Streetwise Professor

February 26, 2017

If You Want Blood, You Got It–Tesla Redux

Filed under: Climate Change,Economics — The Professor @ 3:24 pm

When Musk announced his plans to merge Tesla and Solar City, I remarked that “Tesla bleeds cash like a Game of Thrones battle scene.” Elon (who long ago blocked me on Twitter, BTW) apparently recognized this. In an August 29, 2016 email to Tesla employees Musk emphasized how important it was for the company to report a positive cash flow for 3Q16:

I thought it was important to write you a note directly to let you know how critical this quarter is. The third quarter will be our last chance to show investors that Tesla can be at least slightly positive cash flow and profitable before the Model 3 reaches full production. Once we get to Q4, Model 3 capital expenditures force us into a negative position until Model 3 reaches full production. That won’t be until late next year.

. . . .

Even more important, we will need to raise additional cash in Q4 to complete the Model 3 vehicle factory and the Gigafactory. The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not “Tesla Loses Money Again”, but rather “Tesla Defies All Expectations and Achieves Profitability”. That would be amazing!

Were you amazed(!) that Tesla eked out a positive cash flow in the third quarter? If so, do you feel like a fool now that the 4Q16 results are out, showing that the blood is gushing again? For in the quarter, Tesla set a record (and not the good kind!) for free cash flow: a cool $1 billion to the negative, -$447 in operating cash flow and $522 in capex. The operating number reflected lower vehicle emissions credits, illustrating the company’s dependence on this source of revenue.

So what?, you say. Elon said that “Once we get to Q4, Model 3 capital expenditures” will make results look bad. But it appears that Telsa actually held back on capex. In the vaunted 3Q guidance, the company implied that it would spend $1 billion in capex in 4Q16: it barely spent half of that. This does not bode well for delivering the Model 3 on time, and demonstrates the dilemma that Musk faces.

Given Musk’s emphasis on delivering a positive cash flow number in the third quarter, it appears that his accountants rose to the task. There raises serious questions about the legitimacy of the third quarter number. It was obviously a one-off. Elon said that it was vital to “convince potential investors to bet on us” by “defying expectations.”  Was it necessary to lie to defy?

Any such suspicions should be strengthened by the, well, suspicious resignation of Tesla’s CFO on the day its 8-K was filed, to be effective when its 10-K is filed.  The reason given is rather odd: Wheeler plans to “pursue opportunities in public policy.” Well, I guess it’s better than “I want to spend more time with my family.”

The resignation of a CFO is never a good sign, especially when it coincides with the release of an ugly earnings report that follows an earnings report that appeared to be too good to be true at the time–and which looks even more too good to be true in retrospect.

Even Elon appears a little anxious. He said that the company’s cash position is “very close to the edge.” So get ready to have your stock watered again, boys and girls: “So we’re considering a number of options but I think it probably makes sense to raise capital to reduce risk.”

Or, to mix metaphors: another transfusion for the bleeder. In the vein, out the artery. Investors and Wall Street have been very forgiving. For years. How long can that continue?

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February 25, 2017

Should Social Media Be Regulated as Common Carriers?

Filed under: Economics,Politics,Regulation — The Professor @ 6:43 pm

Major social media, notably Twitter and Facebook, are gradually moving to censor what is communicated on them. In Twitter’s case, the primary stated rationale is to “protect its users from abuse and harassment.” It has also taken upon itself to  “[identify] and [collapse] potentially abusive and low-quality replies so the most relevant conversations are brought forward.” There are widespread reports that Twitter engages in “shadowbanning”, i.e., hiding the Tweets of those users it identifies as objectionable, and making these Tweets inaccessible in searches.

Further, there are suspicions that there is a political and ideological component to the filters that Twitter applies, with conservative (and especially alt-right) content and users being more likely to fall afoul of these restrictions: the relentlessly leftist tilt of CEO Jack Dorsey (and most of its employees) gives considerable credence to these suspicions.

For its part, Facebook is pursuing ways to constrain users from posting what it deems as “misinformation” (aka “fake news”). This includes various measures such as cooperating with “third party fact-checking organizations“. Given the clear leftist tilt of Mark Zuckerberg and Facebook’s workforce, and the almost laughably leftist slant of the “fact-checkers”, there is also considerable reason for concern that the restrictions will not be imposed in a politically neutral way.

The off-the-top classical liberal/libertarian response to this is likely to be “well, this is unfortunate, but these are private corporations, and they can do what they want with their property.” But however superficially plausible this position appears to be, in fact there is a principled classical liberal/libertarian response that arrives at a very different conclusion. In particular, as arch-libertarian Richard Epstein (who styles himself as The Libertarian in his Hoover Institute podcast) has consistently pointed out, even during the heyday of small government, classical liberal government and law, the common law recognized that restrictions on the autonomy of certain entities was not only justifiable, but desirable. In particular, natural monopolies and near-monopolies were deemed to be “common carriers” upon whom the law imposed a duty of providing access on a non-discriminatory basis. The (classically liberal) common law of that era recognized that such entities could exercise market power, or engage in discriminatory conduct without fear of competitive check. Thus, the obligation to serve all on a non-discriminatory basis in order to constrain the exercise of market power, or invidious discrimination based on the preferences of the owner of the common carrier.

Major social media (and Google as well–perhaps most of all) clearly have market power, and the ability to discriminate without fear of losing business to competitors. The network nature of social media (and search engines) leads to the dominance of a small number of platforms, or even one platform. Yes, there are competitors to Facebook, Twitter, and Google, but these companies are clearly dominant in their spaces, and network effects make them largely immune to competitive entry. Imposition of a common carrier-inspired obligation to provide non-discriminatory access is therefore quite reasonable, and has a substantial economic and legal foundation. Thus, libertarians and classical liberals and conservatives and even fringe voices should not resign themselves to being second or third class citizens on social media, merely because these are private entities, rather than government ones. (Indeed, the analogy should go the other direction. A major reason for limiting the ability of the government to control speech is because of its monopoly of legal violence. It is monopoly power, regardless of whether in a market or political setting, that needs to be constrained through things like rights to free speech, or non-discriminatory access to common carriers.)

