Trinity School Economic Review by trinityschoolcroydon

Trinity Economic Review

4th Edition

03. Is the Claimant Count Useless?

04. Monetarism vs Keynesianism

Contents

05. Is technological change driving a wider wage gap between the skilled and unskilled?

07. Should consumers be held accountable for the consequences of their purchases?

09.

14.

Why are all tourists not equal?

Economic Pathway – Katarina Simic, 3 years after leaving Trinity

11. Supply Chains: Why are they in so much trouble?

16. Climate Change in Fixed Income

12.

18.

Economic Pathway – Zara Zapico, 6 years after leaving Trinity

Further Reading

13.

Economic Quotes

Economic Pathway – Simon Upton, 4 years after leaving Trinity

20.

19.

Young Enterprise Opportunities

Is the Claimant Count Useless? Josh Binns The claimant count is certainly a politically influenced figure. Under the coalition government, the benefits system was completely overhauled, replacing legacy benefits with universal credit. This combined in and out of work tax credits meaning that more people had to begin looking for work in order to remain a benefits recipient. As a result, the claimant count number increased by 70%, forcing the Office for National Statistics (ONS) to create an ‘alternative claimant count’ which adjusts for the impact of universal credit, as it was acknowledged that it was no longer a viable method of measuring unemployment due to the streamlined benefits system. In addition to this though, the benefits claimant system, where you must wait two weeks before receiving them, as well as discounting pensioners who are

unemployed and looking for a job, but have a pension as a form of income, reduces the claimant count to ensure the politically sensitive figure does not rise too high. This means the count significantly underrepresents the labour survey, which is a considered a more accurate measure of unemployment. The count reports an unemployment rate of 2%, whereas the labour survey triples this to 6%, although this includes people being classed as ‘unemployable’, as they are perhaps ex criminals or lack any qualifications.

a better representation of unemployment across Britain, which will influence government policy on what regions to prioritise for investment. They also acknowledge that it does “not attempt to measure unemployment” and is instead “a useful indication of how unemployment is likely to vary between region and over time.” Furthermore, the ONS releases monthly updates of the figure, meaning that it is always current and up to date, as well as having a set age range of 16-65 to ensure that pensioners are not included (although this could also be a negative as already explained.)

However, despite this, the ONS insists that the claimant count is a good way to measure broader levels of unemployment over a period of time, as well as allowing for a regional breakdown, which the labour survey does not provide. This can allow for

Perhaps most importantly though, is how expensive, or not, the claimant count figure is to produce. In 2020-21, the UK government spent a total of £1,093 billion across all services. The claimant count costs an insignificant amount of this annual budget, and, despite its many faults, provides the government with valuable data that can help benefit society and thus we should still produce the figure, as its minor benefits allow, at a cheap price, useful data.

Monetarism vs Keynesianism Sebastian Pickering The Monetarism and Keynesian theories are both macroeconomic theories which consider the idea of aggregate demand. However, as the Keynesian theory was created at the time of the Great Depression, it emphasises demand whereas Monetarism was founded during the period of stagflation in the 1970s which focuses more on the supply of both goods and money. The framework for the monetarist theory is the business cycle, the money supply and central banks. It is all based on the Quantity Theory of Money, (money supply x velocity = price level x real GDP). It says that if inflation is too low the aggregate demand will be too low, and when the inflation rates are too high, in the short run there will be greater economic output, however over time the high inflation ceases to be effective when people start to realise what is going on. Many Monetarist economists say the most effective rate of inflation for good economic growth is around 2 or 3%. This theory can work pretty effectively to deal with the problem of inflation, however real negative shocks can drastically affect an economy. This is because it relies on the quantity theory of money working smoothly with

other factors such as an Oil Hike which would influence the Real GDP directly affecting the Price Levels in an economy. So, if ceteris paribus was assumed, an economy based on the Monetarist theory would work well. However, with the regular anomalies such as Oil Hikes and other factors, this model would not work because of these anomalies. So, a more realistic approach to take, is market Monetarism, which means using Monetarism, but still allowing the central bank to respond to changes in velocity. Whereas Monetarists do not trust the discretion of the central banks and would be willing to endure these shocks to enable them to retain control over the economy.

