How did 2021 Predictions go and our annual winner

The questions were; the price of  Tesla, the price of Bitcoin, would Biden still be President, when will the Tier system use end and the FTSE price.

Quite finance focused but let's see what the real-world results are...

FTSE: ending at around 7400 - up from 6500 at the end of last year, so a decent recovery back to levels of, err, 20 years ago. 

Tesla  - up from 700 to 1090 - wow. a mere 50% gain. 

Biden is still President. 

The Tier system ended in June.

Bitcoin has gone from $30,000 odd to $50,000 odd. 

So if we had all bet our money quite simply we should have made a bundle. Sadly, I was contrarian and as usual missed all of this!

THE WINNER IS:

Electro Kev:

FTSE 7500 (just following the crowd here, really)

TESLA £733.25 (because that's $1000 at present exchange rates and TESLA is technically diverse and trades on myth and legend status.)

Tiers end - 2022, Spring. (They're using the Spanish Flu handbook.)

President USA - Harris (a few senior moments will see to that. He should avoid wearing white trousers in public)

Bitcoin - £32,000 (I just looked at the trajectory on a graph and I think major investors will hold out - also drug dealers are the only people travelling on public transport and are making a killing in this crisis... the stench of cannabis is everywhere.)

A very good effort there from Kev. Most entries were very out on Bitcoin - Kev nailed it. He also nailed Tesla and was only two percent out on the FTSE. 

This must be the best ever performance in the 15 years of the competition!

Aston Martin DB7 - best car design evaahhh

The one and only; the original

The other day I happened upon a Kia 'Stinger', of all ridiculous things, and for the 294th time I found myself saying: no prizes for guessing where they got that design ...

Yes, it is the greatest car style ever designed, the Aston Martin DB7.  Which itself didn't just come from nowhere, of course: the marque evolved organically, and by the time of the DB3 the pattern was well and truly formed.  After the DB6, Aston Martin took a wrong turn (in business terms as well as styling) with the DBS, an Italianised parody of a design, albeit very much of its time.  

But with the DB7 which followed a longish while later, they'd perfected the art.  And every single vehicle designer in every car manufacturer ever since has self-evidently had it in the back of their minds at all times.  Sometimes, when the boss has just rejected their nth drawing-board effort for the new model, there's only one way to satisfy demand.  Audi, BMW, Ford, Jaguar, Kia, Mercedes, Toyota, (you can add to the list for yourselves**) ... they've all harked back to the immaculate tapering rear hatch, the lithe haunches, and even - Ford, this especially means You - the grill and front lamps.  (On a Fiesta, FFS!)  It's shameless, it's unimaginative, and it's Not Clever.

Actually, though, it probably is quite clever.  It is, after all, the design everyone really wants on their front drive, whether subconsciously or not.     

Just briefly, a few decades ago, Mercedes had pulled off something similar with its deceptively simple 3-flat-box design, which Ford and Toyota and even Audi raced to emulate.  But that's about as far as it went.   

Essence of DB7.  That's what every car manufacturer wants sprinkled on its products.  Just like they spray that leather smell inside.  Gotta have it.

ND

** and Bentley, and Lexus, and Maserati, and Tesla ...

Energy Supply Carnage: Last Man Standing?

A very traditional business strategy, in sectors where for some reason corporate survival is by no means assured, is "last man standing". Just hang on while competitors go under or vacate the field, in the hope of cleaning up when there's nobody else left and the benefits of monopoly can be reaped.  Well, for a few years at least - until the competition authorities eventually forget how worried they once were.

The UK energy residential supply sector has offered the prospect of this for many years.  The comfortable days of the 'Big 6' - when the barriers to entry were so high that new entrants rarely stayed the course - were always likely to be under threat at some point, with chaotic fallout.  So what were those barriers?  

