Steve’s data shows that the correlation between energy availability and consumption as expressed by GDP, or rather gross world product, which he calls GWP, is very clear and direct. If energy availability is reduced, so too will GWP fall, and the rather ridiculous neoliberal belief that there are alternative supplies to turn on to replace the lost capacity is based on the idea of efficient markets, which can always supposedly react in a moment to price signals, with time to create capacity never being a constraint. That assumption is going to be cruelly exposed at this moment as the nonsense it really is.
The efficient markets hypothesis does not say that markets are efficient. Not in the sense that Murph is using here that is. We all agree that there are some things markets do not do efficiently, just as there are things they do do so.
The EMH says that markets are efficient at processing the information about what prices should be in a market.
Thus, as so often, Spud is chasing a strawman.
Yes, but if the prosperity of a nation depends more on easy availability of energy in all forms at minimum cost then the corollary is that without that you can’t prosper. Therefore we need cheap energy and we shouldn’t let any stupid hairshirt theory of climate danger or sustainability or kindness to our enemies stand in the way.
He is right that markets do not price in Donald Rumsfeld’s known unknowns. That is to say the concept that the Hormuz straight could be closed is known, and the effect that would have on oil and gas supplies is obvious, but the time that when it might be closed is unknown. So the markets just ignore it, until it happens. Then go nuts. If market prices are supposed to be telling people something (conserve this/produce more/less etc ) then its not very sensible to ignore things that can have a massive impact on supply is it? Especially of things that are a) very necessary for life, and b) very difficult to increase production of in a short space of time. Or, if it is too difficult to have a market price that incorporates such known unknown, perhaps we should not be so in hock to the concept of ‘market prices’ being the be all and end all of everything, as you would demand we are?
After all in the globalised free trade model the market price of a good determines where it is made. Country X can produce it 10p cheaper, make it there. But the possibility that country X might suddenly cut off supply of the product or double its cost overnight, and you’d be left with none at all or a large unexpected bill isn’t included in the 10p saving is it? As the UK found out during covid when it was reduced to sending an RAF Hercules to Turkey of all places to beg for PPE.
People who fetishize the ‘the market’ know the price of everything and the value of nothing. The market price is just a tool, that fools adhere to unyieldingly, and wise men use as a guide only.
The price doesn’t include things that haven’t happened because they haven’t.
If they did, some would-be sellers would price that in, and so their price would rise. Others would not, and offer lower prices. The buyers would buy those first, and the higher-priced sellers would be tempted to lower their prices as a result.
The “sudden” changes these days tend to be from the interference of the state. Though even the state can’t change the price directly, they can only threaten a chance that would-be sellers and buyers get caught wrongdoing (and suffer extra cost as a result).
If there is a known unknown potentially affecting a company then its shares will be priced at a discount to what they would be in its absence. That is a FACT. I spent fifty years as an Investment Analyst and I know a damn sight more about it than a tax-avoidance/evasion accountant writing blogs..
John entirely correct. Markets will price in known unknowns. How much they’re pricing it is an unknown. Since all that is visible is price.
The important thing to remember, & even investment analysts get this wrong, is markets are a system not a thing. Every single player in a market is an individual making individual decisions for individual reasons. So investment analysis is a rather pointless occupation. Analysis can only look backwards whereas markets are looking forwards. Sure the future often conforms to history. Except when it doesn’t. And it’s when it doesn’t is important.
Analysis of the range of possible futures is a (some would say *the*) key part of Investment Analysis. Hence, for example, the rapid change in reinsurance rates after a major natural disaster and the slower rate of change during and after an Atlantic hurricane season with no significant insured losses. The frequency with which analysts and brokers quote PFERs (price to forward earnings ratios) suggest to me and millions of others that investment analysts look forward.
