Streetwise Professor

April 24, 2015

A Matter of Magnitudes: Making Matterhorn Out of a Molehill

Filed under: Derivatives,Economics,HFT,Politics,Regulation — The Professor @ 10:47 am

The CFTC released its civil complaint in the Sarao case yesterday, along with the affidavit of Cal-Berkeley’s Terrence Hendershott. Hendershott’s report makes for startling reading. Rather than supporting the lurid claims that Sarao’s actions had a large impact on E Mini prices, and indeed contributed to the Flash Crash, the very small price impacts that Hendershott quantifies undermine these claims.

In one analysis, Hendershott calculates the average return in a five second interval following the observation of an order book imbalance. (I have problems with this analysis because it aggregates all orders up to 10 price levels on each side of the book, rather than focusing on away-from-the market orders, but leave that aside for a moment.) For the biggest order imbalances-over 3000 contracts on the sell side, over 5000 on the buy side-the return impact is on the order of .06 basis points. Point zero six basis points. A basis point is one-one-hundredth of a percent, so we are talking about 6 ten-thousandths of one percent. On the day of the Flash Crash, the E Mini was trading around 1165. A .06 basis point return impact therefore translates into a price impact of .007, which is one-thirty-fifth of a tick. And that’s the biggest impact, mind you.

To put the comparison another way, during the Flash Crash, prices plunged about 9 percent, that is, 900 basis points. Hendershott’s biggest measured impact is therefore 4 orders of magnitude smaller than the size of the Crash.

This analysis does not take into account the overall cumulative impact of the entry of an away-from-the market order, nor does it account for the fact that orders can affect prices, prices can affect orders, and orders can affect orders. To address these issues, Hendershott carried out a vector autoregression (VAR) analysis. He estimates the cumulative impact of an order at levels 4-7 of the book, accounting for direct and indirect impacts, through an examination of the impulse response function (IRF) generated by the estimated VAR.* He estimates that the entry of a limit order to sell 1000 contracts at levels 4-7 “has a price impact of roughly .3 basis points.”

Point 3 basis points. Three one-thousandths of one percent. Given a price of 1165, this is a price impact of .035, or about one-seventh of a tick.

Note further that the DOJ, the CFTC, and Hendershott all state that Sarao see-sawed back and forth, turning the algorithm on and off, and that turning off the algorithm caused prices to rebound by approximately the same amount as turning it on caused prices to fall. So, as I conjectured originally, his activity-even based on the government’s theory and evidence-did not bias prices upwards or downwards systematically.

This is directly contrary to the consistent insinuation throughout the criminal and civil complaints that Sarao was driving down prices. For example, the criminal complaint states that during the period of time that Sarao was using the algorithm “the E-Mini price fell by 361 [price] basis points” (which corresponds to a negative return of about 31 basis points). This is two orders of magnitude bigger than the impact calculated based on Hendershott’s .3 return basis point estimate even assuming that the algorithm was working only one way during this interval.

Further, Sarao was buying and selling in about equal quantities. So based on the theory and evidence advanced by the government, Sarao was causing oscillations in the price of a magnitude of a fraction of a tick, even though the complaints repeatedly suggest his algorithm depressed prices. To the extent he made money, he was making it by trading large volumes and earning a small profit on each trade that he might have enhanced slightly by layering, not by having a big unidirectional impact on prices as the government alleges.

The small magnitudes are a big deal, given the way the complaints are written, in particular the insinuations that Sarao helped cause the Flash Crash. The magnitudes of market price movements dwarf the impacts that the CFTC’s own outside expert calculates. And the small magnitudes raise serious questions about the propriety of bringing such serious charges.

Hendershott repeatedly says his results are “statistically significant.” Maybe he should read Deirdre McCloskey’s evisceration of the Cult of Statistical Significance. It’s economic significance that matters, and his results are economically miniscule, compared to the impact alleged. Hendershott has a huge sample size, which can make even trivial economic impacts statistically significant. But it is the economic significance that is relevant. On this, Hendershott is completely silent.

The CFTC complaint has a section labeled “Example of the Layering Algorithm Causing an Artificial Price.” I read with interest, looking for, you know, actual evidence and stuff. There was none. Zero. Zip. There is no analysis of the market price at all. None! This is a piece of the other assertions of price artificiality, including most notably the effect of the activity on the Flash Crash: a series of conclusory statements either backed by no evidence, or evidence (in the form of the Hendershott affidavit) that demonstrates how laughable the assertions are.

