Streetwise Professor

June 17, 2017

Out of the History, Into the Heat

Filed under: History — The Professor @ 2:31 pm

Apologies for the paucity of posts over the last couple of weeks. I was traveling, bracketed by a visit Zug and Lugano for speaking and teaching and a trip to Oxford for a commodities conference. In between I bounced around France for 12 days–first real vacation I’ve had in years.

My itinerary was Paris-Rouen and environs (Gisors, Gaillard, Harcourt)-Bayeux-Omaha Beach-Avranches-Mortain-Mont St. Michel-St. Malo-La Rochelle-Bordeaux-Chinon-Chartres-Paris (where I spent a couple of enjoyable days with my uncle, aunt, and my cousin and her family). My main focus was, as usual when I travel, history. With the exception of the foray to La Rochelle and Bordeaux (which wasn’t worth the extra mileage), I was not disappointed.

Perhaps my favorite spot was Chinon, even though I’ve been there before. It is hard to imagine such a small place with so much history. In the space of a few acres took place dramas involving the Plantagenets (and notably Henry II and his three sons–who will never be confused for a Fred MacMurray sitcom!–as portrayed in A Lion in Winter), Phillip II of France and the forces of Bad King John (one of Henry’s sons), and most notably, Joan of Arc. Chinon is quite beautiful, offering very pleasant views of the Loire Valley, and blessed with remnants of the castle dating from the 12th-14th centuries. (Not far away is the Abbey of Fontevraud, most notable for the effigies of Henry II, the formidable Eleanor of Aquitaine, and Richard I. It is also definitely worth a trip.)

The connection with Joan is most meaningful to me. It was to Chinon that she traveled in order to meet the future King Charles. Charles attempted to disguise himself, to test Joan’s supposed gifts. But the Maid immediately picked him out in the throng of the court, ignoring the servitor dressed in Charles’ clothing. Overcoming the incredulity of the court at the temerity of a young girl claiming to be a messenger of God sent to redeem France, she persuaded Charles to let her lead an expedition to Orleans, where she led seemingly forlorn hope charges that routed the besieging English and freed the city. From Orleans she led Charles to Reims for his coronation. That was the acme of her career. Her subsequent attack on Paris failed, and soon thereafter she was captured by the Burgundians (perhaps as the result of treachery–there is no doubt that Charles subsequently betrayed her), ransomed by the English, then burned at the stake in Rouen.

Joan has the remarkable talent to dissolve the deepest cynicism of people like her battle-hardened contemporaries, Mark Twain–and me. I actually would consider it more miraculous if she achieved what she did without divine intervention, than with it. How can you explain an ignorant peasant girl persuading kings, becoming an inspirational war leader and skilled tactician, and devising the strategy that reshaped western European politics, all in the course of a few short months? Her performance at her trial–she was both brave and clever–is equally inexplicable, given her background. Her moments of doubt when confronted with the pyre were human, and were redeemed by her decision to suffer a horrible death rather than suffer dishonor, and her transcendence as the flames devoured her. Yes, she has been mythologized, and conscripted in religious and political battles over the centuries, but the basic facts of her life are well-documented and those speak for themselves. I cannot think of a parallel in history: she is an exception that proves many very dreary rules.

I have previously been to Chinon, Orleans, Reims, and Compiègne (where she was captured). Rouen was the last major scene in her life that I visited. There is a single tower remaining from the Rouen Castle where she was imprisoned during her trial (but it is not the tower where she was kept). There is a small garden marking the spot in the Rouen marketplace where she was immolated as a heretic. There is a fairly new multimedia presentation about her trial in a building that is part of the cathedral complex–it’s worth a visit.

The physical remains of the scenes of her life are almost non-existent–the room where she met Charles in Chinon is no longer there, for example–but visiting those traces does evoke thoughts about her remarkable life and career.

I’m back in Houston now, just in time for summer to begin in earnest. So the work–and the posting–will resume. Hopefully it will be improved by a relaxing few weeks immersed in history and historical places.

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We Can Now Bound From Above the Price of German Principles

Filed under: Commodities,Economics,Energy,History,Military,Politics,Russia — The Professor @ 12:30 pm

If you really concentrate, I’m sure you can stretch your memory to recall those long past days when Angela Merkel was hailed as the new Leader of the Free World, most notably because of her stalwart stance on Russia, in contrast to Trump, who was deemed a squish on Russia at best, and a collaborationist at worst. But that was so . . . May. Now in mid-June, the Germans and much of the rest of Europe and their fellow travelers here in the US are totally losing it over the 98-2 vote in the US Senate (the two dissenters being ideological bookends Rand Paul and Bernie Sanders) to strengthen the sanctions regime on Russia, and notably, to limit Trump’s ability to relax sanctions unilaterally.

So: In May, soft on Russia bad, hard on Russia good. In June, hard on Russia bad. In May, Trump had too much power. In June, limiting Trump’s power is inexcusable.

What changed? Actually nothing changed. This is volte face reflects an enduring constant: German commercial interests. The Senate sanctions bill would impose potential penalties on those assisting in the construction of Russian pipelines, most notably NordStream 2. NordStream 2 is a joint project between Gazprom and a handful of major European, and particularly German, corporate behemoths.

German explanations of the motivation behind the Senate’s action betray extreme psychological projection. Echoing Gazprom (an action which if you were to do it in the US would immediately bring down upon on your head screams of “RUSSIAN TROLL”), several European policymakers have claimed that this action was intended to advance the interests of US LNG exporters.

Um, no. Not even close. The objections of the US to NordStream date back to the Obama administration, which was hardly a major promoter of the US natural gas industry. Further, the main drivers in the Senate were people like McCain, for whom economic considerations are tertiary, at best: McCain et al have had it in for Russia generally and NordStream particularly for geopolitical reasons, and their opposition dates back years. Moreover, the bill reflects the current anti-Russia hysteria in the US, which in turn reflects a strange mix of political factors, not least of which is the clinical insanity of the Democratic Party post-November, 2016.

