Streetwise Professor

April 23, 2017

European Elites: Vicious in Victory, Bitter in Defeat

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

The first round of the French presidential election occurred today, with Marine Le Pen winning by about two points, with Emmanuel Macron coming in second. These two will face off in a few weeks, with Macron universally considered to be the inevitable winner, and by a large margin.

It is hard to imagine a more vapid political figure than Macron. His eventual win will therefore be quite gratifying to the Germans, and to the EU, who will have the empty vessel that they desire as French president.

The relief of elite France, and elite Europe, is palpable. Although Le Pen made the final round, the belief that she will be defeated has convinced the elites that the scourge of populism–which they all too often characterize as the second coming of Nazism (thereby gravely insulting their own fellow citizens and trivializing the evils of the Nazis)–has been defeated, and that the European project can continue to sail along, with no correction in course necessary.

A more reflective elite would ask why populism has been so resurgent, and why they have to keep beating it back in country after country–sometimes just barely, and sometimes not at all (e.g., Brexit). A more reflective elite would recognize that their triumphalism, and their insulting of those they have defeated–in this election–will only stoke resentments. A more reflective elite would recognize that populism is flashing a warning that a course correction is desperately in order.

But modern elites in Europe (and in the US too) are anything but reflective. They are smug, arrogant, and dismissive. The ideal is to be magnanimous in victory, gracious in defeat. Modern elites invert that. They are scornful and dismissive and even vicious in victory, and bitter and angry in defeat.

Which is why they may triumph in France in a few weeks, but risk a crushing loss in the longer run. Failing to respond to the rumblings of populism today greatly increases the risk that the EU will fail in the future.

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Cultural Appropriation: The Left’s Latest Power Through Balkanization Play

Filed under: Politics — The Professor @ 6:47 pm

The left’s newest (or one of the newest–it’s hard to keep up) Trojan Horse of tribalism is “cultural appropriation,” e.g., a white person wearing dreadlocks. To illustrate how absurd it has become, consider this article in Teen Vogue–the fact that it is in Teen Vogue also illustrates the thoroughness with which the left attempts to penetrate impressionable minds.

Silly me, but I thought that imitation was the sincerest form of flattery. That one did not want to dress like or eat like or act like or listen to the music of those one despised or detested–quite the opposite.

But no. Apparently “cultural appropriation” is an existential threat. Literally existential. It is increasingly common for college students in particular to say that witnessing an act of cultural appropriation (or hearing a contrary opinion) threatens to annihilate their existence. Annihilate.

Like all things left, this is another mechanism of social control, and a very intrusive one. About as intrusive as possible. Other people are literally telling you what you can wear, how you can style your hair, what entertainment you can enjoy. Based on their claims about the entirely subjective impact of your behavior on them.

The control mechanism works in a variety of ways. One is by creating a cultural Tower of Babel that facilitates divide and conquer.

It is also part of the weakness-is-power strategy, the left’s current preferred MO. A group claims victim status, and alleges its powerlessness at the hands of a group that it hates. Emphasizing their weakness, the aggrieved appeal to the authorities for help. The authorities, who often detest the same group, swoop in to protect the self-proclaimed defenseless victims.

This is a symbiotic relationship between the self-proclaimed marginalized and authorities in certain organizations (academia, surely, and often in government and corporations) that allows them to exercise control over a common enemy.

This helps explain the hyperbolic and hysterical nature of the complaints. “I don’t like that,” or “that hurts my feelings” are hardly grounds for exercising control over what others do or say, right down to their hairstyles. But metaphorical murder–“annihilation of existence”–warrants strenuous action by the authorities.

This trend–and sadly, it is a trend–is profoundly un-American and anti-American. For America has always been a syncretic society. Music is perhaps the best example: American popular music is a veritable Gordian Knot of intricately woven cultural strands. No, the process of amalgamation has never been smooth or easy, but the ideal that there was an American identity that integrated multiple national and cultural identities, and transcended them, made the process work better here than it has worked anywhere else ever.

If it gains traction, the idea that “cultural appropriation” is tantamount to genocide will make not only integration and amalgamation impossible, but it will even make impossible mere peaceful coexistence between disparate groups: live and let live is the antithesis of this movement. It is a recipe for conflict along national, ethnic, cultural, and racial lines. So many borders to be defended. So many existential threats. A war of all against all is the inevitable result.

But that plays right into the hands of progressives who occupy the commanding heights of our institutions, doesn’t it? After all, they must intervene in order to keep the peace. Funny how that works out, isn’t it?

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April 21, 2017

The Left Loses Its Mind (Again!) Over Citgo and Trump

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 5:23 pm

Donald Trump is the left’s Theory of Everything. To be more precise, it is the left’s Theory of Everything Bad.

Latest (nut) case in point: Rachel Maddow is blaming Trump for the riots in Venezuela. No-really!

The theory: the Federal Election Commission revealed that Citgo, a US subsidiary of Venezuela’s national oil company/basketcase PDVSA had donated $500,000 to Trump’s inauguration. According to Maddow, this sent Venezuela’s citizenry, which is reeling under an economic catastrophe wrought by Chavez, Maduro, and “Bolivarian Socialism”–a cause that the left from Bernie Sanders to Danny Glover to many others has swooned over for years–into paroxysms of rage at the thought that their national patrimony was paying to honor the evil Trump.

To start with, there have been violent protests in Venezuela for years. The country is facing economic collapse. PDVSA has been looted by the Chavistas for going on 15 years now, and is a complete wreck. $500K is chump change compared to what the leftist darlings have stolen from the company, or destroyed through their grotesque mismanagement–would that the left shown equal concern over THAT. The country is on the verge of hyperinflation. There are food lines. There is no toilet paper–unless you count the currency the Venezuelan central bank is cranking out like nobody’s business. I could go on and on.

So no, Rachel. The Citgo contribution to the inaugural fund–which represents less than .5 percent of the total raised–is not even a piece of dust on the straw on the camels back: the camel’s back was broken long ago, by the vanguard of socialism that Rachel Maddow and her crowd lionized for years. The rage of the Venezuelan people is directed precisely where it should be: at Maduro, the Bolivarian revolution, and the dirt-napping Chavez.

Maddow’s attempt to lay Venezuela’s social explosion at Trump’s feet is very revealing. She and her ilk think that everything is about us–the US that is. Everything. And now in the minds of her and her ilk, everything in the US is all about Trump. So everything everywhere is all about Trump, and supposedly everyone in the world is as obsessed with Trump as they are, and blame him for all that is bad in the world, like they do.

