Streetwise Professor

July 20, 2017

Hyperloop Hype. What Else Do You Expect From Elon?

Filed under: Energy,Politics — The Professor @ 6:59 pm

The classic sign of a con man is that he always responds to information or developments that undermine his previous promises with new!, better! promises. Elon Musk fits this template to a T.

Most of the news from Tesla lately has been less than favorable, and all of it contradicts previous pronouncements. Vehicle shipments have failed to make forecast, and it is  trying to manage expectations about Model 3 production and sales. It is becoming clear that Tesla will face considerable competition in electric cars, and from companies that have a proven ability to build automobiles in quantity with quality–both of which Tesla has yet to do. As a result, the price has cracked considerably in the past few weeks.

So Elon needs a distraction, and another fantastical statement about Tesla would probably be ill-advised. So what to do? Tweet tantalizing trash about Hyperloop, of course! (I have to rely on press reports, because Elon blocked me long, long ago. I’m so proud.)

Musk stated that he had received “verbal govt approval” to build the NY-DC Hyperloop.

Approval from whom, exactly? Elon didn’t say. Approval to do what, exactly? Elon didn’t say.

Forget the what: the whom question is amusing enough. I can imagine a conversation between Elon and an alderman in say, Applegarth, NJ. “Hey. I’d like to drill a tunnel under your town and run high speed capsules carrying passengers underneath it. What do you think?” “COOL! Go for it!” Then Elon whips out his iPhone and tweets that he got “verbal govt approval.”

Just think how many jurisdictions there are between New York and DC. (And how many of those are corrupt as hell.)  This is also the Land of NIMBY. So unless there is some supersecret Regional Subterranean Construction Authority that can approve–verbally, no less–the building of something like Hyperloop, can override local government in NY, NJ, PA, DE, and the Federal government as well, there is no single body to give the approval that Elon claims he has.

But reality doesn’t matter in ElonWorld. He needed something to feed the fanboyz, and he did. And non-fanboyz (e.g., the WSJ) actually treat these utterances seriously.

Note that Elon’s Hyperloop Tweet gets wall-to-wall coverage, but the fact that his brother-in-law Peter Rive has left Tesla to–wait for it–“spend more time with his family” has barely registered in the news.

Rive was a co-founder of Solar City, and was in charge of one of the projects that Elon had hyped earlier–the Solar Roof, which was supposedly about ready to be installed en masse.  Has anyone actually seen such a roof? I thought not. Yet more hype, the failure to deliver on which requires hyping Hyperloop.

Musk has gone through execs like Kleenex during a bad cold. And now he can’t even keep his relatives.

But Elon always has rent-seeking to fall back on. Of all his bullshit, the biggest is his claim that the company does not depend on government largesse: “And I should perhaps touch again on this whole notion of – it’s almost like over the years there’s been all these sort of irritating articles like Tesla survives because of government subsidies and tax credits. It drives me crazy.”

So I presume you sent back those CA ZEV and US subsidy checks, right Elon? For the sake of your sanity.

Thought not.

Take Elon’s pronouncements at face value (I know, I know) and you would think that the impending phase out of Federal subsidies would be great news for his mental health. But given the fact that EV sales have this tendency to collapse when subsidies go away (recent examples being Hong Kong, China, and Denmark), the loss of this revenue stream is a grave threat to the company. But never fear, California, which hasn’t met an idiotic green technology that it won’t throw money at, is getting ready to throw large green Elon’s way:

The California state Assembly passed a $3-billion subsidy program for electric vehicles, dwarfing the existing program. The bill is now in the state Senate. If passed, it will head to Governor Jerry Brown, who has not yet indicated if he’d sign what is ostensibly an effort to put EV sales into high gear, but below the surface appears to be a Tesla bailout.

. . . .

This is how the taxpayer-funded rebates in the “California Electric Vehicle Initiative” (AB1184) would work, according to the Mercury News:

The [California Air Resources Board] would determine the size of a rebate based on equalizing the cost of an EV and a comparable gas-powered car. For example, a new, $40,000 electric vehicle might have the same features as a $25,000 gas-powered car. The EV buyer would receive a $7,500 federal rebate, and the state would kick in an additional $7,500 to even out the bottom line.

And for instance, a $100,000 Tesla might be deemed to have the same features as a $65,000 gas-powered car. The rebate would cover the difference, minus the federal rebate (so $27,500). Because rebates for Teslas will soon be gone, the program would cover the entire difference – $35,000. This is where Senator Vidak got his “$30,000 to $40,000.”

The Tesla Model 3 would be tough to sell without the federal $7,500. But this new bill would push Californian taxpayers into filling the void. It would be a godsend for Tesla.

AB1184 would be a huge expansion of the current Clean Vehicle Rebate Project which has doled out 115,000 rebates for $295 million to buyers of EVs and hybrids since 2010, averaging about $2,550 per rebate.

Under AB1184, hybrids and hydrogen powered cars are not included, and rebates for plug-in hybrids are slashed – perhaps to keep Toyota’s technologies at bay.

