Streetwise Professor

August 24, 2013

Syria: All the Options are Terrible

Filed under: Military,Politics — The Professor @ 4:18 pm

Chairman of the Joint Chiefs of Staff, General Martin Dempsey, has been very negative about any US military involvement in Syria.  The military takes this position when either (1) it truly believes that the use of military force will not achieve a satisfactory outcome at a satisfactory cost in lives and money, or (2) it has serious doubts about the political support for military engagement.  In the case of Syria, I strongly suspect that (2) drives Dempsey’s opposition to US intervention, but that the messy aftermaths in Iraq and Libya have also convinced him (and the rest of the military) that (1) is true too.  Obama is obviously allergic to military intervention, and the military is no doubt fearful of getting involved in  a conflict with a commander in chief who is not committed to seeing things through.  There is no deep political support in the country for intervention.  Viet Nam and Iraq still haunt the US military.  So Dempsey has resorted to the common tactic of a commander who does not want to be ordered into combat: he emphasizes the negative, and the capabilities of the would-be enemy.

But the recent alleged use of chemical weapons by the Syrian government in an attack that reportedly killed hundreds-mainly children-has changed the dynamic dramatically.  This attack, if it indeed occurred-and the initial US assessment is that it did-took place on the anniversary of Obama’s drawing of a “red line” involving Syrian CW use.  Obama gave himself an out a year ago, with the “whole bunch” proviso.  Well, an attack that kills hundreds would be hard to write off as a minor employment of WMD.  Obama is hoist on his own petard, and quite honestly, even if he had not staked his-and the country’s-credibility on this issue, the pressure to intervene in the aftermath of a proven mass-casualty CW attack would be intense.  The drawing of the red line only makes it harder for Obama to resist this pressure.

Consequently, the US is apparently assembling a target list, and if Assad’s use of CW is confirmed, some action is highly likely, even in the face of Russian and Chinese opposition.

In my opinion, Dempsey has exaggerated the dangers and costs of a US air campaign against Assad.  Yes, Syrian air defenses are more formidable than Libya’s were, but they are still a Russian-designed system operated by Arabs.  Pretty much every one of those has been shredded, either by the US or Israel, every time they have been attacked since 1973.  (I always remember Moshe Dyan’s answer to the question of how he explained his military success: “Fighting Arabs.”  This is particularly true when it comes to anything involving the operation of technically advanced systems.)

This quite useful presentation provides an overview of how an air campaign would proceed.  It clearly suggests that such a campaign could be successful with very minor risks to US personnel, and at modest cost.

A robust air campaign against Assad would seriously jeopardize his ability to survive.  But then what?

That’s the real problem.  Perhaps if the US had intervened in US and toppled Assad in 2011, a somewhat stable outcome could have been achieved.  Stable by Mideastern standards, anyways.  Maybe like Iraq, circa 2008-2009.  You wouldn’t want to live there, but it could be worse.

That’s no longer an option: it now will be worse than Iraq post-Surge, and likely worse than Iraq pre-Surge.  In the last two years, the Islamist fanatics, many of them foreigners, have come to dominate the opposition.  Assad’s fall would result in a bloody civil war between the factions of the opposition, and the communities that support Assad (notably the Alawites).  The place would become a horror show, a magnet for jihadists, and a sanctuary for terrorists.

The US Army and Marines have no stomach for getting involved in such a fight, the American people have no stomach for it, and it is hard to justify on the basis of our national interest.  Some Europeans, notably the French and British, are currently all hot to intervene, but given their pathetic military capabilities, that’s a case of “let’s you and him fight.”  Moreover, you know that as soon as things get tough, or at the first claim that the US military has committed an atrocity, the Europeans would be self-righteously criticizing us.

So I have little doubt that US airpower could make relatively short work of Assad’s military forces and government, and tip the balance to the opposition (who were on the verge of victory early this year without air support) but the aftermath would be a bloody mess, and we would be led by a CIC who would have no stomach for the fight.  So I can understand Dempsey’s reluctance completely.

I am seriously conflicted about how to proceed.  On the one hand, I cannot abide Assad and his brutality, and the use of chemical weapons on civilians would put him well beyond the pale.  But I foresee a bloody, messy, inconclusive aftermath of his overthrow.  The US military would have a thankless task.  It could be totally confident that the Europeans who support intervention now would desert at the first sign of trouble, and can provide  no meaningful military heft.  The cynical ultra-realists say that the US should just let the two sides kill one another, thereby distracting them from terrorizing us: this is a variant of the Kissingerian “it’s too bad they both can’t lose” attitude to the Iran-Iraq war.  But that is profoundly amoral, because it’s not just jihadis and Syrian government thugs who would be dying: innocent civilians would bear the brunt.