The Keynesian theory is also based around the idea of the business cycle and aggregate demand. Keynesians tend to favour activist monetary and fiscal policy and like Monetarists

with the quantity theory of money, Keynesian economics is heavily based on aggregate demand, (Consumption + Investment + Government Spending + [Exports - Imports]). The general idea is that the Keynesian model keeps people in work, typically in nominal wage jobs which are classed as “sticky”. In a typical market, if the demand falls, then the price falls. However, if this was true in a labour market, there would be a drop in aggregate demand meaning wage cuts; not people losing their jobs. There are other factors that effect this, such as longterm contracts and minimum wages, so it is “sticky” and doesn’t fluctuate as easily. If an economy’s aggregate demand decreases because wages cannot be cut, workers must be laid off. This decreases aggregate demand as there is greater unemployment, lower production, lower levels of consumption and less investment. A clear example of this was the Great Depression where over 30% of the workforce were unemployed. Keynesians would support central banks to expand the money supply, decrease inflation and tend to prefer governments to use deficit spending to aid the economy.

Is technological change driving a wider wage gap between the skilled and unskilled? Shakanya Osahon Economists' deep-seated anxiety surrounding the incompatibility of equality and technological change is returning to the centre of discussion. Pioneered by the Luddites in the 19th Century, workers feared that their investments into developing the skills of their trade would go to waste, as machines would effortlessly replace their role in the industry and raise the skills requirement in the industries that remained (Klein, 2019). In turn, unemployment increases – a high price to pay for economic growth. Society has relied on the human ability to learn and adapt, characteristics that we believe enabled us to manoeuvre around disruptive technological advances in a manner which horses in the transport industry were unable to (Ford, 2017). So, the question we face with our modern perspective is: has this advancement remained harmless, or should we fear the prospect of an increasing skills gap fuelling wage inequality should machines out-manoeuvre us? Broadly speaking, economic growth has masqueraded as a reliable measure of social and economic progress, particularly post war times. While the employment elasticity of GDP growth in

developing countries was defined at 0.7 (Rahman Khan, 2007), the sophistication of modernday growth requires deeper scrutiny. The impression of a guaranteed boost in productivity is unreliable, as not all automated tasks become significantly more efficient. For example, a self-checkout system in a supermarket or pharmacy, while reducing the cost of labour, does not make the task more efficient and therefore is merely a ‘so-so technology’; a term coined by Acemoglu and Restrepo.

Keynes explored ‘technological unemployment’; a term used to describe the disruptive process where machines replace the roles of the unskilled. However, this argument is not without its flaws. A firm’s profit incentive would rationally guide them to employ machines that replace high skilled occupations as this reduces costs far more significantly than inexpensive labour. Consequently, we may see the inverse of the conventional job polarization hypothesised

by Keynes. Furthermore, we assume that machines can only perform tasks by imitating the steps humans require to complete a task. Daniel Susskind claims that AI is not limited to routine work and will soon be able to demonstrate ‘human abilities’ like intuition, emotion or cognitive learning. This suggests that all forms of labour can be substituted by machinery and therefore a wage gap will not be defined by skilled or unskilled. Advocates for technologically driven growth suggest that our automated future offers more sustainable provision of better living standards, superseding that attainable through wage policies. Wages are designed to source income for the labour force enabling us to meet our needs and wants, and therefore reach suitable living standards.

However, reaching better living standards is not just contingent on the ability to afford the goods but also on the quality of the product being consumed. Technology has the ability to stimulate competition, and in turn raise the quality of products whilst lowering long-term costs. Conclusively, while I agree that the wage gap between the skilled and unskilled will continue to grow, it is human nature to evolve and innovate so any attempts to prevent it are futile. Therefore, the government should increase public spending to support those most affected. Joseph Schumpeter investigated ‘creative destruction’: the process by which new occupations form as old industries become obsolete. AI does not just create new industries; it also allows pre-existing

positions to be complemented. The underemployment of women in the labour force is driven by discriminative stereotypes in society and inequitable working conditions for mothers. In Britain alone, 70% of mothers reduce their hours or switch to lessdemanding jobs compared to 11% of fathers (Andrew et al., 2020). AI has the ability to increase the flexibility of their hours and adjust to the style of work mothers are able to manage while pregnant.