Even the current, relatively small Clean Vehicle Rebate Project has been lambasted as a subsidy for the wealthy who can afford to spend $100,000 on a set of wheels. A study, cited by the Mercury News, showed that of nearly 100,000 rebates, over 80% went to Californians with incomes over $100,000. This notion of a subsidy for the wealthy also applies to the federal rebate.

So of course Elon threw himself across the Assembly door in Sacramento, right? He’s bombarding Jerry Brown with calls begging him to veto right?

Yeah, sure. No this smells for all the world like California doing a solid for a local company (and the wealthy Californians that buy its cars). And we know how Elon can work governments to get him to shovel money his way.

In some ways, you can’t blame Elon. As transparent as his shtick is, it seems to work. P.T. Barnum’s dictum about a sucker being born every minute seems to be a low-ball estimate when it comes to Musk’s con. So until it doesn’t work, he’ll keep doing it. Given that reality isn’t an option, what else is he going to do?

If Elon fools you once, shame on him. If he fools you twice, three times, four times . . . shame on you.

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July 17, 2017

Alphonse and Gaston Meet LMEshield–and Provide a Cautionary Tale for Blockchain Evangelists

Filed under: Blockchain,Commodities,Derivatives,Economics,Politics — The Professor @ 7:28 pm

This article isn’t explicitly about blockchain, but in a way it is. It describes the halting progress of the LME’s LMEShield digital warehouse receipt system, and ascribes its problems to the Alphonse-Gaston problem:

“It’s all about liquidity and a tipping point,” said an executive with a warehouse company.

“If Party A is using the system, they can’t trade if Party B is not using the system. It’s a redundant system until market masses are using it.”

After you, Alphonse. No! After you, Gaston! I insist! (Warning! Francophobia and Mexaphobia at the link!)

In essence, LMEshield is attempting to perform one of the same functions as blockchain–providing a secure, digital record of ownership. LMEshield’s technological implementation is not blockchain or distributed ledger, per se. It is a permissioned network operated by a trusted party, and does not employ a distributed ledger, rather than being an unpermissioned network not involving a trusted party, run on a DL.

But it is not that technological difference that is causing the problem: it is the challenge of coordinating the adoption of the use of the system. This coordination problem exists here even though there is an entity–the LME–that has an incentive to promote adoption and build a critical mass so that tipping takes over. Despite a promoter, the virtuous cycle has not taken hold. The adoption problem is even more challenging without a promoter.

This problem will be present in all attempts to create a secure digital record of ownership, regardless of the technology used to achieve this goal.* There is more than one technology to skin this cat, and it is not the technology that will in the end determine whether the cat gets skinned: it is the ability to overcome the coordination problem.**

And as I’ve noted before, if tipping does occur, that just creates another conundrum: tipping effectively creates a natural monopoly (or at best a small numbers natural oligopoly), which raises questions of market power, rent seeking, and governance.

Bitcoin world is providing an illustration of the challenges of governance (as well as raising questions about the scalability of blockchain). Block size has become a big constraint on the capacity to process transactions, leading to a spike in transactions charges and long lags in processing transactions. There are basically two proposals to address this issue: expand the size of blocks, or allow some processing to occur off the blockchain. This has divided Bitcoin world into camps, and raises the possibility that if the dispute is not resolved Bitcoin could experience a hard fork (i.e., split into two or more incompatible networks). Miners (mainly Chinese) want to expand block size: Core (the developers who maintain the software) want to externalize some processing. Both sides are talking their book–go figure–which illustrates that distributive considerations and politicking, rather than efficiency, will have an outsized effect on the outcome.

Keep both LMEshield and the Bitcoin block size debate in mind when somebody offers you pie-in-the-sky, techno-evangalist predictions of how blockchain/DLT Is Going to Change the World. It’s not the technology alone that matters. Indeed, that may be one of the least challenging issues.

Also keep in mind that there is nothing new under the sun. The functions that blockchain/DLT are intended to–or dreamed to–perform are inherent in all transactional settings, including in particular financial and commodity transactions. Blockchain/DLT is a different way of skinning the cat, but the cat has been skinned one way or ‘tother since the dawn of these markets. Maybe in some cases, blockchain/DLT will do it more efficiently. Maybe elements of blockchain/DLT will be blended into more traditional ways of performing these functions. Maybe some applications will prove resistant to blockchain/DLT.

But the crucial thing to keep in mind is that blockchain/DLT will not banish the fundamental challenges of coordinated adoption and governance of a system that scales. And note that if it doesn’t scale, it won’t replace existing systems (which do), and if it does scale, it will pose the same organization, governance, and market power issues that legacy systems do.

*There is no guarantee that DLT is even a technological advance on existing technology. As I discuss further on, some implementations (notably Bitcoin) have exhibited severe problems in scaling. If it don’t scale, it will fail.

**I own a cat. I like my cat. I like cats generally. If colloquialisms offend, this is not the place for you. Particularly colorful if somewhat archaic American colloquialisms that I learned at my grandfather’s knee. Alphonse and Gaston is also something I picked up from my grandfather. Today it would cause an outbreak of fainting, shrieking, and pearl clutching (though maybe not–after all, the characters are Europeans), but if you can’t separate the basic comedic idea from what was acceptable in 1903 (the year of my grandfather’s birth, as well as the date of that clip) but isn’t acceptable today, you’re the one with the issues.

