Streetwise Professor

August 28, 2015

Walter Russell Meade Saw Trump Coming, 15 Years Ago

Filed under: Economics,Politics — The Professor @ 9:30 pm

More than 15 years ago, Walter Russell Meade anticipated the emergence of Trump:

It is perversion rather than corruption that most troubles Jacksonians: the possibility that the powers of government will be turned from the natural and proper object of supporting the well-being of the majority toward oppressing the majority in the service of an economic or cultural elite—or, worse still, in the interests of powerful foreigners. Instead of trying, however ineptly, to serve the people, have the politicians turned the government against the people? Are they serving large commercial interests with malicious designs on the common good? Are they either by ineptitude or wickedness serving hostile foreign interests—giving all our industrial markets to the Japanese, or allowing communists to steal our secrets and hand them to the Chinese? Are they fecklessly frittering away huge sums of money on worthless foreign aid programs that transfer billions to corrupt foreign dictators?

Jacksonians tolerate a certain amount of government perversion, but when it becomes unbearable, they look to a popular hero to restore government to its proper functions. It was in this capacity that Andrew Jackson was elected to the presidency, and the role has since been reprised by any number of politicians on both the local and the national stages. Recent decades have seen Ronald Reagan master the role, and George Wallace, Ross Perot, Jesse Ventura and Pat Buchanan auditioning for it. The Jacksonian hero dares to say what the people feel and defies the entrenched elites. “I welcome their hatred”, said the aristocratic Franklin Roosevelt, in his role of tribune of the people. The hero may make mistakes, but he will command the unswerving loyalty of Jacksonian America so long as his heart is perceived to be in the right place. [Emphasis added.]

What is bizarre is that the sin of “giving our industrial markets to the Japanese” was somewhat dated by 1999, but Trump pounds on that theme today, when it is well past its sell date. Decades past. Just yesterday, in  Greenville, SC, he said something to the effect that “the Japanese are up here [holding his hand over his head] and we are down here [holding his hand by his knee].” Fact: Japanese per capita GDP is $36K, and US per capital GDP is exactly 50 percent higher, at $54K. But facts don’t matter. The image of Japanese domination (now accompanied by the image of Chinese domination) resonates intensely among Jacksonians.

But moving beyond that particular point, Meade clearly identified the role Trump is playing, and the audience-Jacksonians-to whom he is appealing.

One of the characteristics of Jacksonians that Meade identifies is their hostility to elites. Anthony Codevilla makes a similar point, saying that Trump is channeling intense anger at the “Ruling Class.”

And truth be told, there is a lot to be hostile to and angry with. Viewed objectively, the term “elite” can only be used ironically in the America of 2015. There has never been such a sorry lot at the upper echelons of politics and culture in our nation’s history, except perhaps for the 1850s. The Jacksonian instinct to break out the pitchforks and torches and get the bastards is understandable.

But Trump is a fatally flawed vessel for this rebellion, in part because of he echoes so well the flawed beliefs of so many Jacksonians, notably the tribalism that gives rise to protectionism and indiscriminate hostility to all immigration. (And I say this as someone with decided Jacksonian impulses on foreign policy, and as someone descended in part from a quintessential Jacksonian family.)

But also in part-in large part-to Trump’s authoritarianism. Virtually every proposal he makes involves some sort of government intervention, such as the imposition of tariffs, a concerted effort to weaken the dollar, or mass deportation. Indeed, it is difficult to find any serious policy differences between Trump and avowed socialist Bernie Sanders.

What’s more, he promises a highly personalized government, in which he will exercise his personal executive authority to impose his policies. (A style pioneered by Andrew Jackson, notably.) He envisions his presidency as the application of the methods of the corporate CEO (who frequently exercises virtually untrammeled authority) to the governance of a nation that dwarfs even the largest company.

Even beyond the defects of his specific policy proposals, this personalization of process is the last thing we need right now. Obama has already taken us far down this road, and we need to retrace our steps, rather than hurtle even further forward on it. We are careening towards presidentialism, which has proved disastrous to both liberty and wealth wherever it has been implemented. (It is not for nothing that Trump sees a kindred spirit in Putin.)

It is ironic that many Tea Party people are ardent Trump fans, despite the fact that he represents the antithesis of the Constitution-worshipping, small-government rhetoric of the Tea Party. If Trump actually wins, these people will wake up with the biggest morning-after regret ever.

That said, I doubt that Trump can win the presidency, or even the nomination. But I temper my doubts because I never thought that he would make it this far. And even if he does not gain the nomination, he may do so much damage to the (already divided and dysfunctional) Republican Party that its electoral prospects may be doomed, even in a year when the presumptive Democratic Party nominee is a walking disaster who is at some risk of trading her orange pantsuits for orange prison garb, and the alternatives are an aging socialist loon and an aging lifelong pol with a well-earned reputation for buffoonery. (This is another illustration of the degraded condition of our purported elites.)