CFTC enforcement routinely whines at the burdens it faces proving artificiality, causation and intent in a manipulation case. Here they have taken on a huge burden and are running a serious risk of getting hammered in court. I’ve already addressed the artificiality issue, so consider causation for a moment. If CFTC dares to try to prove that Sarao caused-or even contributed to-the Crash, it will face huge obstacles. Yes, as Chris Clearfield and James Weatherall rightly point out, financial markets are emergent, highly interconnected and tightly coupled. This creates non-linearities: small changes in initial conditions can lead to huge changes in the state of the system. A butterfly flapping its wings in the Amazon can cause a hurricane in the Gulf of Mexico: but tell me, exactly, which of the billions of butterflies in the Amazon caused a particular storm? And note, that it is the nature of these systems that changing the butterfly’s position slightly (or changing the position of other butterflies) can result in a completely different outcome (because such systems are highly sensitive to initial conditions). There were many actors in the markets on 6 May, 2010. Attributing the huge change in the system to the behavior of any one individual is clearly impossible. As a matter of theory, yes, it is possible that given the state of the system on 6 May that activity that Sarao undertook with no adverse consequences on myriad other days caused the market to crash on that particular day when it didn’t on other days: it is metaphysically impossible to prove it. The very nature of emergent orders makes it impossible to reverse engineer the cause out of the effect.

A few additional points.

I continue to be deeply disturbed by the “sample days” concept employed in the complaints and in Hendershott’s analysis. This smacks of cherry picking. Even if one uses a sample, it should be a random one. And yeah, right, it just so happened that the Flash Crash day and the two preceding days turned up in a random sample. Pure chance! This further feeds suspicions of cherry picking, and opportunistic and sensationalist cherry picking at that.

Further, Hendershott (in paragraph 22 of his affidavit) asserts that there was a statistically significant price decline after Sarao turned on the algorithm, and a statistically significant price increase when he turned it off. But he presents no numbers, whereas he does report impacts of non-Sarao-specific activity elsewhere in the affidavit. This is highly suspicious. Is he too embarrassed to report the magnitude? This is a major omission, because it is the impact of Sarao’s activity, not offering away from the market generally, that is at issue here.

Relatedly, why not run a VAR (and the associated IRF) using Sarao’s orders as one of the variables? After all, this is the variable of interest: what we want to know is how Sarao’s orders affected prices. Hendershott is implicitly imposing a restriction, namely, that Sarao’s orders have the same impact as other orders at the same level of the book. But that is testable.

Moreover, Hendershott’s concluding paragraph (paragraph 23) is incredibly weak, and smacks of post hoc, ergo propter hoc reasoning. He insinuates that Sarao contributed to the Crash, but oddly distances himself from responsibility for the claim, throwing it on regulators instead: “The layering algorithm contributed to the overall Order Book imbalances and market conditions that the regulators say led to the liquidity deterioration prior to the Flash Crash.” Uhm, Terrence, you are the expert here: it is incumbent on you to demonstrate that connection, using rigorous empirical methods.

In sum, the criminal and civil complaints make a Matterhorn out of a molehill, and a small molehill at that. And don’t take my word for it: take the “[declaration] under penalty of perjury” of the CFTC’s expert. This is a matter of magnitudes, and magnitudes matter. The CFTC’s own expert estimates very small impacts, and impacts that oscillate up and down with the activation and de-activation of the algorithm.

Yes, Sarao’s conduct was dodgy, clearly, and there is a colorable case that he did engage in spoofing and layering. But the disparity between the impact of his conduct as estimated by the government’s own expert and the legal consequences that could arise from his prosecution is so huge as to be outrageous.

Particularly so since over the years CFTC has responded to acts that have caused huge price distortions, and inflicted losses in nine and ten figures, with all of the situational awareness of Helen Keller. It is as if the enforcers see the world through a fun house mirror that grotesquely magnifies some things, and microscopically shrinks others.

