Watching Brexit From Sicily

It has been curious to see Brexit unfold, from southern Sicily. In Noto, a stunning Baroque town, albeit rather gypsy-ridden, our queries to waiters last Friday morning at 8AM were met with befuddlement. Similarly, the tourist information lady, glancing at her purple nails, denied all knowledge of the EU but grudgingly acknowledged the possibility of a mayoral election in the next village. Saturday morning, at Caffe Sicilia, the best gelato/sweet shop in Sicily, the cosmopolitan staff were veering between despair & resignation. But by Saturday night, in Ortygia, with its marina of large yachts, one could pick up snippets of conversation amongst hordes of Milanese businessmen. The bronzed thirty-something French couples at dinner were chatting about Londres, the tragedy of the young, in between mouthfuls of linguini con ricci. Even the Gazzeta Dello Sport, Italy’s version of a serious pink broadsheet, was leading with analysis of Brexit.

The FB/Twitter hand-wringing & hysterical calls for a second referendum seem, besides their implied disrespect towards the 52% that voted to exit, to focus far too much on impact on the UK. Granted, the metropolitan elite in London have lost the warm & fuzzy feeling of being ‘part of Europe’; while a long-planned move to the Costa(s) or Puglia might have to be re-thought. Science & culture will undoubtedly suffer through loss of funding, and Cornwall apparently misses its EU cash infusions (I thought only Third-World Countries got development aid?). Still, the British electorate, whether Remain or Leave, may ruefully appreciate the possibility of Britain finally being rid of loathsome financiers as banks choose to migrate operations into the EU.

That aside, I’m not sure how anyone can have any clear view on what will happen finally, given that we seem to be stuck at the starting-block: the gun has been fired, but no one is in a rush to trigger Article 50. It would appear, until that is done, the entire question remains in limbo – hostage to the fascinating ritual fratricide of the Tories & the (mostly irrelevant) idiocy of Labour. A deux ex machina to move things along can perhaps arrive via a second referendum, court challenge, or HM addressing the nation as she memorably (if inadvertently) did on the occasion of the Chinese Premier’s visit.

But that’s the UK side. What the markets are telling us though, is that most of the worry, at a geopolitical level, is for the EU itself. European banks have taken a beating in anticipation.

Centripetal forces continue to imperil an incomplete project that only lurches forward through increasingly frequent existential crises. I can see a fork in the road. On one hand, the core EU countries can double down on unification : try to push the ball forward on fiscal & banking union, now that the tenacious objections from London have (presumably) been silenced. Yet, my suspicion is that even within the core EU, both leadership & electorate, there is little consensus on increased centralisation, consequent loss of sovereignty, erosion of  democratic accountability, and the fiscal transfers that would be needed to overcome deep economic imbalances.

The other, more likely, possibility is that the noise around Brexit, and the more urgent nationalist movements in Italy, France, even Germany, will further hamper the move towards federalism and induce more paralysis. Although the Spanish election seems to have gone okay this weekend, Italy remains the one to watch: its banks are undercapitalised, while Renzi has been a disappointment. A referendum this October looks eerily like the UK one, a protest opportunity for an alienated electorate combined with a promise from Renzi that he will resign if he loses. Recently, voters, disgusted with corruption, have elected mayors in Turin & Rome from Beppe Grillo’s insurrectionist/anti-Euro Five Star movement. In the background Umberto Bossi of the secessionist Northern League watches events calmly, puffing on a cheap Toscano cigar.

Yet the elephant in the room, even if the Remain campaign sort of politely ignored it, is the clear inability of the EU to control its external border. Sicily remains on the front line, though the scenes of 2 years ago have been better managed by Italian authorities – back then there were hundreds of migrants sleeping under the sun in Catania’s port and we were shown the remains of a wrecked migrant boat in Siracusa’s coast guard station. Tourism is the main earner here in the south, and efforts have been made to not present tourists with scenes of chaos. Yet one need only go into the outskirts of certain towns here or talk to the locals to see the social stress induced by large-scale migration into an economy long plagued with unemployment. And of course, many migrants have rapidly moved up the Italian penninsula, arguably with support of local Mafias, and onwards to Europe. It is fear of this ‘Other’, to use the term fashionable in London’s cultural/academic circuit, rather than the apocryphal Polish plumber commonly cited in the Brexit debate, or the nuances of gross vs net transfers to the EU, that probably did most to influence the voters in Hull and Huddersfield.

Unfortunately, the migration problem appears insoluble, in the short-term. To a certain extent, it is the result of an enthusiastically interventionist policy, on supposed ‘humanitarian’ grounds, in N Africa (Libya). Yet a pragmatic non-intervention (Syria) hasn’t worked well either. If one is monadically pre-disposed, one can plausibly link the migration problem to water scarcity, climate change, flawed integration policies (France), excessively permissive multiculturalism (London), or of course, the original sin of France and Britain in the Sykes-Picot Agreement. Ironically, the relatively benign Italian colonialists of Eritrea & Libya are reaping the bitterest fruit at the moment.

In summary, we are probably seeing the clash of several inconsistent pressures, playing out on the European stage. For the UK: a long-term desire to benefit from the 500m strong common market, selling them services (financial and otherwise), while assiduously avoiding many of the associated constraints and obligations. For the Leave camp as a whole: an incoherent mishmash of free trade, buoyant house prices, unfettered finance, reasonably open borders that somehow manage to keep out said Others (but possibly let in Polish builders who, after all, do a rather good job). For many Labour voters and so-called progressives: an equally incoherent, if less well articulated (they weren’t at Eton after all), shibboleth of anti-capitalism and workers’ rights (except when said workers vote the wrong way in an otherwise correctly-constituted electoral process).

And of course, the EU continues to embody a great mass of inconsistencies that are unlikely to be resolved before it is torn into pieces. However – the EU, as envisioned by Monnet, Adenauer, Schuman, and de Gasperi, was always a work-in-progress, a bureaucratic capolavoro that would, by concrete steps, each individually boring and unimpressive, achieve a de facto union. Brussels, having neither the power of autocracy nor the fiscal clout of a modern nation, is reduced to governing via regulation. It must impose a degree of uniformity across the bloc – in the hope that years of dirigisme may, perhaps, create a political unity out of centuries-old plurality.

It is also natural that the path is littered with failures and fudges.  As another great European – whose mix of idealism and brutal pragmatism would be useful today – said: ‘Politics is the art of the possible, the attainable, the art of the next best.‘ (Bismarck)

In any case, the step-by-step approach didn’t reckon with the pace of events post-2008, that have often rumbled the EU into action. Moreover, the project is built on a certain foundation of sand: one need only spend time travelling through Italy to see the deep antipathy & distrust that separates North & South – a mirror of the EU’s own divisions. While many young London-based Brits might see themselves as European, and plenty of young Italians have decamped to London in search of opportunity, it’s not at all obvious that institutionally or culturally, the average Sicilian is particularly keen on the promises of enlightened rule from Brussels. Possibly rightly, he has internalised Don Fabrizio Salina’s recollections on Sicily’s 2,500-year history as a colony.

All the punditry notwithstanding, no one is sure how this will ultimately play out, and most likely we will all become bored with it within the next few days – never mind 2019, the presumptive end of the Article 50 timeline. But we can take great comfort that the UK’s negotiating team, and such Anglophiles as still remain in Brussels, will have ample guidance in back catalogues of Fawlty Towers & Yes Minister !