And Trump also brings out in stark relief the Republicans’ fundamental dilemma. They cannot win without the Jacksonians, but it is seriously questionable whether they can win with them, because they repel a large number of the swing voters who will decide the election. Reagan was able to bridge this gap, but the gap was much narrower 35 years ago. Reagan was arguably the only person that could have done it in the 1980s, but even he would almost certainly find it impossible today.

Trump today is polling at 20 percent or so of a party that may-may-account for 50 percent of the electorate. You can’t win with 10 percent, no matter how intense its support, especially if that very intensity alienates 10 percent (or more) of the voters.

This is particularly true if you look at the electoral map. The swing states that the Republicans need to win to regain the White House are the very ones that are most likely to be neuralgic to Trump and his angry band of Jacksonians.

So what will happen? In such discontented times making forecasts is even more difficult than usual, but I cannot identify plausible, positive scenarios. Trump and the Jacksonian faction he appeals to are a destructive force, even though the object of their anger and disdain largely deserves it.  Destructive because they are likely to perpetuate the misrule of the progressives, and destructive even in the (unlikely) event of victory, because Trump’s policies and presidentialism would just represent a different form of misrule.

Print Friendly

August 26, 2015

Donald Trump Can Only Aspire to Match Obama’s Economic Ignorance

Filed under: Climate Change,Economics,Energy,Politics,Regulation — The Professor @ 8:00 pm

Yesterday I said Trump and O’Reilly were in a cage match to determine the world champion of economic ignorance. There is another contender of course, the current occupant of the office to which Trump aspires. Actually, I would say that Obama is the undefeated reigning world champ, and that the O’Reilly-Trump set-to was merely to see who might contend for the title in the future.

Obama’s gobsmacking ignorance-served up with a heaping side of superciliousness-was on full display at the “Clean Energy Summit” in Las Vegas on Monday. Time is finite, and my energy is only intermittently renewable, so I can’t possibly deconstruct these vaporings in detail. So I will limit myself to a few high-level comments:

  1. Obama’s claims that his policies on renewable energy and carbon will make a meaningful impact on climate is a massive fraud that would land you or me in jail. Obama’s own EPA acknowledges that the policy will reduce global mean temperatures by an imperceptible and irrelevant .02 degrees by 2100. Farenheit? Celsius? Who cares? It matters not. It is rounding error on any scale.
  2. Obama’s mantra is all about the jobs that his renewables policies are creating and will create. Jobs are costs, not benefits.
  3. Further, Obama is clueless about the seen vs. unseen. To the extent that these policies raise the cost of electricity, they will have adverse consequences on wealth and income in consuming sectors, and in sectors that could produce electricity more efficiently, but for the subsidized competition from renewables.
  4. And yes, these policies will increase costs. Renewables are intermittent and diffuse and therefore require backup resources to ensure reliability; there is often a long distance between renewable sources and demand, meaning that new investments in icky transmission are required; and there is often a negative correlation between renewable production and electricity demand (e.g., the wind usually stops blowing when it’s really hot). Just look to Germany, with its Energiewende fiasco if you have any doubts. There is a strong correlation between electricity costs and fraction of electricity from renewables, and although this could be due in part to an endogeneity issue (those with more costly electricity sources utilize more renewables), this does not explain the entire effect.
  5. Obama and other boosters of renewables boast about falling costs of solar. Wind is conspicuously absent from this discussion, even though it represents the bulk of renewables generation. Further. Fine! When these inexorable efficiency gains make solar economical as a large-scale source of electricity, it will be able to compete without subsidy. This is no reason to subsidize now. This technical progress in solar argument is a non sequitur of the first magnitude.
  6. Obama and other boosters rave about capacity additions attributable to renewables. Well, due to the intermittence issue, capacity utilization is very low. It takes a lot more than 1MW of renewable capacity to replace 1MW of thermal or nuclear capacity. Indeed, if the wind ain’t blowing, all the windmills in the world can’t replace one conventional plant.
  7. Obama’s ignorance is on full display when he claims that conventional electricity generation was not characterized by “a lot of innovation.” This is just a crock. Compare heat rates of plants 20 years ago to those of today: in California, for instance, thermal efficiency has improved by 17 percent over the last 13 years. Heard of combined cycle, Barry? There has been considerable innovation in electricity generation. Well, not at the light switch plate, which is probably the extent of Barry’s familiarity with the electricity value chain.
  8. Obama mistakes opposing subsidies with being anti-free market. Welcome to bizarro world. And, as is his wont, he did so in an Alinskyite fashion, demonizing his opponents (the always handy Koch Brothers) in a very personal way.

I could go on, but that would be an S&M exhibition, and this is (usually!) a SFW site.