• Competence: gas may be a relatively easy business to participate in, but electricity is fiendishly difficult, in several dimensions, as many an apparently competent energy player has found to their cost (Shell, BP, Total, Statoil, Conoco, ...)
• Branding & trust (a.k.a. inertia): people were fairly well accustomed to, and comfortable with, buying from "the electricity board" (not realising the concept was otiose from the mid 90's, with the restructuring of the industry and the separation of the supply side from "the wires") 
• Low margins:  the business might have been comfortable for long-term incumbents, but fortunes were not readily made - indeed, once the market settled down after the initial upheavals of sector restructuring, there was always at least one of the Big 6 thinking seriously about jacking it in
• Capital adequacy:  at very least, in order to be able to hedge the commodity price risk (a very necessary requirement in circumstances of volatile wholesale prices), a basic minimum credit standing is required

This all speaks to energy supply being the preserve of relatively large, competent, well-financed companies.  Was a market of "only" six suppliers necessarily non-competitive?  There are many other sectors where six, competing properly, would be considered pretty good.  To be fair, it can be argued that the Big 6 'competed' in a rather nominal fashion, and did little actively to shake up the significant degree of customer inertia: but the acid test - the trajectory of prices for end-consumers - was broadly favourable, and had been ever since the market opened up.

The picture began to change about a decade ago when a number of aspects came together to facilitate participation by players with quite different business models.

• government and regulators were very keen indeed on seeing new entrants, and proved willing to ignore the kind of arrant dross that was applying for supply licences (interspersed with a handful of genuine and properly-financed innovators).
• for the same "reason" (presumably), Ofgem simply hasn't enforced its own rules on smaller players, e.g. the requirement to provide a telephone call-centre service to customers. 
• one of the major barriers to entry - the need for complex systems (again, particularly for the electricity side) ceased to be an issue with the advent of decent-quality off-the-peg supplier software packages at reasonable prices. 
• wholesale prices: they started on a multi-year trend of slowly falling.  This facilitates the "Northern Rock" trick: sell long (e.g. one-year contracts at fixed price), buy short (on the spot market, where because of the falling price-trend, it'll be cheaper than when you made the sale).  Buying spot requires minimal credit; which is, errrr, handy for companies that have almost none...
• the "flipping" model: price comparison firms that offered to switch customers "automatically" (i.e. passively, on the customer's part) onto the cheapest available tariff.  A supplier with next-to-zero marketing capabilty could thereby "buy" as much market share as it wanted, simply by pitching its prices accordingly.
• some of the social-policy costs levied on suppliers only apply to the larger players.

This helps explain how an inadequate company might be able to get into the energy supply game.  But why would they want to?  There is no single motive, but alongside some perfectly creditable intentions, others of them are very bad.

• genuine, albeit speculative profitability of the "Northern Rock" model - for just as long as wholesale prices continue to fall AND the supplier isn't going to the trouble and expense of hedging against the possibility of rising prices (not least, because it doesn't have the credit standing to do so! - see above).
• positive cashflow: notwithstanding various unavoidable start-up costs and system overheads, with a customer base once established the supplier is able to get ahead of supply-cost outgoings via (a) direct debit charges and "estimate"-based payments, i.e. borrowing its customers money; and (b) collecting, as it is required to do, ever-increasing "green" levies, which do not need forwarding to the relevant authorities until several months later (if indeed they are ever paid out at all) - another cheap source of "finance". 
• ease of syphoning off this cash: small players with no public profile nor recognisable corporate governance can readily and quietly play tricks like borrowing from Related Parties at outrageously high interest rates, "investing" in Related Party ventures, and paying Related Parties for extremely costly "software services" and "consultancy".  How do I know about this stuff?  Because sometimes it's as plain as day in their annual reports!  (That's for the supply firms that aren't so small, they don't have to file full accounts ...)  Where were the authorities in all this?  Evidently, neither Ofgem nor government could give a stuff.    

Until now, of course, when they are dropping like flies.  In the meantime, the Big 6 has ceased to exist!  SSE and National Power have exited: we are left with E.on (German), Scottish Power (Iberdola of Spain), good old Centrica, and of course EDF, probably only still in the game to give it political cover for its UK nuclear machinations.  True, Ovo and Octopus have stepped up to the plate: but then, so had Bulb - until last month ...

At least some of the current survivors will be hedged through to April-ish, when the prevailing energy price cap is scheduled to end (see earlier posts).  Of course, nobody will be making any positive plans whatever until the government has shown its hand on replacing the cap.  If it gets this wrong, chaos ensues, probably followed by de facto nationalisation in some shape or other (like the banks in 2009). 

But there must at least be the chance that Centrica's unwavering 25-year strategy of positioning itself to be the Last Man Standing finally pays off.  And a Happy New Year to all concerned!