Pronounce to rhyme with ‘Basil’: BREXXX-IT !!!

Rites of Spring: Gergovie & Tutto Wine Tasting

View of Tutto/Gergovie Spring Tasting 2016 in the Round Chapel, Hackney
View of Tutto/Gergovie Spring Tasting 2016 in the Round Chapel, Hackney

Those lucky enough to be in London for the Bank Holiday had a chance to go to an superb event at the Round Chapel in Hackney, organised by Tutto Wines and Gergovie Wines.  Both importers, along with a handful of others, have done much to create a space for natural wines in the London market – 15 years ago wine-drinking here was neatly segmented into high-end Bordeaux and Burgundy, set against high-alcohol, often New World, rotgut sold to the masses at off-licenses.  Natural wines, with their exacting standards of facture, respect for the land, artisanal approach, and sheer contagious enthusiasm, have brought in younger, cosmopolitan drinkers and really breathed life into the wine scene here.  While events like RAW have popularised natural wine, bringing in producers from Germany, Austria and further afield, Tutto and Gergovie have maintained a distinct Italian and French focus.  On the retail side, Noble Fine Liquor, closely associated with Tutto, has made Broadway Market in Hackney pretty much the hottest place to buy top-end, often idiosyncratic producers, particularly from Italy.  A short distance away, the eno-bistrot Brawn, by another natural wine pioneer Ed Wilson, keeps Columbia Road amply fed & watered. Lastly, south of the Thames, Gergovie’s food venture 40 Maltby Street, with its phenomenal but simple food and tiny menu, the place to go, even as Borough Market has descended into a tourist-driven fracas of selfie-sticks and ‘street-food’.

Wine swatches, akin to artist's colour samples, hundreds of them lined the entrance to the hall. The Gergovie team have been collecting these for years, and they were lovely in their minimal evocation of some phenomenal wines from far-off lands.
Wine swatches, akin to artist’s colour samples, hundreds of them lined the entrance to the hall. The Gergovie team have been collecting these for years, and they were lovely in their minimal evocation of some phenomenal wines from far-off lands.

Rant over…so this event was organised primarily for trade and growers, almost entirely from Italy, France, and Slovenia.  It was in an awesome de-consecrated Victorian chapel off Lower Clapton Road, across from Noble’s second venue P. Franco.  I can’t find much on the history of the chapel, but it had distinct echoes of the fine early Christian basilicas found in Constantinople and in Northeast Italy, the old Exarchate of Ravenna.  The room was hung with the lovely posters that have long been a feature of the London and Paris natural wine shops/enotecas, and are so sorely missed in the hyper-commercial (and somewhat more restaurant-based) New York wine scene.  There was a distinctly aesthetic vibe to the whole thing, from the posters, to the small-scale but utterly conscientious attitude of the growers, and even to some of the London-based staff, artists working part-time in the food and wine businesses around Maltby St.

40 Maltby St's spectacular grub: to start, a gutsy terrine, refined liver mousse; duck egg with asparagus; salt cod fritters. Mains: wood-grilled rabbit, aioli, and simple rough greens; a seafood rice. To end: selection of 3 cheeses; a stunning lemon-rind tarte with pure butter base, creme fraiche. This wasn't the day for vegans or diets.
40 Maltby St’s spectacular grub: to start, a gutsy terrine, refined liver mousse; duck egg with asparagus; salt cod fritters. Mains: wood-grilled rabbit (shown), aioli, and simple rough greens; a seafood rice. To end: selection of 3 cheeses; a stunning lemon-rind tarte with pure butter base, creme fraiche. This wasn’t the day for vegans or diets. Wine: Cristiano Guttorolo’s amphora-aged primitivo.

We ended up mostly sticking with the Italian stalls, with no disrespect intended to the others !  Food was essentially a holocaust of rabbits, grilled outside by 40 Maltby Street’s awesome team.  The evening ended at Brilliant Corners in Dalston, where wine crosses audiophile vinyl.

The distinctive wine posters
The distinctive wine posters
...and the sun from basilica windows
…and the sun from basilica windows

In keeping with the superb spring day, it all got a bit out of hand, with a bit of a Dionysian rendition on the preacher’s pulpit.  A tender respect for religious sentiment restrains me from a pic…

Doyen of the corps de vigneron, Gabrio Bini of Serraghia has long been a fixture on the London wine scene. His wines, from Pantelleria, closer to Africa than Sicily, come from old vines, are hand-tended, and partake of the saline air. Our favourite is his amphora-aged white of Zibbibo (local name for the Moscato di Alessandria, the name of which brings out Cavafy's poems of a vanished city).
Doyen of the corps de vignerons, Gabrio Bini of Serraghia has long been a fixture on the London wine scene. His wines, from Pantelleria, closer to Africa than Sicily, come from old vines, are hand-tended, and partake of the saline air. Our favourite is his amphora-aged white made from Zibbibo (local name for the Moscato di Alessandria grape…evoking perhaps Cavafy’s poems of a vanished city).
Gabrio's distinctive bottles.
Gabrio’s distinctive bottles.
The wines of Cantina Giardino come from the highlands of Irpinia, in Campania, known for the great Taurasi appellation. The noble grape Aglianico (Nebbiolo being the Alianico of the North) dominates reds, here and in Basilicata. The white wine Sophia, is based on Fiano, foot-trodden (by children apparently) and aged in unlined clay amphorae. Other wines are aged in chestnut/acacia barrels from the area.
The wines of Cantina Giardino come from the highlands of Irpinia, in Campania, known for the Taurasi appellation. The noble grape Aglianico (Nebbiolo being the Aglianico of the North) dominates reds, here and in Basilicata. The white wine Sophia, is based on Fiano, foot-crushed (by children apparently) and aged in unlined clay amphorae. Other wines are aged in chestnut/acacia barrels from the area.
Cantina Giardino's amphorae
Cantina Giardino’s amphorae
The wonderful proprietors Antonio & Daniela De Gruttola of Cantina Giardino.
The wonderful proprietors Antonio & Daniela De Gruttola of Cantina Giardino.
Farnea's wines, from the Eugenean Hills just outside Padova in Veneto. The soil is volcanic, grapes are fermented in concrete with natural yeasts and skin contact - Emma, based on Moscato Rosa and Moscato Giallo was a fave.
Farnea’s wines, from the Eugenean Hills just outside Padova in Veneto. The soil is volcanic, grapes are fermented in concrete with natural yeasts and skin contact – Emma, based on Moscato Rosa and Moscato Giallo was a fave.
...meanwhile back in the Colli Eugenei (Source: Tutto Wines)
…meanwhile back in the Colli Eugenei (Source: Tutto Wines)
Again from Veneto, Daniele Piccinin lands are in the Alpone valley near Verona. His focus is on the local, and almost extinct, Durella grape (aka Rabbiosa - the angry i.e. acidic and hard to vinify).
Again from Veneto, Daniele Piccinin’s wines come from the Alpone valley near Verona. His focus is on the local, and almost extinct, Durella grape (aka Rabbiosa – the angry i.e. acidic and hard to vinify).
Cristiano Guttarolo from Apulian karst-covered hills at Gioia del Colle emphasises the local stalwarts Primitivo and Negroamaro, but works hard to tame them and harness refinement and balance instead of the alcoholised fruit that often marks lesser wines of the mezzogiorno.
Cristiano Guttarolo from Apulian karst-covered hills at Gioia del Colle emphasises the local stalwarts Primitivo and Negroamaro, but works hard to tame them and harness refinement and balance instead of the alcoholised fruit that often marks lesser wines of Italy’s mezzogiorno.
Guttarolo's phenomenal Negroamaro - skin contact in steel and clocks in at 12% ABV.
Guttarolo’s phenomenal Negroamaro – skin contact in steel and clocks in at 12% ABV.
...all the better to follow his Trebbiano/Verdecca blend, again skin contact but in terracotta amphorae, giving a salty savouriness. Here supported by a brodetto w/ saffron, staple seaside soup of the Abruzzese, Molisano, and Pugliese coasts.
…all the better to follow his Trebbiano/Verdecca blend, again skin contact but in terracotta amphorae, leaving a salty savouriness. Here supported by a brodetto w/ saffron, staple seaside fare of the Abruzzese, Molisano, and Pugliese coasts.
From the Slovenian border with Friuli-Venezia-Giulia, near Gorizia, we had some excellent wines from Klinec, based on Malvasia, Ribolla Gialla, Jakot (i.e. Tokai Friulano), growing in marl/sandstone soil similar to that of the neighbouring zone in FVG. The wines are aged in cherry, acacia, mulberry, and oak.
From the Slovenian border with Friuli-Venezia-Giulia, near Gorizia, we had some excellent wines from Klinec, based on Malvasia, Ribolla Gialla, Jakot (i.e. Tokai Friulano), et al, growing in marl/sandstone soil similar to that of the neighbouring zone in FVG. The wines are aged in cherry, acacia, mulberry, and oak.
One of our favourites was the aged blend Medana Ortodox, aged since 2006.
Aleks Klinec with one of our favourites – the aged blend Medana Ortodox 2006.  He was here with his wonderful family, with whom he runs an agriturismo we’re going to try to stay at on our winter pilgrimage to NE Italy.