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July 15, 2017

Remember Chinagate?: Trump Jr. Was Betting on Form

Filed under: Politics,Russia — The Professor @ 7:17 pm

The hyperventilating over the Trump Jr.-Veselnitskaya meeting continues. The latest revelation is from a Russian also present at the meeting, lobbyist Rinat Akhmetshin, who claims that Veselnitskaya gave the Trump Jr. party a “plastic folder” (why not a plain brown paper wrapper?) containing “printed documents” (as opposed to what, unprinted documents?) revealing a flow of dirty foreign money into Democratic Party coffers.

According to just about everybody, including the likes of Charles Krauthammer, this is utterly damning. Not only did Trump go to the meeting under the belief he would get damning documents, he actually got them! Proof of collusion!

Did I say hyperventilating earlier? I should have said “paint huffing”: the sound is the same but huffing leads to intoxication and brain damage, which is manifestly evident here. Because it is delusional to think it is somehow scandalous to pursue allegations of foreign money flowing illegally to the DNC during a campaign with someone named “Clinton” at the top of the ticket. It is delusional precisely because allegations that the Clintons and the DNC could be the beneficiaries of illicit foreign donations is hardly beyond the realm of possibility: It is a historical fact. Hello? Remember Chinagate? You know, Johnny Chung. John Huang. James Riady. Maria Hsia. Charlie Trie. Fundraisers in Buddhist temples. The Chinese embassy in Washington coordinating campaign contributions to the DNC–a story broken by the Washington Post, by the way. Veselnitskaya’s claims were not something wildly implausible: they were deja vu. (Which may be precisely why that was her come on.) (And by the way–could you imagine the Category 5 shitstorm that would be raging were there allegations that the Russian embassy in DC had been coordinating donations to the RNC?)

Note that such allegations and the information to substantiate them are not likely to emanate from the Vatican. It is almost inevitable that they would come from a potentially dodgy source with an axe to grind. And the source is ultimately irrelevant as to the truth or falsity of the documents or allegations that the source provides. Reducing all questions of fact to issues of motive-which is true of most of the arguments about Russian influence attempts -is a disreputable tactic, and one that usually means that the facts are pretty damning.

As it happened, Trump Jr. quickly judged that Veselnitskaya could not back up her claims, so he did not pursue the matter.

The nature of Trump Jr.’s supposed sin also sets the head spinning. It is somehow an unpardonable foreign manipulation of US elections to hear out someone claiming to have evidence that one’s opponent is the beneficiary of foreign manipulations? It is foreign interference to receive purported evidence (from foreign sources) about foreign interference?

And that’s somehow worse than accepting–and passing on to law enforcement–unsubstantiated allegations about Trump obtained from a foreign source? John McCain did that with the Steele dossier, which was paid for by (a) at least one of Trump’s Republican opponents, and (b) an as yet unnamed Democratic Party source. Trump Jr. didn’t pay to dig up the alleged dirt: it was brought to him. Trump Jr. rejected what was proffered. McCain (and perhaps others) passed on what they had like the clap.

The Steele dossier was opposition research, meaning that by design it was intended to influence the US election. It was circulated with that intent. It originated from a foreign source, motives unknown. All things which allegedly make the Trump Jr.-Veselnitskaya meeting wrong. Yet the amount of curiosity about the dossier pales in comparison with this Trump Jr. meeting. Do you think Trump Jr. will be able to get away with stonewalling the way Fusion GPS, the intermediary in the Steele dossier, is doing?

No. If the Trump  Jr. meeting demands a full public inquiry, so does the entire genesis and history of the Steele dossier. And I would surmise that the Steele dossier story is far more sordid and damning than Trump Jr.’s ultimately barren dalliance with Veselnitskaya. Which is exactly why a cynic like me believes an examination of the dossier’s provenance is being avoided like the plague–it would not reflect well on many, many members of the political class and federal law enforcement.

Trump Jr.’s meeting was extremely unwise because of the optics, rather than the substance. The dangers of Russian connections were already apparent, although on 9 June 2016 they were not nearly as radioactive as they would become after the Wikileaks release of the DNC emails and subsequently the Podesta emails, let alone after Hillary’s crushing loss and the consequent need for a scapegoat and a means of kneecapping the Trump presidency. It was rash for Trump Jr. (and Kushner) to meet on the basis of such sketchy hints passed on via Z-list promoters: they should have dispatched an intermediary to do a preliminary check, which almost certainly would have led to the same result as the actual meeting did, but which would have avoided the risk–which ultimately crystalized, long after the election–inherent in a face-to-face meeting between a Russian and Trump’s two closest confidents.

