Saturday, November 9, 2013

Last Call: The Unconventional PetroleuMLM Pyramid

Robert Litterman, a former partner at Goldman Sachs and co-developer of the Black-Litterman Portfolio Allocation Model, argued this week that divestment from fossil fuel companies makes economic sense:
It is well known that emissions markets have not yet priced climate risk appropriately, but what is not well understood is that today’s equity markets build in expectations that climate risk will not be priced rationally for a very long time. The market expects a slow increase in emissions prices over the next several decades. But what the market does not yet realize is that this expectation, sometimes referred to as the “slow policy ramp,” is irrational — it does not appropriately take risk into account.
Back in March, Marc Lee and Brock Ellis of the Canadian Centre for Policy Alternatives presented a similar, much more detailed analysis of the financial risk of stranded assets arising from "irrational" pricing of carbon emissions that ignores climate reality.

Update: At New Scientist, Jeremy Leggett agrees "An oil crash is on its way and we should be ready":

It is because of the sheer prevalence of risk blindness, overlain with the pervasiveness of oil dependency in modern economies, that I conclude system collapse is probably inevitable within a few years.
So much for "rational expectations"?

Perhaps. But as I reflect on Canadian government policy promoting pipelines and tar sands development and industry hype about tight oil and shale gas I get another impression: fraud. Equity markets are not merely failing to build in expectations about climate risk; they are being gamed. They are being gamed by policy manipulation at the highest levels. The unconvential "carbon bubble," as Lee and Ellis call it, is not just a bubble but is THE bubble -- successor to the housing bubble that was the successor to the bubble. It is a policy-induced pyramid, a Ponzi scheme and a multi-level marketing scam all rolled up into one.

The "last call" in a tavern is also a marketing opportunity. The customers may even load up on more drinks then they might otherwise order. After all, what the heck, it's... closing time.

and I lift my glass to the Awful Truth
which you can't reveal to the Ears of Youth
except to say it isn't worth a dime
And the whole damn place goes crazy twice
and it's once for the devil and once for Christ
but the Boss don't like these dizzy heights
we're busted in the blinding lights,
busted in the blinding lights

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