Indeed, US opposition to Russian gas pipelines into Europe dates back to the Reagan administration. The US tried to stop the pipelines through Ukraine that Putin is now trying to outflank with NordStream, because it thought the pipelines provided an economic benefit to the USSR and made Europe hostage to Russian economic pressure. This was in fact a source of one of the few disagreements between Thatcher (who supported the pipelines) and Reagan.

How much did the US hate the USSR-Europe gas pipelines, you ask? Enough to blow them up. Blow them up real good: “The result was the most monumental non-nuclear explosion and fire ever seen from space.”

Those who claim economic motivations say a lot more about themselves than they do about the US Senate: adopting a policy to advance German/European economic interests is exactly what they would do, and they are projecting this motivation on the US.  Indeed, the Germans’ hysterical reaction demonstrates just how important economic considerations are to them, and how marginal are geopolitical considerations vis-a-vis Russia.

If you think the Russians are as big a threat as the Germans and other gas-poor nations say, they should be deeply grateful for the emergence of US LNG which reduces their dependence on the evil Russkies. But the Germans say: we don’t want your methadone, we’d rather continue to buy smack from this really nasty dealer.

The hypocrisy and projection don’t stop there. Of course German economic policy is strongly oriented towards boosting its exports, often at the cost of beggaring its supposed European brothers and sisters (especially the swarthy ones down south). What’s good for zee goose, kameraden. .  .

Further, recall (if you can remember back that far) that one reason for the German/European freakout over Trump in May was his refusal to acknowledge solidarity with our allies by mouthing the words “Article 5.” All for one! One for all!

Right?

Well, eastern Europeans–the Poles in particular–think that NordStream basically sells them out to the Russians in order to benefit Germany. The Germans have totally blown off this criticism, and have subjected the Poles and Baltic States to considerable criticism and pressure for their opposition to NordStream. So much for European solidarity. It’s all for one, all right: that one being Germany. That one for all . . . not so much.

It gets better! Merkel and other Euros are fond of saying “more Europe.” Well, that’s exactly what the dispute and the sanctions are about, isn’t it? The economics of NordStream 2 are dubious, but it presents a nearly existential threat to Ukraine. The entire reason for the conflict in Donbas and the seizure of Crimea (conflicts that Merkel is allegedly attempting to mediate) were Ukraine’s attempt to move closer to Europe.

That is: (1) Ukraine takes “more Europe” seriously, and enters into an agreement with the EU that would open up trade with an eye on Ukraine joining the union in the future, (2) Putin takes exception to this, and initiates a series of actions that culminate with the ouster of Yanukovych followed by the seizure of Crimea, and a hot war in Donbas, (3) the US Senate attempts to penalize Russian actions by sanctions, and (4) the Europeans scream bloody murder at US intrusion into their policy domain.

In other words, when forced to put their money (and their gas) where their mouths are, the Europeans jettison “more Europe”. And then turn around and slag the US for taking them at their word.

Hey, they can do what they want. And the US can do what it wants. Just spare me the sanctimonious bullshit about standing up to Russia, European solidarity, more Europe, and on and on. It’s all about the Euros, baby–€–and German € in particular. Every “principle” that supposedly earned Merkel the designation as Leader of the Free World went out the window in a nanosecond, once some big German companies were going to have to pay a price for those principles.

We can now bound from above the price of German principles. The upper bound is in the billions of Euros. I am sure that the true price is far lower than that.

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June 9, 2017

Jim Comey: The Perfect Boy Scout in the DC Troop

Filed under: Politics — The Professor @ 1:20 pm

In the past, I have called James Comey a weasel and a douchenozzle. I was wrong. I therefore extend a sincere apology to all weasels and douchenozzles.

Comey is far worse. He is the consummate swamp thing. A self-serving “public servant.” An appartchik whose ethics are purely situational, with the salient part of the situation being how it affects his interests, and his armour propre.

Comey’s testimony yesterday was breathlessly awaited, yet deeply disappointing to most of the breathless. Yes, he tried to smear Trump, with some success, but what he succeeded at best was smearing himself. By revealing the kind of man he really is.

The main revelations of the testimony were not damning to Trump: they were exculpatory. As Marco Rubio–Marco Rubio!–hardly a Trumpian–pointed out, the only thing about his private conversation with Trump that Comey didn’t anonymously leak was the fact that Comey had indeed told Trump on three occasions that he was not under investigation.

Rubio was wrong, actually: another thing that Comey conveniently left out of his leak was the fact that Trump encouraged him to go after “satellites” in his campaign who might have engaged in illicit activities in connivance with the Russians. That hardly sounds like a coverup, or pressuring Comey to stop investigating.

There is a legal requirement in the US that illustrates the wrong that Comey committed–the Brady Rule. No, it does not apply strictly here, because this is not a formal legal matter, but it reveals the principle. The Rule mandates that prosecutors reveal all exculpatory information. The Rule exists because without it, prosecutors could lie by omission. And that is exactly what Comey did in his leaks.

Comey said that he leaked in order to prompt the naming of a special counsel. The fact that he leaked selectively and left out exculpatory evidence shows that he did so in bad faith, and arguably out of malice at being fired. Comey’s revelation calls into question the basis for naming the counsel in the first place. Apparently he felt that the whole truth might not have produced the desired result. So he lied by omission.

The timing also calls into question the appointment. Comey did not leak–or make a public statement–when the allegedly suspect communications took place, as would have been necessary and appropriate had he believed that Trump’s behavior was so egregious that it demanded an independent investigation. The leaking took place after he was fired. This further strengthens the case that he acted out of spite due to an affront to his person, rather than a belief that the president had indeed committed an offense, or that those around him had done so. If he had believed so, he would have believed it at the time and acted on it. The fact that he waited until after he was fired is damning.