Analysis of published accounts is inevitably looking backwards but it is relatively straightforward (unless someone is lying) and is a relatively small part of the job, looking at the present is a significantly larger share and the majority of our work is looking forward. Every technological innovation (and every change in taxation or economic policy) changes one or more of the parameters and we have to analyse the probable impact of that change (with our valuation comprising the value for each of the range of forecasts multiplied by the estimated probability of that outcome). You may or may not remember that the forward-looking markets were basing their prices upon the forecast earnings predicted by investment analysts.
Investment analysts have always been a bit of a joke. The market is the sum of all the opinions of the players in the market plus those absent for the reasons that they’re absent. And you believe you can out-think all of them? You can get similar results from throwing darts at the back page of the Pink’un. Why managed investment funds have enough trouble beating the index.
Or as it’s said, ask any two investment analysts & get three opinions.
Prices, by definition, are forward looking. Sure the static that is the conflicting opinions of investment analysts obscures the view..
I’m a market trader so I do market analysis. So I’m not interested in the information itself but people’s reactions to the information & their reactions to the reactions of others. It’s an excellent sport.
You haven’t read the competent pieces of analysis. Managed investment funds, using a money-weighted average, have in almost every year outperformed the index even after deducting management expenses (admitted in a FCA publication trying to do a hatchet job on managed funds and push everyone into index-trackers). Index funds inevitably underperform the index because they incur expenses in switching whenever a stock joins or leaves the index whereas the index switch is expense-free. There are some poor-value funds which are “closet trackers” which claim to be managed and charge fees accordingly but deviate very little from tracking the index and – when noticed – harm the repurarion of the investment profession: most of these are in-house funds used for “equity-linked” insurance policies when the insurer’s marketing department has insisted that they have to provide a fund linked to the policies but have not provided the resources to manage such fund. When I was working in Stock Exchange Department our in-house equity fund outperformed the index quite significantly because the boss gave the job to a good investment manager but some of our rivals did not do likewise.
There is a habit of knockers comparing investment performance after expenses with the index performance before expenses in order to claim (a la Murphy) that analysts are worse than useless when the only fair comparison is between investment performance after expenses for managed funds and index trackers.
Despite my comment above I always compared my performance (as specialist analyst for a fund or sector fund manager) after dealing expenses with that of the relevant index without expenses and – despite JMK’s “the market can stay irrational longer than you can stay solvent” I out performed sixteen years out of eighteen which is statistically significant.
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John. An “investment” is the entitlement to future earnings from whatever. The market price is the sum of opinions of what that entitlement should cost in the present. “Investment managers” just do what the market does. Do they do it better? Evidently, some do & some don’t. Of course there’s the “black hole” theory attached to big players like Berkshire Hathaway. That success creates success. That the weight of money being deployed.means where it’s deployed creates the success. And since opportunity cost, where it’s denied results in less success. To go with that is the “grey hole” theory. That the effect of the efforts investment managers in general have a similar result. What it all adds up to is a less efficient deployment of capital than there would have otherwise been. Whatever, the management charges levied by investment managers considerably reduce the capital available for genuine investment. For their ain’t no such thing as a free lunch. Unless you invest in an investment management company.
I really don’t need telling about this shit. I grew up in it.
One – and convincing to me for all that’s worth – argument is that sure, Buffett was an excellent stock picker. But the real gain came from his price of funds. He was investing the float of the insurance company and his cost of funds at 2% *below* Treasuries. That is, the one grand decision he made was to buy into an insurance company.
A good, or even decent, investment manager will contribute to a *more* efficient deployment of capital than there would otherwise have been. If a good company wants to raise money for a good reason they will get it, a dud will only get it from an index-tracker and a few idiots.So company brokers/investment banks will filter out most of the money-wasters.
The charges levied by Unit Trusts are IMHO excessive and often swallow a majority of the value-added by the fund managers they employ. OTOH Investment Trusts pocket a relatively small minority of the value-added: for example Scottish Mortgage which is very much an analyst-driven company is up over 400% (whether measured by NAV or share price) in the last decade and charges 0.31% of assets so less than 2% of returns have gone to management and over 98% to shareholders.
