Streetwise Professor

December 2, 2016

Lucy Putin?

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 12:53 pm

I was somewhat surprised that OPEC came to an agreement. I will be more surprised if they live up to it: that would be not just going against history, but against basic economics. The incentives to cheat are omnipresent (as the Saudi’s ex-Minister of Petroleum of Petroleum Naimi acknowledged in the aftermath of the announcement). Further, what is the enforcement mechanism? Retaliatory output increases/price cuts (i.e., price wars)? Moreover, given that many OPEC nations are facing acute budgetary strains, the present looms and the future looks very, very far away: consequently, getting some additional revenue today at the risk of losing some revenue a year or two from now when a price war breaks out looks pretty attractive.

The breathless TigerBeat-style reporting of the meeting states that Russia’s last-minute intervention rescued the deal. A few things to keep in mind. Russian oil output has surged in the last few months, meaning that its promise to cut 300,000 bbl/day basically puts its output back to where it was in March. This is in fact pretty much true of the OPEC members too: the deal very much as the feel of simply taking two steps back to reverse the two steps forward that major producers took in the past 9 months (and the two steps forward were no doubt driven in large part to improve bargaining positions in anticipation of the November OPEC meeting).

Moreover, the timing of the Russian commitment is rather hazy. Energy Minister Alexander Novak said Russia would cut “gradually.” That can mean almost anything, meaning that the Russians can say “the cuts are coming! Trust us! We said it would be ‘gradual!'” and that there will be no hard evidence to contradict them.

The most amusing part of this to me is that many are interpreting Putin’s personal involvement as proof that the Russians will indeed cut. “If Putin tells Russian oil companies to cut, they’ll ask ‘how deeply’?”

Seriously?

Call me cynical (yeah, I know), but I find this scenario far more plausible: Putin sweet-talked the Saudis and Iranians to overcome their differences to cut output in order to raise prices, all the while planning to sell as much as possible at the (now 10 percent) higher prices. Breezy promises cost nothing, and even if eventually OPEC members wise up to being duped, in the meantime Russia will be able to sell to capacity at these higher prices. Yes, the OPEC members will be less likely to believe him next time, but Putin’s time horizon is also very short, for a variety of reasons. He’s not getting any younger. And more immediately, the Russian recession is dragging into its third year, and budgetary pressures are mounting (especially since he is committed to maintaining a high level of military spending). The Russian Wealth Fund (one of its two sovereign wealth funds) has been declining inexorably: the rainy day fund is almost empty, and the skies still haven’t cleared. And the presidential election looms in 2018. For Putin, the future is now. The future consequences of making and breaking a promise are not of great importance in such circumstances. But more money in the door today is very, very important.

Russia isn’t like other OPEC producers, which have national oil companies that respond to government orders. Although government-controlled Rosneft is the biggest producer in Russia, there are others, and even Rosneft and Gazpromneft have more autonomy than, say, Saudi Aramco. Yes, Putin could, er, persuade them, but a far more effective (and credible) tool would be to adjust taxes (especially export taxes on both crude and fuels) to give Russia’s producers an incentive to cut output (and especially exports, which is what OPEC members really care about). A tax boost would be a very public signal–and reversing it would be too, making it harder to cheat/renege. (Harder, but not impossible. The government could give stealth tax cuts or rebates. This is Russia, after all.) But I have not seen the possibility of a tax rise even be discussed. That makes me all the more skeptical of Putin’s sincerity.

So my belief is that Putin is stepping into the role that Sechin played in 2009, that is, he is being Lucy beckoning Charlie Brown/OPEC with the football. And Charlie Brown is attempting a mighty boot. We know how that works out.

Even if Putin lives up to his pinky-swear to cut output, Russia has cut a much better deal than the Saudis. The promised Russian cut is about 60 percent of the Saudi cut, yet both get the same (roughly 10 percent) higher price, meaning that (roughly speaking) Russian revenues will rise 40 percent more than than Saudi revenues do–assuming that both adhere to the cuts. The disparity will be greater, to the extent that Russia cheats more than the Saudis.

Time will tell, but what I am predicting is that (a) Russia will not cut anything near 300kbbl/d, and (b) cheating by OPEC members will snowball, meaning that next November’s OPEC meeting will likely be another rancorous effort dedicated to repairing a badly tattered deal, rather than a celebration of the anniversary of a successful and enduring bargain.