Further, insofar as leftists (including the managements of the major social media companies) are concerned, it is utterly incoherent for them to assert that as private entities they are perfectly free to restrict access according to their whims, given that leftists also adamantly (indeed, obnoxiously) insist that anti-discrimination laws should be imposed on small entities operating in highly competitive environments. Specifically, leftists believe that bakers or caterers or pizzarias with zero market power should be required to serve all, even if they have religious (or other) objections to doing so. But a baker refusing to sell a wedding cake to a gay couple does not meaningfully deprive said couple of the opportunity to get a cake: there are many other bakeries, and given the trivial costs of entry even if most incumbent bakers don’t want to serve gays, this only provides a commercial opportunity for entrant bakers to cater to the excluded clientele. Thus, discrimination by Baker A does not impose large costs on those s/he would prefer not to serve (even though forcing A to serve them might impose high costs on A, due to his/her sincere religious beliefs).

The same cannot be said of Twitter or Facebook. Given the nature of networks, social and otherwise, entrants or existing competitors are very poor substitutes for the dominant firms, which gives them the power to exclude, and which makes their exercise of this power extremely costly to the excluded.  In other words, if one believes that firms in highly competitive markets should be obligated to provide service/access to all on a non-discriminatory basis, one must concede that the Twitters, Facebooks, and Googles of the world should be similarly obligated, and that given their market power their conduct should be subject to a substantially higher degree of scrutiny than a small firm in a competitive market.

Of course, it is one thing to impose de jure an obligation on Twitter et al to provide equal access and equal treatment to all, regardless of political beliefs, and quite another to enforce it de facto. Of course Jack and Mark or Sergey don’t say “we discriminate against those holding contrary political opinions.” No, they couch their actions in terms of “protecting against abusive behavior and hate speech” or “stamping out disinformation.” But they retain the discretion to interpret what is abusive, hateful, and false–and it is clear that they consider much mainstream non-leftist belief as beyond the pale. Hence, enforcement of an open non-discriminatory access obligation would be difficult, and would inevitably involve estimation of discriminatory outcomes using statistical measures, a fraught exercise (as employment discrimination law demonstrates). Given the very deep pockets that these firms have, moreover, prevailing in a legal battle would be very difficult.

But this is a practical obstacle to treating social media like common carriers with a duty to provide non-discriminatory access. It is not a reason for classical liberals and libertarians to concede to dominant social network operators that they have an unrestricted right to restrict access as a matter of principle. In fact, the classical liberal/libertarian principle cuts quite the other way. And at the very least, imposing a common carrier-like obligation would substantially raise the cost that social network operators would pay to indulge in discrimination based on politics, beliefs, or ideology, and this could go a long way to make these places safe for the expression of political opinions that drive Jack, Mark, et al, nuts.

 

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February 20, 2017

Trolling Brent

Filed under: Commodities,Derivatives,Economics,Energy,Regulation — The Professor @ 10:14 am

Platts has announced the first major change in the Brent crude assessment process in a decade, adding Troll crude to the “Brent” stream:

A decline in supply from North Sea fields has led to concerns that physical volumes could become too thin and hence at times could be accumulated in the hands of just a few players, making the benchmark vulnerable to manipulation.

Platts said on Monday it would add Norway’s Troll crude to the four British and Norwegian crudes it already uses to assess dated Brent from Jan 1. 2018. This will join Brent, Forties, Oseberg and Ekofisk, or BFOE as they are known.

This is likely a stopgap measure, and Platts is considering more radical moves in the future:

It is also investigating a more radical plan to account for a possible larger drop-off in North Sea output over the next decade that would allow oil delivered from as far afield as west Africa and Central Asia to contribute to setting North Sea prices.

But the move is controversial, as this from the FT article shows:

If this is not addressed first, one source at a big North Sea trader said, the introduction of another grade to BFOE could make “an assessment that is unhedgeable, hence not fit for purpose”. “We don’t see any urgency to add grades today,” he added. Changes to Brent shifts the balance of power in North Sea trading. The addition of Troll makes Statoil the biggest contributor of supplies to the grades supporting Brent, overtaking Shell. Some big North Sea traders had expressed concern Statoil would have an advantage in understanding the balance of supply and demand in the region as it sends a large amount of Troll crude to its Mongstad refinery, Norway’s largest.

The statement about “an assessment that is unhedgeable, hence not fit for purpose” is BS, and exactly the kind of thing one always hears when contracts are redesigned. The fact is that contract redesigns have distributive effects, even if they improve a contract’s functioning, and the losers always whinge. Part of the distributive effect relates to issues like giving a company like Statoil an edge . . . that previously Shell and the other big North Sea producers had. But part of the distributive effect is that a contract with inadequate deliverable supply is a playground for big traders, who can more easily corner, squeeze, and hug such a contract.

Insofar as hedging is concerned, the main issue is how well the Brent contract performs as a hedge (and a pricing benchmark) for out-of-position (i.e., non-North Sea) crude, which represents the main use of Brent paper trades. Reducing deliverable supply constraints which contribute to pricing anomalies (and notably, anomalous moves in the basis) unambiguously improves the functioning of the contract for out-of-position players. Yeah, those hedging BFOE get slightly worse hedging performance, but that is a trivial consideration given that the very reason for changing the benchmark is the decline in BFOE production–which now represents less than 1 percent of world output. Why should the hair on the end of the tail wag the dog?

Insofar as the competition with WTI is concerned, the combination of larger US supplies, the construction of pipelines to move supplies from the Midcon (PADDII) to the Gulf (PADDIII)  and the lifting of the export ban have restored and in fact strengthened the connection of WTI prices to seaborne crude prices. US barrels are now going to both Europe and Asia, and US crude has effectively become the marginal barrel in most major markets, meaning that it is determining price and that WTI is an effective hedge (especially for the lighter grades). And by the way, the WTI delivery mechanism is much more robust and transparent than the baroque (and at times broken) Brent pricing mechanism.

As if to add an exclamation point to the story, Bloomberg reports that in recent months Shell has been bigfooting–or would that be trolling?–the market with big trades that have arguably distorted spreads. It got to the point that even firms like Vitol (which are notoriously loath to call foul, lest someone point fingers at them) raised the issue with Shell:

While none of those interviewed said Shell did anything illegal, they said the company violated the unspoken rules governing the market, which is lightly regulated. Executives of several trading rivals, including Vitol Group BV, the world’s top independent oil merchant, raised objections with counterparts at Shell last year, according to market participants.

