Bread and Circuses – The Football World Cup

From the 14th June (tomorrow at the time of this writing) the world will witness its 21st World Cup tournament, this time hosted in Russia. Football is an odd game to have conquered the worlds hearts. A sport popularised by the sons of aristocrats running around the wet and cold fields of England’s leading 19th century public schools, is now actively played by over 270mn FIFA registered players globally while the World Cup is the World’s most watched event, with 3.5bn people reached in the 2014 tournament.

But while the talents of the worlds leading male football players will fill the papers for the next few weeks, it is also worth taking some time to consider the impact that the World Cup has on national politics.

The World Cup can exert a powerful affect on national moods, not only on the host nations but also on those who participate. In 2006 as Germany hosted the World Cup, the nation witnessed the first large scale public displays of German flags and German nationalism, or as one German friend remarked to me “It was the first time in my life I felt it was ok to be proud of being German”. By contrast spare a thought for Brazil, who after financing the World Cup and the Olympics, crashed out of the World Cup against Germany in a 7-1 in what the BBC called one of the “Great World Cup moments”. Not only did the tournament torpedo the reputation of Brazil, it also destroyed the popularity of the national government, and when the full details of the lavo jato or “Operation car wash” scandal first started to appear in 2014, it was a matter of time before the acting President Dilma Rouseff was impeached and the Workers Party (PD) removed from party. Incidentally, Argentina’s subsequent loss to Germany in the final also helped sour Argentine national mood and along with Brail the country removed President Cristina Fernández de Kirchner in 2015.

So, what is there to consider at this World Cup? Well firstly its hosts are not exactly in the international good books. Following large-scale arrests and investigations, it is widely believed that the Russian hosts bribed their way into securing the World Cup tournament this year.  If that wasn’t bad enough, the country remains under heavy international sanctions for its illegal annexation of Crimea, alongside its involvement in the deaths of Dutch nationals in Ukraine and its complicity in Assad’s war crimes in Syria. Given this backdrop, President Putin sees an opportunity to distract the world (and his citizens) with well-executed games. If Russia performs well, the visitors are happy and the matches are exciting, the country will be given a strong platform to re-engage with Europe on sanctions whilst also undermining domestic political opposition. However, a loss in the group stage, followed by further corruption details and stories about Russian football hooligans would further undermine both domestic and international support for Russia.

But Russia is not the only country looking to the World Cup for a reputation boost. Both Iran and Saudi Arabia would benefit from stronger than expected performances, and while the chances of any Middle Eastern Team winning the cup are reasonably low, an advance to the semi or quarter finals would still provide a large positive PR boost to these middle eastern nations.

While for some the World Cup is a chance to build a positive PR platform, for others it is a welcome distraction from challenging political issues at home. A strong Spanish performance may help to deflect attention from Catalonian politics and the current governments relative weaknesses, while Angela Merkel would also gain from a strong German performance to distract from political in-fighting between the CDU and CSU over immigration policy designed to see off the rise of the AfD. In England, a strong performance would surprise the nation and provided a much-needed distraction to Theresa May during a torid period of Brexit discussions. Given the negative publicity surrounding Poland’s current government and its policies on refugees, judicial reform, coal power plants and running battles with the EU Commission, a strong performance from the country would further boost nationalist sentiment and distract from the countries wider challenges. Lastly in France, the Macron factor could receive a badly need boost, following the weak responses from Germany to France’s new EU reform.

Then of course there is Latin America, the only other rival to Europe is its wide spread fanaticism to the sport and its quality of national teams across the continent. Brazil hungrily eye revenge in this World Cup, and a strong performance (especially a win) could be an immensely powerful psychological boost to a country suffering from a prolonged period of economic malaise. By contrast, Colombia sees the World Cup as a chance to build on its strong performance in 2014 and as a way for the country to continue showing off its transition from a near failed state in 2000, to a vibrant and dynamic society, recently approved to join the OECD and eager to encourage tourism and investment.

Across all of these countries and the host of others I haven’t mentioned, the biggest immediate impact of the World Cup is domestic retail spending. When Italy failed to qualify for the World Cup, Bloomberg estimated the cost at 1 billion euros. As each country advances, or crashes out, the countries bars, restaurants, shops and treasury departments will feel the impact. While this may only be small, a good-will spending mood going into the summer can be a powerful driver of economic momentum.