There were a number of other Italians that I didn’t manage to get pictures of – like Skerlj from the Carso in Friuli-Venezia-Giulia, and of course all the wonderful French winemakers.  We also missed, but are looking forward to see at RAW, some others: Cornelissen, Radikon, Lamoresca, Quarticello and so many more from other regions in Italy.

From Bearer Bonds to the Blockchain: Artistic Perspectives on Digital Money

Bitcoin and the blockchain have generated an enormous amount of press, as well as investment by governments, banks and technology companies. Ruth Catlow of Furtherfield  and Ben Vickers of Serpentine Galleries, with the generous support of the Austrian Cultural Forum London organised a fantastic workshop attended by artists, representatives of public and commercial arts organisations, and technologists. The agenda was to consider what the blockchain, a poorly-understood yet politically-charged technology that means many things to many people, might mean for art and artists, and society-at-large.

Motivation

Although our audience had a specifically artistic interest, the discussion around blockchain intertwines economics, technology, and public policy, so I thought it might help to take a step back and start by thinking about money pre-bitcoin. Specifically, I wanted to un-entangle some of the philosophical and historical questions around money; not least because the nature of money itself, and long-standing assumptions in Western economies, are today being subverted by the ongoing after-shocks of the 2008 financial crisis, to wit: negative interest rates, the potential phasing out of cash, and financial repression.

Money as Social Construct

I see money as a social construct, or alternatively, a de-centralised social contract with few explicitly articulated constraints on the individual, but plenty of implicit conventions-in-use. The essence of this contract is that money gives its holder a claim on assets or labour. It generally implies at least two parties in any given transaction; as well as a belief system that most parties in the given society mostly agree upon. These ways we use money are diverse, but are closely related to metrics for the utility of the money in question: authentication, anonymity, portability, convenience, legal certainty and fungibility.

Some examples may help.

Cash

Cash appears to be the simplest form of money. U.S. Dollars represent a claim on the American Treasury via the Federal Reserve Banking system. Since dollars are no longer backed by gold reserves – in other words, if one goes to the Fed or Treasury with a briefcase of dollars, one is not generally entitled to an equivalent amount of gold coins in return – this claim on the U.S. is termed fiat money. That is, most people, domestically and globally, agree that the Fed, and therefore the Treasury, is good for its dollars, and that everyone else in the system will provide goods and services against dollars. Furthermore, most people agree that the Fed will run the U.S. economy in a reasonably responsible way – though this consensus is far from unanimous. When, and if, this confidence erodes substantially, one may see devaluation, or inflation, depending on how the relative price of dollars to foreign currency, or to domestic goods/services, respectively, have changed. A recent example on how belief systems regarding money can change: during the summer 2015 EU crisis when Greece looked likely to be ejected from the Eurozone, there was much serious talk on how a parallel currency could co-exist with the Euro (the so-called ‘New Drachma’).

Cash is more or less anonymous in use, often is free of record/receipt, and may be irreversible (i.e. no refunds). The central bank doesn’t generally keep a ledger of individuals or businesses that hold modest amounts of cash; they do keep a ledger for commercial banks, which have a special relationship with the central bank. The central bank also closely watches how much cash is in circulation on an aggregate basis (so-called M0 or base money) and monetary policy is the science, and art, of managing M0 (and its friends M1-M4), in order to meet various legislative or statutory goals: often, price stability and low unemployment. The anonymity of cash is one reason it is interesting for tax evaders and tax authorities alike. As an aside, for all the noise about offshore accounts in the Panama Papers, HMRC estimates £16.5BN of lost UK tax revenue actually comes from VAT evasion – i.e. paying one’s plumber in cash, an entirely British affair that has nothing to do with offshore centres.

The authenticity of cash is verifiable in a relatively de-centralised way, in a reasonably short period of time: an experienced eye can spot most counterfeit bills, and marker pens or UV lights can easily be used anywhere.  Cash is portable, yet is purely symbolic – for the most part, the social contract that underpins cash, isn’t spelled out in other than the most terse terms on a bill. Most of the enabling legislation, case law, and so forth, exists outside the cash note. These points will become important later in the blockchain section.

It’s worth noting that many of the features above, which fall under the rubric convenience, mean cash can also be stolen easily and thus is expensive to store, transport, and insure.

Precious Metal

I will intentionally not say much about gold and silver, as the history and cultural aspects, while fascinating, would hopelessly complicate the discussion. Indeed, most respectable commentators hold that gold is a ‘barbarous relic’ (as John Maynard Keynes’ put it in 1923) and should be consigned to the bejewelled dustbin of history. Suffice it to say: gold is anonymous, reasonably portable (relative to value), easily authenticated, requires no ledger, but like cash, is expensive to protect. As above, gold relies on an obscure social contract and judging by the price action, I’m not sure the consensus on gold’s value hasn’t changed. Gold also may suffer from the nasty habit of being declared illegal just about when it might prove useful, due to inflation or war – for instance see Executive Order 6102, signed in 1933, that criminalised private ownership of monetary gold during the Great Depression.

Bank Deposits

In contrast to the above, money sitting in a bank has no material form, until it is pulled out of an ATM. It sits in the bank’s ledger, and definitely belongs to someone – namely, the depositor. Thus it is not anonymous, and is, in the absence of fraud or error, authenticated. Nor is it portable, though one can transfer deposits to another bank.