Comey said there were “a variety of reasons” for his decision to leak, rather than go public, either when he was Director or after his termination. What would those be, sir? The fact that by leaking anonymously you could do so selectively in a misleading way, and avoid being questioned and confronted so the public could learn the full story (which would cast doubt on the need for a special counsel)? The fact that by leaking, you could let the misleading story fester for days and become truth in the public mind though it was much less than the whole truth? The fact that leaking adds a certain frisson of excitement, and element of mystery, that intensify interest and attention?

I can’t think of a good reason–a truly publicly spirited reason. An honorable man would have manned up, and gone public. But James Comey is a back shooter.

There are other things in his testimony that reveal his essential nature. For instance, he said that he knuckled under when Loretta Lynch ordered him not to refer to the Hillary investigation as an investigation, even though he knew that she was ordering him to parrot the Clinton campaign characterization of the situation–not the reality.

Crucially, Comey said that he did not push back because he didn’t want to “die on that hill.” Meaning that he wanted to keep his job, and would put up with AG interfering in his performance of that job as long as he kept it. Presumably Comey would have remained silent about his conversation with Trump, as he did about his conversation with Lynch, had Trump kept him in place.

What Lynch said was actually more egregious than what Comey reports Trump said about easing up on Flynn. And it gets worse. Comey also stated that he believed that the Lynch meeting with Bill Clinton fatally compromised her in connection with the Hillary investigation. So he felt obliged to step in and act.

Well, Mr. Comey–isn’t the situation that you describe exactly one in which a special counsel would be warranted? A special counsel would be able to act more objectively than a compromised attorney general and Justice Department–and you believed they were indeed compromised. Yet you did not privately recommend to Lynch the appointment of a special counsel; nor did you call for one publicly; nor did you leak damaging information in order to create public pressure that would have forced Lynch to appoint a special counsel, as you did with Sessions. Instead, you intervened, protected Lynch–and kept your job.

This is yet more evidence that Comey’s leaks were malicious revenge for being fired, rather than an attempt to see justice done. The case for a special counsel was stronger when Lynch was AG, yet Comey did not make it nor attempt to manipulate the situation to lead to an appointment of a special counsel, as he did after he was fired by Trump.

I could go on, but the whole thing is so distasteful and the foregoing is sufficient to show what an appalling person James Comey is.

Trump of course is largely to blame for his predicament. His lack of a filter, impetuosity, suspect judgment, and garbled syntax give enemies, like Comey, ample ammunition to fire at him. Trump has paid a big political price for firing Comey, but given what the man has been revealed to be not just by his testimony yesterday, but his performance over the last two years, that is a price worth paying. For a devious, self-serving, ambitious, and arrogant man like Comey would have done far more damage to Trump had he remained in place, than he has done by his despicable conduct after being fired.

Comey is often described by DC people as a “boy scout.” That says a lot about what the Scout’s Oath is in the DC troop–in other words, it is about 180 degrees from the one recited outside the Beltway. Jim Comey’s oath was to do his best for Jim Comey, the country be damned.

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June 8, 2017

Rosneft Follies, Redux

Filed under: Commodities,Economics,Energy,Russia — The Professor @ 1:16 pm

Sarah Mcfarlane dropped a long piece in the WSJ claiming that the already sketchy Rosneft-QIA-Glencore deal was even sketchier than it appeared at the time, hard as that is to believe. Specifically, according to Sarah (and Summer Said), Putin and the emir of Qatar, Sheikh Tamim bin Hamad Al Thani, agreed in that Russia would repurchase the stake at a future date:

Moscow agreed with Qatar that Russia would buy back at least a portion of the stake from the rich Persian Gulf emirate, the people said. The Qatar Investment Authority and Glencore, the Swiss-based commodities giant, formed a partnership to buy the 19.5% stake in Russia’s energy jewel at a time when Mr. Putin’s government needed cash.

The people with knowledge of the deal say the buyback arrangement was negotiated with involvement from Mr. Putin and the emir of Qatar, Sheikh Tamim bin Hamad Al Thani. Russia and Qatar saw it as an opportunity to build a bridge between countries that had taken up opposite sides in the Syrian civil war, the people said. One of the people said the buyback would happen in the next 10 years.

Color me skeptical. For one thing, Glencore is a principal in the deal, and it would have to sign off too: the story does not assert, claim, suggest, or imply that Glencore did so. Both Glencore and QIA vigorously deny the story, for whatever that’s worth, as do the Russians. (As an aside, a source in Russia tells me that Ivan Glasenberg refused to discuss anything about the deal recently. Why the UK authorities and the LSE are so willing to accept the extremely deficient disclosure by a major UK issuer relating to a major transaction is beyond me. Maybe they are trying to convince Saudi Aramco that if it lists in London, it can do pretty much anything anywhere, no questions asked! BP’s silence is also curious.)

For another thing, Putin saying “I’ll buy it back later” without a mechanism to determine price is meaningless. I smile when I think about the number of times going back to at least 2006 the Russians announced that they had almost completed a gas deal with China: all that remained to determine was the price! And this went on year, after year, after year.  In other words, no agreement on pricing means no real agreement.

This is pretty funny:

Qatar wanted its Rosneft stake to be temporary, the people said. The emirate believes it will profit from selling the shares back to Russia at a later date, the people said, betting that oil prices will rise and push up Rosneft’s share price. Qatar saw the political benefits of giving Russia access to quick cash as a sort of loan to address a budget deficit that had widened due to lower oil prices, the people said.

In the 7 months (to the day) since the deal was announced, this has turned out to be a bad bet: Rosneft’s stock is down about 12 percent in Euros. (It’s down about 18 percent in rubles.)

