Streetwise Professor

October 13, 2014

Russia in a Nutshell: Three Stories That Convey Important Truths About an Aggressive, Mendacious, and Economically Weak Empire

Filed under: Commodities,Economics,Energy,Military,Politics,Russia — The Professor @ 2:43 pm

A quick rundown on some Russia stories. Three stories that encapsulate important truths about an unhappy country that seems intent on forcing others to share in its unhappiness.

First, there was a lot of attention paid to Putin’s announcement that 17,000 soldiers would be withdrawn from Rostov, on the Ukrainian border, to return to their bases. The reactions are a combination of poor memory, ignorance, and wishful thinking. Poor memory because something similar happened in the spring, which didn’t preclude an invasion in the summer. Ignorance, because if you are aware of Russia’s conscription cycle, you are aware that the fall 2013 conscript class is due to be mustered out, and units must return to their bases to discharge last year’s class and induct and train this year’s. That’s what happened in the spring. This ignorance is inexcusable now, as it was written about in the spring, notably by Pavel Felgenhauer: I wrote about it here as well. Wishful thinking, because everyone is grasping at the hope that Putin will back down from the Ukraine battle. As if.

There is no news here. This is an artifact of Russia’s conscription system. Period. Watch for new training exercises in a few months, and the deployment of units to the Ukrainian border again, once the new conscripts are integrated into their units.

Second, Russia will sign several intergovernmental agreements with China when Premier Li visits next month. One of them is an agreement to export gas from Russia to China.

I know what you’re thinking: “Wait, didn’t they sign that deal to huge fanfare back in May?” Apparently not:

Russia has prepared intergovernmental agreements to sign during Chinese Premier Li Keqiang’s visit to Moscow next week including one on a $400 billion natural gas deal agreed in May, Russia’s deputy foreign minister said.

Russian gas exporter Gazprom and China National Petroleum Corp (CNPC) have agreed that Russia will supply China with 38 billion cubic metres of gas starting from 2019.

Yet on Friday Gazprom said an intergovernmental agreement between Russia and China required for the plan to come into force had not yet been signed.

Russian Deputy Foreign Minister Igor Morgulov told Chinese state news agency Xinhua that governmental agreements including one on gas were ready for signing during Li’s coming visit.

“They include an intergovernmental agreement on natural gas supplies via an “‘eastern’ route,” he said. [Emphasis added.]

Proving yet again that announcements from the Russians about any deal should be treated with extreme skepticism. They are the masters of vaporcontracts.

The Russians are touting various deals with the Chinese as proof of their invulnerability to western sanctions and pressure. The feebleminded believe this. In fact, Russian desperation is palpable: the fact that they hyped the gas non-deal is a perfect example of this. If you don’t think that the Chinese are aware that they have the whip hand here, and are flogging the Russians for all it is worth, please contact me. I’ve securitized some bridges, and I’m sure they’d be perfect for your portfolios!

Third, the Russians are in full paranoid mode over the decline in oil prices. Brent is down to $88/bbl, which puts Urals at about $86. Speaking of 86, they are having flashbacks to 1986, when the Saudis flooded the world with oil. This began the fatal crash of the Soviet economy (described well in Gaidar’s book, Empire).

The vice-president of Russia’s state-owned oil behemoth Rosneft has accused Saudi Arabia of manipulating the oil price for political reasons. Mikhail Leontyev was quoted in Russian media as saying:

Prices can be manipulative. First of all, Saudi Arabia has begun making big discounts on oil. This is political manipulation, and Saudi Arabia is being manipulated, which could end badly.

Er, this is way different from 1986. At most, the Saudis have increased output only slightly (about 100kbbl/day): in ’86, they more than doubled output. The Saudis are just acknowledging market reality. Demand is weak,  supplies from the US are growing, and Libya is coming back into the market. Put those  things together, and prices are inevitably going to fall. The Saudis can see the writing on the wall, and their market share is sufficiently small that unilateral reductions in their output are not economically rational. Funny, now that I mention it: Saudi market share is about the same as Russian market share. The Russians produce up to capacity, because that is profit maximizing. Yet they expect the Saudis to cut back output? Of course they do! The Saudis should sacrifice their own interests to bail out the Russians! Of course they should!

