Thursday 30 April 2020

Furlough Fraud: Does It Matter?

... He maketh His sun to rise on the evil and on the good, and sendeth rain on the just and on the unjust alike

As so often, the Bible has it right.  Or, to quote a lesser authority (Mr Dillow): 
Ordinarily, we should worry about the distributional impact of support packages, incentive effects and whether systems will be gamed. In a crisis, though, these are low priorities. What matters is that the support be immediate and large. If your house is on fire, you should not worry about your carpets getting wet. You should put the fire out and clean up the mess later. 
Gamed?!  Outright fraud would be more like it - I am sure we could all recount a long list of the individual cases we are personally aware of.  Dillow's piece is headed "When rules don't apply"; and as a soldier, it's always necessary to remind junior officers that ruthlessness in action is what's needed.  (Your average subaltern is nicely brought up, and inclined to find a gate in a wall instead of driving clean through it.  "A farmhouse is obscuring my line of sight ..." - Then flatten it!)

So - do we care?   Is the point of 'helicopter money' to just get people spending?

I don't think it's quite as easy as that, even if there's a point that needs recognising.   But.  War-profiteering is one thing: outright theft is another.  People of good will on both the Right and the highly-redistributive Left ought to be distressed at the thought that, "when this is all over", the de facto distribution that will have taken place is disproportionately to more-or-less organised criminals.  That's what happened to Russia in the 1990's, and the legacy of that era is pretty awful.

Thoughts?  Solutions?


Wednesday 29 April 2020

Can't see how airlines survive in 2020...

So (congrats Boris!) I saw snuck out this week by the Prime Minister was finally a review of how people enter the UK. Now the virus is under control, there ismore of a need to stop people from abroad coming to re-infect us all.

As such, the guidance will be 2 weeks quarantine for all visitors to the UK. We can assume other countries will do the same.

Also I travel for business a lot, this year until March I was on a plane every week without fail to somewhere or other. Since then not so much. At the office we are planning to not do any travel in 2020. And even in 2021 maybe no non-essetnial travel like conferences etc. so a steep drop in spend.

Few of us will be willing to take foreign holidays with 28 days of quarantine in total around the edges of it - unless your planning a few months in Australia who would even think about this.

Finally, with the UK being hard hit many countries will not want UK covid-ridden tourists anyway for a long time and visa restrictions may are likely. We may find we are not very popular with the locals if we were to go anyway.

All this is a perfect storm for our airlines, no business travel and no tourist travel for six to twelve months. No way the industry can survive in the shape it is now, maybe with drastic cost-cutting, no new planes, giving up all leases, giving up airport slots and reducing staff to only enough to run a skeleton service. The only good news is fuel will be at record lows and in normal times this is huge part of their costs.

Meanwhile some Countries less affected will be able to suport their airlines who will 'fly' into the market and pick up the slots and share when the time comes for a real renewal.

It is a right mess and along with a few other sectors I can't see how share prices are sustained where they are today when you see what is coming in the next few quarters.

Am I too pessimistic...what have I missed?

Monday 27 April 2020

So how bad is it?

This is the biggest unknown question at the moment  - jut how bad is Covid-19 and how bad is the economy?

Boris is back at work today, but after the scare he had you can imaginehe will be very conservative on following the health guidance.

But the Government is rapidly getting into crazy amounts of debt and the economy is ruined for a generation already. People are talking about a recession worse than 2008 (supposedly a once in two generation event) but to me it seems not really dealing with what that means.

The comparison is now crucial because it will determine the next phase. At some point lockdown will be releaxed, but I fully expect a crash in the stock markets and property prices at that time, as the damage becomes more visible.

In parrallel we will know if the end of lockdown increases the virus spread once more and by how much. It could be we get back to the early March situation very quickly, or it could be that we stabilist with it in our society but at a lower level.

Closing our economy will kill tens of thousands of people, this will only exaccerbate the curretn situation. Already hospitals are empty as people stay away, many of the 'excess' deaths reported are likely to be not Covid but people dying of strokes and heart attacks at home. Missing cancer scanning and treatment is also lethal.

Such a hard balance to get right, but to my mind the Government should press on with ending lockdown at the beginning of May to begin an assessment of the situation, following the Red/Amber/Green type strategy recommended here and elsewhere a couple of weeks ago.

