Streetwise Professor

April 18, 2015

Alfred E. Obama

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Print Friendly

A Greek Gas Farce

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

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

Really?

Some thoughts off the top.

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

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

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

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

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

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

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

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

Print Friendly

April 14, 2015

Obama the Negotiator at Home and Abroad: Compare and Contrast

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

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

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

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

And Cuba has done what in return? Bupkis.

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

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

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

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

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

Print Friendly

Putin Punks the President. Again.

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

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

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

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

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

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

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

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

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

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

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

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

 

Print Friendly

April 12, 2015

The War on Excavators

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

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

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

gabreski_p47

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

boyington_f47

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

parr_f86

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

olds_f4

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

b17-nose-art

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

excavator-3518579

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

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

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

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

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

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

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

Print Friendly

April 11, 2015

The Risks of Clearing Finally Dawn on Tarullo: Better Late Than Never, I Guess

Filed under: Clearing,Derivatives,Economics,Politics,Regulation — The Professor @ 10:11 pm

In October, 2011 I was in a group of academics invited to meet the Board of Governors of the Fed to discuss our research. The theme was network industries, and I was to make a presentation on the network aspects of clearing and its implications for systemic risk.

My most vivid memory of the meeting has little to do with my presentation. Instead, it relates to Ben Bernanke, who sat facing me, directly across the massive boardroom table. Bernanke obviously had a headache. He was rubbing his temples, and he asked a staffer to bring him a cold can of Diet Mountain Dew, which he held against his forehead while closing his eyes. Figuring that a Bernanke headache would portend bad financial news, I was sorely tempted to excuse myself to call my broker to sell the hell out of the S&P.

Sitting next to me was Governor Daniel Tarullo. Truth be told, I was not impressed by his questions, which seemed superficial, or his mien, which was rather brusque, not to say grouchy.

He was definitely not sympathetic to my warning about the potential systemic risks of clearing: he made some skeptical, and in fact dismissive, comments. It was quite evident that he was a believer in clearing mandates.

It appears that Tarullo is still struggling with the idea that CCPs are a risk, but at least he’s open to the possibility:

JPMorgan Chase & Co. and BlackRock Inc. have argued for years that a key response to the last financial crisis could help fuel the next one. [What? No mention of SWP? I was way ahead of them!] Global regulators are starting to heed their warnings.

At issue is the role of clearinghouses — platforms that regulators turned to following the 2008 meltdown to shed more light on the $700 trillion swaps market. A pivotal goal was ensuring that losses at one bank don’t imperil a wide swath of companies, and the broader economy.

Now, Federal Reserve Governor Daniel Tarullo is quizzing Wall Street after big lenders and asset managers said clearinghouses pose their own threats, said three people with knowledge of the discussions who weren’t authorized to speak publicly. Among the concerns raised by financial firms: Relying on clearinghouses shifts risk to just a handful of entities, and the collapse of one could lead to uncapped losses for banks.

. . . .

Tarullo, the Fed’s point man on financial regulation and oversight, has publicly conceded that it’s hard for banks to determine their own market risks if they can’t evaluate how badly they would be hit by the failure of a clearinghouse. It’s “worth considering” whether clearinghouses have enough funds to handle major defaults, he said in a Jan. 30 speech.

Tarullo’s speech is here. Although he is still obviously a clearing fan, at least he is starting to recognize some of the problems. In particular, he acknowledges that it necessary to consider the interaction between CCPs and the broader financial system. Though I must say that since he mentions multilateral netting as the primary reason why CCPs contribute to financial stability, and margins as the second, it’s painfully evident that he doesn’t grasp the fundamental nature of clearing. In the first instance, netting and collateral just redistribute losses, and it is not clear that this redistribution enhances stability. In the second instance, although he acknowledges the problems with margin pro cyclicality, he doesn’t explicitly recognize the strains that large margin flows put on liquidity supply, and the destabilizing effect of these strains.

So it’s a start, but there’s a long way to go.