This is clinical solipsism, broadcast live on MSNBC and CNN daily.

And in fact, Rachel should be ecstatic at Citgo’s donation. The company wasn’t spending the money of the Venezuelan people–it was spending Igor Sechin’s money! Rosneft brilliantly–brilliantly I say!–lent PDVSA $5 billion, and negotiated a 50 percent stake in Citgo as partial security. (Rosneft’s brilliance is only surpassed by the Chinese, who lent Venezuela $55 billion. Hahahaha. Good luck collecting on that one Xi! Well played.) Given PDVSA’s parlous condition, it is highly likely that Rosneft will get control of Citgo, meaning that every dollar it spends now is a dollar less in Igor’s pocket.

So the left should be happy! Trump has picked Russia’s pocket!

But no, they are also obsessing about the possibility that Rosneft will get control of Citgo’s US refineries (which represent a whopping ~2.5 percent of US refining capacity) and its gas stations (who cares?). The refineries ain’t going anywhere, so the impact on the US market will be nil. Anything Rosneft would do in operating these refineries that could hurt the US would hurt Rosneft even more. So don’t count on it happening, and if it does, it would be another own goal that weakens Russia.

Again, the left should be experiencing schadenfreude, not panic. Rosneft lent large money to a deadbeat. It’s not going to get paid back so it is seizing assets, and will end up losing money. Playing repo man is hardly the road to riches. It just mitigates the losses from making a bad loan, and it is the bad loan that is the real story here.

But to figure that out would require actual thinking, which is not exactly the strong point of Rachel, et al. Because they have everything figured out. Trump did it! And if Trump is connected, it’s bad!

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April 15, 2017

Is the Order Handling Rule Necessary to Ensure Intense Competition in Securities Markets?

Filed under: Commodities,Derivatives,Economics,Exchanges,Regulation — The Professor @ 2:01 pm

A couple of weeks back Acting SEC Chairman Mike Piwowar announced a new Special Study of the Securities Markets, a reprise of the 1963 Special Study. This is an excellent idea, given that RegNMS (adopted in 2005) has (as was inevitable) spawned many unintended and unexpected consequences. Revision of this regulation in light of experience is almost certainly warranted, and any such revision should be predicated on sound scholarship, lest it be merely a Trojan Horse for vested interests arguing their books.

I wrote about RegNMS in Regulation at the time of its adoption in a piece titled “The Thirty Years War” (an allusion to the fact that the establishment of the National Market System in 1975 had sparked a continuing clash over securities market structure). Overall, I think that piece stands up well, particularly my concluding paragraph:

Therefore, the proposed rules are not the final battle in a Thirty Years War. I fully expect that in 2075, some professor will write an article about the latest clash in an ongoing Hundred Years War over securities market structure regulation.

It is certainly the case that the controversies and conflicts over market structure have continued unabated since 2005, and show no signs of letting up. (Cf. Flash Boys.) Chairman Piwowar’s call for a new Special Study is testament to that.

More specifically, the major prediction of my article has been fully borne out. I predicted that the Order Protection Rule in particular would break the network effect that resulted in the dominance of the NYSE in the securities it listed. Since RegNMS was passed, the highly concentrated listed stock market (where virtually all price discovering transactions in NYSE stocks occurred on the NYSE) has been utterly transformed, with four exchanges now splitting most of the business, with no exchange doing more than a quarter of the volume.

I further predicted that this would result in the disintermediation of traditional intermediaries–like specialists–and the substantial erosion of economic rents. This too has happened. This is best illustrated by the trajectory of Goldman’s investment in specialist firm Spear, Leeds & Kellogg. Goldman paid $5.4 billion for it in 2000 (before RegNMS) and sold it for a pittance–$30 million–in 2014. I didn’t foresee exactly the nature or identity of the new intermediaries–HFT–but I was broadly aware that there would be entry into market making, and that this would reduce trading costs and undermine incumbents with market power. Further, as I’ve written about recently, the new intermediaries don’t appear to be making rents in the new equilibrium.

The years since RegNMS have seen a dramatic decline in trading costs for investors, and it is likely the case that this decline is largely attributable to the increase in competition. Much of the controversy that has raged since 2005 relates to disputes over trading practices that were an inevitable consequence of the breaking of the NYSE near-monopoly–a process pejoratively referred to as “fragmentation.” In particular, multiple markets necessitate arbitrageurs, who effectively enforce the law of one price. The strategies and tactics arbitraguers use often appear unsavory, and strike many as unfair: arbitrageurs get something even though they appear to do nothing substantive. Moreover, arbitrage uses up real resources. That’s costly, and it would be nice if this could be avoided, but that’s unlikely ever to be so. The trade-off between much greater competition (and reduced welfare losses due to the exercise of market power) and the expenditure of real resources to enforce the law of one price seems to be a great bargain.

Much of the criticism of RegNMS relates to the Order Protection Rule, which requires that no order can be executed on market X if a better price is displayed at market Y. The critics (e.g., the Principal Traders Association which ironically represents some of the biggest beneficiaries of RegNMS) argue that this rule (a) has led to a proliferation of order types intended to ensure compliance with the rule, which make the market far more complex, and (b) requires traders to maintain connections with and monitor all trading venues displaying quotes, no matter how small.

These complaints have some merit. The crucial question is whether the equity trading marketplace will be as competitive without the Order Handling Rule as it is with it. This is an open question, and one which should be the focus of the SEC’s inquiry. For if the Order Handling Rule is a necessary condition for robust competition, the costs that the PTA and others identify are likely well worth paying in order to realize the benefits of competition.

My prediction that competition would intensify post-RegNMS was based on my analysis of the effects of the Order Handling Rule, which was in turn based on my work on liquidity network effects done in the late-90s and early-00s. Specifically, in the formal models I derived (e.g., here), the self-reinforcing liquidity effect obtains when investors decide which trading venue to submit an order to on the basis of expected execution cost (i.e., bid-ask spread, price impact). The market with the bigger fraction of trading activity typically offers the lowest execution cost. Therefore, traders submit their orders to the bigger market. This creates a self-reinforcing feedback loop (and a self-fulling prophecy) in which trading activity “tips” to a single exchange. (There are some complexities here, relating to cream skimming of uninformed order flow. See the linked paper for a discussion of that issue.)