Thursday 23 April 2020

Nuclear ain't free, either: EDF in Big Trouble

One of our recent visitors queried my offhand comment that EDF was in Big Trouble (BTL on the "Negative Prices" piece).

Easy:  EDF is essentially a price-taker, but its costs are by no means all sunk - see CU's piece on oil price and comments thereupon.  OK, EDF has some short-term hedges in place (forward sales at fixed prices, in their case) but the very large bulk of its very long future outlook is naked exposure to the market price of power, which ain't gonna be healthy.  (EDF's outlook has to be long - the longest of any European energy producer - because it amortises its stuff over many decades at a very low discount rate.  Only holders of pure, essential infrastructure like National Grid could contemplate longer outlooks and lower discounts.)

The traditional model of most power generators in competitive markets is built not on absolute prices (naked exposure), but spreads - the differences between e.g. electricity and coal prices ("dark spread") or electricity and gas ("spark spread").  They are margin businesses: buy fuel, sell electricity - when profitable.  (Large-scale hydro power is much more complex, economically, but need not detain us here.)  Market prices will be set by something approximating the marginal plant on the system at a given point in time.

Then along come wind and solar, with their sunk costs and near-Zero short-run marginal cost - no fuel!  They would be price-takers, too, were it not for the massive subsidies they traditionally received.  Increasingly, however, they do trash the market price for everyone else (see "negative prices" as before) - that's zero-marginal-cost-plus-sunk-capital-cost for you.  

Here's the thing.  For some purposes - specifically, political and PR purposes - nukes have enjoyed billing themselves as having "zero marginal cost", too.  "Electricity too cheap to meter" in the words of the old slogan.  But it's bollocks.  They have monstrous ongoing costs to cover, of which the cost of fuel is broadly irrelevant.  It's maintenance, safety, plant life-extension and, crucially, decommissioning that loom large in their low-discount future perspectives.  And for EDF these things are (a) vast, and - the most important point - (b) not even remotely fully funded.  If they were fully funded they could be viewed as sunk.  But they ain't - not even close.

So ultra-low electricity prices are catastrophic for EDF and, in turn, for the French state.  Yes folks, EDF is Too Big To Fail. The French are obliged to essay the biggest can-kicking exercise in Europe.  Longtime readers of this blog will know that shortly after we started up I opined (in 2007) that French policy was all about getting other people (the EU, the UK ...) to pay for EDF's astronomic decommissioning bill.  Everything that's happened since has reinforced the point. 

That very much includes the suicidal madness that is Hinkley Point C, one of the primary reasons Osborne, and May in her turn, deserve eternal opprobrium.  The scale of UK subvention that we've committed to over 35 years, to buy the output of this plant at truly ludicrous prices will put a serious dent in our economy.  Ultimately, May is excused through weakness of intellect and will. 

But Osborne?  Osborne seemed to believe in an ever increasing electricity market price (the only conceivable rationale for HPC).  He is a cretin, and how he managed to come by a reputation for political genius is one of those enduring mysteries.

What's to be done?  Well for one thing, don't let's repeat the entire disaster by paying EDF to build Sizewell C! (which was firmly in the pre-covid political calendar, hopefully now on ice).  And for HPC?  We mave have to resort to the Semtex option ...


Tuesday 21 April 2020

Oil ain't free

Really despair at the media approach to the world currently, everything is shock and awe and it shows up how few of the journalists really understand much about anything.

Yesterday was the last day to complete on storage contracts for May in the USA. With a huge fall in demand, production is way ahead of needs. As you would expect the price of oil has been falling, but it has to go somewhere. One little understood aspect of oil production is that once a well is drilled you more or less have to keep it swtiched on - if you cap and stop the flow it might never work again - or only at huge cost to re-start. So you can throttle back production but the rule is don't stop the flow completely. Over-supply is hard to contain.

Also, as a business generally you need cashflow, in Oil and Gas the expensive bit is the exploration and production set-up. Literally a sunk cost. So, to pay your loans back you produce - the price don't matter so much. All the calculations of around cost of production are of course a projection across the lifetime of the project - there is little real-time cost. The daily production cost is very small, it is the financing and set-up that swallowed the investment.

