Showing posts with label Dr. Daniel Lacalle. Show all posts
Showing posts with label Dr. Daniel Lacalle. Show all posts
January 15, 2025
January 03, 2025
December 24, 2024
June 02, 2018
June 19, 2017
June 10, 2017
May-Day. UK Moves into Further Uncertainty after Elections
The UK economy has performed exceptionally well in the past years, even after the Brexit referendum. So well, that international agencies such as the IMF or the OECD had to completely reverse their negative expectations for the economy of a “Yes” vote.
The problem is that we have focused on the positive -the fact that doomsayers were wrong- without analysing the negatives -the impact on potential growth and increase in investments-. The Bank Of England had to increase its growth estimates for 2017 to 1.7% and 1.3% for 2018. However, the uncertainty of a hung parliament, a weak government unable to negotiate Brexit from a position of strength, and the ongoing weakness of the pound may continue to erode growth potential, gross capital formation and economic agents’ investment and hiring decisions.
It is extremely unlikely that Brexit will be reversed. It is, however, very likely, that negotiations will be more difficult and longer.
The UK is a very dynamic economy, and its companies have enormous strengths, with a thriving export sector and global multinationals. These will continue to benefit from a weak currency, but internal demand and the large surplus of service exports may suffer from the uncertain process of an even more complex Brexit.
As such, it is likely that we will not see a major impact in the growth prospects of the economy due to the benefits of a global and strong external sector, which benefits more from solid high-margin products and competitive technology than from weak currencies, but internal demand challenges will likely have an impact on consumption, hiring and wages.
It is no surprise, then, that the FTSE will continue to rise. It is fundamentally composed of diversified international companies. The impact of uncertainty may weigh on banks, consumer stocks and those with a large proportion of sales in the UK. However, the FTSE is more impacted by estimates of the global economy and energy-commodity prices. It is an index with almost 30% of sales in foreign currency.
The pound weakness may continue, also because the BoE is unlikely to take any measures to defend the currency.
As for bonds, extended QE means that sovereign bond yields will remain depressed, while solid corporate earnings and good balance sheets will support a more than adequate demand for corporate bonds. A clear indicator this morning is that yields are still very contained in all the different indices.
Clearly, investors will have to pay attention to guidance and cash flow generation of companies, but I would imagine that the forthcoming uncertainty will likely have an impact on a potential growth that should be well above EU or US figures, but will not.
Being complacent about average growth and acceptable macro figures cannot disguise the fact that the UK could and should grow well above its comparable economies and that the Bank of England is keeping an uncomfortably aggressive quantitative easing program that will leave it without tools in case of a change of economic cycle that is now more likely than before. | Daniel Lacalle | Friday, June 9, 2017
© Daniel Lacalle
All Rights Reserved
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr. Daniel Lacalle’s own website here
June 06, 2017
June 03, 2017
Daniel Lacalle’s Opinion: Climate Agreement, Hypocrisy and Summits
If governments were truly concerned about “climate change”, they would make fewer summits and act more.
These summits are photo opportunities that mask a very different truth. Bureaucrats care about the process, not the results, that’s why they love summits and multilateral vague agreements. Those same bureaucrats justify the atrocious results by organizing another summit.
Keep calm. Do not worry about those who make catastrophic predictions. The history of blunders of the end-of-the-world doomsayers is so vast that only a politician could ignore them. Let us remember that, according to “scientific analysis” of a few decades ago, we would have run out of oil and water already seventeen years ago. Ignoring efficiency, technology and substitution is the favorite hobby of subsidy collectors.
The problem of “combating climate change by a committee decision” is that it neither does so, neither helps consumers. These summits and agreements perpetuate the perverse incentives of subsidized and crony polluters while penalizing consumers via taxes.
But there is good news. Decarbonization is unstoppable. Not thanks to a summit or due to politicians, quite the opposite. Thanks to competition, technology and research. Thanks to human ingenuity. Coal has been disappearing from the global energy mix for decades, despite – not to thanks to – governments. And the same is happening with oil.