This raises some other crucial issues. The €2.8 billion that QIA and Glencore put down represents about 26 percent of the value of the deal. Meaning that about one-half of the equity cushion is gone. Thus, the indemnities and guarantees that the Russian banks provided Glencore (there is no clarity on whether they similarly indemnified the QIA portion of the loan, but its non-recourse nature suggests they did) are getting pretty close to being in the money. Given the recent bloodbath in the oil market there is a decent probability that the loan will be underwater in the near to medium term.

Intesa’s statement suggests that QIA is indemnified/guaranteed too:

An Intesa spokesman said the loan to the Qatar/Glencore partnership “is covered by a robust package of guarantees.” Intesa is trying to spread the risk of its loan by syndicating it to other banks, but a person familiar with the matter said the bank hasn’t yet found willing banks.

The syndication part makes me laugh. Um, you’re kinda supposed to arrange the syndication at the front end, either before the deal or shortly (I mean days) afterwards. Seven months later, when you have zero negotiating leverage because you already are wearing the entire loan? With about half the equity cushion gone? With the loans being backed by Russian banks that are (a) not in the most robust health, and (b) under a cloud due to Russian sins real, and recently, feverishly imagined? Yeah, that will be an easy sell! I’m sure other banks are just lining up for a piece of that!

In bocca al lupo, signori!

The story suggests that Putin pressured Sechin to stitch together this Frankenstein’s monster to address pressing budget issues. I have no doubt that this was done under duress, but less because of budget than because of prestige and reputation. Putin had said that a stake in the company would be privatized in 2016, and to a non-Russian buyer. So Putin put his reputation on the line, and Sechin had to come through.

But virtually all the downside risk resides in Russia (something I pointed out early). So although the deal (a) generated some cash inflow that did address some budget issues, and (b) provided some reputational benefits (for a few weeks, anyway), it did nothing to mitigate the Russian government’s exposure to Rosneft’s downside, but did give away the upside. In essence, Putin and Sechin got their PR play by giving away a put on Rosneft. That’s what enticed QIA and Glencore.

In other news from the bizarre world of Russian–and Rosneft specifically–transactions, the Rosneft/Sechin-Sistema litigation rolls on. Indeed, Sechin increased his demands by more than 50 percent, from $1.9b to $3b. My same Russian source says all of Russia is mystified by this, but he did provide a valuable tidbit.

What had mystified me was how Rosneft could go after Sistema when it bought Bashneft from the state. Well, apparently Igor was in such a hurry to complete the deal that Rosneft didn’t begin the audit/due diligence until after the deal was completed! 

Why was Igor in a hurry? My guess is that Putin had opposed Rosneft’s purchase in August, and changed his mind in September, and Sechin wanted to move before Putin changed his mind again.

Perhaps Igor was thinking that if the audit uncovered irregularities, he could get a Russian court to give him a mulligan and claw back the money. In which case, the current litigation might have been part of the plan (at least as a contingency) all along.

I’m still puzzled, though, because some of the things Sechin goes on about (e.g., the sale of Bashneft’s oilfield services business to a Sistema entity, and the subsequent contract between Bashneft and that entity for said services) was known about before. So maybe Igor is just throwing everything into the litigation claim, even when it doesn’t make any sense. After all, this isn’t being heard in a London court or arbitration in a European country: although this is an intra-Russian dispute, Sechin definitely has home field advantage.

Keep this all in mind whenever anyone (and now it seems that means pretty much everyone) tries to scare you about the Russian bogeyman. The follies of one of Russia’s premier companies, a so-called national champion, illustrate just what a ramshackle, and at times clownish, contraption the Russian state is. Putin does a great Wizard of Oz imitation, but when Toto pulls back the curtain as has happened with the Rosneft/Glencore/QIA deal, you’ll see that there’s a little man blowing a lot of smoke.

 

 

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June 4, 2017

Terrorism, Populism, and Elite Failure

Filed under: History,Politics — The Professor @ 1:02 pm

Yesterday witnessed yet another terrorist attack in Europe, leaving seven dead in London.

The London mayor, safe behind his massive security detail, assures that there’s no reason to be alarmed.

Easy for him to say. Revelers and pedestrians, not so much.

This kind of vapidity is of a piece with something that I’m sure we’ll hear yet again: People overreact to terrorism. After all, you are more likely to die in your bathtub or some such than be slain by a terrorist. So accept it! Don’t be alarmed! Nothing to see here.

For one thing, this banality about violence does violence to statistics. I’m pretty sure that the Saturday night partiers in London or the cartoonists at Charlie Hebdo or the attendees at a concert in Paris or the celebrants in Nice or the schoolgirls at a concert in Manchester are not in demographic cohorts heavily represented in the statistics of bathtub slips and falls.

For another, there is a difference between a small risk willingly taken to achieve some other benefit and being subjected to the risk of political violence in return for no benefit whatsoever. I am perfectly aware that every time I get in my car to go somewhere, I might be killed in an accident. That is part of the full cost of driving, and when I decide to drive I do so because the benefit of the trip exceeds the full cost. I made that choice. Getting decapitated by a religious fanatic while going out for a drink should not be something that must be considered when evaluating the pros and cons of a night on the town. That is the result of a breakdown of public order, not a private misfortune to which everyone is prone.

But those aren’t the biggest reasons to object to the bathtub comparison. The biggest reason is that intuitively people recognize that there is a difference between political violence, a social phenomenon, and the ordinary risks of every day living. They recognize that political violence may start with small, isolated instances, and spin out of control. The history of humanity is a dreary litany of social and political violence, and people have an intuitive sense that if it is not contained, it can well metastasize and make life all but unbearable. People rightly dread the prospect of political violence, because if unchecked, its trajectory is almost always upwards not the other way round. That is categorically different from the random misfortunes inherent in everyday life, and people intuitively recognize it is categorically different, and therefore react differently to it.