Anyway, in the US some less than smart people decided that going long physical oil whilst the price was low would be a smart thing to do. Those who trade a lot, just laughed; they bought the storage contracts as they felt the physical price was being held up given the demand shock. Try taking physical delivery with no storage. This is what happened yesterday, dumb money getting eaten by smart money to buy storage and get rid of the oil. A good lesson in not to interfer in things you don't understand.

Addtionally, whilst we are on oil prices, China bought a year's worth of physical supply from the US last week at $7 per barrel. Saudi was trying with Russia to sell at $10 to kill the US Shale producers. Now who is laughing. The shale producers may not make it, but neither will the Saudi or Russian budgets.

Plus of course, this demand shock is very deep. Anyone fancy a long-haul holiday this year? Thought not. How about a cruise? Drive to Milan? The only thing even close to this was the 1974 oil shock which was a Government led demand reduction. The idea, also floated today in the media, that there will be some big re-bound to $80 in a year is hilarious. The world is literally full of ships with unused crude  - it has been around for hundreds of millions of years, it is not a perishable good. Months of normality to burn off this surplus and as I just said, normailty is for 2021 people. Yes, no new exploration will be done, but with such massive over-capacity in USA, Russia and Saudi we are looking at a few years of low prices, not a few months.

So, no the real price of oil is not zero but may get close, but it won't get there for us petrol-station using people (tax will end up as near 90% of the price we pay!). Nor there will not be some easy spring back and yes Oil dependent nations will feel a fiscal shock - but who isn't today? Not the big deal many may think it when put into the context of the global recession facing us all.

Monday 20 April 2020

Labour Party Bans "Passion of St Tibulus"

"Down with this sort of thing! ... It's very immoral, Jim, you wouldn't like it ..."

The volcanic eruption that is the mighty leaked Labour report rumbles on, you couldn't devise a more compelling political distraction if you were Old (Domi)Nic himself.

Switching idioms, this is a regular pile-up of a car crash. The ambulance-chasing lawyer cited in the Observer is obviously angling for some very juicy instructions, and good luck to him. 
[He] told the Observer: “There are lots and lots of claims. There are claims under the Data Protection Act, there are claims for breach of confidence or invasion of privacy and there are claims for libel. It is a very lengthy report that mentions a lot of people. I’ve been contacted by 15 people. Each one of them could well have several claims. What is going on is phenomenal ... There are actions against the party, actions against individuals, actions against commentators. People need to be careful about statements that have been made. If this bankrupts the Labour party or individuals, so be it ...”
That's the spirit, boy.  Lots and Lots of Claims!  Haha.  The angle I particularly like is the idea that party members can be forbidden from sharing the document -  a bit like the old ruling from Rome that lay Catholics mayn't read the Bible.  Or, for that matter, view the blasphemous Passion of St Tibulus: another deeply counterproductive instruction, as Father Ted discovered. 


Sunday 19 April 2020

Capitalist Weekend Reading: China as Capitalist Power

Gotta keep up with what's going down.  Chinese capitalism is a common theme in these two pieces.

