RORO: Risk on, risk off

Assets are moving in lockstep with each other, which is making life very hard for traders indeed.

The phenomenon of RORO – risk on, risk off – is nicely illustrated in two graphs from HSBC, via alphaville:

What you are seeing is two maps of correlations between various assets, in 2005 and 2012. Dark red means the two assets are strongly positively correlated, dark blue means they are strongly negatively correlated, and turquoise, green and yellow means no real correlation either way.

In 2005, most assets were roughly uncorrelated. Some, like the NASDAQ, S&P500 and Dow Jones, moved in tandem, as did the four key European markets, and the key sovereign and investment-grade bonds. But for the most part, different assets gained and lost value in an uncorrelated manner.

Come 2012, and everything changed. In the top left are all the assets which get stronger in the good times – mostly indexes like the FTSE, but also a few currencies and copper. In the bottom right, there are the assets used to hedge bets when times are rough: the sovereign bonds, the Yen, and right down at the bottom, the US Dollar.

The former class are the risk-on assets; those investors buy when they want to take on risk to make money. The latter are the risk-off assets; those which they buy to get themselves some stability.

The simplified reason for the change is the bimodal nature of responses to crises. When things go wrong, one of two things happen: Governments step in and save the day, or they don't. Quantitative easing is one example of this, but so are bank bailouts, expansions of the "firewall", and so on. If they happen, every risk-on asset rises; if they don't, everything falls.

For those interested, a deeper examination of what RORO means for markets is given by Bryce Elder over at the FT, but the overall problem with the phenomenon is that it reduces trading to a bet on up or down. As a result, traders hate it. As Elder writes, instead of being able to do their job well, by focusing on the fundamentals of each asset they buy (asking questions like "is copper going to be in demand because of growing infrastructure demands"), "each day’s profit or loss is determined to a large degree by results of a sovereign bond auction or comments by a central banker".

Until the crisis is over, though, RORO is sticking around, so investors had better learn to live with it.

Risk on: A trader at the New York Stock Exchange. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.