file6071284660910We are not good at learning the lessons of the past. Alas, we are not so good at learning the lessons of the recent past. Take the oil price and the way the markets are failing to grasp that there is a thing called a cycle.

This is the theory. When the oil price is high, at first we just carrying on demanding it as before. Economists say that oil demand is price inelastic. But over time, things change. For one thing, when the oil price is high we see masses of investment into finding new sources of oil. For another thing, we change our habits.

So in the 1970s, for example, the US government imposed a speed limit on the roads, so that less petrol was consumed.  In recent years, people have been saving money by opting for more fuel efficient cars, putting solar panels on roofs, insulating lofts, while the likes of Elon Musk promote the electric car and battery bandwagon.

At the same time, we see innovation on the supply side, and we get oil from the Alberta tar sands, and shale gas and oil.

But always, the markets, and even the wise people at the top of business, fail to spot it. Oil is going to be expensive forever, we are running out of it, we are told. “We are at peak oil.”

But things change. Even the rise of China failed to have the impact on the oil price that had been expected, for the simple reason that China made very inefficient use of energy. As it grew, it became more efficient in its use of energy, and its demand did not rise at the pace that had been expected.

So the oil cycle turned, and the oil price collapsed. That is how the market cycle works. Always we seem to forget, and say this time it is for good.

Now the International Energy Agency has warned that Middle East oil producers, such as Saudi Arabia and Iraq have their highest share of world oil markets since the 1970s.

At the same time, the imperative of energy efficiency slowly seems to be in the process of being forgotten. According to the FT, sales of sports utility cars have risen such that sales of these cars now exceed ordinary cars by two and half times. Our habits are changing; we are slowly adjusting to cheaper oil.

Investment into new energy resources has been cut, less money is being spent on oil exploration. Shell maintains its dividend, and invests less in the future, less for the day when oil price starts to rise.

That is why the oil cycle will turn again. And why I suspect that the oil price will surge over $100 before this decade is out.

Now gaze even further into the future. I wonder whether the next turn in the cycle may be the last upwards one. The slump in the oil price has delayed alternatives but that is all it has done.  The internet of things will create unprecedented efficiency. Solar power is becoming ever more efficient. Battery technology is advancing, nano technology may even make it possible for us to create synthetic oil.

The oil cycle will turn upwards within a few years, and then a few years later it will turn down, but then it may not turn anymore.

This article originally appeared at Fresh Business Thinking:

file4741270417603The UK can be thankful it has experts at the Bank of England, because its seems that they are all that stand between the UK economy and recession.

Ever since the result of the EU referendum was revealed, economic forecasters have been warning of the possibility, and in many cases the probability, of a UK recession later this year.

Indeed, before the referendum, Bank of England governor, Mark Carney, warned of precisely that danger. But then Mark Carney, along with the rest of the economic forecasters, is a so called expert, and as we all know in this post referendum era, they know nothing.

But maybe, we can ignore experts and instead look at the data.

The monthly purchasing managers’ indices, or PMIs, covering UK manufacturing, construction and services are a reasonably reliable guide to the state of the economy at any one time. They are not perfect, but then again nothing is, and when they pick-up, the UK economy seems to pick-up soon afterwards and when they fall, the UK economy usually dips soon afterwards.

The latest batch have been released in the last few days, and they were awful.

The good news is that of the three PMIs, the first to see the light of day, the PMI covering manufacturing, wasn’t too bad. The index rose to 52.1, a five month high.  It was good to see the index rise, but even so, by historical standards, it was a pretty lacklustre score.

Bear in mind, that when it comes to PMIs, the magic number is 50. Any score over is meant to suggest expansion, any score below is meant to suggest contraction.

And that takes me to the PMI tracking construction. In June, the index crashed, falling from 51.2 in May, which itself was seen as pretty woeful, to 46.0, that’s the lowest reading since December 2012.

Then, finally we got the PMI for services. The Business Activity Index which experts tell us is the index that matters – not that they know anything – fell from 53.5 in May to 52.3 In June, the lowest reading since December 2012.

Collectively, and based on past findings, the three PMIs point to growth of just 0.1 per cent in Q2. A recession is defined as two successive quarters of negative growth, so if the PMIs are accurate, then the UK only needs to slow very slightly from the June level and it’s in recession territory.