Bank (time) deposits do, however, earn interest , while cash obviously doesn’t. More accurately, they used to earn interest – in what some will call financial repression, and others, unconventional monetary policy, retail deposits in most Western nations, and Japan, earn near-zero interest. In an increasing number of situations, certain deposits now earn negative interest rates – one pays the bank to place a deposit.

Bank deposits also exhibit double counting. In its first guise, double counting is more commonly known as fractional reserve banking. Basically, very little cash money actually exists in the banking system. A great deal of the ‘money’ in circulation is in the form of on-demand deposits at various commercial banks (so-called M1). But those deposits rarely become cash. Bluntly, when a mortgage bank disburses a loan to a home-buyer, it almost never pays out hundreds of thousands of pounds in cash; rather, there are a chain of debits and credits, respectively, of the buyer and seller deposit accounts, that result in the seller’s account going up by the price of the house. The bottom line, for the financial system as a whole, is that a tiny sliver of M0 cash supports a large volume of M1 deposits. A bank run is when all depositors want their cash out of the bank at the same time, and there isn’t enough to go around.

A more relevant example of double-counting is when a transaction actually happens, there is often a period of 1-3 days, when balances are in transition between the seller’s deposit account and that of the buyer. Again, there are a chain of transactions, often involving two or more banks (i.e. the seller’s and buyer’s), as well as the central bank, during which time deposits may well be double-counted in the accounts of multiple financial institutions. This is mostly fine, because the central bank, in theory, supervises the system, provides plenty of extra cash liquidity and, in any case, the double-counting doesn’t last for very long; however, when there is a financial crisis, this could become a problem. This double-counting problem applies to blockchain precisely because the latter is basically a simultaneous system – transactions are confirmed and settled almost instantaneously.  I would point the reader to Izabella Kaminska’s writings over at the Financial Times for more on this topic, and in general for excellent critical commentary on how various quasi-utopian aspirations of digital money square up to the sometimes brutal realities of the financial world.

Bonds and Shares

The last animals in this taxonomy are bonds and shares, of which I’ll only treat the former. Bonds combine many of the features above, namely they are a promise (i.e. debt) by a party (the issuer) to pay another party (the bondholder) in a certain currency (dollars, pounds, etc.) at a certain rate of interest (known as the coupon) on a certain date (the maturity date of the bond).

The first difference we note is that bonds have a maturity date – unlike on-demand deposits, the bondholder generally can’t get his/her money back whenever he/she wants. So they look more like time-deposits in a bank (which incidentally go into M2).

Bonds, interestingly, used to come in two flavours: bearer and registered. Registered bonds usually have no physical form: rather they are an entry on the ledger of a central record-keeping agency, a so-called custodian. There is usually a specific method of transferring them, through a so-called clearing system – basically this is the bond-world equivalent of the bank that kept track of who had what deposit, and provided a way of transferring money between deposit accounts. Bearer bonds are more interesting – they belong to whoever physically holds the bond document and therefore are anonymous. That owner can transfer the bond to another by simply giving the transferee the document. Bearer bonds used to have little pieces of paper attached to them, called coupons, that one tore off and took to the bank, where one could get cash in return for the coupon. So bearer bonds actually look a lot like cash. They are mostly extinct now, since they were often used for tax avoidance or evasion. Also, if one misplaced a bearer bond, the wealth that it represented (for them) was often lost, disappeared, gonzo…

Bonds as a class have a particular relevance for blockchain – the ‘system of beliefs’ that govern how they work are mostly contained within the bond document itself, in hundreds of pages of legal language specifying how the bonds are to be transferred, what happens if the bondholder defaults on their payments, which courts are allowed to resolve disputes between bondholders and issuers, and so forth. However, in order to enforce contractual terms or resolve a dispute, a bondholder needs to approach the issuer or chase down the custodian/trustee, and if that doesn’t work, sue everyone – all of which is a time-consuming and expensive process.

Bitcoin, the Blockchain, and Digital Money

After that lengthy preamble, we can perhaps see, in the proper perspective, what bitcoin and the blockchain might offer to various societal stakeholders. Firstly, terminology: bitcoin and the blockchain are easily conflated, but for the purposes of this essay, bitcoin is a ‘digital currency’, while blockchain refers to a complex of underlying technologies that support and enable bitcoin and other digital currencies. Blockchain-based platforms may be available to everyone (public) or only accessible by a specific group of users (private). Bitcoin has attracted a great deal of attention and notoriety, but I, mirroring the FF/ACFL conference, will concentrate on the blockchain, which also happens to be the focus of intense investment by technology firms, venture capitalists, banks, and regulators. Furthermore, I will wave my hands and abstract away exactly what the blockchain is. Suffice it to say that it replaces the central ledger or repository variously referred to above, with a distributed ledger which is held at various nodes in a network, in multiple, synchronised copies. Every time a transaction happens, this information about asset ownership is updated across the network (essentially) simultaneously. Most of the complexity arises in authenticating transactions and in working out the time order in which transactions have happened, to avoid double counting/spending, ensure anonymity, reward the various agents in the network for participating, etc.  An engaging lay explanation of bitcoin (blockchain is easier to grasp if one starts with bitcoin) is here.  A sophisticated, but not especially mathematical, explanation of the blockchain, which starts with bitcoin’s implementation of the blockchain, is here.  For those interested in the undressed guts, see the Nakamoto PDF below which references Hashcash and other bits of prior work in this area.  Lastly, I’d be remiss in not pointing to the blog of he whom some, depending on their cultural background, might deem the Pretender, the false Dimitry, or a mere Anti-Pope: self-outed as Satoshi Nakamoto.

Smart Contracts

One of the most exciting, from a commercial perspective anyway, things about the blockchain is the idea of a ‘smart contract’. As I touched on above, bonds have fixed contractual provisions but in order to enforce any of them, one needs go to court or to a custodian. What if there was a bond which would automatically do certain things, like pay its coupon, or shorten its maturity date, in such a way that the (small) bondholder didn’t need to go fight the (big) issuer in court? A real-world example arises with Everledger diamonds that have blockchain-derived serial numbers etched onto them, accompanied by smart contracts that describe their provenance. One of the important points to note about blockchain, posited early on by bitcoin’s (ex-)pseudonymous inventor Satoshi Nakamoto, is the idea of immutability – once a transaction is inserted into the distributed ledger, it is impossible, or unfeasibly hard, to reverse. This means, in a contractual, financial, and legal sense, the history and provenance of diamonds (say Angolan or stolen) cannot be re-written or laundered. Another of Nakamoto’s principal aspirations was that, in a manner analogous to authenticating cash, authentication and verification of blockchain-based transactions should be something that could be done easily by an agent, even if they weren’t technologists or didn’t have the resources of a network node (i.e. a farm of computers mining bitcoins).

Devolving Funding, Ownership, and Contract

Smart contracts may also allow groups of (not necessarily rich or especially knowledgeable) collectors to jointly buy stakes in an artwork that none of them could have afforded singly. A digital contract would accompany the artwork, and the collectors would be immutably bound to that artwork. Conversely, the artist too could be immutably bound to the work, so that, in 30 years, when it sold at auction for millions, the artist could get paid. This is in contrast to the current situation, where artists or early-stage collectors don’t always benefit from the eye-popping gains in the value of artwork they created or nurtured.

