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Does Mark Carney Understand How Financial Markets Work?

December 31, 2019
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By Paul Homewood

 

 

Yesterday I mentioned Mark Carney’s latest call for the financial sector to divest from fossil fuels:

 

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Mark Carney has claimed the pension fund investments held by millions of people could become “worthless” unless the financial sector reacts quicker to the climate change crisis.

Financial firms are starting to curb investment in fossil fuels but are “not moving fast enough,” the Bank of England governor will say in an interview for an edition of the BBC Today programme edited by Greta Thunberg, the teenage environmental campaigner.

The Bank of England claims up to £16 trillion of assets could be wiped out if the climate emergency is not addressed effectively including by banks and pension funds over-exposed to “sunset” fossil fuel industries…

Pressed on whether pension funds should divest from fossil fuels even if the returns are attractive, Mr Carney said: "Well that hasn’t been the case but they could make that argument.

"They need to make the argument, to be clear about why is that going to be the case if a substantial proportion of those assets are going to be worthless."

He added: “The judgement of some leading pension funds is that if you add up the policies of all of the companies out there, they are consistent with warming of 3.7-3.8 degrees. That is far above the 1.5 degrees that the people say they want and governments are demanding.”

The Governor who steps down in the New Year to be the UN’s special envoy for climate action and finance, warned that unless firms woke up to the “climate crisis,” their assets would be worthless.

“If we were to burn all those oil and gases there’s no way we would meet carbon budget,” he said. “Up to 80 per cent of coal assets will be stranded, (and) up to half of developed oil reserves.”

https://www.telegraph.co.uk/politics/2019/12/29/pension-fund-investments-held-millions-could-rendered-worthless/

 

Not only does this show a naivety about the politics of climate. Perhaps even more alarming, given the fact he has been in charge of the Bank of England for umpteen years, is that it shows a complete lack of understanding of how financial markets work.

So, to re-cap:

Carney argues that investments in fossil fuels, such as oil and mining companies, could eventually be worthless, as their assets will be “stranded”.

However, the market normally values shares not on the perceived asset value in decades time, but on discounted future returns, ie dividends. Because they are discounted, potential dividends in the near future are worth considerably more than those, say, in twenty years time. Put another way, BP could go bust in 2050, but it would make next to no difference to its market value now.

(There are exceptions to this, notably where investors buy into loss making companies, in the hope they will become successful and profitable in future. However, this is a huge gamble).

To see how the numbers work out, let’s look at BP’s accounts:

Currently BP’s market capitalisation is £95bn  – 20.2m shares at £4.70 per share.

According to their 2018 Annual Accounts, post tax profit came to $9.4bn, or £7.2bn.

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https://www.bp.com/en/global/corporate/investors/results-and-reporting/annual-report/annual-reporting-archive.html 

 

So in simple terms, if you bought a share in BP today, you would get all of the money back in 13 and a bit years, assuming profits are maintained at this same level. Of course, you would need to discount these numbers, as you could have invested it somewhere else and earned interest as well as getting your money back.

Nevertheless though, you can see that BP is a worthwhile investment, assuming returns can be maintained over a period of maybe about 20 years. And let us be absolutely clear here, regardless of Carney’s scaremongering, fossil fuels will still be in global demand for many years to come.

In fact though, an investment in BP is even more attractive than my figures indicate, because free cashflow is much greater than profits. Last year, operating cashflow was $22.9bn, more than double profits. This is because that figure does not include capital expenditure, roughly $16bn in 2018, which makes up such a sizeable proportion of the oil industry’s costs.

If Carney is really right, and the world stops using oil and gas in the next decade or so, what will BP and other oil majors do? Very simply, they will do exactly what they do every time there is a market slump.

That is, they will cut back on new capital expenditure, possibly to nothing. The money they would have spent on drilling new oil fields will instead go to enhance dividends or fund share buy backs.

In the event that Carney is right then, investors can expect to recover their capital in four years. As I say, this is a common practice when demand for oil is low, and oil prices tank. To make things even more attractive for investors, BP holds $26bn in cash and cash equivalents in its balance sheet, covering more than a quarter of current market value.

 

As I say, I find it frightening that the Governor of the Bank of England does not appear to understand this very basic market mechanism. Or maybe he does, but would rather scaremonger for political reasons.

23 Comments
  1. December 31, 2019 6:09 pm

    Reblogged this on Climate- Science.press.

    • Joseph Sharp permalink
      January 1, 2020 9:51 am

      Given that the UN’s objective (according to statements by Christiana Figueres) is to destroy capitalism as being the cause of the climate “crisis”, what does Carney’s new role as the UN’s special envoy for climate action and finance indicate about his economic philosophy? Has he always been a socialist?