Mandating something akin to to the order handling rule forces order flow to the market offering the best price at a particular moment, not the one that offers the best price in expectation. As I phrased it in my Regulation paper, such a rule “socializes order flow”: even if an order is directed to a particular exchange, that exchange does not control that order flow and must direct to any other exchange offering a better price.

I think that both theory and the post-RegNMS experience show that the Order Handling Rule is sufficient to break the liquidity network effect because it socializes order flow. But is it necessary? Maybe not, but it is important to try to find out before jettisoning it.

Here’s a story which suggests that the rule is not necessary in the modern electronic trading environment. One reason why traders may choose to submit orders to where they expect to get the best execution is because of search costs. In a floor-based environment in particular, it is costly to verify which market is offering the best price at any time.  Moreover, since it takes time get quotes from two floor-based markets, by the time that you actually submit your order to the one giving the best quote, the market will have moved and you won’t get the price you thought you were going to get. So economize on search costs and the risks associated with delay by submitting the order to the market that usually offers the best price. Ironically, the inevitable result of this process is that there is only one market left standing.

Search is cheaper and faster–and arguably far cheaper and far faster–in the modern electronic environment. Based on feeds from multiple markets, an electronic trader (and in particular an automated trader) can rapidly compare quotes and send an order to the market offering the best quote, or by viewing depth (something pretty much impossible in the floor days, where much of the liquidity was in the hands of floor brokers) split an order among multiple venues to tap the liquidity in all of them.

In other words, the natural monopoly problem was far more likely in a floor-based environment where pre-trade transparency was so limited that search costs were very high: it was nigh on impossible to know precisely what trading opportunities were or to move fast enough to exploit the one that appeared best at any point in time, so traders submitted their orders to where they expected the opportunities to be the best. In contrast, electronification and automation have created such great pre-trade transparency and the ability to act on it that it is plausibly true that in this environment traders can and will submit their orders to whatever venue is offering the best trading opportunity at a point in time, regardless of whether it usually does so. In this story, technology eliminates the uncertainty and guesswork that created the liquidity network effect.

Maybe. Perhaps even likely. But I can’t be certain. Note that one complaint about the existing market structure is that even though everything has vastly speeded up, some traders are still faster than others. As a result, those who submit a market order in response to seeing a particular displayed price are often dismayed to learn that the market has moved before their order actually reaches the trading venue, and that their order is executed at a worse price than they had anticipated. Freed of the obligations of the Order Handling Rule, these traders may choose to submit their order to where they usually get the best price: if enough do this, the liquidity network effect will reemerge.

Further, the PTA and others have complained that it is costly to monitor and maintain connections with all trading venues as is necessary under the Order Handling Rule. If the Rule is relaxed or eliminated, one would expect that they will disconnect from some venues. If enough do this, the smaller venues will become unviable. After this happens, there will be fewer venues–and some traders may choose to disconnect from the smallest remaining one. This dynamic could result in another feedback loop that results in the survival of a single dominant exchange that exercises market power.

It is therefore not clear to me that elimination of the Order Handling Rule will result in traders having their cake (intense inter-exchange competition) and eating it too (less complexity, lower connection cost). Given the substantial benefits of greater competition that have been realized in the past dozen years, changes to the cornerstone of RegNMS should not be taken lightly. The Special Study, and the SEC, should pay close attention to how competition will evolve if the Order Handling Rule is eliminated. This analysis should take into account the existing technology, but also try to think of how technology will change in the aftermath of an elimination and how this technological change will affect competition.

Most importantly, any analysis must be predicated on an understanding that there are strong centripetal forces in securities trading. Any time traders have an incentive to direct order flow to the venue that is expected to offer the best price, the likely outcome is that only one venue will survive. The incentives of traders in a high speed, largely automated, and electronic market in the absence of an Order Handling Rule need to be considered carefully. It should not be assumed that technology alone will eliminate the incentive to direct orders to the market that is usually best, not the one that is best at any particular instant. This hypothesis should be probed vigorously and skeptically.

Experience in futures markets suggests that liquidity network effects can persist even in high speed, automated, electronic markets: futures contracts in a particular instrument exhibit a strong natural monopoly tendency, and strong tendencies towards tipping. It is arguable that the vertical integration of clearing, and the resulting non-fungibility of otherwise identical contracts traded on different venues, could contribute to this (though I am skeptical about that). But it could also mean that something like the Order Handling Rule (which is not present in futures markets) is necessary to create strong competition between multiple venues even in a highly computerized and automated trading environment.

This is the big issue in any revamping of RegNMS. It should be front and center of any analysis, including in the impending Special Study. The intense competition in the post-RegNMS world is a remarkable achievement, particularly in comparison with the near monopolistic market structure that existed before 2005. It would be a great shame if this were thrown away due to an incomplete analysis of what competition in a modern computerized market would be like in the absence of something like the Order Handing Rule.

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April 14, 2017

SWP Climbs The Hill

Filed under: Derivatives,Economics,Exchanges,Regulation — The Professor @ 10:40 am

I have become a regular contributor to The Hill. My inaugural column on the regulation of spoofing is here. The argument in a nutshell is that: (a) spoofing involves large numbers of cancellations, but so do legitimate market making strategies, so there is a risk that aggressive policing of spoofing will wrongly penalize market makers, thereby raising the costs of supplying liquidity; (b) the price impacts of spoofing are very, very small, and transitory; (c) enforcement authorities sometimes fail to pursue manipulations that have far larger price impacts; therefore (d) a focus on spoofing is a misdirection of scarce enforcement resources.

My contributions will focus on finance and regulatory issues. So those looking for my trenchant political commentary will have to keep coming here 😉

Click early! Click often!

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April 9, 2017

Down the Syrian Rabbit Hole

Filed under: China,History,Military,Politics,Russia — The Professor @ 12:15 pm

The Syria story has many threads. I’ll address a few of them here.

First, to follow on Ex-Regulator’s comment: Trump’s initial public justification for the strike–the humanitarian impulse stirred by pictures of dying children–is deeply troubling. Sentimentality is a poor basis for policy. In particular, it has no limiting principle. If you take a tragic view of humanity–if you view mankind as fallen and flawed–you know that there is a virtually unending supply of sad, heartbreaking, stories. So how does a president choose which appeal to answer? And how do people know which appeals he will answer? Truth is, we have no idea. The line will be arbitrary, which leads to unpredictable, inconsistent policy.