But facts are facts, regardless of the source. And if Veselnitskaya indeed had factual evidence of a foreign attempt to influence the US election, her dubious background would not have gainsaid those facts. And given the DNC’s and the Clinton’s history with dirty foreign connections, it was hardly wrong to entertain and investigate assertions that history was repeating.  And if the allegations were proven, they would have demonstrated what is supposedly a horrible sin–foreign interference in the US election. Trump Jr. was betting on form, and by the standards now advanced by his father’s political opponents, performing a public service of policing American elections.

 

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July 11, 2017

I Don’t Think He’ll Be Very Keen. He’s Already Got One, You See

Filed under: Politics — The Professor @ 8:23 pm

If some stranger had offered the Trump campaign the Holy Grail of Hillary Kompromat, when a conspiracy was already in place, the reaction probably would have gone something like this (at the 30-40 second mark).

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Why Would You Meet With a Nobody Promising a Watch, If Putin Already Gave You a Rolex?

Filed under: Politics — The Professor @ 8:06 pm

I presume you have heard, ad nauseum, the hyperventilating about the Donald Trump Jr. meeting with a Russian lawyer, and the email correspondence leading up to it, in which Trump Jr. expressed intense interest in the possibility that the lawyer might be able to pass some dirt on Hillary originating with the Russian government.

I think my rule of thumb that the true significance of a Trump-related revelation varies inversely with the frenzy it sets off holds here. Maybe I need to revise the rule to say the significance varies inversely with the exponential of the cube of the frenzy.

For starters, what campaign wouldn’t check out an offer of compromising material on an opponent–especially one like Hillary? And do you think that Hillary or her campaign would have passed up a similar offer? Hardly. This is the way the game is played. This is the way the game has always been played–by the Clintons in particular. Like Tip O’Neill said: politics ain’t beanbag.

And let’s not forget that the Steele digging expedition, which originated with Republican opponents to Trump but which continued with funding by as yet unnamed (why not? why no curiosity here?) Democratic operatives after Trump and Hillary had clinched their respective nominations, involved paying to get Russian dirt on Trump. So the Black Earth of the Russian steppes is open for the Democrats to plough, but is off limits to Republicans?

If the Democrats (and the media) didn’t have double standards, they’d have no standards at all.

But these things are not the biggest thing. I have yet to see anyone point out the obvious here. Namely, if in June the Trump campaign was openly interested in compromising material allegedly supplied by the Russian government, would completely undermine the dominant collusion narrative. Why meet with a Russian walk-in on the possibility she would produce official Russian kompromat if there was already an active conspiracy between the Russian government at the highest levels and the Trump campaign to obtain such information? Why meet in a public place with some woman off the street whom you don’t know from Adam’s off ox offering you a watch, when Putin has already given you a Rolex?

Yes, there are possible ways to reconcile these possibilities, but they make the story even more convoluted and baroque, and therefore less plausible.

Then there are the inconvenient realities that the woman lawyer wildly exaggerated her connections, and lied about having information. She was not a Russian government lawyer, of one thing. She was a private attorney dangling this bait solely to get a meeting, in order to importune Donnie Jr. on behalf of a sanctioned client to relax the Magnitsky Act. She then blathered about some deal involving adoptions (which she clearly had no ability to swing). Manafort–whom we are told, repeatedly, has been around the Russian block many times–realized she was a fraud: no doubt he has met her kind many a time. The meeting ended quickly, and crucially, there was no second meeting.

In other words, Natalia Veselnitskaya told a tall tale in order to break the ice. Which she then proceeded to fall through.

Veselnitskaya denies telling Trump that she was dishing dirt on Hillary. She could be right. That bait came from the intermediary to set up the meeting. Maybe he was the fabulist. Who knows? Who cares? What we know is that whoever spun it, it was a fable, and the moral of the story is that grifters lie in order to get face time with powerful people. Who knew?

So we know Trump Jr. was open to getting compromising information from Russians. Not shocking. At all.

We also know that he didn’t get any.

We also know that if he was open to it on 9 June, it is highly unlikely that there was at that time a conspiracy between the campaign and the Kremlin to discredit Hillary.

One interesting coda. Trump Jr. released the email chain related to the meeting. This set reporters, including notably one of the four (!) NYT reporters (Adam Goldman, AKA @adamgoldmanNYT) on the story and CNN’s bald, chubby, budding Kurt Eichenwald-lookalike, Hillary pom-pom squad member (I add the personal details so that you can distinguish him from the other members of the CNN cheerleading team) Brian Stelter (@brianstelter), into a foot stomping, breath holding tizzy. How dare he preempt them?!? How dare he make it impossible for them to quote selectively from the emails?!?

Goldman was shocked! Shocked! That personal emails were released. Again: if they had no double standards, they’d have no standards at all.

And by the way–how did the NYT get the emails in the first place? Seems to me that the fact that they did lends credence to Trump’s March assertion that his team was under government surveillance. But that possibility to has escaped attention. Because it doesn’t advance the mission, and indeed undercuts it.

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July 9, 2017

Trump Throws Down the Civilizational Gauntlet In Warsaw

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

Trump’s speech in Poland was like a political Rorschach Test, or a word-association exam. If you hear the word “will”, and think Leni Riefenstahl, you just might be a leftist! If you hear the phrase “Western civilization,” and think “white supremacism”, you just might be a leftist! If  you hear the word “God”, and think “Nazi”, you just just might be a leftist!