Lastly spare a thought for young Iceland. As a country of under 400,000 people it has the ability to truly upset the footballing world. Not only would a series of Icelandic victories likely lead to a record number of google searches for “where is Iceland” but more importantly it would drive home the question that many sports fans, players, investors and commentators have long asked: “Is football about money, or about the passion of the team and how they work together?”…….well maybe I am stretching a bit here, as the more likely question will probably be “how the hell did they win when we cant even qualify”? Nonetheless, the symbolism of an underdog succeeding is a powerful image in sport and a powerful tool for domestic identity building.

So while you enjoy the games during this World Cup, spare a thought for what the win or loss may mean for those competing. The consequences may be bigger than you realise.

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Europe is focusing on all the wrong issues

Possibly one of the most engaging podcasts of 2017 for me was a show called “Talking Politics”, a Cambridge University show hosted by a historian called David Runciman. While Professor Runciman covers a number of fascinating topics on the show, his most memorable is a recording of a lecture he gave based on his latest book “How Democracy Ends”.  The talk itself excellent and the link is available here. The key takeaway of David’s talk is that democracy as we know it is extremely young and liable to fail, but its cause for failing is unlikely to look familiar to anything we have seen before. In this regard, the comparisons between modern times with the 1930s (See Macron’s recent OECD speech), are at best lazy and at worst dangerous. The risk is not the collapse of democracy we have seen before, but rather the challenges to democracy which we have not even realised are undermining democracy. All of which begs the question: if there are signs that democracy is failing, then are we even looking in the right place? Which in turn brings me to the future of the European Union.

Today politicians, pundits and the press comment tirelessly on Trump, Orban, Erdogan, Putin and a range of other global “strongmen”, whose actions are closely scrutinised under the micros-scope of historical comparative analysis. In this regard, I believe that we are falling into Runciman’s trap of focusing on the wrong challenges to Democracy.  I want to offer a different perspective. The greatest threats to democracy today are not coming from Trump, Brexit, Putin or Xi Jinping. Rather the greatest threat to the Democracy today is that political discourse, institutions and policies are focused on the wrong issues. Nowhere is this trend more apparent to me than in the European Union.

For the EU to survive, thrive and evolve, it needs to stop focusing on how to bully members like Poland and Hungary, impoverish members such as Italy and Greece, punish close allies like the UK and ignore crucial strategic partners like Turkey. An EU that retains its membership by fear of the economic consequences that leaving will entail (see Greece in 2014 and current threats in the Brexit negotiation today), rather than by promising and providing an exciting vision of a better future, is doomed to failure. Democracy in Europe will not end because countries vote to leave the EU or because citizens across the union hold different social values on immigration, human rights and economic opportunities. Rather, democracy will end because the cost of leaving the EU becomes so great that accepting technocratic governments in perpetuity becomes the default position for a public, whose increasing frustration with the inability to affect real change in their country leads to anger, then despair and finally total disengagement with the political process.

The EU needs to reflect on its history, the pillars that made it successful, the flexibility it showed as it grew and the positivism it gave to its citizens. The EU was built by people who believed the nation state could be swept away by a new identity, a “European identity”, which would create a sense of continent wide solidarity between citizens. We see this very approach today in the existence of the Schengen zone, the ERASMUS program, the joint funding of agencies like ESA, Frontex, and new EU national symbols such as a flag, an anthem and a series of diplomatic embassies abroad. But while the idea of a United States of Europe may have been the dream of the bureaucrats who built the EU’s institutions, it has never been the desire of the population of Europe. It is because of this disconnect and the lack of clear accountability between the EU institutions and EU citizens on this issue, that the future survival of the EU is at stake.

In less than ten years, a project that took over seventy years to construct is about to lose its second largest net budget contributor (The UK), it has converted the most pro-EU country into a nation whose governing coalition are explicitly anti-Europe (Italy), it has allowed an autocrat to take control of a key central European economy on an anti-EU ticket (Hungary), meanwhile facilitating the rise of anti-EU parties to become the second and third largest political parties in Europe’s core (France and Germany).