Tarullo pays most attention to the implications of CCP failure, and to measures to reduce the likelihood of this failure. Yes, failure of a large CCP would be catastrophic, but as I’ve oft written, the measures designed to save them can be catastrophic too.

Tarullo would be well-advised to read this short piece by Michael Beaton, which summarizes many of the issues quite well. The last few paragraphs are worth quoting in full:

In general, I think what we need to take away from all of this is that systemic risk can be transferred – it’s arguable whether or not it can be reduced – but it certainly can’t be eliminated, and the clearing model that we are working towards is a hub and spoke which concentrates risk on a very, very small number of names.

A decentralised network is arguably stronger than a hub and spoke model, mainly because open systems are generally regarded as more robust than closed ones. The latter is what the clearing model operates on and you have that single, glaring point of failure, and there’s really no escape from that.

So, going back to the original questions – do I think the proposals are enough?  I think it goes a long way, but fundamentally I don’t think it will ever resolve the problem of ‘too big to fail’.  I’m just not convinced it’s a problem that is capable of resolution. [Emphasis added.]

Exactly. (The comparison of open vs. closed systems is particularly important.)

Since clearing mandates create their own systemic risks, the Fed, and other central banks, and other macroprudential regulators, must grasp the nettle and determine what central bank support will be extended to CCPs in a crisis. Greenspan extemporized a response in the Crash of ’87, and it worked. But the task will be orders of magnitude greater in the next crisis, given the massively increased scope of clearing. It’s good that Tarullo and the Fed are starting to address these issues, but the mandates are almost 5 years old and too little progress has been made. Faster, please.

 

Print Friendly

The Obama Doctrine: Incompetence or Intent (Bordering on Malice)?

Filed under: History,Military,Politics,Russia — The Professor @ 4:27 pm

There have been several attempts lately to discern some sort of “Obama Doctrine” in foreign policy. This piece from the FT is just the latest example.

Actually, the doctrine has been apparent from the first, to those paying attention. To put it crudely, but oh-so-accurately, it is “F*ck our allies, let our enemies f*ck us.”

The roots of this doctrine have also been quite obvious. There are two main ones.

The first is his very progressive view that the United States has been a malign force in the world. This is best encapsulated in his Cairo speech, with its criticism of American arrogance. It is also demonstrated in word and deed, in his insistence that American presence in foreign places creates disorder rather than reduces it, and his concerted effort to withdraw from the world and to defer to others (to “lead from behind”, if you will).

In his younger days, he was a supporter of the nuclear freeze movement, which was animated at the very least by morally relativistic beliefs, but that moral relativism was usually merely a fig leaf to disguise deep-seated anti-Americanism (and anti-Westernism). He is a product of romanticism about the Third World that flourished in the 70s and 80s, and he came by it honestly, from both parents, inveterate leftists both.

It shows.

Indeed, Obama’s views on these matters are quite aligned with Ayatollah Khamanei’s, as set out in this fawning (but revealing) piece in Foreign Affairs. Khamenei’s constant invocation of American arrogance is an eerie echo of Obama’s: or is it the other way around? Either way, it is easy to understand Obama’s benign attitude towards the most strident rhetoric coming out of the Iranian regime, e.g., the motto of “Death to America.” (One of Obama’s spokesman said that this rhetoric should be ignored, even when uttered by the Supreme Leader, because it is just “background noise” intended for domestic consumption.) He views it as an understandable, if somewhat overwrought, expression of a legitimate critique of the United States.

This helps explain his willingness to treat with Iran, and to make concession after concession. From the “closed fist/open hand” rhetoric of his first campaign and first term, to his recent statements that Iran would moderate its behavior and become a responsible nation when it achieves a rapprochement with the US and the West, it is clear that he believes that Iranian actions are an understandable response to American and Western hostility, rather than a dangerous brew of Persian chauvinism and imperialism on the one hand, and fanatical Islamist ideology on the other.