Should consumers be held accountable for the consequences of their purchases? David Aisa Miller As a world that predominantly adopts a mixed market economy, consumers are left to decide how to spend their income and I think that it is this freedom that makes us accountable for the consequences of our purchases. There will always be consequences for our actions so if we can control them, then I believe that we have an obligation to take responsibility for them and in an ideal world we should only invest in goods and services that generate positive results. What contributes to this freedom is the nature of our economy. For example, the UK has more resources allocated through the government like healthcare, so it is considered a mixed market whereas the US has more resources allocated through the market so is still mixed but leans more towards a free market. Ultimately, consumers in most economies have economic freedom which consequently impacts our society in many ways such as our environment, welfare and technological development. Whether these impacts are positive or negative, consumers should take accountability for them as our decisions control the market. For example, the choice to

quickly adopt new behaviours in response to the pandemic from videoconferencing to online shopping meant that usage has already reached levels that were not expected for many more years. “Recent data shows that we have vaulted five years forward in consumer and business digital adoption in a matter of around eight weeks,” declared McKinsey, a consultancy firm, in May 2020. Our purchases and behaviour can also lead to negative outcomes. To illustrate this, the graph below shows that the US has the highest amount of meat consumption per year in the world. This consumer behaviour should be seen as negative as these actions are causing a rise in global warming because of the large quantity of methane released. I believe that we all need to fight climate change not only because it is the right

thing to do but also because as you can clearly see our economic choices are resulting in negative ramifications that will affect future generations. On the other hand, some people think that we have no accountability as consumers are independent of the consequences of their purchases. Like when Milton Freedom said “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” He is suggesting that having this freedom is a beneficial factor of a capitalist society as it will lead to further freedom and high equality. Linking this to the idea of accountability, someone might argue that the connection between a consumer’s purchase and the consequence is very distant because in many

instances there is no immediate impact on them. Moreover, in many instances the purchase is just a step in a very long chain of actions that eventually lead to climate change and its extreme consequences like flash floods or sea level rise therefore it is natural to think that you are not personally accountable for those externalities. Personally, I think that consumers should be held accountable for the consequences of their purchases because the society we live in allows us to be free and gives consumers choices. But like Uncle Ben told Spider Man “With great power,

comes great responsibility” so I think we need to accept that we are accountable and apply this thinking in order to better control the consequences of our purchases. As we saw in this year’s COP26 climate summit, we are reaching a tipping point which once passed, will mean that parts of the planet will never be able to return to how they once were. In my opinion, we have an opportunity to make the right decision, but it is only the individual who can decide what to do. You have the power to change our economy for the better. But only you know what you will do.

Why are all tourists not equal? Tom Binns Tourists are, for many countries, the main source of income. In fact, tourism accounts for one in eleven jobs on the planet. This shows how much of a crucial economic sector it is in the global economy. However, some tourists are more valuable than others. Venice is a prime example of this. Despite being almost entirely reliant on tourists, they banned cruise ships from docking due to the lack of economic value as visitors eat and sleep onboard. In this article, I will be exploring the relative benefits of different types of tourism. The first type of tourist that I will be looking at is the lower spending backpacking or travelling tourist. These people in general, stay much longer in the country, and make a higher aggregate economic contribution than tourists that spend a lot of money

daily but pass through much quicker. An example of when backpackers support the economy in ways that higher income tourists do not, is when they support ‘diverse tourism’. This type of tourism helps support the ‘off-the-beaten track’ regions and supports attractions and businesses that might not survive without them. However, this kind of tourism isn’t all positive for the economy. Bali is one example of when tourism could be negative for the economy. In Bali, backpackers still require transport, accommodation, and entertainment. There is a growing concern that the large volume of tourists damages heritage and cultural assets and requires investment in transport and other infrastructure. Followi ng the COVID-19

pandemic, Bali has an opportunity to reduce the negative environmental and social impacts on tourism by making a more sustainable tourism model. This gives a chance to start a new chapter and try and welcome back the right number of tourists with the right economic value. However, due to the lack of money being spent by these tourists, Government Spending has had to increase to support the infrastructure that these tourists need resulting in a negative result for the economy. The second type of tourist is the higher income holiday maker. These people normally have a very high daily economic output per day, in terms of the amount of money that they spend per day. Most of these people will spend lots of money on entertainment, accommodation, travel and

a whole range of things that many lower income tourists would not. To put this into perspective, the top 5% of tourist spenders spend 35% of the total money spent by all tourists. This can help support many smaller countries who rely on tourism for income. This can be highly valuable to the local economy as it can provide people with employment and a source of income which supports a positive circular flow. This money could then be reinvested causing a positive chain reaction. In addition, the infrastructure put in place for these tourists can also positively benefit the locals such as better roads and sanitation. However, on the other hand, this type of tourism