Things would have been ugly in 2011, but things will be infinitely uglier now.  2012 and 2013 are years of the locust.  2014 and beyond will be hell, regardless of what Obama decides to do.  We are where we are, and where we are is not a good place to be.

If I had to choose, I would decide that removing Assad would have some geopolitical benefits, and would not make the humanitarian situation any worse.  Syria is Iran’s major ally, and its bridgehead to Hezbollah.  Assad’s fall would be a strategic blow to Iran, and thus would be a strategic benefit to us.  But this objective is not sufficiently beneficial to justify the commitment of any American ground forces.  So I would limit American involvement to a robust air campaign targeting the Syrian air force, command and control targets, chemical weapons facilities, air defenses, and Hezbollah logistics and support, supplemented by a program to arm the opposition, trying to the extent possible to direct the weapons to the least bad guys.  And I would plan like hell for the myriad contingencies that may follow.

What I definitely would not do is what Obama is apparently considering, namely, a set of limited strikes intended to “send a message.”  Back in the day, I would have said if you want to send a message, use Western Union.  That’s obsolete, but the concept is fully operative.  The message that would be sent is that we lack seriousness and are just doing something because we have to do something so it doesn’t look like we’re doing nothing.  Such actions betray a lack of will and seriousness and actually tend to encourage rather than deter thuggish rulers.  We don’t need Rolling Thunder in the desert.  It would also unleash all of the negative diplomatic consequences that a more aggressive strike would.

In other words: moderation in war is imbecility (attributed variously to Lord Fisher and Macaulay).  Or in other other words: If you want to take Vienna, take Vienna. Assad is facing an existential moment.  We are not going to change his “calculus”: he isn’t going to back down in a war for survival in the face of attacks that don’t threaten his survival.  We cannot affect his will to survive: we can affect his capability to survive.  The best we can do is affect the “correlation of forces” to use the old Soviet term. By so doing, we can increase the odds that he will topple.

Even if this is done, the aftermath will be very ugly.  But so are all the other alternatives.  This just seems the least ugly of a hideously repulsive lot.  Act or don’t act, we’ll be blamed for whatever ugliness transpires.  Contributing to Assad’s overthrow would at least have some strategic benefits.  So, with reluctance, I guess that’s the way I’d go.

August 23, 2013

What Happens in Berlin Doesn’t Stay in Berlin

Filed under: Economics,Exchanges,Military,Politics,Regulation,Uncategorized — The Professor @ 12:44 pm

Nasdaq shut down for 3 hours yesterday, the second electronic trading SNAFU of the week (the first being the Goldman option fiasco).  The problem?  Another example of the effects of a SLOB (simulacrum of a limit order book).  One of the links in the US SLOB is the SIP (Security Information Processor) connecting NYSEArca and Nasdaq.  This sends information about quotes from one exchange to the other.  This information is necessary to link the markets: in order to prevent locks and crosses, and to direct orders to the best priced market, each venue needs to know the quotes at the others.  According to Nasdaq, irregularities in the SIP were causing problems with its system, so it shut down to prevent a more catastrophic failure.

Moral of the story: links are major points of failure in a SLOB.  (Though it is interesting to note that on the same day Globex was displaying crossed markets in the bean complex, and Globex is a true CLOB not a SLOB.  But trading continued.)

My first thought on hearing of the shutdown was a SLOB problem.  My second was hacking.  There has been a spate of stories of late about exchanges being major potential targets of hackers/cybercriminals.

This is one of the reasons why I take an interest in Appelbaum, Snowden, Anonymous, etc.  Exchanges, and financial infrastructure generally, are major targets of these psychopaths for at least a couple of reasons.  First, some are just criminals, who like Willie Sutton target banks and the like because that’s where the money is.  Second, the hacker movement is a hotbed of anti-capitalist ideology that motivates attacks on capitalist institutions.

Meaning that the defenses of our financial infrastructure are vitally important.  And this is another source of major concern, which the Snowden affair puts front and center.  Infosec workers are recruited from the same milieu as the hackers.  The membrane between hackers on the outside and supposed defenders on the inside is very permeable.  There is lots of talk about the color of hacker hats, but ethically and ideologically the distinctions between black, white, and grey hats are quite blurry, and the boundaries are transgressed often.

Snowden is a classic example of that.  Former head of the NSA, General Hayden, said that perforce NSA and the government generally has to recruit from this group, but find ways to protect from those with a “romantic attachment to absolute transparency at all costs.”  Yes, the transparency romantics are a potential problem, but I think they’re the least of our worries: transparency romanticism is often a public pose for those motivated by malign anti-US and anti-capitalist beliefs.

