Average incomes of the poor now exceed those of the rich 50 years ago.

By Matt Ridley

In my book I point out that an unemployed British father of three on welfare today receives more in state support than a man on the average wage received in income in 1957. It's an eye-catching reminder of how wrong J K Galbraith was to argue that affluence in the late 1950s had already gone too far.

Now the Institute of Fiscal Studies has compiled data on average incomes in Britain since 1961, coming to the remarkable conclusion that

in real terms the bottom 25% are now considerable richer than were the top 25% in 1961.

Here's a graph, (hat tip Tim Worstall)

Of course this underestimates the increase in wealth because it does not measure the extent to which many goods and services have got cheaper during this time. Nor does it take any account of innovations: the products of Vodafone, Starbucks and Google were unobtainable at any price in 1961.

Thank you, Matt Ridley

  by Anthony Watts

It is a great honour to be asked to deliver the Angus Millar lecture.

I have no idea whether Angus Millar ever saw himself as a heretic, but I have a soft spot for heresy. One of my ancestral relations, Nicholas Ridley* the Oxford martyr, was burned at the stake for heresy.

My topic today is scientific heresy. When are scientific heretics right and when are they mad? How do you tell the difference between science and pseudoscience?

Let us run through some issues, starting with the easy ones.

• Astronomy is a science; astrology is a pseudoscience.
• Evolution is science; creationism is pseudoscience.
• Molecular biology is science; homeopathy is pseudoscience.
• Vaccination is science; the MMR scare is pseudoscience.
• Oxygen is science; phlogiston was pseudoscience.
• Chemistry is science; alchemy was pseudoscience.

Are you with me so far?

A few more examples. That the earl of Oxford wrote Shakespeare is pseudoscience. So are the beliefs that Elvis is still alive, Diana was killed by MI5, JFK was killed by the CIA, 911 was an inside job. So are ghosts, UFOs, telepathy, the Loch Ness monster and pretty well everything to do with the paranormal. Sorry to say that on Halloween, but that’s my opinion.

Three more controversial ones. In my view, most of what Freud said was pseudoscience.

So is quite a lot, though not all, of the argument for organic farming.

So, in a sense by definition, is religious faith. It explicitly claims that there are truths that can be found by other means than observation and experiment.

Now comes one that gave me an epiphany. Crop circles*.

It was blindingly obvious to me that crop circles were likely to be man-made when I first starting investigating this phenomenon. I made some myself to prove it was easy to do*.

This was long before Doug Bower and Dave Chorley fessed up to having started the whole craze after a night at the pub.

Every other explanation – ley lines, alien spacecraft, plasma vortices, ball lightning – was balderdash. The entire field of “cereology” was pseudoscience, as the slightest brush with its bizarre practitioners easily demonstrated.

Imagine my surprise then when I found I was the heretic and that serious journalists working not for tabloids but for Science Magazine, and for a Channel 4 documentary team, swallowed the argument of the cereologists that it was highly implausible that crop circles were all man-made.

So I learnt

lesson number 1: the stunning gullibility of the media. Put an “ology” after your pseudoscience and you can get journalists to be your propagandists.

A Channel 4 team did the obvious thing – they got a group of students to make some crop circles and then asked the cereologist if they were “genuine” or “hoaxed” – ie, man made. He assured them they could not have been made by people. So they told him they had been made the night before. The man was poleaxed. It made great television. Yet the producer, who later became a government minister under Tony Blair, ended the segment of the programme by taking the cereologist’s side: “of course, not all crop circles are hoaxes”. What? The same happened when Doug and Dave owned up*; everybody just went on believing. They still do.

Lesson number 2: debunking is like water off a duck’s back to pseudoscience.

In medicine, I began to realize, the distinction between science and pseudoscience is not always easy.  This is beautifully illustrated in an extraordinary novel by Rebecca Abrams, called Touching Distance*, based on the real story of an eighteenth century medical heretic, Alec Gordon of Aberdeen.

Gordon was a true pioneer of the idea that childbed fever was spread by medical folk like himself and that hygiene was the solution to it. He hit upon this discovery long before Semelweiss and Lister. But he was ignored. Yet Abrams’s novel does not paint him purely as a rational hero, but as a flawed human being, a neglectful husband and a crank with some odd ideas – such as a dangerous obsession with bleeding his sick patients. He was a pseudoscientist one minute and scientist the next.