In brief, people realize that if you don’t suppress political and social violence when it is a relatively modest problem, it will become bigger: and that if you can’t deal with it when it is a small problem, you will be totally overmatched when it grows.

It is particularly infuriating when such platitudes pour from the pieholes of pompous politicians, of whom the London mayor is only the latest, and by no means the most powerful–the recently elected president of France, and the departed and unlamented (by me, anyways) president of the United States have uttered similar “thoughts.”

The only principled argument for the existence of the state is that people exchange some liberties for security of their lives and property. The primary–and to a classical liberal, sole–reason for the state is to provide such protection. When it fails to do so, it has failed utterly in its mission. When those ostensibly responsible for governing trivialize these failures, it is unpardonable.

It is particularly unpardonable in places like France particularly, but almost as much in the UK, and increasingly in the US, where the state holds itself out as omnicompetent to rule over every aspect of citizens’ lives. As the saying goes: you had one job. You fail at that, yet you presume to tell us that we should trust you with everything from health care to occupational licensing to monetary policy to all the other goddam things you claim only the government can do?

The initial reaction of the increasingly horrid British PM, Theresa May, encapsulates–yet again–the elite failure that is the hallmark of the 21st century. May posits that it might be necessary to restrict–wait for it–the Internet. If you are going to constrain liberties further in your feeble attempts to provide security, mightn’t a little more targeted approach be better, Ms. May? Starting, say, with places like the Finsbury Park Mosque? Or the 1000s of individuals which your security forces have already identified as threats (and then apparently ignored until after they act on them)?

But oh no. That would be discriminatory. Can’t have that, can we? But indiscriminate approaches like restricting the Internet or subjecting everyone from toddlers to the senile to security theater at airports are both wildly over inclusive and wildly under effective, thereby entailing great cost with no remotely corresponding benefit. Which just makes the populace all the more alarmed by terrorism, because it makes them all the more convinced that their supposed betters in government are not serious people and do not have their true interests at heart.

The elites are frightened and befuddled by populism: they freaked out at Trump’s very populist reaction to the latest London attacks. They should not be confused in the slightest, but they just cannot admit the truth: that populism is a reaction to profound elite failure, which the elite gives evidence of every passing day. Understanding populism would require that they admit failure, which they adamantly refuse to do.

People fear terrorism when they see it growing and they see those charged with preventing it failing time and again, and consciously avoiding doing the sometimes messy things necessary to do so. That fear seems pretty rational, given the fundamental differences between political violence and the risks of normal life, no matter how frequently the better thans instruct us about mortality statistics.

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June 2, 2017

Trump Rejects the Climate Gateway Drug: Global Progressives Go All Spanish Inquisition

Filed under: China,Climate Change,Economics,Energy,Politics — The Professor @ 7:00 am

The wailing, gnashing of teeth, and rending of garments that has followed Trump’s widely expected decision to withdraw the US from the Paris Climate Accord is truly amazing to witness. It is virtue signaling taken to a new extreme. Indeed, since so many people want to signal simultaneously, each apparently feels obliged to outdo the other in hysterics in order to attract the attention their precious egos crave. Hence the apocalyptic paroxysms of rage that started the moment Trump spoke.

Truth be told, even if one believes the predictions of standard climate models, and even if one believes there will be compliance with the commitments of the Accord (which is slightly less likely than my becoming Pope), it would have a trivial impact on global temperatures: on the order of .2 degrees. The impact of the US withdrawal alone, given its declining CO2 emissions relatively (especially compared to China and India) and even absolutely (something the pious Europeans have not been able to manage despite their moribund economy and costly—and insane–commitment to renewables), means that Trump’s action by itself will have an immeasurable effect on climate in any time frame.

So despite all of the screeching that Trump has doomed—doomed I say!—life on earth, in reality the accord is not a practical agreement, but a ritual. And like all rituals, its primary purpose is to provide an opportunity to display obeisance to a creed, theology, doctrine, or dogma.

Which explains the overwrought reaction: those rejecting creeds, theologies, doctrines, and dogmas are heretics, and heretics must be attacked, ostracized, ridiculed, and in the dreams of some, burned. Trump is accused of heresy on three counts — heresy by thought, heresy by word, heresy by deed, and heresy by action — four counts! Yet he does not confess, and indeed revels in his heresy, only infuriating his inquisitors all the more.

There is much dispute over the concrete effects of Paris qua Paris. Some claim it is merely symbolic. Others claim that it will lead to real policy changes. Whatever the practical effects, there is no doubt about the ambitions of those pushing Paris, and Trump rejected them all. He rejected the delegation of authority over the United States to an unelected and unaccountable (self-perceived but actually utterly failed) elite. He rejected the exploitation of climate concerns to implement a vast scheme of international wealth redistribution.

And perhaps most importantly, he called out, confronted, and rejected the role of Paris as a gateway drug to even more intrusive supranational elite control and power:

The risks grow as historically these agreements only tend to become more and more ambitious over time.  In other words, the Paris framework is a starting point — as bad as it is — not an end point.  And exiting the agreement protects the United States from future intrusions on the United States’ sovereignty and massive future legal liability.  Believe me, we have massive legal liability if we stay in.

Absolutely. Climate concerns (hysteria, really) have become an engine for rent seeking and power grabbing on a global scale never seen before, and it needs to be throttled in the crib. For it is evident from years of experience how the leftist-statist-dirigiste march through the institutions works. Stake out a modest set of policies to achieve a lofty goal. When the policies fall short, impose more draconian ones. When those policies in turn fail, unleash more bureaucratic dragoons to intrude on every aspect of institutional life. And in this case, the institution at stake is the world. Better to stop it now, then to watch it metastasize later.