1)  Here's a long review of Capitalism on Edge, a book about 'precarity capitalism' (inter alia).  Extract:
... Capitalism itself has moved on, leaving its neoliberal phase behind and the global left-neoliberal critique and prescriptions largely dangling in mid-air ... the large Chinese state-owned corporations and China’s presence on the world stage are unquestionably Galbraithian, focused on market share, learning, new technologies, and improvement of the national capital stock. And so, in important respects, has been the Chinese state, which prizes above all autonomy, predictability, and social stability, and if not always firm control of its banking sector, the willingness to override that sector’s autonomy whenever necessary. China is no democracy, and modern China was built on many epic disasters, including the famine and Cultural Revolution, none of which appeal as models. But that it is a functioning society capable of mobilizing to meet vast challenges has never been clearer than in recent days. And one can say the same of South Korea, and perhaps of Japan, while in Europe Germany is, so far, the best prepared to handle the corona crisis.
What is the source of this resilience? It is not, of course the leadership of a Communist Party, which does not exist in Korea or Japan or Germany. What these societies share is that over four neoliberal decades they maintained their large industrial corporations as going concerns in line with national strategies, along with their productive base and social organization; they did not give everything over to the market. And over those decades, put to the test against the neoliberal corporation dominated by Wall Street, there is no doubt which side won out. The Galbraithian firm fostered and protected by a vigilant state now dominates world markets in most advanced sectors and many that are more modest but no less basic. It is also capable of meeting the challenge of mobilization facing the world in this pandemic...
2)  And here's an article specifically about China, aka 'authoritarian capitalism', coupled with some nervous glances at the EU.  Extract:
... Amidst the turmoil in global financial markets in recent weeks, something unusual has happened. Investors, seeking shelter from the coronavirus-linked sell-off, have piled into Chinese government bonds on an unprecedented scale. These purchases have increased the total foreign ownership of Beijing’s bonds to record highs, even as much of the country is still emerging from lockdown after the viral outbreak. In an ironic twist, the country where the pandemic originated has become an unlikely safe haven for investors – a shift that one prominent trader has described as “the single largest change in capital markets in anybody’s lifetime” ... it would be naïve to assume that China is content to live under dollar dominance forever.
... But those who have spent years dreaming about a world beyond neoliberalism should think twice before popping the champagne. While some may celebrate the arrival of policies that, on the surface at least, involve a greater role for the state in the economy, there remains one problem: there is no evidence that state action inherently leads to progressive social outcomes ... For progressives across the West, the task ahead is enormous. Not only is there a need to respond to the growing dynamism of China’s authoritarian political-economic system, there is a need to do so in a way that strengthens democracy and protects civil liberties at a time when both are increasingly under threat. When economies eventually open up again, the urgency of the climate crisis means that we cannot afford to return to business as usual ... Following the global financial crisis however, it was the authoritarian right, not the progressive left, that managed to gain a foothold in many countries. The same can be said of the Great Depression in the 1930s. As governments struggle to deal with an economic crisis on a scale that could easily surpass both, there are signs that authoritarian forces could stand to benefit once again. In 1848 Karl Marx wrote that ‘A spectre is haunting Europe — the spectre of communism.’ Today another spectre is haunting the West: its name is authoritarian capitalism.


Saturday 18 April 2020

The unbearable lockdown

As night follows day, so the media hyperventilating about the need for a hard lockdown have switched to demanding an end to it.

The lockdown though now is causing a real split between those who are being furloughed or in full work and those who have lost their income entirely. Clearly the latter group are rather keen on coming out of lockdown so that they can survive.

My own focus today is those who are in lockdown but basically on an enforced staycation. There are millions of people now  in this state. Whilst worried for the future, they are actually having quite a nice break now. My hunch is quite a few won’t fancy a return to work. These will be the group that claim they are too scared to travel etc in true new woke style. They will demand to work from home or have sick leave.

The longer we have a lockdown, the worse this mindset will become. For this alone, we need to quickly long term impact for this further 3 week lockdown. I have not criticised the Government ugh clearly are trying their best and the time for asking questions about preparedness is later when we are through the worst.

France has already seen this phenomenon, I was speaking to an employer there who said 30% of staff won’t come back because they don’t feel safe but expect someone to pay them (white collar workers).

Friday 17 April 2020

Negative Prices - a Rich Irony

I don't know how many people are aware of negative (wholesale) prices in the energy industry.  They often come as a surprise to the layman, but were easily and correctly predicted by those who understood the game, way back when electricity was first mooted as a candidate for being commoditised and de-monopolised into a traded market.  They would arise because some kind of pricing dynamics would be needed that disincentivised over-production.  

Why would this be an issue?  (a) The difference between peak demand (6 pm on a freezing winter's evening) and least demand (3 am on a hot summer's morning) is extreme, and both must be catered for, ideally via price signals; (b) quite a lot of electricity generation is "must run" - nuclear and run-of-river hydro being the traditional ones, but even back in the early nineties it was obvious that solar- and wind-power would be coming on in ever larger quantities.  (Of course, in those cases "must run" is by green-policy fiat, whereas nuclear is to a large extent a safety issue.**)  So there was always the logical possibility that must-run would exceed demand, at which point some generators whose marginal cost was zero might need to be offered a lower-than-zero price - i.e. paid not to generate.

And so it transpired, mostly in the German electricity market++ to start with.  I've written about German power dynamics before: they are bizarre (the Energiewende is absolutely inane) and the cogniscenti weren't even slightly surprised when it started happening there.  However, such was the widespread puzzlement in Germany itself^^, the leading technical stiftung in that country, Fraunhofer, started publishing minute-by-minute explanations of each and every instance.  (This was when the examples were fewer than one a month.  They soon became much more frequent, and the good Fraunhofervolk began to tire of doing these analyses.)   