What are the odds that Mr. Fit for Purpose is a Shell trader?

All of this is as I predicted, almost six years ago, when everyone was shoveling dirt on WTI and declaring Brent the Benchmark of the Forever Future:

Which means that those who are crowing about Brent today, and heaping scorn on WTI, will be begging for WTI’s problems in a few years.  For by then, WTI’s issues will be fixed, and it will be sitting astride a robust flow of oil tightly interconnected with the nexus of world oil trading.  But the Brent contract will be an inverted paper pyramid, resting on a thinner and thinner point of crude production.  There will be gains from trade–large ones–from redesigning the contract, but the difficulties of negotiating an agreement among numerous big players will prove nigh on to impossible to surmount.  Moreover, there will be no single regulator in a single jurisdiction that can bang heads together (for yes, that is needed sometimes) and cajole the parties toward agreement.

So Brent boosters, enjoy your laugh while it lasts.  It won’t last long, and remember, he who laughs last laughs best.

That’s exactly how things have worked out, even down to the point about the difficulties of getting the big boys to play together (a lesson gained through extensive personal experience, some of which is detailed in the post). Just call me Craignac the Magnificent. At least when it comes to commodity contract design 😉

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February 19, 2017

More Contradictions and Confusions

Filed under: History,Politics — The Professor @ 2:12 pm

One could really make a parlor game out of identifying all of the contradictions and confusions in the “thinking” of the identity progressive left.

Further yesterday’s point, how can they possibly win (in the US, anyways)? On their terms, winning would mean the subjugation of the victimizers (e.g., the alleged white patriarchy, including all of those white privileged denizens of Appalachia). How is this to occur? Since those to be subjugated are unlikely to voluntarily agree to become Morlocks, they must be subdued by force or the ballot box. The current correlation of forces, however, is strongly on the side of the alleged oppressors. Re-education camps to get their minds right would also be required, but “elite” liberal arts colleges (the closest thing to such camps currently in operation n the US) have already made plain their unwillingness to admit such people, and coercion would be required to force them into something that Pol Pot could love. And given that those to be coerced have the guns (a fact the left never ceases to bewail), how could that possibly work?

And is victory even possible? The leftist version of identity politics is predicated on the conflict between the oppressed and the oppressors. What happens if the oppressed defeat the oppressors? How could they function if a vital piece of their worldview disappears? When your life is structured around fighting The Man, what do you do when The Man loses/dies/disappears? My guess is that there would be a period of internecine struggle to identify who assumes the role of oppressor, and who gets the prized role of being the oppressed.

This brings to mind the Taoist critique of other (not exclusively, but mainly) western religions and philosophies which posit wars between light and darkness, goodness and evil, and so on, which can be summarized as: “um, what happens when light/good win?” Similar critiques have been applied to progressive thought (cf. Alan Watts): how is progress possible in a world of polarity? This problem is particularly acute for identity leftists, because polarity (oppressed/oppressors) is at the core of their mental model.

Traditional Marxists faced a similar dilemma. Marx was quite detailed in describing the class struggle and its ultimate outcome of a dictatorship of the proletariat, but he was quite hazy at describing just what that dictatorship would look like, and how it would be free of conflict (in the presence of any specialization at all).  I would guess that in the unlikely event of victory that the intramural contests on the left would put the intra-party conflicts among the Bolsheviks post-1917 to shame. (And remember what ended the latter conflict: Stalin killing everybody who disagreed with him.)

One last thing. the focus on identity has led to a category error in interpreting US politics, Trump’s rhetoric, and the appeal of that rhetoric to his supporters. In the identity left’s worldview, nationalism is inherently based in national, racial, and ethnic supremacism (and gender and sexual orientation and on and on). Hence, when Trump or a Trump supporter celebrates or asserts American nationalism, the Pavlovian response on the left is to think of European nationalism of the blood and soil variety. No! American nationalism has always been different, and to equate Trump with a Le Pen or an Orban–or a Putin!–on this issue is fundamentally wrong.

On this eve of Presidents’ Day, a review of Lincoln’s formulation of American nationalism, and his distinction between American and European varieties is quite useful. Sadly, all too many people have forgotten this fundamental distinction, including Republican Senators, notably John McCain, who committed this very category error a few days ago. In a statement aimed clearly at Trump, as well as continental nationalist leaders, he said:  “[The founders of the Munich conference] would be alarmed by an increasing turn away from universal values and toward old ties of blood and race and sectarianism.”

Maybe that’s true in some countries, but it is not what is going on in the United States. Indeed, it is a disgusting insult of tens of millions of Americans to insinuate that it is. McCain’s combination of senility and narcissism is becoming too much to bear, but this remark (and other things he said in Munich) demonstrate how deeply the identity left/progressive rot has penetrated establishment opinion in the US.

 

 

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February 18, 2017

Putin Is So Smart That He Outsmarted Himself–You Should Have Listened to Me, Vlad

Filed under: History,Military,Politics,Russia — The Professor @ 2:29 pm

Apparently there is buyer’s remorse in Moscow, as Putin and his coterie are disappointed at Trump’s failure to change dramatically the relationship between the US and Russia. Don’t believe me? The WaPoo and the FT say so.

This is no surprise to me at all. Indeed, from the time that the hysteria over alleged Russian manipulation of the US election broke out, I said Putin should be careful what he asks for, because it was be unlikely that Trump would behave as expected–and hoped, in Moscow, apparently. There are several reasons for this, some of which I pointed out at the time.

The first is Trump’s mercurial nature. Counting on what he says at time t to be reliable information for forecasting his behavior at T>t is a mugs’ game, because much of what he says is for tactical value and to influence negotiations, and because he changes his mind a lot, in part because he does not have strong ideological convictions.

I think Trump’s stand on Nato–an issue of particular importance to Putin–is a classic example. There is good sense at the core of Trump’s position: European Nato states have been free riding for years. He wants to get them to stump up more money. What better way than to threaten to ditch Nato? He has quite clearly put the fear into them. Then he dispatches his reasonable emissaries–Mattis and Tillerson–to lay out the framework of a modus vivendi.