In proceeding as they have, DOJ and the CFTC have set off a feeding frenzy that could have huge regulatory and political impacts that affect the exchanges, the markets, and all market participants. CFTC’s new anti-manipulation authority permits it to sanction reckless conduct. If it was held to that standard, the Sarao prosecution would earn it a long stretch of hard time.

*Hendershott’s affidavit says that Exhibit 4 reports the IRF analysis, but it does not.

 

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April 21, 2015

Gary Gensler Resurfaces as Hillary!’s CFO: Is He Our Next Treasury Secretary?

Filed under: HFT,Politics — The Professor @ 7:27 pm

At a couple of conferences recently, people asked me what Gary Gensler is up to? I said “I don’t know. It’s not like GiGi and I are buddies.” (True fact: he had me banned from the CFTC building.) Well, now we all know what he’s up to: Gensler has landed as the CFO of Hillary’s presidential campaign.

When Gensler was CFTC chair, I surmised he had ambitions to replace Timmy! as Secretary of the Treasury. But that went to a Rubinoid, Jack Lew. There was also talk of Gensler running for the Senate from Maryland, and Mikulski has announced her retirement, but more well-known Dem pols in the state are poised to run, so that’s not an option.

Taking the campaign CFO job probably does give Gensler an inside track on the coveted SecTreas job. If Hillary wins. If.

Yes, I know she is the odds on favorite. But she was shopping for Oval Office curtains in 2008, and we know how that turned out.

Hillary’s problem is, well, Hillary. A lot of people like the idea of Hilllary. It’s the real person that is the problem.

This has been illustrated by her slow-motion-train-wreck of a campaign kickoff. There’s an old expression: if you can fake sincerity, you have it made. Hillary hasn’t quite mastered that yet. The launch and the comically contrived “spontaneous” road trip to Iowa were about as authentic as Velveeta. It was a remarkable act of will, because you can just tell how much Hillary hates to be with actual people. Further, she has operated in a bubble, protected by some Harry Potteresque charm that repels all serious questions from serious people.

Eventually, though, her personality will shine through. And that’s the problem. Playing word association, if you say “Hillary”, I say: shrill, angry, bitter, entitled, strident, rigid, ideological, dishonest, hyper-partisan, vengeful, arrogant, paranoid, and . . . I could go on. And on. And on. And she’s not that bright: whoever calls her “the smartest woman in the world” is a virulent misogynist, with an obviously low opinion of women. I on the other had, think so highly of women that I would prefer to select the next president by lot from America’s 150 million or so adult females, than by an election in which Hillary is the Democratic Party standard bearer. 150 million-to-one: I’ll take those odds over better than even any day.

She is also an awful politician. She has no political instincts whatsoever. You can see the gears grinding behind her phony grin, trying to figure out what would be the politically advantageous thing to say. Today’s persona is Class Warrior. She recently said the one percenters must be “toppled.” Actually, I could kinda go for that, because despite her past protestations of being as poor as a church mouse, she is definitely in that class now.

In other words, she’s no Bill, who was if nothing else, a natural politician that had a magnetism and suppleness that could overcome his other deficiencies.

Which brings up another issue: the psychodrama between Hillary and Bill. You would think that Bill is a major asset, but I wonder. She wants to win on her own, and has put up with decades of humiliation from him to advance her ambitions: will she put herself in a position where she has to accept his help to win? Nor are Bill’s incentives unmixed. Will he want to play second fiddle as the first First Husband? Hillary’s campaign in 2008 was a soap opera: will 2016 be any different?

Then there’s the old baggage, which Hillary has more of than the lost and found at JFK. (I contributed, in a modest way, to that collection, many years ago, as detailed in the Senate Whitewater Report and the Congressional Record.) It is quite a remarkable record, stretching into the distant past, when she was fired from the Watergate Committee staff, to Arkansas skullduggery, to various White House scandals, to her service as Secretary of State (Benghazi, preventing naming Boko Haram as a terrorist organization, the Reset), to the very present (the stench of cronyism and influence peddling at the Clinton Foundation, and the Immaculate Abortion of her private email server).

Further, she’s not getting any younger, and it shows.

So she has many liabilities. What about the assets? They are formidable, particularly a national media that may not like her, but hates Republicans more. They can be counted on to avoid criticizing her, to form a defensive phalanx around her, and to attack her Republican adversary relentlessly. That didn’t help her in the primaries in 2008, when the fickle press found someone even more attractive. But there is no Barack Obama on offer in 2015-2016.

