Wednesday, 8 July 2015

A little bit of interesting finance.

Today has been budget day here in the UK.   George Osborne, Ozy for short, has produced his first true blue budget and most early comments is along the lines: 'it's not as bad as it might of been'.   It did, however, manage to nudge the Greeks of the head of the news but not much of interest happening there until their PM presents their proposals for a new bail-out package tomorrow.   But what caught my eye in the budget was the removal of the tax shield attaching to 'buy-to-let' mortgages first for high rate taxpayers from 2017 onwards and, ultimately, I am sure for standard rate tax-payers.  There are two important issues here:  the first is whether this presages the removal of the tax shield on all business loans for the unincorporated self-employed and second, what the unintended consequences might be.  My interest here is the 2nd point, and this is my reading of what will happen.  My observations are based upon the fact that Buy2Let mortgages are significantly more expensive than their equivalent in the personal property market.

I have long suspected that mortgage companies, like trades people working for land-lords. try to 'bump the price'.  They are aware that any expense is tax deductible and trade on the basis that at the margin the land-lord is prepared to pay correspondingly more.  So this is my guess:  as the tax shield comes off, mortgage companies will be under pressure bring their rates down as the distinction between the Buy2Let and conventional mortgage disappears. As a result their margins and their regulatory capital will be squeezed restricting the additional loans they can make.  Make no mistake the tax shield is not much benefit to the land-lord but has, in my view, been a a back-door subsidy to the mortgage companies who have leapt at this rather tasty corner of the mortgage market.  

If the market corrects fully I suspect the effect will be broadly neutral and this is the line of argument that M&M made in rebutting the so called tax-shield effect on the WACC.  OK, the tax shield is a benefit to the borrower - only if the lender lets them have it.  But in a world where lenders have the market power it's significance on the cost of capital is moot to say the least.

Friday, 26 June 2015

in Praise of Skeptics

Some of us have been sitting on the high perches of academe for many decades.   It gives some perspective when new disciplines ride into town like some old fashioned preacher holding a bible, proclaiming hell fire and damnation, and totting a six-gun.  Like many of the so-called social sciences, health science, computer science and numerous others, climate science did just that.   Until very recently it could only, at best, be classed as an immature science.  

Like many of the other 'cross over' disciplines that came into existence in the 1960's and 70's, it attracted the weaker and newer universities and a large number of academics who discovered an opportunity for a university career who would not have been short listed for appointment in any mainstream discipline.  Students, enthralled by any discipline that didn't entail too much cerebral activity signed up as undergraduates and then, aided and abetted by supervisors who understood barely more than their students, registered for doctoral degrees.   The result: doctoral dissertations based upon pillaged methods and techniques from established disciplines unsullied by any proper understanding of how they should be used. Who needs to know the subtleties of computation, modelling or data analysis when the examiners and referees are your supervisors' pals on the conference circuit?

In the feverish search for funding and recognition,  the new disciplines, up against the old, had to make bold claims.  A new discipline needs a new theory, something that sets it apart from the rest.  In addition, some entrepreneurial academics were able through the conference circuit and by persuading other academics to join editorial boards started journals which rocketed in popularity as the hermetically sealed incumbents of the discipline talked to one another and gave one another credibility.  They, through their self referential publishing in their own closet journals, were able to give those bold claims the gold standard support of being published in refereed journals.   It still didn't alter the fact that they were embarrassingly deficient methodologically and empirically.  One of the properties of bullshit is that it doesn't matter how much refereed deodorant you spray on it, it still smells of what it is - bullshit.