Further, as Ex-Reg notes, by emphasizing his susceptibility to sentimentality, Trump makes himself a target for manipulation. These manipulations are likely to include false flags whereby those attempting to get the US to intervene on their side create an outrage to pin on their opponents: it cannot be precluded that this occurred in Syria last week.

Second, in subsequent remarks by others than Trump, the administration has downplayed the humanitarian aspect, and emphasized the signaling motivation. Moreover, it has explicitly stated that the signal was not directed at Assad alone, or even Putin and Assad, but also at Kim Jung Un and the Chinese.

My concern here is the Rolling Thunder problem: the signal that you think you are sending through a limited use of force is not necessarily the signal that your intended audience hears. What happened in Vietnam during the Johnson years was that graduated escalation was interpreted by Ho Chi Minh et al as weakness, and as an unwillingness to take decisive action. Assad or Kim Jung Rolly Poly may conclude that they can easily absorb a strike like the one launched Thursday night, and that Trump may not be willing to go much further. Or, they may conclude that (a) this strike was so modest, (b) Trump is likely to engage in graduated escalation if he escalates at all, and (c) they can absorb much heavier blows. Either way, they could be encouraged, rather than deterred.

Lesson from Vietnam (pun intended): if you want to achieve a decisive outcome, Linebacker trumps Rolling Thunder.

Of course, one reason for Johnson’s reticence in Vietnam was the risk of drawing in the USSR or China. That’s obviously an issue in Syria and North Korea. But if that is the real concern, don’t even start down the road with a limited strike. If you do, eventually you will pull up short and look feckless.

Third, the administration is sending extremely mixed signals. Last week, Tillerson said point blank that regime change was not on the administration’s agenda. This morning, Nikki Haley intimated that it is. Given that no matter how horrid the Assad regime any successor is likely to be as bad or worse, that regime change is even on the table is highly disturbing.

Fourth, assessing whether the chemical attack was a false flag or a regime attack requires an evaluation of the plausibility that Assad would do such a thing. As Dearieme and Ex-Reg note, and as I noted initially, it does not seem rational for Assad to have taken this action. It certainly was not a military necessity. But people like Assad think differently, and there may be some Machiavellian reason for him to take this action.

One is that he, like everyone else, is trying to fathom Trump’s policy, and Trump himself. Therefore, Assad ran a calculated risk to see how Trump would respond to a pretty extreme provocation. As suggested above, he might be pleased with the answer (contrary to DC conventional wisdom).

Another is that he needed to bind Russia and Iran closer to him. Again running a calculated risk that they would stand with him rather than abandon him (for that would call into question their previous policy of support), he launched this attack and forced them to be complicit in a very inflammatory war crime.

Relatedly, one of Assad’s big fears has to be a rapprochement between Russia and the US that would make him expendable. The Russians had guaranteed that he had eliminated chemical weapons. That guarantee is now shown to be inoperative, either due to (as Tillerson said) deliberate deception or incompetence. Regardless, now no deal with the Russians regarding Assad can be considered credible. This reduces the risk that the Russians will be able to cut a deal with Trump that makes Assad expendable.

I have no idea whether these possibilities are realities. I just put them out there to highlight that there can be twisted motives that cause people like Assad to take actions that seem to be against their interest–just as there can be twisted motives for jihadis to kill their own in horrible ways.

Fifth, Occam’s Razor would say that Trump’s attack completely undercuts the narrative that he is Putin’s bitch. But Occam’s Razor is an alien concept in the fever swamps of the left. The certifiably insane (Louise Mensch) and the hyper partisan but supposedly sane (Lawrence O’Donnell, Chris Matthews) certain have never shaved with it. They are claiming that this proves Trump is Putin’s bitch! The “reasoning”? He is doing it because the most likely interpretation is that it shows that Trump isn’t Putin’s bitch, so that means that he is! Or something.

In other words, this lot interprets everything that Trump does as evidence of his collusion with the Russians. This means that the hypothesis that he is in collusion with Putin is unfalsifiable, and hence is junk reasoning. It should therefore be rejected, as should anything that those who espouse this theory say.

Lastly, the attack is a complete embarrassment to the Obama administration, which preened and bragged that it had rid the Assad regime of chemical weapons. All of the administration weasels–Susan Rice, Ben Rhodes, Colin Kahl among them–have been quick to defend the administration. Although Obama remains silent, their voices were joined by the next most authoritative one–John Kerry–who ranted against the airstrike. He claimed that the Obama administration had accomplished MUCH more without firing so much as a shot, and that Trump’s attack will undermine all of the great progress that had been achieved.

But watch the weasels’ weasel words. They all say that the 2013 agreement eliminated all of Assad’s declared chemical weapons. Um, the criticism of the deal all along was that Assad might have undeclared stocks, and hence might retain a chemical capability despite the deal. It is beyond embarrassing that these people would protest so stridently that their deal was great in the face of an event which most likely shows that it was a complete, and completely predictable, sham.

So is Kerry’s outraged response to the Tomahawk Chop delusional? Chutzpah? I’m going with delusional chutzpah.

It’s almost tax time. So I suggest that you implement the following strategy, and cite the authority of John Kerry as justification. Report 50 percent of your actual income on your 2016 1040. When the IRS comes after you, tell them–in high dudgeon: How dare you! I paid all I owed on my DECLARED income! Good luck! I’ll write you in jail!

The alternative explanation for the chemical attack–a false flag–hardly provides any cover for Obama and the Obamaites because that would mean that the chemical attack was launched by opposition forces that the administration supported. So, either the administration entered into a farcical deal, and was played the fool by Assad, or it was played the fool by anti-Assad forces whom it had supported.

People with any decency would don sackcloth and ashes and plead forgiveness. But we are talking about the Obama administration, so  . . .

Perhaps there will be more clarity on all these issues in coming days and weeks. But I kind of doubt it. Any venture into understanding Syria is a trip down the rabbit hole. And given the depravity of all the actors involved, that’s yet further reason to stay as far away from this mess as is humanly possible.

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April 7, 2017

Trump, Putin, and the Tomahawk Chop

Filed under: China,History,Military,Politics,Russia — The Professor @ 9:14 pm

President Trump ordered a cruise missile strike on a Syrian air base that was allegedly the launching point of a sarin attack on a town in the Idlib  Governate. My initial take is like Tim Newman’s: although the inhumanity in Syria beggars description, getting involved there is foolish and will not end well.