Short periods of negative pricing are now utterly commonplace in electricity markets around the world.  (Dis)incentivising via price signals is not the only mechanism for balancing electricity grids, of course: grid operators typically retain the right to make generators switch off because they're told to.  However, in the case of 'green' electricity (and sometimes other generators) there is often compo to be paid - part of the less-visible subsidy regime, even if no premium is paid for the electricity they do generate.  But market mechanisms are best.

Rich Irony    Now we come to the funny bit.  The costs of constructing some types of renewable electricity generation sets are plummeting, especially for wind and solar; and of course the variable costs are close to zero.  In several markets, they don't need the traditional type of subsidy - a guaranteed offtake price - any more.  That's great.  (There are other, less obvious subsidies on offer, such as not being made to pay for the trouble their intermittency cause the grid.)

But here's the thing.  In many countries now there are auctions for who gets to build new generating plant, where bidding is for how much subsidy you'll accept - lowest bidders win.  Already, some applicants have bid in at zero, meaning they don't need a cash subsidy at all ...  Sometime soon, windfarms are going to start bidding in at "negative subsidies", i.e. they will be willing to pay in order to join the game!   

Ain't markets wonderful?

** Of course the very existence of nuclear power is by policy-fiat, too 
++ For afficianados, there was also an early (and quite unexpected) instance of a negative price in the UK gas market, where the underlying logic is the same, though conditions are rarely so extreme as in electricity.  It was, in essence, a freak occurence, albeit wholly explicable after the event
^^ As noted here before, even educated and professional Germans truly don't understand how markets work 

Technical Note (may safely be skipped):  a word on one of the technical spin-offs of all this.  Some readers may be aware that "traditional" modelling of the seemingly random and jerky behaviours of spot prices in commodity markets uses "geometric brownian motion" as the explanatory mathematical assumption to capture volatility, with its associated parabolic function.  It works brilliantly for post-rationalising & analysing price evolution across all the "traditional" commodities - metals, oil, agriculturals etc (in conjunction with a mean-reverting function, and sometimes a seasonality function and a drift factor).  It even worked for modelling natural gas when that started to be traded, notwithstanding spot prices in that market that were (and remain) vastly more volatile than ever before encountered.  But it doesn't work for power: (a) because the extremes of electricity prices include blips that are more even extreme than can be "explained" by a standard volatility function, however high you turn the dial; and (b) brownian motion can't "explain" / represent negative prices!  Another function was required.  I'm proud to say that Enron had people doing original mathematics: and to cut through the heavy stuff (though I can explain if you wish ...) the answer was an inverse hyperbolic sine (sinh-1), coupled with a Poisson distribution for the blips.

Now you know.

Thursday 16 April 2020

An Eruption on the Left

With the implosion of Bernie Sanders and the final damping of the pitiful Long-Bailey squib, the misery for the Anglo-left seemed complete for the time being; and I was planning to write about how the comrades were settling down for a period of dispirited low-key rumination, whistling in the dark and trying to persuade each other to stay in the Party, stay engaged, stay strong.  

Strong?  Just about the strongest strategic move they've taken in 2020 has been to accommodate themselves as best they know to the quickly-apparent inevitability of Starmer - trying to pour a thin layer of quick-setting cement on his left-gesturing *pledges*, despite the manifest lame hopelessness of this gambit.  And there might yet be a post on that some day soon: I remain fascinated by how the thoughtful and well-intended fraction of the Corbynist project is going to evolve.

But then; instead of the next event in the grid of their leftist lives being the EHRC report on anti-semitism ... along comes the Mantel-sized blockbuster that is the leaked internal report.  What an eruption!

The early responses are quite revealing.
  • See, we could have won in 2017, we wuz betrayed, we wuz robbed!
  • The Tories never behave like this!
  • Those centrists [sic] are genuinely nasty!    And from some ...
  • Now we really gotta leave this horrible party!
Shitstorm, eh?  Welcome to the cess-pit that is left-wing politics, boys and girls.  Do they stop for even a moment to reflect that this is why most people want nothing whatsoever to do with them?   That it is only on the left that anyone has ever heard the term "zio" being uttered?  That while unpleasant "right-wing" nut-jobs seeth away in the fringes of the www, they never get anywhere near polite society, still less control of the routine workings of any mainstream political party, either in its headquarters or its local branches?