Most worrying of all, the three PMIs relate to a period before the EU referendum.   It seems likely that the UK economy has slowed more than slightly since then.

But not all are fretting.

Take Standard and Poor’s. It has taken time off from downgrading the UK’s credit rating, to suggest that the UK will avoid recession. It said that the fall in the pound will support exporters, that the UK chancellor, a certain George Osborne, will relax on his austerity drive, but most important of all, the Bank of England will cut interest rates and go for another burst of QE.

But the story of pound devaluations giving the UK economy a lift is mixed. Besides, sterling’s falls against the euro have been more modest.

George has already confirmed that he will go back on his pre-election promise to create a budget surplus by the end of the decade.

But it seems to me that the fate of the UK economy in the short term, and whether it can avoid recession, is dependent on the experts at the Bank of England. Let’s hope that really do know something after all.

Article originally posted on Fresh Business Thinking:

file0001300785481Question, what does the Swedish economy and George Osborne’s dream have in common?

Answer: Setting aside that Sweden is still somewhat concerned about such issues as equality, welfare and workers’ rights, the Swedish economy is, quite probably, Mr Osborne’s dream.

Like the UK, Sweden once suffered a banking crisis. Unlike the UK, the Swedish crisis occurred a quarter of a century ago. Lots of dust has settled since, but today, Sweden is a country with a firm check on public finances. Today, Swedish public debt to Sweden’s GDP is just 44 per cent, roughly half of the UK equivalent. Since 1997, the Swedish government has targeted a one per cent budget surplus over the course of an economic cycle.

You could say that its prudence writ large. Sweden has become one of the most competitive economies in the world, a major technology hub and a centre for entrepreneurism, all this with a growth rate since 2008 that the UK can only envy.

So that’s austerity for you. Cut the size of the state, and the private sector can grow into the void that is left – at least that’s the theory. But maybe Sweden bears the theory out.

There is just one snag. Since 1997, household debt to disposable income in Sweden has risen from 90 per cent to a staggering, and very worrisome, 190 per cent.

It does rather seem as if the price Sweden has paid for reducing government debt is for household debt to rise. When you think about it, across the global economy, if savings are at a certain level, and governments are trying to cut debt, that must mean that private debt must rise, otherwise, all that money that is saved leaks out of the economy.  It’s a point that gets forgotten.

But George, or so it appears, has abandoned his dream.  It is no longer his target to create a budget surplus by 2020. Brexit has made this impossible.

The truth, of course, is that for all the talk of prudence, of how you can’t fight a crisis caused by too much debt by borrowing more, of how the Keynesian idea of demand stimulus in times of trouble is dead, Mr Osborne has done the opposite of what he said he was doing. Year in year out, targets for government finances have been missed. Borrowing each year was higher than was predicted the year before.  On the other hand, while household debt to disposable income has been rising of late, it is way below the pre-2008 level and nowhere near the level in Sweden.

And now, thanks to the Brexit vote, it appears even more targets will be missed.

Before the referendum, Mr Osborne threatened an austerity budget if Leave won. Instead, it appears we are getting more Keynesian stimulus.

If the Brexit supporters, such as Michael Gove and Andrea Leadsom, have a dream, it is for the UK to be like Singapore, a dynamic independent hub off a mainland. Can that happen? It is hard to imagine the whole of the UK being like Singapore, but London . . . well, if you squint your eyes, and apply a large dollop of thinking outside of one of those box things, then maybe London can become Europe’s Singapore.

And now George Osborne is talking about cutting corporation tax from 20 to 15 per cent, the lowest such tax rate amongst the world’s major developed economies. So is that good thinking, or has he boxed himself into creating a low tax haven even though social discontent was the main driver of the referendum result?

The Keynesians argue that in times of economic trouble you should forget about government finances and spend instead.

But the government tells us that this philosophy is irresponsible, that we must live within our means.

In reality, we are being told to forget about government finances and cut corporate taxes instead.