And so it was with climate science.  But climate science hit pay-dirt, its boldest claim that humanity was about to destroy life as we know it became a very useful political rallying point as the dismal ideologies of the left smothered and subverted the nascent green movement in the decades around the turn of the century.   It was also an easy idea to feed to the 24/7 media circus.  That claim became larded with a moral imperative to do something to save our grandchildren.   The problem is that the fledgling science became choked by opportunism and in such a climate any criticism was viewed as heresy.   And there were heretics - academics, scientists, engineers and indeed scholars from many diverse disciplines who smelt a very fetid rat.  They soon realised that the underpinning science was pretty straightforward; you don't need to be able to solve the Schrodinger Wave Equation to figure out how the greenhouse effect works.  But, as soon as they questioned the clothing on the Emperor they were damned: 'not published in the pal reviewed literature', an 'oil company schill', 'not a climate scientist', 'not one of us', 'votes republican or conservative', 'not one of the 97%'..... The abuse rained in and only the old and wise with little to lose apart from the invitations to their alma mater's rubber chicken events for academic emerati were prepared to put their hands up and cry 'foul'. 

However, the hard question began to be put and the data was not playing ball.   The myth of consensus is gradually breaking down and there is a chance that at long last climate science can move on.  Unfortunately, like bad case law, it is hard to get beyond the precedents set by earlier publications in the literature.   Here is where the Internet and the sceptical community have done climate science an invaluable service.  When criticism doesn't come from within, its falls upon the Steve McIntyres, Anthony Watts, and yes, even the Matt Ridleys of this world to put the boot in.

So, isn't it a given that human emissions of CO2 are raising global temperatures, destabilising our weather systems, elevating sea levels and turning the oceans into skin shredding, boil creating acid?   Are we really like rabbits staring into the headlights of armageddon?   Well no.   What the science tells is that CO2 added to the atmosphere increases its thermal capacity, this causes the atmosphere to expand and in doing so the top of the atmosphere (which radiates heat away) gets a bit cooler.  Because of that the atmosphere at ground level gets warmer.   There is no real doubt that over the 20th Century the planet warmed and the best estimate puts that at about 0.8C.  Part of that occurred in the early decades and cannot be attributed to human influences.  So, the addition of another 120ppm of CO2 (from 280ppm to 400ppm) elevated temperatures by perhaps 0.5C.  If we doubled the CO2 concentration to 560ppm that would imply an additional temperature increase of 0.7C from now.    That's not much - but what happens if we keep on increasing CO2?  Will temperatures rise exponentially and we will all be toast?  Not quite, the addition of CO2 to the atmosphere has a logarithmic effect - the more you add, the less the impact.   The uncontroversial bit is that adding CO2 to the atmosphere will have diminishing but positive warming effect.

The problem with the theory is that the climate is not well behaved.   For the first 40 years of the last century there was a sharp rise in temperatures that is normally explained as a 'bounce' from the little ice age of 300 years ago.    Over the following 30 years temperatures fell but with a significant reversal and rising temperatures for the next 30 years. Since the late nineties temperatures (both land, ocean and crucially satellite) have been (statistically) insignificantly different from zero.   This variability over the instrumental period has not been in lockstep with the smooth increase in atmospheric CO2.   So, the inescapable conclusion:  CO2 is not insignificant  but there are other powerful forces at play.   The natural rhythms of the oceans, solar influences, volcanic activity, aerosols, orbital mechanics, albedo effects of changing patterns of polar ice and glaciation all play a part.   The problem is that climate science with its myopic focus on CO2 and the impact of homo sap. has only just begun to get to grips with these more pedestrian issues.   You don't get huge grants for investigating geo-thermal effects in the deep oceans.  You do get huge grants if you can show that we are all about to fry ourselves.  


Monday, 22 June 2015

His Holiness Pope Francis has ventured into realm of Green Politics with his latest Encyclical Laudato Si
I have, as devoted and ever patient readers of this blog know, been slightly skeptical of the more apocalyptic predictions emanating from some quarters about our emissions of CO2 and their effect on our climate.  I do not regard myself as a 'skeptic' about 'global warming' nor am I a 'denier' to use that ugly term.  I do believe that the science has been over-stretched by the ignorant and the conniving.  So here is my take on an encyclical (which is a posh, papal word for a letter. I hope my wording conveys the solemnity of the message.