Leontyev seems to be vying with the Gazprom guy Komlev to see who can make the most idiotic statements about world energy markets. Something that commentor Ivan passed on suggests that as idiotic as Komlev was, Leontyev has him hands down. The Rosneft spokesman also blamed low oil prices on ISIS selling oil at a “triple discount.” Hilarious! World oil prices are determined in the world market. ISIS has to sell at a huge discount because it is politically radioactive, and because it cannot access world markets directly. Those to whom it sells pocket the discount to adjust for the risk of dealing with a political leper (a radioactive leper!-I’m not mixing metaphors), and sell at the world price. The world price is determined by world output, not the price of the first sale. If anything, ISIS is propping up prices by reducing output in Syria (not a big deal) and threatening output in Iraq (a bigger deal).

Together, these three stories convey important truths  about Russia. And truth is ugly indeed. An aggressive, economically tottering empire dependent on commodity rents, and constitutionally unable to tell the truth or deal with reality.

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October 12, 2014

Achtung! Jabos

Filed under: History,Military,Politics — The Professor @ 9:11 pm

Here is a fascinating document from WWII. It’s a semi-official history of the IX Tactical Air Command, written to promote the unit’s achievements and build morale. It’s not independent and objective, but it does provide valuable information. I note especially the description of the vital importance of personnel on the ground to spot targets and coordinate the actions of the fighter bombers and the armor and infantry on the ground p. 7:

Some things don’t change: the need for air-ground cooperation has been proven again and again, in Europe, in Viet Nam, in the two Gulf Wars, and in Afghanistan. But apparently a community organizer knows better.

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He Doth Protest Too Much, Methinks

Filed under: Military,Politics,Russia — The Professor @ 1:56 pm

In recent weeks there have been a spate of stories about how JP Morgan and perhaps 13 other financial institutions were the target of a massive cyber probing attack. The early reporting fingered Russians. Now there is pushback:

There is no indication that Vladimir Putin, the Russian government or any foreign nation state was involved in the JPMorgan cyberattack this summer, a source familiar with the incident tells CNBC.

There have been media reports speculating that the Russians may have carried out the attack in retaliation for U.S. sanctions on Russia, but that appears not to be the case, the source said. “Anyone who says this is the Russians, that’s ridiculous,” the source said. “There’s no indication of any foreign nation state. Any reporting on that is not coming from someone who knows what’s going on.”

Um, except that wasn’t the reporting, at all. Here’s an example:

JPMorgan Chase & Co.’s own investigators have found clues that a global network of computers available for hire by sophisticated criminals was used to reroute data stolen from the bank to a major Russian city, according to people familiar with the probe.

. . . .

The use of a Russian-based data center is another piece of a puzzle being constructed by investigators as they chase answers to urgent questions such as the attack’s motive, the hackers’ identity, and the possibility other banks may have been attacked or probed by the same group.

The link to Russia cybercriminals is pretty concrete here. Yes, some people pointed out the obvious: that there are links between Russian cybercriminals and the Russian state, specifically its intelligence agencies. Especially given the ongoing confrontation between the US and Russia, involving sanctions, aggressive Russian actions in the air and at sea, etc., and Russia’s history of using private hackers in attacks on states it is at odds with, it is reasonable to suspect that the probes of US financial firms has some connection to the Russian security services.

Given these facts, and this history, the very aggressive denial, and the invocation of Putin by name, is very odd. He doth protest too much, methinks.

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October 11, 2014

If You Set Out to Bomb ISIS, Bomb ISIS

Filed under: History,Military,Politics — The Professor @ 9:15 pm

As a follow up on my post about the devastating use of airpower to turn back the Eastertide Offensive in Viet Nam in 1972, consider this judgment delivered by LTG David Deptula (USAF ret):

The issue is not the limits of airpower, the issue is the ineffective use of airpower. According to [The Department of Defense's] own website, two B-1 sorties can deliver more ordnance than did all the strikes from the aircraft carrier Bush over the last six weeks. Two F-15E sorties alone are enough to handle the current average daily task load of airstrikes in both Iraq and Syria.

Wise analysts understand that those blaming airpower for not ‘saving Kobani’ are confusing the limits of ‘airpower’ with the sub-optimization of its application. One can see [ISIS] tanks and artillery . . . in the open on TV, yet the coalition forces for ‘Operation Un-named Effort’ are not hitting them. Airpower can hit those targets and many others, but those in charge of its application are not—that’s the issue—not the limits of airpower.

The airstrikes to date have been very closely controlled, tactical in nature, and reflect the way they have been ‘metered’ in Afghanistan. The process that is being used to apply airpower is excessively long and overly controlled at too high a command level.