She also has a relentless fundraising machine, a reliable and experienced party and campaign apparatus, union support, and a solid base who would vote for Godzilla over a Republican.

Thus, she has great institutional advantages that will go far in overcoming her severe personal deficiencies.

But her biggest asset is that you can’t beat somebody with nobody, and right now the Republicans are offering up national nobodies. Maybe a somebody will emerge, but I wouldn’t count on it.

All meaning that although Hillary is a flawed person, and a flawed candidate, she has many advantages. So, as much as it pains me to say so, GiGi’s wish may come true. And as bad as a Gensler Treasury would be, it pains me even more to say that it likely would be one of the best parts of a Hillary Clinton Administration.

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April 20, 2015

A Russian Troll Trolls From the Land of Trolls

Filed under: Climate Change,Military,Politics,Russia — The Professor @ 2:22 pm

Trolls are characters from Scandinavian folklore who inhabit desolate islands, so it only seems fitting that Rogozin the Ridiculous trolled Nato from a desolate Norwegian island. Rogozin, who is banned from traveling to Norway due to sanctions, showed up on Svalbard (formerly Spitsbergen), which is sovereign Norwegian territory (though Russians have residence and commercial rights there under the Svalbard Treaty). Rogozin obnoxiously (but I repeat myself) tweeted that “the Arctic is Russian Mecca.” The Norwegians are not amused. Nor should the US. But we seem unfazed.

Wouldn’t you know, the United States is assuming the chairmanship of the Arctic Council from Canada. In the face of Russia’s quite in-our-face assertion of control over the Arctic (of which the Ridiculous One’s “Russian Mecca” Tweet is just an example), and its dramatic increase in its military activities and presence in the Arctic, what is John Kerry’s priority for the Council? You guessed it: climate change. You know, for the polar bears.

Back to Rogozin, last seen here performing so marvelously in his role as commissar of the Vostochny Cosmodrome. His intervention into the management of the troubled project (including threats to “rip off the heads” of those holding up construction) has worked wonders. Well, mainly, it has resulted in a spread of strikes protesting lack of pay. And to save costs, the construction of infrastructure to support manned launches is being deferred, resulting in at least a two year delay in the use of the facility for such purposes. Well played, Bozo! The mind boggles at the thought of what you’ll accomplish in your icy Mecca.

Believe it or not, Rogozin has intense competition for the title of most insane Russian official today. His competition is Nikolai Rogozhkin, Putin’s representative in the Siberian Federal District. (Hey. Rogozin, Rogozhkin: pretty similar! Lame attempt at a pseudonym? Or is “Rogoz” a Russian prefix meaning “moron”?) Siberia is beset by wildfires already, and there are fears that this summer will make 2010 look like child’s play. So whom does Rogozin-sorry, I mean Rogozhkin-blame? Saboteurs, of course! Wreckers! Fifth Columnists! Oppositionists! As for his reasoning, check out the most outrageous flouting of Occam’s Razor I have ever seen:

Rogozhkin said he had flown in a helicopter and seen fire sites in “places where a normal person cannot go, even one who is well-prepared.”

“A specially trained person would be needed for this, and it would take at least 24 hours,” he said.

So rather than reason: “It is nearly impossible for a normal person to set these fires, so they must have a natural cause”, Rogozhkin the Almost as Ridiculous concludes that it isn’t a normal person after all. It is a specially trained person.

You literally cannot make up this stuff.

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April 19, 2015

Victor Davis Hanson and the Streetwise Professor: Peas in an Anti-Progressive Pod

Filed under: History,Politics — The Professor @ 4:57 pm

It’s kind of spooky that Victor Davis Hanson and I will frequently draw the same conclusions from a particular Obama remark or action, phrase our analysis in similar terms, and do so almost simultaneously. This VDH piece from April 14 and mine from April 11 are a case in point. We both conclude that Obama’s foreign policy is driven not by incompetence (though there is that) but instead it is the result of conscious choice based on his beliefs and mindset. VDH and I both attribute Obama’s actions to his “romantic” view of Third World nations and revolutionaries, and his belief in America’s sins. Our conclusions are based on the same words uttered by Obama, and by same actions that Obama has undertaken.