Trump uttered all these words, and people on the left responded in exactly these ways.

On the right, the reaction was much more favorable. Trump’s themes have been staples among many conservatives and some libertarians for decades, dating back to the Cold War. Now the main perceived threat is not the godless Soviet Union, but the hyper-militant strains of a religion. But most conservatives believe that an ideology inimical to the Western heritage and Western beliefs is on the march now as it was then. Further, there were serious doubts about the will of the West to resist, then as there are today. The past does not repeat itself, but it rhymes, and Trump adapted an old tune to a new day.

Insofar as other issues that exercise some Republicans and allegedly many Democrats are concerned, Trump even criticized Russian actions in Ukraine and Syria. No, not as vigorously as John McCain and his ilk would like, but to McCain anything short of a nuclear first strike against Russia is lily livered appeasement so he can be discounted. Trump also forthrightly committed to Nato Article Five. So that should have put paid to, or at least represented a substantial down payment on, the soft-on-Russia narrative.

But those issues were largely drowned out by the shrieking on the left, and among many Europeans. And the reason why is straightforward. In reality, the left doesn’t care all that much about Russia or the Paris Accord or the like. What it is most heavily invested in, by far, is the culture war. And arguably the most important motivating belief driving the left in this war is the conviction that not only is there not anything special, valuable, or uniquely worth defending about the West, but that the West is actually a malign force that has been and continues to be the source of great evil in the world. The legacy of the West isn’t individual freedom, political democracy, the rule of law, economic and technological progress, and great works of art and literature: it is racism, sexism, colonialism, oppression, and cultural appropriation. It doesn’t need defending–it needs to be transformed past recognition, if not destroyed altogether.

About twenty years ago, a popular chant on college campuses was “hey, hey, ho, ho, Western Civ has got to go.” Ostensibly the chant was about mandatory classes in Western Civilization. But in reality, then and especially now, among many on the left it is Western civilization itself that has to go.

The seemingly strange affinity of the left for Islam, despite its diametrically opposed beliefs on women, gays, family, and the role of religion in society, is more readily understood when you grasp the left’s real enemy–the civilization that Trump stood up for. Islam is a useful ally in the war on that enemy. Given the utter incompatibility in beliefs it’s an insane alliance in the long run, but one can see the short term method in this madness. The enemy of my enemy. And this alliance reveals how the left prioritizes its enemies.

And in Warsaw Trump threw down the gauntlet and rejected all this. He not only refused to surrender, he vowed to fight, and said that there is something worth fighting for. All of which is an anathema to the left, hence the hyperbolic–and Pavlovian–response.

It’s also a very clarifying response. It shows just what the real fault line is. The supposed pressing issues of the day–Russia, climate change, trade–are really just stones that lie within easy grasp to be flung in the fight. What the fight is really about is a much deeper conflict of visions (to lift a phrase/title from Thomas Sowell) about the Western inheritance. Is it something to be conserved (recognizing that a crucial aspect of that inheritance is a capacity for great and rapid change), or is it something to be razed? Trump said the former: the frenzied reaction on the left tells you that they believe the latter.

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July 6, 2017

The Qatar LNG Expansion Announcement: Vaporware Meets LNG?

Filed under: Commodities,Economics,Energy,Politics — The Professor @ 4:04 pm

Qatar sent shock waves through the LNG market by announcing plans to increase output by 30 percent. Although large energy firms (including Rex Tillerson’s old outfit) expressed interest in working with Qatar on this, color me skeptical.

I can think of two other explanations for the announcement, particularly at this time.

The first is that this may be akin to a vaporware announcement. Back in the day, it was common for software firms to announce a new product or a big update of an existing product in order to try to deter others from entering that market. If entry in fact did not occur, the product announced with such fanfare would never appear. Similar to this strategy, I think it is very plausible that Qatar is trying to deter entry or expansion by North American, Australian, and African producers by threatening to add a big slug of capacity in a few years. Perhaps the developers won’t be scared off, but their bankers may be.

The surge in LNG capacity around the world has severely undercut Qatar’s competitive position, and forced it to make contractual concessions. It also threatens to erode prices for a considerable period. Even more entry would exacerbate these problems. This gives Qatar a strong incentive to try to scare off some of that capacity, and a vaporware strategy is worth a try in order to achieve that.

The second is based on the current set-to between Qatar and the Saudis and the rest of the GCC. They are all but blockading Qatar, and have made demands that bring to mind Austria-Hungary’s demands against Serbia in July, 1914: the ultimatum is designed to be rejected to give a pretext for escalation. Qatar needs to demonstrate that it is immune to the pressure. An announcement of grandiose expansion plans is a good way to signal that it is immune to pressure and not only plans to continue business as usual, but to go further. In a part of the world where showing weakness is an invitation for the wolves to pounce, putting on a bold front is almost a necessity when the wolves are already circling.

So we’ll see where this goes. But I think there’s a good likelihood that this is a big bluff.