ND

Mr P's bold gamble -but what is it?

Very expensive business keeping 100,000 troops on station and ready to go. Let alone prepare an area with bridging equipment, tanks and all the logistical supplies needed for a war. Sooner or late the treasury will start weeping at these costs and the men will want to go home to see their families. 

Mr Putin has been playing this game for months though, Troops positioned to both expand Crimea to attach to a Greater Russia and conquer the Donbass region with its big cities and heavy industry. More worryingly, the maskirovka is in full swing  - stories of the CIA prepping chemical weapons in Ukraine for example. 

The price would be high though, Ukraine will fight on home territory, they don't much like the Russians and the russian troops - who knows how they will do, many are just conscripts. Russian equipment is both good on paper and poor in performance. 

But the West will not defend Ukraine. Some sanctions yes, severe ones even, but Germany still need Russia's gas. Mr P is currently turning this on an off in a display of his power. How Merkel, so lauded like Obama, has left a gaping strategic wound. 

Can Europe survive without Russian gas? In the short term, no, not without power cuts which will visit the UK too. In the long term yes. Plenty in the tank of Uncle Sam that can be shipped (at a price!) to Europe in a war-footing scenario. Equally though, the yanks might let Europe squirm a bit, having told Germany not to do this for decades, they will be very keen on an 'I told you so' moment. 

For Mr P, the upside is an odd one. yes an expanded Russia but international oblivion for 20 years. Long-term, less dependency on her gas which is the only valuable product they have. Maybe he plans to sell it all to China, who are less concerned about CO2 emissions anyway. 

Maybe it is all an elaborate ruse to get Ukraine to say it will never sign up to Nato and to get Nord-Stream2 approved which will in turn impoverish Ukraine suitably. 

But the troops are there now, the stand-off has a time limit. 

The End of Brexit and the return of the Remainers

 Why do I write this you ask? 

Well if you recall the crazy days of 2016 there were 4 very strong Brexiteers. Farage, Boris and Gove with guidance from Cummings. They really led the charge  to the Brexit vote. In more recent times, the brain charged with delivering Brexit has been Lord Frost and he has made his excuses and exited stage left (because of Covid, allegedly). 

Here in 2021, Boris is on the edge, his reputation will never recover from this, even if he limps back up a bit for a while. Farage is a radio host and Cummings sniping from the sidelines, disillusioned by the realities of power. 

Meanwhile, remain leader - Keir Starmer - is happily sitting an waiting for the Covid mess to hand him the keys to No 10. Future Tory leaders like Liz Truss and Rishi Sunak are both europhiles. 

Whilst no one, above all Brussels, will want us back in the EU full time. The machinations will begin to get the UK into the vast majority of EU things, maybe even the army using Ukraine shenanigans as cover. 

Won't it be ironic, that the outcome of the Covid pandemic will be a long-term remainer victory? Even though in reality the jabs, boosters and even-handed approach to the science have overall been very effective from the Government since the early disasters of March 2020. 

Who is there available to the Tories who could credibly lead the post-Boris Brexit faction. The loonies on the right of the party like Andrew Bridgen are only going to make things worse - who is there?

Frost In The Bleak Midwinter

 ... with the usual apologies 

 

 

In the bleak mid-winter 

Windy Frost made moan 

“Johnson’s cred is falling, 

Falling like a stone” 

Shropshire North had fallen, 

Polls were running low

 In the bleak midwinter 

Time to go 

How can we persuade him?

“Fall upon your sword!”

You have f*****d up mightily 

Right across the board. 

If you are a wise man, 

(“King of everything!”) 

Drink the hemlock now, man 

Do the decent thing

ND

Interest rate rise klaxon!

My goodness. 

The denizens of the Bank of England have only gone and done it, raising interest rate by 0.15% today. A harbinger of the doom to come. 

Inflation sits at a mere 5% or thereabouts and surprisingly wages for the year have manager, err, 0% rise. Too much covid and change in the economy to sustain wage rises even though some sectors have done well. 

Still this is almost the first rate rise I can remember! People under 30 won't even really know what the Bank of England does or what the significance of interest rats is - we have been in a zero-interest economy for so many years, nearly a decade and a half now. 

Of course, with Quantitative Easing and inflation, real interests rates are at -5%. Holding cash is very bad for your wealth, much better to spend it or buy assets as quick as you can. 