This can lead him to deny some very basic and obvious realities about the Iranian regime. For instance, he pushed back against Arab criticism of his quest for a deal with Iran by saying that they needed to pay less attention to an Iranian threat, and realize that their greatest risk was “dissatisfaction inside their own countries”.

Truly, there is much to criticize about the Saudis and Qataris and Egyptians: I find the oil ticks particularly loathsome. But Obama’s criticism of the Arabs is not matched by a similar criticism of Iran, even though by every measure (e.g., public executions of gays, oppressive lifestyle police, totalitarian control of civil life), Iran is as bad or worse than the Saudis et al. But Obama is silent about Iranian repressions and internal dissatisfaction even as he criticizes the Saudis and Egyptians.

Indeed, in 2009 Obama notoriously spurned a broad-based expression of popular dissatisfaction in Iran during the “Green Revolution,” yet disastrously embraced the Arab Spring: the fervent support for Morsi and  the Muslim Brotherhood in Egypt was particularly disastrous.

Looking at this history, it is clear that the best predictor of whom Obama will support (or at least not criticize) and home he will oppose (and criticize) is not the political system, or the repressiveness of the government, but whether it is allied with the US, or not.

Cuba is the latest example. The spectacle that is occurring in Panama is sick-making in the extreme. The Cuban regime has not reformed, in the least. It remains oppressive, and inveterately anti-American. Yet Obama strives to normalize relations without demanding the slightest moderation of Cuba’s domestic oppression or anti-American foreign policy.

Obama’s progressive blaming of the US is implicit in these actions. His words also betray the second taproot of his “doctrine”: his overweening arrogance. I have mentioned several times that I was going to start dating things “BO” for “Before Obama” and “AO” for “After Obama”, because he quite evidently believes that things that happened before his birth are irrelevant, and that his arrival makes a new world possible. Whoops, he did it again!:

“The Cold War has been over for a long time,” Obama said. “And I’m not interested in having battles frankly that started before I was born.”

As if the date of his birth has any relevance whatsoever to the historical, political, economic, and social forces that drive the relations between nations. (BTW, Raul Castro obviously knows how to play Obama: with obsequious praise for his genius.)

This statement about the Cold War is particularly amazing, given recent developments, including developments involving Cuba. I recalled just the other day Obama’s sneer at Romney’s warning about Russia, saying that the 80s wanted their foreign policy back, because the Cold War is over, and noted that this statement was risibly clueless because Putin clearly wants to refight it: a war ain’t over if one guy is still fighting it. (This is another principle that Obama seems to ignore because of his narcissism: in Iraq and Afghanistan, he declares peace simply because he has stopped fighting. But there is no peace.) If you’ve been paying attention (and Obama clearly hasn’t been, or worse, has been and doesn’t care) you will have noticed that one Cold War strategy that Putin is resurrecting is extensive military and intelligence cooperation in the Caribbean, in particular with Nicaragua, Venezuela . . . and Cuba.

That’s all right out of the Cold War. And believe it or not, some of it happened after Obama was born!

So while Putin is busy trying to reignite superpower competition, Obama acts as if it’s a thing of the past, to be ignored. Which explains why Obama does not condition dealing with Cuba on its agreement to forego military ties with a revanchist and revisionist Russia.

This all demonstrates another symptom of Obama’s narcissism: his mental rigidity and inability to admit a mistake, or that conditions have changed in a way that invalidate his original judgments. He has believed that the Cold War is over, and nothing will budge him from that view.

My conclusion is based on observation from a distance. Someone who observed him up close for many years, Richard Epstein, has noted the same thing. His criticism of the Iran “deal” is withering, and it culminates with this conclusion (at about the 14:35 mark):

I see no sign that he will change his mind. He is always the smartest man in the room. That’s true when there’s one person there.

In other words, Obama believes that he is incapable of error; that facts cannot change in ways that make it necessary to change his mind; and that he can ignore criticism because no one is capable of achieving his Olympian insights.