  2. iananthonyharris permalink
    December 31, 2019 6:22 pm

    Carney seems to agree with whomever he’s working for. First it was Osborne with Project Fear, then May/Hammond with Brexit warnings, and now he has a new job promoting the global warming ’emergency’. Pliable? Flexible? Hypocritical?

  3. alsomaninthemirror permalink
    December 31, 2019 6:22 pm

    ….”Or maybe he does, but would rather scaremonger for political reasons…” he’s coming back to Canada sometime soon and will likely be a Liberal candidate, maybe even a front runner for PM …. if he wants to pursue politics.

    • bobn permalink
      December 31, 2019 7:39 pm

      …. if he wants to CONTINUE to pursue politics.
      (fixed your sentence). He’s always been a politician, and as Paul has shown, little else.

  4. GeoffB permalink
    December 31, 2019 6:28 pm

    MY COMMENTS ON THE ARTICLE IN THE TELEGRAPH PROMPTED A DISCUSSION CONCERNING TEMPERATURE RISE SOMEONE ELSE SPRANG TO MY DEFENCE> ITS A BIT LONG AND LOSES A BIT IN PASTING

    Geoff Be 30 Dec 2019 5:01PM
    You would think Carney was bright enough to look at the facts….no warming for 20 years…decrease in weather related casualties…..air quality best ever…crop yields all time high… Oh he’s just got a job at the UN running climate change…in it for the money….

    Delete13LikeReply
    Angry Porkpie 30 Dec 2019 5:42PM
    “No warming for 20 years”. Ah more armchair climatologists. Suggest you do research on the facts:

    https://www.climate.gov/news-features/climate-qa/why-did-earth’s-surface-temperature-stop-rising-past-decade

    “The long-term trend—change over the course of a century or more—is what defines “global warming,” not the change from year to year or even decade to decade.”

    FlagLikeReply
    Captain Mainwaring 30 Dec 2019 5:58PM
    @Angry Porkpie

    Suggest you do some research of your own:

    https://www.heartland.org/_template-assets/documents/Books/Why Scientists Disagree Second Edition with covers.pdf

    “Over recent geological time, Earth’s temperature has fluctuated naturally between about +4°C and -6°C with respect to twentieth century temperature. A warming of 2°C above today, should it occur, falls within the bounds of natural variability.”

    Flag5LikeReply
    David Evans 30 Dec 2019 6:04PM
    @Captain Mainwaring @Angry Porkpie Maybe you’re the one who should do the research. Heartland are a leading promoter of climate denial. In the past, they were involved in discrediting the health risks re. 2nd hand smoke.

    https://en.wikipedia.org/wiki/The_Heartland_Institute

    Probably not the best source for reliable, accurate and honest information 🙂

    Flag1LikeReply
    Ed Burke 30 Dec 2019 6:13PM
    Just saying stuff you disagree with us wrong because you disagree with it us not actually an argument. Yes sceptics say stuff that is sceptical.

    FlagLikeReply
    Ed Burke 30 Dec 2019 6:01PM
    The trend is taken over whatever time produces a trend. The temperature actually shows a clear series of steps, then plateaus, which are wholly unconvincing in terms of a trend caused by CO2. Instead we see warming caused by El Ninos superimposed on natural warming from the colder Little Ice Age.

    But no doubt you are a real climatologist, not an armchair one then?

    Flag4LikeReply
    richard knight 30 Dec 2019 8:10PM
    @Angry Porkpie

    Some warming-

    “Little known temp data from the state of the art U.S. Climate Reference Network (which never seems to make it into NOAA’s monthly “state of the climate” reports) show that for the past nine months, six of them were below normal”

    “The data, taken directly from NOAA’s national climate data page, shows not only that much of 2019 was below average, but that the US Temperature average is actually cooler now for 2019 than we were in 2005, when the dataset started”

    If you use old data you come to the wrong conclusions-

    “The U.S. Climate Reference Network (USCRN) was established to give the most accurate temperature readings compared to the old Cooperative Observer Network (COOP) which suffers from urban encroachment, siting problems, and a multitude of human induced inhomgeneities such as station moves, incomplete data, closed stations, and runway condition stations at airports that were never designed to report climate data”

    Warming is seen in the vast areas of the world that are estimated- no surprises there- or using the old temp data that has been compromised.

    Flag1LikeReply
    PETER VAN DE GRAAFF 30 Dec 2019 10:55PM
    @Angry Porkpie

    Check with the IPCC, the planets average water/land surface temperature has increased about 1C since 1860.

    Wow!

    Catastrophe!

    AGW is a UN socialist agenda scam; and it is hurting the poorest of poor who need cheap reliable energy.

    FlagLikeReply
    Geoff Be 30 Dec 2019 6:45PM
    the graph i used was the CET its here https://www.metoffice.gov.uk/hadobs/hadcet/

    you can see the rise 1975 to 2000 which kicked off all this global warming rubbish..but no increase the last 20 years…

  5. Harry Passfield permalink
    December 31, 2019 6:32 pm

    Mark Carney’s view of the resilience of pension funds is on a par with Sir David King’s view of the ability of Greenland’s icecap to disappear. In either case, whether a financial or ocean flood, they are very much out of their depth.

