Global warming? How about galactic cooling?!

Global cooling on the way? Be prepared!

The  climate is changing. We can agree on that.

The question is what is driving it, and what we can or should do about it. And possibly in which direction the wind is blowing.

In a recent short paper (by J. KAUPPINEN AND P. MALMI, June 29, 2019) the researchers demonstrate how natural changes in humidity explain, much better than, e.g., CO2 emissions, the variations in global temperatures over the last half century.

Variations in low cloud cover, and their corollary, changes in relative humidity, seem to be an order of magnitude more important for explaining both the general trend rise in global temperatures and even more so regarding the interimistic drops in temperature. The latter is of course wholly unexplained by the steadily rising levels of CO2.

The authors conclude that “During the last hundred years the temperature is increased about 0.1°C because of CO2. The human contribution was about 0.01°C,” i.e., “we have practically no anthropogenic climate change. The low clouds control mainly the global temperature

Note (Note: the paper has been criticized here). The results, however, have been corroborated by a team in Japan: “New evidence suggests that high-energy particles from space known as galactic cosmic rays affect the Earth’s climate by increasing cloud cover, causing an ‘umbrella effect’

It’s not us

So, humans aren’t doing it. Therefore there’s really no use in trying to reverse the effects by unnecessarily restricting human activity. Quite the contrary, actually. If galactic rays are causing temperatures to rise through changes in relative humidity and cloud cover, we’ll need all the human ingenuity and creativity we can muster in order to find out how to live and thrive in a much warmer world, including potentially higher water levels and frequency of extreme weather.

You can’t predict, but you can prepare

This is no joke. In fact, space weather changes could even cause a cooling before a warming, with potentially just as adverse effects. No matter which way the galactic gods lean in this respect, it’s better we come prepared, even if we can’t predict the outcome.

Winners from warming

No matter, the green revolution is still good for many things, not least combatting pollution (whether slightly warming or not), and fanning (!) innovation. So don’t give up on your recycling efforts just yet. And solar power is still our best bet long term to make sure our energy needs are met in the future, so if you like your solar companies you can keep them. The warmth of the sun is our cleanest, safest and most abundant source of energy. But we need to keep inventing better ways to capture and store it.

The corporate winners in this scenario will be solar energy capture and energy storage companies, including the entire value chain of industrial suppliers of complementary factory parts, not to mention finance companies (huge investments in storage infrastructure will be required once solar energy dominates the power supply).

However, even more interesting will be the opportunities within construction and construction materials. Imagine all the levees to be built, water-proofing solutions needed for buildings and other equipment, not to mention all the new buildings required higher up on dry land, to replace the multitude of new Atlantises being created. 

And then there is the insurance business (extreme weather, remember?).

What about losers? Well, there’s the oil industry of course. And retail: the money to pay for all the new infrastructure must come from somewhere; my guess is higher housing and insurance costs will diminish the room for non-essential shopping for the bottom 99 per cent.

Tougher times might mean higher aggregate demand (whoa, Keynes!), but the resulting higher GDP doesn’t mean ordinary people will benefit. All the extra efforts are just going toward strengthening or moving all the things we’ve already got, rather than producing new and life-enhancing stuff

Är guld historiskt dyrt eller billigt?

En ny artikel på Zerohedge förklarar hur guld är både lättare (!) och tar mindre plats än Bitcoin. En bitcoin väger t.ex. ca 1,7kg, med 8 000$ guld bara väger 200 gram.

Artikeln är underhållande, men onödigt mångordig för min smak. Ögna igenom den om du har väldigt gott om tid, samt vill höra varför “Drop Gold” bygger på tveksamma premisser.

En viktigare fråga är om guld är billigt eller dyrt i förhållande till sig självt just nu. Jag skrev nyligen en krönika för Omni på det temat, som du hittar om du följer länken. Här följer några korta utdrag:

“I dag får du lämna ifrån dig 70 gram guld för att köpa en enhet av det breda amerikanska aktieindexet S&P 500. Det är extremt mycket. Till exempel kostade det bara en femtedel så mycket, 18 gram guld/index, för bara åtta år sedan. Guldet har faktiskt haft mycket större köpkraft än så många gånger de senaste 150 åren, med priskvoter på låga 5-10 gram/index.”

“Bara det senaste halvåret har kvoten både hunnit falla och stiga med 25 procent, så visst svänger det så mycket att man kan handla på det, men trots allt utan tydlig trend. De stora rörelsernas tid är definitivt inte förbi bara för att vi lever på 2000-talet. Kanske är det dags igen nu.”