I am not alone now in trying to determine whether Obama’s actions are the results of incompetence or intent: this question is debated with some regularity, and this is not limited to the right anymore (though of course it is predominant there). I do not discount that he is incompetent and over his head, but I think he is intentionally pursuing these various courses out of a firm set of beliefs rooted in a progressive, fundamentally anti-US and anti-Western worldview, and in a belief in his transcendent superiority. Isis and other disasters are unintended consequences, but by and large he ignores them because he is convinced that these are irrelevant to his ultimate quest to remake the world and redeem America’s sins, original and derivative.

Hanlon’s Razor says never attribute to malice what can be explained by incompetence. What Obama is doing cannot be explained by mere incompetence alone. It has to be intentional, and is arguably malicious.

Print Friendly

April 9, 2015

Rashomon Meets Rouhani, or Oh, Obama You’ve Done It Again!

Filed under: History,Military,Politics,Russia — The Professor @ 8:50 pm

The days after the alleged consummation of the nuclear “deal” between Iran and the the US and other P5+1 nations bears a strong resemblance to the famous Kurosawa film Rashomon: the participants have totally different accounts of what happened, and what was agreed to.

In the US version, Iran agreed to many terms that will make it impossible for it to “break out” to build a bomb in less than a year during the 10 year term of the deal. Centrifuges will not process uranium. Stockpiles of processed uranium will be neutralized. There will be intrusive inspections. Sanctions will not be eliminated immediately.

In the Iranian version, none of these things are true. Indeed, the Iranians characterize them as “lies”. In particular, sanctions will be lifted immediately, and there will be no inspections of military sites.

So which version is true? Who knows? All we have to go on is the accounts of the participants. No document detailing the understandings reached has been released. Instead, each side has released “fact sheets” which are wildly contradictory. At least in Rashomon the basic contours of every story were the same, even if key details differed. Here, one wonders if these people were even in the same room.

Astoundingly, even if the American account is accurate, the US has made major concessions on every key issue. Obama had originally said Fordow (the hardened uranium processing facility) and Arak (the heavy water reactor) would be closed. Both will remain open, although allegedly they will be repurposed. For a while, anyways. There will be no accounting of past Iranian violations, making it impossible to establish a baseline against which to evaluate future actions. There will be no snap inspections. And on and on. All of these reflect dramatic concessions from the original American negotiating position. Iran made no similar concessions.

Remarkably, the CIA director John Brennan claimed the Iranians finally agreed to a deal because the Iranian economy was “about to go down” due to the existing sanctions regime. If that’s true, why didn’t our crack negotiating team present Iran with a take it or leave it offer that forced Iranian concessions on every matter, rather than fold on issue after issue? Why did the allegedly stronger party make all the concessions? Why didn’t Obama play good cop to the Republican bad cop, and tell the Iranians “unless you take give up your nuclear program, these crazy Republicans will impose even more sanctions”, instead of fighting the Republicans tooth and nail? Either (a) Brennan is wrong, (b) Obama is the world’s worst negotiator, or (c) Obama really had no desire to force Iran to give up its program.

Given the utterly ineffectual, inept and/or feckless American negotiating strategy, it is hardly surprising that the Iranians are now demanding yet even more concessions. In particular, they are saying that immediate elimination of sanctions is a red line: no lifting, no deal. They are also saying that there will be no inspections of Iranian military facilities. Another red line.

Obama apparently operates under the delusion that a revisionist, revanchist, and messianic power that is involved deeply in conflict throughout the Middle East, and which has made “Death to America” words to live by for the last 37 years will somehow become a normal, non-aggressive nation when sanctions are eased, the money flows, and it is on its way to getting the bomb, in 10 years even if Obama is accurate in his description of the deal and his belief that Iran will adhere to it, or even sooner if he isn’t. This is delusional. Iran didn’t become an aggressive, revanchist, terrorism-supporting nation because it was isolated from the international community: it was isolated from the international community because it has been aggressive, revanchist, and terror-supporting. Now it will be able to pursue its messianic and imperialist goals under far less constraint. Yes, this will work out well.