Suffice it to say that in Las Vegas Obama gave a demonstration that proves that when it comes to economic illiteracy, Trump can only aspire to fill Obama’s shows.

And yeah. Take a moment to absorb just what that means.

Print Friendly

August 25, 2015

Donald Trump: Leader of the Mercantilist Zombie Apocalypse

Filed under: China,Economics,Politics — The Professor @ 6:53 pm

Running the risk of serious brain damage, I watched Trump on O’Reilly last night. It was a cage match to determine the world champion of economic ignorance. I declare it a tie.

The “discussion” started out with China. O’Reilly asked Trump about China’s alleged devaluation policy. Except O’Reilly couldn’t pronounce “devalue”: he kept saying “devaluate.” But Trump took the bait and ranted (but I repeat myself) about how China has relentlessly devalued its currency over the years.

Except, of course, it hasn’t. It devalued years ago, but since the financial crisis it has pegged the yuan to the dollar, and only recently made two small devaluations.

Indeed, the yuan has been appreciating in recent years. Since 2011 the yuan has risen from about 6.8 to the dollar to 6.2 to the dollar, before dropping to 6.4 to the dollar as a result of the devaluations. It is arguable whether the yuan is undervalued or overvalued as a result of the peg, but that’s something completely different than devaluation. And it is just wrong to say, as Trump does, that China has been relentlessly devaluing its currency for years. If anything, indicators are that the currency has become overvalue of late: in particular, capital outflows signal overvaluation. Look at real estate markets in the Bay Area, Vancouver, Sydney, etc., or step into any luxury car showroom in the US, and you will see a lot of Chinese buyers. That’s a telling anecdote, but there is hard data to back that up.

What’s more, it’s not as if the US has been passive post-crisis. QE anyone? To ignore this is to ignore one elephant in the room, and criticizing the currency peg without mentioning QE has more than a little of the feel of “Mommy! No fair! Johnnie hit me back!”

Further, even if the Chinese have engaged in policies that keep their currency artificially low, the effect on the US is not unambiguously bad. Yes, some US industries and workers are harmed, but consumers overall would get a great boon, as we exchange overvalued paper for artificially cheap goods. It is not uniformly bad for US manufacturing either, as many of the “consumers” are manufacturers who can purchase cheaper inputs. This raises the derived demand for other inputs, including some labor.

The best part was where Trump repeated one of his common themes that American leadership is dumb (I don’t disagree) but that Chinese leadership is really smart. But then he went on to screech that the Chinese have created a huge bubble that is imploding, and threatens to bring down the US economy with it. But, if the Chinese leadership is so damn smart, why would they create a huge bubble, and then be incapable of preventing its bursting? And if we live in a zero sum world where China’s gain is America’s loss, wouldn’t a Chinese economic collapse be good for the US?

Another lowlight was the discussion of trade with Mexico, which is apparently also governed by those overqualified for Mensa. (Who knew?) He is furious at Nabisco for moving a plant from Chicago to Mexico. Presumably if elected president he will force the company to forego use of the “Ritz” brand (because that’s the name on a fancy-schmancy American hotel!) and preclude them from selling Oreos with a cream center in the US. Nope, just two dry chocolate biscuits, unsweetened, held together with a nail. Ford also came in for a bashing for moving assembly to Mexico.

Perhaps to give him more intellectual credit than he deserves, Trump is a died-in-the-wool mercantilist who believes trade is a zero sum game, and who favors protectionism and beggar-thy-neighbor currency policies. He talks like it is the late-80s, and Japan is still an economic juggernaut that will overwhelm the US, completely overlooking the fact that Japan’s crypto-mercantilist policies gifted it a 25 year long lost decade, and that neo-mercantilist China is on the brink of the same fate. If it is lucky.

Adam Smith is spinning in his grave.

But alas, mercantilism is a like a zombie. It has no brain, and has proven impossible to kill. Which means, I guess, that in Donald Trump, it has found its perfect advocate.

Print Friendly

August 24, 2015

I Knew Black Monday. Black Monday Was a Friend of Mine. This Was No Black Monday

Filed under: Economics,Financial crisis — The Professor @ 6:26 pm

Today the S&P500 dropped about 4 percent. A pretty big move, yes, but hardly a catastrophe. But to follow the financial media and Twitter, you’d think it was market Armageddon. It’s Monday, so of course everybody was screeching “Black Monday,” and (of course)^2, #blackmonday trended on Twitter.

Not even close.

I worked at an FCM in Chicago on Black Monday. Well I guess I still worked there. After a falling out with my boss, I submitted my resignation at 7AM on the October 19, 1987: so now you know the real cause of the Crash. But I was in the office, and had a ringside seat to an honest-to-God crash. People, please. Today wasn’t even close.