The reaction has been predictable. Corporate rent seekers—Goldman Sachs’ Lloyd Blackfein, GE’s Jeffrey Immelt, and our favorite among them Elon Musk—have expressed their rage and dismay. Political power seekers, the Euros most notable among them, are beside themselves.

The Euros are particularly amusing. After Trump spurned them, they are now looking to China’s Xie for climate policy leadership, just as they did on “free trade” at Davos. Daddy didn’t give them what they wanted, so they are throwing themselves into the arms of the leader of a biker gang. That will show that meanie, harrumph!

That won’t end well, and don’t bother come crying to us when it doesn’t! China is a mercantilist environmental disaster that will pump out increasing quantities of CO2 for the foreseeable future. China is in this for China, and will exploit climate policy to advance its economic interests while paying lip service to green pieties. Only the willfully self-deluded refuse to see otherwise.

The economic costs of any actual implementation of Paris promises would have dwarfed any benefits accruing to its effects on climate. Force-feeding of renewables will increase energy costs, thereby impairing growth—which will have a disproportionate effect on the poor. Taxes to fund global wealth transfers will have similar effects: and if you think that money transferred to poor countries is going to go to the poor, rather than sticky-fingered elites, you are truly a fool.

So Donald Trump has said we’ll never have Paris. And that’s a damn good thing. Arguably the best thing he’s done—and the shrieking of global progressives is about the best proof of that I can think of.

 

 

 

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May 30, 2017

Clearing Fragmentation Follies: We’re From the European Commission, and We’re Here to Help You

Filed under: Clearing,Derivatives,Economics,Financial Crisis II,Politics,Regulation — The Professor @ 6:33 am

Earlier this month came news that the European Commission was preparing legislation that would require clearing of Euro derivatives to take place in the Eurozone, rather than in the UK, which presently dominates. This has been an obsession with the Euros since before Brexit: Brexit has only intensified the efforts, and provided a convenient rationalization for doing so.

The stated rationale is that the EU (and the ECB) need regulatory control over clearing of Euro-denominated derivatives because a problem at the CCP that clears them could have destabilizing effects on the Eurozone, and could necessitate the ECB providing liquidity support to the CCP in the event of trouble. If they are going to support it in extremis, they are going to need to have oversight, they claim.

Several things to note here. First, it is possible to have a regulatory line of sight without having jurisdiction. Note that the USD clearing business at LCH is substantially larger than the € clearing business there, yet the Fed, the Treasury, and Congress are fine with that, and are not insisting that all USD clearing be done stateside. They realize that there are other considerations (which I discuss more below): to simplify, they realize that London has become a dominant clearing center for good economic reasons, and that the economies of scale and scope clearing mean that concentration of clearing produces some efficiencies. Further, they realize that it is possible to have sufficient information to ensure that the foreign-domiciled CCP is acting prudently and not taking undue risks.

Canada is another example. A few years ago I wrote a white paper (under the aegis of the Canadian Market Infrastructure Committee) that argued that it would be efficient for Canada to permit clearing of C$ derivatives in London, rather than to require the establishment and use of a Canadian CCP. The Bank of Canada and the Canadian government agreed, and did not mandate the creation of a maple leaf CCP.

Second, if the Europeans think that by moving € clearing away from LCH that they will be immune from any problems there, they are sadly mistaken. The clearing firms that dominate in LCH will also be dominant in any Europe-domiciled € CCP, and a problem at LCH will be shared with the Euro CCP, either because the problem arises because of a problem at a firm that is a clearing member of both, or because an issue at LCH not originally arising from a CM problem will adversely affect all its CMs, and hence be communicated to other CCPs.  Consider, for example, the self-preserving way that LCH acted in the immediate aftermath of Brexit: this put liquidity demands on all its clearing members. With fragmented clearing, these strains would have been communicated to a Eurozone CCP.

When risks are independent, diversification and redundancy tend to reduce risk of catastrophic failure: when risks are not independent, they can either fail to reduce the risk substantially, or actually increase it. For instance, if the failure of CCP 1 likely causes the failure of CCP 2, having two CCPs actually increases the probability of a catastrophe (given a probability of CCP failure). CCP risks are not independent, but highly dependent. This means that fragmentation could well increase the problem of a clearing crisis, and is unlikely to reduce it.

This raises another issue: dealing with a crisis will be more complicated, the more fragmented is clearing. Two self-preserving CCPs have an incentive to take actions that may well hurt the other. Relatedly, managing the positions of a defaulted CM will be more complicated because this requires coordination across self-interested CCPs. Due to the breaking of netting sets, liquidity strains during a crisis are likely to be greater in a crisis with multiple CCPs (and here is where the self-preservation instincts of the two CCPs are likely to present the biggest problems).

Thus, (a) it is quite likely that fragmentation of clearing does not reduce, and may increase, the probability of a systemic shock involving CCPs, and (b) conditional on some systemic event, fragmented CCPs will respond less effectively than a single one.

The foregoing relates to how CCP fragmentation will affect markets during a systemic event. Fragmentation also affects the day-to-day economics of clearing. The breaking of netting sets resulting from the splitting off of € will increase collateral requirements. Perverse regulations, such as Basel III’s insistence on treating customer collateral as a CM asset against which capital must be held per the leverage requirement, will cause the collateral increase to increase substantially of providing clearing services.

Fragmentation will also result in costly duplication of activities, both across CCPs, and across CMs. For instance, it will entail duplicative oversight of CMs that clear both at LCH and the Eurozone CCP, and CMs that are members of both will have to staff separate interfaces with each. There will also be duplicative investments in IT (and the greater the number of IT potential points of failure, the greater the likelihood of at least one failure, which is almost certain to have deleterious consequences for CMs, and the other CCP). Fragmentation will also interfere with information flows, and make it likely that each CCP has less information than an integrated CCP would have.