Outside of Obama’s amen corner, virtually everyone in the foreign policy establishment is aghast. Eminences grise Henry Kissinger and George Schultz wrote a long and devastating oped in the WSJ that eviscerated virtually every aspect of the deal. The administration’s response? State Department interim spokesidiot Marie Harf (whom I would say is right out of a dumb blonde joke, except that would be insulting to the subjects of dumb blonde jokes) said that the Kissinger-Schultz piece was “sort of” full “a lot big words and big thoughts.” Wow. What a telling riposte to the two most experienced diplomats of the post-WWII US.  The only more inane response would have been “Is NOT!”

And then there’s Obama himself, dishing out his usual sneering disdain at critics. For instance, he said that those who opposed the deal were taking “a foolish approach” and needed to “bone up on foreign policy.”

Maybe what he meant to say is that they need to be boneheads on foreign policy, and therefore more like him. This is a guy who has lurched from one foreign policy misjudgment (or disaster) to another. The examples are endless. Calling ISIS the JV is one. The recent FUBAR with the Chinese International Development Bank is another. But my favorite, because it illustrates Obama’s unique (and toxic) mixture of warped judgment and narcissistic belief in his own Olympian discernment, was his response to Romney’s statement that Russia is the US’s greatest geopolitical threat: “The 1980s are now calling to ask for their foreign policy back because the Cold War’s been over for 20 years.”

Hahahahaha. Touche! What a zinger! Silly Romney, living in the past, not like the progressive, hip, future-focused Obama.

Well, the problem with that is that Putin is living in the past too, and is itching to refight the Cold War. But our Barry knows better.

So yeah. Based on his stellar track record of being wrong 99.8 percent of the time we should totally trust his judgment that his “deal” with the Iranians will tame them and thereby usher in an era of peace and tranquility to the Middle East. In fact, the opposite is true, and we see more evidence of that daily, as Arabs gear up for a civilizational and sectarian war with Persians (with Yemen being only the first theater in this conflict).

Obama is the Mr. Magoo of foreign policy. He blindly and happily tools along in his jalopy, thinking he is accomplishing great things, totally oblivious to the chaos and destruction that he is leaving in his wake, proudly proclaiming “Oh, Obama! You’ve done it again.”

Yes. Yes he has. And every time he does it, the nation-and the world-moves one step closer to the abyss.

Print Friendly

April 5, 2015

Not So Krafty?

Filed under: Commodities,Derivatives,Economics,Regulation — The Professor @ 10:23 am

The CFTC has filed a complaint against Kraft and Mondelez Global, accusing the companies of manipulating the December, 2011 CBT Wheat Futures Contract. A few comments, based on what is laid out in the complaint (and therefore not on a full evaluation of all relevant facts and data):