The Syrian conflict is terrible, but Syria makes the snake pit in Indiana Jones and the Temple of Doom look hospitable.

Further, the politics of Syria (both internally, and in the region) make the intrigues of Game of Thrones seem like child’s play by comparison. So I agree with Tim:

Every course of action I can think of other than “fuck ’em” has an almost zero chance of succeeding in its aims and a very high chance of making things worse.

. . . .

It’s not through moral principle that I am saying this, it is from practicality based on fourteen years of recent, bloody experience: Assad is a monster, the Russian government is showing the world exactly what they are like by backing him, and the Syrian people are suffering terribly, but there is nothing – nothing – we can do about it. It is a terrible indictment on the state of the world, but a policy of “fuck the lot of ’em” is the only workable one on the table right now. It’s high time our leaders started taking it seriously.

To put it slightly differently. Good intentions mean nothing. Results and consequences do. I am at a loss to think of any policy with results and consequences that accord with good intentions. Indeed, it almost inevitable that any major military intervention would not save Syrian lives but would cost American ones.

Truth be told, given the devastation wreaked on children, women, and men in Syria by bombs, shells, small arms and even throat-slashing blades, chemical weapons do not represent a quantum shift in the horribleness of the Syrian war. Dead is dead, and periodic use of chemical weapons does not materially affect the amount of dying that is going on. Assad–and the Islamists he is fighting–have killed and maimed far more innocent civilians with conventional weapons than with chemical ones.  The use of chemical weapons does not represent a fundamental shift in the nature of the war, which was already a total war waged without restraint against civilians by all sides (would that there were only two sides in Syria).

Insofar as Trump’s action is concerned, it is best characterized as a punitive strike. And as punitive strikes go, it is modest. It bears more similarity to Clinton strikes in Iraq (e.g., Desert Fox) than Reagan’s Operation El Dorado Canyon in 1986, which put the fear of god into Gaddafi: a 2000 pound bomb dropped near one’s tent has a tendency to do that. In contrast, Thursday’s Tomahawk detonations wouldn’t have disturbed Assad’s sleep in the slightest, let alone put him in mortal danger.

The record of such punitive actions in curbing the misbehavior of bad actors like Saddam or even Gaddafi is hardly encouraging, but at least the downside (to the US) of such indulgences of the Jupiter Complex is rather limited. The concern is that the raid turns out to be ineffectual in moderating Assad’s behavior and leads to Trump to escalate, and to make regime change–rather than a change of regime behavior–the objective. The neocons are celebrating and baying for more: that should be a cause for serious concern.

And I don’t think that this was exclusively about Syria, or even primarily so. The Tomahawks might have landed in Syria, but in a very real sense they were aimed at North Korea.  It is significant that Trump launched the attack while Chinese premier Xi was still digesting the steak he had eaten with the president.

Russia is clearly processing the message. The Russians are obviously angered. One would think that this puts paid to the Trump is Putin’s bitch narrative. But that would assume sanity on the part of the left and the Never Trumpers, who are anything but sane.

The prospects for some rapprochement between the US and Russia were already on life support, now they appear to be dead and buried. This reinforces a point I’ve made for months: that if Putin really did think that a Trump presidency would be better for him than a Clinton one, he made a grave miscalculation. This event proves that Trump is predictably unpredictable, and that he is completely capable of a volte face at a moment’s notice. The word I used was “protean”, and the decision to fire off a barrage of cruise missiles after months-years, in fact-of criticizing the idea of American intervention in Syria is about as protean as you get.

This points to a broader message. For all his alleged tactical acumen, Putin has stumbled from one strategic blunder to another. It is highly unlikely that Russian involvement, whatever it was, materially impacted the US election: its impact has been exaggerated for purely partisan and psychological reasons. It is also highly unlikely that any Russian meddling in European elections will sway them in favor of pro-Putin candidates.

But Russia has paid a steep price for these equivocal gains: Russian actions have created political firestorms not just in the US but in Europe that have actually increased Russian isolation. Hysteria in America about Russian meddling in US politics is vastly overblown, and has been ginned up for partisan reasons, but that is irrelevant as a practical matter: it has made the US-Russia relationship more adversarial than it has been since the height of the Cold War, and that works to Russia’s detriment.

His support for Assad in Syria has had similar effects. Yes, Putin achieved his immediate objective: Assad has survived, and looks likely to prevail. But Russia has only cemented its pariah status. The chemical attack makes it even more than a pariah. For what? Syria’s strategic value is minimal.

Indeed, the chemical attack is not just a crime, but a blunder, and puts Putin and Russia in an even worse spot. The action appears so militarily unnecessary and politically counterproductive that like Scott Adams, it raises doubts in my mind as to whether Assad actually ordered it. (The alternative explanations include a rogue general or a false flag carried out by the opposition.) But this is largely irrelevant: Assad is almost universally blamed, and as his stalwart defender, Putin and Russia have been deemed guilty of being accessories to and enablers of what is just as universally considered a war crime. By going all in for Assad, Putin made himself vulnerable to this. (That might provide a Machiavellian motive for Assad’s action: maybe he thought that the chemical attack would bind Putin even more closely to him.)

So by intervening in Syria, and defending Assad even in the aftermath of a widely reviled chemical attack, what has Putin gained? Yes, he had the satisfaction of showing Obama (and in his mind, the US as a whole) to be feckless, all grandiose talk and no action. He could claim to have reversed Russia’s retreat from the Middle East. He could assert that Russia is back and must be reckoned with in world affairs. He apparently experienced great personal satisfaction as a result of these accomplishments.

But viewed more soberly, these gains are more than offset by losses on the other side of the ledger. Russia is isolated, distrusted, feared, and reviled. It’s not entirely fair, but it should have been predictable. Moreover, nothing that Putin has done has improved what the Soviets called the correlation of forces. Indeed, although Russia has rejuvenated its military to some degree, other elements of national power (relative to the US) have slipped since 2008, and a Trump presidency will almost certainly erase the relative change in military power that occurred during Russian rearmament and the American sequester.

The simple fact is that other than in nuclear weapons, Russia cannot compete with the US, let alone the entire west. By achieving limited victories in strategic backwaters like Syria, all Putin has succeeded in doing is goading the US and the west into viewing him as a threat and sparking a competition that he can’t win.