Your theory that weight of money creates price changes often works in the short term but in the long term fundamentals matter more.
The biggest investors – life assurance companies and pension funds – don’t levy management charges and the overwhelming majority of investment trusts charge less than 1% so that does not *considerably* reduce the capital for genuine investment.
John, the primary purpose of stock markets is to provide capital for business. The trade in “second hand” shares enables this because investors’ capital is not “locked into” their investments. The market looks at companies earnings, assigns a risk which produces a price & thus a yield. So if one wishes to derive an income from ones investments, pick a yield that reflects the risk you’re willing to accept & buy shares produce that yield.
Does expertise make a difference? With a proliferation of experts, they all do their calculations based on information which produces a price & thus a yield. In a market with few experts, the low information punters are effectively picking shares at random. So therefore they cancel out. The price & thus the yield is still set set by the few high information punters. Thus the market itself is an effective calculator of share values. The market being all the individual participants making their own judgements & decisions for their own reasons. Thus the contribution “investment analysts” make is pretty trivial
My personal experience of the not inconsiderable managed portfolio I inherited. Going back over its history it produced the income was required. As far as capital appreciation was concerned, roughly in line with the market. But I could have selected an entirely different portfolio by the dart throwing method with random changes (or not) using the same & come up with much the same result. I would however have saved on the management fees & transaction costs which had eaten half of the capital appreciation.
The “black hole”/”grey hole” theories are really about allocation of fresh capital to business. But since company share prices/yields tend to determine companies’ ability to raise fresh capital, it all folds in.
No, you are simply incorrect. Perhaps the more valuable function of stock markets is to provide capital for business but their *primary* function is to enable people and other legal entities to buy and sell investments. The existence of the market makes it cheaper for the government and companies to raise capital because investors will accept a lower expected return if they do not fear having to accept a “fire sale” price if they suddenly face a need to sell to raise cash.
Secondly the price is set by the marginal buyer and seller; the marginal seller will be influenced by his/her/their individual tax and cash flow positions. There is no guarantee that neither the marginal buyer nor the marginal seller will be “low information” – quite often the marginal buyer will be a “low information” punter responding to a newspaper or other “tip”.
It is interesting that you say *in the same paragraph* that the price and yield are set by the the few high information punters and that the contribution investment analysts make is pretty trivial – that is an almost Murphyesque piece of self-contradiction.
You should be disappointed with your portfolio manager if the majority of performance has been swallowed by costs and fees; I only retain those records I need in order to do tax returns but I can tell from them that I have taken out significantly more money than I put in (for, e.g., the deposit on my son’s house) and have some shares left.
One minor point – one only buys fixed interest for yield, one buys equities for expected total return, dividends and capital appreciation, after tax, taking into account the risk attached. Folk will buy Shell rather than Ithaca Energy if the expected return is the same.
The ability of some investment managers to outperform the market is irrelevant as it merely moves the problem from trying to outperform the market to tryting to identify which investment manager to use. Then there’s Neil Woodford.
Your problem of identifying good investment managers for your portfolio is not the question we have been discussing – we were discussing the allocation of capital *by* investment managers to “good” (e.g. Glaxo) or “bad” (e.g. Woolworths) investments.
I am not going to name individual managers because any one of them could die and be replaced by a dud but I do assure you that most analysts can very quickly spot which other analysts are ignorant of the subject and haven’t done their homework and have a sense of which are good. [e.g. I can remember from years ago that the lad from Norwich Union was the best on North Sea Oil stocks]. If you have a modest amount of money to invest and no specific time limit you can choose from a range of good quality investment trusts.
Neil Woodford was a good stockpicker when he worked for Invesco and was constrained by the guardrails of prudence Invesco maintained. Regrettably when he left to set up his own company he didn’t bring the guardrails with him.
I’d like to see a citation for that, since it contradicts all the research that I am aware of over about the past four decades. It would be good to broaden my understanding.