This article was originally posted on Fresh Business Thinking

Bias, and the EU referendum

Posted: July 5, 2016 in Brexit, eu

Nothing is more likely to get someone’s goat than to accuse them of bias. So you are disagreeing and you say “I can’t argue with you, it is clear you are biased.” They may react with incredulity. “Me biased!” They will exclaim in disbelief, “you are the one who won’t listen to facts.”

Here is a tip, by the way, for those of us who really don’t like facts being thrown at them with such precision that you feel you may lose the argument. Don a pair of headphones, and start singing.

During the EU referendum, if felt to many as if the people they were rowing with were doing just that.  Of course, if the argument was over Facebook, it was metaphorical headphones that were used to hide from facts.

But which side was the guiltiest for ignoring facts? Or were both sides equally at fault?

Daniel Kahneman, the godfather of behavioural economics, says we think fast and then slow. We form a view, or we react in a certain way, driven by emotion or instinct. Then we form a logical set of arguments to justify what we did. In the process we try to persuade ourselves that our action, or belief, was determined by logic. We are kidding ourselves, just 20,000 generations separate us from a species that had not yet evolved into homo sapiens. Maybe little more 250,000 generations separate us from our common ancestor with the rest of the apes. What possible reason is there to think that evolution has made us logical, careful thinking humans, who always put logic before emotion?

We are not like Mr Spock. We are more like chimps.

As it happens, Mr Kahneman seems to think that the Brexit camp was closer to being irrational. But let’s not jump the gun. Is he right? Before you hear the answer, avoid dashing for the headphones.

A couple of weeks before the referendum Mr Kahneman said: “The major impression one gets observing the debate is that the reasons for exit are clearly emotional.” He told the Telegraph—and/ that: “The arguments look odd: they look short-term and based on irritation and anger. These seem to be powerful enough that they may lead to Brexit.”

Well, he was right about Brexit winning, but was he right about emotion triumphing over logic?

Frankly, the answer would probably have been yes however the referendum turned out.  When it comes to the court of popular opinion, little things like facts count for very little.

Professor Dan Kahan is one of the leading lights in this field.  In an article for Salon magazine, he stated: “People who thought WMDs were found in Iraq believed that misinformation even more strongly when they were shown a news story correcting it,” or people who were highly critical of Barack Obama’s management of the economy said that unemployment had risen over the previous 12 months, even when they were looking at a graph which showed the precise opposite.“

But it appears that it has nothing to do with IQ. The above findings applied no matter the intelligence of the subjects.

Now I quote from a book I co-authored called IDisrupted

Kahan took a slightly tricky puzzle, involving a fictitious example of two groups of people comprising individuals who had a skin rash. The two groups were not the same size. One group was given a cream. Here are the results of this fictitious experiment:

Rash got better Rash got worse
Group A: Patients who did use the cream 223 75
Group B: Patients who didn’t use cream 107 21
Dan Kahan Motivated Numeracy and Enlightened Self Government.


He then asked people to select one of two possible conclusions relating to his fictitious study:

1:    People who used the skin cream were more   likely to get better than those who didn’t.

2:    People who used the skin cream were more likely to get worse than those who didn’t.

The answer is not obvious, but if you look at the ratio of ‘rash got better’ ‘to rash got worse’, for each of the two groups, you realise that actually people who used the skin cream were more likely to get worse than those who didn’t. As a rule, those who were better at maths tended to get the answer right.

He then set precisely the same puzzle, but in a different context. Instead of rash and cream, the subject of the study concerned the link between carrying guns and crime in the US. In this case, reasoning went out of the window. If the numbers were fixed so that a quick look suggested carrying guns reduced crime – when a more careful look revealed the opposite finding – it was irrelevant how good the test subjects were at maths. If they held liberal view on crime, they were more likely to get the answer right. Then Kahan flipped the stats, to show the opposite finding.  In this scenario, those with more conservative views on carrying guns got the answer right.

As it happens, psychologists have duplicated the experiment, but applied to the EU referendum. Their conclusion, quele surprise, “a voter’s ability to think rationally about the evidence for a referendum topic distinctly depends on whether or not that evidence supports their existing views,” – or so says The Online Privacy Foundation

The research found that Leave voters tend to be more right wing, and more religious. Remain voters score higher in personality tests for openness. They are more concerned about privacy, and feel more strongly about human rights, or so claims

More controversially they say that Leave voters “typically have a worse grasp of statistical literacy, making them arguably less skilled at evaluating the pros and cons of important decisions such as financial investments.”