In fact, my reader will not be surprised to know that climate summits always hide agreements to perpetuate the polluting rent-seeking sectors of each member country by setting targets to 2030 that no one will monitor and someone else will come to explain./>
br /> 100% public (producers in petro-states, coal producers, refineries, steel mills, etc …). Even seeing the Climate Accountability Institute analysis, 63% of emissions come from 90 companies, of which 31 are state-owned, 9 are government-run and 50 develop government owned resources through royalty-providing concessions.
"If these countries were so concerned about climate change, they would not need to meet in exotic places at expensive hotels. Closing down their state-owned polluters would solve 'the problem'. In fact, no need to close them. If those countries that signed the “climate” agreement implemented the measures of efficiency, environmental control and best practices of US companies, there would be no need for a summit."
The reality is that the US and its companies do more in terms of R &D, technology, efficiency and corporate responsibility than the vast majority of countries that signed this agreement.
• The US energy intensity has plummeted and needs much less energy consumption to grow, even though it has increased its energy independence until it is almost self-sufficient. The energy intensity of the US is 60% lower than that of 1956 and the country grows in a more sustainable way.
• China is the biggest polluter in the world. It accounts for 15% of the global economy but is almost 30% of total emissions. If China is concerned about climate change, all its government needs to do is to look at the sky in Beijing and see that it is black, not blue, then close its coal companies. They are mostly all state-owned.
• India is almost 7% of global emissions and the vast majority comes from state-run and subsidized coal and high-energy intensity sectors.
• China consumes much more coal than their official figures say. Both The Guardian and The New York Times have reported that China emits up to 1 billion tonnes of CO2 more than it officially recognizes each year. But it appears before the world as the leader of the fight against climate change. Well, in 2030 60% of its energy mix will still be coal.
• To say that China and India emit more CO2 because they produce goods for the West is simply untrue. Governments decide what energy mix they want through central planning in four out of five of the top CO2 emitters in the world.
• The so-called “green” European Union spends $ 6.9 billion annually on coal subsidies. Since the 2015 “Paris agreement”, these subsidies have actually increased by $875 million per annum. In other words,coal subsidies (as well as refineries and subsidies to the car industry) have increased, while consumer bills have skyrocketed with the excuse of being “green”. In addition, the European super-green Union is about 10% of the world’s CO2 emissions but its citizens bear 100% of the costs in their tariffs.
• Of the subsidies to fossil fuels, the largest by far is Iran – which has also signed the “Paris agreement” – and spends more than Saudi Arabia, Russia and India together in fossil fuel subsidies.
As I explained before, decarbonisation is unstoppable. But it would be even faster without the pitfalls of those who today present themselves as saviors of the Earth while in reality they just tax citizens to perpetuate their polluting “national champions”.
No Hollywood star in a private jet denounces these hypocrisies. The hundreds of thousands of pages of legislation that this summit will produce are not going to eliminate progress, but delay it, they do.
Trump is not an anti-environment monster, and Macron is no green giant. The US has reduced its CO2 emissions more than the vast majority of countries thanks to competition. The success of the US in its energy policy has been precisely not having one, Dick Cheney told me years ago. If it had been up to the administration in 2007, today the US would not be self-sufficient in natural gas, one of the largest oil producers in the world, and a leader in competitive wind and solar without subsidies.
The gradual decarbonization of the US has not only come from healthy competition, but a cheaper transition helped the consumer. The US has cut more emissions in the past ten years thanks to fracking and competition than the European Union’s subsidy -driven interventionist nightmare (read).
The US has achieved this reduction by lowering gas and electricity prices to its citizens, while in the EU they have skyrocketed.
Trump is not going to stop a winning formula. Neither will he join a summit of perverse incentive decisions with little practical use. Obama could not stop the energy revolution that he initially rejected and now considers natural gas and almost energy independence a personal achievement.
Would it have been better for the US to accept the agreement? I’m not sure. It may negotiate something less cosmetic and more realistic. An agreement that does not harm competitiveness and employment.
Therefore, let us be calm.
If you think that Trump’s decision is bad, breathe easy. The Paris agreement is non-binding and completely unenforceable anyway. And the US will take at least three and a half years to fully implement the withdrawal. And if you really think that the climate savers are going to be the Chinese, take a trip to Beijing and Shanghai, look at the sky, and tell me what you see (if you can see anything).
