Net Zero: More expensive hot air from Boris

If you have nothing substantial to say, make sure you say it at great length, larding it generously with adjectives, uplifting sentiments and visions of the broad sunlit uplands in the far distance. Thus it was this week that Boris Johnson launched his Net Zero Strategy, 1,868 pages (and counting, thanks to Simon Evans of Carbon Brief) of aspirations, plans and dreams for the carbon-free future. There is almost no meaningful number with a pound sign in front of it anywhere. Please do not call this magical thinking.

Besides, there is nothing magical about a heat pump, which is merely a reverse refrigerator, so why should they not get 25 to 50 per cent cheaper to install in four years’ time? Why not suggest that they will be no more expensive to buy and run than gas boilers by 2030? Ah, that one is easy: “rebalance” energy prices to make it so, but nothing as vulgar as an admission of higher taxes on gas. There are over 200 pages of this sort of well-meaning drivel, larded with uplifting examples of sterling progress, soothing expressions about working with the grain of the market, avoiding one-size-fits-all and coy little admissions like “electric heating appliances, such as heat pumps, are only low-carbon if the electricity used to run them is generated from low-carbon sources.”

Heat pumps are the former double-glazing salesman’s dream come true, but they are hardly the answer to a warm and cosy home. Just as your refrigerator has to work hardest to stay cool when you want it most in hot weather, so heat pumps are at their least effective when it’s cold outside. If you want a proper hot bath in the winter, you’ll need an immersion heater. Never mind: improving technology will conquer thermodynamics. Oh, and the fans in next door’s air-sourced heat pumps will be completely silent, too. 

Buried in the text is the occasional corker, like: “We are considering how we can kick start the green finance market and have consulted on introducing mandatory disclosure requirements for mortgage lenders on the energy performance of homes on which they lend, and on setting voluntary improvement targets to be met by 2030.” Alas, there is no space to explain what this sinister little comment really means. It suggests that mortgage lenders will take a sniffy view (ie charge a higher rate of interest, or lend a smaller percentage of the purchase price) if the windows rattle or the roof insulation is inadequate – or perhaps if you haven’t got a heat pump. Still, it’s all voluntary, you’ll note, so no need to get upset.

It’s a comfort to learn that “We have seen the impact of overreliance on gas pushing up prices for hardworking people but our plan to expand our domestic renewables will push down electricity wholesale prices” Ah yes, it’s the Saudi Arabia of wind again. Oh, and connoisseurs of charts should not miss page 67 of the main document.

It’s no coincidence that this Net Zero Strategy has been launched just ahead of what promises to be a grim Budget and the looming car crash that is COP26 next month. It gives the prime minister a fine text to preach from, to show the world he (and his wife) is deadly serious about all this, even if they have no idea how we can get there, and refuse even to contemplate the cost that “hard-working families” are going to have to pay. But then economics was always something of a closed book to our dear leader.

Don’t Bank on a rate rise

Silvana Tenreyro is in no doubt. For the Bank of England’s Monetary Policy Committee to raise interest rates next month would be “self-defeating”. Her views matter more than most since she is a member of the MPC. As do those of Catherine Mann, a new appointee, who argues that “there’s a lot of endogenous tightening of financial conditions already in train in the UK. That means that I can wait on active tightening through a Bank Rate rise.” Do not confuse this Catherine Mann with the author of romantic fiction, although some might argue that to put off raising from 0.1 per cent when retail price inflation is galloping towards 5 per cent requires a particularly rosy view of the future.

The MPC’s Ms Mann was previously at the OECD, that hangover from the post-war Bretton Woods settlement, whose executives enjoy enviable tax privileges and which has long outlived its usefulness. Its forecasting record is no better than a dozen other economics bodies. But given these two dovish views, neither she nor Ms Tenreyro is likely to vote for an increase next month. Others, perhaps even a majority, may do so, but intriguingly, the pair may be right to try and put off a rise, despite the belief in the money markets that one is coming.

The clue is in the mysterious phrase “endogenous tightening”. In English, it means that if money market rates rise in anticipation of a higher Bank Rate, then that will tighten conditions sufficiently to choke off inflation without actually needing the rise at all. If this seems bizarre, it has worked in the past, and merely betrays the importance of psychology in people’s behaviour. Of course, this ruse only works to buy time. If inflation turns out to be more than a shudder through the consumer prices index which will look like a bad dream by next year, contrary to the views of Ms Tenreyro and Ms Mann, then the MPC will have to raise rates much further to bring it back to the 2 per cent target. Whoever said central banking was dull? 

Saving the Scottish

It is not quite 20 years since two big shareholders in Scottish Investment Trust decided that its performance was so dull that it should be broken up. The board, stuffed with Scotland’s great and good, saw that attack off, but the victory was a Pyrrhic one for the shareholders, who have endured two decades of sub-par performance. Now, at last, change is coming, and it might even be an improvement, as the Scottish (not to be confused with the sector’s soaraway star, Scottish Mortgage) is to be absorbed into the snappily-titled JP Morgan Global Growth & Income.

On the whole, investment trusts are a good idea. They combine transparency, low charges and the discipline of the Companies Acts, and over time produce better returns than their higher-cost cousins, investment funds. These funds are “open-ended” but can be closed without notice as holders discovered in the last market crash. Investment trusts are “closed-ended” which are always open to sellers, although you may not like the price you are offered. 

Shares in the Scottish, for example, recently sold for 11 per cent less than the value of its assets, thanks to years of waiting for its ugly investment ducklings like Glaxo, BT and NatWest to turn into swans. The takeover is in effect a mercy killing of this failed approach, and in future the portfolio will be whatever JP Morgan’s army of analysts fancy, anywhere in the world. Shares in the Scottish jumped by 8 per cent in relief, and in the hope of better performance.

There are far too many investment trusts, so this takeover, to produce a £1.2bn trust, is encouraging. Unfortunately, most trusts are too small to be considered by many investors, and the minimum they will look at is being raised all the time. Boards of those little trusts are reluctant to take the role of Christmas turkeys, while those running better performers are reluctant to pay up for a portfolio they don’t like and will only liquidate. Someone, some day, will find a way to square this circle, and hoover up the tail of trusts which are there because they’re there, to everyone’s benefit except the redundant directors. Someday…