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November 29, 2016

A Policy Inspired More by the Marx Brothers Than Marx

Filed under: China,Climate Change,Commodities,Economics,Politics,Regulation — The Professor @ 9:51 pm

As goes China, so go the commodity markets. The problem is that where China goes is largely driven by a bastardized form of central planning which in turn is driven by China’s baroque political economy. In past years, China’s rapid growth conferred on the government a reputation for wisdom and foresight that was largely undeserved, but now more people are waking up to the reality that Chinese policy engenders tremendous waste, and that the country would actually be richer–and have better prospects for the future–if its government tempered its dirigiste tendencies.

Case in point: Morgan Stanley’s Chief China Economist uses the ham-fisted intervention into the coal industry to illustrate the broader waste in the Chinese system:

These reforms entail the necessary reduction of excess capacity, particularly in state-owned enterprises (SOEs) and industries where overproduction issues are often the most acute.

While economists agree that a reduction of excess capacity, particularly in heavy industry, is key to the nation’s efforts to get on a more sustainable growth trajectory, China’s supply side reforms bare little resemblance to the “trickle down” Reaganomics of the 1980s, which seized upon tax cuts and deregulation as a way to foster stronger growth.

In Morgan Stanley’s year-ahead economic outlook for the world’s second-largest economy, Chief China Economist Robin Xing uses the coal industry to detail two key ways in which supply-side reforms with Chinese characteristics have been ill-designed.

“The state-planned capacity cuts and the slow progress in market-oriented SOEs reform have come at the cost of economic efficiency,” laments the economist.

In a bid to shutter overproduction and address environmental concerns, Beijing moved to restrict the number of working days in the sector to 276 from 330 in February.

But in enacting these cuts, policymakers employed a one-size-fits-all approach.

“The production limit was implemented to all companies in the sector, which means good companies that are more profitable and less vulnerable to excess capacity are affected just as much as the bad ones with obsolete capacity and weak profitability,” writes Xing.

This is largely true, but begs the question of why China adopted this approach. The most likely explanation is that the real motive behind the cuts has little to do with “environmental concerns”, though those are a convenient excuse. Instead, forcing the most inefficient producers out of business–or allowing them to go out of business–would cause problems in the banking and (crucially) the shadow banking sectors because these firms are heavily leveraged. Allowing them to continue to produce, and propping up prices by forcing even relatively efficient firms to cut output, allows them to service their debts, thereby sparing the banks that have lent to them, and the various shadow banking products that hold their debt (often as a way of taking it off bank balance sheets).

If the goal was to reduce pollution, it would have been far more efficient to impose a tax on coal-related pollutants. But this tax would have fallen most heavily on the least efficient producers, and would caused many of them to fail and shut down. The fact that China has not pursued that policy is compelling evidence that pollution–as atrocious as it is–was not the primary driver behind the policy. Instead, it was a backdoor bailout of inefficient producers, and crucially, those who have lent to them.

Morgan Stanley further notes the inefficiency of the capital markets which favor state owned enterprises:

As such, this misallocation of production serves to amplify the already prevalent misallocation of credit stemming from state-owned firms’ favorable access to capital. That arguably undermines market forces that would otherwise help facilitate China’s economic rebalancing.

But this too is driven by politics: SOEs have favorable access to capital because they have favorable access to politicians.

The price shock resulting from the output cuts hit consuming firms in China hard, which has led to a lurching effort to mitigate the policy:

This month, Beijing was forced to reverse course to allow firms to meet the pick-up in demand — another case of state dictate, rather than price signals, driving economic activities.

“In this context, we think the more state-planned production control and capacity cuts cause distortions to the market and are unlikely to be sustainable,” concludes Xing.

“Beijing was forced to reverse course” because utilities consuming thermal coal and steel producers consuming coking coal pressured the government to relent.

The end result is a policy process that owes more to the Marx Brothers than to Marx. A cockamamie scheme to address one pressing problem causes problems elsewhere.

Methinks that Mr. Xing is rather too sanguine about the ability or willingness of the Chinese government to sustain such highly distorting policies. They have done so for years, and are showing no inclination to change their ways. Efficiency is sacrificed to achieve distributive and political objectives, and the bigger and more complex the Chinese economy the more difficult it is for the authorities to predict and control the effects of their policy objectives. But this just induces the government to resort to more authoritarian means, and attempt to exercise even more centralized power. This is costly, but these are costs the authorities are willing and able to bear. Inefficiency is the price of power, but it is a price that the authorities are willing to pay.