The narcissism and grandiosity that Snowden exhibits are also all too common in this community, both inside government and financial institutions, and outside.  Indeed, there is a very strong and widespread tendency of these people to view themselves as superior in some way, and justified in acting as judge, jury, and executioner when it comes to the release of information, and operations against targets that violate their highly tuned-and self-righteous-moral senses.  Again, Snowden is a perfect example: he arrogated to himself the ability to decide what was illegal and immoral.  So did Bradley Manning, though he (and yes, he is still a he and he was a he when he made this statement, so I’m passing on the Chelsea thing) repudiated that in his pre-sentencing statement.

Indeed, this is a common theme in the infosec community.  Take a look at the attached video by a Pied Piper of this community, ex-priest (and, alas, University of Chicago grad) Richard Thieme.  (H/t @libertylynx, who also raised many of the points below.) This guy is lionized in this community.  He matters.  He is viewed as the voice of many. Check out the fawning, personality cultish comments to the video.

Thieme basically asserts that infosec specialists answer to a higher law, in part because there is a nexus between law enforcement and criminality, and in part because traditional legal distinctions (e.g., foreign vs. domestic) have been obliterated by technology and shadowy, scary supra-state actors.  Check out the rants around minute 32:00.  And for a dose of virulent anti-bank rhetoric, which really has to be heard to be believed, fast forward to minute 43 or so.

You know that there are infosec people in banks-and exchanges-who idolize this guy, and buy into his message.  The message is banks are criminal.  The government is criminal.  So it’s not criminal to attack them. Indeed, one can be justified in doing so.  Yes, many of the would-be attackers are on the outside, but as Snowden shows, there are inevitably many on the inside. And some on the inside have no problem in dealing with Appelbaum and the like. Case in point, an infosec guy I interacted with on Twitter until he blocked me. (Thin skin seems to be another occupational hazard.) He would countenance no criticism of Appelbaum.

Meaning that the most dangerous threats to exchanges and financial infrastructure may be those who are hired to defend them.

So this is one of the reasons I write about Snowden, and Appelbaum, and Assange, and Greenwald, and the rest of this crowd. Their agendas and connections need to be understood-and broadcast. For these avatars of transparency are notoriously protective of their own activities and connections. Given the inevitability that some of those to whom they are connected are on the inside of vital financial and government institutions, this is a matter of grave concern. And a matter that mainstream journalism has been shockingly negligent in investigating and reporting.

Appelbaum and Poitras are in Berlin now, and Berlin-land of the Pirate Party-is arguably the epicenter of this community. But it is an international community, and what happens in Berlin doesn’t stay in Berlin. It could be coming to a bank or exchange near you. If it hasn’t happened yet, it’s not for lack of trying, or the lack of potential acolytes within these very institutions.

August 21, 2013

When Do the Wrecking Trials Begin?

Filed under: Military,Politics,Russia,Uncategorized — The Professor @ 9:05 pm

A couple of months back the head of the Russian Pacific Fleet bragged that his unit would receive 30 plus new vessels of all types this year.  I was pretty skeptical, given all the negative stories about the Russian shipbuilding industry.

I’m not the only one who’s skeptical.  Putin, in fact, is PO’d at the situation, and took out his ire on Rogozin, demanding an end to warship delays:

Delivery of some new ships to the Russian Navy due after 2015 under the current procurement program, could be delayed until 2025, President Vladimir Putin said Monday.

“I know you have voiced the idea of introducing amendments into the existing state armaments program for financing ships which are due to be handed over by 2015,” he told a conference on the Navy’s development. “And for ships due after 2015 – ascertain the amount of money already in the new state program for the period to 2025. This is all possible, let’s see, but only so there are not setbacks,” in order to “synchronize manufacturing capabilities with the volume of funding provided,” he added.

. . .

He attributed the delays in the delivery of new warships and weapon systems for the Navy to irregular supplies of components to subcontractors, a lack of effective collaboration between design organizations and manufacturing enterprises, and the low quality of equipment.

No less than 132 equipment failures were found during construction of one warship, he said, urging industry and defense related agencies to submit proposals on ways of improving the situation.

Putin gave them six months to resolve these issues, Deputy Prime Minister Dmitry Rogozin said after the meeting.

It’s not just warships.  It’s also ships to support gas projects in the Far East:

Deputy Prime Minister Dmitry Rogozin said that construction at the Zvezda shipbuilding complex in the Far East is running 14 months behind schedule and will require a consortium of investors to bring it up to speed.

Rosneft head Igor Sechin proposed the plan at a meeting between government officials and representatives from the state-owned oil and gas giants Gazprom and Rosneft.

“The speed of vessel construction does not correspond to the aims dictated by the development of offshore fields,” Sechin told RIA-Novosti, adding that Rosneft and Gazprombank would both participate in the consortium.

There was also a proposal to transfer control of civil shipbuilding to Rosneft, Rogozin said, confirming reports from Kommersant last week.

