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Trump’s grandstanding in the Arctic

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One thing to start: Joe Biden’s energy team is finally taking shape with the imminent appointments of Gina McCarthy and Jennifer Granholm to senior roles within the administration. We took a look at what the picks mean.

On to today’s newsletter. The prospect of the Trump administration selling drilling leases in a pristine Arctic wildlife refuge has generated headline upon headline across the globe in recent months. But what are the prospects of it actually happening?

We teamed up with our colleagues at Moral Money to dig into the question. Our discussion forms the core of today’s newsletter.

Thanks for reading. You can sign up for the newsletter here. — Myles

Who wants to drill in the Arctic anyway?

Once the US presidential race was called for Joe Biden, the world has watched to see what a lame duck Trump presidency would entail. Lots of golf? Executive orders? Pardons?

Arctic drilling may not have been top of mind, but in his final weeks in office, Mr Trump has moved to allow just that — with the interior department moving to auction off leases in the Arctic National Wildlife Refuge.

To tackle this very important topic, this week we’re doing something new. We’re hashing things out with our Moral Money’s Billy Nauman to give you a full picture of what this means for often intersecting worlds of energy and sustainability. You can hear more from our Moral Money colleagues by subscribing to their newsletter here. And tell us what you think of this new format at energy.source@ft.com.

Derek (ES): The Trump administration spent almost four years trashing rules designed to protect the environment, from loosening controls on oil and gas companies’ methane pollution, to allowing mercury emissions from power plants, to opening up national forests to drillers. It eased Obama-era fuel-economy and emissions standards for passenger cars. The day after President Trump lost the election, the US formally left the Paris climate pact.

But let’s be clear about Mr Trump’s hopes to open the Arctic National Wildlife Refuge to drillers. Yes, he plans to sell leases just days before President-elect Biden enters the White House. But this is pure symbolism. Exploring North America’s Arctic is expensive and risky. Shell, the last big major to launch a big Arctic campaign, blew more than $7bn before abandoning the idea in 2015. Forget climate activists, the market would punish any company willing to plough billions into such costly adventurism. Plus, there’s enough oil in Texas — available without much controversy, producible quickly and at relatively low cost — to keep producers occupied. The world is not clamouring for Arctic oil.

Moral Money colleagues, what do you think? Is Mr Trump just toying the Arctic stuff to own the libs one last time? 

Billy (MM): You nailed a couple important themes here, Derek. “Owning the libs” often appears to be Republicans’ sole aim these days. But Trump is not alone in creating Arctic policies that amount to little more than symbolism. Companies that claim to care about global warming are getting in on the action as well. 

After years of activists and investors ratcheting up pressure on banks that lend to fossil fuel companies, we’ve started to see a wave of new climate policies rolling in from the finance sector. One of the most common pillars of these policies is — you guessed it — a pledge to stop funding fossil fuel projects in the Arctic. Goldman Sachs, JPMorgan Chase, Wells Fargo, Citi, Bank of America and Morgan Stanley have all jumped on this bandwagon.

The zeitgeist is certainly changing in finance. Banks are finally waking up to the risk that fossil fuel companies will be forced to leave significant portions of their assets in the ground. The massive PR accompanying the announcements also indicates that they are still desperate to rehab their images after the last financial crisis, and see climate consciousness as a good way to do that.

But since no one wants to touch the Arctic anyway, as you point out, it is difficult to get too excited about these commitments. If Arctic oil became an attractive investment again, however, it would be meaningful if these banks actually stuck to their guns. (I’m sceptical that they all would). Doing it now is pure symbolism. 

At the end of the day, a banker’s job is to assess risk — and investing in Arctic oil exploration is just not a smart bet. They don’t deserve a pat on the back and a green star just for doing their jobs. 

Myles (ES): That is exactly the crux of it Billy: it’s easy to take a stand against something that isn’t going to happen. 