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November 22, 2016

In Like Flynn

Filed under: History,Military,Politics — The Professor @ 12:54 pm

Retired General Michael Flynn, fired as head of the Defense Intelligence Agency by President Obama, has become a lightning rod for criticism. This was true during the campaign, where he was an early and outspoken Trump supporter, and it has become doubly true since the election and his appointment as National Security Advisor designate. This criticism is largely unfair, and relies on the typical distortions and dishonest tactics that have become the norm for the “elite,” and the “elite” media.

For instance, Flynn has been excoriated for his alleged sympathies for Putin and Russia. These allegations rest on (a) his appearances on RT, and (b) the fact he sat at Putin’s table during an RT dinner. They also ignore the truculently anti-Russia, anti-Putin statements that Flynn made in his book. In a Politico piece that at least lets the man speak for himself, at length (although it also includes a typical dose of MSM snark), Flynn gives his opinions on these subjects:

Yet at times Flynn still struggles to reconcile his views with some of Trump’s most extreme positions, including his persistent praise of Putin.

“Putin is a totalitarian dictator and a thug who does not have our interests in mind. So I think Trump calling him a strong leader has been overstated, I’ll give you that,” Flynn said. “But Putin is smart and savvy, and he has taken actions in Ukraine and elsewhere that have limited our options, and the U.S. and NATO response has been timid. I think Trump’s strength lies in being a master negotiator, and he wants as many options as possible in dealing with Russia.” (Still, Flynn himself may have image problems here, since he appeared with Putin last year at an anniversary party for the Kremlin-controlled RT television network in Moscow.)

Yeah. A real Putin lover, that dude. This echoes what Flynn says in his book (co-authored by Michael Ledeen). This was out there for anyone interested in a fair portrayal of the man’s views to read, but no. Instead all we heard about was Flynn being pro-Putin because he sat with him once in Moscow.

Flynn has also drawn fire for his blunt statements about Islam. Well, get this. They are based on an up-close-and-personal view of our Islamist enemies. A view, it should not need mentioning, but does, that absolutely no one in the media and no one in the Obama administration and pretty much no one outside the US intelligence community has. Here again the Politico piece is informative:

As JSOC’s director of intelligence, Flynn interrogated the senior Al Qaeda commanders at length. Sitting across from them at the detainee screening facility at Balad Air Base, Iraq, Flynn wondered why such obviously educated and intelligent people were devoting themselves to tearing their country apart, regardless of the horrendous toll in innocent lives. Some of the men had electrical engineering and other advanced degrees, but instead of building a bridge or helping establish a functioning government, they applied their talents to attacking vulnerable governing institutions in order to terrorize and intimidate civilians. He could understand their hatred of American interlopers, but the vast majority of their tens of thousands of victims were fellow Iraqis.

During the course of those interrogations and hundreds of others in both Iraq and Afghanistan, Flynn concluded that what united the terrorist warlords was a common ideology, specifically the extremely conservative and fundamentalist Salafi strain of Islam. Salafis believe the only true Islam is that version practiced by the Prophet Muhammad and his followers in the seventh and eighth centuries. They reject any separation of church and state in favor of puritanical interpretation of Islamic Sharia law. They are intolerant of other religions or sects, and at least in terms of Salafi Jihadists, their ideology is violent and expansionist by its very nature. The terrorist leaders he interrogated on a regular basis—whether they marched under the banner of Al Qaeda, the Taliban or ISIS—were true believers, every bit as committed to their ideology and skewed moral universe as Flynn was to his own.

“Over the course of all those interrogations, I concluded that ‘core Al Qaeda’ wasn’t actually comprised of human beings, but rather it was an ideology with a particular version of Islam at its center,” Flynn said in the recent interview. “More than a religion, this ideology encompasses a political belief system, because its adherents want to rule things—whether it’s a village, a city, a region or an entire ‘caliphate.’ And to achieve that goal, they are willing to use extreme violence. The religious nature of that threat makes it very hard for Americans to come to grips with.”

He has looked the enemy in the face. Literally looked them in the face. Hundreds of times. He has interrogated them at length. You think perhaps he just might–just!–have a better understanding of what drives ISIS and Al Qaeda than 99.99999 of the people venting about his unacceptable, radical–and politically incorrect–views about the nature of Islamic terrorism?