When residents of EU countries are asked if they would like to leave the EU, the majority are solidly against such an idea. But every day political parties and political movements against Europe are getting stronger and stronger and that certainty is fading. The problem is not, as many EU supporters believe, that Russia and/or fox news are spreading fake news and corrupting local politics (though I am sure they’d love to if they could). The problem is that there the EU is unable to articulate a future vision that resonates with the wishes of the EU’s own citizens and provides them with an exciting future to work towards.

If the best future outcome is a United States of Europe, then make the case. Explain the need for a European response to global issues, the merits of fiscal solidarity alongside monetary solidarity and the case for continued subsidies for poorer members, to reduce the pressure of internal migration on richer members. But the EU does not make the case.

If the future is to be a two-speed Europe, with a membership for countries like Turkey, the UK, Norway, Ukraine and potentially even more peripheral members such as Morocco, Israel or Russia, then make the case. Maintain a eurozone core, allow divergence from certain core competencies in the outer core and allow parties to decide which projects and programs they wish to contribute to and engage with. But again the EU does not make this case.

Many Europhiles think these comments are unfair. The issue, they would argue, is not that the EU does not have a clear vision but rather that the national governments of Europe are too afraid of their electorates to promote a United Vision of Europe. There is certainty truth in this. In referendums on an EU treaty, France and the Netherlands voted “No” in 2005, Ireland voted “No” to Lisbon in 2007, The Netherlands voted “No” to allowing greater visa access to Ukraine in 2015 and the UK voted to leave the EU in 2016. All of which brings us back to the question of why is the EU so unpopular today and how can it change it?

I believe that the EU’s existential crisis is a direct result of the systems disconnection from democracy. It is not enough to simply suggest that electing MEPs shows that the EU is a democratic insitution. The EU now controls vital national issues such as migration, citizens’ rights, agriculture, trading relations with other nations, foreign affairs and a slew of other issues. These areas affect EU nationals every day and yet the mechanisms to change these policies are completely beyond the scope of any one nation. To change migration for example, a citizen of France would need every EU national to vote for MEPs in their countries who wanted to change migration, they would then need to get every EU national to vote for national governments who sit on the Council of Europe so they also vote to change migration. They would then need to lobby the EU commission and if a treaty change is needed, they may need a referendum in certain countries. At almost all stages, a lack of unanimity can end the whole process, see the near collapse of thee free trade deal with Canada over less than 100,000 angry Belgian farmers (500mn people almost ignored because of 100,000).

This complete lack of responsiveness to change is at the heart of why the UK is leaving, Italy could potential leave and many other Eurosceptic parties across Europe believe that their own exist from the EU is a matter of time. While the EU focuses on trade deals abroad, beating up US tech companies, punishing the UK for the EU’s own inflexibility and begging Turkey and Libya to avoid more mass migration into Europe, the EU is failing to tackle the real issues. The lack of a vision for the future and the lack of democratic accountability within the EU are the single largest issues facing the Unions survival and they are being ignored. The consequences of the EU’s continued failure on these issues will be dire: The failure of democracy within the EU itself.

Has Facebook gone too far?

It was probably inevitable, but the crisis engulfing Facebook is one of the most embarrassing examples of Silicon valleys hubris in the last two decades.

A company that specialises in connecting people, an exercise that requires people to trust the platform as a place to share content, has managed to simultaneously violate that trust and act totally surprised in doing so. When Facebook was first created it was a place for university students to share stories, an occasional photo and talk to friends when they couldn’t afford to call abroad. Today it is a business platform for multinational corporates, a virtual monopoly in the global social media world (excluding the great digital firewalls of China and Russia), as well as the largest surveillance mechanism ever created by man. If the apocryphal tales that Facebook was created by the CIA ever become more than conspiracy theories, I would take the agents out for a beer. It’s hard to imagine them being more successful in manipulating billions of people to hand over the most intimate details of their life than Facebook.

But what do we do about it? Facebook IS the only platform where everyone can find a friend, family member or old classmate from their school days. It also owns Whatsapp, Instagram and nearly brought out Snapchat (before deciding it was cheaper just to copy all of their ideas into Instagram instead). Indeed, the monopoly is alive and very well in the social media space. So much for a dynamic and free market that internet radicals long predicted.

The issue with Facebook is that it has transcended its role as a tech company and become a global public good, much in the way that GPS, SWIFT and Wikipedia have done. This conflict between its corporate needs and Facebooks public nature is at the heart of the conundrum that is threatening Facebooks future role as the global sharing platform.