I got it from a FCA site: I cannot immediately quote it to you because my memory is not quite photographic..
There are several misleading reports that show a majority, by number, of funds underperformed the index after management expenses: this obviously included every single index-tracker (if you want an Index-tracker choose Vanguard which has low charges) and all the “closet trackers”. Each actively managed fund only exists because the proprietor expects his/her/its chosen fund manager to outperform the market after expenses by enough to provide the proprietor with a profit and investors with a modest benefit.
Trustnet will show you the performance of all investment and unit trusts (it used to show performance relative to the appropriate index).
From https://www.morningstar.com/business/insights/blog/active-vs-passive-investing
That is US data, not UK
That is US funds, not UK and there is a tell-tale sentence near the bottom “some active funds are …(closet trackers) but from a higgher price point” – they are not active funds and including them in the comparison falsifies the results.
The thing I notice with them is how wrong they are, when it gets into things I particularly know about.
Cybersecurity stocks took a big tumble this week because of something Anthropic did, but if you know the technical details, you know that it’s a security issue that affects almost no companies. But what does some bloke at Barclays who has just been a stock analyst his whole life know about memory-safe and memory-unsafe programming languages? Yeah, it’s very obscure, but if you don’t understand that, you don’t understand whether it’s a big deal or not on the cybersecurity business.
Where I invest is where I see big falls driven by faulty analysis in things I know. It’s not perfect, but I view it like counting cards in blackjack, that you get an edge.
I expect a good analyst to understand what the companies do, not just the numbers in the accounts: if they do not how on earth do you expect them to forecast the revenue, let alone profit, from any product?
In the rather successful investment bank I used to work for the research analysts used to talk to the technical people including us security experts.
“People who fetishize the ‘the market’ know the price of everything and the value of nothing.”
Actually, no. It’s the other way around. Any time I talk to someone with a government mindset, they don’t understand concepts like carbon pricing, jobs are a cost. They want high speed rail which is value destructive.
And yes, country X might cut off supply of the product but if you know businesses that manufacture, they think a lot about contingency. At one factory I worked in, they kept a lot of stock of a particular display panel because the only supplier they could find were a small company in Korea. If that company went tits up, they’d want time to figure out another solution. The market protects itself because the owners of that factory can’t make things for their customers. That means they don’t get their bonus and a shiny BMW.
Now, we could have the state doing contingency, but we’re talking about people like Ed Milliband and Grant Shapps being in charge of it. Are they going to successfully assess risk, are they going to be making sure that the warehouse of aspirin is properly stocked, and sending the manager to the gallows if it’s not? 3 months ago, how many politicians, from any party were saying we should have a giant oil reserve, in case shit kicks off in Iran? They can’t run the trains. Lack of carriages, drivers not turning up. A thing where the risks have been known for a century.
“People who fetishize the ‘the market’ know the price of everything and the value of nothing.”
Price is ephemeral. It’s the result of a transaction. And one can be sure it is now incorrect because both seller & buyer were satisfied in the transaction. Value is fantasy until there’s a transaction.
Here’s one for you. Murphy knows the value of everything but has no idea what the price is going to have to be paid.(In fact he never ever seems to consider it.)
That not entirely accurate.
I ordered my latest batch of heating oil on 24th February, four days before Trump started bombing, but even then prices were all over the place, with some suppliers charging up to 60% more than others.
Clearly they were all reacting to a ‘known unknown’, and pricing it in. They weren’t ignoring it, but were putting different probabilities on it, or different estimates of the duration or severity. After a few days the market reached much more of a consensus, as more information came through.
Delivery wasn’t due until a week later, by which time prices had spiked; I was astonished that they delivered at the old price, and didn’t try to wriggle out of the contract.
Despite the initial conversion costs, you might find an air source heat pump worthwhile in the longer term. My rural holiday let/second home is warmed by an (inherited) ASHP + solar panels. Cheaper than oil, but more expensive than gas…
When the strait closed, the markets didn’t “go nuts”. They reflected the facts at the time.