Exactly. Air power has limits, but we haven’t even come close to those limits in Iraq and Syria. The limits on the current campaign don’t inhere in the nature of air power, but are being imposed by those in command.

Note the last line: “overly controlled at too high a command level.” The highest command level, in fact. We know that Obama is exercising tight control over this operation, and it shows.

I know all about zoomies exaggerating the capabilities of air power. They claim that it can win wars unaided. That’s never happened. But most of the over-promising relates to strategic bombing. Tactical air can be devastating (think the Luftwaffe during the blitzkrieg, or the ferocious Jabos of the IX Tactical Air Command in Europe in 1944-45), but the USAF has always bridled at being beholden to the ground pounders. (This is why the A-10s have always had more to fear from the Air Force brass than enemy fire.)

Well, here and now there are no ground pounders involved. For better or worse, this is an Air Force and Naval Air show.  They can be decisive, if allowed to do what they are capable of doing.

The current desultory campaign is worse than no campaign at all. Apropos what Napoleon said about taking taking Vienna, if you set out to bomb ISIS, bomb ISIS. Here is definitely a case where moderation in war is imbecility. It achieves nothing except embolden the enemy and raise their stature, and make the US look like a timorous, cringing giant, thereby encouraging further challenges. The current effort is bolstering Assad, and infuriating the anti-Assad forces we are looking to support the fight against ISIS. It is reinforcing America’s image as a betrayer of the Kurds. This is exactly why I despaired at the thought of Obama waging a war.

I am sure that most in the military are beside themselves. But what to do about it? Perhaps those in the Pentagon, and especially the Joint Chiefs, should read H. R. McMaster’s Dereliction of Duty, or maybe give LTG McMaster a call.

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October 9, 2014

To See How We’re Doing It Wrong, Consider When We Did It Right: Eastertide, 1972

Filed under: History,Military,Politics — The Professor @ 10:17 pm

Watching the desultory air campaign in Syria and Iraq, and in particular the minimal strikes in defense of Kobani, brought to mind an example of what air power can do to rescue a beleaguered, poorly-led, and demoralized ground force: the crushing US air strikes against the North Vietnamese Eastertide Offensive in 1972.

This paper provides a very thorough history and analysis.

Particularly devastating were massive B-52 strikes, delivered in 3 ship “Arc Light” packages. Flying too high to be heard or seen, the first indication that the NVA soldiers on the ground had that they were Arc Light targets was the world exploding around them. Many of the dead were found without a mark, killed by the concussive force of the explosions. Gunships, initially AC-47s and eventually AC-130s, were also very effective in night-time raids. (The USAF also used B-52s with devastating effectiveness against Iraqi Republican Guard and regular infantry units during Desert Storm.)

For a Kobani comparison, look at the Battle of An Loc, where outnumbered and shaky PAVN units were saved by wave after wave of US air strikes.

Two things stand out. The first, to be decisive, the attacks were massed and unrelenting. Second, and this is particularly relevant in the Iraq-Syria context, was the vital role played by Tactical Air Controllers. You know, boots on the ground (gag) calling in the strikes.* Without them the NVA would have prevailed. They were the difference between success and failure.

The effort in 1972 was massive. But that’s because the NVA attack was massive, well over 200,000 strong, heavily supported by armor and artillery. The losses inflicted by the air campaign were also massive: the NVA lost over 100,000 casualties, perhaps half of those KIA.

The ISIS forces are much smaller, so such a massive effort would not be needed. Moreover, the advent of precision guided weapons allows the delivery of decisive fires with fewer sorties and fewer bombs dropped. The terrain is also more favorable, desert in which concealment is difficult vs. dense jungle.

Unlike the NVA, ISIS is unlikely to stand still and be pounded into dust. But that’s fine. They can’t advance, and they can’t win, if they are hunkered down.

Air power works best if it works hand-in-glove with ground forces. But the events of 1972 show that  air power can be decisive if employed in overwhelming force and is guided by expert soldiers and airmen on the ground.

At present the US is doing neither. Hence we will fail, and we will have chosen failure.

*I hate, hate, hate the expression “boots on the ground” by the way. It was annoying when first used years ago, by Colin Powell I think. It has only become more annoying through overuse by people who know less about the military than you could learn by watching Gomer Pyle reruns. I use it sarcastically here  because it has been used ad nauseum in this context.

 

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Not an Intellectual, and Not a Leader

Filed under: History,Military,Politics — The Professor @ 7:24 pm

This Reuters article about Obama’s Syria policy, such as it is, is brutal, but at the same time overly charitable.