I am not asserting a causal relationship here. Instead, this is an example of “multiple discoveries”, a phenomenon studied by the sociologist Robert Merton, and the Stiglers, père George (an economist) et fils Stephen (a statistician).

That is, similarly prepared or disposed minds, presented with the same facts, are likely to reach the same conclusion. Hanson and I are both conservatives who have spent our professional lives in the progressive swamps of academia, and who are hence quite familiar with the leftist infatuation with anti-Western movements abroad and disdain (and often hatred) for the United States. Through long exposure, we are well versed in leftist cant. We are both steeped in history, although Hanson is a real historian, and I am just an amateur. We both share a tragic view of man, and a belief that there are historical regularities that connect all ages: this gives us a neuralgia to progressivism (literally understood based on a knowledge of its Hegelian roots) and makes us shake our heads at people like Obama, who quite openly believes that things that happened before he was born, or came of age, are irrelevant (except, of course, if they can be used to shame western culture-the Crusades!-or the US-slavery!-or idealize “the other”-remember the beautiful Caliphate!).

In other words, we are almost destined to see Obama in the same way, and interpret his remarks and actions  nearly identically.

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More Obama & Wilson Parallels

Filed under: History,Military,Politics — The Professor @ 3:57 pm

Watched a show on CSPAN3 (yes, it’s an exciting life I lead) involving a discussion of Woodrow Wilson and the Versailles Treaty and the League between Prof. Melvyn Leffler of the University of Virginia, and Oxford’s Prof. Margaret MacMillan, author of “The War that Ended Peace: The Road to 1914.” Leffler made two points that resonate today, when thinking about Obama. (This discussion is around the 1:05 mark of the video.)

First, Leffler pointed out that Wilson made many compromises in Paris, but adamantly refused to make any compromises with his domestic opposition. Leffler further noted that contemporaries noted the contrast.

Second, and relatedly, Leffler emphasized that Wilson hated and despised his domestic opponents, in particular Henry Cabot Lodge. MacMillan related some anecdotes about what she called Wilson’s “stupidity” in dealing with the opposition, in particular his very public scorn for the domestic opposition that just intensified their desire to defeat him. She said that Wilson didn’t just disagree with Lodge: he believed Lodge was evil, and wouldn’t do a deal with the Devil. MacMillan said that [I paraphrase] “Wilson believed if you disagreed with him, there was something morally wrong with you.” (This is around the 1:08 mark.) That is, Wilson’s refusal to compromise on the League (even though MacMillan claims that many of Lodge’s objections were reasonable) stemmed from a visceral hatred and disdain for his political opponents. This refusal to bend (indeed, Wilson instructed Democratic senators to vote against an amended treaty) doomed his beloved League to defeat.

The parallels with Obama are quite apparent. One wonders if the outcome will be as well, that is, whether Obama’s disdain for Republicans will doom his beloved Iran deal to defeat.

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April 18, 2015

Alfred E. Obama

Filed under: History,Military,Politics,Russia — The Professor @ 2:37 pm

Obama reacted in his best Alfred E. Newman “what? me worry?” fashion to Putin punking him by selling S-300 missiles to Iran. Short version: “What took you so long, Vova?”:

President Obama said that he was “not surprised” Russia sold an advanced missile system to Iran in the midst of his negotiations with the Ayatollah to prevent Iran’s nuclear facilities from making a bomb. He went even further to say that he expected the deal to happen a lot sooner than it did.

“I’m frankly surprised that it held this long given that they were not prohibited by sanctions from selling these defensive weapons,” President Obama said on Friday.

Another example of the flexibility that Barry promised Vladimir via the whisper to messenger boy Dmitri.

Correct me if I’m wrong, but supposedly the big payoff to the Reset was Russian cooperation on Iran. But apparently Obama believes that the sell-by date of that cooperation has long passed. Or , he doesn’t really give a damn about keeping Iran in a box.

And look at what he did there. He totally buys the Russian and Iranian line that these are “defensive weapons”, and hence pose no problem: again, “what? me worry?” Is he that stupid? Does he not realize that a strong shield protects those who wield the sword? These AAMs dramatically undercut the credibility of any military response to Iran’s developing nuclear weapons: they thereby undercut the credibility of Obama’s vaunted deal. (Although that presumes that Obama actually intends to deprive Iran of the bomb. His actions repeatedly cast doubt on that presumption.)