The common denominator here?  United Shipbuilding.  One of the national champeens Putin created to supposedly rationalize Russian industry, exploit economies of scale, yadda yadda.  But, in what should have been a predictable result, a state created monopoly negotiating with other state entities (defense, energy companies) tries to extract high prices and delivers poor performance, because there’s no competition.  (NB: shipbuilding for the military in the US is a mess these days too. )

A great illustration of the fundamental flaws in Putin’s state directed capitalism, and an indication of why Russia’s economy is stagnating.

It’s not only shipbuilding.  The space program is facing serious delays in building a new cosmodrome to replace facilities in Kazakhstan.  And Rogozin is losing it, blaming the delays on sabotage:

Deputy Prime Minister Dmitry Rogozin slammed the slow progress of construction at Russia’s Vostochny cosmodrome during a visit to the facility Wednesday, saying the delays amounted to “sabotage.”

Rogozin, who oversees the defense and aerospace sectors, said two key instructions regarding construction of the cosmodrome had been issued, but even though one had a July 30 deadline, neither have so far been fulfilled.

Both instructions he mentioned related to setting project construction costs and performance indicators for the site, which covers over 1,000 square kilometers (386 square miles).

“I will view any deviation from the plan as sabotage,” Rogozin said at a meeting with representatives of agencies involved in building the cosmodrome. “I have no intention of being one of those public servants who accept failure to deliver on instructions.”

“I will view any deviation from the plan as sabotage.”  I would have written: “I will view any deviation from The Plan as sabotage.”

Create a simulacrum of the Soviet economy, get Soviet results. It’s that simple.\One potentially related tragic story.  A Russian-built Kilo class sub, recently refitted in a Russian yard, caught fire and sank last week, killing its entire crew.  The cause of the incident is not known, but the Russians denied any responsibility with unseemly haste.

And weirdly, the same guy who is blasting Russian firms (including United Shipbuilding) for their incompetence, delays, and quality problems-yes, Rogozin the Ridiculous-immediately absolved United Shipbuilding from any responsibility, all while the sub and its doomed crew are resting on the bottom of the bay where the incident occurred:

The Russian specialists do not see technical failure as the likely cause of the incident, Rogozin said.

“The initial information … is that the explosion occurred in the compartment where the batteries were charging,’” he said. “This is the most dangerous work, which is not so much to do with the makers of these batteries, but with technical safety measures, which must be at the highest level. So the first suspicions of our experts are about questions of technical safety standards. We aren’t blaming the equipment yet,” he added.

Russian experts have not yet been to the scene of the accident, where Indian Navy divers are still working to try to recover the bodies of those who died. The divers recovered three bodies Friday from among the 18 crew believed to have been on board, The Times of India reported.

So they haven’t been to the scene, but they know what isn’t the cause.  Got it.

Given the huge problems the Indians have had with Russian hardware-and with United Shipbuilding in particular-I doubt they’re taking Rogozin’s word on this.

Putin has grand plans to rejuvenate the Russian military.  The Navy is centerpiece of these plans.  It is evident that Putin’s own creation will scupper these plans.  Which will lead to anger and a search for scapegoats.

Can the wrecking trials be long in coming?

August 19, 2013

Maybe Guys Named Ed Stick Together: Why Is Edward Lucas So Pro-Snowden?

Filed under: Military,Politics — The Professor @ 7:03 pm

Under the editorship of Edward Lucas, who has written passionately about the New Cold War, and the dangers of Russian espionage under Putin, has taken a very benign-to say the least-line on Snowden, Poitras, Greenwald, etc.  Indeed, the publication has been broadly sympathetic with the Snowden-as-whistleblower meme, and quite uncurious about Poitras and Greenwald.  Lucas has expressed similar views on his Twitter timeline.  Yes, often in RTs and MTs which he will no doubt claim do not represent an endorsement, but given the obvious tilt in what he RTs, and the correlation with the Economist’s editorial line, it’s clear where his sentiments lie.

This despite the fact that, as Orwell would say, Poitras and Greenwald are objectively pro-terrorist.  I would say they are subjectively so, but they would respond that the concept of terrorism, in its Muslim incarnation anyway, is a construction not based in fact, but created by the US to justify a war on Islam.  So is Lucas/the Economist buying into those views?  Neither he nor the publication have expressed the slightest interest in their background or agendas to determine whether these have led them to slant their writing, and to disclose selectively in highly misleading ways.

Even more peculiar: at the very least, Snowden, Poitras, and Greenwald (and Assange too) are in an alliance of convenience with Putin and the FSB.  It is plausible that it is more than an alliance of convenience, but the Snowden-Poitras-Greenwald-Assange agenda and methods are quite to Putin’s and the FSB’s satisfaction, you can be very sure.