It is however, important to point out that the issue I highlight above is not essentially technological – it is a contractual problem. Nothing actually prevents groups of collectors buying shares in paintings, just as nothing prevents artists from selling artwork with a restrictive covenant that constrains further sales or attaches to such  sales (and plenty of artists have explored these ideas of contract-in-art). The practice isn’t widespread presumably because few collectors would buy an emerging artist’s work with such a proviso. Having blockchain technology doesn’t really change the picture, in my view. What blockchain does do is automates execution of the relevant provision, and in the event there is a breach or dispute, might lower the cost of enforcement. Because smart contracts don’t require lawyers or court enforcement, and are almost instantaneous to execute, they become useful for relatively small sums of money. The diamond example above can easily be ported to art: Ascribe and MONEGRAPH provide content management suites that use blockchain to manage rights to digital art assets.  The notion of lowering barriers-to-entry is one of the most prosaic, and therefore most adoptable, applications of blockchain.

A high-profile applications in the area of funding and rights management was by the musician Imogen Heap, who has established Mycelia, a music storage and rights-management system built upon the Ethereum platform. Mycelia hosts an artist’s tracks, automatically updating as and if new and improved recordings are added; the information is stored in the cloud, and as a track is played, a smart contract is triggered to automatically pay the artist. Mycelia would also store other digital assets, such as liner notes, videos, etc., and contain provisions to allow derivative use: content to be embedded into other media (such as videos, advertisements, etc.) would trigger automatic payment to the artist. In theory, this all happens in the music industry already, but I suppose the point is that middlemen or artists’ agents handle the process, often badly (from artists’ perspective) and take a significant slice of the economics. In Heap’s words, Mycelia’s promise is that it might make the contracts between music artists and whoever ultimately is paying for content, whether record labels, advertisers or the public, much more transparent, easier to understand, self-executing, and thus, cut out layers of middlemen, while ensuring artists received as much revenue as possible, as quickly as possible.

Collaboration

It appears that Heap’s ideological perspective is that audience, listeners, can and almost should be brought in as partners with the artists, and thus Mycelia allows for more direct links between the two. An analogue of this forms the curatorial practice of Helen Kaplinsky, who talked about how to share assets in the current British cultural climate, where the concept of ‘civic publicness’ is crumbling, throwing into crisis the Enlightenment-era model of the museum as a public good. She has been converting a cultural space from a single-landlord entity into one that is owned by a community land trust. In a related project, she wanted to think about how artworks, accessioned into institutions but not currently on display, may still remain in circulation (and visible) rather than just sitting in a warehouse. In her vision, viewers, artists, and institutions would share an artwork in a fundamentally different way than the previous institutional model, which was binary – either a work was on-display or in-storage. More generally, the project tries to address questions that are coming up now in the contemporary economy & in art, revolving around what to do with artwork that might not have a ‘permanent’ or ‘stable’ state, something that has become key in museum conservation departments globally. Blockchain-based platforms like Ascribe provide a way of keeping track of interactions (ownership, borrows, licensing, insurance, liability, etc.), and because of the relatively low legal/financial cost, perhaps enable large-scale sharing of an artwork or a collection. Again, incorporating blockchain seems to me an incremental, and possibly worthwhile, technological improvement to an existing real-world solution: at MIT, students are already able to borrow artwork for their residence rooms.

Geo-wallets: Monetising the Self

Another intriguing applications of the blockchain lies in the integration of money, via the digital wallet, with GPS technology. Max Dovey presented a project undertaken with University of Edinburgh’s researcher Chris Speed where geo-location technology was connected with a digital wallet, such that the account balances within the wallet would change depending on how the user/viewer moved through Edinburgh. Another project called Handfastr also meshed geo-location with digital money, allowing couples to form temporary fake ‘marriages’ and temporary pooled accounts based on proximity: as long as the couple were near each other, they would have a joint digital wallet, and when they moved apart (spatially) they would revert to individual wallets.

These projects exemplify how small collaborative groups, physically co-located, can self-organise, and pool their financial resources easily and with a minimum of legal and contractual overhead.

In my view the more interesting perspective is an ambiguity of the whole thing: by linking money so closely to other digital technologies (GPS today, and in the future, say, bio-medical data from an Apple Watch), the move towards monetising individual identities and bodies continues apace. At a basic level, one can imagine large corporations, and the state, having even more information and potentially, control, over people. Given the enthusiasm with which people have adopted cashless, non-anonymous, immutable-record and friction-free payment methods (tapping debit cards, Apple Pay, or Uber), I can imagine many people will happily opt-in to linking more and more elements of their identity into a variety of surveillable and monetisable, albeit ‘free’ and convenient, networks.

From Self-Executing to Self-Replicating

Most of the approaches above have looked at funding, ownership, and sharing implications of the blockchain. Another potential artistic trajectory could be investigating the underlying technology itself. For instance, Plantoid is a system implemented on the Ethereum blockchain, that takes the initial form of a sculpture; however, once a certain trigger, described in an Ethereum smart contract, is reached, the blockchain instructs human collaborators to make a new version of the sculpture (and an algorithm embedded in the smart contract provides the specific dimensions of the sculpture to the human producers). The auto-generative potential, even if it is, at the moment, human-assisted, is combined with an economic metric, as encoded in the smart contract. If one takes a dystopian view, the project, loosely paralleling certain concerns about hypothetical self-replicating AIs, perhaps shows a future where mechanical things make themselves over and over, with human beings as mere workers or artisans operating under the (benevolent?) guidance of the an automated, financialised network.

Questioning Some Shibboleths: Доверяй, но проверяй

In the FF/ACF discussion, the word ‘trust’ kept coming up.  All the while, I was reminded of U.S. President Reagan’s little joke phrase he’d trot out regularly at his meetings with General Secretary Gorbachev: “Trust, but verify”.

In Nakamoto’s original technical paper, in which he drew up the bitcoin idea, he quite explicitly describes it as a system not predicated on trust. Specifically, it doesn’t require participants to trust the keeper, whether governmental or corporate, of the central ledger, as was the case with bank deposits or bonds. In fact, the technology makes distinctly non-idealistic assumptions: rational actors, often intensely individualistic even quasi-autistic, who don’t know each other, thus have no reason to trust each other or any third party.  Hence the importance of ensuring that each transaction can be authenticated and verified independently and quickly.

Other words came up in our discussion: ’emancipatory’, ‘radical’, which appear to be sentiments that come in from the hype around bitcoin. A cursory Google search tells us bitcoin and other crypto-currencies would eliminate the need for governments, central banks, courts, international law. Many of these aspirations seemed to gloss over the point that bitcoin doesn’t operate in a vacuum, it needs telecom networks and lots of computers, and in most cases, it interacts with real world laws and regulations. These quasi-public goods represent a societal subsidy (or shackle), often by profit-maximising evil capitalists and neoliberal-infected governments. Moreover, even self-executing ‘smart contracts’, pace theory, are unlikely to do away with disputes or fraud. What about when the system makes a mistake or simply breaks? Just as in the real world, we keep a wary eye on cash wallets, in the digital world, there will presumably be a need for users to constantly monitor digital balances, as well as familiarise themselves with applicable Terms & Conditions (which most of us currently Ignore & Accept). When something bad happens, counter-parties may, in extremis, need to resort to boring physical-world things like courts, lawyers, and contracts. As an aside though, Vitalik Buterin, the main force behind Ethereum, has proposed a ‘decentralised court’ that would arbitrate disputes.