The Politico article also details what led to Flynn’s disillusionment with the Obama administration and his criticism of its policies while he was head of DIA. In a nutshell: Flynn thought, based on his deep, personal knowledge of the Islamist enemy both in Iraq and Afghanistan, that Obama’s declaration of victory after Osama’s death was wildly premature. He was dismayed at the administration’s firing of Stanley McChrystal for having the temerity to push back on Obama’s Afghanistan policy. He was also furious at the sanitizing of intelligence about Islamist terrorism:

Worst of all from Flynn’s bird’s-eye perch at the DIA, intelligence reports of a growing threat from radical Islamist terrorism were often expunged as the intelligence stream worked its way up to the president’s desk. Flynn suspected part of the problem was National Security Adviser Susan Rice, who chaired many of the NSC deputies meetings and seemed uninterested in reports out of Iraq. But other intelligence bottlenecks have also come to light. After more than 50 intelligence analysts at U.S. Central Command complained to the Pentagon inspector general that their intelligence reports on the war against ISIS were consistently watered down, a recent House Republican task force report—written by members of the House Armed Services and Intelligence committees—concluded that intelligence on the ISIS threat was systematically altered by senior U.S. Central Command officials to give it a more positive spin.

I can say with metaphysical certainty, that if Flynn had been fired for blasting the distortion of intelligence in the Bush administration, he would have been the toast of all the best parties in DC and New York, and lionized on the pages of the NYT and WaPo. But this telling truth to power thing is a one way street in DC.

Tell truth to the Bush administration: Righteous! Hero!

Tell truth to the Obama administration: Renegade! Loose cannon! Dangerous bigoted wacko!

I wrote about DIA’s truth telling about what became ISIS circa-2012. Another example of no truth goes unpunished.

There is currently a lot of tut-tutting about Flynn’s outspokenness and political advocacy from ex-military types, such as Admiral Mullen. Let’s just say that one should always be somewhat skeptical of those who achieve positions like Mullen did, especially in an administration like Obama’s (or Clinton’s), but Bush’s too. They are usually chosen for their biddability and political reliability, especially in times of (relative) peace.

Some of the things Flynn has said are puzzling, his apparent flip-flop on the coup in Turkey, for instance. But I would not leap (as many have) to the conclusion that he did so for mercenary reasons.

Flynn is obviously a strong willed individual unafraid to speak his mind. He also has deep knowledge of certain issues that none–yes 0.0000 percent–of his media or political critics have. So is it too much to ask to judge him on the substance of his views, and the basis for them, rather than on issues that are less than trivialities?

That question was purely rhetorical. The Lie Swarm gonna swarm.

I fear that a similar fate awaits General James Mattis, in the event that Trump nominates him for SecDef. (This would be a livin’ the dream moment for me, because Mattis is someone whom I deeply admire. But the fact that he would have to get a waiver to serve in this post tempers my hopes.) Mattis was another man who called out the intellectual flyweights in the Obama administration foreign poliicy apparatus, and who was unceremoniously defenestrated for his temerity. (Even Tom Ricks, an Obama-friendly voice, found this episode incredibly shabby and disturbing.)

Flynn’s appointment–and Mattis’, in the happy event–reveals something about Trump. He is willing to have outspoken subordinates. This represents a stark contrast with Obama, who surrounded himself with unimpressive toadies and political partisans (Ben Rhodes–are you effing kidding me? Susan Rice?), and who refused to tolerate any internal dissent (as the fates of Flynn, Mattis, and McChrystal demonstrate). Whether Trump endures internal opposition remains to be seen: the fact that he is at least willing to risk it is admirable, and deserves some praise, rather than the ankle biting of people like Flynn by the apparatchiks and careerists who dominate what passes for America’s political and media culture.

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November 19, 2016

I’ve Learned My Lesson, But Far Too Many Have Not

Filed under: History,Military,Politics,Russia — The Professor @ 8:40 pm

Tim Newman has written numerous excellent posts of late, but the one that resonated most with me was this one from about a month ago, which in response to a reader’s question about what he admitted changing his mind about, he admitted to having misjudged the outcome in Iraq:

I supported the Iraq War for several reasons, one of which was I thought the Iraqis deserved the chance to be free of Saddam Hussein and run their country without him.  I genuinely thought they would seize the opportunity to demonstrate to the world that Arabic people are not incompatible with democracy and, so thankful that Saddam Hussein is gone, they would make a pretty decent effort to make things work.