There may come a time where individuals lose their inhibitions and learn to accept the flawed nature of humanity, such that the embarrassing university photos and awkward Facebook status of our childhood become nothing more than a source of amusement. But we are not there yet.

In the interim the most radical solution may yet be the one true way to ensure the eternal legacy of Zuckerberg’s creation: turn the company into a global charity with an international non-partisan board. Such a solution has long been muted for Twitter, another social media company that serves a clear public good, but unlike Facebook it has lacked the will (some would say ability) to extract the financial gains necessary to ever become commercially viable.

A world where Facebook becomes a utility like Verizon or a charity like Wikipedia is hardly likely to thrill investors and tech entrepreneurs. Then again, few people who change the world ever live to see the real fruits of their efforts.

If Zuckerberg is serious about fixing Facebook he needs to find a way to square the circle between regaining user trust and generating the returns expected by Wall Street.

For a man more concerned about his public appearance than his bank account, Mr Zuckerberg could do worse than consider what Facebook would look like if it became a true global public good rather than a Wall Street darling. The clock is ticking and the users are leaving.

Your move Mr Zuckerberg.

Wham, Bham, thank you Ma’am! – Financial Market chaos in 2018

On the 5th of February 2018, the Dow Jones witnessed its largest one-day point decline in its 120-year history. In total, the 30 largest US listed companies from across the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) dropped 4.6%, a percentage decline not seen since the eurozone crisis in August 2011. Nor was the Dow alone.

As investors across the world saw the roaring US stock market come to a violent halt, stock markets in Asia and Europe started to collapse as well.

Why? What went so badly wrong that the world suddenly lost its cool and within a week almost all global indices had fallen by 6%-12%?

Most of the news for 2018 actually looked pretty great.

The IMF had upgraded global growth forecasts for 2017, 2018 and 2019, while claiming that the world was about to witness the “‘broadest’ upsurge in global growth since 2010”. Global Mergers & Acquisition activity was at its highest since the dot.com boom over 17 years ago, the eurozone grew at its fastest rate in a decade and manufacturing growth has exploded across the US, Europe and the UK.

Given these factors, many retail investors and ordinary people reasonably asked the question: “Why did everything collapse and what should I do with my money now”? In an attempt to answer the first part, we have to begin with separating the event itself (the stock market collapse), and the reasons behind the crash (the fundamentals).

There are many different and authoritative views on this issue, including a very easy and concise piece by Bloomberg available here. My take is below:

With interest rates at record lows, the stock-market continuing to grow at breakneck speed and the global economy expanding, people have thrown caution to the wind and invested in the stock markets. In fact, January 2018 witnessed record levels of investment in the stock-market, as confidence took over and people from all walks of life began to invest. This is where the problem started.

Everyone in the stock market had been waiting for a fall. But knowing when it would come had been a significant challenge. If investors left too early, they would be potentially giving up the chance to make more money. If they left too late, they may lose everything. On January 29th and 30th, the first investors lost their calm and pocketed their gains and as January came to a close, the US stock market saw two days of consecutive decline and its largest fall since May 2017 (a small blip in comparison to what would happen later).

But why were the professional investors sceptical of the market? Here again we must return to expectations.

The aim of a professional investor is to generate returns that exceed what could be earned by investing in a risk-free asset. In simple terms “risk free” usually means bank deposits and the bonds of the worlds most financial secure markets (US, UK, Switzerland, German). The reason they are “risk free” is because most bank deposits are covered by insurance and because these governments are considered financially prudent enough to guarantee that any money owed to investors will always be repaid. Naturally this sounds like a great deal for investors. Put your money into a bond and earn a guaranteed amount of interest. What is not to like? Well the problem is that after the financial crisis too many investors thought that this was a good idea and so as the demand for bonds increased, their price increased. To cut a long story short, when the price of a bond increases the interest (read return) gets smaller. This is where the problem started.