also has its negatives. In many cases most of the money spent by these higher income tourists is centred around one area, for example the accommodation. They often remain in their accommodation an d the economic benefits rarely ventures int o the hands of the people who really need it. It may create jobs for these locals in the hotel but will mean the wider economy, regions that these richer tourists don’t travel to, will benefit much less from this type of tourists. In conclusion, a fine balance needs to be found in countries over the extent to which the different types of tourists are needed for economic

benefit. Venice is an example of this; they banned cruise ships from docking due to the lack of money spent. This doesn’t affect any other of the lower spending tourists. Changes like these are the ones that are needed, as highlighted by the action taken by Venice. So, overall, in my opinion tourists aren’t equal in the eyes of countries, and are not all equal, as an excess of one kind or another can cause problems. However, tourists can bala nce each other out very well and a mixed model of tourism will create the broadest economic benefit. The higher income tourists help make jobs and the lower spending tourists help the smaller untouched regions.

Supply Chains: Why are they in so much trouble? Thushan Peiris The UK experienced long queues in October at petrol stations with many motorists waiting to fill up their vehicle; a sight not seen since the 1970s oil crises. Despite the arguments around placing the blame for the crises, whether the media overreported fuel shortages in the UK or otherwise, the problem was very real. In fact, there is enough capacity for petrol and diesel vehicles to be on the road in the UK at any given time. So, what was the problem? It was that the fuel operators that supplied to petrol stations throughout the UK were operating a model of supply chains called the ‘just in time.’ This means that the fuel supply to each station is regulated based on the consumption data where the fuel tankers supply enough to maintain the daily demand needs while avoiding excessive storage of fuel (which is costly). In order to achieve this “just in time” supply chain, there is a reliance on an army of trucks and drivers to ensure smooth delivery with a higher degree of reliability in fuel availability for consumers. How did it get to this? The Covid-19 pandemic forced the UK government to impose restrictions on the movement of people and business activity to control the spread of the SARS-

Cov-2 virus. The prolonged restrictions including shutdown of many businesses meant that the demand for fuel dropped as many people worked from home while businesses, particularly retail and hospitality sectors, no longer needed the delivery capacity that existed before the pandemic. The fuel supply chain adjusted the delivery schedules to ensure the operational costs are kept low and maintaining the supply needed in an economically suppressed environment. The drop in demand for fuel delivery drivers meant that many left the industry at the end of furlough periods and took up other employment. At the same time, the UK completed its transition out of the European Union and left the customs union, which meant that that UK abandoned the freedom of movement for labour and goods it enjoyed over the period of membership. Many of the drivers from the EU returned to their home countries creating a shortage in the available delivery drivers. This was not an issue while the pandemic was at its peak due to the suppressed economy. From March 2021 onward, the ambitious and successful vaccination programme meant that much of the restrictions

that existed, particularly lockdowns and stay at home orders, were no longer needed. The UK moved out of the emergency phase of the pandemic towards endemicity with the removal of many restrictions including those for air travel, meant that ‘the lid’ on the economic engine was removed leading to an initial rapid rate of recovery. Businesses re-opened with customers returning although the return to work, particularly in urban areas, remained controlled. This rapid recovery increased the sudden demand for fuel but a major challenge for a ‘just in time’ supply chain, which had lost its skilled tanker drivers during the pandemic as well as to the UK’s departure from the EU. While the fuel shortages were seen as an inconvenience to many of us, lasting only several weeks, this is a wake-up call to a wider global supply chain problem that is persisting in the wake of the global pandemic. With climate change, our current increased consumption levels, globalisation and ‘just in time’ supply chains, the situation can only get worse with many supply chain disruptions to come. It is time to re-evaluate the global supply chain structure before it is too late.

The Economics Pathway 6 Years after Trinity An interview with Zara Zapico Zara attended Trinity School 2013-2015 A-Levels: Maths, Further Maths, History,

Economics, EPQ (A*AA*A*A*) Studied BSc of Science , Economics,

Politics and International Studies from University of Warwick 2016-2019 What was the favourite part of your degree? That I had the ability to focus on macroeconomics, which I prefer to micro. If you were to go back in time, what would you do differently regarding university? Honestly, I would have had a gap year after school and before Uni. I think this would have given me a much-needed mental break and would have allowed me time to be mentally prepared for Uni. It also gives you time and more life experience to think about what you really want to do. What career paths were you considering after university? What did you choose in the end? Why? I was considering the classic Investment Banking Division (IBD) route as I wasn't really aware of other opportunities out there and everyone studying Economics at University is either looking to do this or consulting. I worked in a Hedge Fund for nearly 2 years but realised that it wasn't for me. In April I left my job and travelled around Ecuador for 4 months and have now returned to the UK to study an MPhil in Latin American Studies at Oxford. I plan to do my research in the sustainable development of Ecuador.