But is the Privacy Foundation being influenced by bias? They also say “Leave’ voters do significantly worse at interpreting the numbers than ‘Remain’ voters if those numbers show that immigration decreases crime. But they return to their normal performance if the numbers show that immigration increases crime.” But they add; “‘Remain’ voters typically have a much better grasp of how to accurately interpret statistics and numerical information. But, they also slip in performance if numerical evidence runs counter to their views. When the numbers show that immigration increases crime, they no longer beat the ‘Leavers’ in doing the maths.”

Let me finish by quoting from another experiment.

A paper by Linda Babcock and George Loewenstein examined ways to de-bias someone. They conducted an experiment, in which subjects played the role of either a plaintiff or defendant in a pretend trial involving a motor bike accident. The defendant was given a sum of money, and the plaintiff had to ask for damages to be paid from this money. In the event they were unable to agree, a third party, a judge, decided and the sum of money available was reduced. The experiment was re-run with different subjects.

Alas the two sides rarely agreed, each was convinced that the judge would decide in favour of their negotiating position. So Babcock and Loewenstein got subjects to read a paper about self-serving bias, and even tested them on it to ensure they understood. The result: after reading the paper, subjects were even less likely to agree as they became convinced the other party was biased.

It turned out the only solution was to get each party to argue the other person’s case. Only then was it more likely that the two parties would agree on a settlement without calling on the services of a judge, who reduced the overall amount of money available.

Curiously, or so it is said, Boris Johnson did something similar before deciding on which side of the referendum he stood. He wrote two articles, one for, one against. He then selected the Leave article for his weekly Telegraph column, rejecting the Remain piece, presumably to the bin.  According to Andrew Marr, speaking on his Sunday morning TV show, rumour has it, that the Remain article made the more convincing case,

Or, it this all too biased to say?

Article originally posted on Fresh Business Thinking:


London may top the Hollywood list for cities that it most likes to destroy.  The latest Independence Day movie is one example, but these days, it is quite common for a crumbling London to form the backdrop to a Marvel blockbuster, as super heroes take to the tube on their way to wage war with Norse gods.  Even in that movie franchise that seems to most exemplify US culture, Star Trek, where the American dream spreads across the galaxy, it was London and not New York that formed the centre piece in the most recent movie. Images of King Kong on the side of the Empire State have been replaced by images of the London Eye, or the Palace of Westminster, fallen at the hands of an alien space ship.

If there was a Hollywood destruction index, London would no doubt come top.  Why is that? Is it because of Pinewood studies? Or is it because Hollywood implicitly sees London and not New York as the de facto capital of the world?

Yet, based on the recent EU referendum one could be forgiven for concluding that the rest of the UK doesn’t like London.  Sure, there are good reasons to think that the UK capital will lose out big time to Brexit, but in many parts of the UK it is seen as arrogant. They have longed for it to get its comeuppance, maybe not quite in the way that Hollywood has it happening, in reality, Gerard Butler does not form a part of the narrative, but ‘London has Fallen’, does all the same seem to sum up the hopes of some.

As Yanis Varoufakis put it in that indefectible way of his,  “the City (whose insufferable self-absorbed arrogance put millions of voters off the EU)” was one of the causes of the Brexit vote.

Some respond with a call for an independent London, a petition on asking the London Mayor to declare London independent, so that it can apply to join the EU, has 175,000 signatures. It seems unlikely many of the people who signed the petition really believe in the idea of an independent London, they signed in protest, just as many people voted in protest in the referendum.

An independent London is about as likely as the football authorities declaring England’s recent euro match against Iceland null and void. Although oddly enough, there may be some sense in a watered down version of an independent London. Certainly the rest of the UK may benefit from London having its own currency, but with taxes paid into the UK exchequer.

The FT recently warned that London’s buoyant Fintech sector may take a major knock from the Brexit vote. After-all, immigrants have had a lot to do with the success of this sector.

Yet maybe in parts of the UK, where economic depression has been the norm for decades, the sorrows of London are seen to be roughly as important as the criteria by which Hollywood chooses cities for the location of blockbuster movies.