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July 4, 2017

Sunlight is the Best Disinfectant: If the Light of Day Scares You, You May Be a Germ

Filed under: Climate Change,History,Politics — The Professor @ 10:30 am

The Climate Change Mafia is threatening to go to the mattresses over EPA director Scott Pruitt’s plans to hold a “red team/blue team” exercise to evaluate climate science. Given the billions the US lavishes on this research, such a review is a salutary thing: but perhaps because it threatens said billions, the Mafia is going nuts:

The idea has been derided by activists and scientists who say it’s “dangerous” to elevate dissenting voices who disagree with them on global warming.

“Such calls for special teams of investigators are not about honest scientific debate,” wrote climate scientist Ben Santer and Kerry Emanuel and historian and activist Naomi Oreskes.

“They are dangerous attempts to elevate the status of minority opinions, and to undercut the legitimacy, objectivity and transparency of existing climate science,” the three wrote in a recent Washington Post op-ed.

Defenders of the “consensus” argue the existing peer-review process works well and a red-blue team dynamic is not needed. They further argue scientific bodies, like the Intergovernmental Panel on Climate Change, provide a forum for scientific debates.

“Developing science, far from being ignored, is confronted directly and openly in such assessments,” Santer, Emanuel and Oreskes wrote.

This is very, very revealing. What Pruitt is planning threatens the role of people like Santer and Emanuel as gatekeepers–although “trolls under the bridge” is probably a better metaphor. They dominate peer review, through a variety of mechanisms. They are the editors of the journals. They are the go-to referees. Look back at some of the references to peer review in the Climategate emails if you doubt this. No Little Skeptical Billy Goat or Medium Size Skeptical Billy Goat is going to make it over their bridge of peer review. But the sight of Pruitt and Trump playing the role of The Big Billy Goat Gruff has them quaking in fear.*

As for “scientific bodies, like the Intergovernmental Panel on Climate Change” providing a “forum for scientific debates”–don’t make me laugh. There was more open debate at Soviet Party Congresses in the 1930s. Again–these people dominate these forums, and like any guild or clerisy, they cannot tolerate the rise of competing forums where contrary voices may be heard.

This is all very revealing. Truly confident scientists would welcome the opportunity to prove in a very public way that they are right. They would welcome the opportunity to vanquish publicly–and if they are so right, to humiliate–their adversaries.

This lot is very fond of pointing out what transpired during the Scopes Monkey Trial. Well, here’s their opportunity to make their supposedly anti-science opposition a public laughingstock, just like Clarence Darrow did (unfairly, truth be told) in 1925. Yet they recoil at the prospect.

Telling, no?

Also telling is the refusal of many states to provide public records relating to voter registration and voting to the Trump administration’s Presidential Advisory Commission on Election Integrity. The media and the governing establishment heap scorn on anyone who dares suggest that there might be voting irregularities in the US. Well then–turn over the records so that it can be proved! If US elections in every jurisdiction in the United States are as pure as the driven snow (I snort writing that, being a Chicago native), you’d think these states would be falling over themselves to prove what a great job they are doing in achieving such an outcome, right?

They say that sunlight is the best disinfectant. Those–like the Climate Change Mafia and state election officials and pols–who shriek at the suggestion that sunlight be cast on their activities just might be germs.

* Looking back on my old Climategate posts, I stumbled across something I’d forgotten: that the Climate Mafia was truly ahead of its time in blaming its discomfiture on Russian hackers.  Just like Hillary and her minions and the media (but I repeat myself), they attempted to distract attention from the damning substance by attacking how the embarrassing emails came to light. I had a very Trumpian response, years before Trump was a political phenomenon–I praised the FSB. Hilarious.

 

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Donald Trump, LNG Impressario: Demolishing the Putin Puppet Narrative

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 9:50 am

If Trump has a signature policy issue, it is promoting US energy to achieve what he calls “energy dominance.” The leading edge of this initiative is the promotion of LNG. Immediately prior to his appearance at the G20 Summit (where ironically he will be tediously hectored on trade by the increasing insufferable Angela Merkel), he will speak Thursday at the “Three Seas Summit” in Poland, where he will tout American LNG exports as both an economic and security fillip to Europe, and in particular eastern Europe.

“I think the United States can show itself as a benevolent country by exporting energy and by helping countries that don’t have adequate supplies become more self-sufficient and less dependent and less threatened,” he said.

This strikes at the foundation of Putin’s economic and geopolitical strategy. Export revenues from gas and oil keep his country afloat and his cronies flush. He uses gas in particular as a knout to bludgeon recalcitrant eastern Europeans (Ukraine in particular) and as a lever to exercise influence in western Europe, Germany in particular.

Gazprom routinely sniffs that LNG is more costly than Russian gas, and that LNG will not appreciable erode its market share. That’s true, but illustrates perfectly the limitations of market share as a measure of economic impact. The increased availability of LNG, particularly from the US, increases substantially the elasticity of supply into Europe. This, in turn, substantially increases the elasticity of demand. As the low cost producer (pipeline gas being cheaper), Russia/Gazprom will continue to be the source of the bulk of the methane molecules burned in Europe, but this increased elasticity of demand will reduce Gazprom’s pricing power and hence its revenues.