If defensive weapons as so benign, why doesn’t Barry supply them to Ukraine? Indeed, the defensive weapons (e.g., ATGMs) that Ukraine is pleading for cannot serve the same strategic function as the S-300s supplied to Iran. They are truly useful only in local defense, particularly by an army like Ukraine’s that is hard pressed to hold its own ground, let alone attempt to project power. They can help make a Russian invasion too costly for Putin to undertake, but cannot provide a shield behind which an aggressive power can develop the means to carry out its expansionist schemes. So Obama should shove Putin’s words about the benignity of defensive weapons back in his botoxed face. “What’s good for Iran is good for Ukraine, Vlad.”

But instead, Obama (and the feckless Europeans) cringe before Russia’s freak outs about providing one bandolier, bullet, bayonet or trainer to Ukraine, or stationing one tank in the Baltics. Indeed, the Russians also went ballistic (figuratively) by threatening to go literally ballistic over Nato ABM systems.

Ponder the hypocrisy here. It is a thing to behold. Russia told Israel to lie back and enjoy it because S-300’s are purely defensive. But any Nato defensive missiles in Europe have become “objects of priority [Russian] response [i.e., they are now nuclear targets].” (General Dempsey has Obamaitis, apparently, saying that he’s “not surprised” by Russia’s rhetoric. This guy is becoming a daily embarrassment.)

Obama also channeled good old Alfred E. when he downplayed Khamenei’s insistence that sanctions would be eliminated immediately upon reaching an agreement, and that military sites were completely out of bounds to inspectors:

“It’s not surprising to me that the supreme leader or a whole bunch of other people are going to try to characterize the deal in a way that protects their political position,” Obama said in a news conference Saturday at the Summit of the Americas in Panama.

Talk about projection! What the hell has Obama been doing in the past three weeks other than “try[ing] to characterize the deal in a way that protects [his] political position”?

Obama is also demonstrating that his vaunted flexibility is not limited to Russia, saying that he is open to “creative” approaches to lifting sanctions early. He claims that he insists on “snapback” capability, but anyone who believes sanctions can be snapped back is out of his bleeping mind. Or is a liar that is “characteriz[ing] the deal in a way that protects his political position.” That is, saying anything to protect a deal that he wants, hell or high water.

If Obama is Alfred E. Newman, I am definitely not. Me worry. In particular, me worry that we are bumping against the limits of the amount of ruin in a nation that Adam Smith wrote about.

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A Greek Gas Farce

Filed under: Commodities,Energy,Financial Crisis II,History,Politics,Russia — The Professor @ 11:44 am

Der Spiegel reported that Greek officials claim that the country is on the verge of signing a deal with Russia that would give the Greeks €5 billion upfront, to be repaid from transit fees on a yet-to-be-built Turkish Stream pipeline: the Russians deny any deal. The quoted (but anonymous) Greek official said that this would “turn the tide” for Greece.

Really?

Some thoughts off the top.

First, Greece owes €320 billion, including payments of €30 billion in 2015 alone. It is “scraping the bottom of the barrel” by borrowing from various state entities (e.g., the public transport system) to meet April payroll. It has a budget deficit of €23 billion. Deposits at Greek banks fell by about €20 billion last week. This creates a liability for the Bank of Greece to Target2 (i.e., to the members of the ECB). A measly €5 billion will buy it a few weeks time, at best.

Second, it’s not as if creditors (e.g., the EU and the IMF and Target2 members) are going to give Greece discretion over how to spend this money. And they have many levers to pull. So it would set the stage for more arguments between the creditors and the debtor.

Third, the Russians are likely to write terms that secure the debt and give it priority over other creditors (at least with respect to any future transit fees). (Just remember how tightly the Russians crafted the Yanuk Bonds.) The Euros will flip out over any such terms. This would set up an epic The Good, The Bad, and the Ugly three-way standoff.

Fourth, this initiative would be directly contrary to European energy policy, which is finally attempting to reduce dependence on Russia and limit vulnerability to Russian gasmail and the use of energy as a wedge to create divisions within the EU.