Risk free bonds are the benchmark for professional investors. The expectation is to beat the risk free rate and the more risk the investor is asked to take, the bigger the return they expect (over the risk free rate). But if the risk free rate is extremely low, then risky investments can look increasingly attractive if investors cannot reach their target return through traditional investments. Pension funds are an excellent example of this. Prior to 2008 a pension fund would expect to pay 3% of all its funds under management out to its retirees every year. Therefore, as long as the pension fund could earn over 3% the fund would meet its obligations. Conveniently several types of government bond from the UK, USA and across leading economies were paying around 5% prior to 2008, allowing pension funds to make a 2% profit and meet all of their commitments, with minimal risk. But the financial crisis and ultra-low interest rates changed everything.

 As interest rates dropped to nearly 0% (in some cases negative), investors like pension funds, were forced to find other ways to generate their returns and so they piled into property, real assets (gold, oil, etc) and stocks. Accordingly, the stock market exploded. It didn’t matter that a company was now generating 3% return a year (compared to 5%) because its share price had risen. The alternative was a 1% government bond.

So back to 2018, the key question for investors was this: when would interest rates rise sufficiently that large money managers would sell their stocks? After all, if the interest rate rises then the return from the stock must price in tandem at every step. But that cannot happen forever.

So the magic number was 3%. Specifically, investors began to believe that rising wage inflation in the US at the end of January would increase the interest rate on US ten-year debt to 3%. If inflation was high, the US Federal Reserve would increase rates and money managers would sell their stocks. In Germany the same thing happened when the largest German workers union negotiated an inflation busting pay rise in February, leading to significant stock market declines in the US stock market (the 2nd worst performer after the Dow Jones).

What next?

The financial markets have broadly calmed following their collapse at the start of the month, but the truce remains uneasy. It is clear that investors remain extremely uncertain whether the sharp decline in share prices remains the only price “correction” that we shall see for the year, or if it is merely an early warnings tremor before a larger financial earthquake later in the year. On this question, expert opinion is fiercely divided.

However, for people interested in following the stock market closely its worth looking at whether any of the large companies, famously called “Unicorns” choose to finally go public this year. Traditionally private companies go public when they believe that valuations are at record highs, not when they believe that there is space to grow. So if you see AirBnB, Uber or even Spotify go public, then maybe consider putting some more cash in the bank and out of the stock market.

Important disclaimer here: This piece merely reflects the views of the author and should not be considered as financial guidance or advice.

Trump’s exit from the Presidency

Could the Trump presidency end with a faked illness and a presidential pardon? This is the question I have been asking myself recently and increasingly I am convinced that this is the most rational route I can see. So how would that actually look, why would the administration follow this route and how would it play out?

Let’s review where we are.

The current president clearly did not intend to win the election. While it was already widely suspected, the fact that Michael Wolff has audio recordings from the White House and staff confirming this is significant. Moreover, Trump is now at risk of having either his son or his son-in-law impeached by an ongoing FBI investigation.

But before we continue, here is a very brief recap for those who have no idea what is going on:

Since the Trump presidency began a series of scandals and rumours have swirled around whether Trump or his team received political and/or financial support from Russia. These have exploded as an investigation led by the Justice Department’s Special Counsel Robert Mueller have repeatedly detained and charged key members of the Trump team. Thus far three campaign officials have pleaded guilty to various misdemeanors and the question is whether they will reveal even more information on the senior members of Trump’s circle, in return for reduced sentences. If you’d like a far more detailed explanation, Vox and the NYT have two great pieces linked here.

The concern then is that Trump, already embroiled in scandals, now risks losing a very close family member to a story that is intimately tied to his own name and brand – the election of Trump as the President. But why cant he just pardon Jared Kushner or Donald Trump Jnr? Better yet, why not fire Mueller? The answer is the Republican party itself.

The Republican party leadership are distraught. They have held all three branches of government for a year, yet failed to repeal Obamacare and only managed an overhaul of the tax bill by ignoring every Democrat and out of internal desperation for a “win”. Even worse, the Republican President has called several African countries “shitholes” in a congressional meeting on immigration, openly admitted that he can do what he wants with women because he is famous and has defended White Supremacists. To add insult to injury he risks starting a war in North Korea and he has destroyed US credibility on trade. By weakening the WTO through failure to appoint key figures, ending both the TTIP and the TPP treaties, renegotiating NAFTA and imposing unilateral tariffs, Trump is managing to undermine the Republican brand on a core issue – trade and economic prosperity.

