The Actual Inconvenient Truth

Jeff Rubin spoke at the Business of Climate Change Conference '09. Rubin used to be the Head Economist at CIBC. It's long at 45 mins, but well worth a watch:





Global warming believers, climate change sceptics, and especially investors, will all get something from what he says. If you haven't got time to watch, Rubin's key talking points are: 

• Green socialists won't kick globalisation in the balls - economics will and it's unavoidable;
• Peak Oil is real and it's here;
• Conventional oil is the only oil we can afford to burn;
• The inconvenient truth is that since '05 conventional oil supply has not grown and may not again;
• The trajectory for oil demand is + and will grow hugely if/ when economic fundamentals again take off;
• So you thought ChIndia were fuelling the biggest demand increases in oil demand? Wrong. Micro economics plays much more of a part than you think;
• Never mind the demographic drivers - the future equilibrium price of oil will likely kill house market values in the outer 'burbs of cities/ towns in the developed world;
• Paradigm shift - wage arbitrage from the law of comparative advantage will die from the introduction of carbon tariffs;
• Supply side innovation is too far away to begin saving us - and forget the environment for a moment, he means the economy;
• Peak Oil ≠ peak GDP. The immediate solution lies firmly on the demand side;
• Distance is going to cost more and more. And then a whole lot more; 
• By economic necessity, we will all have to move from a global to a local economy. 

Now this is thought provoking, radical, and logical stuff. Whether his logic proves true is another matter. 

Clearly his arguments have huge implications for countries farthest from centralised global activity (remember: distance costs money). Especially developed nations that rely heavily on exports to drive GDP and imports for some domestic functions. 

I'm familiar with New Zealand which is a good example. NZ's economy is relatively export driven and it is rather import reliant - Rubin says these activities are carbon intensive and suggests both will get hit hard. But does a small nation like NZ have sufficient critical mass to internalise and vertically integrate as Rubin suggests? Maybe it won't have to if it can identify and utilise a sustainable competitive advantage where domestic producers have an offsetting lower carbon output at an earlier stage in the value chain. 

Rubin's views sure do add to the medium term investment case for buying oil stocks.


UPDATE: For those investors of you who wish to read more, Beetle Capital have published a piece called The 2020 Race to Post Oil. HT: MGJ 

A New Tax System for New Zealand

For those who follow what's happening in NZ, the Tax Working Group (TWG) has submitted its recommendations to government. The TWG was set up to review the NZ tax system and provide advice for reform. Bernard Hickey's written a good break down of the report and what it means. For those of you who are interested but uninformed, there's plenty of previous articles from Bernard on the issues here.

As I've written before, there are structural problems with the NZ economy restricting growth and fueling inefficiency. Of these, arguably the most significant is the skewed investment preference of retail investors for residential real estate. This preference is driven by tax incentives and at a deeper level, ignorance.

If the government follows the TWG's advice, the tax incentive will change to a disincentive - with the intention of driving investment from non-productive to productive asset classes. But it won't fix the ignorance problem. Well, not immediately anyway. NZers' proclivity for buy-to-let residential real estate, junk debt (via finance companies), and over-priced domestic corporate bond investment is firmly ingrained. Market efficiency will deal with the ignorance and punish those slow to learn and adapt through poor returns for the risk assumed.

When the reality of the likely tax changes takes hold and domestic retail investors learn that diversification out of their favourite asset classes is helpful, that wall of equity will have to go somewhere. My guess is a good chunk of it will flow into the NZ Stock Exchange. The NZSE provides one of the consistently highest dividend yeilds in the developed world. Offering tax free With capital gains, the retail yield seekers that want their capital return cake too might find this too good to turn down. The NZSE has been under capitalised compared to its developed world peers since the '87 crash when retail investor aversion set in. My bet is things are about to change commencing with a structural break in the tax system - and the NZSE will be on the winning side of the bet.

So You Thought Your National Public Health Service was Inefficient?

It probably is. . . . though this is interesting. . . not sure what conclusions can be drawn. Aggregate public & private health care spending within the OECD:

• Switzerland has the highest listed per person (PP) spend with between 0-4 average annual doctor visits, but only the second highest life expectancy at birth;
• Luxembourg's PP spend is a close second with between 4-8 average annual doctor visits, but only manages a just above average life expectancy;
• The clear winner though is Japan, with an almost 16% below average PP spend with a whopping 12+ average annual doctor visits and the highest life expectancy at birth.

I wonder how much the 2007 USD basing skews the data? Would be interesting to see the same figures on a PPP basis:

Click here for larger source graphic from National Geographic Magazine.

HT: Bernard Hickey.

So You're an Apple User ?

Especially if you're a Guardian-reading, anti-globalisation Apple user rebel, then this is for you:

HT: Bernhard Hickey

Genetics, Behaviour & Bullies

The orchid variant of the DRD4 gene, for instance, increases risk of ADHD (a syndrome best characterized, Cochran and Harpending write, “by actions that annoy elementary-school teachers”). Yet attentional restlessness can serve people well in environments that reward sensitivity to new stimuli.

Interesting that what annoys a primary school teacher might prove ultimately constructive. . . and it would be interesting to hear more about the relationship between dietary 5-HTP intake and 5-HIAA. Rather relevant to endemic users of specific recreational empathic entactogens.

Curious the article raises the "Dunbar Numbers" construct - which is interesting when applied to how large densely populated urban areas such as Mexico City, Tokyo or Moscow develop (would be good to hear Nick Gogerty's anthropological thoughts). Richard Branson had an intuitive take on this for maximal business-social interaction for his businesses/ business units - he restricted each business/ business unit to a limited immediate head count to maintain relational efficiency.

This all leads from another great article from The Atlantic: The Science of Success - worthy of a read.

Post title and original HT also via Mister Gogerty per his site above. Replication really is the highest form of flattery. . .

Mid-week set. . .

Here's a recent set from Soul Clap (via a quicktime webcast). I saw these guys DJ back in summer '05 at the Delano on South Beach - a hard to beat combination. Not a bad way to deal with a Wednesday. . . have a listen.

Friday Tunes

The first for 2010. . . . Grip volume dial and turn clockwise:

Buckcherry - Broken Glass

Bob Mould & friends - The Act We Act

Connectivity/ Inter-connectivity

Back in September last year, I posted on African trade links and the relationship with internet, shipping and airline connectivity. That post linked to an AidWatch post with three graphics showing these connections with Africa. AidWatch proposed causality for African poverty from a (relative) lack of these three infrastructure connections. I suggested this was merely pinko sentiment for "build it and they will come", which itself is a Keynesian misinterpretation of Say's Law of Markets. As I explained in my September post, there's a bunch of things that need to precede these infrastructure (which are a source of supply), in order for them to then allow foundation for effective demand.

Nick Gogerty from Designing Better Futures has just posted a similar, more recent graphic from AidWatch in his post Could You Disconnect, Even If You Wanted To? This graphic shows connectivity across the world via distance from major cities as a function of geography and time. Whilst the graphic points out that same lack of macro connectivity as the earlier one I reference above, it also interestingly shows that intra-continental African connectivity is not so bad. What also surprised me was the high level of domestic connectivity across the whole of India despite it being a developing country, and the low level across Australia as a whole despite it being firmly first world. Clearly population levels play a part. Nick's post is well worth a read.