.therationalpessimist.com. 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 www.therationalpessimist.com. 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 http://www.therationalpessimist.com. 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.