Furthermore, the effect on short-run elasticities will be particularly acute. Pre-LNG, there were few sources of additional supply available in a period of days or weeks that could substitute for Russian gas cutoff during some geopolitical power play. With LNG, the threat of shutting off the gas has lost much of its sting: especially as LNG evolves towards a traded market, supplies can swing quickly to offset any regional supply disruption, including one engineered by Putin for political purposes. So LNG arguably reduces Putin’s political leverage even more than it reduces his economic leverage. This is particularly true given complementary European policy changes that permit the flow of gas to regions not serviced by LNG directly.

Trump is getting some pushback from domestic interests in the US (notably the chemical industry) because greater exports would support prices and deprive these industries of the cheap fuel and feedstock that has powered their growth (something totally unpredictable a decade ago, when the demise of the US petrochemical industry was a real possibility). But (a) Trump seems totally committed to his pro-export course, and (b) complementary efforts to reduce restrictions on supply will mitigate the price impact. So I expect the opposition of the likes of the Industrial Energy Consumers of America to be little more than a speed bump in his race to promoting energy exports.

This all reveals Trump for the mercantilist he is: imports bad, exports good. This is economically illiterate and incoherent, but it’s Trump trade policy in a nutshell. Economic coherence aside, however, Donald Trump, LNG Impressario totally demolishes the Putin puppet narrative. Not that you’d notice–the hysteria continues unabated, because reality doesn’t matter to the soi disant reality-based community.

Here we have Trump devoting the bulk of his non-Twitter-directed energies (and he is high energy!) to promoting an economic policy that hits Putin at his most vulnerable spot, economically and geopolitically. Whatever his Russia-related rhetoric, pace Orwell, he is objectively anti-Putin.

Not that this causes neo-McCarthyites even to experience cognitive dissonance, let alone to engage in a serious re-evaluation. To them, Trump is literally a Kremlin operative in Putin’s thrall. And nothing–not even Trump venturing to the heart of the area Putin and his ilk believe to be in Russia’s sphere of influence and loudly (very loudly) proclaiming that he is offering American gas to free Europe from its energy thralldom–will divert them from their non-stop narrative.

As an aside, I do Joseph McCarthy a grave disservice by comparing today’s mainstream media, the Democratic Party, Neocons, and large swathes of the Republican establishment to him. There was actually a far more substantial factual basis for his paranoia than there is for that of the anti-Trump brigades.

There is an irony here, though. I have often sneered at Putin (and when he was president, Medvedev), for acting like a glorified Secretary of Commerce, going around being the pitchman for Russian economic interests, in energy in particular. Stylistically, Trump is doing somewhat the same. But substantively, in Making American Energy (LNG particularly) Great, Trump is giving Putin a good swift kick in the stones.

Not that the promoters of the New Red Scare are paying the slightest heed. Which demonstrates that theirs is a completely partisan and grotesquely intellectually dishonest campaign.

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July 1, 2017

All Flaws Great and Small, Frankendodd Edition

On Wednesday I had the privilege to deliver the keynote at the FOW Trading Chicago event. My theme was the fundamental flaws in Frankendodd–you’re shocked, I’m sure.

What I attempted to do was to categorize the errors. I identified four basic types.

Unintended consequences contrary to the objectives of DFA. This could also be called “counter-intended consequences”–not just unintended, but the precise opposite of the stated intent. The biggest example is, well, related to bigness. If you wanted to summarize a primary objective of DFA, it would be “to reduce the too big to fail problem.” Well, the very nature of DFA means that in some ways it exacerbates TBTF. Most notably, the resulting regulatory burdens actually favor scale, because they impose largely fixed costs. I didn’t mention this in my talk, but a related effect is that increasing regulation leads to greater influence activities by the regulated, and for a variety of reasons this tends to favor the big over the medium and small.

Perhaps the most telling example of the perverse effects of DFA is that it has dramatically increased concentration among FCMs. This exacerbates a variety of sources of systemic risk, including concentration risk at CCPs; difficulties in managing defaulted positions and porting the positions of the customers of troubled FCMs; and greater interconnections across CCPs. Concentration also fundamentally undermines the ability of CCPs to mutualize default risk. It can also create wrong-way risks as the big FCMs are in some cases also sources of liquidity support to CCPs.

I could go on.

Creation of new risks due to misdiagnoses of old risks. The most telling example here is the clearing and collateral mandates, which were predicated on the view that too much credit was extended via OTC derivatives transactions. Collateral and netting were expected to reduce this credit risk.

This is a category error. For one thing, it embodies a fallacy of composition: reducing credit in one piece of an interconnected financial system that possesses numerous ways to create credit exposures does not necessarily reduce credit risk in the system as a whole. For another, even to the extent that reducing credit extended via derivatives transactions reduces overall credit exposures in the financial system, it does so by creating another risk–liquidity risk. This risk is in my view more pernicious for many reasons. One reason is that it is inherently wrong-way in nature: the mandates increase demands for liquidity precisely during those periods in which liquidity supply typically contracts. Another is that it increases the tightness of coupling in the financial system. Tight coupling increases the risk of catastrophic failure, and makes the system more vulnerable to a variety of different disruptions (e.g., operational risks such as the temporary failure of a part of the payments system).