In short, Republican loyalty to the President is non-existent at the executive level. The only thing holding both Trump and the party together is the electoral base of radical republicans who first elected Trump in the US primaries. But while they may protect Trump from attacks from the establishment Republicans, that doesn’t mean they would attack the establishment if Trump voluntarily left the post.

This leads me to my current hypothesis: Trump wants to leave and save face in the process. Trump also wants the risk of criminal charges to be removed, without him having to make the move himself. Meanwhile the Republican party want a smooth transition of power from Trump to Pence, with an agreement that the radical wing that Trump/Bannon pander too, will support a more moderate Republican platform. In such a scenario, it is perfectly plausible that the administration will wait until inside news reaches them that criminal charges are being drawn up against the closest members of the Trump family. Then the pieces on the chess board move.

In the weeks before charges are brought, Trump will appear in public less frequently and news of medical treatments will be leaked to the press. In the final two weeks, Trump will officially be “treated” for a series of “undisclosed illnesses” and charges will be officially brought against Trump’s circle. Pence will strike a deal with the Republican leadership and the Trump family that he will pardon all involved parties, but for this to work the charges have to be issued. Trump’s inner circle, whether it is Trump Jnr or Jared, will have to take the fall and accept all responsibility for the actions.

With the investigation concluded and charges brought, Trump can now resign on ill health and Pence can pardon the family on the grounds of political inference by Mueller. Besmirching his name may not be accepted by many, but it will placate the Trump base and help them to save face as they leave office. Then we will have a Pence Presidency.

At any rate, this is just a thought. Let me know what you think.

Wrapping up 2017

Given the volume of news in 2017, finding a common theme to make sense of the noise has proven challenging. However, as we start 2018, there is an argument to say that 2017 was defined by the actions of the world’s Central Banks.

After years of unconventional monetary policy, the actions of the Federal Reserve, the Bank of Japan, the Bank of England, and the EBC have begun to deliver results. The spectre of deflation has been defeated and inflation appears to be increasing across the world’s major developed economies. Economic growth has picked up in the Eurozone and Japan, while emerging markets have survived the first few US interest rate hikes without causing a collapse. But just as the achievements of these policies have been recognised, so have the costs.

As central bankers discouraged saving by reducing interest rates close to zero, investors were forced into equities and real assets. This led to a surge in global property prices and record levels of investment in global start-ups, crypto-currencies, and passive indexes. Rising property prices have led to bans on second homes across developed economies from New Zealand to Western Canada, and clamouring calls for a ban in London. In many developed economies, the average property price is now well beyond the 4x annual salary against which banks will provide loans, forcing a greater proportion of people to rent than ever before.

The hunt for yield has also played an essential role in the financing of the new economic giants that dominated news headlines in 2017: the FANGS (Facebook, Amazon, Netflix, Google, and Salesforce) being the most notorious. The perfect combination of ultra-low interest rates, subdued consumer demand and a psychological willingness to believe in the new technological era has encouraged investors to support “revenue over net profit” business models. The FANGS now represent five of the world’s most valuable companies; yet in over ten years only two have recorded net profits in their annual reports. Even more dramatic has been the explosion of Uber, Lyft, and AirBnB, whose valuations now exceed $100bn but who have never generated a profit.

Many of these themes were apparent in 2016, but their significance was not fully appreciated by politicians. As a result, the continuation of these economic distortions in 2017 was essential in highlighting the driving political crisis of the year, that of public outrage over growing economic inequality. As a consequence, 2017 represented a break in the conventional political wisdom that a government which achieves economic growth can offset these incentives against social and domestic challenges.

Even with a raging equities market, record low levels of unemployment, and signs of growing wage inflation, the US welcomed 2017 with the arrival of the most populist President in living memory. Similarly, the Conservative party in the UK ushered in the New Year with one of the strongest economies in the G7, only to lose its majority in Parliament following a snap election in June.  European voters showed that immigration was frequently a more significant issue for voters than headline economic numbers. In Germany, the bed-rock and engine of the Eurozone, the governing grand coalition hit record low polling numbers in the Bundestag elections, as the AfD entered the federal government for the first time. Meanwhile, France closely avoided electing the outwardly racist Front National. Austria elected a far-right party to government for the first time since the 1930s, where the party took the cabinet posts for the Ministry of Interior, Defence and Foreign Affairs.