Today’s move was about a 3 sigma move. Black Monday, 1987, was a 20 sigma move. If the world was normal-which it ain’t, of course-a 20 sigma move should occur every several billion lives of the universe. Three sigma moves occur about once every five years. So in fact, we’re a little bit overdue.

In brief, there is no comparison.

Despite the decline in stock prices, there is still one raging bull market. In stupidity. Today’s market move triggered Pavlovian responses from both idiots and people who should know better.

Leading the idiot parade were Bernie Sanders and Donald Trump. (You’re shocked, I’m sure.) Both took to the express lane of stupidity, Twitter, to share with us their deep thoughts. Sanders reflexively blamed trade:

The results are in. Unfettered free trade has been a disaster for working Americans. It is high time we ended our disastrous trade policies.

Trump blamed China, and (apparently) US policy makers dancing to China’s tune:

Markets are crashing – all caused by poor planning and allowing China and Asia to dictate the agenda. This could get very messy! Vote Trump.

Yes, China has something to do with it, but (a) as noted above, today’s “crash” is small beer indeed, and (b) the sort of autarky that Trump fantasizes about would have made us far less wealthy than we are, resulting in stock prices (and other asset prices) far below than the level to which they “crashed” today.

And then there’s Zero Hedge, which wet itself repeatedly in excitement, all the while declaring that the era of DOOM! is upon us. Too bad for ZH that if there’s anybody who’s effed by recent developments, it’s ZH’s BFF Putin and Russia. (Ruble above 71, and Brent at a 42 handle today. Good times, Vlad!)

As for people who should know better, consider Mark Cuban:

Later, in an interview on CNBC’s “Fast Money,” Cuban said the historic moves in the market on Monday were not caused by normal trading.

“No one else that trades can move the market [by] hundreds of points in hundreds of seconds in either way,” Cuban said.

“What we saw today was like a three stooges market… that doesn’t happen from normal traders, that doesn’t happen from large funds taking positions or selling positions, that happens because algorithms watch everything that’s happening and everything that’s correlated to what’s happening in equities and they take action.

Cuban has an obsession with HFT, and today gave him an opportunity to spout off on it again, revealing his ignorance, and unreasoning hatred, of it. Days like today, and market movements like today (with big gaps) have occurred before anyone even thought of algos, before markets were computerized, and before Mark Cuban was born. Days like today occurred when prices were recorded on blackboards in chalk. Days like today occurred when the closest thing to HFT was the telegraph and the stock ticker. Regardless of the technology, markets do things like they did today.

Everybody should just give it a rest. Days like today happen with some regularity. No reason to panic. Indeed, it should be a source of some comfort that the impetus for the selloff was events in China, rather than (as in 2008) the impending implosion of the US banking sector.

And do yourself a favor. Turn off the TV, and just look at Twitter so that you can mock the likes of Trump and Sanders. The signal-to-noise ratio is asymptotically approaching zero. When you really need to panic, you’ll know.

 

Print Friendly

August 23, 2015

China’s Michael Jackson Moment Has Arrived

Filed under: China,Economics,Politics — The Professor @ 7:05 pm

About 6 years ago, reflecting on China’s massive stimulus effort in the aftermath of the crisis, I referred to the country as the “Michael Jackson economy,” sustained by artificial stimulants, and extending the analogy, predicted it would not end well. In the years since, Chinese economic statistics have performed according to plan with metronomic regularity, but all of the distortions inherent in an investment-driven, credit-financed boom only accumulated. Throughout this period, China interfered in markets, by the manipulation of crucial prices, notably interest rates and the exchange rate, and the implementation of measures to direct capital to favored sectors and firms.

Signs of resource misallocation have abounded most notably in the form of massive overcapacity in myriad industries (e.g., steel), the construction of vacant cities, and a relentless rise in debt-to-GDP that is approaching the stratospheric levels attained by Japan before its crash in the early 1990s.

It was inevitable that this was not sustainable. But although Chinese authorities indicated at some level they understood this, and talked about transitioning away from the credit, export and investment-driven growth model towards a consumption-driven one, political economy considerations that tend to favor established interests, and no doubt a deep fear about their inability to maintain control and social peace during a transition, kept them from kicking the old habits. And now it appears that the Michael Jackson-esque denouement is nigh.

All signs are of an impending economic crisis in China. The recent stock market decline is one symptom (but mainly a symptom), as are other economic data. But the surest sign is the panic evidenced by truly gargantuan stimulus measures (totaling around $2 trillion, or four plus TARPs, according to Christopher Balding’s figuring) and the recent decision to devalue the yuan.

The real slowdown is an especial concern because of the Rube Goldberg nature of the Chinese financial system, and the massive amounts of debt that has accumulated since 2009. The government is using a variety of measures to take the associated risk on its balance sheet (although it is using indirect means to conceal this fact), but even the government balance sheet is not bottomless. In such a debt-dominated and opaque financial system, a full-blown financial crisis that would greatly exacerbate the real slowdown is quite possible.