As the Clearing Cassandra I warned about this early and often, to little avail–and indeed, often to derision and scorn. Belatedly regulators are coming to an understanding of the importance of this issue. Fed governor Jerome Powell recently emphasized this issue in a speech, and recommended CCPs engage in liquidity stress testing. In a scathing report, the CFTC Inspector General criticized the agency’s cost-benefit analysis of its margin rules for non-cleared swaps, based largely on its failure to consider liquidity effects. (The IG report generously cited my work several times.

But these are at best palliatives. The fundamental problem is inherent in the super-sizing of clearing and margining, and that problem is here to stay.

Imposition of “solutions” to non-existent problems. The best examples of this are the SEF mandate and position limits. The mode of execution of OTC swaps was not a source of systemic risk, and was not problematic even for reasons unrelated to systemic risk. Mandating a change to the freely-chosen modes of transaction execution has imposed compliance costs, and has also resulted in a fragmented swaps market: those who can escape the mandate (e.g., European banks trading € swaps) have done so, leading to bifurcation of the market for € swaps, which (a) reduces competition (another counter-intended consequence), and (b) reduces liquidity (also counter-intended).

The non-existence of a problem that position limits could solve is best illustrated by the pathetically flimsy justification for the rule set out in the CFTC’s proposal: the main example the CFTC mentioned is the Hunt silver episode. As I said during my talk, this is ancient history: when do we get to the Trojan War? If anything, the Hunts are the exception that proves the rule. The CFTC also pointed to Amaranth, but (a) failed to show that Amaranth’s activities caused “unreasonable and unwarranted price fluctuations,” and (b) did not demonstrate that (unlike the Hunt case) that Amaranth’s financial distress posed any threat to the broader market or any systemic risk.

It is sickly amusing that the CFTC touts that based on historical data, the proposed limits would constrain few, if any market participants. In other words, an entire industry must bear the burden of complying with a rule that the CFTC itself says would seldom be binding. Makes total sense, and surely passes a rigorous cost-benefit test! Constraining positions is unlikely to affect materially the likelihood of “unreasonable and unwarranted price fluctuations”. Regardless, positions are not likely to be constrained. Meaning that the probability that the regulation reduces such price fluctuations is close to zero, if not exactly equal to zero. Yet there would be an onerous, and ongoing cost to compliance. Not to mention that when the regulation would in fact bind, it would potentially constrain efficient risk transfer.

The “comma and footnote” problem. Such a long and dense piece of legislation, and the long and detailed regulations that it has spawned, inevitably contain problems that can lead to protracted disputes, and/or unpleasant surprises. The comma I refer to is in the position limit language of the DFA itself: as noted in the court decision that stymied the original CFTC position limit rule, the placement of the comma affects whether the language in the statute requires the CFTC to impose limits, or merely gives it the discretionary authority to do so in the even that it makes an explicit finding that the limits are required to reduce unwarranted and unreasonable price fluctuations. The footnotes I am thinking of were in the SEF rule: footnote 88 dramatically increased the scope of the rule, while footnote 513 circumscribed it.

And new issues of this sort crop up regularly, almost 7 years after the passage of Dodd-Frank. Recently Risk highlighted the fact that in its proposal for capital requirements on swap dealers, the CFTC (inadvertently?) potentially made it far more costly for companies like BP and Shell to become swap dealers. Specifically, whereas the Fed defines a financial company as one in which more than 85 percent of its activities are financial in nature, the CFTC proposes that a company can take advantage of more favorable capital requirements if its financial activities are less than 15 percent of its overall activities. Meaning, for example, a company with 80 percent financial activity would not count as a financial company under Fed rules, but would under the proposed CFTC rule. This basically makes it impossible for predominately commodity companies like BP and Shell to take advantage of preferential capital treatment specifically included for them and their ilk in DFA. To the extent that these firms decide to incur costs (higher capital costs, or the cost of reorganizing their businesses to escape the rule’s bite) and become swap dealers nonetheless, that cost will not generate any benefit. To the extent that they decide that it is not worth the cost, the swaps market will be more concentrated and less competitive (more counter-intended effects).

The position limits proposed regs provide a further example of this devil-in-the-details problem. The idea of a hedging carveout is eminently sensible, but the specifics of the CFTC’s hedging exemptions were unduly restrictive.

I could probably add more categories to the list. Different taxonomies are possible. But I think the foregoing is a useful way of thinking about the fundamental flaws in Frankendodd.

I’ll close with something that could make you feel better–or worse! For all the flaws in Frankendodd, MiFID II and EMIR make it look like a model of legislative and regulatory wisdom. The Europeans have managed to make errors in all of these categories–only more of them, and more egregious ones. For instance, as bad as the the US position limit proposal is, it pales in comparison to the position limit regulations that the Europeans are poised to inflict on their firms and their markets.

 

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