The Tories never behave like this ... Yes, boys and girls, it's you!


Tuesday 14 April 2020

Ending lockdown - brand strategy needed

I really hope the Government can do a better job of Lockdown undoing than they did of doing it in the first place.

If we remember those heady weeks of er... last month, we can recall the Government seemed taken aback by the speed of the epidemic spread, as was every Government in Europe and North America.

Now though we have more time to consider how we get out of this box, as there are a few things that need sorting first:

1) As per yesterday, antibody tests and copious full body PPE for the NHS key workers.
2) Low enough community tranmission that the whole pandemic won't just start up again immidiately.
3) Enough extra NHS capacity to cope for a year with a few thousand people on ventilators at any one time.

Only really point 3 has been achieved, so we will be here another couple of weeks. But the lockdown must be released to save the economy but also in a flexible way that allows it to be re-imposed if needs must. The way to do this it to have a simple colour coded system.

This system can be used on motoroway signs, train stations, TV/Radio ads etc to let the population know where we are at any time. I would propose something like the below:

Chilli - Full lockdown as now, no going out, to be saved for when deaths are over 400 a day

Lemon - Travel to work, with masks, if needed, schools open, restaurants and cafes for takeaways, football behind closed doors etc.

Apple - social distancing stil in place, wearing masks when travelling, leisure open but with social distancing measures ( e.g less covers in restaurants, limited people in pubs, 50% capacity in sports stadiums)

It will only be with a vaccine in place of herd immunity that we will release from Apple status - so maybe not until spring 2021. In the meantime we need something that gives the populace a guide as to how they can live under this Covid-19 threat, but to do so responsibly and effectively whilst balancing risk and work.

If you like this idea, feel free to promote it, I am keen the Government make a better fist of explaining this clearly than they did in March when we entered the lockdown.

Monday 13 April 2020

Can the NHS take it?

Herd immunity, a phrase spat out by Beth Rigby and Adam Boulton, is in fact the only route out of our crisis. A six month lockdown is not going to find any obedient takers. There is a small chance people might go for a in and out type strategy where we get sent home again for a few weeks for a week or two out again. This will work better when we have an antibody test.

What I have not seen though, amongst the cheerleading for the NHS, is that when reality hits in a few weeks time, it could get nasty. For lockdown to end, we need to accept ongoing illness and deaths. The NHS workers have to deliver this and risk themselves at the same time. Over time, when they see everyone else going back to normal this will be resented by them - as I would myself.

Where is the danger money? Where is the 💯 effective PPE and process?

Without these it is only a matter of time until the unions strike or the NHS suffers mass illness and nurses and careers stop going to work. I think both of these remedies can be found but they need to be high on the Government’s  agenda. Also it needs to be clear to the public that we are expecting those in the NHS to suffer as footsoldiers in war and to treat them with the respect this deserves.

Saturday 11 April 2020

"The Only Free Lunch ..."

A couple of weeks ago I did a piece on Black Swans involving some technical stuff on risk management, and someone asked if there was more.  Well indeed there is ... and this morning I'll pick up on some of the issues raised by our discussion on attempting to envisage some rational basis for determining a logical quantum of self-sufficiency or, as Mark Wadsworth put it, the "efficiency vs reliability" debate.

We can readily agree that full self-sufficiency is an implausible national goal.  It lay at the heart of North Korea's Juche *philosophy*, and look where that got them, even as they remain dependent on China for all manner of important things.  As one of our esteemed Anon's said BTL, "... trade vs self sufficiency, surely it's not an either/or proposition? The sin would appear to have become so reliant on single sources, which has many sources of blame, including the 'lowest price' mentality".

In normal times, it's positively beneficial to procure almost anything from multiple sources.  When one lets you down, the likelihood is another will come good.  Plus, you tend to get better prices because (a) you shop around and obtain good price discovery; and (b) suppliers quickly find you're not a mug.  (Obviously, if we thought to add Australia to our list of toilet-roll suppliers, the transportation costs would overwhelm the benefits of competition in that particular case.)