There are a couple of lessons here that need to be emphasized. The first is the dubious value of GDP as a measure of economic performance, especially in an investment-driven, highly managed economy. Investment is a cost incurred in the expectation of realizing a greater benefit in the future: it is not a benefit  in itself. In an economy where price signals and incentives are deeply distorted by financial repression, capital controls, and crucially a high-powered incentive system that ties remuneration and promotion of government officials to GDP targets, there will be massive malinvestment. With this malinvestment, future returns will be small and negative, and often insufficient to service the debt used to finance it.

When the investment is made it looks great in the GDP figures. But in an economy where investment accounts for upwards of 50 percent of GDP, the destruction of value caused by the malinvestment is staggeringly large.

The GDP-linked high powered incentive system is likely especially pernicious. Investment decisions should be forward looking, but the incentive system drives officials to make “investments” based on their current cost, not the expectation of their future returns.  Big investment (cost!) today means big GDP today means life is good for the cadres. This is beyond perverse.*

Another lesson is that no one should be surprised. Logic and experience lead to the same conclusion. Economic logic teaches that distortions of prices and top-down resource allocation mechanisms destroy wealth rather than create it. Experience, from extreme cases like the USSR to less extreme ones like Japan, illustrate vividly the hard reckoning that a managed system must eventually face.

I am only surprised that people are surprised. Even though logic and experience should have led people to question the Chinese “miracle,” and to doubt rather than tout its GDP figures, for years Smart People** have marveled at Chinese economic performance and sang paeans to its wise government steersmen. They were mesmerized by GDP figures, and confused costs with benefits. But just as it was inevitable that Michael Jackson’s dependence on artificial means would eventually result in a health crisis, it was inevitable that China’s dependence on artificial stimulants and distortionary interventions driven by political agendas and warped incentives wold result in an economic crisis.

And there are mounting signs that that moment has arrived. Perhaps it will result in a serious crisis. Perhaps it will result in multiple lost decades (a la Japan). But one way or another, forecasts of future Chinese economic dominance are going to look quite embarrassing.

* This is a different issue than whether Chinese officials routinely falsify economic data. Given the high powered incentives at the lower and middle levels of the governing hierarchy, and the need for the government to demonstrate its alleged economic competence at the upper levels, the incentives to falsify data are acute.

** H/T @soncharm, of Rhymes With Cars and Girls.

Print Friendly

August 15, 2015

Is Elon Musk’s Flim-Flam Beginning to Unravel?

Filed under: Climate Change,Economics,Energy,Politics — The Professor @ 7:03 pm

I’ve long been an Elon Musk skeptic.  He struck me as Harold Hill-esque con man, and an aspiring cult leader.

Izabella Kaminska at FT Alphaville has come to the same conclusion. (I appreciate her giving extended play to my posts on Musk, and for pointing out that I’ve “never bought the hype.”) Her last sentence says it all, in a rhetorically questioning kind of way: “Who was it again that said “the bigger the lie, the more it will be believed”?”

Exactly.

There are some major cracks beginning to show in the Musk facade. The most telling is the fact that one Musk entity-SolarCity-sold $165 million in bonds (that are backed by the cash flows from SCTY’s solar installations) to another Musk entity, SpaceX (which just experienced an embarrassing spacecraft malfunction.) When money is taken out of the left pocket to put into the right pocket, eyebrows should be raised. Especially when the explanation is this lame:

So why is SpaceX buying these up? According to SolarCity’s Vice President of Financial Products, Tim Newell, the answer is “very straight forward.” The bonds offered SpaceX an attractive rate of return for a one-year investment compared to other investment options out there. SpaceX carriers a fair amount of cash at times, noted Newell, and the company wanted to put that cash to work in the short term with a high degree of reliability

Sure. If it’s offering such a great rate of return, why isn’t anyone else buying it? And why does it have to offer a better rate than “other investment options out there”? A more plausible story is that the bonds weren’t selling, or that they would only sell at yields Musk didn’t want to pay, so  he had to use one of his companies to prop up another. Those kinds of shell games can only last so long.

Moreover, some executives have left, most recently the head of service, who is taking a leave of absence. This follows the departure of the CFO (announced in June).

Then there is the recent Tesla earnings report, which showed that despite the massive subsidies it has received, it still can’t earn a GAAP profit and, and is burning cash at a hellacious rate, $565 billion million* in the last quarter alone. Further the company revealed that it almost certainly will miss its sales target of 55,000, perhaps by as much as 10 percent. The introduction of the Model X is being pushed back yet again. The company had been counting on China for future growth. Performance there had been disappointing, and China’s current economic troubles (which include a huge automobile inventory overhang) make it an unlikely future savior.