Lesson number 3. We can all be both. Newton was an alchemist.

Like antisepsis, many scientific truths began as heresies and fought long battles for acceptance against entrenched establishment wisdom that now appears irrational: continental drift, for example. Barry Marshall* was not just ignored but vilified when he first argued that stomach ulcers are caused by a particular bacterium. Antacid drugs were very profitable for the drug industry. Eventually he won the Nobel prize.

Just this month Daniel Shechtman* won the Nobel prize for quasi crystals, having spent much of his career being vilified and exiled as a crank. “I was thrown out of my research group. They said I brought shame on them with what I was saying.”

That’s lesson number 4: the heretic is sometimes right.  What sustains pseudoscience is confirmation bias. We look for and welcome the evidence that fits our pet theory; we ignore or question the evidence that contradicts it. We all do this all the time. It’s not, as we often assume, something that only our opponents indulge in. I do it, you do it, it takes a superhuman effort not to do it. That is what keeps myths alive, sustains conspiracy theories and keeps whole populations in thrall to strange superstitions.

 

Bertrand Russell* pointed this out many years ago: “If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence.”

Lesson number 5: keep a sharp eye out for confirmation bias in yourself and others.  There have been some very good books on this recently. Michael Shermer’s “The Believing Brain”, Dan Gardner’s “Future Babble” and Tim Harford’s “Adapt”* are explorations of the power of confirmation bias. And what I find most unsettling of all is Gardner’s conclusion that knowledge is no defence against it; indeed, the more you know, the more you fall for confirmation bias. Expertise gives you the tools to seek out the confirmations you need to buttress your beliefs.

Experts are worse at forecasting the future than non-experts.

Philip Tetlock did the definitive experiment. He gathered a sample of 284 experts – political scientists, economists and journalists – and harvested 27,450 different specific judgments from them about the future then waited to see if they came true. The results were terrible. The experts were no better than “a dart-throwing chimpanzee”.

Here’s what the Club of Rome said on the rear cover of the massive best-seller Limits to Growth in 1972*:

“Will this be the world that your grandchildren will thank you for? A world where industrial production has sunk to zero. Where population has suffered a catastrophic decline. Where the air, sea and land are polluted beyond redemption. Where civilization is a distant memory. This is the world that the computer forecasts.”
“Science is the belief in the ignorance of the experts”, said Richard Feynman.

Lesson 6. Never rely on the consensus of experts about the future. Experts are worth listening to about the past, but not the future. Futurology is pseudoscience.

Using these six lessons, I am now going to plunge into an issue on which almost all the experts are not only confident they can predict the future, but absolutely certain their opponents are pseudoscientists. It is an issue on which I am now a heretic. I think the establishment view is infested with pseudoscience. The issue is climate change.

Now before you all rush for the exits, and I know it is traditional to walk out on speakers who do not toe the line on climate at the RSA – I saw it happen to Bjorn Lomborg last year when he gave the Prince Philip lecture – let me be quite clear. I am not a “denier”. I fully accept that carbon dioxide is a greenhouse gas, the climate has been warming and that man is very likely to be at least partly responsible. When a study was published recently saying that 98% of scientists “believe” in global warming, I looked at the questions they had been asked and realized I was in the 98%, too, by that definition, though I never use the word “believe” about myself. Likewise the recent study from Berkeley, which concluded that the land surface of the continents has indeed been warming at about the rate people thought, changed nothing.

So what’s the problem? The problem is that you can accept all the basic tenets of greenhouse physics and still conclude that the threat of a dangerously large warming is so improbable as to be negligible, while the threat of real harm from climate-mitigation policies is already so high as to be worrying, that the cure is proving far worse than the disease is ever likely to be. Or as I put it once, we may be putting a tourniquet round our necks to stop a nosebleed.

I also think the climate debate is a massive distraction from much more urgent environmental problems like invasive species and overfishing.

I was not always such a “lukewarmer”. In the mid 2000s one image in particular played a big role in making me abandon my doubts about dangerous man-made climate change: the hockey stick*. It clearly showed that something unprecedented was happening. I can remember where I first saw it at a conference and how I thought: aha, now there at last is some really clear data showing that today’s temperatures are unprecedented in both magnitude and rate of change – and it has been published in Nature magazine.