The second is that Trump’s assertion of an independent United States with attenuated ties to traditional multilateral organizations is hardly helpful to Putin. This is especially true because part of Trump’s program along these lines is to revitalize the US military. Russia has strained mightily to overcome the decrepitude of its 1990s military, and has managed to recapitalize it sufficiently to make it a credible force. Even after these efforts, however, it can only dimly see the tail of the American military in the distance. If Trump goes into super-cruise mode, Russia’s expenditures will have largely been for nought. Closing the military gap required the US not to compete. Trump made it clear he would compete. How could Putin have desired that?

Nato was already the US military plus a few European military baubles hung on for decoration. A stronger US military makes Nato stronger, regardless of what the Europeans do. If the Europeans kick it up a bit too, well that all really sucks for Vlad.

The third is something that has only become manifest in the past months. Namely, the Democratic loss left them desperate to find a scapegoat. Russia has become that scapegoat, and anything said that is remotely positive about Russia unleashes paroxysms of fury–not just from Democrats, but from many Republicans as well. Any positive move that Trump would take towards Russia would be seized upon as evidence of a dark bargain with the Kremlin. So (as he acknowledged in his press conference) he has no political room to deal with Russia. Indeed, if anything he might be forced to being more Russophobic Than Thou in order to put this issue to rest.

That is, the dynamic created by his intervention has completely undermined Putin’s purpose. A self-inflicted wound.

There is yet more irony in this development. Along with their spawn, 1980s peaceniks who shrieked that Reagan’s robust stance with the Soviet Union threatened the earth with nuclear annihilation now sound like those in the hard right in the ’80s who thought Reagan was a wimp, and a traitor for talking with Gorbachev. Trump, of all people, is the one lamenting that defusing conflict and talking with the Russians would reduce the risk of nuclear holocaust.

All this calls into considerable doubt Putin’s vaunted tactical and strategic acumen. If indeed Russia intervened heavy-handedly in the US election, it is not turning out well for Putin. And evidently he recognizes this, and is sharply reducing his ambitions. Maybe, pace Stalin, we’ll see him write an article where he claims Russia is dizzy with success, and needs a respite to consolidate its gains.

Truth be told, I do not think that Putin thought that his machinations (whatever they were–and I am skeptical about some of the more lurid claims) would result in Trump’s election. I surmise that his objective was to damage Hillary, in the full expectation that she would win and it would be advantageous to deal with a weakened president. But, he was too clever by half, outsmarted himself, and now has to deal with an unpredictable dervish capable of turning any which way.

Viewed in this light, Putin is less Sorcerer, than Sorcerer’s Apprentice, who cast a spell he could not control: authoritarians who have been in control too long have a tendency to do that, because they are convinced of their own greatness. Whatever his intent, the unintended consequences of his actions have arguably left him worse of than if he had left well enough alone. I do not believe that it was his intent to elect Trump. When Trump was elected, he let his mind run wild with the possibilities, but he has now come crashing to earth.

Wiley Coyote comes to mind. That Acme Election Kit (or would it be the Acmeski Election Kit) hasn’t worked quite as planned, has it Vlad?

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The Identity Left Needs to Heed the Lesson of Major Patrick Ferguson & King’s Mountain

Filed under: History,Politics — The Professor @ 12:56 pm

At his Thursday press conference Trump unleashed a frontal attack on the press, and appealed directly to the American people: he said, in not so many words, that he would not accept the press as an intermediary standing between him and the electorate  because it is not an honest broker, but is instead  tendentiously partisan, and fundamentally dishonest in its partisanship. Trump followed this fusillade with a Tweet labeling an alphabet soup of media organizations “enemies of the people.”

The media reacted predictably, and indeed as Trump predicted during his press conference. And you know what: He doesn’t care! Indeed, he relishes it, precisely because he knows that the people to whom he is appealing detest the media. And the primary reason that they detest the media is that they know the media detests them, and indeed, largely considers them beneath contempt.

Which brings me to my main subject, which is the left’s doubling down on identity politics post-election. This is the subject of an excellent essay in the Claremont Review of Books by William Voegeli (unfortunately behind a paywall).

Voegeli brings out a couple of very important points. One is the relentless, and indeed militant, subjectivity of identity politics. (This is something I’ve remarked upon going back at least 25 years.) The premise is that there are no universals, but that everyone’s beliefs,  mind, and behavior are determined by their identity, which is the function of a nexus of primarily race and gender (with the latter definitely NOT being binary) and sexual orientation (and crucially, only to a very minor degree class/economic status–more on this in a bit).

This leads to an intense tribalism.*  This tribalism inherently creates conflict and makes dialogue impossible. This is greatly exacerbated by the leftist belief that language itself is highly subjective and the product of power relationships. When the possibility of a common meaning of language is denied, conversion by persuasion and the demonstration of error through argument become impossible. The left thinks the Tower of Babel is, if not a good thing, an inevitable thing. In such a world, dispute can be settled only by conflict and the assertion of power. In this situation, language serves the purpose almost exclusively of signaling one’s identity tribe, and to one’s identity tribe, rather than to engage in civil discourse with those outside it.

Moreover, the most crucial part of these identities is victimization. Which requires a victimizer. The left of course has that all figured out, and of course it is identifiable by race, gender, orientation etc.: the victimizers are white, primarily male, heterosexual, and middle class. Often rural or exurban, living in the Heart of Darkness that stretches from the Hudson to the San Andreas fault (with a few small islands inhabited by good tribes, namely college towns, scattered there).

And as Voegeli notes, this creates a tremendous problem for the left. They were convinced that demography, combined with raising the identity consciousness of the victimized categories, would result in an electoral majority that would sweep them into power. Once in power, they could take their revenge on the benighted–and Voegeli points out that many (e.g., Harvard’s–go figure!–Mark Tushnet) were quite explicit in their desire to exterminate the American kulaks as a class.

But the demographic revolution has not proceeded as quickly as the left had anticipated, and they launched their revolution too quickly, while the hated kulaks were still in a majority (and in particular, in an Electoral College majority–pesky Constitution!). They also misjudged their enemy. (And I am not being hyperbolic here–they definitely view whites in flyover country as the enemy.)