The marker of success for 2018 will therefore be to generate broadly spread economic growth that benefits all within society. In that vein politicians of the political right are likely to find themselves in need of an alternative narrative. The appeal of socialism across western worlds, whether in the Jeremy Corbyn style, the Bernie Sanders variety or the Mélenchon school, will never be stronger. Finding an alternative slogan to challenge, ‘for the many, not the few’ will be an important starting point.

The cynicism is unjustified – Hydrogen is the key to a clean transport future

The world’s largest free trade deal fundamentally re-shaped the future of Transportation – and no one noticed.

In December of 2017, the EU and Japan announced that they had agreed the terms of a vast international free trade deal. The deal, still subject to final approvals in the EU and from the Japanese diet, will create a combined economic free trade area of 600mn people worth 30% of GDP. But while the focus has been on the changes to agriculture, sustainability and regulatory alignment, a key provision has slipped almost unnoticed from the public eye. A regulatory drawbridge for hydrogen vehicles has been created.

In one of the most startling changes, barely noticed by the press, the EU have been allowed to sell hydrogen cars straight into the Japanese market, bypassing stringent legislation for Japanese specialist steel and labelling standards. In addition, the EU has agreed that “Furthermore, EU manufacturers that are not yet as far advanced in the development of this technology of the future can, thanks to the specific and much lighter conditions, import hydrogen fueled cars for testing and validation purposes and use the Japanese infrastructure of hydrogen filling stations to fine-tune their cars.”

Why does this matter? It matters because (arguably) the world’s most technologically advanced nation has bet big that the future of transportation will be Hydrogen and it is now luring all the world’s largest automakers to build out their R&D and manufacturing within Japan.

Hydrogen cars:

In 2020, Japan will host the Olympic games and the vehicles of those games will be hydrogen fueled. The aim is to put 40,000 hydrogen fuel cell vehicles (HFCVs) onto the roads by 2020, including over 160 charging spots. However global current sales of HFCVs are low, with only 1,600 sold in H1 of 2017. In part this is because the vehicle selection remains limited and the cheapest versions…are not that cheap. As a result, there are no shortage of critics. Elon Musk is famous for deriding the chances of hydrogen vehicles, a view widely shared amongst the lithium battery bulls.  However, with its ability to re-charge a car in under 5 minutes and its exceptional long range, the battle for vehicle dominance is far from over.

In only 5 years’ the global electric vehicle fleet has risen from ~50k cars to over 2mn worldwide, driven by government subsidies and falling costs as production increased. Analysts believe those same drivers could transform the hydrogen market too. In early 2017, Honda and GM announced targets for mass production of HFCVs by 2020, while Toyota, Honda, Hyundai, BMW and Daimler have committed $10.7 billion into research and development of hydrogen-based products over the next five years. There are now even a range of apps that can show you all the planned and current Hydrogen re-fueling points, like this one.

Granted, I am a confessed Hydrogen fan and have been so for a while. So in the interests of fairness, I also leave an attached rebuttal of the case for Hydrogen cars here, though it is a little dated. But regardless of whether Hydrogen will transform the light vehicle car market, there are plenty of other sectors where Hydrogen technology is likely to transform our transportation system.

De-carbonizing transport:

Depending on the source, transportation accounts for between 14% and 23% of global greenhouse gas emissions (GHGs). This sector is also growing rapidly, as aspiring middle class citizens seek to travel more and to own their own forms of transport. Ride-sharing, urbanization and automated driving all offer potential avenues in the longer term, however poor urban planning, under-educated regulators and significant cost challenges will ensure that these solutions are unable to meaningfully reduce emissions until 2040 if not later. Moreover, they only deal with the simplest solution of all, light duty vehicles.

Using IEA estimates from the Global Tracking framework, a joint World Bank and IEA publication, global renewable transport numbers remain a significant concern for efforts to de-carbonise the global energy system. According to the IEA, Electric vehicles must reach 160mn by 2030 to meet the 2 degrees target set at Paris and over 200mn to reach the below 2 degrees target. In other words, the world has to manufacture and sell at least 158mn EVs in 13 years globally, mostly fueled by clean electricity and with sufficient grid infrastructure to handle re-charging.