And markets don’t generally ignore risks.
Britain could be producing quite a lot of its own oil right now.
If there is vulnerability to oil supplies that markets don’t address, that would be a proper role for gov’t to handle. But they’re too busy with jailing people for memes apparently.
Markets would address the oil supply problem if they were allowed to. In the USA they have. In the UK they can’t. Instead we have a surfeit of unreliable Chinese green junk.
Esteban
Spot on – or alternatively they’re ignoring mass child molestation for political purposes and enthusiastically policing X
I’ve never heard a “neoliberal” argue that governments should force shutdown of perfectly good energy production. I have heard many “non-neoliberals” propose it
Government bullies the market. ‘Market’ has problems. ∴ Markets don’t work.
Formulaic commie dick Murphy. “Blah, blah, blah. ∴ Markets don’t work.”
Britain and Ireland have lost far more energy due to the actions of our own government than is being choked at the moment by mad mullahs. Can’t get new oil and gas for ourselves, can’t buy it from Russia either, windfall taxes,no reservoirs, no pumped storage this century, and no RN to defend sea routes.(some exaggeration there)
Ditto, free speech, while the initial cause of the Batley school teacher is the mullah mentals, the outcome we get is Greens and Labour on course to bringing back blasphemy laws.
Broadly speaking, yes, but it isn’t a precise correlation. Because things like transport have trade-offs of time and fuel.
If you’re working 30 miles from home, and someone suggests a lift share, whether you do it depends on fuel price, how much of a diversion you have to make, and whether you like her taste in music half the time. If it’s 5 miles off your trip or she likes Barbara Streisand, you might turn it down. But fuel rises 20%, and maybe it now adds up. And at the point you do, you don’t save 20% of the fuel but 40+%. You’re still poorer, slightly longer journey, suffering Don’t Rain on My Parade, but big energy saving.
Smartphones, sat navs cut a lot of energy costs. You avoid traffic, you can phone a sales guy who is en route and tell him you need to cancel. A truck doing a delivery can do another pickup, saving a van. Petrol and Diesel consumption peaked in 2005, but GDP is at least 30% higher.
Shipping wine starts costing too much in energy, maybe we get it in cartons, or start selling in en vrac like the French and you turn up with a plastic barrel and get it refilled.
That could repurpose some of those petrol pumps that we can’t afford to use any more.
The Efficient Markets Hypothesis is that markets process all the available (relevant) information and prices move as a consequence thereof. The EMH is utilised to develop theories (which usually turn out to be a good approximation to reality) on the behaviour of stock market prices.
Using the EMH to predict the behaviour of crude oil supply is like hiring Stuart Broad as a wicket-keeper.
But oil traders are doing exactly that. What do you think they’re doing?
They are not. They may be acting as market participants to determine the *price* of crude oil – which is not the same thing.
One might say that EMH uses the crude oil traders but *not* that they use it.
The supply of crude oil is not a free market because it is heavily distorted by governments for political, not economic, reasons.
As ever, he thinks markets are evil hobgoblins with their own dastardly agenda.I don’t think I’ve ever met anybody who thinks capacity is created instantly. I’d say he got it from an economics text but that would imply that he’s read one.
Once more, Spud trounces the voices in his head. Take that neoliberals!
Spud has an interesting take on the conflict in Iran including insight on US military operations which I would have thought were classified (he knows how many Tomahawk missiles they’ve used for example). I asked ChatGPT for its view on what Murphy was saying. Interestingly it then offered, unprompted to give me an analysis of Murphy’s general approach. It’s quite lengthy but an insightful extract:
Many of his posts follow this structure:
Once you recognise the template, it becomes easier to see why the same style appears whether he is writing about:
Specialist disciplines like these have large technical literatures, and Murphy rarely engages deeply with them. Instead he tends to apply his preferred explanatory framework to the subject.