They should have read Walter Russell Mead’s description of the Jacksonian American. It is usually politically detached and rather passive. But when it perceives it is threatened, it reacts with a rather frightening intensity, latent with the threat of violence.

A historical example illustrates this. During the American Revolution, the “Overmountain Men” of Tennessee, the proto-Jacksonians, largely remained aloof from the conflict. They wanted to be left alone. But neutrality did not satisfy the British crown. The British demanded subservience and support. British commander Patrick Ferguson made blood curdling threats to attack Over the Mountain unless subservience was forthcoming, post haste.

These threats pushed the Overmountain Men into outright defiance. Believing their liberty to be at risk, and not willing to bend to any man (which is why they were living in the wilderness in the first place), they flooded out of their mountain fastness and gathered near King’s Mountain, North Carolina, where they met Ferguson and his Redcoats. And proceeded to shoot them to pieces, killing Ferguson in the process, in one of the most decisive and one-sided battles of the war.

The Trump election bears some similarity to this. The left’s identity politics requires that their enemies either deny their own identity and submit, or commit suicide (which, in fact, some on the left have helpfully suggested). Yes, this may work with pussified white males at Oberlin (obedient products of the feminized primary and secondary education systems in the US), but it doesn’t work with high school graduates in Gunland. As the left found out to its horror and shock on November 8, 2016.

The old Marxist left always went on and on about how the internal contradictions in capitalism would cause its collapse. The new cultural left is blind to the internal contradictions of identity politics. One cannot reasonably expect that the Evil Identity–which the Good Identities constantly call out by name–will not itself consolidate on identity lines and fight back, but that is exactly what the left’s strategy requires. A strategy based on one’s enemy’s self-abnegation can hardly be calculated to succeed, especially if that enemy is Jacksonian America, which (a) already has a well-formed identity, and (b) has a nasty habit of fighting war to the knife when threatened.

Indeed, the irony here is almost too much. The gravamen of the left’s criticism of the white middle class focuses on the very characteristics (which Obama conveniently summarized as clinging to guns and religion) that make it dangerous when threatened. So it’s not like this should have been a surprise.

One last thing about economic status and class that is worth mentioning. Although Trump’s message does appeal mainly to the white middle and working class, the fact that it is primarily economic (jobs! factories! Make America Great Again!) its appeal is not limited to whites. Indeed, it has the potential to appeal to blacks and Hispanics who are in similar economic circumstances to the whites who put Trump in the White House, especially in places like Wisconsin, Michigan, and Pennsylvania.

This is a mortal threat to the left, because the supposed demographic inflection point has not arrived, meaning that the left needs every black and Hispanic vote, and it needs these groups to turn out in number. Indeed, by pushing away many whites who have in the past voted Democratic, the left needs these minority voters all the more. Therefore, Trump’s attempts to appeal to these voters, and the inherent appeal of his program to those in the 30th-50th income percentiles, and those without advanced degrees, regardless of ethnicity, is potentially disastrous for the left. This is why Trump has to be portrayed as a racist indistinguishable from Bull Conner.

The left has responded to the Trump defeat not by questioning the wisdom of its identity-based strategy, but by doubling down on it. Those who question–such as Columbia Historian Mark Lilla–are subjected to a torrent of abuse not much different from that directed at Trump. If you want to see the doubling down, look at the contest for DNC chair, which is all about identity politics. The most flagrant example of this being the statement of one candidate to the effect that she (a white woman) believes that her “job is to shut other white people down when they want to interrupt.” Yeah. That will work really swell with Jacksonian America. You go, girl!

Thinking about these things, and reading things like Voegeli’s essay, leaves me very dispirited. The entire premise of the left is that there is no common ground among Americans. We are a collection of tribes defined by racial, ethnic, gender, and sexual orientation categories. Language is a reflection of oppressive power relationships, and is not to be trusted. If this is what one believes, then persuasion and debate and appeal to sweet reason are futile. It all comes down to a fight.

And the left’s big mistake is not recognizing that they have picked a fight with people who outnumber them, are quite disposed to fight back, and who now have as president someone who is quite willing to bring it on, and won’t back down.

I say this not because it is something I want. It is a diagnosis of what I believe the situation to be, independent of my desires. What I desire is that Americans accept a common civic creed applicable to all, and where diversity is respected by letting heterogeneous people pursue happiness according to their own lights, and where the role of the state is largely limited to protecting individuals from force and fraud attempted by foreign nations and fellow citizens.

But that is not what the left desires. It demands obedience to its (self-contradictory) creed of no common creed, and is willing to crush those that do not submit. It is acting like a modern-day Patrick Ferguson, and has stirred the descendants (some literally, most figuratively) of the Overmountain Men to take up their arms and fight. That did not work out well for Major Ferguson, and is unlikely to work out well for the left. Not that such an outcome would disappoint me. What is disappointing is that they have brought on this battle. Whoever wins, America would have been much better off had it not been fought at all.

*Reading Voegeli’s essay I was reminded of something else that I read recently, namely that most Native American tribe names were not given by the tribes themselves: most tribes referred to themselves by a word meaning “the people.” Instead, tribes were named by their enemies, and the name was usually something meaning enemy, or some negative characteristic.

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February 15, 2017

Never Argue From a Price Change, Oil Market Edition

Filed under: Commodities,Derivatives,Economics,Energy — The Professor @ 9:19 pm

In the FT, Greg Meyer ponders a puzzle: “A mystery is confounding the US oil market: when inventories rise, prices rise, too.”

Yes, it is normally the case that inventories and prices, and inventories and the spot-deferred spread, move in opposite directions. But this does not have to be the case.

The typical case is based on the following economic logic. Inventories respond mainly to current, and temporary, supply and demand shocks. If current demand falls, and this demand shock is anticipated to be temporary, then current availability rises relative to expected future availability. The efficient way to respond to this is to store more today because the commodity is abundant today relative to what is expected in the future, and efficient allocations move resources from where they are relatively abundant to where they are relatively scarce. Storage increases expected future availability, which depresses expected future prices. The nearby price must fall relative to the expected future price in order to encourage storage, and together the fall in the expected future price and the fall in the nearby price relative to the expected future price causes the nearby price to fall.