Fifth, what are the odds that the pipeline will get built? The Europeans are against it. It requires the Greeks and the Turks to play well together, and we know how that usually works out. It requires additional investment in infrastructure in Turkey, which is problematic. Further, the Russian track record on these sorts of projects leaves much to be desired.

So what happens if the pipeline isn’t built, or is delayed significantly. No doubt the Russians will anticipate this contingency in the debt agreement, and write things in such a way that they have security or priority, which will just spark another battle with Greece’s European creditors.

In sum, such a deal would hardly be a solution to Greece’s problems. Indeed, it only escalates conflicts between Greece and the EU.

Which may be Putin’s purpose, exactly. Exacerbating Greek-EU conflict over a matter involving Russia directly at a time when Greece could scupper the extension of sanctions against Russia suits Putin perfectly. The fact that the pipeline is as much pipe dream as realistic project doesn’t matter a whit. This is all about stirring trouble. And that’s Putin’s speciality.

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April 14, 2015

Obama the Negotiator at Home and Abroad: Compare and Contrast

Filed under: History,Military,Politics,Russia — The Professor @ 6:56 pm

We know that Obama knows how to play tough in negotiations. We know that he can engage in brinksmanship. We know he can draw red lines, and stick to them. Just look at past confrontations with Congressional Republicans, especially over budgetary issues, the debt ceiling, and Obamacare.

This contrasts starkly with his abysmal negotiating strategies with foreign adversaries. The unilateral concessions, by the bagful. The failure to extract any meaningful concessions from his interlocutors. The declaration of red lines, followed by at most mewling protests when the lines are crossed.

The Iran negotiations are of course the most prominent example. But consider the opening to Cuba. Indeed, it is really impossible to consider this a negotiation at all. Instead. Obama has just unilaterally undone a set of restrictions that have been in place for years, including today’s removal of Cuba from the State Department’s terror supporting nations list.

And Cuba has done what in return? Bupkis.

Whatever you think about the embargo and the terrorism list designation, we have issues with Cuba, notably its expanded cooperation with Russia (which last year Newsweek called “Partying like it’s 1962“), including the reopening of the Lourdes surveillance facility: note, that the Cold War is not over for everyone. To ease up on Cuba at the very same time it is increasing its cooperation with an aggressive and truculent Russia is astounding. Human rights is another issue.

So we have things that we should want from Cuba, and the means to extract them. Cuba is in dire economic straits, especially since its most recent patron, Venezuela, is circling the bowl at mach speed. So the US has leverage, just as it does with Iran. And the costs to the US of continuing the embargo are trivial. Threats to walk away-or to increase the pressure-are quite credible. There is a huge asymmetry in bargaining power here.

You know how Obama would play this hand with Republicans. We see how he plays it with the Castros and Khamenei. It’s not that he doesn’t know how to play hard ball: It’s that he doesn’t want to.

The question is why? I keep returning to the theory that he  believes that the exercise of American power abroad is illegitimate, and that in the cases of countries like Iran and Cuba, he actually believes that the US owes redress for past transgressions.

If you all have a better theory, I’d like to hear it. But your theory has to explain why a man who can be so obdurate in negotiations at home is so pliable-to put it mildly-in negotiations abroad.

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Putin Punks the President. Again.

Filed under: Military,Politics,Russia — The Professor @ 9:34 am

Putin just punked Obama. Again. This time by announcing the resumption of the delivery of S-300 antiaircraft missiles to Iran, and the beginning of the oil-for-goods swap that had been mooted some months ago, and doing so before the non-ink on the nuclear non-deal with Iran has dried. Lavrov put the boot in, by stating that the moves advanced the negotiations on Iran’s nuclear program:

“It was done in the spirit of good will in order to encourage progress in talks,” Lavrov said. “We are convinced that at this stage there is no longer need for such an embargo, specifically for a separate, voluntary Russian embargo.”

The Daily Beacon goes into the wayback machine and reminds us that in 2010, the administration asserted that the sale of S-300s was a red line. But we know about Obama’s red lines, don’t we? And you know Putin does.

Shockingly, Kerry expressed “concern” at the Russian move. (That was sarcasm, people.) Kerry is doubly punked, because just the other day he cited the Russians as agreeing with him on the understandings reached in Lausanne.