Most analytical work proceeds like this:
Murphy’s writing usually proceeds the other way round:
Typical underlying conclusions in his work include:
the conclusion is predetermined
Isn’t there always a final demand that he be put in charge of everything?
Thanks, AndrewC.
I think an important addendum is that he doesn’t say how he will fix the whatever. It’s just bad. In democratic societies, people offer up ideas, then people select which they like best. No democracy with Spud. Just, “Your ideas are bad. Not working. Collapsing.”
If he knew what the words he uses means he’d be a neoliberal;)
“the correlation between energy consumption as expressed by GDP, is very clear and direct.”
If the correlation is so good then perhaps Steve Keen could give us the formula for it. China’s CO2/head is now greater than the US, ok could be a definitional problem in where imports and marine fuels get counted. UK using less energy per head than 1913 afaik. Not doubting there’s a correlation, could be closer to linear than to square or sqrt, but what is it Steve. Doesn’t say.
I will bet my house to his horse that the correlation between prosperity (GDP/head) and %wasted energy is much better. If you pay a price for poor insulation or an inefficient engine or cooking with wood, you will do something about it. When government pays wind turbines to switch off in strong winds, they don’t.
There isn’t a direct correlation and it doesn’t take a rocket scientist to work out why. How much energy did JK Rowling use when writing Harry Potter? It took her a while, but somewhere to sit, powering a word processor and coffee is about it. It’s piss all for the tens of millions she earns. The big energy is moving books to Waterstones, making them in a factory, moving paper to the factory, making the paper.
The big money in iPhones, Dysons is the thinking bit. And we do that stuff in California and Malmesbury.
Britain has low carbon manufacturing because it’s higher brain stuff. Go to Airbus in Filton, a bit of it is people attaching things to planes. Most of it is people in front of computers doing things like designing stuff in Catia.
I’m not talking money-making, I’m talking prosperity. The ability to do stuff. Options. Being removed from first-order restrictions on your life. Now, I have a contract with an electricity supplier. I don’t wanna hear that I have to conserve power because they aren’t making enough. Some with water or petrol or gas. I don’t want a smart meter that can switch off my supply if I misbehave or the wind don’t blow. I want all the freedom I can get. Abundant cheap energy is a requisite for that. It’s the lubrication of enterprise.
“How much energy did JK Rowling use when writing Harry Potter? It took her a while, but somewhere to sit, powering a word processor and coffee is about it. It’s piss all for the tens of millions she earns. The big energy is moving books to Waterstones, making them in a factory, moving paper to the factory, making the paper.”
JKR writing HP created no wealth at all. All she did was extract wealth from other true wealth creators. She makes lots of money from HP because the society she lives in is already wealthy, and she’s diverted some of that wealth her way. If a Middle Ages version of JKR had written the same books she would have made no money at all, because the society she lived in had no surplus wealth for her to leach off. True societal wealth is created by resource extraction and manufacturing, not writing books about wizards. No society got wealthy by ignoring mining, or farming, or manufacturing, and starting with films and books did they?
“True societal wealth is created by resource extraction and manufacturing, not writing books about wizards.”
So, manufacturing children’s toys, something that amuses children, is creating wealth, but writing a children’s book, something that amuses children isn’t?
Quite. Value is what is perceived as value by humans. Make something humans value then you are producing value.
All else is bullshit.
On the specific issue of kiddies books. Wasn’t the Gruffalo, wasn’t Goodnight Moon, but something along those lines. The author said he was both humbled and had done something right. Parents spend that 10 or 20 minutes of the day when their full and only attention is focussed upon the most important and precious thing in their lives, their child, with something he’d written. Yeah, yeah, it’s reading the kiddies a story. But proper job. That’s value creation and everyone else can fuck off.
Value is not prosperity. Prosperity is a pre-requisite of value. The buyer has to get the item of exchange from somewhere. You can’t build a society by swapping children’s books. That’s the top of the pyramid. It can’t happen without the lower levels.