Instead they tore each other apart and did everything they could to demonstrate that those who dismissed them as savages that needed a strongman to keep them in line were right all along.  I think this was probably the most depressing aspect of the whole shambolic affair.

. . . .

But the one issue I changed my mind on was that the US (or British) military should no longer be brought to bear for altruistic or humanitarian reasons.  It is rather depressing, but I am now a firm believer in the premise that a population generally deserves the government it gets.  No longer would I support a war that is not prosecuted for clear strategic reasons that are indisputably in the national interest.  So all those suffering under the jackboot of oppression?  Sorry, you’re on your own.  We tried our best and look where it got us.

I couldn’t agree more, for I have undergone a similar conversion. I too succumbed to Western universalism, and believed that freed from the oppressions of a sadistic dictator, Iraq had the potential to become a passably free, democratic country that could become a role model for a benighted region. I believed that the problem was misrule from the top, rather than dysfunction at the bottom.

I was wrong.

What Iraq has taught me–reminded me, actually, in a rather forceful way–that although political and economic freedom are highly desirable, the preconditions that make this possible are the exception, rather than the rule. Further, the preconditions are highly culturally and historically contingent. The experience brought home forcefully the relevance of civilization (as Huntington emphasized): not everyone yearns to be like Americans; in fact, to many Western/American beliefs and mores are an anathema; Western institutions and behaviors can’t be grafted onto fundamentally different civilizations and cultures, and they certainly won’t arise spontaneously in the aftermath of the overthrow of a repressive regime, especially one that has deliberately crushed civil society for decades (and I could say something similar of the FSU); the tragic view of history has much more predictive power than the progressive view.

I should have remembered the experience of the Reconstruction in the United States, or Napoleon’s experience in Spain, or myriad other historical examples of the futility of attempting to impose a social and political revolution on a hostile alien culture.

Iraq, and subsequently Libya, pushed me back to my Jacksonian roots. Reforming foreigners isn’t our business. What they do amongst themselves is up to them, as long as they don’t harm Americans or American interests in a serious way. If they do that, deal with them forcefully and quickly, with no dreamy ideas of “nation building” in the aftermath. A view summarized by one of my heroes, USMC General James Mattis, who while in Iraq said: “I come in peace. I did not bring artillery. But I’m pleading with you, with tears in my eyes, if you fuck with me, I will kill you all.” Translated: we’ll leave you alone, unless you don’t leave us alone. In which case, watch out.

It’s one thing to make a mistake, to misjudge. It’s another thing to make a mistake and then learn nothing from it. We are seeing that right now, in regards to Syria. To judge by the words of many on both sides of the current political divide, Iraq (and Libya) never happened. Why do I say that? Because figures on both the right and left are advocating direct American involvement in the Syrian civil war, even though it makes Iraq look like Sunday school.

The catalyst for this waving of the bloody shirt is the carnage in Aleppo. John McCain in particular is beating the war drum, claiming that the US is now complicit in genocide in Syria. From the left, Samantha Power (she of Responsibility to Protect, which went so swell in Libya) obsesses about Syrian and Russian atrocities there.

Then there are the journalist/wonk pilot fish like Charles Lister and the execrable Michael Weiss, who churn out war propaganda in the best yellow journalism tradition, all the while doing their best to hide their connections with malign medieval regimes in the Gulf.

I will stipulate that what is occurring in Aleppo is horrific (although I would also note that the opposition is waging a transparent propaganda campaign  in an attempt to manipulate the US into intervening–a campaign in which Weiss, Lister, and their ilk are avid participants).

That said, what can the United States do about it? Would intervention lead to a less horrific result? What would be the likely outcome? Would the US be able to achieve its intended outcomes? What would the unintended consequences be?

Anyone who thinks about these questions without considering the sobering lessons of Iraq is a menace. But it’s worse than that, I don’t think that McCain, Power, Weiss, Lister, et al, think about these questions at all. It’s like Iraq never happened. The amnesia is rather astounding.

Here are my answers. There are no good guys in Syria, and even if with US assistance Assad was overthrown, it would not end the civil war, which would just devolve even further into a multi-sided hell that makes Libya and Iraq look like a picnic; it would empower jihadists who will slaughter as many or more as Assad has; the flow of refugees will not stop, although the composition of the refugees might change (with Alawites and Christians replacing Sunnis); if the opposition gets control of Syria, it will be the jihadists who control the opposition, and Syria will become a base for anti-American and anti-Western terrorism.