  1. A trader executes a market power manipulation (i.e., a corner or a squeeze) by taking excessive, and uneconomic, deliveries on a futures contract. This causes the calendar spread to increase, and the basis at locations where delivery does not (or cannot) occur to fall. The complaint alleges that Kraft took large deliveries. The relevant calendar spread (December-March) rose sharply, and according to Kraft emails cited in the complaint, the basis at Toledo declined. Thus, the facts in the CFTC complaint support a plausible allegation that Kraft and Mondelez executed a market power manipulation/corner/squeeze.
  2. A cornerer takes uneconomic deliveries. That is, the deliveries taken are not the cheapest source of the physical commodity for the cornerer. The complaint does not provide sufficient detail to determine with precision whether this was the case here (but discovery will!), but it does include circumstantial evidence. Specifically, Kraft took delivery on the Mississippi, whereas it needed physical wheat at its mill in Toledo. Further, Kraft did not use most of the wheat it bought via delivery. Instead, it sold it, which is consistent with “burying the corpse.” In addition, given cash bids in Toledo and the futures price at which the defendants took delivery, it is highly likely that it was cheaper for Kraft to buy wheat delivered to its mill in Toledo than it was to take delivery (at an opportunity cost equal to the futures price) and pay load out and freight costs to move the wheat from the Mississippi to Toledo. Again, though, the complaint doesn’t provide direct evidence of this.
  3. A cornerer liquidates a large fraction of its futures position: whereas it loses money on the deliveries it takes, it makes money by liquidating futures at a super competitive price. Kraft liquidated more than half its futures position. This provides further evidence that it did not establish its futures position as a means of securing the cheapest source of cash wheat, and is consistent with the execution of a corner/squeeze.
  4. A processor hedging anticipated cash purchases doesn’t buy calendar spreads. The complaint quotes an email stating that Kraft did.
  5. One clunker in the complaint is the allegation that Kraft’s actions “proximately caused cash wheat prices in Toledo to decline.” Market power manipulation when Toledo is not the cheapest to deliver location (as was evidently the case here, as deliveries did not occur in Toledo) would be expected to reduce the Toledo basis (i.e., the difference between the Toledo cash price and the December futures price), and there is some evidence in the complaint that this occurred. But this is different from causing the flat price of wheat to decline, which is what the CFTC alleges. Any coherent theory of market power manipulation implies that a corner or squeeze would increase, or at least not reduce, the cash price at locations where delivery does not occur, but that the rise in the cash price at these locations is smaller than the rise in the futures price (and in the cash price at the delivery location). This results in a compression of the basis, but a rise (or non-decline) in flat prices.
  6. In sum, the complaint presents a plausible case that Kraft-Mondelez executed a market power manipulation.
  7. But the CFTC doesn’t come out and allege a corner, squeeze, or market power manipulation: these words are totally absent. Instead, the agency relies on its shiny new anti-manipulation authority conferred by Frankendodd under section 6(c)(1) of the Commodity Exchange Act, and CFTC Rule 180.1 that it adopted to implement this authority. This is essentially a Xerox of the SEC’s Rule 10b-5, and proscribes the employment of any “deceptive or manipulative device.” That is, this is basically an anti-fraud rule that has nothing to do with market power and therefore it is ill-adapted to reaching the exercise of market power.
  8. The CFTC no doubt is doing this because under 6(c)(1) and Rule 180.1 the CFTC has a lower burden of proof than under its pre-Frankendodd anti-manipulation authority. Specifically, it does not have to show that Kraft-Mondelez had specific intent to manipulate the market, as was the case prior to Dodd-Frank. Instead, “recklessness” suffices. Further, it does not have to demonstrate that the price of wheat was artificial. In my view, the straightforward application of economics permits determination of both specific intent and price artificiality, but earlier decisions like Indiana Farm and in re Cox make it difficult to for the CFTC to do so. Or at least that’s what CFTC believes.
  9. Although I understand the CFTC’s choice, it has jumped from the frying pan into the fire. Why? Well, to mix metaphors, there is a square peg-round hole problem. As I’ve been shouting about for years, fraud-based manipulations and market power manipulations are very different, and using a statute that targets fraudulent (“deceptive”) actions to prosecute a market power manipulation is likely to end in tears because the legal concept does not fit the allegedly manipulative conduct. The DOJ learned this to its dismay in the Radley case (which grew out of the BP propane corner in 2004). Even though BP executed a garden variety corner, the DOJ alleged that the company engaged in a massive fraud. Judge Miller found this entirely unpersuasive, and shot down the DOJ in flames. The CFTC risks the exact same outcome. Tellingly, it asserts in a conclusory fashion that Kraft-Mondelez employed a “deceptive or manipulative contrivance” but doesn’t say: (a) what that device was, (b) how Kraft’s taking of a large number of deliveries deceived anyone, (c) who was deceived, and (d) how the deception affected prices.

It will be interesting to see what happens going forward. The CFTC is obviously using this as a test case of its new authority. Perhaps it thinks it is being crafty (or would that be Krafty?) but I fear that by using a law and rule targeted against fraudulent conduct to prosecute a market power manipulation, the agency will just be finding a new way to screw up manipulation law, thereby undermining, rather than strengthening, deterrence of market power manipulation.