The charitable part is about him being “analyst in chief.” Yes, the article makes it clear that this is not intended to be a compliment, and that the administration is a classic case of paralysis by analysis. But I think it’s unduly charitable to credit Obama with any real analytical prowess. I’ve yet to see evidence of it. He is the master of logical fallacies and rhetorical tricks (the straw man, the false choice). He can regurgitate progressive tropes in a stentorian voice. But original thought? Incisive intellect? Those are certainly not on public display. His intellectual gifts are vastly overhyped.

A related criticism is that Obama is too professorial to be president. As Richard Epstein (who truly is an analytical genius with a penetrating intellect) has noted, Obama wasn’t a professor (he was a senior lecturer) who never produced one piece of independent research, and what’s more, he assiduously avoided the intellectual give and take at Chicago. He did not participate in the amazing and unique lunch and seminar culture.

This is offensive to me, actually. As a Chicago alum (three times over) I realize how special that culture is. It borders on the criminal to have the opportunity to be a part of it, and spurn it. No real intellectual would do that. So spare me the he’s-too-cerebral bunk. He’s not a professor. He’s a poser.

Other parts of the piece suggest a man who is rigidly wedded to his preconceptions, and cannot adjust when reality does not conform to them:

The president’s supporters say his approach is based on principle, not bias. He ran on a platform of winding down the Iraq War and made his views crystal-clear on military action in the Middle East. Obama believed that the human and financial costs of large-scale interventions weren’t worth the limited outcomes they produced. He held that U.S. force could not change the internal dynamics of countries in the region.

The problem is that those beliefs  and principles appear to have been immune to contradictory evidence, as revealed by how tightly he clung to them as things spun out of control.

The most damning part of the Reuters piece is not the analyst-in-chief stuff. It relates to his control freakery, inability to delegate,  reliance on a small group of staff, and failure to engage seriously people who might actually know something and who have independent heft:

In some ways, Obama’s closer control and the frequent marginalization of the State and Defense departments continues a trend begun under Bill Clinton and George W. Bush.

But under Obama, the centralization has gone further. It was the White House, not the Pentagon, that decided to send two additional Special Operations troops to Yemen. The White House, not the State Department, now oversees many details of U.S. embassy security – a reaction to Republican attacks over the lethal 2012 assault on the U.S. consulate in Benghazi, Libya. A decision to extend $10 million in nonlethal aid to Ukraine also required White House vetting and approval.

On weightier issues, major decisions sometimes catch senior Cabinet officers unawares. One former senior U.S. official said Obama’s 2011 decision to abandon difficult troop negotiations with Baghdad and remove the last U.S. soldiers from Iraq surprised the Pentagon and was known only by the president and a small circle of aides.

. . . .

Some aides complained that alternative views on some subjects, such as Syria, had little impact on the thinking of the president and his inner circle. Despite the open debate, meetings involving even Cabinet secretaries were little more than “formal formalities,” with decisions made by Obama and a handful of White House aides [can you say Valerie Jarrett? I knew you could!], one former senior U.S. official said.

Obsession with control, inability and unwillingness to confront conflicting views, and a refusal to delegate are classic management/leadership fails, especially in a vast organization like the USG. A former NSC staffer hits the nail on the head:

“The instinct is to centralize decision-making with the hope of exerting more control,” she said. “But that often limits the U.S. government’s agility and effectiveness at a time when those two traits are most needed.”

The conventional explanation of these tendencies is that Obama is excessively arrogant, as epitomized by this quote:

“I think that I’m a better speechwriter than my speechwriters. I know more about policies on any particular issue than my policy directors. And I’ll tell you right now that I’m gonna think I’m a better political director than my political director.”

But I wonder whether the condescension and arrogance are a narcissistic mask for deep insecurity. A truly confident man would wade into the rough-and-tumble Chicago workshop culture with a relish, rather than avoid it. A truly confident man would have no problems surrounding himself with women and men of independent stature, rather than toadies and non-entities totally reliant on him for their position: his Lilliputian second term cabinet speaks volumes (and it’s not as if his first term cabinet was a collection of giants). A confident man would be able to delegate in the belief that subordinates would be willing and able to act on his instructions in accordance to the circumstances that they encounter. Fearful men are obsessed with control.