What was the most interesting question you received at your university or Job Interviews? There was nothing particularly interesting only thing all interviews seem to ask, "tell me about yourself" and I would recommend having an answer ready for this as I literally told them about myself and I am not sure that this is what they are looking for. What advice would you give to your younger self with regard to your university or starting your Economics career? Try to throw yourself into everything and never be embarrassed about looking too keen. One last question - macro or micro? (or something else completely) Macro FOR SURE. (nothing against micro it is extremely important in understanding everything in real life including macro movements/metrics and politics - macro is just my personal favourite).

What do you like the most about your job? Not Applicable

The Economics Pathway 4 Years after Trinity An interview with Simon Upton Simon attended Trinity School 2011-2017 A-Levels Maths, Further Maths, Economics and History (A*A*A*A) Studied Philosophy, Politics and Economics (PPE) at University of Oxford 2017-2020 He is currently pursuing a Master’s in economics at Toulouse School of Economics (2021-2023), focussing on Public Policy and Development. He is interested in Public Policy evaluation or economic research, and has work experience in education, public policy and financial regulation.

What was your favourite part of your degree? The best part of my degree (I did Philosophy, Politics and Economics) was how varied it was. Getting highly trained in several disciplines makes you a stronger thinker in all of them by exploiting the synergies and the differences in the styles of working. Within Economics, my favourite part was Public Economics (economics of taxation, healthcare, education etc.). I enjoyed how applicable it was to my future career goals. If you were to go back in time, what would you do differently regarding university? I don't think I would have done anything differently going back. I was very lucky to love my degree. What career paths were you considering after university? What did you choose in the end? Why? After university I wanted to work in government. I am currently still pursuing this goal through doing a Master’s in economics. I chose to do further study in Economics because I find it fascinating and thought that my undergraduate did not leave me satisfied. I also think that I can find more interesting work with a master’s degree - doing research is incredibly interesting to me.

What do you like the most about your job? I'm a master’s student currently so not a 'job' but my favourite aspect of this is that it has allowed me the opportunity to live abroad (I am based in Toulouse) and meet people from all over the world. What was the most interesting question you received at your university or Job Interviews? In a job interview from the Bank of England I was once asked if Andy Haldane was correct to forecast a V-shaped recovery after Covid-19. Incredibly difficult question! I was also asked in a philosophy interview for Oxford, “how many grains of sand are needed to make a heap of sand?” What advice would you give to your younger self with regard to your university or starting your Economics career? I would say to go beyond economics and read sociology, anthropology, philosophy, politics all about economics. This will give you a broader understanding of what economics is and how it is limited/how it can be improved. One last question - macro or micro? (or something else completely) This distinction is not too helpful, I think. For example, if you are interested in labour economics, this has micro and macro aspects that are inseparable. Also, macro is made up of lots of micro so really...?

The Economics Pathway 3 Years after Trinity An interview with Katarina Simic Attended Trinity School (2016-2018) A-levels: Maths, Further Maths, Physics and French for A Levels (did not choose to study Economics while at school). BSc in Economics at University of Warwick (2018-2021) and now pursuing a master’s degree in Business & Managerial Economics from HEC Paris. She is looking for a job in Investment Banking.

What was favourite part of your degree? I went into my degree with a heavier background in maths and not really any Economic background. At Warwick the Economics degree is rather maths dominated which is something I loved. However, the favourite part of my degree was seeing how these mathematical tools and economic concepts could be applied to world situations (this is something we don't really get to experience while studying for A levels). Also, the independence of learning, a lot more of the focus is put on the work and effort you put in outside of lectures - and for me that meant a lot of small study groups with my friends - which I loved.

If you were to go back in time, what would you do differently regarding Uni?

interpersonal skills to create relationships with clients etc. Following my masters, I want to go into Investment Banking, particularly M&A (mergers and acquisitions). I have chosen this path because it is the perfect mix between using analytical and empirical skills (needed to create models for tasks) and giving presentations and creating long-term relationships with people (team members and clients). Additionally, I find the idea of being in the middle of some of the biggest strategic moves in key market areas thrilling and it will hopefully make every day different and exciting.