Yet it has been utterly debunked by the work of Steve McIntyre and Ross McKitrick. I urge you to read Andrew Montford’s careful and highly readable book The Hockey Stick Illusion*. Here is not the place to go into detail, but briefly the problem is both mathematical and empirical. The graph relies heavily on some flawed data – strip-bark tree rings from bristlecone pines — and on a particular method of principal component analysis, called short centering, that heavily weights any hockey-stick shaped sample at the expense of any other sample. When I say heavily – I mean 390 times.

This had a big impact on me. This was the moment somebody told me they had made the crop circle the night before.

For, apart from the hockey stick, there is no evidence that climate is changing dangerously or faster than in the past, when it changed naturally.

• It was warmer in the Middle ages* and medieval climate change in Greenland was much faster.
• Stalagmites*, tree lines and ice cores all confirm that it was significantly warmer 7000 years ago. Evidence from Greenland suggests that the Arctic ocean was probably ice free for part of the late summer at that time.
• Sea level* is rising at the unthreatening rate about a foot per century and decelerating.
• Greenland is losing ice at the rate of about 150 gigatonnes a year, which is 0.6% per century.
• There has been no significant warming in Antarctica*, with the exception of the peninsula.
• Methane* has largely stopped increasing.
• Tropical storm* intensity and frequency have gone down, not up, in the last 20 years.
• Your probability* of dying as a result of a drought, a flood or a storm is 98% lower globally than it was in the 1920s.
• Malaria* has retreated not expanded as the world has warmed.

And so on. I’ve looked and looked but I cannot find one piece of data – as opposed to a model – that shows either unprecedented change or change is that is anywhere close to causing real harm.

No doubt, there will be plenty of people thinking “what about x?” Well, if you have an X that persuades you that rapid and dangerous climate change is on the way, tell me about it. When I asked a senior government scientist this question, he replied with the Paleocene-Eocene Thermal Maximum. That is to say, a poorly understood hot episode, 55 million years ago, of uncertain duration, uncertain magnitude and uncertain cause.

Meanwhile, I see confirmation bias everywhere in the climate debate. Hurricane Katrina, Mount Kilimanjaro, the extinction of golden toads – all cited wrongly as evidence of climate change. A snowy December, the BBC lectures us, is “just weather”; a flood in Pakistan or a drought in Texas is “the sort of weather we can expect more of”. A theory so flexible it can rationalize any outcome is a pseudoscientific theory.

To see confirmation bias in action, you only have to read the climategate emails, documents that have undermined my faith in this country’s scientific institutions. It is bad enough that the emails unambiguously showed scientists plotting to cherry-pick data, subvert peer review, bully editors and evade freedom of information requests. What’s worse, to a science groupie like me, is that so much of the rest of the scientific community seemed OK with that. They essentially shrugged their shoulders and said, yeh, big deal, boys will be boys.

Nor is there even any theoretical support for a dangerous future. The central issue is “sensitivity”: the amount of warming that you can expect from a doubling of carbon dioxide levels. On this, there is something close to consensus – at first. It is 1.2 degrees centigrade. Here’s* how the IPCC put it in its latest report.

“In the idealised situation that the climate response to a doubling of atmospheric CO2 consisted of a uniform temperature change only, with no feedbacks operating…the global warming from GCMs would be around 1.2°C.” Paragraph 8.6.2.3.

Now the paragraph goes on to argue that large, net positive feedbacks, mostly from water vapour, are likely to amplify this. But whereas there is good consensus about the 1.2 C, there is absolutely no consensus about the net positive feedback, as the IPCC also admits. Water vapour forms clouds and whether clouds in practice amplify or dampen any greenhouse warming remains in doubt.

So to say there is a consensus about some global warming is true; to say there is a consensus about dangerous global warming is false.

The sensitivity of the climate could be a harmless 1.2C, half of which has already been experienced, or it could be less if feedbacks are negative or it could be more if feedbacks are positive. What does the empirical evidence say? Since 1960 we have had roughly one-third of a doubling, so we must have had almost half of the greenhouse warming expected from a doubling – that’s elementary arithmetic, given that the curve is agreed to be logarithmic. Yet if you believe the surface thermometers* (the red and green lines), we have had about 0.6C of warming in that time, at the rate of less than 0.13C per decade – somewhat less if you believe the satellite thermometers (the blue and purple lines).

So we are on track for 1.2C*.  We are on the blue line, not the red line*.