Achieving the Paris commitments for light duty electric vehicles alone should put pause to the idea that we can electrify shipping, aviation, rail and heavy freight with batteries as well meeting the Paris commitments for electric light duty vehicles. The only credible alternatives are hydrogen, LNG or CNG.

Compare and contrast: the new Tesla truck with the Nikola Two. The Tesla truck will have a maximum range of 300-500 miles and will require 30 minutes of full charge to add 400miles. It will also require the equivalent demand from the grid of 3,000 – 4,000 UK homes when it is charging. That is per truck…In contrast, the Nikola Two can cover 800 – 1,200 miles with a 15 minute re-fuel time. The bigger brother of the Nikola Two, the Nikola One, has similar statistics but has received $2.3bn in pre-orders, totaling over 8k. Nikola isn’t the only company in the field either. Toyota has its own project, called “Project portal”, while Kenworth is examining HFCV options as well.

Looking at the aviation space, Hydrogen fuel cell planes have already been developed and successfully tested, including the HY4 passenger craft. The plane already has a range of 1,500 kilometers and expansions for a 19 passenger plane are underway. By contrast, experts from WIRED estimated that electric batteries will take until 2045 to have a commercially viable battery plane available. Even in the smaller plane segment, the current record distance set for an EV plane is 300 miles in a two seater plane, largely modelled on a glider technology.

In freight, Alstrom and Hydrogenics already have tested Hydrogen on trains in Germany, while Ontario is looking at Hydrogen trains to replace the current rolling stock on the GO rail network. Aside from promoting local businesses, the trains are almost silent and emit none of the harmful particles associated with diesel or other fuel sources. There clearly will remain a role for electrification of urbanized rail, but even in a small landmass like the UK, the costs of electrifying entire train lines have forced planners to move towards mixed fuel and electrification trains. In this regard, Hydrogen is likely to compliment electrification for long distance commuter trains. The UK is already considering this option.

Then we have shipping. The maritime industry is one of the worst sources of pollution in coastal cities, with cities like Hong Kong calculating that 50% of all locally produced air pollution comes from the maritime industry. In Norway, parts of Canada and the USA, various attempts to introduce LNG bunkering have produced significant results in reducing maritime emissions, with Vice estimating 20% less CO2 emissions per ship, but hydrogen is likely to be the next major frontier. So far both Viking Cruises and Royal Caribbean have committed to procuring hydrogen powered ships, while Norway’s Fiskerstrand Holding AS is building a hydrogen ferry and the Port of San Francisco is mulling a $5mn investment in a Hydrogen fueling station. They are unlikely to be the last movers.

But perhaps the most surprising thing about Hydrogen now is its wider application in more niche services. For Amazon, hydrogen fuel cells have allowed the firm to revolutionize its warehousing forklifts, so much so that the company invested $70mn into a fuel cell company called Plug Power, while Walmart reacted with its own investment of $80mn in the same firm. Why? Well according the leading US body NREL, hydrogen fuel cell forklifts are at least 10% cheaper than alternatives over a 10 year investment. But the effect is not limited to forklifts. Amazon now uses Hydrogen powered drones in its warehouses to monitor inventory. With a flight time of two hours, compared to 30 minutes for a comparable electric powered drone, Pincs aerial drones offer savings of up to 5% of the total inventory stock.

Final comments:

On our current global trajectory there is almost zero chance of the world reaching its Paris climate commitments, let alone the wider level of agreement needed to reduce CO2 emissions below the two degrees limit by the middle of the century.

Our energy system is going through the most rapid transformation in its history. It is going to be messy, complicated and littered with failures. It is going to cost more than it may have done had we guessed everything right at the start, and for decades there will be debates around this subject. But one thing is clear. Without hydrogen in transportation, there is no clear evidence that we can save our planet.

In 2003 to 2004, the UK government overwhelmingly backed the idea that Hydrogen would be a key fuel of the future. Like most new ideas, the hype came early and failed to deliver. In product innovation this is often the case. The dot.com boom was preceded by the explosion of the internet almost a decade later, with the worlds largest companies all being tech stocks. Electric vehicles themselves were considered the car of the future….in the 1900’s!! Yet it took over 100 years to become the new focus of policymakers hopes for a clean transportation future.

Hydrogen has had a lot of bad press, some of its deserved. But if we are serious about climate change, investors need to drop the cynicism and engage with the technology.