My view, and I think that of some in the FF/ACFL room, was that the blockchain technology isn’t inherently emancipatory, just as it isn’t inherently repressive. As Vinay Gupta pointed out, blockchain can be used to support pretty much any political outlook. In fact, the reason banks are interested in it is pretty tedious stuff: it might dramatically shorten the amount of time it takes to finalise transactions in bonds, stocks, and other financial instruments. It might also minimise the risk of double-counting money or assets during the payment settlement period, as mentioned above. Similarly, governments are interested in blockchain because it might reduce tax fraud, make for a safer financial system, better track eligibility for welfare support, and increase employment.

Steve Fletcher at Carroll/Fletcher Gallery noted the ecological cost associated with implementing blockchain – again, hardly something that fits comfortably in the radical story-line. The ecological cost arises from the electricity utilisation of thousands of computers that, collectively, form the network which underpins the distributed ledger. These computers are constantly running to process transactions, a process sometimes called ‘mining’ (analogy with mining gold), and this eats up lots of power.

At a poetic level, insofar as economics can be looked at poetically, this process, called ‘proof-of-work’ in the blockchain jargon, is a loose analogy to what I originally defined money as: a socialised claim on labour (or assets). Hence, it would almost be philosophically perverse to expect a form of money, digital or physical, that did not perform this almost-sacramental act of abstracting labour into monetary value.

From another perspective, and this lies beyond the scope of this post, I’m also not sure how scalable the various blockchain technologies are – if everyone in the world used blockchain for all transactions, does that imply a huge increase in mining processes (with consequent ecological cost), or can a very limited stream of proofs-of-work be used to support all transactions? While blockchain might reduce the need for trust (in government or big corporations), it does so tortuously and expensively; I can’t help sensing a vague analogy with American survivalists who flee the Federal government for a rural homestead, armed-to-the-teeth and stocked with tinned provisions, bleakly awaiting the End of Days.

In summary

The FF/ACFL programme was a great opportunity to bounce ideas around, without a tightly-framed artistic, commercial, or ideological agenda. What I’ve tried to do here is sketch out how one might think about money generally, using the metrics of authentication, anonymity, convenience, fungibility, and contract, and apply these metrics to the bitcoin/blockchain complex. What seems to emerge is a potential for blockchain to devolve mechanisms and processes for funding for artists, as well as allowing various players in the arts ecosystem – artists, collectors, viewers, curators, and others – to define how they want to interact, with the possibility that sharing and artwork almost merge, or at least become as two sides of the same coin. Both of these potentialities seem more evolutionary than revolutionary. Other approaches offer fertile ground for exploring bio-politics and auto-generative physical artworks. A constant I observed through the entire conference was the inherent ambiguity of the technology: in contrast to the original libertarian or revolutionary claims made for bitcoin, the evolution of the technology today seems to offer as many risks of a dystopian future as emancipatory opportunities.

U. Kanad Chakrabarti  is an artist and former banker based in New York and London.

 

Neoliberal Lulz at Carroll / Fletcher

Carroll/Fletcher Gallery’s soon-to-shut exhibition Neoliberal Lulz takes a look at manifestations of capitalism, and specifically at the joint-stock company, a form of social organisation that is both broadly criticised and utterly indispensable.

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Femke Herregraven ‘Rogue Waves’ 2015, engraved aluminium sticks. Source: Carroll / Fletcher

The press release invokes the fall of the gold standard in 1971, but the more resonant historical starting point is the 2008 Global Financial Crisis (GFC), the aftermath of which we are, arguably, only halfway through.  The artists in the show intertwine a perspective on the GFC with parallel, and more than incidentally related, developments in Western consumerist society, technology and politics.  In comparison other work on similar themes out there, this is a sophisticated take, aestheticised with high production values.  It is also muted: no screeching about Late Capitalism – yet it remains an eminently political and punchy show.

Constant Dullaart, Femke Herregraven, Emilie Brout & Maxime Marion, and Jennifer Lyn Morone combined investigations into the mechanics of financial capitalism, particularly the corporation, with elements of contemporary social discourse, such as privacy in a networked world, corporate tax evasion, or the visuals of ubiquitous advertising.  From a material perspective, the exhibition was very long video and web, and short to the tune of 20,000 shares sold online to the public.  The physical stuff on display was slick – perspex, photographs, CGI video, machined aluminium, etched glass, careful ink-on-paper drawing, neon.  One could easily see in this show the genealogy of Haacke, Sekula, Klein, and the aesthetics-of-administration, albeit less explicitly applied here to the Artworld.

Herregraven’s work, I thought, took the subtlest approach – he seemed to focus on the terminology of high-frequency trading, and its emphasis on ultra-short timescales, the so-called ‘latency’ of a stock order-routing network. Machined aluminium bars both recalled a graph of pulses in a fibre-optic cable, as well as a more archaic currency: the Spartan legislator Lycurgus, perhaps to prevent the corrosive influence of ‘easy’ money in society, mandated that gold and silver coins be replaced by heavy and unwieldy iron bars.  In doing so, any usefulness of money that stemmed from its portability would be eliminated, leaving only its function as a numeraire.

In another work, Herregraven worked with Dutch technologists to make an online game of tax avoidance – players could organise the corporate structure of their (fictional) companies to minimise tax bills.  This reflects the contemporary anger about multinationals using the tax code to drastically cut their taxes.  There’s an ambiguity here that oft goes unmentioned: the companies are generally using perfectly legal means, and mostly complying with laws that democratically-elected legislators have enacted.  Thus to get angry (only) at the companies is to overlook the fact that politicians, the system, and indeed, in many cases, voters themselves, are at fault.  I recall a U.S. appellate-court judge, the brilliantly-named Learned Hand, commenting on taxation: ‘Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.’ (in Helvering vs Gregory [1934] Source: Chirelstein, Marvin A. Learned Hand’s Contribution to the Law of Tax Avoidance in Yale Law Journal Vol 77, 1968.  http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=5558&context=fss_papers).

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Emilie Brout & Maxime Marion ‘Untitled Sas’ 2015. Source: Carroll / Fletcher

Emilie Brout and Maxime Marion established a French company, the sole purpose of which was to be a work of art, and are selling shares in the company online (http://www.untitledsas.com/).  As a corporate shell with no debt, its value is lower-bounded by the cash it holds from share subscriptions, while the sky is the limit on the upside, and indeed the company is now worth €300,000.  In doing so, they reference and update Yves Klein’s conceptual share-certificate work Zone of Immaterial Pictorial Sensibility (1959).  They were advised by a French legal firm, presumably to ensure regulatory compliance for share offerings – something that is not merely a technical footnote.  Although the facts are quite different, one may for illustration and amusement read about the 2015 Sand Hill Exchange case: what might happen when the ‘fun’ aspect of an online game, interacts with pedantic, boring, and ever so aggressively-enforced SEC rules (https://www.sec.gov/news/pressrelease/2015-123.html).