Remember Jim Hansen of NASA told us in 1988 to expect 2-4 degrees in 25 years. We are experiencing about one-tenth of that.

We are below even the zero-emission path expected by the IPCC in 1990*.

Ah, says the consensus, sulphur pollution has reduced the warming, delaying the impact, or the ocean has absorbed the extra heat. Neither of these post-hoc rationalisations fit the data: the southern hemisphere has warmed about half as fast as the northern* in the last 30 years, yet the majority of the sulphur emissions were in the northern hemisphere.

And ocean heat content has decelerated, if not flattened, in the past decade*.

By contrast, many heretical arguments seem to me to be paragons of science as it should be done: transparent, questioning and testable.

For instance, earlier this year, a tenacious British mathematician named Nic Lewis started looking into the question of sensitivity and found* that the only wholly empirical estimate of sensitivity cited by the IPCC had been put through an illegitimate statistical procedure which effectively fattened its tail on the upward end – it hugely increased the apparent probability of high warming at the expense of low warming.

When this is corrected, the theoretical probability of warming greater than 2.3C is very low indeed.

Like all the other errors in the IPCC report, including the infamous suggestion that all Himalayan glaciers would be gone by 2035 rather than 2350, this mistake exaggerates the potential warming. It is beyond coincidence that all these errors should be in the same direction. The source for the Himalayan glacier mistake was a non-peer reviewed WWF report and it occurred in a chapter, two of whose coordinating lead authors and a review editor were on WWF’s climate witness scientific advisory panel. Remember too that the glacier error was pointed out by reviewers, who were ignored, and that Rajendra Pachauri, the head of the IPCC, dismissed the objectors as practitioners of “voodoo science”.

Journalists are fond of saying that the IPCC report is based solely on the peer-reviewed literature. Rajendra Pachauri himself made that claim in 2008, saying*:

“we carry out an assessment of climate change based on peer-reviewed literature, so everything that we look at and take into account in our assessments has to carry [the] credibility of peer-reviewed publications, we don’t settle for anything less than that.”

That’s a voodoo claim. The glacier claim was not peer reviewed; nor was the alteration to the sensitivity function Lewis spotted. The journalist Donna Laframboise got volunteers all over the world to help her count the times the IPCC used non-peer reviewed literature. Her conclusion is that*: “Of the 18,531 references in the 2007 Climate Bible we found 5,587 – a full 30% – to be non peer-reviewed.”

Yet even to say things like this is to commit heresy. To stand up and say, within a university or within the BBC, that you do not think global warming is dangerous gets you the sort of reaction that standing up in the Vatican and saying you don’t think God is good would get. Believe me, I have tried it.

Does it matter? Suppose I am right that much of what passes for mainstream climate science is now infested with pseudoscience, buttressed by a bad case of confirmation bias, reliant on wishful thinking, given a free pass by biased reporting and dogmatically intolerant of dissent. So what?

After all there’s pseudoscience and confirmation bias among the climate heretics too.

Well here’s why it matters. The alarmists have been handed power over our lives; the heretics have not. Remember Britain’s unilateral climate act is officially expected to cost the hard-pressed UK economy £18.3 billion a year for the next 39 years and achieve an unmeasurably small change in carbon dioxide levels.

At least* sceptics do not cover the hills of Scotland with useless, expensive, duke-subsidising wind turbines whose manufacture causes pollution in Inner Mongolia and which kill rare raptors such as this griffon vulture.

At least crop circle believers cannot almost double your electricity bills and increase fuel poverty while driving jobs to Asia, to support their fetish.

At least creationists have not persuaded the BBC that balanced reporting is no longer necessary.

At least homeopaths have not made expensive condensing boilers, which shut down in cold weather, compulsory, as John Prescott did in 2005.

At least astrologers have not driven millions of people into real hunger, perhaps killing 192,000 last year according to one conservative estimate, by diverting 5% of the world’s grain crop into motor fuel*.

That’s why it matters. We’ve been asked to take some very painful cures. So we need to be sure the patient has a brain tumour rather than a nosebleed.

Handing the reins of power to pseudoscience has an unhappy history. Remember eugenics. Around 1910 the vast majority of scientists and other intellectuals agreed that nationalizing reproductive decisions so as to stop poor, disabled and stupid people from having babies was not just a practical but a moral imperative of great urgency.