But Putin has staked a great deal on Syria, in terms of both national and personal prestige. He is not the kind of man to back down and lose face after putting down such a stake. For his part, after claiming benign indifference to who rules Syria, the protean Trump has reversed course, and in so doing has put his own reputation on the line over who rules there, or at least how the man who rules there behaves. That is a combustible mix, and I have no idea how it will turn out.

But I am sure of how things will not turn out. Sore election losers’ dystopian fantasy of Trump selling out to Putin will never become reality. In fact, the reverse is more likely. Indeed, this could develop into a reversal of Reagan-Gorbachev. Then, two bitter antagonists found enough common ground to come to an understanding and ratchet down Cold War tensions. Now, two alleged members of a mutual admiration society are likely to find themselves in an increasingly antagonistic relationship, in yet further proof of my axiom that if you want to find the truth, you could do far worse than to invert elite conventional wisdom.



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April 4, 2017

The Unintended Consequences of Blockchain Are Not Unpredictable: Respond Now Rather Than Repent Later*

Filed under: Clearing,Commodities,Derivatives,Economics,Regulation — The Professor @ 3:39 pm

In the past week the WSJ and the FT have run articles about a new bank-led initiative to move commodity trading onto a blockchain. In many ways, this makes great sense. By its nature, the process of recording and trading commodity trades and shipments is (a) collectively involve large numbers of spatially dispersed counterparties, (b) have myriad terms, and (c) can give rise to costly disputes. As a result of these factors, the process is currently very labor intensive, fraught with operational risk (e.g., inadvertent errors) and vulnerable to fraud (cf., the Qingdao metals warehouse scandal of 2014). In theory, blockchain has the ability to reduce costs, errors, and fraud. Thus, it is understandable that traders and banks are quite keen on the potential of blockchain to reduce costs and perhaps even revolutionize the trading business.

But before you get too excited, a remark by my friend Christophe Salmon at Trafigura is latent with deep implications that should lead you to take pause and consider the likely consequences of widespread adoption of blockchain:

Christophe Salmon, Trafigura’s chief financial officer, said there would need to be widespread adoption by major oil traders and refiners to make blockchain in commodity trading viable in the long term.

This seemingly commonsense and innocuous remark is actually laden with implications of unintended consequences that should be recognized and considered now, before the blockchain train gets too far down the track.

In essence, Christophe’s remark means that to be viable blockchain has to scale. If it doesn’t scale, it won’t reduce cost. But if it does scale, a blockchain for a particular application is likely to be a natural monopoly, or at most a natural duopoly. (Issues of scope economies are also potentially relevant, but I’ll defer discussion of that for now.)

Indeed, if there are no technical impediments to scaling (which in itself is an open question–note the block size debate in Bitcoin), the “widespread adoption” feature that Christophe identifies as essential means that network effects create scale economies that are likely to result in the dominance of a single platform. Traders will want to record their business on the blockchain that their counterparties use. Since many trade with many, this creates a centripetal force that will tend to draw everyone to a single blockchain.

I can hear you say: “Well, if there is a public blockchain, that happens automatically because everyone has access to it.” But the nature of public blockchain means that it faces extreme obstacles that make it wildly impractical for commercial adoption on the scale being considered not just in commodity markets, but in virtually every aspect of the financial markets. Commercial blockchains will be centrally governed, limited access, private systems rather than a radically decentralized, open access, commons.

The “forking problem” alone is a difficulty. As demonstrated by Bitcoin in 2013 and Ethereum in 2016, public blockchains based on open source are vulnerable to “forking,” whereby uncoordinated changes in the software (inevitable in an open source system that lacks central governance and coordination) result in the simultaneous existence of multiple, parallel blockchains. Such forking would destroy the network economy/scale effects that make the idea of a single database attractive to commercial participants.

Prevention of forking requires central governance to coordinate changes in the code–something that offends the anarcho-libertarian spirits who view blockchain as a totally decentralized mechanism.

Other aspects of the pure version of an open, public blockchain make it inappropriate for most financial and commercial applications. For instance, public blockchain is touted because it does not require trust in the reputation of large entities such as clearing networks or exchanges. But the ability to operate without trust does not come for free.

Trust and reputation are indeed costly: as Becker and Stigler first noted decades ago, and others have formalized since, reputation is a bonding mechanism that requires the trusted entity to incur sunk costs that would be lost if it violates trust. (Alternatively, the trusted entity has to have market power–which is costly–that generates a stream of rents that is lost when trust is violated. That is, to secure trust prices have to be higher and output lower than would be necessary in a zero transactions cost world.)

But public blockchains have not been able to eliminate trust without cost. In Bitcoin, trust is replaced with “proof of work.” Well, work means cost. The blockchain mining industry consumes vast amounts of electricity and computing power in order to prove work. It is highly likely that the cost of creating trusted entities is lower than the cost of proof of work or alternative ways of eliminating the need for trust. Thus, a (natural monopoly) commercial blockchain is likely to have to be a trusted centralized institution, rather than a decentralized anarchist’s wet-dream.

Blockchain is also touted as permitting “smart contracts,” which automatically execute certain actions when certain pre-defined (and coded) contingencies are met. But “smart contracts” is not a synonym for “complete contracts,” i.e., contracts where every possible contingency is anticipated, and each party’s actions under each contingency is specified. Thus, even with smart (but incomplete) contracts, there will inevitably arise unanticipated contingencies.

Parties will have to negotiate what to do under these contingencies. Given that this will usually be a bilateral bargaining situation under asymmetric information, the bargaining will be costly and sometimes negotiations will break down. Moreover, under some contingencies the smart contracts will automatically execute actions that the parties do not expect and would like to change: here, self-execution prevents such contractual revisions, or at least makes them very difficult.

Indeed, it may be the execution of the contractual feature that first makes the parties aware that something has gone horribly wrong. Here another touted feature of pure blockchain–immutability–can become a problem. The revelation of information ex post may lead market participants to desire to change the terms of their contract. Can’t do that if the contracts are immutable.

Paper and ink contracts are inherently incomplete too, and this is why there are centralized mechanisms to address incompleteness. These include courts, but also, historically, bodies like stock or commodity exchanges, or merchants’ associations (in diamonds, for instance) have helped adjudicate disputes and to re-do deals that turn out to be inefficient ex post. The existence of institutions to facilitate the efficient adaption of parties to contractual incompleteness demonstrates that in the real world, man does not live (or transact) by contract alone.