Encyclical from:

 Prof Bob, servant of the servants of the IPCC


Professor Bob Ryan makes no claim to know much about Climate Science but he probably knows a bit more than Pope Francis.  So here goes:


We, Prof Bob the first, have reflected upon the ineffable mysteries of life, the universe and all that is, what is and ever will be.  We have meditated upon the mystery of climate and the extent to which mankind and the multitude of all CO2 emitting creatures are fallen and have, as a result, contributed to the warming of our temporal paradise, planet Earth, during the twentieth century.

Using the magisterium of our position based upon authority granted to us by no one in particular we wish it to be known that we are not a global warming sceptic, heretic, apostate, infidel or anything else except a true servant of the 3G faith of Gaia, Green and Gore.   This is what is revealed to us:

We declare that global warming is happening.

During the 20th Century the planet warmed by 0.8C and this was so unusual there must be an unusual reason for it.  It is so unusual that it has only occurred twice in the past two millennia.  It is a mystery why it warmed then, but we do know why it has warmed now and knowing is better than not knowing so we must be right about why it has happened this time.

We declare that 97 per cent of scientists are not in error.

Ninety seven per cent of scientists believe that bits of the planet have warmed (these being the bits where temperatures can be measured) and that the industriousness of human beings is implicated a bit.  Some scientists are blessed of a prophetic charism of knowing, through the insights granted to them by advanced interpolation, extrapolation and triangulation, that those bits of the planet where temperature is not measured, has never been measured and indeed cannot be measured have also warmed at a rate faster than the average.   This means that what we believed to be an average global temperature has been revealed for what it is – not an average.   This further reveals to us that the non-warming of the last twenty years is a wicked deception by sceptics and other heretics and the evil of CO2 is still an ever-present reality.  The remaining scientists not counted amongst the 97 per cent elect do not believe in anything we understand and thus we declare that they be cast out as non-scientists.  So, by definition, the proportion of scientists believing the planet has warmed can be, forever and ever, 100 per cent.

We declare that the devil is CO2 - a Greenhouse Gas.

Whilst being absolutely necessary for the survival of the vast mass of the biosphere CO2 has, of its own free will, the ability to radiate heat away from the planet one part of the spectrum of light whilst being willing to allow free passage to any other part of the spectrum emitted by the sun.  This untoward and sinful behaviour declines with increasing concentration.    As a consequence the impact of subsequent doubling of CO2 upon global temperature diminishes although it has been revealed to us that replacing all oxygen in the atmosphere by CO2 would represent an existential threat to all humanity and could lead to panic and mass migration underground.

We declare that the Earth is Wet. 

The earth is mostly covered with wetness (H20), which has similar properties to CO2 in retarding the earth’s ability to cool after a hot day in the sun.  Therefore, any warming of the oceans could bring about the apocalypse.  Because H20 is even more wicked than CO2 any additional H20 released to the atmosphere would immediately lead to a rise in global atmospheric temperature because of the H2O and not the CO2.  The oceans being quite indifferent to the source of its warming and being possessed of a lot of water will result in yet more H2O evaporating leading to more warming and so on in a vicious cycle.  Thus any warming of the ocean no matter how venial will lead to mortal global warming.  

We declare that climate is defined by computer models and not by data on a graph. 

The only true guide to the future of the planet is by sustained devotion to computer models of our unutterably complex, chaotic, non-linear and indefinable climate. We affirm that ‘climate’ is not knowable, will only be realised over the next 50 years, and can only be accessed through theory, and faith.  It has been revealed to us that climate is an ineffable mystery based upon a number of immutable laws that are immutably true.  Observations of temperature taken by thermometers, balloons, satellites and buoys say nothing about climate which is defined the way the Office for True Climate Realism say it is.  As a result climate comes from computer models and thinking anything else is heresy and not to be listened to.

We declare that the polar ice caps and polar bears are good.

The melting of the polar ice caps is a sign that global warming is occurring and even though the ice around our beloved southerly polar region is increasing that does not mean that the polar ice caps are not melting.  It’s just that the ice that is expanding is not the right sort of ice.  Yes it is made of frozen seawater but that is quite beside the point – it’s the wrong sort of water.  We further aver that the receding summer ice in the Arctic is wiping out polar bears (which are white and therefore good) and that any increase in their number is a statistical artefact and that the real decline in their numbers can only be observed through an unobservable statistical trend that is pointing downwards (inexorably).