It is still a long way from going back to a 'normal' economy and I still feel in the end the only way back will be with some very high inflation to erode the debt pile of the West vs East dynamic in the world - and that will be so painful that the politicians might try and put it off for generations yet. 

To Whom the (Energy) Spoils? A Genuine Puzzle

There's an interesting dynamic rumbling in the energy sector and associated financial elements, the dialectic of which is as follows:

1. We can't use fossil fuels in future, oh dear me no.  Perish the thought.  Put my pension into something else.  Let me believe that the ambulance runs on pixie-dust and electricity comes entirely from wind.  Don't allow any more production of North Sea oil & gas.  Make Shell's life hell if it even thinks about such a thing.  I might even start to feel very strongly about all this.
2. Actual disinvestment starts apace: actual pension funds switch out of fossil fuels by the billion.  For the BPs and Shells, the Centricas and even the EDFs (see below), the cost of capital starts to rise.  They actually sell some of, maybe all of, their hydrocarbon-related assets.  
3. But in the world outside of all those tightly-shut eyes & heads-in-sand, the ambulance still runs on diesel and electricity is still generated using fossil fuels.  
4. In fact, the market for fossil fuels right now is pretty tight (see previous post) AND, what with all this wind in the power fleet & other kinds of uncertainty, prices are exceptionally volatile.  They are likely to stay that way, even if in absolute terms they subside from today's level.
5. Some people are making a Great Deal of Money from this - right now.  And the scope for a great deal more to be made in the coming years is huge: particularly via assets (and managements) that are responsive enough to make hay from all that volatility - e.g. efficient & flexible gas-fired power units.  Even just the continued supply of simple gas to western consumers (whether the green-woke like it or not) has a lot of mileage still in it (at least two decades, I'm guessing).
6. But the 'traditional players' seem to feel themselves unable to make the usual response to an economic reductio ad absurdum, in terms of investment (long term) and arbitrage (short term) to take advantage of the mispriced assets etc.  

For present purposes, let's put aside the amusing cognitive dissonance that ought to be (though probably isn't) increasingly wreaking havoc with all those who like to mouth "we don't need fossil fuels" but still like to be warm etc etc.  It's the economic & commercial dissonance I'm interested in.

We can easily spot little Volodya Putin and other traditional upstream players making pots of money out of the situation.  They probably hope to make yet more.  China, though essentially an energy importer right now, will probably benefit in relative terms (that is, relative to the West) by being untroubled by 'green' scruples.  All this is easy stuff.  

But what of other business models?  Can 'western' firms somehow thrive in this crazy market?

Exxon:  it's been clear to me for a long time that Exxon, that ailing, blinkered and sluggish beast, is basically hoping it can quietly get on with not changing much at all, and not go down the costly, guilt-stricken route of Shell et al.  But is there anywhere to hide for a US stock-exchange listed firm of Exxon's prominence?  Can any others of its kind, smaller and perhaps less exposed to the limelight, pull off that trick?  

The big commodities players:  there are plenty of these big players - you all know who I mean, but slander is slander - who, if they have any scruples whatsoever, well I've never noticed.  (Ditto their shareholders: well they couldn't, could they?)   Some of these cos are indeed buying up fossil fuel assets: the energy version of money launderers and sanctions-busters.  Are the unscrupulous to be the big western beneficiaries?

A.N.Other Corp: this is where it gets really interesting.  Case study:  EIG Partners - ("Over the past decade, EIG has thoughtfully developed a quiet yet purposeful commitment to integration of ESG factors throughout our business")  - whose website homepage would encourage you to believe they are essentially investors in wind farms and solar.  But lo!  Earlier this year they quietly bought West Burton B, one of the UK's biggest, most modern and efficient gas-fired power plants, from EDF which is busily trying to reposition itself as 100% green.  And what magnificent timing: EIG has already made an absolute ton of money at WBB from the extreme market conditions of the second half of 2021.  

Here's another example: Vitol, who've also bought UK gas assets recently - this time from none other than Drax (who have problems of their own) -  and are likewise minting it this winter.  Here's how they brand this venture ('VPI'):  "We are part of the UK’s pathway to Net Zero, complementing the increase in renewable energy to power homes and businesses. Our portfolio includes hydrogen and carbon capture projects to help lower emissions and develop a future for decarbonised, dispatchable and flexible generation in the UK."  Oh and, errrr, gas-fired power plants.