Yet Lucas, who has written two books warning about Putin’s malign intent, and the nefarious goals and methods of the FSB, seems oddly uninterested in this convergence of interests.  Indeed, Lucas’s warnings about Russia have been dismissed as overwrought, not to say hysterical, by critics: but his deep suspicions of Putin and Russian intelligence seem to go into abeyance where Snowden, Poitras, Greenwald, Assange et al are concerned.

Passing strange.

I am at a loss to explain this.  Perhaps it is just the instinctual sympathy of a member of the journalist tribe to a fellow member-although to call Poitras a journalist is to push the definition almost beyond recognition.  (I get the sense that the label of journalist is viewed as better than a get out of jail free card: it’s viewed as a never go to jail card. Hell, even Appelbaum is calling himself a journalist, for crissakes. Case in point: today Lucas  RTd something bewailing the detention in Heathrow by British law enforcement of Greenwald’s partner-and admitted mule of encrypted, stolen material-Miranda.  No mention of the fact that the Guardian admitted to paying for this expedition, and is declaring Miranda a journalist by proxy.  Or something.  Real journalists should be very leery about buying into this, because it bodes ill for them.)

Another hypothesis that comes to mind is that like many Brits, Lucas bears a lingering grunge against the upstart colonials who have supplanted Britain as the indispensable nation.  I’ve read more than enough WWII history to recognize the similarities with the attitudes of Britain’s high command and political elite in 1943-1945: attitudes that became even more sour post-Suez.

Just a hypothesis.  But I can’t find a better explanation for Lucas’s suspension of suspicion and skepticism.  And the disconnect between Lucas’s suspicion and skepticism about Putin and the FSB and his broadly supportive take on Snowden et al couldn’t be more stark.  (And I don’t mean Holger, but that sort of fits too.)

Update: I owe Edward Lucas an apology.  I incorrectly identified him as Editor of the Economist, and hence responsible for its editorial line, on Snowden and other issues, which he is not.  Moreover, he did write a piece titled Snowden is Not a Hero, which criticized Snowden for taking refuge in Russia.  So it is not correct to attribute the decidedly squishy-on-Snowden Economist editorial position to him, or to claim that he has gone soft on Russia on Snowden.

So my criticism should be directed at the Economist generally, because it (like virtually the entire journalistic establishment) has been virtually silent on the Poitras-Greenwald-Appelbaum-Assange nexus; their agenda; and their methods; and hence, on the reliability of their “reporting.”  (That’s not right, exactly.  When the silence is broken, hagiography replaces journalism, aka the NYT piece where Maass basically played stenographer to Poitras and Greenwald, and served up the transcript with a big, wet kiss. H/T to Catherine Fitzpatrick for the stenographer metaphor.)

I will say that six weeks ago I did convey to him my dismay at the Economist’s benign characterization of Poitras, and provided some background to demonstrate why a far more skeptical attitude is warranted.  Since then nothing really has changed.  But I can’t say that he is responsible.

Perhaps Britain’s libel laws are ultimately to blame.

So let’s grant this makes the British press unlikely to dig into Poitras et al, or if they dig into them, to publish what they find.

What’s the excuse of journalists in the country that does have the First Amendment?

Penetration Pricing in the Futures Markets: This is a Bad Thing?

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Regulation — The Professor @ 4:43 pm

The CME has seen increased volumes in its cash settled Brent contract in the aftermath of its launch of a program that pays rewards to those who trade the contract.  This is a standard way to attract volume to a contract competing against an incumbent/dominant contract.  Indeed, it’s probably the only way to do it.

Eurex tipped the Bund market away from LIFFE in 1998 after implementing a fee holiday, which LIFFE smugly refused to match, so confident was it of its liquidity advantage.  But Eurex had enough organic order flow that it was fairly liquid already, and the fee cut made it cheaper to trade Eurex Bunds, as I document in my paper “Bund for Glory: Or, It’s a Long Way to Tip a Market” (which will be a chapter in a book I’m currently writing).  The market tipped within a period of mere months.

Other exchanges didn’t repeat LIFFE’s near fatal mistake, and responded to fee cutting entrants by cutting their own fees to match.  This is how CBOT saw off Eurex’s attempt to enter the US Treasury futures market in 2003, and how CME torpedoed EuronextLIFFE’s attempt to enter into the Eurodollar futures market a few years later.

Here’s the deal: incumbents have a huge liquidity advantage that entrants must overcome.  How can this be done?  The only way, really, is to cut fees, or actively reward volume to attract enough liquidity to compete with the incumbent.  And the odds are still long, especially if the incumbent follows the CBOT script, and matches the reduced fees.

But if you want to encourage inter-exchange competition, you have to look favorably on entrants using strategies that reward volume as a way of building liquidity to make themselves into viable competitors.

