Market Thinking

making sense of the narrative

Bad Models Make Bad Policy

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Ronald Reagan once said that the scariest words in the English language were ‘I’m from the government and I am here to help” and in our view there is no doubt that there is little that is more dangerous than a bureaucrat with a mission – usually backed up by a computer model that does little more than produce outputs consistent with the inputs. It’s not so much bad intentions, but Bad Models that make Bad Policy. This tendency is what has led us to the deadly trinity of the Zeroes – Zero Interest Rates, Zero Carbon and Zero Covid. While we might celebrate that the obvious flaws in these models have been exposed, that does not mean that those pursuing them have acknowledged the fact. In fact, in many cases they are doubling down and either re-inventing history (both figuratively and literally) to exculpate themselves in the case of Zero Covid or Zero Carbon, or repeating the error but in the opposite direction – Central Banks. There is then something more dangerous than a bureaucrat with a mission; a bureaucrat refusing to acknowledge the failure of their last mission.

In some senses the Zero Covid zealotry is the easiest place to start, since, with the personally painful exception of China/Hong Kong, this is all but over, despite the attempts by a small group to keep the momentum going. It does, however, expose the technique of what Chomsky refers to as ‘manufacturing consent’; you terrify people with propaganda, then commission an opinion poll to see if they are terrified and if they agree with the policy you wished to introduce in the first place. Hard to believe now, but the overwhelming majority appeared to be in favour (at least according to polling) of policies that they themselves now regard as being wildly excessive. Meanwhile, intrusions previously thought ‘unthinkable’ like widespread censorship of speech that contradicts the official narrative with ‘dis-information’ and authoritarian policies such as facial recognition and digital ID/DNA databases are regarded as inevitable, with barely a protest. There are alarming similarities here in the War Propaganda now underway, but that is for another post perhaps.

The ‘throw a brick through their window and sell them a burglar alarm‘ technique is not, of course, new and in recent years has been highly successful for the Green Lobby and their Zero Carbon Policies. Recent events, not just the war in Ukraine, but the economic ‘reckoning’ from the, frankly reckless, ‘sustainable energy’ policies in the years before that, which had left western Europe with little gas storage, no long term contracts and an unwarranted dependency on gas for base load energy requirements, had started to turn opinion against Zero Carbon. Years of ‘cost free’ voting in favour of green energy had manufactured consents for policies that were suddenly costing money. A lot of money. This has had the positive effect of propelling a sensible debate and set of decisions on nuclear power – further enhanced by a desire to be less dependent on Russian gas – but, we should realise that, like the bio-security state, the Green Industrial Complex is now fully established.

The answer to less Russian Gas is not more renewables, it is more gas from somewhere else.

But the answer to a dependency on Russian gas is not more renewables (as the powerful renewables lobby predictably declare), for it does not solve the problem that renewables are unreliable and need base load back up that can only come from fossil fuels (nuclear can’t be ‘spun up’ quickly enough). The answer is more gas from elsewhere until more nuclear can be built. Intriguingly this may well be from Ukraine, which will also be the subject of another post.

It is almost an aside at this point to discuss whether or not Man Made Climate Change is even a problem. It has become an article of faith, impervious to criticism or discussion and it will continue to ‘inform’ policy, even if its predictions are all as shaky and dependent on inputs as those in Imperial College’s Covid models. To be clear, the Climate is changing, as it always has done, and it may even be the case that the theory that the marginal driver is the 4% of Co2 that is man made and that Co2 itself, which is by turn only 4% of all greenhouse gases is the only one that matters. We would argue that, while possible, this is ‘quite a stretch’, as well as note that the models that are based on this assumption have consistently over-predicted temperatures such that if they were brought to us as part of a Quant model that consistently failed to deliver on the alpha predicted by its back-tests, we wouldn’t care how many PhDs were on the board, we wouldn’t invest.

It is, however, worth noting the latest study on how the ‘scientists’ have been adjusting the historical data to suit the current alarmism (in effect, fiddling the back-tests). As reported at the ever-interesting Daily Sceptic , the Met Office has adjusted its historical records of surface temperatures to show the earth being cooler in the 1970s, and warmer in the 1990s, thus exaggerating the recent ‘increase in Global Temperatures’. Similarly in the US, where the GISS database shows a similar re-writing of history, best illustrated by this picture (again from the Daily Sceptic), where the blue shows downward adjustments and red upward adjustments of historic data that has taken place since 2008. This, as the author of the original report points out, means that around half of the 0.67 degree ‘warming’ from 1910 – 2000 has been “due to administrative adjustments to the original data made since May 2008”.

Re-Writing History – ‘adjustments’ to historic GISS data since 2008.

Source GWPF , Daily Sceptic

Far more accurate satellite date actually shows no increase for the last 88 months and counting.

The point of this is that, while the green lobby will continue to push the politicians and the bureaucrats and their computer models will continue to rewrite history, the actual disasters they continue to predict look less, rather than more, likely to happen – which is surely a good thing. This means potential mis-pricing and thus opportunity. To take a seemingly trivial example (again quoted in from the GPWF publication by the Daily Sceptic, which is actually what caught our eye in the first place), the prediction that there will be no snow in the Alps by 2100. A classic propaganda trick, wheeled out every time there is a lack of snow, or the weather (not climate) is warm and quietly ignored when the opposite occurs, skiing is a way to scare the worried middle classes to manufacture consent for green energy policies. However, as the data shows, the range and the average level of snow cover is essentially unchanged over the last 50 years.

Northern Hemisphere Snow Cover – no change for 50 years.

Source: GWPF, Daily Sceptic

This is not to say that Ski Chalets are a bargain, they aren’t, probably because those buying them don’t believe what many of them preach. There is of course a parallel here with the number of high profile celebrity climate campaigners, who, in between their private jet flights to Cop26 and Davos, continue to invest in waterfront estates.

The parallels between Zero Covid and Zero Carbon are not only in the reliance on computer models and ‘appeal to authority’, but also in the demands that the policy prescriptions offered are to be immune to criticism. To question the efficacy of lockdowns or masks is to be labelled ‘A Covid Denier’ in the same way as questioning the cost benefit of renewables is to be ‘A Climate Denier’. To question the ‘solution’ is not to deny the problem, but as investors we need to consider not only the veracity of the claims about the problem (and thus whether ‘insuring against it’ is a mis-allocation of capital), but also the impact of the very policies brought in to ‘counter the problem’.

Zero-Covid brought serious disruption and an end to the latest version of Globalisation, ending dis-inflation and setting the stage for a mis-match of supply and demand and an inflationary impulse into the world economy that is crushing bond markets. Zero Carbon is also hugely inflationary as a policy, since it under-invests in essential resources as well as allocating scarce capital to inefficient energy production and distorts markets through taxes and subsidies. It boosted the price not only of renewables (as planned by their lobbyists), but also gas for base load. Other ‘innovations’ like carbon credits are essentially taxes that are distorting financial markets as well as raising the costs of manufacturing energy intensive products. Meanwhile the whole ESG movement – which is essentially a Climate Change campaign – is mis-allocating capital in the form of other people’s savings, further exaggerating commodity price rises as well as encouraging enormous amounts of greenwashing as bureaucrats (on a mission) centrally allocate capital. Something that historically has never worked.

We haven’t even got to the ultimate Bureaucrats with a mission and a bad computer model – the Central Bankers. That too, requires a seperate post.

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