Thus, the benefits of a mechanism for adjudicating and responding to contractual incompleteness create another reason for a centralized authority for blockchain, even–or especially–blockchains with smart contracts.

Further, the blockchain (especially with smart contracts) will be a complex interconnected system, in the technical sense of the term. There will be myriad possible interactions between individual transactions recorded on the system, and these interactions can lead to highly undesirable, and entirely unpredictable, outcomes. A centralized authority can greatly facilitate the response to such crises. (Indeed, years ago I posited this as one of the reasons for integration of exchanges and clearinghouses.)

And the connections are not only within a particular blockchain. There will be connections between blockchains, and between a blockchain and other parts of the financial system. Consider for example smart contracts that in a particular contingency dictate large cash flows (e.g., margin calls) from one group of participants to another. This will lead to a liquidity shock that will affect banks, funding markets, and liquidity supply mechanisms more broadly. Since the shock can be destabilizing and lead to actions that are individually rational but systemically destructive if uncoordinated, central coordination can improve efficiency and reduce the likelihood of a systemic crisis. That’s not possible with a radically decentralized blockchain.

I could go on, but you get the point: there are several compelling reasons for centralized governance of a commercial blockchain like that envisioned for commodity trading. Indeed, many of the features that attract blockchain devotees are bugs–and extremely nasty ones–in commercial applications, especially if adopted at large scale as is being contemplated. As one individual who works on commercializing blockchain told me: “Commercial applications of blockchain will strip out all of the features that the anarchists love about it.”

So step back for a minute. Christophe’s point about “widespread adoption” and an understanding of the network economies inherent in the financial and commercial applications of blockchain means that it is likely to be a natural monopoly in a particular application (e.g., physical oil trading) and likely across applications due to economies of scope (which plausibly exist because major market participants will transact in multiple segments, and because of the ability to use common coding across different applications, to name just two factors). Second, a totally decentralized, open access, public blockchain has numerous disadvantages in large-scale commercial applications: central governance creates value.

Therefore, commercial blockchains will be “permissioned” in the lingo of the business. That is, unlike public blockchain, entry will be limited to privileged members and their customers. Moreover, the privileged members will govern and control the centralized entity. It will be a private club, not a public commons. (And note that even the Bitcoin blockchain is not ungoverned. Everyone is equal, but the big miners–and there are now a relatively small number of big miners–are more equal than others. The Iron Law of Oligarchy applies in blockchain too.)

Now add another factor: the natural monopoly blockchain will likely not be contestible, for reasons very similar to the ones I have written about for years to demonstrate why futures and equity exchanges are typically natural monopolies that earn large rents because they are largely immune from competitive entry. Once a particular blockchain gets critical mass, there will be the lock-in problem from hell: a coordinated movement of a large set of users from the incumbent to a competitor will be necessary for the entrant to achieve the scale necessary to compete. This is difficult, if not impossible to arrange. Three Finger Brown could count the number of times that has happened in futures trading on his bad hand.

Now do you understand why banks are so keen on the blockchain? Yes, they couch it in terms of improving transactional efficiency, and it does that. But it also presents the opportunity to create monopoly financial market infrastructures that are immune from competitive entry. The past 50 years have seen an erosion of bank dominance–“disintermediation”–that has also eroded their rents. Blockchain gives the empire a chance to strike back. A coalition of banks (and note that most blockchain initiatives are driven by a bank-led cooperative, sometimes in partnership with a technology provider or providers) can form a blockchain for a particular application or applications, exploit the centripetal force arising from network effects, and gain a natural monopoly largely immune from competitive entry. Great work if you can get it. And believe me, the banks are trying. Very hard.

Left to develop on its own, therefore, the blockchain ecosystem will evolve to look like the exchange ecosystem of the 19th or early-20th centuries. Monopoly coalitions of intermediaries–“clubs” or “cartels”–offering transactional services, with member governance, and with the members reaping economic rents.

Right now regulators are focused on the technology, and (like many others) seem to be smitten with the potential of the technology to reduce certain costs and risks. They really need to look ahead and consider the market structure implications of that technology. Just as the natural monopoly nature of exchanges eventually led to intense disputes over the distribution of the benefits that they created, which in turn led to regulation (after bitter political battles), the fundamental economics of blockchain are likely to result in similar conflicts.

The law and regulation of blockchain is likely to be complicated and controversial precisely because natural monopoly regulation is inherently complicated and controversial. The yin and yang of financial infrastructure in particular is that the technology likely makes monopoly efficient, but also creates the potential for the exercise of market power (and, I might add, the exercise of political power to support and sustain market power, and to influence the distribution of rents that result from that market power). Better to think about those things now when things are still developing, than when the monopolies are developed, operating, and entrenched–and can influence the political and regulatory process, as monopolies are wont to do.

The digital economy is driven by network effects: think Google, Facebook, Amazon, and even Twitter. In addition to creating new efficiencies, these dominant platforms create serious challenges for competition, as scholars like Ariel Ezrachi and Maurice Stucke have shown:

Peter Thiel, the successful venture capitalist, famously noted that ‘Competition Is for Losers.’ That useful phrase captures the essence of many technology markets. Markets in which the winner of the competitive process is able to cement its position and protect it. Using data-driven network effects, it can undermine new entry attempts. Using deep pockets and the nowcasting radar, the dominant firm can purchase disruptive innovators.

Our new economy enables the winners to capture much more of the welfare. They are able to affect downstream competition as well as upstream providers. Often, they can do so with limited resistance from governmental agencies, as power in the online economy is not always easily captured using traditional competition analysis. Digital personal assistants, as we explore, have the potential to strengthen the winner’s gatekeeper power.

Blockchain will do the exact same thing.

You’ve been warned.

*My understanding of these issues has benefited greatly from many conversations over the past year with Izabella Kaminska, who saw through the hype well before pretty much anyone. Any errors herein are of course mine.

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Big Brother Revealed!

Filed under: Politics,Russia — The Professor @ 9:22 am

Some 200 theaters around the world are screening 1984 to warn about the dark descending night of fascism under Donald Trump. The timing of this could not be more ironic, given that all the news of late makes it abundantly clear that the former administration, not the current one, deserves to be known as Big Brother.