There are other indications of narcissism, notably the injured and self-pitying response to criticism:

Six years of grinding partisan warfare over foreign policy (and much else) have left Obama increasingly fatalistic about his critics. [Note the attribution of partisanship to others exclusively, and no recognition of his own contribution to partisan rancor.]

While on vacation in Martha’s Vineyard in late August, he was widely criticized for golfing after making a condolence call to the family of murdered American journalist James Foley. Minutes after declaring Foley’s murderer – Islamic State – a “cancer” that had “no place in the 21st century,” Obama teed off with a campaign contributor, an old friend and a former NBA star.

Obama later told aides the criticism was inevitable. No matter what I do, he said, my enemies will attack me.

That is, rather than acknowledging that some criticism might be accurate, and trying to learn from it, he uses the fact that some criticism is partisan (from “enemies”-Nixon much?) to dismiss all of it, so he can rationalize doing just what he wants to do (e.g., playing golf at a time of tragedy).

I guess the intellectual and psychological roots of Obama’s failure as a leader don’t really matter (and if Jimmy Carter slags you for foreign policy fecklessness, you are a failure). What does matter is that the world is in flames, America’s standing is at its lowest ebb in living memory, dictators and authoritarians are on the march, and we have two more years to endure this before there is a possibility of an improvement. For Obama isn’t going to change. Regardless of why he is who he is, he is who he is. And who he is is not constitutionally equipped to lead during times of strife, especially strife that is largely the result of his own failures to lead.

 

 

 

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October 8, 2014

Pugachev’s Rebellion

Filed under: History,Politics,Russia — The Professor @ 8:41 pm

Spare a thought for ex-oligarch Sergei Pugachev, who was expropriated by the Russian state in 2012. Sergei has had a blinding insight about the nature of Putinistan:

A former close associate of Vladimir Putin has said Russian businessmen were all now “serfs” who belonged to the president, with none of the country’s companies beyond his reach.

. . . .

Speaking to the Financial Times, Mr Pugachev warned that there were no longer any “untouchables” in a Russian business landscape increasingly dominated by Mr Putin. The Russian economy, he argued, had been transformed into a feudal system where businessmen were only nominal owners of their assets.

“Today in Russia there is no private property. There are only serfs who belong to Putin,” he said.

. . . .

“Now there is Putin and there are his lieutenants who carry out his orders – and all cash generated is put on the balance of Putin,” he said. “The country is in a state of war. And therefore big business cannot live as before. It has to live under military rules.”

Excuse me while I wipe away a tear for a fallen oligarch.

But seriously, this is a revelation? This has been obvious since very early on in the Putin years.

Indeed, it is just a recognition that Putin’s Russia is the continuation of a historical tradition stretching back to the dawn of Muscovy. As Richard Pipes wrote years ago, Russia/Muscovy was a patrimonial state in which all property was the tsar’s. Possession was temporary,  contingent on service, and conditional on the will of the tsar. Muscovy was the land of kormenlie-”the feeding”-in which the tsar granted a lucrative territory to an official, who was expected to support himself off of what he could take from it, and provide the tsar with service. Lands and serfs were granted to individuals in exchange for service, but were not property as such. Everything was occupied at the sufferance of the tsar. The system was later softened, and the service obligation weakened, but since forever the patrimonial aspects of the Russian state have survived. Putin is just the latest in a long tradition.

As I’ve written since the very beginning of the blog, Putin’s Russia is a “natural state” in which the ruler adopts policies that create rents, and then divvies up those rents in order to secure support,  to reward those who do his bidding and punish those who don’t: patrimonialism is one of the most primitive forms of the natural state. So the Timchenkos and Rotenbergs and Sechins live large, and the Yevtushenkovs and Khordokovskys and Pugachevs get crushed. Sometimes people are broken for a reason: sometimes the fall is arbitrary, just to demonstrate who is boss and to reinforce the understanding that wealth and power are contingent on the Putin’s will.

As I also wrote for a long time, especially around the time of the crisis in 2008-2009, the survival of this system depends on the existence of a stream of rents. When that stream dries up, it is more difficult to buy the subservience (I would not characterize it as loyalty) of the placemen. At such times, the system becomes vulnerable to collapse.

And there are some indications that this is the case now. One must always be cautious about trying to figure out what is going on behind the scenes in Russia, but there are some visible indications of a system under stress. One is the resort to sticks, with Yevtushenkov’s arrest being one example, and myriad repressive measures being others: sticks are needed all the more when the carrots run low. Another is the pervasiveness of propaganda. Yet another is the need for foreign adventures, confrontations with the outside world, and the assiduous cultivation of an us-versus-them mentality.