A similar story holds with respect to a temporary increase in current supply.

Parenthetically, the temporary nature of the shock is important in driving the change in storage because this causes a change in relative availability that is necessary to make it optimal to store more. A shock that is anticipated to persist does not change current availability relative to expected future availability, so there is no benefit to shifting resources through time via storage. A persistent shock causes a parallel shift (roughly) in the forward curve, and no change in storage. In my academic research, I show that in a dynamic storage model supply/demand shocks with a very short half-life (on the order of 30 days) drive storage behavior, and that very persistent shocks drive the overall level of prices.

But there are other kinds of shocks. One kind of shock is to anticipated future demand or supply. Let’s say supply is expected to decline in the future. This increase in expected future scarcity can be mitigated by storing more today (i.e., reducing current consumption). This spreads the effect of the anticipated future supply loss over time, and thereby smooths consumption in an efficient way. The only way to reduce current consumption in order to increase inventories is to increase the spot price. So in this scenario, (a) inventories and prices move in the same direction, and (b) inventories and calendar spread (deferred minus nearby) move in opposite directions in order to reward the higher amount of storage.

Here’s a real world example. The Energy Policy Act of 2005 mandated increased use of renewable fuels–notably ethanol–in future years. This caused an increase in anticipated future demand for corn used to produce ethanol. When the act was passed, the supply of corn was basically fixed. One way of responding to the expected increase in future corn demand was to store more immediately (thereby carrying current supplies into the future when demand was going to be higher). Given the fixed supply, the only way to achieve this higher storage (and hence reduced current consumption) was for prices to rise.

Therefore, one explanation for the positive co-movement between prices and inventories is a shock to the expected future supply/demand balance. For example, an increased likelihood that OPEC will extend its supply cuts beyond April could produce this result.

Another kind of shock that can lead to a positive co-movement between spot prices and inventories is a shock to supply/demand volatility: I discussed this in an early blog post, and later analyzed this formally in my 2011 book. (A good example of the synergy between blogging and rigorous research, BTW.)

The intuition is this. Inventories are a way of insuring against uncertainty: putting something aside for a rainy day, as it were. If fundamental economic uncertainty goes up, it is efficient to hold more inventory. Since supply is fixed in the short run, the only way to increase inventory is to reduce current consumption. The only way to increase current consumption is for spot prices to rise. Moreover, to compensate increased inventory holding, futures prices must rise relative to spot prices. Therefore, for this kind of shock (like a shock to future demand) the forward curve rises and becomes steeper (i.e., increased contango).

So although the positive co-movement between spot prices and inventory may be unusual, it can occur in a rational, efficient market. It depends on the underlying driving shock. The typical case occurs when shocks to current supply/demand dominate. The more unusual case occurs when the shocks are to expected future supply and demand, or to fundamental volatility.

This relates directly to something I mentioned in the “kill the economists” post yesterday. Specifically: never argue from a price change. It is necessary to understand what is causing the price change. When there are multiple shocks that can affect prices (e.g., supply and demand shocks; current or future shocks; shocks to supply/demand volatility as well as to the level of supply/demand), just looking at the pice movement is not sufficient to draw conclusions about either its effect, or its cause. Indeed, it is even misleading to talk about the “effect” of the price change, because the price change is itself the endogenous effect of underlying causes/shocks.

The usual way to sort out what is going on is to look at quantities as well as prices. For instance, in a simple supply-demand model if you see prices go down, that could be because supply rose or demand fell. You can figure out which only by observing quantity: if you see quantity fall, for instance, you know that a demand decline caused the movements.

This means that the recent co-movements in oil inventories and prices reflects market participants’ assessment that the supply/demand balance is expected to tighten in the future, or that fundamental uncertainty is going up, or both.

 

 

 

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February 14, 2017

“First, Kill All the Economists!” Sounds Great to Some, But It Won’t Fix Monetary Policy

Filed under: Economics,Financial crisis,Financial Crisis II,History,Regulation — The Professor @ 9:00 pm

A former advisor to the Dallas Fed has penned a book blasting the Fed for being ruled by a “tribe” of insular egghead economics PhDs:

In her book, Ms. Booth describes a tribe of slow-moving Fed economists who dismiss those without high-level academic credentials. She counts Fed Chairwoman Janet Yellen and former Fed leader Ben Bernanke among them. The Fed, Mr. Bernanke and the Dallas Fed declined to comment.

The Fed’s “modus operandi” is defined by “hubris and myopia,” Ms. Booth writes in an advance copy of the book. “Central bankers have invited politicians to abdicate leadership authority to an inbred society of PhD academics who are infected to their core with groupthink, or as I prefer to think of it: ‘groupstink.’”

“Global systemic risk has been exponentially amplified by the Fed’s actions,” Ms. Booth writes, referring to the central bank’s policies holding interest rates very low since late 2008. “Who will pay when this credit bubble bursts? The poor and middle class, not the elites.”

Ms. Booth is an acolyte of her former boss, Dallas Fed chair Richard Fisher, who said “If you rely entirely on theory, you are not going to conduct the right policy, because policies have consequences.”

I have very mixed feelings about this. There is no doubt that under the guidance of academics, including (but not limited to) Ben Bernanke, that the Fed has made some grievous errors. But it is a false choice to claim that Practical People can do better without a coherent theoretical framework. For what is the alternative to theory? Heuristics? Rules of thumb? Experience?

Two thinkers usually in conflict–Keynes and Hayek– were of of one mind on this issue. Keynes famously wrote:

Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

For his part, Hayek said “without a theory the facts are silent.”

Everybody–academic economist or no–is beholden to some theory or another. It is a conceit of non-academics to believe that they are “exempt from any intellectual influence.” Indeed, the advantage of following an explicit theoretical framework is that its assumptions and implications are transparent and (usually) testable, and therefore can be analyzed, challenged, and improved. An inchoate and largely informal “practical” mindset (which often is a hodgepodge of condensed academic theories) is far more amorphous and difficult to understand or challenge. (Talk to a trader about monetary policy sometime if you doubt me.)