This article raises another real concern: a Eurozone clearer is more likely to be subject to political pressure than the LCH. It notes that the Continentals were upset about the LCH raising haircuts on Eurozone sovereigns during the PIIGS crisis. In some future crisis (and there is likely to be one) the political pressure to avoid such moves will be intense, even in the face of a real deterioration of the creditworthiness of one or more EU states. Further upon a point made above, political pressures in the EU and the UK could exacerbate the self-preserving actions that could lead to a failure to achieve efficient cooperation in a crisis, and indeed, could lead to a catastrophic coordination failure.

In sum, it’s hard to find an upside to the forced repatriation of € clearing from LCH to some Eurozone entity. Both in wartime (i.e., a crisis) and in peacetime, there are strong economies of scale and scope in clearing. A forced breakup will sacrifice these economies. Indeed, since breaking up CCPs is unlikely to reduce the probability of a clearing-related crisis, but will make the crisis worse when it does occur, it is particularly perverse to dress this up as a way of protecting the stability of the financial system.

I also consider it sickly ironic that the Euros say, well, if we are expected to provide a liquidity backstop to a big financial entity, we need to have regulatory control. Um, just who was supplying all that dollar liquidity via swap lines to desperate European banks during the 2008-2009 crisis? Without the Fed, European banks would have failed to obtain the dollar funding they needed to survive. By the logic of the EC in demanding control of € clearing, the Fed should require that the US have regulatory authority over all banks borrowing and lending USD.

Can you imagine the squealing in Brussels and every European capital in response to any such demand?

Speaking of European capitals, there is another irony. One thing that may derail the EC’s clearing grab is a disagreement over who should have primary regulatory responsibility over a Eurozone CCP. The ECB and ESMA think the job should be theirs: Germany, France, and Italy say nope, this should be the job of national central banks  (e.g., the Bundesbank) or national financial regulators (e.g., Bafin).

So, hilariously, what may prevent (or at least delay) the fragmentation of clearing is a lack of political unity in the EU.  This is as good an illustration as any of the fundamental tensions within the EU. Everybody wants a superstate. As long as they are in control.

Ronald Reagan famously said that the nine scariest words in the English language are: “I’m from the government and I’m here to help.” I can top that: “I’m from the EC, and I’m here to help.” When it comes to demanding control of clearing, the EC’s “help” will be about as welcome as a hole in the head.

 

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May 28, 2017

Calling Out the Free Riding Euroweenies

Filed under: Economics,History,Military,Russia — The Professor @ 4:26 pm

Trump’s continued insistence that Europe pony up to pay for its own defense–by living up to its commitment to spend 2 pct of GDP on the military–sent the Euros into a tizzy during the recent Nato and G-7 meetings. Ironically, given that the UK is leaving Europe, the FT has been particularly obnoxious in its defense of the decided lack of Euro defense spending. Two opeds from last week are perfect cases in point.

In this one, Ivo Daalder, former US permanent representative to Nato, and diehard foreign policy establishmentarian, opines that defense expenditures are not the measure of a defense alliance. Instead, “[t]he heart of the alliance lies in the commitment of each member to defend the others.”

That this is retarded is self-evident. What, pray tell, is the commitment to defend worth if those making the “commitment” do not have the means to live up to it?

It is worth exactly nothing. If, for instance, the Russians invaded the Baltics or Poland: what could the Europeans do? They could no doubt issue stirring statements expressing solidarity with their eastern brethren. But as for actually doing something–fat chance.

Belgium has committed to defend other Nato members. Belgium has zero main battle tanks. The Netherlands has committed to defend other Nato members. The Netherlands has 18 MBTs. Germany has committed to defend other Nato members. Germany–an economic colossus–has a grand total of 250 MBTs.

Furthermore, not only do these nations have little actual combat power, they have virtually no strategic mobility. God only knows how the 18 Dutch MBTs would actually make it to Nato’s eastern marches.

When the Europeans intervened in Libya, they depended almost exclusively on the US for reconnaissance, intelligence, and aerial refueling.

In brief, non-US Nato countries have little combat power, and no ability to sustain what little power they have outside of their own countries.

Meaning that the hallowed commitment is worth exactly squat.

The second oped, by a Princeton poli sci prof, claims that Europe pays its fair share because measuring contributions to security by looking at military expenditure alone “rests on an outdated notion of global power.”

Pray tell, Professor Moravcsik, how is that “civilian power” is working out in Syria, Iraq, Libya, Ukraine, etc.? Besides, I thought that the reason that Putin was such a grave threat is precisely that he clings to “outdated notions of global power”, for which the Europeans have no answer.

Moravcsik and others who make the same argument also present a false choice: “civilian power” and military power are not mutually exclusive. In fact they are highly complementary. As the Al Capone line goes, you can get much farther with a kind word and a gun than you can with a kind word alone. That’s especially true when those you are dealing with do not embrace the same post-modern conceits as you.

This last point is of particular importance. “Civilian power” may work in a world where there are only sheep: it is not a feasible strategy when there are wolves, too. Moreover, playing the sheep strategy makes it quite advantageous for others to adopt the wolf strategy. If you declare force to be an “outmoded measure of global power,” and disarm yourself accordingly, as sure as night follows day, a nation or nations will find such “outmoded” notions work quite fine, thank you. Indeed, by disarming you make it quite affordable for economic basket cases that could not compete otherwise (e.g., Russia) to obtain a relative advantage in conventional military power–and a relative advantage is all that they need.  By disdaining “outmoded measures of global power” you make it eminently affordable for less edified nations to achieve an advantage.

Today Angela Merkel said that Europe can no longer rely on the US. That’s projection, Angie baby: the US has not been able to rely on Germany for decades. Well, we can rely on them for pretentious preening, carping, and ankle biting. But for actual contributions to mutual defense, not so much.