The price benefit can be real enough, but just as important is the risk-management principle involved - diversification, sometimes known as the only free lunch.  Describing it technically, we are relying on the variables of failure of each source of supply as being less than 100% positively correlated.   The maths involved here is Portfolio Theory, and it's an exceptionally important principle - at its simplest, well known thoughout the ages.  You can find it in the Bible (Ecclesiastes 11:2, v6), Shakespeare (Merchant of Venice); and Churchill famously stated "Safety and certainty in oil lie in variety and variety alone". (He was referring to his policy of sourcing oil for the Admiralty from more sources than just Persia, which had been the case in the early years of RN steamships.)  Not my job to advise anyone on personal investment, but everyone needs to bear it in mind: it has a role to play in every portfolio, large and small.

The second part of Anon's comment was also on the money.  "Perhaps it's time to start have rules on what %age of a good can be sourced from a single, foreign, nation or economic bloc? Security, after all, comes from plurality. Self sufficiency just changes *who* can take you hostage, rather than remove the threat. Add to that a minimum amount sourced internally, even it means having a nationalised source, with the capability of scaling up where possible, allows for flexibility and security of materials?"  This is exactly what happens in a good commercial risk-management regime - rules such as "no more than 20% of our business with a single counterparty" are instituted.  Quite a lot of valid maths can be put into this, to come up with something "optimal" - under a given set of assumptions.  The key, of course, is to price in the risk, to counter Anon's issue of going for the lowest (nameplate) price. We may return to risk-pricing on another occasion, if we've the appetite for even more technicalities (when we've nothing better to do in lockdown ...)

A free lunch ... but when the custard really hits the fan, variables that were heretofore less than perfectly correlated suddenly become highly correlated, all in the same direction - downwards.  If Tesco has run out of toilet paper, so too has Sainsbury - and it ain't a coincidence.  At this point the maths no longer helps us, and we're down to inventory, improvisation, *requisitioning*, sauve qui peut ... and ultimately, privation.

Thus far, Covid-19 has mostly exposed lack of diversification in medical supplies of various sorts.  There's every reason to believe that, as the months wear on and the tide recedes still further, we'll find who's been swimming without trunks on a lot more beaches.  Starting with food ..?


Thursday 9 April 2020

Self-Sufficiency: Good or Bad?

Our old friend Sackerson and I have periodically debated between ourselves what attitude one should take as regards national self-sufficiency.  On the one hand, to be dependent upon imports for any vital need is to offer a hostage to fortune in difficult times.  The very concept of the nation-state is often identified with this situation.  Only when man (or proto-man) existed in isolated and self-sufficient communities could reliance on trade be thought of as irrelevant.  On this analysis, nation-states exist when, and because of, the move to specialisation and trading, which requires the thus-extended and non-independent communities to organise in such a way as to (attempt to) make this a viable state of affairs.  Sometimes, typically in warfare or conditions of famine etc, such arrangements fail.  History is littered with case studies, Germany in WW2 being a fine example: suppose the Third Reich had been self-sufficient in raw materials ..?  Today, China is endlessly nervous about its own dependencies on imported raw materials - just as we are about their monopoly on rare earths.

On the other hand: given this potentially fatal outcome, why do people surrender their self-sufficiency in favour of specialise+trade at all?  Because it is a thousandfold more efficient to do so - in "normal" times!  Even George Monbiot rapidly tired of life as a subsistence farmer; and many on the green-left reject what is termed "deep adaptation" (= living in caves).  All capitalist instincts (and not just doctrinaire capitalism either) speak in favour of doing what we're good at, and buying those wonderful things someone else excels at.

So - how is the balance to be struck?  How does a government decide what percentage of, say, the country's electricity should be generated within its own borders, or (a similar problem) how many rarely-to-be-used snowploughs should litter one corner of Heathrow airport?  How much Risk Capital should a bank hold?  How high should the Dutch dykes be?  Or how big should be our armed forces, to rectify matters when "normal" affairs get out of hand?  In the abstract:  how much of our resources should be tied up, how much potential comfort should we forgo today, against adverse future contingencies?

Let's cut to the chase: we are on a continuum and there is no definitive socio-economic calculation to be done.  There is indeed a ton of maths and modelling we can do, with Nobel prizes on offer for advances in technical Risk Management analysis - but the basic inputs include critical and wholly subjective judgements**.  So nobody should get hung up over what can be portrayed as, or mistaken for, a science.  Only towards the very ends of the spectrum can anything strong be stated, e.g. (a) the Vatican isn't a viable state, and needs to be embedded in something a lot bigger;  (b) Canada is very fortunately placed, and very unusually so (and even Canada is somewhat parasitic on the USA for defence);  and (c) the dykes had better be higher than the average high-water mark.