This basic fact makes this FT article very disappointing.   It criticizes the CME initiative, and only quotes those who are critical or dismissive of the endeavor.  Yeah, it’s probably true that the only reason why those who participate in the incentive program trade is to collect the rewards.  But their order flow can attract order flow from others: other traders see that there is two-way activity, and can be more confident that if they establish a position, it won’t be a Hotel California that they can check into, but can’t leave.  Meaning that it’s BS to say, as one anonymous source to the story says, “there is no economic benefit to the trades whatsoever.”  The economic benefit is that it can make the entrant a more viable competitor to the incumbent.

And quoting Bart Chilton.  Please.

The quote that claims that spread trades-which dominate the activity in the CME Brent contract-“make no loss because they buy and sell at the same price” is just a crock.  Yes, spread trades are lower risk, but calendar spreads do move.

The CME is engaging in a penetration pricing strategy.  The only real strategy that permits competition against an incumbent.  If you like competition, you should like a strategy that harnesses the greed of trading firms to generate liquidity and volume.  Because, quite frankly, that’s the only way to compete.

But if you like monopoly, go ahead and denigrate what the CME is doing.

It would also be interesting to see how ICE built market share in its WTI cash settled contract that competes with the CME’s flagship oil contract.  It is my recollection that ICE rebated fees for firms that brought volume to the ICE contract.  (The structure of the ICE inducement, and Eurex’s in Bunds, were interesting.  They basically made it a tournament, with rebates/bonus payment being limited to the top three-if memory serves- order flow providers.  That provides a very high powered incentive while controlling the cost of the program.)  If my recollection is correct, doesn’t that mean that sauce for the goose is sauce for the gander?

Competition in futures markets, where order flow is not socialized, is highly imperfect.  Incumbents have huge advantages.  Aggressive price competition-pentration pricing, specifically-is about the only way that an entrant can hope to dent the incumbent monopolist’s huge liquidity advantage, and even that is a highly dicey proposition.  The FT story would have been much better had it recognized this reality rather than taking an all too critical view, and containing only quotes that were no doubt music to Jeff Sprecher’s ears.

August 18, 2013

Is the FSU Tank Biathalon Homosexual Propaganda?

Filed under: Military,Politics,Russia — The Professor @ 7:33 am

August 15, 2013

Is Uralkali Pulling a Crazy Ivan?

Filed under: Commodities,Politics,Russia — The Professor @ 7:07 pm

The potash market is effectively cartelized, with (until recently) two FSU firms, Uralkali and Belaruskali, having one joint marketing agreement, and three Canadian firms having another (with the blessing of the Canadian government).  There was also some coordination between the FSU and Canadian groupings.

This cozy system came crashing down a couple of weeks ago when Uralkali announced its departure from its agreement with Belaruskali, and stated that it would now seek to increase output dramatically, and aim to maximize market share rather than protect price.  Potash prices are expected to fall, by as much as 33 percent, and the stock prices of the major producers cratered too.  Including Uralkali’s: its price fell 19 percent on the announcement. Other firms fell even more (e.g., Mosaic fell by 24 percent).

There are a couple of theories for Uralkali’s move.  One is that it is punishing Belaruskali for selling to China outside the marketing agreement, effectively busting the cartel.  The other is that Uralkali is trying to drive out marginal high cost producers and deter the entry of new firms.

The problem is that both strategies are of questionable rationality.  In a finite horizon game, or when discount rates are high enough, if you are rational and everyone believes you are rational neither strategy can work.  In a finite horizon game, it is never optimal to try to deter entry or punish a cartel cheater in the last period, and backwards induction implies that it would never be optimal to wage a price war to deter or punish in earlier periods.  In an infinite horizon game, if discount rates are too high, the future gains (i.e., monopoly profits) from deterring entry or ensuring future survival of the cartel agreement are discounted so heavily that they do not exceed the short term costs of selling at low prices today.  And given the low valuation of Russian stocks relative to earnings, you know the relevant discount rate is very high.

Consider entry deterrence.  While price is low, nobody will enter, but the price cutter (Uralkali, in this instance) loses a lot of money by selling at a low price.  It can only recoup this loss by raising price later.  But as soon as it raises its price, new mines will enter, and it would be rational for Uralkali to accommodate this entry rather than wage another destructive price war.  Better to earn a moderate price for a long period than a very low price forever.

However, if rivals assign a positive probability to the possibility that firm X is nuts, and gets some sort of psychic thrill from crushing enemies through price wars, the price war strategy can be profit maximizing even if X is totally rational.  If X wages a price war it can get a reputation for craziness that will make it less likely that others will test it in the future.  Once it gets this reputation, its bluff isn’t called, and its reputation for toughness endures and continues to deter.