“There is now no reasonable excuse for refusing to face the fact,” said George Bernard Shaw*, “that nothing but a eugenics religion can save our civilization from the fate that has overtaken all previous civilizations.’’ By the skin of its teeth, mainly because of a brave Liberal MP called Josiah Wedgwood, Britain never handed legal power to the eugenics movement. Germany did.

Or remember Trofim Lysenko*, a pseudoscientific crank with a strange idea that crops could be trained to do what you wanted and that Mendelian genetics was bunk. His ideas became the official scientific religion of the Soviet Union and killed millions; his critics, such as the geneticist Nikolai Vavilov, ended up dead in prison.

Am I going too far in making these comparisons? I don’t think so. James Hansen of NASA says oil firm executives should be tried for crimes against humanity.  (Remember this is the man who is in charge of one of the supposedly impartial data sets about global temperatures.) John Beddington, Britain’s chief scientific adviser, said this year that just as we are “grossly intolerant of racism”, so we should also be “grossly intolerant of pseudoscience”, in which he included all forms of climate-change scepticism.

The irony of course is that much of the green movement began as heretical dissent. Greenpeace went from demanding that the orthodox view of genetically modified crops be challenged, and that the Royal Society was not to be trusted, to demanding that heresy on climate change be ignored and the Royal Society could not be wrong.

Talking of Greenpeace, did you know that the collective annual budget of Greenpeace, WWF and Friends of the Earth was more than a billion dollars globally last year? People sometimes ask me what’s the incentive for scientists to exaggerate climate change. But look at the sums of money available to those who do so, from the pressure groups, from governments and from big companies. It was not the sceptics who hired an ex News of the World deputy editor as a spin doctor after climategate, it was the University of East Anglia.

By contrast scientists and most mainstream journalists risk their careers if they take a skeptical line, so dogmatic is the consensus view. It is left to the blogosphere to keep the flame of heresy alive and do the investigative reporting the media has forgotten how to do. In America*, Anthony Watts who crowd-sourced the errors in the siting of thermometers and runs wattsupwiththat.com;

In Canada*, Steve McIntyre, the mathematician who bit by bit exposed the shocking story of the hockey stick and runs climateaudit.org.

Here in Britain,* Andrew Montford, who dissected the shenanigans behind the climategate whitewash enquiries and runs bishop-hill.net.

In Australia*, Joanne Nova, the former television science presenter who has pieced together the enormous sums of money that go to support vested interests in alarm, and runs joannenova.com.au.

The remarkable thing about the heretics I have mentioned is that every single one is doing this in his or her spare time. They work for themselves, they earn a pittance from this work. There is no great fossil-fuel slush fund for sceptics.

In conclusion, I’ve spent a lot of time on climate, but it could have been dietary fat, or nature and nurture. My argument is that like religion, science as an institution is and always has been plagued by the temptations of confirmation bias. With alarming ease it morphs into pseudoscience even – perhaps especially – in the hands of elite experts and especially when predicting the future and when there’s lavish funding at stake. It needs heretics.

By providing products that consumers Use across the Internet, Google can dominate the ad market

by Rick Summer, CFA, CPA  Morningstar

Analyst Note 03/14/13

Google GOOG announced it is closing more products and features, including Google Reader and the Google Voice app for Blackberry. Although none of these closures affect our forecast, fair value estimate, or economic moat rating, we believe these moves support our general thesis that management is disciplined in its capital allocation efforts. Still, this "spring cleaning" effort to manage expenses does not alter our view that the company is unlikely to benefit from meaningful improvements in operating margins. While the company trades at a modest premium to our fair value estimate, we believe investors should look to allocate new investment dollars to other names that are more attractively valued.

Thesis 01/23/13

With a dominant Internet search product as its foundation, Google has built an impressive portfolio that individuals use frequently, beyond search. These new products allow advertisers to reach out to potential customers multiple times, in multiple ways. Google's importance to the future of advertising has only just begun.

Consumers are using new devices (smartphones and tablets, for example), new operating systems (Windows Phone by Microsoft MSFT, Android, and iOS by Apple AAPL) and new interfaces (voice search), and these changing behaviors shine a light on other successful products Google has built in order to keep a hold on users and provide a greater benefit to advertisers. Google's mobile operating system and browser help to unify users' experience as they move from one device to another. The firm's success in products such as Gmail, a browser (Chrome), and Google Maps provides a cohesive experience for users and helps Google show more relevant ads. These applications are important. At the end of 2012, Apple issued a mea culpa for favoring its own mapping product over Google Maps, demonstrating the importance of several of Google's products. Executives from Google claimed its mapping product was downloaded more than 10 million times within two days of launching on Apple's App Store. Furthermore, the Chrome browser is the most widely used browser in the world.