“Det finns några anledningar till att snarare tro på en fallande kvot (fallande aktier eller stigande guld) än tvärtom. Till exempel är aktievolatiliteten ovanligt låg och med vissa tendenser till plötsliga högre spikar, precis som mönstret var inför finanskrisen 2008.”

“Ett annat tecken är att värderingen av börsföretagens försäljning i dag nästan är tre gånger så hög som den historiska normen. Det såg ut på ungefär samma sätt både år 2000 och 2007, det vill säga precis innan börsen föll och guldet steg. Det trots allt stigande guldpriset de senaste tre åren ser ut att vara på väg att sniffa sig till att det är en period på gång med stigande volatilitet och riskaversion.”

Läs resten av artikeln här. Där får du bland annat perspektiv på aktietoppnivåer på >300 gram guld per S&P 500, dvs S&P på över 10 000.

How to (not) get rich managing a hedge fund

Topic: the economics of running a hedge fund

How much money do you need to manage in a hedge fund?

Let’s say you manage to raise 100 million dollars from friends and family. How far would that get you?

Revenues

Fixed fee: 1% of 100m = 1 million dollars a year

Performance fee: 20% of whatever your “outperformance” is, which depends on what you’ve promised, and if you have some catching up to do relative your high water mark or other promises.

We’ll leave that part for later, since you can’t really count on reliably amassing performance fees. On average fund managers don’t add any value relative their benchmarks, so on average fund managers can’t expect to get any performance fees.

Costs

Staff: 3 people (you, a partner, and one more for research and administrative work) at 150k$ each a year, which would be considered the bare minimum for running a 100m$ fund and attracting decent talent. 3*150=450k$.

In Sweden the cost of 150k$/yr amounts to less than 10k$/month (95k SEK) per employee before taxes but after social services fees. The take home pay for the employee after personal taxes will be around 5.5k$/month (55k SEK)

Travel expenses (eight trips per employee/yr to attend conferences, visit important companies, clients etc. NB just two trips per quarter, and at a cost of just 2k$ per trip for a few hotel nights, airplane tickets and expenses): 8*2k$*3 = 50k$

Premises: 50k$ per year for an average office in the CBD district

Equipment, computers, mobile phones: 2k$/yr per employee = 2*3=6k$ (could just as well be rounded to zero)

Information and trading systems, 3rd party research: 50k$ per employee = 3*50 = 150k$ (NB: the cost could easily run to twice that)

Regulatory fees, expenses, insurance, securities custody etc.: 0.1% of AUM = 0.1%*100m$ = 100k$ (could easily be twice as much)

Total costs: 450+50+50+6 (rounded to zero)+150+100 => 800k$ (or up to 1m$ depending on information costs nd regulatory expenses)

Income

Income before performance fees and taxes: 1 000k – 800k =200k$ (or as little as zero)

Income after taxes (25%) per employee (3): 200 * (1-25%) /3 =50k$ (or zero)

Bonuses and dividends

The above example leaves just about no room for bonuses, and thus little chance of retaining high quality employees (including yourself). In addition if you can’t perform good enough for a performance fee, even your friends and family will jump ship before long.

Let’s say you outperform your threshold by 5-10 percentage points, how far would that get us?

Performance fees for 5-10pp outperformance: 20%*5%*100m = 1m$, and 20%*10%*100m = 2m$.  That would leave 750k – 1.5m$ after taxes for distribution to the owners, or a decent 250-500k$ each in dividends that year. Now, I wouldn’t get my hopes up too much for repeating such a performance year after year.

In addition you’d run the risk of falling behind during difficult years. While struggling to catch up there could be periods of no performance fees in sight for years at a time. What if your fund lost just half of what the market lost in the crashes of 2002 and 2008? Even with such stellar performance, you’d still need 3-5 years per crash to catch up before earning variable fees again. Most actually give up altogether, after losing more than 20% from their high watermark.

Conclusion

Even a 100m$ hedge fund is more or less a break even operation, where its founders or employees get a basic annual compensation but no frills. The upside consists mostly of soft factors, like independence and freedom, plus the potential for landing a few lucky big years before enduring a crash. If, however, the order is reversed they get nothing extra.

Please note that if you simply had 5m$ of your own and made a 10% return, without the hassle of running a hedge fund (clients, authorities, regulations…), you’d net a clean half million dollars for yourself. In Sweden that would be after taxes, since personal capital gains are tax free here.

Running a billion dollar hedge fund or bigger is a whole different game. We, e.g.,  managed our +1B$ fund with more or less the same crew as when it was a tenth that size.

At fixed fees of +10m$ a year and performance fees of typically at least as much, and total costs before bonuses, taxes and dividends, of around 2m$, there was plenty to go around for us four principal owners. Now, try a 10B$ fund on for size in terms of its economics!