    • George Lawson permalink
      January 1, 2020 10:47 am

      A bit like Sir David Attenborough’s attitude towards doomed polar bears and plastics in the sea.

  6. December 31, 2019 6:59 pm

    Mark Carney is a climate cult church member. He put Canada on a road to ruin with carbon taxes and he hasn’t helped England and now he is going to work with his church buddies at the UN .He is a dangerous man

    • Curious George permalink
      December 31, 2019 10:01 pm

      He is to become a new Christiana Figueres. I wonder if it comes with a sex change?

  7. December 31, 2019 7:17 pm

    Carney is an example of the Peter Principle, which is rife in NGOs in the UK. It doesn’t matter whether it is the Bank of England, the National Trust, the Environment Agency, Natural England, the Climate Change Committee, National Parks etc etc. People such as Carney rise through a succession of NGO jobs demonstrating increasing levels of incompetence.

    • Steve permalink
      January 1, 2020 8:38 am

      The new governor was ic the Financial Conduct Authority. Earlier last year the London and County direct lender went down with many savers losing everything. The latest is that thousands have lost their pensions in bonds run by scammers and registered by the taxman and unchecked by the authority. Now the highly pensioned functionaries at HMRC are fining the savers who lost out for investing in illegal schemes, which they registered. Honours all round.

  8. December 31, 2019 10:20 pm

    Fully agree! Investment decisions should be guided only by the present value of forecasts of future returns and NOT by activism. Carney should look to markets for that information. Markets will not and should not look to Carney for that information.

  9. Nordisch geo-climber permalink
    December 31, 2019 11:26 pm

    Paul, this is brilliant analysis. Carney is a Liberal. Enough said. If I had the means to give you a £1000 squid I would! Happy New Year and keep up the good work.

  10. January 1, 2020 1:32 am

    Guardian review of mrs Carny from Tue 27 Nov 2012 – https://www.theguardian.com/business/shortcuts/2012/nov/27/diana-fox-carney-bank-governors-wife

    tells you all need to know about the Carney’s POV.

  11. January 1, 2020 9:20 am

    BP may look financially healthy. It has valuable assets and large profits plus a history to back this up. How BP has acquired its assets and wealth is more questionable. Little episodes like the 1953 Iranian coup. But with the financial market what matters is a thing they call confidence.
    20.2m shares at £4.70 per share. But if the market looses confidence those share could soon lose there value. Meanwhile there are companies that have never made a profit in fact have shown huge losses for long periods like Google and Amazon but the market has high confidence in.
    Mark Carney is basically threatening those companies that resist joining the New Green Deal ponzi scheme that the market will lose confidence in them.

  12. Phoenix44 permalink
    January 1, 2020 10:30 am

    Yes but if the oil price falls, free cashflow will fall too!

    The current share price if BP includes all the stuff Carney is saying – that’s the Effecient Market hypothesis. Unless he knows something all the investors don’t know, he us merely stating his own opinion that a stock is too highly valued. Not his job. If he wants to be a stock analyst, give up being governor.

  13. January 1, 2020 10:49 am

    Carney must know that financial markets run on confidence. His new job is to steer the herd towards ‘climate compliance’ i.e. whatever his Goldman Sachs bosses want, and to corrode confidence in any business or market sector seen as not conforming to the climate narrative.

  14. Bob Schweizer permalink
    January 1, 2020 12:49 pm

    Gainsayer extraordinaire. Thank goodness he is soon leaving; the sooner the better. He has been awful.

  15. Oliver King permalink
    January 1, 2020 6:34 pm

    As someone who invests in the stock market via a regular savings ISA what redress do I have if someone in a position of responsibility ie Carney talks complete drivel and it negatively affects the value of my investment?

    • Gerry, England permalink
      January 2, 2020 1:03 am

      None. But as you are sensibly dripfeeding your money into the market, if the market reacts to what Carney has said then you will be able to buy more stock which will then be worth more when the market bounces back having ignored the moron. BP currently has a yield of 6.6% which is better than any bank account you can find.

  16. January 1, 2020 10:07 pm

    Even if we don’t look at the flaws in financial gimmickry, we must be appalled. One of the leading financial figures calls for pension funds to shove all their cash into renewable stock while seeing scores of those companies going bellies up as countries cannot continue to shove endless subsidies down their throats. Everyone who puts his cash into those outfits will lose everything. Those pension funds as well. Question: has anyone looked into what stocks Carney and family hold? Do they drink their own Kool Aid?

  17. A R Clapham permalink
    January 4, 2020 10:36 pm

    I believe Mr Carney was a failed Polititian, Banking wasn’t a strong suit either!

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