But perhaps the most telling indicator is the increasingly bizarre cult of personality being constructed around Putin. Putin’s apotheosis is occurring on his 62nd birthday. Almost literally. Recently an Orthodox activist suggested that Putin will become God, or the human embodiment of God on earth, through divine grace. There was an exhibition in Moscow portraying him as a Russian Hercules.  Russians from all walks of life-including hockey playing ape Alex Ovechkin-thronged to wish VVP a happy birthday. Other evidence of cultism abound.

A society that does this is not healthy. A society that does this is deeply insecure. A society that does this is desperate to believe that it is the hands of a savior because the alternative is too frightening to contemplate.

A society like this, a polity like this, is extremely brittle. It is at risk to shattering into a thousand shards.

Centuries ago, a rebel named Pugachev shook Catherine the Great’s Russia to its foundations. The 21st century Sergei Pugachev does not pose such a threat, but in a state as brittle as Putin’s Russia, a latter day Pugachev may arise from the steppe. Or from the center of Moscow.

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October 7, 2014

The Crude Export Ban: Moot For Now, But That’s Not Necessarily a Good Thing

Filed under: Commodities,Economics,Energy,Politics,Regulation — The Professor @ 7:55 pm

Markets are wondrous things.

Consider the crude oil market. Remember the debate about the US crude export ban? Well, in a few months, that has turned out to be a moot issue. Due to the collapse of demand in Europe, and the freeing up of Nigerian supplies formerly exported to the US, price relationships have changed dramatically. Whereas Louisiana Light Sweet had recently traded at a big discount to Brent, it is now at a sufficiently high premium that it is economical to import Brent to the US, especially to the East Coast. Jones Act tankers expected to take crude from the Gulf to the East Coast are swinging at anchor because it is now economical to feed the EC refineries with Brent.

What’s more, the US crude glut fattened domestic refining margins. So how did US refiners respond? By increasing capacity, and reducing maintenance schedules by 30 percent. This has increased the demand for domestic crude, which has in turn helped close, and at times reverse, the US price discount. This investment in capacity and adjustment of maintenance schedules is arguably inefficient: it’s better to direct some of the crude to underutilized European refineries than to expand refining capacity in the US. But the point is that this inefficiency is attributable to inefficient laws: the laws on oil export have stood still, but the markets have moved on to mitigate the damage.

Meaning at present, price differentials are such that it would not be profitable to export crude even if it were permitted.

This may be true now, but of course it is not destined to be true forever. Therefore, it is still desirable to eliminate the ban, if only to eliminate the incentives to use scarce resources to take advantage of the price distortions that the ban can sometimes cause.  The ban might be a moot issue for now, but that’s not necessarily a good thing.

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Manipulation Prosecutions: Going for the Capillaries, Ignoring the Jugular

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Politics,Regulation — The Professor @ 7:32 pm

The USDOJ has filed criminal charges against a trader named Michael Coscia for “spoofing” CME and ICE futures markets. Frankendodd made spoofing a crime.

What is spoofing? It’s the futures market equivalent of Lucy and the football. A trader submits buy (sell) orders above (below) the inside market in the hope that this convinces other market participants that there is strong demand (supply) for (of) the futures contract. If others are so fooled, they will raise their bids (lower their offers). Right before they do this, the spoofer pulls his orders just like Lucy pulls the football away from Charlie Brown, and then hits (lifts) the higher (lower) bids (offers). If the pre-spoof prices are “right”, the post-spoof bids (offers) are too high (too low), which means the spoofer sells high and buys low.

Is this inefficient? Yeah, I guess. Is it a big deal? Color me skeptical, especially since the activity is self-correcting. The strategy works if those at the inside market, who these days are likely to be HFT firms, consider the away from the market spoofing orders to be informative. But they aren’t. The HFT firms at the inside market who respond to the spoof will lose money. They will soon figure this out, and won’t respond to the spoofs any more: they will deem away-from-the-market orders as uninformative. Problem solved.

But the CFTC (and now DOJ, apparently) are obsessed with this, and other games for ticks. They pursue these activities with Javert-like mania.

What makes this maddening to me is that while obsessing over ticks gained by spoofs or other HFT strategies, regulators have totally overlooked corners that have distorted prices by many, many ticks.