But Musk responded in his typical supercilious fashion:

Rather sanctimoniously, the carmaker said that it would prioritise “a great product” over quarterly numbers. Investors have probably understood that by now. Just in case of doubt, Mr Musk followed up on the earnings call with: “We don’t want to set high expectations . . . Winning needs to feel like winning.”

Just a suggestion: channeling one’s inner Charlie Sheen is probably not a good idea.

There is also a medium-to-long term risk for Tesla, and a deliciously ironic one (though it is somewhat hedged by SolarCity). Specifically, Musk is a anthropomorphic anthropogenic climate change true believer who touts electric automobiles as a way of combatting it. The EPA’s recent proposed regulation of CO2 is also targeted at climate change. Though by its own admission will do virtually nothing to ameliorate temperature increases, the regulation will make electricity much more expensive: that’s a certainty. Estimates are in the range of 10-20 percent. That makes electric cars that much less attractive. Higher energy costs will also reduce income, leading to lower demand for Tesla vehicles, but will also reduce the demand for petroleum, which will lead to lower gasoline prices which will also negatively impact demand for Teslas: the EPA regulation will therefore cause both income and substitution effects that are harmful to Tesla (though again SolarCity will benefit from the EPA plan). Meaning that one green dream will cannibalize another.

For those who see Tesla as more of a battery company than a car company, higher electricity prices hurt the storage battery business too.

But no doubt Elon will turn his attention to doing what he does best: importuning the government to subsidize him. I lay heavy odds that we will see an effort to increase or extend subsidies to electric vehicles with the specific purpose of offsetting the effect of EPA regulations on the sales of electric cars. Just watch. If the markets are becoming less enamored with Elon, there are still plenty of suckers for his shtick in government.

*Thanks to commenter Highgamma for catching this.

Print Friendly

August 12, 2015

Hey, It’s August: The Russian Economy Imitates the Kursk

Filed under: China,Economics,Energy,Politics,Russia — The Professor @ 1:37 pm

Despite happy talk from the government in recent months, Russia continues its downward economic spiral. The economy contracted by 4.6 percent in the second quarter. This is pretty appalling, given that oil prices had rebounded some. The Economics Ministry says this is “the lowest point” for Russia, but given the recent rout in oil prices, and the troubling signs coming out of Russia, this seems unduly optimistic. If anything Q3 and Q4 are likely to be worse. These therefore seem to be more realistic predictions:

“While second-quarter growth surprised on the downside, perhaps far more importantly is the fact that the outlook for the Russian economy has deteriorated so far in the third quarter,” Piotr Matys, a London-based foreign-exchange strategist at Rabobank, said by e-mail.

. . . .

“The economic prospects for the coming quarters look pretty grim,” Liza Ermolenko, an analyst at London-based Capital Economics Ltd., said by e-mail. “Industry appears to have been a major cause behind the deterioration in the second quarter, having gone from being a relative bright spot in the first quarter.”

The consensus is now that the current economic situation is more dire than 2008-2009, and that it is likely to persist far longer.

On top of this, China’s sudden devaulation of the Yuan has caused a further decline in commodity prices, with Brent now below $50/bbl. This has contributed to a further decline in the Ruble, which fell about 2 percent in the aftermath of China’s move.  The Russian currency is now around 65 to the dollar.  Russia is particularly vulnerable to an extended Chinese malaise, not to mention a hard Chinese landing.

The Russian Central Bank now faces the same conundrum that it confronted last summer and fall. It can choose between loosening monetary policy to spur the economy but would thereby spur inflation (already running at over 15 percent) and pressure the ruble even further. Or it can choose to defend the Ruble, which would hamstring the real economy, and potentially spur capital flight if the credibility of the RCB’s action is doubted. Which leg does it chew off?

Wherever Putin and his economic advisers look, the scene is bleak indeed. The situation in China is particularly ominous, because Putin had grabbed onto China like a drowning man, hoping it would rescue him from the blows raining down from sanctions and the commodity price implosion. But the Chinese devaluation, combined with a litany of other grim statistics coming out of China, suggests that if China is not drowning itself, it is struggling mightily to keep its head above water.  Russia is particularly vulnerable to an extended Chinese malaise, not to mention a hard Chinese landing. Putin counted on China’s economic support to allow him to continue his Ukrainian adventure and weather the resulting sanctions.  It’s not happening (Chinese direct investment into Russia has fallen by 25 percent), and the prospects of it happening anytime soon are diminishing daily.

Nor are the long run prospects particularly encouraging, not with Bloomberg running articles titled “Russian Workers Vie With Greece in Race for Productivity Abyss,” the upshot of which is that Russia has the lowest productivity in Europe, running at 50 percent of the European average and 30 percent below Greece. (Which makes this boast by the Russian Minister of Industry and Trade that Russia has overtaken the US in labor productivity even more hilarious.)