As Derek points out, the newfound ability to exploit America’s abundant shale resources has largely put paid to the days where plucky wildcatters would set out on high risk, high reward missions to unearth big oil reserves in far flung places. But there is another reason why drilling in ANWR is not a realistic prospect: a septuagenarian from Scranton named Joe Biden. 

Even if some enterprising upstart buys up leases in ANWR, despite the odds stacked against its success, the man who takes up residence at 1600 Pennsylvania Avenue next month will do all he can to impede the project. While Mr Biden cannot easily cancel the lease sales, he can slow the process to a snail’s pace, driving up costs to make the project even less palatable. 

Mr Biden has a range of tools at his disposal: an executive order to stop further development of ANWR pending a lengthy review; reallocating permitting staff away from Alaska; or he could go the whole hog and declare parts of the Alaska coastline a national monument, rendering it off limits to drilling. 

Rushing through lease sales may be a symbolic gesture by Donald Trump. Stopping the project in its tracks, by hook or crook, would be an even greater symbolic gesture for his successor.

Data Drill

Global capital expenditure on renewables took a hit in 2020 as the pandemic disrupted new projects, but spending is set to recover to pre-crisis levels next year, predicts IHS Markit, a consultancy.

Global spending on renewables development (not counting hydro power) is set to fall 7 per cent this year to around $235bn. That will bounce back to around $255bn next year, IHS Markit expects, with spending levels then staying relatively flat through 2025, bringing total expenditure to $1.3tn between 2021 and 2025.

Stalled spending growth may sound counterintuitive given the boom in new wind, solar and other renewables capacity. IHS Markit points out that falling costs mean renewables developers will get a lot more bang for their buck in the coming years. Solar costs are expected to be about 40 per cent lower than 2017 levels by 2025. Onshore wind projects will be about 20 per cent cheaper.

Column chart of $bn showing Global renewables spending to bounce back from crisis hit

Power Points

  • Oil demand is set to rebound more slowly than anticipated in 2021 as the aviation sector takes longer to recover.

  • The US Federal Reserve has joined a consortium of central bankers supporting the Paris climate goals as it becomes more outspoken on the risk climate change poses to the global economy.

  • BP’s former finance chief Brian Gilvary is set to take a senior position at Ineos, ending speculation he could become Rio Tinto’s next chief executive.

  • Australia has warned China that a ban on its coal would breach World Trade Organization rules and harm both countries.

Endnote

The Trump administration’s latest effort to lock in a more industry-friendly regulatory regime in its waning days saw the US Securities Exchange Commission pass watered down transparency rules for oil and mining companies on Wednesday.

The Dodd-Frank legislation, passed in the wake of the financial crisis in 2010, included an anti-corruption provision, known as section 1504, to compel US-listed companies to report project-level payments to foreign governments. The first iteration of that rule was thrown out by the courts, and a second version was overturned by the Republican-controlled Congress in 2017.

The Trump administration yesterday passed an updated rule that only requires US-listed companies to report payments to foreign governments at the national level, not the much more detailed project level.

It was a big win for the US oil and gas industry, which had argued that detailed reporting put it at a competitive disadvantage to international competitors not subject to the disclosures. Resource companies listed in Europe and Canada are subject to detailed project-level reporting in those jurisdictions, which ironically modelled their own rules on the original Dodd-Frank legislation.

For all the twists and turns, it’s not clear how much the Trump administration’s efforts will matter in the years to come. Ken Rivlin, a partner Allen & Overy, argues that investor pressure around environmental, social and governance standards is pushing corporate America towards more disclosure — not less. And the Biden administration is likely to champion tighter reporting standards once it comes into office.

“Big picture I see most companies ultimately needing to disclose these types of activities down the road,” said Rivlin.

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from Justin Jacobs in Houston, Gregory Meyer in New York, and David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London.



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Coinbase: digital marketing | Financial Times

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Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.

This thread is closed to comments due to a history of posts on this subject that breach FT user guidelines



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US stocks make gains on Fed message of patience over monetary policy

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Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.