A strong secular growth trend for online advertising is core to our thesis. The market for Internet search advertising is still growing in the double digits, while display advertising is growing thanks to newer innovations tying display ads to specific actions, including clicks, leads, and customers. Also, faster-growing geographies such as Asia are propping up overall growth rates even as pockets of economic weakness hit various regions. We forecast global Internet ad spending to grow in the midteens annually during the next five years. We expect that Google will leverage its dominant position in Internet search and support strong growth in display and mobile advertising, allowing it to meet or exceed the overall industry growth rates.

As the preeminent leader in search, Google maintains more than 60% of worldwide market share; no other competitor has even 10%. We believe the company's early technical advantages attracted users who now use it habitually, creating a switching cost based on familiarity with the engine. While the firm may face near-term headwinds from efforts by Microsoft's Bing and social network Facebook FB, we expect the larger players to win share from weaker players, including AOL AOL and IAC's IACI Ask. Although we expect small movements in market share, we believe Google's dominance will persist and not lose more than 3 to 5 points of share.

We believe that both Facebook and Google are wide-moat firms that will grow revenues faster than the online advertising market. Although they compete for display advertising dollars, we would not expect one firm to disrupt the other. In fact, we estimate that Google generated more than $5 billion in display advertising in 2012, modestly exceeding Facebook's display revenue for the year. 

Still, there are risks on several fronts. First, we cannot ignore the potential impact of social networks such as Facebook, Twitter, and LinkedIn LNKD. While we believe these will not be an immediate or direct threat to Google's search business, we do believe they are immediate and significant competitors for display ads. Additionally, these firms undoubtedly will invest in search capabilities, and we could be wrong about their ultimate success. We also believe the returns on capital for the new businesses will be lower than the returns in its core search business. As many companies are investing heavily in content strategies, Google will have to continue investing in an attempt to keep pace in attracting more branded advertisers.

Valuation

We have revised our fair value estimate from $780 to $740 per share, representing a 2013 price/earnings multiple of 23 and an enterprise value/EBITDA multiple of 14. We are forecasting very modest operating margin improvements from a 2012 trough, which is the primary cause for our revision. We forecast revenue to grow more than 13% annually during the next five years, slightly ahead of the growth rate for the overall online ad industry. Google reports its business in three market segments: Google websites, Google Network websites, and other.

Revenue driven by Google websites include its search engine and Web properties such as YouTube and Google Finance. Although we expect minor short-term loss of market share in search, we believe that improvements in monetization (the conversion of a search to a paid click on an advertisement) and overall market growth will help drive revenue. Additionally, with additional investment in display revenue technology and content on YouTube, we have modeled Google websites to grow more than 13% per year. We also expect uplift from mobile search to support strong revenue growth in this core business. Excluding YouTube, search is the most significant cash generator and highest-margin business for Google. We are more conservative in our view of revenue coming from Google Network. Google Network represents revenue earned by the placement of ads on partner websites. We anticipate this growth will be greater than the market, growing in the mid-teens annually through 2016.

As operating expenses have continued to climb, we are becoming more watchful of the firm's limited potential for operating leverage as it enters new businesses. While we believe Google could easily drive operating margins substantially above 40%, it would have to ratchet down its investment in research and development and its data centers to achieve these targets in the short term. It would also need to share less revenue with its partners, which we believe could potentially disrupt the company's advertising ecosystem. We expect long-term operating margins to reach the mid-20s, as the revenue mix continues to move away from desktop search, its most profitable segment. Because Google is heavily investing in new markets, we still expect free cash flow to be depressed over the next few years. However, we expect growth in free cash flows to exceed 25% annually through our explicit forecast period.

Risk

Although we believe Internet search is habitual, explicit switching costs are relatively low. Fickle consumers may move to a competitor that is able to establish a stronger brand or a more useful experience. Google is investing in new businesses where it is less competitive, which may lead to a deterioration in its operating margin and return on capital. Advertisers may find new ways to reach their target audience in a cost-effective manner, like Facebook. Finally, competition in technology is fierce, and employee retention may become more difficult and cause an increase in operating costs.