Regardless of what you believe, technology and efficiency will continue to generate more progress, cleaner and more abundant energy.
The whole Paris climate agreement is non-binding, not enforced and with no guidelines other than “annual contribution reports” -ie, papers. Whether or not the agreement was accepted by Trump, nothing in it is enforceable, so efficiency and technology change will happen whether there was an agreement or not. | Daniel Lacalle | Saturday, June 3, 2017
© Daniel Lacalle
All Rights Reserved
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr Daniel Lacalle’s own website here
May 31, 2017
May 29, 2017
May 26, 2017
OPEC’s Next Mistake
Why? OPEC has underestimated the reaction of new technologies and independent producers. The cut by OPEC has been the biggest gift to shale in a long time. The US achieved a production growth that has surprised the most optimistic, and the country is closer to energy independence. That the US imports less and stores more, affects oil prices in several ways. On the one hand, US producers have done their homework and increased their efficiency and reduced costs by more than 40%, which has allowed them to be competitive at $45 a barrel. This makes the price of oil lose strength in the face of evidence that the market is better supplied and more diversified than expected.
There is another very important effect. The “oil weapon” mentioned by Chavez years ago has run out of gunpowder. With the drastic reduction of US oil imports, the geopolitical premium historically added to the price of oil due to the US dependence on politically unstable countries, disappears.
Evidence from recent years shows us that the success of the American energy revolution, carried out without any support from the Obama Administration, is twofold. The dream of energy independence of the world’s largest energy consumer is ever closer, and the combination of shale, renewables, coal and natural gas, has been an essential factor in competitiveness, growth, employment and has destroyed the power of OPEC to manipulate the price of oil.
The big mistake
With this meeting, the cartel shows that its control over the price of the barrel in the medium term is non-existent. Worse, if they continue with this policy, the response of alternative technologies will accelerate. The great error of OPEC has been to think that lowering prices would displace alternative technologies and the inexorable advance of efficiency, but the suicidal movement puts at risk OPEC’s role as the most reliable, competitive and flexible supplier. Throwing themselves into unnecessary cuts, they sent a dangerous message to their customers: it was worthwhile to continue to advance with disruptive technologies.
None of the OPEC countries is losing money with the current prices. The production and development cost of all members is massively below the current oil price (average total costs $20 a barrel), but member states had become accustomed to financing unproductive subsidies and political spending, to squander their oil revenues. So, despite having costs well below $20 a barrel on average, almost no OPEC country balances its budget at these prices. Between $20 and the $100 some would like to see, there are hundreds of billions of dollars in political spending and subsidies.
I am sorry, because I have had the honor of attending several OPEC meetings and I value the principles that have always informed its policy: to defend an adequate supply and a price that is good for consumers and producers, to be a reliable and safe supplier. We mentioned it in the book The Energy World Is Flat (Wiley), the decision to manipulate the market will only make the market respond more quickly.
Today, OPEC is faced with the devil’s alternative. If it continues to limit production, the response of efficient operators in different technologies will accelerate, and if it recovers production levels prior to the cuts, it will not be able to finance the excessive expenditure to which the member countries have become accustomed.
OPEC’s response should only be one. Demonstrate that they are the most efficient and reliable operators and that their governments can stop irresponsible spending. Only in this way will these countries, full of wonderful opportunities, remain relevant and prosperous.
“Low” oil prices are a blessing in disguise to producers, even if they do not believe it. It is the shock they need to wake up from the nightmare of the petrostate, that wastes billions of oil revenues and thinks it will go on eternally. Disruptive technologies are here to stay and have only one future: brilliant. | Daniel Lacalle | Friday, May 26, 2017
© Daniel Lacalle
All Rights Reserved
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr Daniel Lacalle’s website here
May 19, 2017
Why Solar Bankruptcies Soar Despite Growth and Subsidies
Bankruptcies in the solar sector already surpass all those of inefficient coal and fracking companies combined. The interesting thing is that this domino of bankruptcies, which accumulates more than 120 corpses of large companies around the world, is self-inflicted.