Syria is even more broken, complex, divided and fissiparous than Iraq was/is. It is rooted in the same political and religious culture, and the same civilization. Minority-based Baathism has had 13+ more years of power in Syria. So what has happened in Iraq in the last 13+ years is probably the best scenario in Syria. And I would consider even that happy prospect to be among the least likely.

And one more thing. An American intervention in Syria would risk a superpower confrontation. Even a unicorns and rainbows outcome in Syria would not make such a risk worthwhile, and as noted above unicorns and rainbows would not be the result–a dystopian, sectarian war of all against all would be. And the US should be in the middle of that why, exactly?

Some, notably Weiss and even more respectable journalists like Edward Lucas, link Syria to a broader conflict with Putin’s Russia. Syria, Lucas tells us, is Putin’s first step in rebuilding the USSR.

Seriously? That sounds like the ravings of someone playing Risk on LSD.

Pray tell, where does Putin go from Syria? The road to the Elbe runs through Aleppo? Who knew?!? Even if Putin succeeds in propping up His Man in a shattered country that has no natural or human resources to speak of, what then? Does that change Putin’s calculus of exercising power or force in the Baltic, or the European plain? Does that change Russia’s fundamental strategic weakness (most notably a decrepit economy that is utterly incapable of supporting an extended confrontation with the US)? No to all. Hell no, actually. Syria is a diversion of Russian effort and strength in one of the least consequential countries in the Middle East.

Yes. Syria is a humanitarian catastrophe. But as Tim Newman said, the US (or British) military should not be dispatched to intervene in such places for humanitarian or altruistic reasons. Because regardless of how altruistic the intentions, the outcome will be grim, and policy should be based on what is possible not what is desirable. If the desirable isn’t possible, leave it be.

I would go further. Even if you believe–especially if you believe–that Russia and China pose grave threats to US interests, Syria is not the place to fight. It will be another ulcer that will drain American morale, produce debilitating internecine political conflict, kill and maim American service men and women, and sap its military. Better to devote resources to recapitalizing the American military than to pour them into a lost cause like Syria–or pretty much anywhere else in the Middle East.

One of the most encouraging outcomes of the election is that the likelihood of American intervention in Syria has gone down as a result: Hillary was clearly much more favorably disposed to intervention (e.g., she spoke favorably of the idiotic idea of no fly zones, a McCain hobby horse) than Trump. If Trump truly is Jacksonian, or defers to his Jacksonian base, he will not get involved. Indeed, methinks this is exactly why McCain has become particularly unhinged in the past days. He realizes the prospects for intervention have plunged, and in his impotence he is raging.

Obama’s instincts were actually sounder than Hillary’s here. Would that he had the courage of his convictions and eschewed any involvement whatsoever. Instead, he gave mixed signals (“Assad must go”, the “red line”), and authorized a CIA effort to support the (jihadist-dominated) opposition–an effort that succeeded in getting 3 Green Berets killed a few weeks ago. (The CIA is an institution that I have also had a serious change of views about.)

Historical parallels are never exact. But it is difficult to find one as close as between Iraq and Syria–temporally, culturally, or civilizationally. Given the historical precedent, it is beyond reckless even to contemplate seriously US involvement in the Syrian civil war. But too much of our political class are latter-day Bourbons, having forgotten nothing and learned nothing. One of the benefits of the rejection of the political class on November 8th is that there is a very good prospect that we will also reject some of their worst ideas, of which intervention in Syria on humanitarian or geopolitical grounds is probably the worst of all.

 

 

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November 16, 2016

Lie Swarms

Filed under: Politics — The Professor @ 8:40 pm

If you get your “information” through Twitter, mainline print/online publications, or the netwits, you probably think that Trump’s newly appointed chief strategist Steve Bannon is the love child of Nathan Bedford Forrest* and Leni Riefenstahl. Racist. Anti-Semite. Master propagandist.

One should always be suspicious of such tendentious portraits, and that suspicion is especially warranted here. Spengler (David P. Goldman) wrote a furious and effective rebuttal of the attacks on Bannon which is worth a read, but do yourself a favor and read the man in his own words–and not the clip quotes attributed to him by his enemies on the left and among the #NeverTrump right. (One should be doubly suspicious when such disparate groups unite in an attack.)