Management & Stewardship

Cofounder Larry Page was named CEO in April, taking over from Eric Schmidt. Schmidt was CEO from 2001 to 2011, a period that saw Google define its business model, become a public company, and stay at the forefront of the Internet advertising industry as the largest company by revenue and enterprise value. Schmidt is retaining his position as chairman of the board and serving a more active role in lobbying Washington. With Schmidt as a key executive, the company essentially has been managed by a three-person team of him, Page, and cofounder Sergey Brin. The company's equity has a dual-class structure that concentrates the voting power in the hands of these three executives, who hold two thirds of the voting rights. They also have a significant economic interest in the firm at more than 15%, which helps to align the interests of management with the shareholders.

We are comfortable with management at the firm, but employee retention will be a continual challenge for Google. Page's style and efforts will not mirror Schmidt's and may cause some short-term disruption. In fact, the senior vice president of product management resigned the week that Page's new title became official. Although we don't view the move as emblematic of any looming management issues, we would not be surprised to see other similar moves as competition for personnel is ruthless in the technology sector.

Generally, we are encouraged management's by the long-term focus on capital allocation, although the lack of transparency around milestones for new projects presents an analytic challenge. We are encouraged that past acquisitions including DoubleClick, Android, and YouTube are bearing fruit and deepening the company's moat. Additionally, the management has been pruning products that have not been hitting internal success metrics, a positive development, in our view. The company also reached an agreement to sell Motorola's Home business to Arris ARRS, a positive development as we did not believe the segment would generated excess returns and it also had no strategic benefit.

Overview

Financial Health: 

Google's balance sheet is flush, with more than $45 billion in cash equivalents and about $6.2 billion in short- and long-term debt.

Profile: 

Google manages an Internet search engine that generates revenue when users click or view advertising related to their searches. This activity generates more than 80% of the company's revenue. The remaining revenue comes from advertising that Google places on other companies' websites and relatively smaller initiatives, such as hosted enterprise products including email and office productivity applications.

Matt Ridley on How Fossil Fuels are Greening the Planet

Matt Ridley, author of The Red Queen, Genome, The Rational Optimist and other books, dropped by Reason's studio in Los Angeles last month to talk about a curious global trend that is just starting to receive attention. Over the past three decades, our planet has gotten greener!

Even stranger, the greening of the planet in recent decades appears to be happening because of, not despite, our reliance on fossil fuels. While environmentalists often talk about how bad stuff like CO2 causes bad things to happen like global warming, it turns out that the plants aren't complaining.

The dirty little secret of electric cars — they’re really not green

Posted by Carpe Diem Blog

Nissan advertises the Leaf as being a “100% electric” vehicle that generates “zero emissions.” So, electric cars must therefore be “green” vehicles, right? Well, not really, according to Bjorn Lomborg, writing in yesterday’s Wall Street Journal.

Consider these facts about green cars from Bjorn’s article:

1. A 2012 comprehensive life-cycle analysis in the Journal of Industrial Ecology shows that almost half the lifetime carbon-dioxide emissions from an electric car come from the energy used to produce the car, especially the battery. The mining of lithium, for instance, is a less than green activity. When an electric car rolls off the production line, it has already been responsible for 30,000 pounds of carbon-dioxide emission.
2. By contrast, the manufacture of a gas-powered car accounts for 17% of its lifetime carbon-dioxide emissions. The amount for making a conventional car: 14,000 pounds.
3. The life-cycle analysis shows that for every mile driven, the average electric car indirectly emits about six ounces of carbon-dioxide. This is still a lot better than a similar-size conventional car, which emits about 12 ounces per mile. But remember, the production of the electric car has already resulted in sizeable emissions—the equivalent of 80,000 miles of travel in the vehicle.
4. If a typical electric car is driven 50,000 miles over its lifetime, the huge initial emissions from its manufacture means the car will actually have put more carbon-dioxide in the atmosphere than a similar-size gasoline-powered car driven the same number of miles. Similarly, if the energy used to recharge the electric car comes mostly from coal-fired power plants, it will be responsible for the emission of almost 15 ounces of carbon-dioxide for every one of the 50,000 miles it is driven—three ounces more than a similar gas-powered car.
5. Even if the electric car is driven for 90,000 miles and the owner stays away from coal-powered electricity, the car will cause just 24% less carbon-dioxide emission than its gas-powered cousin. This is a far cry from “zero emissions.” Over its entire lifetime, the electric car will be responsible for 8.7 tons of carbon dioxide less than the average conventional car.
6. Those 8.7 tons may sound like a considerable amount, but it’s not. The current best estimate of the global warming damage of an extra ton of carbon-dioxide is about $5. This means an optimistic assessment of the avoided carbon-dioxide associated with an electric car will allow the owner to spare the world about $44 in climate damage. On the European emissions market, credit for 8.7 tons of carbon-dioxide costs $48.
7. Yet the U.S. federal government essentially subsidizes electric-car buyers with up to $7,500. In addition, more than $5.5 billion in federal grants and loans go directly to battery and electric-car manufacturers. This is a very poor deal for taxpayers.