So the only way to rationalize in economic terms alone Uralkali’s action is that it is employing a Crazy Ivan strategy.  In the Cold War, Russian subs worried about being trailed by American SSNs would perform the Crazy Ivan turn-a wild U-turn.  If there was indeed an American sub trailing, the Soviet and American boats would collide, sinking both.  Crazy, huh?  But if you get a reputation for craziness no American will follow closely and you don’t have to worry about a collision.

The market apparently doesn’t believe that Uralkali’s strategy will be successful.  As I noted above its stock price was hit hard.  If the belief was that this strategy would deter future entry and/or ensure Belaruskali’s cooperation for the foreseeable future, the company’s stock price would have risen.

Being Russia, there was of course a strong odor of inside dealing and corruption surrounding the event.  A large investor, Alexander Nesis, sold out about a month before the announcement.  Lucky him. Uralkali denies he had any foreknowledge of the price-crashing news.  Sure he didn’t.  Like I say, he’s just lucky. And I am Queen Marie of Rumania.

But maybe this isn’t about Uralkali per se, and maybe this isn’t an economic game.  Maybe it’s a political one.  Maybe Uralkali is just a Putin pawn in his ongoing, under the carpet, war against Lukashenko and Belarus.  That would actually make some sense.  Because on economic terms alone, what Uralkali did is pretty much inexplicable, except on Crazy Ivan terms: namely, that Uralkali truly is crazy, or is trying to convince everybody it is

August 14, 2013

Bradley Manning: Manning Up

Filed under: Military,Politics — The Professor @ 8:48 pm

Bradley Manning was contrite, rather than defiant, in a statement he gave to the military court in advance of his sentencing.  He apologized for damaging the United States.  Although he pleaded that he did not intend to do such damage, he acknowledged that he had damaged it, and acknowledged it plainly and forthrightly.

He made some statements that I admire, because they reveal serious self-appraisal and a refusal to play the victim his supporters vehemently claim that he is.  For instance:

I did not truly appreciate the broader effects of my actions. Those effects are clearer to me now through both self-reflection during my confinement in its various forms and through the merits and sentencing testimony that I have seen here.

I am sorry for the unintended consequences of my actions. When I made these decisions I believed I was gonna help people, not hurt people. The last few years have been a learning experience. I look back at my decisions and wonder, ‘How on earth could I, a junior analyst, possibly believe I could change the world for the better over the decisions of those with the proper authority?’

Yeah.  What about that, Eddie?  And what about this?:

In retrospect I should have worked more aggressively inside the system as we discussed during the Providence Statement and had options and I should have used these options.

Eddie had options too.

Reading Mannings words brought these lyrics from an old Sea Level song to mind:

And it’s agonizing reappraisal,
Says Dusty Rhodes

And he’s the American Dream

Manning obviously engaged in some agonizing reappraisal.

One imponderable is whether the drawn out process of prosecuting Manning made the Snowden episode possible.  What if Manning had made this statement in August, 2012, instead of August, 2013?  Would it have made Snowden think twice?  I doubt it actually, but it might have.  It couldn’t have hurt.

Manning reflected on his mistakes in prison.  Snowden will have plenty of time to reflect on his actions in his “asylum.”  I wonder if Manning’s words will affect him now.  Again, I doubt it, given his grandiosity.

Manning’s statement also contradicts the entire narrative that his vehement supporters have been pushing for years.  Assange. Greenwald. Poitras.  The whole Wikileaks crowd.  Many more.  They would never-never-acknowledge that what he did harmed the US.  Working inside the system is an anathema to them: they want to destroy the system, from the inside if possible. They portray Manning as purely a victim.  But he refuses to play one.

Will they attack him for selling out?  Or, more likely, will they ignore him going forward, because he isn’t useful to them anymore, and because his statements are an embarrassment in their eyes.

Perhaps they’ll explain away his contrition as a case of someone who has gotten his mind right, a la Cool Hand Luke, under the unrelenting pressure of a cruel imprisonment.   In their Orwellian way, they’ll claim that his denial of victimhood is further proof of how he was victimized by the security state.

And of course, Manning has every incentive to say what he thinks a court might find persuasive.  But as cynical as I am, I sense that he is being honest. The colloquial language (“gonna”) lends an air of genuineness.  I get the feeling he is manning up, and accepting the consequences for his actions, and his failure to think through the potential consequences.

I would hope every word burns into the brains of Assange, Greenwald, Poitras, and Snowden.  A vain hope, probably.  But their prop, their poster boy, has refuted them far better than I ever could.

August 12, 2013

Stability-or Stagnation? The Putin Purgatory Is A Reality

Filed under: Economics,Politics,Russia — The Professor @ 9:43 pm

Russia’s economy has been stagnating, and may in fact be in recession.  The Putin Purgatory is reality.

Putin, like most authoritarians, craves stability over everything.  That measures intended to achieve stability usually result in stagnation, “leaders” like Putin consider a price worth paying.