In brief, the Russian economy is doing an imitation of the Kursk, 15 years ago. The only difference is that Putin has yet to admit the economy has sunk.

 

Print Friendly

August 11, 2015

Chronicles of Hillary, Book the Second: The Felon’s Education Plan

Filed under: Economics,Politics — The Professor @ 7:13 pm

A few weeks ago I wrote the first in what I anticipated would be a running series of posts on Hillary Clinton. If the US is still a country of laws, not men (or women, in this instance), or if Hillary Clinton is an honorable individual, this would be a short-lived serial indeed. For today the State Department Inspector General determined that Clinton’s private email server contained a least two emails classified at extremely high levels. This despite her adamant (though utterly risible) denials that she ever discussed classified matters via her personal email. (I say risible because what Secretary of State would never discuss classified information in writing? If you believe she never did, I have a bridge spanning boroughs to sell to you cheap.)

Pair this story with another story that has been in the news and you know how bad it is. Namely, the story that the Chinese have penetrated the private emails of virtually all high ranking national security officials since at least 2010. And you know the Russians have done the same. And the Iranians. And maybe even the Tongans.

This is a felony. It appears to be open and shut. Hillary Clinton has no business holding any office or trust in the United States government, let alone the presidency. If this is a country of laws, she will be prosecuted and convicted, like David Petraeus. If she were a woman of honor, she would terminate her candidacy. But I have serious doubts on both scores-especially the last. Expect a barrage of vicious attacks on her critics (protect the queen! kill the messenger!), combined wit a campaign of obfuscation and denial. It’s the Clinton way. I can hope, but seriously I think this episode will be yet another demonstration of the low state to which this nation has descended.

Pending the outcome of this despicable affair, I will add to the Hillary Chronicles by writing about her New College Compact. I read it, so you don’t have to. Suffice it to say that it proves that Hillary only excels her dishonesty with her economic retardation. This document is triple distilled economic stupidity. 199 Proof.

Where to begin? Start with her formulation of the problem:

Either they say, “We just can’t afford it,” and pass up on all the opportunities that a degree offers — or they do whatever it takes to pay for it, even if that means going deeply into debt.

Now, for most people, the return on investment of a college degree is still worth it. On average, people with four-year degrees earn over half a million dollars more over their careers than people with high school degrees.

So it’s too expensive, but it’s worth it. Or something. But what about those for whom it isn’t worth it? Then why the hell should they be doing it? And why the hell should somebody else be paying for it?

But the worst part is this: “we’ll make sure cost isn’t a barrier.”

Under my plan, tuition will be affordable for every family. Students should never have to take out a loan to pay for tuition at their state’s public university. We’ll make sure the federal government and the states step up to help pay the cost, so the burden doesn’t fall on families alone.

Further, Hillary proposes to make community college free, and to subsidize the student loans that are undertaken, and to refinance outstanding loans at subsidized rates. (Come to think of it, Hillary’s proposal has a lot in common with China’s recent bailout of local government funding vehicles.) The refinancing portion is particularly daft, because those costs are sunk. This is just a pure transfer, and likely a regressive transfer because as Hillary herself admits, the college educated have higher incomes.

Most economic train wrecks occur when those who receive the benefits don’t pay the cost. One of the virtues of student loans is that the person who borrows out the wazoo to pay for the degree in anthropology (or puppetry!) has to bear the misery of his/her unwise choice. Their experiences should be spread far and wide, pour encourager les autres. A Scared Straight program is in order, but instead Hillary proposes to saddle taxpayers with bearing the cost of the romantic or juvenile or just plain stupid choices college bound students make, which often includes the choice of bounding off to college in the first place.

Here’s Hillary’s plan, such as it is:

  • Under the New College Compact, no student should have to borrow to pay tuition at a public college.
  • Schools will have to control their costs and show more accountability to their students.
  • States will have to meet their obligation to invest in higher education.
  • The federal government will increase its investment in education, and won’t profit off student loans.
  • And millions with student debt will be able to refinance it at lower rates.

First, I note the massive amount of federal coercion on the states inherent in the plan. Second: I laughed out loud at the “federal government . . . won’t profit off student loans.” That’s pretty much guaranteed.

Third, the South Park Underwear Gnomes plan is about as coherent: “1. Collect underwear. 2. ? 3. Profit!”

The outcome of this plan, if heaven forfend it is implemented, will be: 1. a massive misallocation of human resources, as too many people go to college and too many people choose the wrong degree. 2. Deadweight losses from the taxation required to pay the estimated $350 billion cost of the program (which is doubtless an underestimate). 3. The cost of college–the real cost incurred, not the cost paid by the beneficiaries of the program–will go up, as surely as day follows night. The objective of the program is to raise the demand for college education, which will increase output, total cost, and marginal cost.