We declare that the only way the planet can be saved is through fasting, abstinence and bearing the heat or the cold with fortitude and true faith.


Erecting fans across the land is not a good way to cool the planet.  This can only be achieved through sacrifice.  The only way to planetary salvation is by switching off any heating or air conditioning, not eating, not moving, ceasing production of anything useful and by abstaining from meat.   Any money saved should be transferred from those who do have it to those who don’t so that they don’t have to work if they don’t want to.   By this means we can discern the truth of light and preserve our natural bodily fluids. 

Tuesday, 22 July 2014

MH17 and the news circus moves on

Do you remember the floods in the UK or MH370?  What about Rolf Harris?   Do you care?  The loss of MH17 was a ghastly accident or a ghastly crime.  Time will tell.  But, this blogger feels passionately for the victims and the families and hopes that justice will eventually be meted out to the perpetrators.  However, what is almost certainly true is that it will not make a jot of difference - when the stakes are too high the cards never get played.  No western government is going to impose meaningful sanction on the Russian economy.  A few politicians and oligarchs have had to move their assets about and relocate their holiday plans. But that is trivial cost as the great bear in the East attempts of create a greater Russia federation of states to rival the European Union.   Even as I write the media storm is abating, I predict that within 3 days it will no longer be headlines and within 10 days it will have slipped into the realm of old news and the circus will have moved on.  Russia is rapidly fast replacing Iran as the pariah state of choice but I doubt that Vlad, Putin the Boot, Putin really cares less.  This is not the start of WW3, that started a long time ago, there will be no western boots on the ground, military meddling yes, but real action no.  As I say, the stakes are too high.  The cards will never be played.

Wednesday, 25 June 2014

Suarez Gives Love Bite Shock!

Luis Suarez of Liverpool and Uruguay has vented his frustration on an opponent in their last group game against a lacklustre Italian team.  The video of the action appears to show Luis head-butting his hapless victim with his teeth.  The video isn't clear to be fair.  There is no doubt the molested Italian decided to make a scene as, after all, Suarez has form.  'Disgusting' the three P's roar as the press, pundits and, led by the nose, public go for our carnivorous football star.  But, come on, let's get some perspective.  What's worse:  a reckless tackle leaving a player damaged and out of the game, a wild head butt which lays someone out cold or a gentle nibble?  My observation of Mr Suarez is that he is a pretty passionate young man.  His love of his sport, his country and indeed all those around him is so intense that he gets carried away.  And like many men and women (to be balanced about this) vent their passion with their teeth.  I suspect far more damage to human lives and relationships has been caused by over-intense love bites.  The bruising is hard to hide and marriages have fallen apart as a result.  So, let's cut Luis some slack here if he is guilty.  After all he doesn't have rabies and he probably regularly cleans his teeth.

Friday, 2 May 2014

Teaching in Germany

For each of the past four years I have been lured out to Germany to teach the MBA students at NordAkademie in Hamburg.  This is a small school by many standards with both an undergraduate and a postgraduate MBA programme run, very effectively, by a small team of administrators.  Now I am very fond of administrators - indeed how could I not be.  I am married to one of the best.   But was is surprising about NordAkademie is the quality of what they do and the quality of the small group of students they attract and who are willing to sign up for my gruesomely difficult Business Valuation module.  For three days I pound them with ideas and methods, forcing them to deal with a real company - Rolls Royce Holdings plc - and come up with analyses and valuations which would be beyond your average CFA.  How do they do it?  Well its because technically they are very good.  They are not afraid to work at theoretical models to understand their uses and their limitations.  They are not switched off by what they don't understand which is a truly refreshing characteristic of any student.