Economic dynamism is inherently dangerous to authoritarians.  It creates new sources of wealth that can be the foundation for alternative sources of power.  It undermines the wealth and power of regime loyalists.  It is harder to orchestrate and control a changing, dynamic economy than a plodding, predictable and sclerotic one.

Add to that the fact that an important part of the Russian economic system, and a main source of income to “law enforcement” and security forces, is shaking down small businesses and entrepreneurs, and it would be a miracle if the economy was anything but sclerotic.   The burst of growth in the mid-00s was the result of a rebound from the catastrophe of the late-90s, the spike in oil prices, and the exploitation of the capital accumulated during the Soviet years.  It was not the harbinger of a transition to sustained, dynamic growth.

I continue to chuckle at the memory of those who, in the aftermath of Putin’s election, opined that he would have to reform the economy in order to ensure growth.  What were these people thinking?

This Pavel Baev article in Eurasia Daily Monitor sums it up fairly well:

This economic weakness shapes the deepest context of the Russian-US counter-reset as Putin suspects that the outflow of investment capital, which determines the onset of stagnation, is orchestrated by his Western enemies.

As these destabilizing developments and misguided responses keep piling up, the space for engaging Putin in meaningful international initiatives that promise no instant gratification is fast contracting. He assumes that every project aimed at advancing Russia’s modernization or increasing its openness to global flows of innovations and information is undermining his grasp on power in the political system where normal evolution is blocked and change might happen only through a coup.

Yes.  The more open Russia is, the less control Putin can exercise.  The more likely it is that dangerous ideas will enter Russia. Add to this paranoia the fact that aging men invariably favor stability over dynamism, and all the ingredients for purgatory are there.

August 10, 2013

Cutting Stroke?

Filed under: Politics,Russia — The Professor @ 1:22 pm

Obama created something of a kerfuffle yesterday when he dismissed inferences about his relationship with Putin drawn from body language.  Obama said that Putin slouches, and often behaves like a bored schoolboy at the back of the classroom.

Interestingly, Putin’s posture has been discussed for going on a decade now.  This article from the Atlantic from June is of some interest in that regard:

Actually, what we saw today was a stark expression of what many who have closely observed Putin’s physicality have discovered over the last 13 years. In a valuable 2005 profile of Putin for The Atlantic, Paul Starobin hit upon one little-explored explanation for these tics: Putin is a possible stroke victim, and he may have befallen before he was even born.

Starobin cites Brenda L. Connors, a strategic research fellow at the Naval War College and former State Department official whose specialty is something called “movement analysis.” That is, she studies how gaits, hand gestures and facial expressions correlate not just to human emotions but also to styles of leadership: a kind of Max Weber of walking and talking. As Starobin wrote:

After a tour of her lab we watched a tape she had made of Putin, compiled mostly from Russian television footage. The tape rolled to a shot of Putin at his first inauguration, in the spring of 2000, at the Andrei Hall of the Great Kremlin Palace. “Here’s the picture,” she said, as we watched Putin enter the hall and stride down a long red carpet. I saw what she meant only when she slowed the tape — and when she did, I was taken aback. Putin’s left arm and leg were moving in an easy, natural rhythm. But his right arm, bent at the elbow, moved in a stiff way, as if jerked by the shoulder, and the right leg dragged, without absorbing his full weight. When she replayed the segment at normal speed, it was easy to pick up on the impediment, and then I had no trouble spotting it in other segments. All the momentum and energy in Putin’s gait comes from the left side; it is as if the right side is just along for the ride. Even the right side of his torso seems frozen. When he is holding a pen, his right hand appears to have only an awkward, tenuous grasp on it.

Retired Senator Bob Dole has similar movements, but his excuse was that he lost the use of his right arm from being hit by German machine gun fire in World War II. In Putin’s case, medical and physical therapy experts with whom Connors consulted suggested that Putin might have suffered a fetal stroke, or been permanently injured by forceps as he was being pulled out of his mother’s birth canal (a condition known as Erb’s palsy). Still another cause could be polio, to which, as a child growing up in postwar Leningrad, he’d have been very susceptible.

Here’s Starobin again: “Based on what she has seen and on her consultation with other experts, Connors doubts that Putin ever crawled as an infant; he seems to lack what is called contra-lateral movement and instead tends to move in a head-to-tail pattern, like a fish or a reptile.”

Presumably these conditions could also produce schoolboyish fidgitines.

Surely Putin is sensitive about this, and quite possibly Obama has been briefed about it: Putin would likely believe that Obama has been.  Which means that Putin may read something into Obama’s remark, and maybe he would be right.  Obama could have dismissed the body language question in many different ways that couldn’t be interpreted in the personally cutting way the posture remark could.  If it wasn’t an intentional dig, it was a pretty big faux pas.

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