This is the first of Hillary’s big, bad ideas. If justice is done it will be the last. But, alas, I doubt justice will be served, and that more big, bad ideas are to come. When they are, I’ll add to the chronicles.

 

Print Friendly

August 10, 2015

Destroying Seized Food: Compounding Idiocy With Lunacy

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 5:59 pm

Russia cemented its well-deserved reputation for insanity by bulldozing and burning tons of food seized for violating the country’s cut-off-its-nose-to-spite-its-face import ban. This was daft, even overlooking the foolishness of the ban.

Seizing smuggled foodstuffs raises the cost of violating the ban, thereby achieving a deterrent effect. But what’s the point of destroying what was seized? Selling it would make much more sense. First, selling would actually help strengthen the ban by increasing supply and reducing prices in Russia, thereby reducing the profitability of smuggling. This would have also increased Russian consumption, making Russians better off. Second, the Russian government could realize revenue by selling the confiscated products: God knows it can use every ruble it can get. Or it could just give the stuff away, and get a PR victory as well as reducing the incentive to smuggle.

In other words, no economic downside, and some economic upside (assuming the ban is rational).

Instead, the Russian government engaged in exhibitionist masochism, and destroyed the seized items in a very public and flamboyant way.

Why? Beats me. Maybe they were trying to make the point that Russia needs nothing from the decadent West. Or maybe they are in thrall to the broken window fallacy, and believe that destroying stimulates production.

I really don’t want to understand. Because to understand these lunatics, I would probably have to descend into lunacy myself.

Print Friendly

Gazprom Has Unprotected Sales, And Pays the Price

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 5:40 pm

I have long mocked Gazprom’s obstreperous, and economically unhinged, defense of an oil price peg of its gas sales. So today is another schadenfreude day, as the FT reports that Gazprom’s vaunted gas deal with China is finding that The East is Red (as in ink) because the price was linked to oil and “offers no protection against low [oil] prices.” (And despite the evident risks of going without protection, Russia is contemplating a ban on foreign condoms! Maybe Gazprom needs to be more “strict and discriminating” in its contracting practices.)

Apparently the company took strategic advice from Obama, who when asked by Fareed Zakaria what would happen if the Iran deal failed, said that “I have a general policy in big issues like this not to anticipate failure“:

Asked whether the contract built in protections to ensure that Gazprom would not make a loss in the event of a prolonged period of low oil prices, Pavel Oderov, a director at the company, said: “We have registered high risk appetite for this contract and we do not envisage such an event.”

By “high risk appetite,” I think he meant: “we were freaking desperate and we put it all on black (as in oil) to gamble for resurrection.”

And of course, Putin can’t let Gazprom eat a loss:

Separately, the Russian government is preparing to support the flagship project. According to a document published by the Kremlin on Monday, president Vladimir Putin ordered the Russian government to draw up by the start of September a “comprehensive action plan to ensure government support for the construction of gas transport infrastructure, including the Power of Siberia pipeline”.

Like the Russian government has money to throw around, especially since Gazprom (and Rosneft) are supposed to be the cash cows that feed the rest of its corrupt cronies, and the budget.

Insisting on the oil peg was always nuts. Note that one reason why many buyers of LNG want to move away from the oil-link is to diversify their price risk: that’s exactly why Russia, already a huge oil long, should have jumped at the chance to move away from a 100 percent reliance on oil price linkages. Yes, oil and gas prices are correlated, but imperfectly so, and moving away from oil-based pricing for gas would have reduced the country’s exposure to oil prices. But apparently Gazprom management and Putin believed that oil would always outperform gas, and insisted on the link. Be careful what you ask for, Vlad!

This is just the latest in a litany of Gazprom failures. Along with today’s bad news about the China contract-the cornerstone of Putin’s vaunted pivot to Asia-the company disclosed that production was down and sales to Europe were down in the first quarter. The company’s ruble profits rose only because the ruble cratered: talk about the cloud engulfing the silver lining. Further, the Turkish Stream project appears dead in the water, foundering upon-you guessed it-the inability to negotiate a price. That, and the cracked economic rationale for the project.

The world is finally awakening to the fact that the alleged energy behemoth is in fact an economically incoherent mess. In the US, it would have been taken over, and ruthlessly rationalized. Or put into rehab. Or broken up. But Putin continues to let it blunder on, like a vodka-sotted giant.

Not so long ago, Putin was considered some sort of virtuoso. He apparently thought so too. But now everything that used to work for him is self-destructing. And he seems quite bewildered at his turn of fortune.

In truth, Putin was not a virtuoso: he confused luck–high oil prices–for some sort of strategic genius. He was a huge spec long on oil, and looked brilliant when the price was high. When it is low, not so much. And idiotically, one of his champions insisted on increasing that exposure instead of diversifying away from it.

Well played. Well played.

Print Friendly

Next Page »

Powered by WordPress