So: is it all simply about greenwashing?   Maybe you just need the right "communications" firm in tow.  Good old capitalism at work:  assets change hands from those who don't know what to do with them, to those who do.  At distressed prices, if the former are panicky enough ...

Well, maybe.  I think Shell was hoping they could pull this one off, too.  Do we think it's all about shuffling the western-owned assets into less prominent, more media-savvy hands?  Or is it destined to be yet another massive transfer of wealth from the naive & decadent West to the hard-nosed East?   

ND

Energy Crisis: Nobody Seems To Care - Yet

The only time the global energy crisis was front and centre in the UK's dozy media was when there was also a completely coincidental "shortage" (i.e. mass hysteria) at the petrol pumps.  That resolved itself, as it was bound to do: at which point everyone stopped gawping at the levels of international wholesale prices of gas and electricity.

This negligence is of course encouraged by Theresa May's domestic energy price cap, under which most of us will be sheltering as our fixed-price deals roll off, and we can't find anything cheaper.  But of course this time-bomb is set to explode in April.

European wholesale 1-year power price for Calendar 2022

Just feast your eyes on this chart; and imagine what's going to happen when this works through to ordinary punters.  I reckon it will be a serious factor in Boris' decision-making on his political future.  Whoever's holding this baby when it goes off will be well-and-truly covered in ordure.   (To mix idioms freely.)

So: when will it get the attention it deserves?

ND 

Friday Post - Fun Tory Time Competition

Who will make the best next Prime Minister? You have to choose a current Tory MP to make it a bit harder.

I start with mine below:

Tom Pursglove. He is the youngest Tory MP but very experienced nonetheless. Rising up from roles as advisor and also from Wellingborough Borough Council, he has already fought and won 3 elections in 2015, 2017 and 2019. As the MP for Corby he is in the heart of the Country and so nicely between the ex-Red Wall seats but far from the Home counties. 

He has been chair of Conservative Youth and has expressed the "right" views on being anti-Europe and also a borderline climate change denier and actively campaigning against more onshore wind farms. A good anti-dote to the green obsessed Boris but still unlikely to undo Brexit. 

Being so young he is also unlikely to die from the ongoing covid pandemic and is not a member of either the Cotswold or Islington sets that have done so much damage to the body politic over the last few years. 

Answers in the comments please.

I'll try to engineer a job as an unpaid Tory spad for the winner.

Not a very merry Xmas in Downing Street..or the Country

 A new baby, no money, no friends....attacked for a party he did not even go to. 

Boris won't be full of Christmas cheer. 

He has a lot of mouths to feed on his PM salary. Even more now but his happy day is not so much for Boris Johnson. 

I won't be surprised to see him quit in January. He always wanted to be Prime Minister and he has been. Because of Brexit it will always be remembered and Covid would have ruined anyone at the helm, there was just now way to come out of it looking good. Even the Goddess of the Left in New Zealand or Princess Nicola in Scotland have started to come unstuck. 

More worryingly, who will take over. I fear Rishi has not the 'common touch' of Boris. Raab is an idiot who doesn't know where Dover is and Liz Truss is more likely to be another May than a Thatcher. None of us could stand Gove, although  his streetwise and intellectual heft means he is probably the best of the cabinet. 

Luckily for them, they only have to face Sir Kneel of Lockdown and have a stonking majority to defend in any election. 

More widely, in times of Crisis we have typically had more PM's and also in the new media age, I wonder if over-exposure to politicians is reducing their sell-by dates even further. Even Thatcher may have found the endless well of hate emitting from Twitter difficult to live with. 

Life comes at you fast - perhaps we should quickly open the borders now to welcome Omicron?

 The potential was always there. Nature, with its heartless wisdom, always wants success. For a virus, this means more virus. Dead hosts are neither here nor there, what is being looked for is more virus. 

So, all things being equal, less dead hosts and more virus is a better outcome for Nature. 

I noticed one of the comments on the last thread saying there had been no deaths from Omicron - what a terrible scrooge. According to City AM, there are not even any hospitalisations in South Africa. 

So if this turns out to be true, the best thing the world can do is quickly make sure that Omicron out-performs Delta and all other COVID variants. It should mean a kind of global measles-party.