So will the Beastie Boys be singing about the CFTC? We’ll see, but I’m not hopeful.

 

Print Friendly

April 4, 2015

The IECA Libels Me: I Am Oddly Flattered

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Politics,Regulation — The Professor @ 10:22 am

The Industrial Energy Consumers of America has submitted a comment letter on the CFTC’s position limit rule making. The letter contains this libel:

If one looks at the agenda from the February 26, 2015 meeting (see below), other than CFTC presenters, every presenter has views that are not consistent with CFTC action to set speculative position limits. Professor Pirrong has a long history of client paid studies in this area and will need to identify who paid for the underlying data and study for his results to be credible on this subject.

If “this area” is the subject of speculation and position limits, this statement is categorically false. I have not done one “client paid study” on these issues. Period.

In fact, most of my writing on speculation has either been in my academic work (as in my 2011 book), or here on the blog. I have been arguing this issue on my own time.

Actually, I did do one client paid study on these issues about 11 or 12 years ago. For the IECA, in fact, which was just certain that the NYMEX’s expanded accountability limits for natural gas had caused volatility to increase. They hired me to study this issue. I did, using methods that I had employed in peer reviewed research, and found that IECA’s firm beliefs were flatly contradicted by the data: data that IECA paid for, analyzed using methods that were disclosed to it. IECA decided not to release the study. Surprise, surprise. So IECA knows from direct experience that my opinions are not for sale.

So just who here is hiding something? Hint: it ain’t me.

I could provide other examples. The GFMA study on commodity traders is a well known case: it was written up in the Financial Times. Another example that is not as well known was my work on a project for the Board of Trade in 1991-1992, in which I studied the delivery mechanism for corn and soybeans. (The resulting report was published as Grain Futures Markets: An Economic Appraisal.) I concluded that the delivery mechanism was subject to manipulation, and recommended the addition of delivery points at economic par differentials to Chicago. This was not the desired answer. On the day I presented my results to the committee of the CBT that commissioned the study, the chief economist of the exchange pressured me to change my recommendations. I refused. The meeting that followed became heated. So heated, in fact, that the head of the committee and I almost literally came to blows when I refused to back down: committee members from Cargill and ADM actually took the guy bodily from the room until he calmed down.

So the track record is abundantly clear: I call them like I see them, even if it isn’t what the client wants to hear.

In fact, it is IECA’s ad hominem that lacks credibility. My white papers for Trafigura are not related to the issue of speculation at all. To the contrary, they are related to the issue of physical commodity trading. I did a study for CME in 2009 on the performance of the WTI futures contract. Nothing related to speculation. Data sources disclosed, and the methodologies are clearly set out. Again, if IECA has specific critiques of any of these analyses, bring it on. Anytime. Anywhere. And they can leave their libelous insinuations behind.

Perhaps IECA head Paul Cicio is still sore over how I smacked him around at a House Ag committee hearing in July 2008. Cicio said it was obvious that speculation had inflated energy prices. He used the metaphor of a swimming pool: if a bunch of speculators jump in, it has to raise the water level. I retorted that this shows the exact opposite, because all the speculators get out of the pool before contracts go spot. Long speculators are sellers of futures as delivery approaches, meaning they are out of the pool (the physical market) as delivery approaches, and hence can’t be inflating spot prices.

If Cicio is still sore, all I have to say is: Get over it.

To reiterate: IECA’s statement in a document submitted to a government regulatory agency is categorically false, and libelous.

And oddly flattering. You don’t go out of your way to libel the irrelevant. The fact that this organization feels compelled to slur me by name and attack my credibility (even though the attack is false) means that they must believe that I pose a threat to them. I sure as hell hope so.

Word to the wise. Don’t bring a wet noodle to a gunfight. (I cleaned that up.) You’re going to lose.

 

Print Friendly

Next Page »

Powered by WordPress