I know of two market operations in the last ten years plausibly involving major corners that have arguably imposed mid-nine figure losses on futures market participants, and in one of the case, possibly ten-figure losses. Yes, we are talking hundreds of millions and perhaps more than a billion. To put things in context, Coscia is alleged to have made a whopping $1.6 million. That is, two or three orders of magnitude less than the losses involved in these corners.

And what have CFTC and DOJ done in these cases? Exactly bupkus. Zip. Nada. Squat.

Why is that? Part of the explanation is that previous CFTC decisions in the 1980s were economically incoherent, and have posed substantial obstacles to winning a verdict: I wrote about this almost 20 years ago, in a Washington & Lee Law Review article. But I doubt that is the entire story, especially since one of the cases is post-Frankendodd, and hence the one of the legal obstacles that the CFTC complains about (relating to proving intent) has been eliminated.

The other part of the story is too big to jail. Both of the entities involved are very major players in their respective markets. Very major. One has been very much in the news lately.

In other words, the CFTC is likely intimidated by-and arguably captured by-those it is intended to police because they are very major players.

The only recent exception I can think of-and by recent, I mean within the last 10 years-is the DOJ’s prosecution of BP for manipulating the propane market. But BP was already in the DOJ’s sights because of the Texas City explosion. Somebody dropped the dime on BP for propane, and DOJ used that to turn up the heat on BP. BP eventually agreed to a deferred prosecution agreement, in which it paid a $100 million fine to the government, and paid $53 million into a restitution fund to compensate any private litigants.

The Commodity Exchange Act specifically proscribes corners. Corners occur. But the CFTC never goes after corners, even if they cost market participants hundreds of millions of dollars. Probably because corners that cost market participants nine or ten figures can only be carried out by firms that can hire very expensive lawyers and who have multiple congressmen and senators on speed dial.

Instead, the regulators go after much smaller fry so they can crow about how tough they are on wrongdoers. They go after shoplifters, and let axe murderers walk free. Going for the capillaries, ignoring the jugular.

All this said, I am not a fan of criminalizing manipulation. Monetary fines-or damages in private litigation-commensurate to the harm imposed will have the appropriate deterrent effect.

The timidity of regulators in going after manipulators is precisely why a private right of action in manipulation cases is extremely important. (Full disclosure: I have served as an expert in such cases.)

One last comment about criminal charges in manipulation cases. The DOJ prosecuted the individual traders in the propane corner. Judge Miller in the Houston Division of the  Southern District of Texas threw out the cases, on the grounds that the Commodity Exchange Act’s anti-manipulation provisions are unconstitutionally vague. Now this is only a district court decision, and the anti-spoofing case will be brought under new provisions of the CEA adopted as the result of Dodd-Frank. Nonetheless, I think it is highly likely that Coscia will raise the same defense (as well as some others). It will be interesting to see how this plays out.

But regardless of how it plays out, regulators’ obsession with HFT games stands in stark contrast with their conspicuous silence on major corner cases. Given that corners can cause major dislocations in markets, and completely undermine the purposes of futures markets-risk transfer and price discovery-this imbalance speaks very ill of the priorities-and the gumption (I cleaned that up)-of those charged with policing US futures markets.

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October 6, 2014

Stop the Non-War-Without-A-Name “Led” by the Community Organizer in Chief

Filed under: History,Military,Politics — The Professor @ 1:50 pm

In my earlier posts on the non-war-without-a-name in Iraq and Syria, I said the following:

As I wrote the other day, I do not support a vigorous military operation in Syria. But if we are going to get involved, it must be done the right way, in a militarily sensible way. What Obama is hell-bent on doing is the exact wrong thing. He is repeating the LBJ mistakes, and adding some of his very own making. This is why, even overlooking the meager security stakes and the daunting obstacles involved in Syria and the Middle East generally, I blanch at the idea of a military campaign conducted by Obama, especially when he stubbornly insists on maintaining tight control over it.

And:

But more sober reflection (figuratively and literally!) leads me to conclude that a full-blooded response to ISIS is unwise, especially in Syria. For many reasons, the commitment that would be required to fully extirpate the organization is not worth the cost, and it’s better not to fight at all than to fight a half-assed or quarter-assed battle.

. . . .

I also shudder at the prospect of the Anti-Jackson commander in chief leading a campaign. An extended military action of the type the Pentagon would consider necessary is antithetical to every fiber in his being. It is obvious that he has no appetite for the fight, and has a predilection for limited measures (drone strikes aimed at killing terrorist leaders, the odd special forces raid) that have no strategic purpose or effect. War under such unwilling and uncertain leadership would be a pointless expenditure of American lives and treasure.