Sunday, 20 April 2014

Scientist is what scientist does

Across the blogosphere the vexed question keeps surfacing: what is a scientist?  Do they have privileged access to knowledge denied to the rest of us.  Should their views be given the status of indisputable advice on how to conduct our lives? In medicine, the climate, economics, and in the conduct of our lives who are these modern day priests who whilst not calling us to church on Sunday or to prayers twice a day still demand our respect?  Governments and courts call them to give expert witness and their conclusions they call 'evidence backed'.  The post-modern era with its slogan 'anything goes' has come and gone but we are left with a resurgence of 'speculative science' driven by a multiplicity of agendas.   So, let us be clear: what makes a scientist?

Scientists come in two broad categories: theoretical and experimental.  There is also a third type we will return to shortly.  Theoretical scientists are those who, starting from some well established theoretical or observational background spin out a range of further theories which they claim explain or predict the nature of underlying reality in novel ways.  Some of the greatest theoretical scientists such as Einstein, Hawking, Newton and Schrodinger have created powerful explanatory theories giving us explanations of gravity, space time, black holes and the sub-atomic world and, crucially predictions of observable phenomenon which have been astonishingly successful.  However, their language is constructed of theoretical terms which do not have direct observational reference.  Take a term like 'temperature'.  Temperature is something we talk about all the time but how do we define it?  Very soon we discover that we are using other theoretical terms in our definition which do not have direct observational reference but appeal to further terms: heat, energy and so on which in their turn are not directly observable.  Theoretical scientists use predominantly mathematics to develop their conceptual understanding of the world: tensor geometry, number theory, calculus and so on.  By and large they are platonists, looking for that 'ideal reality' which the real world more or less imperfectly reflects.

Empirical scientists are, in their turn, of a different ilk.   Their interest is in constructing experiments. Their language is observational using terms which, they believe, will lead to measurement of empirical phenomena of various sorts.  Sometimes these experiments will be strictly controlled in a laboratory environment, sometimes the observation is less direct, undertaken in context perhaps through field trials or directly through observation.  Some try to directly engage the subject blurring the object-subject divide in order not to gain knowledge in the Platonic sense of 'justified true belief' but rather understanding of processes physical or social.

The problem for science is how to bridge the gap between the theoretical and the empirical in such a way that the former can be justified by the latter.   The classical way that this has been done is through the creation of 'hypotheses' - compound statements that linked theory with observation.  The problem is that observation is not theoretically neutral.   Observation relies upon measurement and measurement has its own theory of measurement.   The notion that observation is intrinsically 'theory laden' underpinned the challenge of Kuhn, Lakatos and Fayerabend against Popper's simple falsificationism as the defining standard for science.  Science, Popper argued is about putting 'conjectures' to crucial tests with the aim of refuting them by the simple logic If p is true then q is true, not q, therefore p is not true where p is the premise and q the consequent.

The problem, as Lakatos pointed out is that (i) all observation is theory laden and (ii) with any well formed theory there will be so many ceteris paribus clauses that it is impossible to determine uniquely what has been refuted.  Lakatos went on to propose what this blogger believes to be the most cogent exploration of how sciences develop.  He argued that scientists coalesce around a series of 'core terms' - theoretical constructs if you like which they consider irrefutable and which they protect against refutation through the creation of a range of ad-hoc modifications as a way of immunising them against challenge.   Theories are not the way science progresses, Lakatos argued.  They progress by scientists becoming committed to research programmes which either progress when they generate novel predictions or degenerate when the desire to sustain the core of belief against refutation overwhelms the empirical significance of the programme.  

However, since Lakatos untimely death in 1974 a new type of science has arisen.  It is where scientists seek to create computer based models of more and more complex social and physical systems reflecting a series of underlying laws which whilst not conjectural in themselves are spun into more and more abstract sets of interacting relationships.   By priming these computerised models of reality with a small number of empirically determined parameters and seeding them with given initial conditions projections of future outcomes are derived.   These theoretical realities, created in cyberspace, are designed to give an insight into how real systems operate.    In practice they rarely perform well in that what they project rarely maps onto what is observed and measured.   Indeed, what I will refer to as Bob's Law applies:  as models gain complexity they progressively lose any connection with reality.    This is an application of what I regard as an almost universal principal:  the more complex a model the less real are its outcomes.  
http://www.lse.ac.uk/philosophy/About/lakatos/introduction.aspx