It will be interesting to see how this plays out for Governments if this is the case, for once, our rather rubbish Government tends to be very right about what to do re Covid - after its initially bad response, it has basically been amongst the best. 

Some of our friends in the EU are though haphazard and ineffective and plenty of the world is ruled by the kind of people who just love this for the power trip (see Burma, charging Aung San Suu-Kyi with breaking Covid rules, by waving to a crowd, in order to send her to gaol forever) and will not let it go so easily.

Of course, this is likely wildly optimistic, but medical reality hitting entrenched bureaucracies systems and social media conditioning will be interesting to watch, 

Collapse of Enron: 20th Anniversary

It's the 20th anniversary of the Fall of the House of Enron, folks.  Hard to believe it's been that long.

As this fairly good article touches upon, the influence of Enron on the energy markets (and wider) has always been powerful, such was the enduring solidity of the intellectual and technical innovations it synthesised,  fostered and promulgated.  Energy markets and market participants worldwide are still shaped by the Enron model, even if some don't realise it, and might even resent it.  

Even two decades on, many companies don't manage to operate to the superior level of analytic skill and commercial decision-making that Enron achieved.  It had critical mass of excellence and good practices.  If transplanted through time, intact, into today's markets, the Big E would still clean up.  Provided it could find adequate capitalisation, of course - the failing which ultimately did for it back then.  Cash and credit - the oldest and hardest lesson in the book, however whizzy your other core capabilities.

Unsurprisingly, it was a great place to work & learn.  Enron alumni either went on to other great things, or *ahem* to gaol ...

ND

With dumb energy ministers like this ...

Minister says price cap not to blame for supplier failures:   Suppliers which have gone out of business as a result of the recent escalation in gas costs cannot blame the price cap because they should have been adequately hedged, the energy minister has argued. Appearing at the House of Lords Industry and Regulators Committee, Greg Hands said suppliers who were properly prepared have “clearly been in a much better position to ride out the big increases in global gas prices.”

OK, we haven't yet seen the full transcript and maybe Hands said something more nuanced later on.  Maybe ...

Here's the thing, Greg.  

(a) Just hedging volatile wholesale prices alone is hard enough for very small suppliers that have been stupid enough to sell forward at fixed price - which is of course what a very large % of residential gas and electricity customers (the ones that are active in the buying market) expect from their supplier.  

Why?  Because in order for the supplier to fix its own prices in the wholesale markets, effectively entering a forward contract (i.e. a financial derivative), it is getting into two-way credit risk.  Will it still be around to pay up if prices subsequently collapse?  That's the consideration from the point of the other party to the hedging agreement.  Of course, the small supplier should equally be worried about whether that other party itself will still be around to perform, should prices subsequently soar.  But that 'other party' will probably be at least three orders of magnitude bigger than the dodgy little twat-company that is the "small supplier" in Ofgem-regulated Britain: so not an issue the tiddler need worry about in practice.  And on the other side, well, who's going to extend the latter any credit?  So they can't actually afford to hedge much at all.  When they sell at fixed prices, in other words, they are taking a purely speculative punt on what the spot price will be at the time they must make delivery ('Northern Rock syndrome').

(b)  But it gets worse.  Suppliers don't just need to think about fluctuating commodity prices; the government has forced them to provide a price cap.  As eny fule kno, a price cap is essentially a Call Option, in the jargon of financial derivatives; and while (for the provider) hedging a price cap that's out of the money is relatively simple, albeit an advanced technical exercise, the cap that the government forced on suppliers was always fairly close to being at-the-money - a vastly more difficult and sophisticated, costly, dynamic hedging challenge.  (It's deeply in-the-money now! - which of course means wipe-out for the unhedged...)

But we are not talking players who are remotely capable of mastering sophisticated derivatives challenges - we are talking a bunch of opportunistic, under-resourced minnows, some of whom have extremely dodgy business models and that should never have been licensed in the firstplace!

So, Mr Hands, while you may fairly expect the Centricas and EDFs and Eons of this world (and maybe the Ovos and Octopuses ... maybe?) to have their shit together, you should be looking squarely at Ofgem for the rest.   Licensing players with no capital, but then imposing a tight-fitting cap, is a sure recipe for what's happening right now.

ND