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Fed needs to ignore ‘taper tantrums’ and let longer rates rise

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The writer is chief executive officer and chief investment officer of Richard Bernstein Advisors 

The Ferber Method, a sleep training technique, teaches babies to self-soothe and fall asleep on their own. It’s as much a training technique for new parents to ignore their baby’s crying as it is for the child to learn to cope by themself. 

The US Federal Reserve should consider Ferberising bond investors and ignore future “taper tantrums” like the market disruption that occurred when the central bank signalled tighter monetary policy in 2013. The long-term health and competitiveness of the US economy may depend on bond investors’ self-soothing ability to cope with reality.

The slope of the yield curve is a simple model of the profitability of lending. Banks pay short-term rates on deposits and other sources of funds and receive longer-term rates by issuing mortgages, corporate loans, and other lending agreements.

A steeper curve, therefore, is a simple measure of better bank profit margins, and has in past cycles spurred greater willingness to lend. Historically, the Fed’s Survey of Senior Bank Lending Officers shows banks have been more willing to make loans to the real economy when the yield curve has been steeper.

A chart showing how banks have been more willing to lend with a steep yield curve. As the slope on the US treasuries  10-year-less-2-year yield curve has steepened, so the net percentage of banks reporting tighter lending standards has fallen

With that simple model of bank profits in mind, textbooks highlight the Fed’s control of short-term interest rates as a tool to control lending. The Fed reduces banks’ cost of funding and stimulates lending when it lowers interest rates. But it increases funding rates and curtails lending when it raises short-term rates. Coupling lower short-term rates with a steeper yield curve can be a powerful fillip to bank lending. 

However, policies in this cycle have been unique. As US short-term interest rates are near zero, the Fed has attempted to further stimulate the economy by buying longer-dated bonds and lowering long-term interest rates. Those actions have indeed lowered long-term borrowing costs in the economy, but banks’ willingness to lend has been constrained because lending margins have been narrow and risk premiums small.

Banks in past cycles might have been willing to lend despite a relatively flat yield curve because they could enhance narrow lending margins by using leverage. However, regulations after the financial crisis now limit their ability to use leverage.

This policy and regulatory mix has fuelled some of the growth in private lending. Private lenders are not subject to regulated leverage constraints and can accordingly lend profitably despite a flat curve. The growth in private lending effectively reflects an unintended disintermediation of the traditional banking system. This has meant liquidity destined for the real economy has largely been trapped in the financial economy.

The yield curve has started to steepen, and the Fed should freely allow long-term interest rates to increase for monetary policies to benefit the real economy more fully. Allowing long-term rates to increase would not only begin to restrain financial speculation as risk-free rates rise, but could simultaneously foster bank lending to the real economy. 

Thus, the need for the Fed to Ferberise bond investors. Banks’ willingness to lend is starting to improve as the curve begins to steepen, but some economists are suggesting the central bank should continue its current strategy of lower long-term interest rates because of the potential for a disruptive “taper tantrum” by bond investors. The Fed needs to ignore investors’ tantrums and allow them to self-soothe.

The investment implications of the Fed allowing longer-term interest rates to rise seem clear. Much of the speculation within the US markets is in assets such as venture capital, special purpose acquisition vehicles, technology stocks and cryptocurrencies. These are “long-duration” investments that have longer-time horizons factored into their valuations. They underperform when longer-term rates rise because investors demand higher returns over time. Capital would be likely to be redistributed to more tangible productive assets.

Investors and policymakers should be concerned that monetary policy is fuelling speculation rather than supporting the lending facilities needed to rebuild the US’s capital stock and keep the country’s economy competitive.

Like a new parent to a baby, the Fed should not rush to coddle bond investors’ tantrums and should let the financial markets soothe themselves. Short-term financial market volatility might cause some sleepless nights, but the Fed could unleash the lending capacity of the traditional banking system by letting the yield curve steepen further.



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