Covid-19 makes this otherwise rather academic debate ultra-real; climate change ditto.  (For example: we may note that in some quarters it seems to count as wicked not to be self-sufficient in ventilators and virus testing chemicals; but just fine to depend on migrants to staff the NHS ...)  And when it comes to reordering the world in due course, some highly motivated parties will be competing for control over those "critical and wholly subjective judgements".  

We can at least be grateful they won't include Bernie Sanders^^ or John McDonnell.

**  Another post, maybe.  I can bore for England on this
^^ Definitely another post!  There are fascinating developments on the lefty front

Saturday 4 April 2020

Light, Mirror ... Camera, Action: Wolf Hall 3

Having praised Wolf Hall to the skies here - for its writing, its takes on court politics and fake news, its take-down of Bolt's Thomas More - now, after an impatient decade, I've devoured all 800+ pages of Book 3, The Mirror and the Light.  In truth, Mantel was by any standards an unconscionable time completing the trilogy; but it could fairly be argued she used the time well because there's evidence of a lot more research having been done (if not, errr, nine years worth) and I could just about say it was worth the wait.  

We always knew how it would end, of course; and in various learned articles (and interviews with Mantel herself) we'd been given hints as to how she was going to settle her account.  The very precise beginning and end of the story-arc (so now get up!) had already been explained by her; and the suggestion had been made that Henry VIII would end up treating Cromwell and everyone else essentially the same as he treated his wives.  I'm not sure that latter interpretation / prediction got it right: the dynamic of who's up and who's down in no-holds-barred court politics is unsavoury, but probably quite enough to account for our hero's temporary, but in the circumstances fatal, fall from favour.  But Mantel's fabulous extended illustration is taken full-cycle, of how poor a grasp we have on "facts", publicly and privately - even for a man with a memory and a grip on reality as strong as Comwell's.

Wolf Hall has set me back to Foxe's Protestant Martyrs, clearly one of Mantel's main sources.  What an amazing text that is: and what a bastard Stephen Gardiner was.  Mantel agrees.  Or perhaps we now need an author to do for him, contra Mantel, what she's done for Cromwell contra Bolt.

All the book prizes Christendom has to offer surely cannot be far behind.  Oh, and the TV version: bring it on (up)!


Wednesday 1 April 2020

Maybe a little private enterprise could help here?

Sorry for the absence this week, family illness and other things have taken up all spare time.

The non-stop Covid news is very trying for all of us. The era of 24 media is a distressing one, things are bad enough without the constant stream of inane takes (yes, I get the irony!) across all news outlets, many of whom have given up reporting for the cheaper option of just cut 'n paste Reuters and add some views.

A current issue being raised is the lack of testing for Covid in the UK. Clearly, we are well behind the curve on what we could have done to stop the spread. But us and most European countries.

We should have stopped international football and skiing trips etc. "If only" we will be saying for years to come after this.

However, on the current media spasm around PPE and testing I feel the NHS has a lot to answer for. There is no real shortage of PPE at the basic level, but distribution to the right places has been poor. Moreover,  I know of plenty of suppliers keen to help with equipment, but NHS procurement has long processes and rules - it only buys from those it knows already. Addtionally, it has an aversion to dealing with the private sector. By contrast, in Germany they are very far ahead procurement for testing and PPE but worked with Bayer a few weeks ago to produce an effective cheap test and manufacturing capability.

The NHS wanted to do it in house and to work with Universities and their laboratories. Perhaps they would have been better to speak to GSK or to contract it out to them - but if you have socialised medicine it means a socialised approach. I note the US, for all of its many mistakes, also has plenty of testing does Korea, Singapore etc. The questions are being asked of the government, but as ever in the UK,  complete worship of the NHS (this is not to do down a sterling effort by it frontline currently has to include all its staff - when the admin side we know is very weak indeed) means that the buck cannot stop where the issue lies.

It is not too late to change course, I see the Government has been super keen on "Dyson" ventilators which has had the Left in fits of vapours about Brexit - in reality it is a sensible move in these dark days to put all hands to the pump, literally.

Let's hope the NHS and Government are learing some fast lessons about moving quickly becuase unfortunately the situation is going to get very bad now, very quickly for a time.