It is not due of lack of growth. Solar installations soared by 50% in 2016, with annual growth at 76 GW. Do you know the famous curse that says “if you run you hurt, if you walk, it hurts you more and if you stop, you die”? That, dear friends, is what happens to much of the solar sector.
It’s ironic: A sector that brags of how much it has lowered costs and how competitive it is, and at the same time blames its bankruptcy domino on low prices. A huge drop generated by excess capacity – over 40% despite exponential growth – and, with it, the need for operators to generate any cash and sell at lower and lower prices. The curse of the sector has been its own growth:
Death by working capital. Huge expansion plans and new capacity to meet a demand that has grown exponentially, but not enough to cover the pace of productive capacity growth. Cheap money and juicy subsidies justified a business model that was far from being an energy model, but closer to a builder-developer one: Over-indebted, dependent on subsidies and unable to absorb overcapacity and compete with its own price cuts.
With costs falling, many companies are economically unviable and if the price decline were reversed, they would be unviable as well. If the prices of the panels went up to stop bankruptcies, the mantra that solar is competitive with other energies would disappear in one minute. Any of the companies mentioned in the first paragraph of this article would have needed price increases in their products of more than 50% only to stop burning cash, let alone make money. Born from a bubble, dead by a bubble.
The reality is simple. If a technology is viable, it does not need subsidies. If it is unviable, no subsidy will change it.
The efficient companies will survive and absorb the weak, but let us not blame the collapse on a lack of environmental commitment or support, when it is an evident case of massive leverage and fraud, hiding debt off-balance-sheet and giving overly optimistic estimates to “inflate” share prices.
The problem is that an important part of the solar sector still thinks that the problem is that they are not “supported” enough or that governments have to subsidize more their business for a “greater good” at any cost to the consumer. A proof that it is not a problem of support or growth, is that the list of bankruptcies has risen after debt restructurings, capital increases, interest rate cuts, massive liquidity injections, and spectacular growth.
If a solar -or any- company goes bankrupt in an environment of huge subsidies, spectacular growth, low-interest rates and high liquidity, it is not a case of a mistake, it was a bomb about to explode.
That is why we may see more bankruptcies in the face of greater growth. Because the wrong model of overcapacity, high debt, dependence on subsidies and inefficiency is being perpetuated. And that is not attacking a technology. Do not mistake technology and environmental commitment with indebted and inefficient businesses.While the wind sector works with an industrial energy model, in the solar subsector the constructor-promoter model still exists, and this will not be solved by a climate summit or 50GW more in annual installations.
Some solar companies have learned to manage a realistic model, partly thanks to venture capital funds and outside companies who have bought what was left of the disaster created by engineers who ignored working capital and debt.
Finally, sanity is starting to prevail with real industrial energy models, less or no debt and managing inventories as entrepreneurs. But the problem is the same, if costs continue to fall due to competition, inefficient firms will continue to fall, and if costs rise, the technology will not be competitive. The devil’s curse.
Disruptive technologies cannot be based on inflationary models, because their own development attacks price inflation – in electricity prices, in asset valuations – and therefore companies cannot be leveraged as if they were regulated utilities.
A disruptive technology can only succeed if it understands its function, which is to reduce costs and energy intensity (in this case). If the solar sector is based on an over-indebted constructor-developer model, it loses its role of innovation and competitiveness to become rent-seekers, precisely what they criticize of the incumbents.
There is life in solar energy. If companies die, no one will be to blame but themselves. | Daniel Lacalle | Friday, May, 19, 2017
© Daniel Lacalle
All Rights Reserved
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr Daniel Lacalle’s website here
May 17, 2017
May 16, 2017
China’s New Silk Road Is Just Old White Elephants
Proponents of the mega stimulus plans ignore the importance of real profitability in favor of “sustaining GDP” in any possible way. A study by Deepak Lal, UCLA professor of international development, discusses the devastating impact on potential growth and debt of stimulus plans in China, and Edward Glaeser’s ”If You Build” analysis destroys the myth repeated by many of the multiplier effects of public infrastructure. Advocates of infrastructure spending at any cost ignore the most basic cost-benefit analysis, underestimating the cost and magnifying the estimated benefit through science-fiction-multipliers.