In another, slightly more predictable work, they ordered free samples of gold-coloured objects, which were then framed along with texts that document where and how they were produced.  The works seemed to comment on labour, production chains, and whether things described as ‘free’ or ‘costless’ really are so (thus tying in nicely with Morone below).  They also echo Christopher Williams’ practice that exposes, via attached text or books, the documentation, material, bureaucracy and geography of the banal objects he photographs, albeit without the beauty or intense staging that Williams brings to bear on the images themselves.

Jennifer Lyn Morone continued with the idea of the corporate entity, in this case, incorporating herself and selling shares.  Her specific angle relates to the contention that internet-users collectively give away an enormous amount of personal data to the companies that provide internet services.  Even if the data is aggregated and anonymised, it is still valuable as it correlates geography, consumption (eating, buying, browsing) patterns, social networks, medical anxieties (as evidenced by web searches), political allegiances, and so forth.  We give this up in exchange for free, or the perception of free, access to the internet and perhaps even consumer goods (Shoshana Zuboff wrote a great piece on this in the Frankfurter Allegemeine Zeitung http://www.faz.net/aktuell/feuilleton/debatten/the-digital-debate/shoshana-zuboff-secrets-of-surveillance-capitalism-14103616.html).  Morone’s concept and videos, and its connections to bio-politics, are considerably more thought-provoking than her somewhat forced manufactured objects that cross consumer design and advertising: perfume-on-a-plinth or diamonds-made-from-hair.

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Jennifer Lyn Morone ‘JLM Inc Promotional Video’ 2014. Source: Carroll / Fletcher

Lastly, Constant Dullaart had a number of video and image-based works that reflected on corporate design and branding, as well as the fact that companies develop technology that is used for purposes that not everyone agrees with, so-called ‘dual-use’: in this case, spyware that might have been utilised to monitor various political activities during the 2014 Arab Spring.  These works were all well-made, but other than the large photographs in the front room, they didn’t seem particularly strong aesthetically or conceptually: I didn’t discern a lot of new ideas or imaginative re-workings of old ideas.

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Constant Dullaart ‘Most likely involved in sales of intrusive privacy breaching software and hardware solutions to oppressive governments during so called Arab Spring’ 2014. Source: Carroll / Fletcher

The exhibition as a whole, however, provides a different take to other relevant recent shows.  For instance, Show Me the Money: The Image of Finance, 1700 to the Present (2014-2016), is a particularly comprehensive and historical look at finance and financial crises.  The academic curators have, admirably, taken on difficult topics and tried to make them somewhat accessible to a general audience.  Furtherfield’s Art Data Money (2015) programme had some overlap with the Carroll/Fletcher exhibition (Morone and Brout/Marion were shown), but with a more explicit political agenda and with much greater emphasis on social engagement/participation.  Carroll/Fletcher’s conceptual cross between corporate structure and technology, delivered as a tasteful and elegant exhibition in a major for-profit gallery points out what is really at stake here: the inherent ambiguity we face in criticising capitalism while sitting comfortably within its consumerist cocoon.

A Few Questions on Stranded Assets

Now for a post that’s a bit different from the usual rants about food or art:

‘Stranded Assets’ are a somewhat emotive topic that have moved from the relative backwater of Guardian-readership into mainstream investing thought.  The issue has been simmering away since about 2011, entwined with various fossil-fuel divestment campaigns, and headline-grabbing art performances.  Meanwhile, relatively quietly and in the more prosaic world of investment management, coalitions of investors, purely out of gimlet-eyed self-interest, have been pressuring the corporate world to take the threat of climate change more seriously.  With the 2015 COP21 climate-change conference in Paris, and Mark Carney’s widely-publicised intervention, the issue moved onto the front-pages.  We wanted to ask a few questions to assess how this issue might evolve, and how much, if any, is already priced into oil & gas stocks.

Is this a fringe issue or a real risk to investors?

Some investors, oil companies, and media have tried to paint the issue as something dreamt up by coddled, rich-world tree-huggers that has no relevance to actual portfolio allocation decisions.  While at one point this might have been true, it is no longer a gap-year fringe issue.  Look at BOE Governor Carney’s letter to insurers delivered at Lloyd’s in September 2015,  an HSBC research report from April 2015 on stranded assets, or Michael Bloomberg’s chairmanship of the Financial Stability Board (FSB) disclosure panel on climate-related financial risks.

What exactly is the financial risk?

There are at least 3 components to the financial risk to an investment portfolio.  Firstly, to the extent climate change causes substantial, secular changes to the global economy, most obviously a higher frequency of natural disasters (hurricanes, flooding, etc.), this could have implications for insurers’ liabilities as well as for broader portfolios with significant EM concentrations.  Much of these risks are concentrated in the significant equity/debt markets of Latin America and South/Southeast Asia.  So we are talking increasingly-frequent and large natural-disaster-related losses distributed across broad-market portfolios.

Secondly, if one believes that the 2° C global-warming target is something that, from a regulatory perspective, is likely to be enforced – meaning that most global regulators are likely to comply with their COP21 commitments to bring down emissions to a level consistent with this target – then it would appear that much of the world’s coal, oil, and gas reserves would be un-burnable.  Therefore, the reasoning goes, because the traded energy groups are partially valued using their hydrocarbon reserves, this would have significant negative implications for their market valuations.  In theory, if this regulatory response happened overnight, there would be a massive drop in energy group stocks, associated drops in utility shares, as well as companies that support the energy complex (pipes, pumps, etc.).  Given these sectors’ contribution (Vanguard’s all-world VT ETF is 13.7% invested in energy, basic materials, and utilities), there would be implications for broad indices, and therefore pensions, endowments.  Insurance companies, already exposed above on their liability side, may also run risks on assets.

Obviously this isn’t going to happen overnight. There are other caveats: technology to lower carbon emissions might improve – though, carbon capture & storage (‘CCS’) doesn’t appear to be going anywhere fast.  Also, much of the world’s oil & gas is owned by national oil companies (‘NOCs’) who aren’t investible anyway and operate in countries, such as Iran, Iraq and Saudi Arabia, where the regulatory response to COP21 may be quite different from that in the US/EU.

Lastly, carbon risk is tied up with oil-price risk.  At current prices, much of the reserves of certain oil & gas companies is uneconomical to exploit – Russian Arctic oil, Canadian tar sands, shale all need prices between $80-120 range to be profitable.  These assets can be said to be, to a greater or lesser extent, economically stranded due to low oil prices.

How might this play out?

From a pragmatic perspective, the risk to portfolios lies over a 1-3 year horizon, as the regulatory response evolves.  The risk also lies in large institutional investors themselves placing pressure on companies, or indeed divesting, from fossil-fuel groups.  To the extent that investor coalitions, such as the IIGCC, which represents €13TN of assets, can gradually push energy companies to publish sensitivity analyses, at least the scale of the problem at an individual company level would become clearer.

At present, companies and equity analysts are able to assess the impact of prices on reserve valuation.  But it is much harder to disentangle the parallel effects of oil prices and climate-change regulation on the value of reserves.  Absent any other information, the base-case assumption might be that companies under pressure on carbon-emission regulation, would exploit their lowest-cost reserves first and mothball high-breakeven reserves.