Indeed, Ms. Booth gives evidence of this. Many have been prophesying doom as a result of the Fed’s (and the ECB’s) post-2008 policies: Ms. Booth is among them. I will confess to have harbored such concerns, and indeed, challenged Ben Bernanke on this at a Fed conference on Jekyll Island in May, 2009. It may happen sometime, and I believe that ZIRP has indeed distorted the economy, but my fears (and Ms. Booth’s) have not been realized in eight plus years.

Ms. Booth’s critique of pre-crisis Fed policy is also predicated on a particular theoretical viewpoint, namely, that the Fed fueled a credit bubble prior to the Crash. But as scholars as diverse as Scott Sumner and John Taylor have argued, Fed policy was actually too tight prior to the crisis.

Along these lines, one could argue that the Fed’s most egregious errors are not the consequence of deep DSGE theorizing, but instead result from the use of rules of thumb and a failure to apply basic economics. As Scott Sumner never tires of saying (and sadly, must keep repeating because those who are slaves to the rule of thumb are hard of hearing and learning) the near universal practice of using interest rates as a measure of the state of monetary policy is a category error: befitting a Chicago trained economist, Scott cautions never argue from a price change, but look for the fundamental supply and demand forces that cause a price (e.g., an interest rate to be high or low). (As a Chicago guy, I have been beating the same drum for more than 30 years.)

And some historical perspective is in order. The Fed’s history is a litany of fumbles, some relatively minor, others egregious. Blame for the Great Depression and the Great Inflation can be laid directly at the Fed’s feet. Its most notorious failings were not driven by the prevailing academic fashion, but occurred under the leadership of practical people, mainly people with a banking background,  who did quite good impressions of madmen in authority. Ms. Booth bewails the “hubris of Ph.D. economists who’ve never worked on the Street or in the City,” but people who have worked there have screwed up monetary policy when they’ve been in charge.

As tempting as it may sound, “First, kill all the economists!” is not a prescription for better monetary policy. Economists may succumb to hubris (present company excepted, of course!) but the real hubris is rooted in the belief that central banks can overcome the knowledge problem, and can somehow manage entire economies (and the stability of the financial system). Hayek pointedly noted the “fatal conceit” of central planning. That conceit is inherent in central banking, too, and is not limited to professionally trained economists. Indeed, I would venture that academics are less vulnerable to it.

The problem, therefore, is not who captains the monetary ship. The question is whether anyone is capable of keeping such a huge and unwieldy vessel off the shoals. Experience–and theory!–suggests no.

 

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A Refreshingly Un-Straussian–and Evil–Statement from a Diehard Neocon

Filed under: History,Military,Politics — The Professor @ 4:33 pm

Many neoconservatives are devotees of Leo Strauss. Among the hallmarks of Straussian thought and rhetoric are indirection and concealment. The Straussian neocon does not make statements and arguments that are transparent to, understandable to, and have common meaning for, all. Instead he writes or speaks in a language that conveys very different meanings to the initiated, and to mere hoi polloi who are duped into supporting things from which they would recoil from in horror if they actually understood what is going on.

Thus, Bill Kristol is to be congratulated for being transparently evil, rather than deviously so as a Straussian would be. This afternoon he tweeted:

Obviously strongly prefer normal democratic and constitutional politics. But if it comes to it, prefer the deep state to the Trump state.

The phrase “deep state” has its origins in Turkey, and means that a nation’s true rulers are the security and intelligence apparatus working behind the scenes, rather than the duly constituted civil authorities to whom the said apparatus is formally subordinate. In the deep state, the de facto rulers are quite different from the de jure government: a very Straussian arrangement, come to think of it, because the surface appearance is completely at odds with the reality.

In addition to Turkey, Egypt is considered to be another exemplar of the Deep State phenomenon. And viewed objectively, a siloviki-dominated Russia is another exemplar. The Duma plays for show: the siloviki play for dough.

So it is ironic that someone who has excoriated Trump for his alleged affinity to Russia is an avowed supporter of bringing Russian (and Egyptian and Turkish) deep state methods to the United States. All because he doesn’t like the current occupant of the White House.

I called Kristol’s statement evil, and I mean that. It is evil unadulterated. The gravest threat to individual liberty and safety is an unaccountable state. The entire American Constitutional system of checks and balances is predicated on the bedrock principle that every person in every branch of government is accountable and subject to checks and balances that constrains him (or her) from wielding power not authorized under law and the Constitution.

Lincoln called this system “the last, best hope of earth.” And Bill Kristol is willing to sacrifice this last, best hope because he doesn’t like Donald Trump.

The Sorcerer’s Apprentice comes to mind here. Kristol blithely summons forces that he cannot control–and that no one can control. Once these powers are invoked, they will do as they will, not as Bill Kristol and all the others who are totally OK with an intelligence agency coup would like. Once the Deep State is empowered, it will not go away. It will be emboldened to enhance that power. Again, the siloviki model shows that clearly.

And there are so many historical examples that demonstrate how these bargains almost always go wrong. Consider the Roman rulers who invited barbarians to intervene on their side in internecine conflicts. . . . and then couldn’t get rid of the barbarians when “victory” had been achieved.

The Founders were deeply suspicious of a standing army because of the threat it posed to liberty and republican government. The United States has proved remarkably successful at constraining the uniformed military. But the intelligence establishment presents a threat far, far more dangerous than anything that the Founders could have possibly imagined, and a far greater threat than the uniformed military, precisely because it operates in the shadows and because it controls information–and information is power. It also controls misinformation and disinformation, and those are powerful too.

The right and proper way to deal with Donald Trump–or any president, for that matter–is to ensure that the existing system of checks and balances works, rather than undermine it in a way that will result in its destruction. We have already seen this in action. The Ninth Circuit–wrongly in my view, but that is not the point–has already stopped one administration initiative. The likelihood that Trump will get most of his legislative agenda through is extremely low. His executive orders have been more symbolic that substantive, precisely because the power of the presidency does have limits. For all his bluster, there are many ropes that keep Trump tied up like Gulliver.

It is beyond disgusting to see people like Kristol pay lip service to “normal democratic and constitutional politics,” and then cheer the subversion of those norms. Disgusting, but useful. At least those who actually do believe in democratic and constitutional politics know who they are fighting, and what those they are fighting stand for.