These warnings have been borne out fully by the actual execution of the campaign, such as it is.

The utter futility and failure and frankly the immorality of this pitiful effort is epitomized by events in Kobani (or Kobane) a Kurdish town on the Syrian-Turkish border. Lightly armed YPG Kurds have been fighting desperately to hold off an armored attack by ISIS. But they are being overwhelmed, and reports today indicate that at least parts of the town have fallen.

If you look at pictures of the area, you will note that it is perfect for the deployment of US airpower against vehicles and artillery. No cover whatsoever. Wide open desert. PGMs or a few passes by A-10s (which have been deployed to the region) would devastate any ISIS mechanized forces and artillery. But such robust force has not been deployed. ISIS is so confident that they are planting their flags in broad daylight on high points, a la Suribachi. You don’t do that unless you have no fear that death will come from the skies.

The writing was on the wall a few days ago, when Pentagon spokesman Admiral Kirby uttered this:

Kirby said the U.S. operation in Syria targets areas Islamic State can use as a “sanctuary and a safe haven,” compared with strikes in Iraq that are being conducted to back local forces. That doesn’t mean “we are going to turn a blind eye to what’s going on at Kobani or anywhere else,” Kirby said

Er, what is the point of going after “safe havens” and “sanctuaries” if not to prevent them from being used as launching pads for offensive operations? So then why not go after the offensive operations themselves? Aren’t we making Kobane a safe haven? Does this make any sense? Any?

We obviously washed our hands of Kobane and the Kurds last week. And Kirby is right. We haven’t turned a blind eye. We stood by and watched it happen, eyes wide open (and probably beamed back to DC from a Predator via video uplink).

I can usually reverse engineer the military logic behind decisions. Here I am at a total loss. The only think I can think of is that the Turks have waved us off, hating the Kurds as they do. As if we should be deferring to them, for all they’ve done for us in recent years. Or, as @libertylynx suggests, because we didn’t get permission from Assad, and from the Russians and Iranians.

It gets worse, actually. There are now leaks that the US will bomb the environs of Kobane. A day late and a bomb short. Reinforcing failure. Adding insult to injury.

Again: this is Obama’s choice. Remember that he has taken personal control of the selection of bombing targets. I say again: “I blanch at the idea of a military campaign conducted by Obama, especially when he stubbornly insists on maintaining tight control over it. ”

So much for Responsibility to Protect, eh? That’s so like 2011, dude.

We either need to stop bombing, or do it seriously: to paraphrase Napoleon, if you are going to bomb ISIS, bomb ISIS! This half-assed approach is a disaster: it’s more like 10th-assed. It is the worst of all worlds. It has no military effect. This in turn makes ISIS look like they are beating the US which makes them stronger by making them seem to be the “strong horse” that is defying the Crusaders. It also is turning locals against us, in part because of civilian casualties but more because it shows we are not really serious and we are not going after their real enemy.

I doubt Obama could do any worse if he were trying to screw things up. (Don’t go there.)

But never fear! The USG is on the case. The State Department has created a Global Coalition to Counter ISIL (sic) website!

This is clearly an escalation. First hashtags. Now a website. I am sure ISIS is shuddering at the thought of what horrors are to come.

Look at the list of countries:

Albania
Arab League
Australia
Austria
Bahrain
Belgium
Bulgaria
Canada
Croatia
Cyprus
Czech Republic
Denmark
Egypt
Estonia
European Union
Finland
France
Georgia
Germany
Greece
Hungary
Iraq
Ireland
Italy
Japan
Jordan
Kosovo
Kuwait
Latvia
Lebanon
Lithuania
Luxembourg
Macedonia
Moldova
Montenegro
Morocco
NATO
The Netherlands
New Zealand
Norway
Oman
Poland
Portugal
Qatar
Republic of Korea
Romania
Saudi Arabia
Serbia
Slovakia
Slovenia
Spain
Sweden
Taiwan
Turkey
Ukraine
United Arab Emirates
United Kingdom
United States

Every one doing nothing, in equal measure.

I remember that Napoleon once rejoiced when he learned another country had joined a coalition against him. He would have been positively giddy to have been “confronted” by this one.

The US military is allegedly calling this “campaign” Operation Shock and Yawn. It should actually be Operation Avert the Eyes. It is the most incoherent and strategically barren military operation in US history. Please make it stop.

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