What do you like most about your job? I cannot really answer this as I am not working at the moment. However, I am studying a masters in Managerial and Financial Economics at the best business school in Europe and I love everything about it. I would be happy to discuss this further but am not sure how relevant it is. If you would like to find out more, I'd be happy to answer any other questions.

This is a tricky one because I loved every minute of all three years while at university. However, from a practical perspective I wish I had taken more advantage of the career advice and services on offer to help me get spring weeks and internships early on.

What was the most interesting question you received at your Uni/Job Interview?

What career paths were you considering after Uni? What did you choose? Why?

This is such an interesting question. It requires a lot from you but can tell the interviewer so much. It tests if you know about recent events in the news, whether you can establish when a decision is being made and it also looks to see if you have formed your own opinion about the things you read. Finally, if your opinion does differ, it is an amazing opportunity to show how you think and showcase things you know.

I enjoyed the learning style at university so much that from the end of my first year I knew that I wanted to further study once it had finished. I will explain this more in the next question. Regarding career paths, I had some experience in some sectors of the financial services industry and knew this was the area I wanted to pursue as I enjoyed the culture and the type of work it required. A lot of this work is empirically dominant (which I like) as well as working with lots of people and using

"Tell me about a recent event in the news that required a decision. Explain what it was and if you would have done anything differently."

What advice would you give to your younger self regarding university or starting your Economics career?

1) Read often and as much as you can. Getting used to reading articles from the FT or the Economist from the start will make your life a lot easier in many ways. It may give you more insight into topics you are studying at university, it will give you a background and setting for your knowledge and finally will mean that you stand out in interviews if you have this wider understanding plus the occasional detailed fact about a topic. 2) Don't be afraid to change your mind. Some people get to university knowing exactly what they want to do when they finish. Others change their minds 15 times. Both of these are fine! Just make sure that what you end up choosing is because you really want to do it, not because your friends are all taking that path, or you think it is the path you should take after a specific degree. Use the careers services to explore different options and understand which paths may be right for you and then go and network in those areas to find out more.

One last question - macro or micro? (or something else completely) Both are amazing, if I had to choose between the two, I would probably lean towards Micro (purely because it is slightly more mathematically challenging). However, I would say my favourite is Econometrics - essentially the statistical side of Economics. Working with datasets, running models to try and find effects etc. If you like statistics at the moment, Econometrics is definitely something I think you might enjoy.

Note: Investment Banking is not the only career path after an Economics degree, it simply happens to be the one that will suit me best. There are new careers being created all the time, for example Economic Consulting is something that has only really made an impact in the last 10 years and is gaining a lot of attention due to its merits. I would say keep an eye out for things like this (either by reading sources such as the Economist, or the FT) or simply asking those already with jobs that are in your network.

Economic consultants analyse business organizations' economic statuses and propose plans to help improve and change their existing programs. They generally work for a consulting firm and the firm is hired by individual businesses. Economic consultancies help businesses, lawyers and government bodies across different sectors come up with solutions to the economic issues that they face. ... No two questions asked by firms are the same, which means that the job remains interesting and requires innovation in thinking. Economic Consultancies: -

Analysis Group

Brattle

Cambridge Econometrics

CEPA

Centre for Research

Compass Lexecon

Cornerstone Research

Deloitte

Economics Consulting Associates

Economic Insight

Europe Economics

Fideres

Frontier Economics

FTI Consulting

London Economics

NERA Economics Consultancy

Oxford Economics

Oxera

PA Consulting

PWC

RBB Economics

SQW

Vivid Economics

Economic Intelligence Unit

Global Insight

International Consulting Economists’ Association

Economic

Business

Climate Change in Fixed Income An interview with Kris Atkinson Kris Atkinson is a Fixed Income Portfolio Manager at Fidelity International, where he has worked for the last 21 years. He has a Master of Arts (MA) focused on Economics from University of Cambridge. What is Fixed Income (FI)? Fixed income (FI) is a class of assets and securities that pay out a set level of cash flows to investors, typically in the form of fixed interest or dividends. At maturity for many FI securities, investors are repaid the principal amount they had invested in addition to the interest they have received. Government and corporate bonds are the most common types of FI products, popular in retirement portfolios. How has the 2008 Global Financial Crisis (GFC), Brexit & Covid-19 changed FI? The 2008 Financial crisis had an huge impact on financial markets and FI in particular. The crisis began with loose lending standards, particularly in the U.S., that damaged the value of FI instruments that were secured on those loans - Mortgage-Backed Securities (MBS). These instruments were widely held in the markets as well as derivatives used to insure them. It is estimated by the IMF that large U.S. and European banks lost more than $1trn on toxic assets and bad loans. The GFC then sowed the seeds for the European Sovereign Debt crisis which then arguably created the conditions needed for Brexit. The financial crisis transformed how financial markets and their participants are regulated. Regulatory oversight of banks and financial services companies is now far more stringent. This should make them safer, but it will not stop market crashes, just make it less likely that loose bank lending will be the causal factor. Another change being used during these crises (especially during COVID) was the widespread adoption of Unconventional Monetary Policy (UMP). UMP such as Central Bank asset purchases and negative interest rates have become normalized both as a crisis response but also in more “normal” times. This has led to extremely low interest rates/ credit spreads and a lack of dispersion and volatility; this has encouraged greater issuance of debt to fix the problems caused by economies having too much debt! What impact has Climate Change had on financial investment opportunities?