In particular, after a steady trickle of news about surveillance and unmasking of Trump campaign and transition personnel by the US intelligence community, yesterday the story broke that ex-National Security Advisor and noted f-bomber* Susan Rice–yes, that paragon of honesty, Madam Benghazi Talking Points–had requested the unmasking of numerous Trump personnel picked up in reports of surveillance on foreigners (incidentally, of course! Trust them on this!).

Last month, Ms. Rice played dumb (not a stretch!) by claiming that she had no idea what Devin Nunes was on about. Yesterday, Susie F was unavailable for comment, although one of the Obama creatures working for CNN (but I repeat myself) tweeted: “Just in: ‘The idea that Ambassador Rice improperly sought the identities of Americans is false.’ – person close to Rice tells me.”

Note the presence of the weasel modifier “improperly.” Not a categorical denial of unmasking. I therefore consider this an admission that unmasking did occur.

Within minutes of Rice’s unmasking, the left and the egregious never Trumpers (led by Jennifer Rubin, David Frum, and Evan McMuffin), had their narrative response ready to go: It’s a good thing that Rice was keeping tabs on the evil Trump’s canoodling with the Russkies! Just doing her job and saving the Republic!

Which overlooks one crucial detail: Nunes claims that the unmasked communications he saw had nothing to do with Russia. And let’s get real here. It is almost certain that Nunes saw a sample of what the White House has learned. NSC staffer Evan Cohen-Watnick (who played a role in discovering the information, though his exact part is hazy, like most details in this story) was apparently told to stop collecting material by the White House counsel’s office. Presumably they have continued the effort given its political and legal sensitivities. We know that US intelligence systematically collects intelligence on foreigners, meaning that any contacts by the Trump campaign and the Trump administration with anyone in countries ranging from Albania to Zanzibar would have been collected (incidentally! pinkie swear!) and available for unmasking. If Rice was asking for material on contacts with one non-Russian country, it is likely she was asking for it all.

So just who is Big Brother now?

The defense of Rice overlooks another crucial detail. Despite the huffing and puffing of the likes of Andy Kaufman lookalike Adam Schiff and every talking shill on CNN/MSNBC/ABC/NBC/CBS and writing shill on the NYT/WaPoo, etc., all of the allegations of collusion have produced bupkis in terms of actual, you know, evidence. We are treated to stories about peripheral figures like Carter Page and Paul Manafort dating from about the time of the Trojan War (in political time), but nothing of substance. Even the Flynn “bombshell” is something of a dud: what he actually said to the Russian ambassador has not been revealed, strongly suggesting that nothing explosive transpired–if it had, you can be sure we would have heard of it by now. My colleague and eminent scholar of Russia Paul Gregory, no shill for Putin, believe me, writes persuasively of the emptiness of the allegations, and their baleful impact on our politics. It even appears that Obama is trying to end this line of attack. There is little doubt that the linked article originated from the Obama camp, and its timing is particularly interesting now that it looks like the issue is boomeranging on him and his closest aides.

I would also point out some other 1984 echoes in the Obama tenure. Consider this nauseating piece on how different official photography of the White House is under Trump as compared to Obama:

Many of the most iconic photos of Barack Obama’s presidency came from Pete Souza, the official White House photographer. Granted extensive access to Obama, he shot the Osama Bin Laden war room photo, moments the president shared with Michelle Obama, the many famous images of the president interacting with kids, and countless more. These carefully composed photos so defined the public image of Obama that it nearly made Souza a household name.

In its visual representation, as in so many other respects, the Trump administration has made a break with the past. Most of what we see of Trump comes from either the traveling pool of press photographers or the smartphones of his staff. On the one hand there are Getty Images or Reuters shots of Trump standing at podiums (or pretending to drive a truck). And on the other, we get unusually informal images of him posing with world leaders or appearing to be caught off guard. In the meantime, the White House’s Flickr account was purged, and the “Photos” section was removed from the official website.

In other words, Obama deliberately created a cult of personality, using “carefully composed” “iconic” (there’s a tell!) photos to “define the public image of Obama.” Yes, Trump is a narcissist, but he could learn something about narcissism from Obama, who from long before he became president obsessed about creating a public image–a personality cult, in all but name.

And the U-turn to the late-Obama administration and current Democratic hysteria over Russia, the Monopoly of Evil (none of this wimpy multi-country axis stuff) from the previous Reset/”tell Vladimir that after my election I have more flexibility”/”the 1980s called and want their foreign policy back” policies bears more than a little similarity to 1984’s Oceania Has Always Been at War With Eastasia. Alas, whereas in 1984 there was only Hate Week, we are now well into Hate Year.

So those tramping to a revival of 1984 to protest Trump are way, way late to the game. They should have expressed their outrage years ago. But that’s when they were all part of Big Brother’s personality cult, wasn’t it?

*I’ve got nothing against f-bombers! There was a time when I could be the B-52 of f-bombers 😉

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March 27, 2017

No, I Haven’t Gone Soft on Putin: It’s That I Understand Who the Real Menace Is

Filed under: Politics,Russia — The Professor @ 9:09 pm

I spoke to my uncle over the weekend. He asked me, in all seriousness: “You haven’t written anything about Vlad lately. You going soft?”

My answer: “No–not going soft. But there are so many know-nothing lunatics shrieking about Putin that I don’t want to run the risk of being lumped in with them or confused with them or giving them any credence.” (If you think “know-nothing lunatic” is too strong, check out the Twitter timelines of Louise Mensch or John Schindler. You’ll see I’m actually being overly generous.)

And here’s the truly perverse thing about the hysteria. The lunatics are Putin’s most useful allies. If he really desired to create havoc in the American political system–which I would have no problem believing–in his wildest dreams he couldn’t have done the amount of damage that is now being wreaked by the Democrats and the media (I repeat myself, I know). They are using Putin and Russia as the pretext to carry out their own political vendettas, and to express their rage at losing a race that they just knew was in their pocket.  By massively overreacting to rather pitiful allegations (Podesta’s emails–really?) for purely partisan reasons they are doing far worse harm to the US than Putin could have ever hoped of doing.

I know Putin has an obsession with the US, and would love nothing more to undermine it. But his best sappers are unwitting ones, and Americans to boot. And bizarrely, they are doing their sabotage in the name of fighting Putin. I have never seen anything so demented and destructive in all my living days: it is so twisted it is difficult to explain it. Given that, it is far more important that I go after them, and leave Putin out of it. They are the immediate menace, and fighting them is not only justified in its own right, it is also the most direct way of depriving Putin of a chance to weaken the US.

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