But there is something bigger going on.

The clash we are seeing between London and some of the poorer areas of UK is being played out in similar fashion across much of the world.

People in many parts of the UK voted for Brexit because when they heard that the economy would deteriorate, they thought “but, the economy is already awful where I live.” The claim that all those years of hard work, of rebuilding the UK economy, may go into reverse, means little to people who are worse off today than ten years’ ago. Instead, they voted for change.

Yesterday’s FT also ran a story about how the Berlin mayor is grappling with populism.

Wikipedia defines populism as a “political position which holds that the virtuous citizens are being mistreated by a small circle of elites, who can be overthrown if the people recognise the danger and work together.” Of course in many cases, rebellions against the elite are led by people who are even more elitist.

Even so, it seems that a resentment towards an elite was one of the main drivers of the Brexit vote.

But this same resentfulness percolates across the world, how else do we explain Marine Le Pen, Donald Trump, Philippine president-elect Rodrigo Duterte, Austria’s near miss with an extreme right wing president, governments in Poland and Hungary?

The Brexit vote shows that when economic success is seen to bypass great swathes of the population, problems follow.

Varoufakis predicts years of deflation, as the EU descends into ever greater instability.

But then he has his own agenda. He hates the way the EU elite treated Greece, and believes their determination to create an ever more united Europe is fuelling resentment.

But the pressures of immigration are not going to go away. The population in Africa is set to explode. In Nigeria alone, the population is expected to rise from 159 million in 2010 to over 400 million by 2050.

If the Brexit vote was mainly about fears over immigration, then what will happen as immigration pressures soar, as it surely will?

One economic consequence may be so called helicopter money.  If deflation becomes a permanent threat, then why can’t central banks print money and governments use it to fund stimulus programmes?

Maybe we have forgotten one of the lessons of the post-World War 2 era. During the quarter of century after the war, equality was greater, unions were stronger, but in the west growth was the highest ever.  By the mid-1970s, the system that created all that growth seemed to have backfired, instead we got inflation and the reforms of Thatcher and Reagan followed. The pendulum swings, and then it swings back again. Sometimes the swings are punctuated by wars, other times we just get discontent.  It seems that that right now, the pendulum is swinging again.

Article originally posted on Fresh Business Thinking:


China is being accused of starting a new currency war. The People’s Bank of China has devalued the Chinese currency three times in three days. Politicians on Capitol Hill can barely conceal their ire. There is even talk that both the Fed and Bank of England will hike interest rates as a result. Yet for all that, it may simply be that China is doing what both the IMF and Washington have been calling for it to do for years.

China wants its currency, the yuan, or the renminbi, to be part of the basket of currencies that make-up the IMF’s Special Drawing Rights, or SDR.  For this to happen, the IMF says that the yuan must be allowed to trade freely on the open markets. China say that this is precisely what it is doing.

There was a time when China manipulated its currency, keeping its value artificially low. To achieve this, the government went out and bought western bonds, especially US government bonds. This in turn pushed up on the value of those bonds, causing their yields to fall. It’s an important point that often gets overlooked. Some criticise the Fed’s polices over the years, but truth be told in the long term, it is not central banks which determine interest rates, but movements of money which in turn can be changed by deep forces at play.  China’s policy of maintaining a cheap currency was a major factor in creating low interest rates for much of this century. And while the cheap yuan theoretically led to lower US exports, US borrowing was partly funded by China, and at exceptionally low interest rates.

It is just that the yuan is no longer cheap.  It hasn’t been for some time. If the yuan really was allowed to trade freely, it would surely fall in value. Washington can scream with fury, but China is gradually moving towards a position that the US has wanted it to occupy for years.

After the first devaluation, the IMF said “The new mechanism for determining the central parity of the Renminbi announced by the PBC appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate. The exact impact will depend on how the new mechanism is implemented in practice. Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets. We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years. Regarding the ongoing review of the IMF’s SDR basket, the announced change has no direct implications for the criteria used in determining the composition of the basket. Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward.”