Climate change is only just starting to be factored into asset valuations, as such the values of fossil fuel producers and heavy polluters are beginning to be impacted but not to the extent that you would expect given the risks they face. We are starting to see opportunities opening up to benefit from some of the shifts in economic activity that will result.

What are the best bets for Climate Change Investments? That is the billion-dollar question! There’s no doubt climate change risks and opportunities created by our attempts to address it, are a global and multi-generational megatrend. The investment required to fix the problem is huge I have seen estimates that put it at $5trn every year for the next 80yrs. To put this in context, global GDP in 2020 was $85trn. This will create unprecedented opportunities, and risks too. For FI investors, our options are quite limited. Unlike shareholders we do not benefit from the theoretically infinite upside of a company that appreciates in value, if we are ‘buy & hold’ investors, all we get is our capital and interest no matter how well the company performed! However, we can invest in Green Bonds, bonds whose proceeds are used to invest in green projects or seek to generate excess returns by investing in companies whose risk profile decreases as a result of their climate strategy. In equities the upside (and downside) are much greater, winning technologies that replace fossil fuels will capture enormous returns but finding the winners from the losers is tricky even for professional investors who devote their working life to it. In addition to the obvious beneficiaries such as renewable generation and electric vehicles, technologies such as green hydrogen, carbon capture, energy efficiency & sustainable agriculture will have an enormous role to play. One principle that many successful investors stand by is investing in the second derivative of winning technologies, I.e. identify what are the inputs needed for a given technology & invest in those. E.g. Electric Vehicles may be the

future of personal mobility but identifying which automaker will be the beneficiary is difficult. However, we do know that most electric vehicle batteries are lithium based and rely on a mix of cobalt, manganese, nickel, and graphite and that an electrified world will require a lot of copper. Perhaps then the miners are a safer bet, no matter which automaker wins, they will all require the same basic inputs. How have you adopted your Portfolio to minimize the effect of climate change? The easy answer would be to sell all fossil fuel companies but this is the wrong approach in my opinion. Many fossil fuel producers are shifting to new energies whilst using the cash flow from legacy assets to fund this transition. Moreover, conventional fossil fuels will remain part of our energy mix for many years to come whether we like it or not, we cannot simply rule them out of a diversified portfolio. I am focusing on companies with a credible transition strategy. These companies also need to provide me with a thoughtful assessment of risks their business faces under different temperature scenarios “scenario analysis”. All sectors need to rapidly transition to a low carbon economy, we cannot leave any behind if we are to be successful in limiting global warming to 1.5 degrees. As an investor it is important that we engage with management to ensure that they stick to their promises, this means active shareholder voting and withholding debt capital from companies who do not meet our requirements. Are the UK Government & financial institutions doing enough for Climate Change? Unfortunately not but the UK is not alone in this failing. Perhaps the biggest source of CO2 emissions is the verbal hot air that has been emitted since the Kyoto protocol, as Greta Thunberg said “Net-zero by 2050, blah blah blah'. This is all we hear from our so-called leaders – words”. Governments are elected and so this reflects a broader societal apathy or ignorance to the effects of climate change. Only by accepting