Kerry is the biggest buffoon and chump to serve as Secretary of State in the 229 year history of the republic (but perhaps the most arrogant). (And that includes James Buchanan! At least we will probably be spared a Kerry presidency.) He has been spinning and harrumphing non-stop in defense of the non-deal. For instance, he claims that we will be able to detect any Iranian violations because Science! (the usual lefty magical incantation). Further, he says Congress (and everyone else) should but out because Obama has a “global mandate”:

Secretary of State John Kerry described the nuclear agreement with Iran as a “global mandate” that Congress only “assisted” in creating. “This is a global mandate issued by the United Nations,” Kerry said Sunday on CBS’ “Face the Nation.” “Congress assisted by passing sanctions.”

Um, you would have thought that Kerry would have given up such “global” formulations after the “Global Test” fiasco of 2004. But of course not.

And I think my copy of the Constitution is complete, and I can’t find “global mandate” anywhere. Interesting, isn’t it, that two ex-Senators who were once insistent on Congressional prerogatives are now utterly dismissive of the legislative branch. Further proof that where you stand depends on where you sit.

And of course genuflecting to some “global mandate” gives power to malign actors, like Putin, who can jerk us around at will. This is particularly disturbing when we have an administration that is quite willing to be jerked around by not just Putin, but Khamenei, Assad, and assorted other thugs and punks.

So what’s Putin’s game here? Beyond the sadistic pleasure of torturing Obama, I mean. Economically, an Iran deal does not favor Russia. So is this part of a particularly Byzantine plot to undermine the deal? It certainly gives lots of ammunition to opponents of a deal in the US, Israel, and even France. (Germany and the UK are hopeless.) But perhaps as this Bloomberg piece suggests, Putin is willing to take an economic hit for a geopolitical gain. I don’t know exactly.

But what I do know is that Putin is re-fighting a Cold War that Obama believes is over because he wants it to be over. Because Obama doesn’t believe that in war, the other guy gets a vote: Obama believes his is the only vote that matters. This delusion is refuted daily, but Obama persists in it.

 

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April 12, 2015

The War on Excavators

Filed under: History,Military,Politics — The Professor @ 11:34 am

Once upon a time, American pilots adorned their aircraft with enemy insignia to commemorate their aerial victories.

Here’s WWII Europe air ace Gabby Gabreski in his P-47 Thunderbolt:

gabreski_p47

Here’s Pappy Boyington in his F-4U Corsair:

boyington_f47

The tradition continued in Korea, here with Ralph Parr in his F-86 Super Saber:

parr_f86

Vietnam too: here’s Robin Olds (an all around badass, by the way) in his F-4 Phantom II:

olds_f4

The fighter jocks were not the only ones. Bombers commemorated their missions with nose art:

b17-nose-art

I wonder if, and how, pilots participating in the ongoing campaign in Iraq and Syria are commemorating their accomplishments. This would be the most obvious choice to adorn an F/A-18E or an F-15E or a B-1B:

excavator-3518579

I am quite serious. If you follow the CentCom (or DoD) news releases, you will note that “excavators” are one of the top targets of the air campaign. Nary a day goes by without a press release announcing the bombing of another excavator. On Thursday, the US destroyed 9 (9!) excavators, 7 at one location (Bayji).

Obviously, excavation contractor is the most dangerous job in Iraq. (It would be an interesting test of Adam Smith’s theory of compensating wage differentials!)

I get why they are targets. ISIS uses them to build defensive fortifications. They are stationary targets that are easy to identify and hit. They are mainly in isolated areas and engaged in purely military work, and therefore can be destroyed with little risk of killing civilians.

But still. Excavators are hardly high value strategic targets. They support ISIS military operations, but are hardly essential to them: anyways, fortifications are irrelevant if there is no serious possibility of a ground attack, and the key positions in the fortifications could be knocked out when they are manned in preparation of any such attack. Destroying excavators does not crimp ISIS financially in any serious way.

In brief, the War on Excavators is a confession of the strategic inanity of the current air campaign. It smacks of “Well, we’re over here, and we gotta bomb something!” rather than demonstrating a Resolve to destroy ISIS, Inherent or otherwise.

A famous Bush quote criticizing a previous non-serious air campaign comes to mind: “When I take action I’m not going to fire a $2 million missile at a $10 empty tent and hit a camel in the butt.”

Regarding tents: we bomb those too. No news on whether any camels were harmed.

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