Professors Ansar and Flyvbjerg have also devoted a great deal of effort to analyzing the negative effect of large “stimulus” plans from hydraulic megaprojects to the organization of the Olympic Games.
Deepak Lal’s study citing Professors Ansar and Flyvbjerg shows that the actual cost-benefit analysis compared to the “estimated returns” when projects are approved, proves to be disastrous. Fifty-five percent of the analyzed projects generated a profit-to-cost ratio of less than one, that is, they created real losses. But, of the rest, only six projects of those analyzed showed positive returns. The rest, nothing. The country does not grow more, it makes the economy weaker.
This week, China has hit the accelerator with its project of new routes connecting with the rest of the world called “new silk road”. The media has immediately praised the $124 billion additional funds to relaunch communications with the world. Direct freight trains to more than twenty European cities such as Madrid, London, Warsaw or Rotterdam, a pan-Asian rail network, railway connections between African cities where China has invested hundreds of billions in oil and mining projects, and ports in Pakistan and other countries.
For China, it is an ambitious project that seeks three objectives: to redouble its bet, evacuating its enormous overcapacity, already close to 60%, to enhance collaboration with countries around the world so that they see China as an opportunity, not a risk, and finally, to reduce its huge indebtedness by encouraging growth.
The analysis looks positive, including savings in the sea routes, and the expected trade multiplier effect, but there are several elements of risk that we must not forget.
On the one hand, the estimated cost is simply too optimistic. The talk of huge projects ignores difficulties of all kinds, which, in some continents, includes military risks. It would not be difficult to see final figures that doubled those that are currently discussed.
On the other hand, China aims to place many more products in countries whose domestic demand is at least questionable and saturated, and ignores the risk that many countries will take the same measures that China implements, to “protect” their local industries.
Of course, the Chinese government presents itself to the world as the champion of globalization and a connection that benefits us all, but any dispassionate analysis shows that the new silk road is disproportionately more beneficial for China. Some think that China will adopt stricter rules of trade and working conditions. Given that the big beneficiaries of this mega-global-corridor are Chinese state-owned enterprises, many question that “change” in regulation.
Finally, these huge projects, with all their benefits, assume growth estimates that are, at the very least, optimistic, to cover the cost. What a good friend calls “the self-bail-out of Chinese overcapacity.” In this week’s presentations at the New Silk Road Forum, there were talks of multiplier effects for global economies that have neither occurred in the past nor can be considered realistic (including doubling estimated growth).
I fear the same old errors of optimism about growth and cost control that, as history shows, do not occur.
And no one has spoken of the deflationary effect. No one. While 27 central banks around the world and their governments are persistent in creating inflation by decree, does anyone think that huge access to cheap products from the Chinese giant will not create a greater risk of deflation? It’s amazing.
I’m not worried about that price-disinflation effect. It has positive consequences for consumers, but very negative consequences for the rent-seeking crony sectors that governments want to protect at all costs (China, too) because they are “strategic”. This new silk road is a time bomb for subsidized low productivity companies and for the inflationary aspirations of the indebted countries.
What about technology? These huge estimates of consumption and transportation of commodities used in the New Silk Road forum ignore the erosion of demand generated by efficiency and technology. In fact, the new silk road is a monument to the old economy, to inflate GDP via spending, and to transfer the surplus capacity of rent-seeking sectors from one country to another.
In 1992, only two G20 countries had China as one of their top five export destinations, now there are fifteen. However, in 1992 China had a productive capacity deficit, now it has 60% overcapacity, and – as it can not destroy that excess in a centralized planned economy – it intends to export it.
Let us take all that is good, but let us not doubt that there will be excesses. Let us not ignore that the new silk road is intended to alleviate Chinese overcapacity by evacuating it to other countries. It is not a project of globalization, but a bail-out of a Chinese model that starts to sink.
The risk that these megaprojects may become white elephants is not small. | Daniel Lacalle | Monday, May 15, 2017
© Daniel Lacalle
All Rights Reserved
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr Daniel Lacalle’s website here
Subscribe to:
Posts (Atom)