the problem and voting for political leaders accordingly will we react to this problem with the requisite level of urgency. Previous generations have failed to do this, hopefully yours will be more successful. Financial institutions have been late to grasp climate change but are able to move with far greater speed and agility than governments who are subject to political cycles, e.g. the global public FI markets total $125trn in market capitalisation and over $1trn changes hands every day, we can and are beginning to direct capital to those businesses that can have a large beneficial impact on the climate. Environmental, Social, Governance (ESG) criteria are of increasing interest to companies, their investors, and other stakeholders. With growing concern about the ethical status of quoted companies, these standards are the central factors that measure the ethical impact and sustainability of investment in a company. How do they affect companies and investors? ESG investing has exploded in the last couple of years, particularly following the COVID crisis, this has led to a proliferation of products/ data making reporting and analysing companies far more complex. Understanding which ESG factors are important indicators and which is “noise” is challenging, interpreting that data is even more difficult. Even relatively straight forward data like carbon emissions is misreported and misunderstood. ESG factors introduces a layer of complexity to investing but there is increasingly acceptance that it is an vital way to capture the impact of investments. Are there risks to this change in investment strategy? Do the risks outweigh the upside? Considering the broader externalities of a business cannot be a bad thing since there is always a risk that society will force you to internalise those costs whether through fines, regulation or clean-up costs (think BP and the Deepwater Horizon incident). I don’t think “ESG investing” will be a thing in a few years-time, it will be part of a standard investment process. There are risks with any investment strategy, particularly one that results in a level of hype or herd-like investment, e.g. I personally struggle to understand the valuation ascribed to Tesla / Bitcoin but I may be wrong. As a general rule, do your homework, don’t buy something just because everyone else is and you will be okay.

Further Reading Thushan Supply Chain Risk Management - John Manners-Bell, 2020 (I read the first chapter, more specifically the part about understanding about disruptions to supply chains due to the model they had been using.) Petrol shortage: Is the fuel crisis improving? https://www.bbc.co.uk/news/explainers58709456 Talks about Triggers and effects of the Petrol Crisis. https://en.wikipedia.org/wiki/2021_United_Kingdom_fuel_supply_crisis This is more of a global perspective of the supply chains issue https://www.cbsnews.com/news/supply-chain-issues-uschina/?utm_medium=email&utm_source=rasa_io&PostID=40935927&MessageRunDetailID =6918837107 Shakanya The Tyranny of Merit - Michael Sandel (discusses growth and inequality) Susskind, D. (2011). Transcript of “3 Myths about the Future of Work (and Why they’re Not true).” [online] Ted.com. Available https://www.ted.com/talks/daniel_susskind_3_myths_about_the_future_of_work_and_why_ they_re_not_true/transcript?language=en. Ford, M. (2017). Transcript of “How we’ll Earn Money in a Future without jobs.”TED. Available at: https://www.ted.com/talks/martin_ford_how_we_ll_earn_money_in_a_future_without_jobs/tr anscript. Josh A Level Economics Textbook David Link to article: https://www.economist.com/the-world-ahead/2020/11/16/new-technologicalbehaviours-will-outlast-the-pandemic https://www.bbc.co.uk/news/health-47057341 Seb https://www.youtube.com/watch?v=jClodJpWPhY Tom https://www.researchgate.net/publication/314110119_Importance_of_Tourism_Paradox_To urism_Equinox_and_Tourism_Detox_for_Urban_Environments

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Economic Quotes

Contrary to what professional economists will typically tell you, economics is not a science. All economic theories have underlying political and ethical assumptions, which make it impossible to prove them right or wrong in the way we can with theories in physics or chemistry.

If we are really serious about preventing another crisis like the 2008 meltdown, we should simply ban complex financial instruments unless they can be unambiguously shown to benefit society in the long run. Ha-Joon Chang

Ha-Joon Chang And it's interesting, when you look at the predictions made during the peak of the boom in the 1990s, about e-commerce, or internet traffic, or broadband adoption, or internet advertising, they were all right - they were just wrong in time. Chris Anderson

I don't think Brian Cox does 'The Wonders of the Solar System' because he believes the world would be a better place if people understood about the rings of Saturn; I just think he finds physics extremely interesting. It brings him joy, and he wants to spread the love. I feel the same about economics. Tim Harford Economists have allowed themselves to walk into a trap where we say we can forecast, but no serious economist thinks we can. You don't expect dentists to be able to forecast how many teeth you'll have when you're 80. You expect them to give good advice and fix problems. Tim Harford Disasters are usually a good time to re-examine what we've done so far, what mistakes we've made, and what improvements should come next. Dan Ariely The climate crisis is both the easiest and the hardest issue we have ever faced. The easiest because we know what we must do. We must stop the emissions of greenhouse gases. The hardest because our current economics are still totally dependent on burning fossil fuels, and thereby destroying ecosystems in order to create everlasting economic growth. Greta Thunberg

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