In 2015/2016 there have been a number of high-profile divestments, particularly from coal groups, for instance by the Danish fund AP2, the Rockefeller Family Office, and the Norwegian Government Pension Fund.  There will undoubtedly be more – though it’s not clear that divestments, at least at the current rate, pose a significant portfolio threat to investors, since someone else buys those shares at the market price.

A game-changer could be if more SWFs joined Norway in either divesting or aggressively pushing for changes in company policies, not least because they are amongst the largest investors, with the most patient capital, and with potential access to infrastructure projects and assets that are not publicly traded.  Moreover, the biggest SWFs often belong to hydrocarbon exporters, who, one might imagine, would like to diversify their exposure away from energy.

China is another force to watch – in the 13th 5-year Plan, to be announced in March 2016 – there are expectations of significant initiatives to reduce carbon emissions and promote green technology.  The date often mentioned is 2030, when China’s carbon emissions are expected to peak, but until the Plan is actually announced it’s not clear what, if any, immediate steps are expected.

On the other hand, a more granular picture on regulatory response scenarios is provided in a paper from the Grantham Research Institute.  The interesting bit of it is as suspected – in what sense is it fair to ask EM countries, significantly poorer per-capita than the DMs, to bear the inevitable costs, howsoever pro-rated, of transitioning to a low-carbon environment?  Moreover, how reasonable is it to expect that countries who have short or non-existent histories of civil society/institutions, a record of policy reversals, endemic corruption, and weak states, will embark on, and deliver on, COP21 commitments that are intensely challenging, from institutional, legal, political, financial, and technological perspectives.  The report, euphemistically, highlights Argentina, China, India, Indonesia, Saudi Arabia as having ‘potential for increasing support [for implementing COP21 commitments]’.  Lest our SUV-driving North American friends pat themselves on the back, neither the U.S. nor Canada do much better in the report.  So it’s quite possible that, from a regulatory perspective, very little happens in the next few years; though that would seem to imply that the necessary adjustment to policies, and therefore investment portfolios, when it inevitably comes, will be that much more severe.

How have the oil & gas companies responded?

As stated above, the quality of disclosure and sensitivity analyses is presently most inadequate.  Even so, European majors score better – for instance, Shell, Total, Repsol, GALP all score highly on the Carbon Disclosure Project’s rankings. Chevron and Exxon Mobil are on record as being resistant to shareholder resolutions proposed in 2015.  However, Exxon Mobil did produce a climate-change disclosure report in 2014, albeit without any meaningful sensitivity analysis.  More specific information on company responses, including mining groups, can be found at the Association of Chartered Certified Accountants.

Exxon Mobil’s 2016 energy outlook, which covers the period out to 2040, provided their take on how carbon reduction commitments might be met for the system as a whole, namely through dramatic reductions in carbon-dioxide and energy intensities (50% and 40% respectively).  According to the FT, this stretches credibility given apparent lack of political will, certainly in the US and even in the EU, as well as an inadequately high carbon price.  Looking at the price of American gasoline and the alacrity with which people drive in most of the U.S., outside Manhattan anyway, I can see the pink paper’s point.

Lastly, some companies, such as Total SA have invested in renewable energy as a hedge, howsoever small, to their extractive activities.

Is the risk already priced in?

At current oil prices (Brent future for December 2018 delivery is $46), the market recognises that certain high-breakeven reserves, such as in the Arctic or in Canadian tar sands, are unlikely to be monetisable.  Thus, economic stranding is reflected in share prices of groups and funds that are highly exposed to these reservoirs.  It is much less likely that the risk is priced in for the integrated majors, given their diverse properties and mid- and down-stream operations.  It is even less likely to be priced in for utilities and infrastructure companies.  Again, there doesn’t seem to be much analysis or disclosure around the (presumably) differing sensitivities to economic and carbon-related stranding, in part because the regulatory regime that would drive this is yet to be announced.

How to play this?

At the moment, this is basically a structural risk that’s relatively hard to avoid – since in theory everyone from energy companies to utilities to car-makers are somewhat exposed.  Moreover, energy groups are steady dividend payers, for now anyway, so dropping them has a significant financial cost.  Thirdly, coal is mined by integrated miners who also pull other stuff out of the ground, so divesting coal might mean losing much of the metals & minerals complex.

The simplest approach, for a small or passive investor if not the system as a whole, is to remain invested in a broad index, and hope for the best.  There are two reasons for this: one is that, depending on how the situation plays out, portfolio impacts could vary tremendously.  Mercer Consulting highlight drastically different return and composition-of-return scenarios depending on whether regulatory and investor actions prompt rapid, proactive and coordinated, as opposed to, delayed and fragmented, responses.  Thus, this risk could be viewed as an exogenous factor, a bit like catastrophe, war, or un-planned death, that cannot be diversified away simply or costlessly.

The ‘dumb’ strategy above can be improved by removing coal, which no one has anything good to say about (not even Goldman Sachs), and (possibly) by removing high-breakeven companies, such as those involved in Canadian sands or US shale.  Whether one then tilts the portfolio from oil to the relatively cleaner gas becomes a judgement call.  Further tilts are possible away from E&P towards pipelines, infrastructure, refining, or distribution, again probably with diminishing returns (in terms of yield/concentration trade-off).

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Vanguard VT (all-world ETF) against two ‘low-carbon’ ETFs Source: E*Trade

Some new ETFs, including CRBN from iShares and LOWC from State Street/SPDR follow indices with lower carbon footprints, such as the MSCI ACWI Low Carbon Target Index, jiggling other index constituents to achieve similar dividend yields and correlation with the much broader all-world MSCI ACWI Index.  This chart above shows performance relative to Vanguard’s all-world ETF VT, albeit over the slightly meaningless timeframe of a year.  These ETFs use company disclosures on emissions to re-weight their allocations, but it’s not entirely transparent how meaningfully exposure to carbon regulation has actually been reduced: for instance, Exxon Mobil and Chevron are still in the portfolios, albeit at tiny allocations, while Enbridge Inc, a gas-pipeline operator and Ultrapar, a Brazilian conglomerate with downstream operations represent meaningful holdings in LOWC, while not showing up at all in VT.

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Clean energy ETFs compared to VT (Vanguard all-world) and VDE (Vanguard energy) ETFs on 5-yr horizon

A complement to the approaches above could be investing in clean, renewable, alternative energy and related companies.  There are a number of ETFs in the space (ICLN, PZD, QCLN, FAN, NLR, KWT, YLCO, GEX).  Most of them look like dogs: over 5 years they’ve substantially under-performed the broad market (VT) as well as energy (say VDE) ETFs.  Fukushima Dai-ichi wiped out the uranium ETF.  Over 3 years the others seem to have gone through a bubble as oil prices went up, making their relatively-expensive technologies look viable.  Then, in the last year as oil prices have crashed, substitution effect has made green technologies again look uneconomic.  So unless one believes substantial subsidies for green tech are forthcoming, that oil prices will shoot back up, or that regulatory and public attitudes towards nuclear will change, these feel a lot like a levered play on oil prices, where investment timing becomes critical.  However, within this universe, specific plays might be interesting (such as measurement companies or water-treatment companies), due to the diversity of their businesses and/or relative independence from subsidies and oil prices.

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The clean-energy bubble (2013-2016)
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Clean energy follows oil down in 2015-2016