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February 13, 2017

The Intelligence Community Coup Continues

Filed under: History,Military,Politics,Russia — The Professor @ 8:27 pm

Update (2239 CST, 2/13/17). The pack has caught its quarry: Flynn has resigned. The taste of blood will just excite their appetite for more. Further, this will show that leaking works. Unless this is rooted out ruthlessly, this administration will die the death of 1000 leaks. Regardless of what you think of Trump, the ramifications of this are disturbing indeed.

The hounds are baying at the heels of National Security Advisor Michael Flynn. Flynn’s sin was to discuss sanctions with the Russian ambassador Sergey Kislyak before inauguration. Flynn denied this when the issue was allegedly raised.

Flynn’s denial has been challenged by the Washington Post, which relied on descriptions of intercepts of Flynn’s communications with the Russian ambassador. Flynn’s alleged dishonesty has allegedly led Trump to “evaluate” his status.

The substance of Flynn’s conversation with the Russian ambassador was benign. The WaPoo reports it thus:

Two of those officials went further, saying that Flynn urged Russia not to overreact to the penalties being imposed by President Barack Obama, making clear that the two sides would be in position to review the matter after Trump was sworn in as president.

“Kislyak was left with the impression that the sanctions would be revisited at a later time,” said a former official.

“Cool your jets.” Wow. How incendiary. Even if the interpretation placed on Flynn’s alleged words is correct, he did nothing more to say that sanctions would be part of broader discussions with Russia. This is a surprise why, exactly?

I further note that the WaPoo is basically serving as a ventriloquist’s dummy, dutifully mouthing “a former official’s” interpretation. (My nominee for the “former official”: Ex-CIA director and all around slug John Brennan.) Everything about “making clear” and “left with the impression” is the “former official’s” interpretation. Does he read minds? Kislyak’s in particular?

If Flynn is to be axed because he dissembled, every figure from every past administration should be sanctioned in some way. It’s almost amusing how the WaPoo is SHOCKED! SHOCKED! at the thought. FFS. Ben Rhodes comes out and says that the Obama administration lied to the media and the public as a matter of policy, and the WaPoo shrugged its shoulders so hard it took months of chiropractic treatment to straighten out.

And none of this is the real story. The real story is that this is just another act in the intelligence community’s attempted coup of the duly elected president of the United States. Consider the facts here. First, the intelligence community was surveilling Flynn’s communications. Second, it leaked those communications in order damage him and the president of the United States over a matter of policy disagreement.

The chin pullers seriously intone that Flynn may have violated the Logan Act, i.e., that he was conducting diplomacy as a private citizen. But if he was a private it was unlawful to surveil him without a warrant, or if his communications were intercepted while communicating with a legitimate target of surveillance, his communications had to be discarded/minimized, and certainly NOT leaked. (Exceptions include those communicating with Al Qaeda and other terrorist organizations. Russian ambassadors don’t count.)

If he was not a private citizen, the Logan Act allegation is bullshit. In that case, Flynn had some official status, and his communications were almost certainly classified, which would make leaking them a crime.

So whatever way you cut this, someone in the intelligence community has committed a crime, or multiple crimes.

This episode also gives the lie to the IC’s justification for not providing anything more than a Wikipedia entry to document alleged Russian hacking of the election. Recall that the IC claimed that releasing specific communications was impossible, because it would compromise sources and methods.

Um, this leak about Flynn doesn’t?

Evidently–and not surprisingly–the IC’s concerns about “sources and methods” are oh-so-situational, aren’t they?

This is all beyond the pale. Yet anti-Trump, pro-IC fanboyz (e.g., the execrable John Schindler) think it’s just great! Trump is the security risk, so everything’s fair! The ends justify the means!

Um, no. If these IC people have a basis to believe that they should resign publicly. They are not judge and jury. To arrogate those roles is a violation of the constitutional order, and they should be terminated forthwith, and prosecuted if they are revealing classified information. (Funny how Schindler was all for hanging Hillary from the highest tree for jeopardizing classified information on her server, but he’s all in with these leaks.)  Those who are currently outside government should be prosecuted as well.

The irony meter has exploded from being overloaded, but I will mention another irony: Schindler, Brennan, and other critics of Snowden constantly said that he should have taken his concerns through channels, rather than leaking classified material based on his own political views. More situational “ethics”: apparently this “go through channels” dictum is not operative when Trump or Flynn are involved.

Yet another irony: those baying the loudest here also constantly intone ominously about the threat that Putin and the siloviki pose. But what is the siloviki (one component of it anyways) but senior intelligence personnel acting outside the law in order to exercise power and decapitate political enemies and rivals? So those who warn of the danger of the Russian siloviki grab their pom-poms and lead the cheers for American siloviki.

Why is this happening? I think the problem is overdetermined, but there are a couple of primary drivers.

First, there is intense bad blood between Flynn and the CIA. This apparently goes back to Flynn’s opposition to the CIA’s glorious endeavors in Syria, most notably his incredibly prescient prediction of the rise of ISIS, and his insinuation that this would be the direct result of US policy (acting largely at behest of the oil ticks in the Gulf), either intentionally or unintentionally. This is payback, and also an attempt by the CIA in particular to defend its prerogatives against someone who is deeply skeptical of its (disastrous) machinations.

Second, it is a well known strategy of those who want to attack the king to strike at his trusted retainers first. This isolates the king; makes him reluctant to rely on others (because in so doing he makes them targets too); and sends message to those who dare to support the king.

It is for this reason that I believe that Trump will not throw Flynn to the hounds, at least not now when the baying and panting is at its most intense. He knows that it would just encourage his enemies to select a new fox once they tear this one to pieces. And he also knows that eventually they will be emboldened to go after him directly.

Regardless, this is an extremely dangerous turn of events. The intelligence community (which has a litany of failures to its “credit”) cannot be allowed to use leaks and surveillance to undermine the legal order, either because of a policy disagreement, a dislike of the man elected president, or to protect its institutional interests (including protecting it from being held accountable for past failures). Once upon a time the left–the Washington Post prominent among them–told us the same. But that was then, and this is now.

PS. I suggest you also read Spengler’s take on this, which is similar to mine.

 

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