The global stock market rally

Posted: 07 Mar 2013 11:30 AM PST by Carpe Diem Blog

 

The Paris-based World Federation of Exchanges, an association of 58 publicly regulated stock market exchanges around the world, recently released updated data on its monthly measure of the total market capitalization of the world’s major equity markets. As of the end of January 2013, the total value of world equities in those 58 major stock markets was $58.76 trillion, which was just slightly below the previous peak of $59 trillion in April 2011 (see chart above). Total world stock market capitalization increased by more than $4 trillion from December to January, which is the second largest monthly gain in world equity values in history. Compared to a year earlier, January’s world stock market capitalization increased by 15.4%, led by especially strong gains in Thailand (41.4%), Philippines (34.1%), the US (28.1%), Japan (24.7%), Greece (23.3%), and Mexico (22.0%).

Although the current world stock market capitalization is still $4.2 trillion below the pre-recession peak of $63 trillion in October 2007, an analysis over the last decade reveals that world equity values almost tripled between January 2003 and January 2013, and increased at an average annual rate of 10% over the last ten years. Compared to the recessionary low of $29.1 trillion in February 2009, the total world stock market capitalization has roughly doubled over the last four years to the current level of $59 trillion. The significant recovery in world stock market value since 2009 demonstrates the incredible resiliency of economies and financial markets to recover, even following the worst financial crisis in generations. As we celebrate a new bull market in the US, let’s not forget that it’s part of widespread global stock market rally.

Rising stock market and housing recovery bring US household net worth above pre-recession level

Posted: 07 Mar 2013 01:10 PM PST by Carpe Diem Blog

The Federal Reserve released data today for the net worth of US households in Q4 2012 (see B.100 Balance Sheet of Households and Nonprofit Organizations). Here are some highlights:

1. The net worth of US households increased to $66.1 trillion in the fourth quarter last year, which was an increase of $5.5 trillion, and 9%, from the same quarter in 2011 (see top chart). 
2. Household net worth in Q4 last year of $66.1 trillion was the highest level in any quarter since Q3 2007 before the recession, when household net worth was at an all-time high of $67.3 trillion (see top chart). 
3. As a result of rising home prices last year (7.9% according to CoreLogic’s repeat-sales home price index), the value of real estate owned by US households increased by $1.4 trillion during 2012 to $17.65 trillion in the fourth quarter, up from $16.24 trillion at the end of 2011. Household real estate values are now at their highest level since 2007 (see bottom chart above). With about 78 million US households owning homes, the $1.4 trillion in real estate appreciation last year would translate into an average gain of more than $19,000 per household in home value. 
4. The value of equities and mutual funds owned by US households increased almost $3 trillion last year and by more than 14%, from $13.2 trillion at the end of 2001 to $15.1 trillion in Q4 last year. 
5. The total value of all financial assets owned by US households increased by $3.8 trillion last year, from $50.6 trillion in Q4 2011 to $54.4 trillion in Q4 2012.

In nominal terms, US households last year gained back nearly all of the $16 trillion of net worth that they lost during the Great Recession, financial crisis, and collapse of housing values in 2008 and 2009. With further gains so far this year in: a) stock prices – the S&P is up year-to-date by 8.3% - and b) home prices – the CoreLogic home price index was up 9.7% in January and its pending home price index predicts another 9.7% gain in February home prices, it’s now pretty certain that US household net worth has surpassed the pre-recession peak of $67.3 trillion in Q3 2007 and reached a new all-time high.