Trump is right to continue to pound of the Euros about this. If it hurts their tender little feelings, oh well. Free riders need to be called out.

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May 27, 2017

Comey Channels Maxwell Smart

Filed under: Politics — The Professor @ 6:24 pm

So, the new version of the Comey rationale for dropping the Hillary investigation is that he knew the document claiming that Loretta Lynch had promised a Clinton staffer that the email investigation would go away was disinformation, but it didn’t matter! He had no choice but to drop the investigation lest the disinformation be leaked in order to discredit Lynch if she dropped the investigation. Or something:

Sources close to Comey tell CNN he felt that it didn’t matter if the information was accurate, because his big fear was that if the Russians released the information publicly, there would be no way for law enforcement and intelligence officials to discredit it without burning intelligence sources and methods. There were other factors behind Comey’s decision, sources say.

What complete and utter bullshit.

The I’d-tell-you-but-then-I’d-have-to-kill-you-because-the-information-is-from-super-secret-sources dodge is getting so, so tiresome, especially when the people who tell us this leak like sieves. Such a convenient way of telling partial truths.

But it gets better! Come on, think about it: the Russians would only plant disinformation where they knew it would be found, that is, in communications they already knew were compromised.  What’s the point of passing disinformation through a super-secure channel? You WANT the disinformation to be uncovered, and hence will broadcast it over channels you know the target is monitoring. So revealing this information would have compromised exactly nothing.

Meaning that the new story is inherently contradictory, and an insult to our intelligence.

And please: you think there is no way for the FBI to show that a document is disinformation through independent means? Especially when they knew of its existence in advance of any leak?

Comey (and/or his leaky mouthpieces) remind me of Maxwell Smart. When one stupid story implodes, they try another: “Would you believe . . . ?”

“Would you believe, I knew the story was disinformation, but because of its existence I had to torpedo the Hillary investigation anyways?”

No. We find that hard to believe, Mr. Smart, I mean Mr. Comey.

.

 

 

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May 25, 2017

OPEC and Inventories: An Exercise in Game Theoretic Futility

Filed under: Commodities,Economics,Energy — The Professor @ 11:37 am

OPEC met today, and agreed to extend its output cuts for another nine months. OPEC’s focus is on “rebalancing the market,” that is, on inducing a decline in world oil stocks to a level well below their current inflated value. This is far easier said than done, and indeed may be impossible because of the inability of OPEC to commit to a path of future output. This is because inventory changes result from changes in the temporal supply and demand balance.

In a competitive market, stocks accumulate when there are unexpected increases in supply or declines in demand, and crucially, these shocks are expected to be highly transitory. Similarly, market participants draw down on stocks when there are unexpected declines in supply or increases in demand that are expected to be highly transitory.

The “transitory” part of the story is very important. It makes sense to store when expected future supply is less than current supply, i.e., when future scarcity is greater than current scarcity. It makes sense to draw down on storage when future scarcity is expected to be low relative to today: why carry inventory to a time of greater abundance? Markets move things from where/when they are abundant to where/when they are scarce. Highly persistent shocks to supply and demand don’t affect the temporal balance, and hence to don’t lead to temporal reallocations. Temporary shocks (or shocks to future supply/demand) also change the temporal balance, and lead to inventory changes.

In my empirical work on the copper market (where inventory data is pretty good), I document that a net supply shock with a half-life of about 1 month drives inventory changes. Much more persistent shocks (e.g., those with a half-life of a year) have virtually no impact on inventory.

Inventories can also decline if expected future supply rises, or expected future demand declines. An increase in expected future supply reduces the future value of oil, and makes it less valuable to hold oil today for future use. Or to put it another way, it is desirable to smooth consumption, so if expected future supply (and hence future consumption) goes up, it makes sense to increase consumption today. This can only be done by drawing down on inventory. (Time travel that would allow bringing the abundant future supply back to the present would do the same thing, but alas, that’s impossible.)

OPEC’s desire to cause a drawdown in inventory would therefore require it to commit to a path of output. Further, this path would involve bigger cuts today than in the future in order to cause a temporal imbalance involving an increase in future supply relative to current supply.

But it is unlikely that this commitment could be credible, precisely because of the reason that OPEC gives for fretting about inventories: that they constrain its pricing power. Assume that inventories do drop substantially. According to its own logic, OPEC would feel less constrained about cutting output even further because non-OPEC supplies (in the form of stocks) have declined. Thus, if inventories indeed fall, OPEC’s logic implies that it would cut output further in the future.

But this path is inconsistent with the path that would be necessary to induce the inventory decline in the first place. Indeed, market participants, looking forward to what OPEC would do in the event that stocks were to decline substantially, would choose to hold on to inventories rather than consume them. Meaning that OPEC would fail in its objective of reducing stocks. In the game between OPEC and other market participants, OPEC’s own rhetoric about inventories and supply/demand balance severely undercuts its ability to cause others to consume inventories rather than continue to hold them.

In sum, OPEC is likely to have little if any ability to influence inventories. To influence inventories, it would have to commit to an output path, but that commitment is not subgame perfect/time consistent.

Instead, inventories will be driven by factors outside of OPEC’s control, namely, unexpected transitory changes in supply and demand. But the effect of even those shocks will depend on how market participants believe OPEC will behave when inventories are low. The supply changes will mainly result from shocks to non-OPEC producers (e.g., US shale producers) and to politically unstable OPEC nations like Libya, Nigeria, and Venezuela. Inventory changes may also result from information about the durability of output cut agreements and cheating: a surprise increase in the estimates of future cheating would tend to cause inventories to decline today. Thus, perversely from OPEC’s perspective, its wish of lower inventories may come true only when it is widely believed that OPEC output discipline will soon collapse.

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