Some say the timing is cynical, because China has devalued in the same week that saw weak data on industrial production investment and retail sales. That may be right, but so what. China is simply doing what the IMF has recommended, but chosen the most fortuitous moment. What’s wrong with that?

file9961251406222Oil has fallen again in recent weeks. This week, West Texas Intermediate oil has been hovering at just a dollar or two above the year low. Meanwhile, a report from the National Institute of Economics and Social Research (NIESR) has predicted that 2015 will be the worst year for the global economy since 2008. It shouldn’t be like that. With oil as cheap as it is, the economy should be booming.  So this all begs the question, “why?” Is there some rather worrying underlying reason for the weakness in the global economy?

At the time of writing (6 August 2015, 6.45 am) West Texas Intermediate oil is trading at $45.17. To put that in context, just over a year ago it was trading at $104. Brent crude oil is just shy of $50. One day, black gold will probably go back over $100. Maybe, one day it will even pass the 2008 peak, when it went close to $150, but this day is not likely to be any time soon.   The oil cycle moves slowly. Investment in oil has dropped drastically, new projects have been shelved. It will be several years before these developments show up in rising oil prices, though.

There are winners and losers from cheaper oil. Apologies if this sounds like a lesson from the University of the Bleeding Obvious, but cheaper oil benefits its consumers and hits its producers. So in theory the effect of falling oil prices on the global economy should be neutral. It is just that on the whole, oil consumers have a much lower savings ratio that oil producers. A fall in the oil price distributes income from high savers to high spenders. Given that we are in a time when there is a chronic shortage of demand worldwide, this should be good news.

As an aside, there is another not commonly understood potential side effect of cheaper oil. Ask yourself this question, why are interest rates so low? That is to say, what is the real reason? Forget central bankers, they move with the tide. The main reason why rates are so low is because worldwide there is a shortage of demand and a savings glut.  Back in the noughties this savings glut funded consumer spending in the West, creating a bubble which burst in 2008. Since then it has been funding surging government debt, and maybe sharp rises in debt in emerging markets.  McKinsey has said that global debt has risen by $57 trillion since 2007. The savings glut made this possible. There are many reason for this, and many of these reasons have not gone away. But at least one driver of low interest rates, the rise in savings coming out of oil producers, has gone into reverse.  

Returning to the global economy in 2015, earlier this week NIESR projected that “The world economy will grow by 3 per cent in 2015 – the slowest rate since the crisis – and 3.5 per cent in 2016.” So that is odd. The price of oil has fallen by a half, and the global economy is weak. Something is wrong.

There are two ways looking at this. You can look at individual countries, one at a time, or you can look for some deeper underlying cause.

The US has a bad start to the year because of an exceptionally cold winter in the north east of the country. This had a knock-on effect worldwide. The UK, it appears, got caught up in it all with falling exports to the US dragging down on growth.  

By its standards, the Eurozone had a good first half of this year, this despite Greek woe. But then again, this is the Eurozone, and the key phrase here is “by its standards.”  The only other region in the world that puts in such a continuously poor performance is Japan.

The world’s second largest economy, China, has slowed fast. There is more than one reason. For one thing, China sits on a mounting debt pile, with local government especially badly exposed.  This is beginning to hurt. For another thing, the Chinese government is trying to re-engineer the shape of the Chinese economy, shifting it from investment and savings led, to consumption led. This is a good thing, but the transformation is hurting

Russia’s problem are well documented. It is clear that it has lost out big time to the falling oil price. Brazil has suffered from a wider fall in commodity prices, but like Russia, there were deep structural problems with the economy anyway.

So pick it apart, there is a reason for the slow growth. Even so, I can’t help but feel that the overall performance of the global economy, given how weak oil and other commodity prices are, is very disappointing. You could respond by saying that I have mixed up cause and effect. You could say that oil has fallen in price because global demand is low. But I would respond to that by saying at least part of the reason for the fall in the oil price has been the revolution in fracking and previous surges in oil investment. The rise of renewables are taking a toll, too.  I don’t accept that I have got things the wrong way round.

So what are the possible underlying drivers at work? There are to theories to explain what is happening, there is the Robert Gordon ‘innovation is slowing’ theory, and the Larry Summers Secular Stagnation theory. I will look at these theories in more depth in a few days.