In that 2014 speech and interview, Bannon comes off as bright, thoughtful, and articulate. Certainly he has strong views, but they are not the noxious brew that his attackers attribute to him. His main sensibility is religious. As for anti-Semitism, note that he stresses the Judeo-Christian tradition. He believes in capitalism, but he is not a “hard” libertarian or Objectivist. His brand of capitalism is of the Smith-Hayek-Friedman variety. He decries the devolution of capitalism in corporatism and crony capitalism. He attacks bailouts. He is stridently anti-jihadist. He is also a believer in national and cultural identity, and obviously a critic of globalism.

He spoke about Putin before Putin became a devil figure in the US campaign. His is a nuanced view. On the one hand, he slams Putin as a kleptocrat and ruler of an illegitimate form of capitalism–state capitalism. He also notes Putin’s deviousness and recognizes the threat he poses. But he does not exaggerate that threat, and appreciates that Putin has struck a chord among Russians by appealing to their patriotism and cultural identity.

He also discussed what is now referred to as the alt-right before it became a thing in the popular mind. He frankly admits that opposition movements like the Tea Party inevitably attract fringe elements, but believes in the end that these fringes don’t define these movements: they are free riders not drivers, and will eventually “boil off.” He is not uncritical of the European populist movements: “With all the baggage that those groups bring — and trust me, a lot of them bring a lot of baggage, both ethnically and racially — but we think that will all be worked through with time.” He draws distinctions between movements like UKIP or the Tea Party and continental European nationalist parties and groups, finding the latter more tinged with racism and anti-Semitism.

Reading the talk, and you will have an understanding of how Trump won. One of his key strategists had a very clear understanding of the discontent of the non-elites. He is genuinely sympathetic to the people that the left alternately scorns and claims to represent. All in all, Bannon clearly is not the man his enemies portray him to be. Methinks that the fury of their attacks reflects a deep fear that he is indeed a discerning thinker and able political strategist–and information warrior.

Spengler said that the attacks on Bannon are an example of the Big Lie. I take issue with that. What we are seeing with Bannon, and have seen and are seeing with Trump, is something different: it is the Lie Swarm.

The Big Lie is an effective propaganda tactic in a centralized, vertical media system dominated by a small number–and in totalitarian systems, basically one–of information channels. Radio or television with a small number of national stations either directly controlled by the state, or subject to substantial state pressure (e.g., the US in the days of the Fairness Doctrine). To oversimplify only a little: one message, one medium.

In the modern fractured information environment, with a proliferation of outlets and social media that allows free access to millions, coordinating on a single message is far more difficult in such a diffuse and fragmented system. But this technology is perfectly suited for unleashing a swarm of half-truths and lies that forms what can best be described as an emergent order. It is not consciously designed by anyone, but without central coordination design it does exhibit order and synergistic behaviors.

One swarm tactic that is becoming increasingly common is Six Degrees of Hitler/Putin/The KKK/etc. Target A has some connection to B who has some connection to C who has a connection with D who said something that could be interpreted as being vaguely fascist . . . so Hitler!

In some respects, it is harder to fight the Lie Swarm than it is the Big Lie in a society where there the media is not rigidly controlled. A single lie can be rebutted if the target of the lie has the ability to make the case and the access to enough eyeballs and ears to do so. It is almost impossible to swat every lie in the swarm, especially since the lies change and mutate from day to day, and since whenever you are in a position of rebutting a lie you tend to draw attention to it. But unrebutted lies are often as treated as facts, so if you don’t kill them all some damage is done.

Bannon, and especially Trump, are primary targets of the Lie Swarm, especially since Trump had the temerity to actually prevail in the election. Don’t get me wrong–there is much about Trump to criticize. But there has been a kind of Gresham’s Law at work here: the bad criticism has driven out the good. Screeching “racist!” “Anti-Semite!” “Fascist!” on the basis of the most twisted and biased interpretation of the flimsiest evidence has overwhelmed substantive argument.

And the Swarm really hasn’t figured out that their attack will do little to get Trump supporters to change their minds. If anything, it will do the opposite, because the “deplorables” know that they are being attacked and smeared as much as Bannon and Trump. Furthermore, the Swarm seems hell-bent on living out Einstein’s definition of insanity: doing the same thing over and over, and expecting different results. Hillary’s whole campaign was based on personal attacks on Trump and his supporters, and she enlisted the Swarm in this endeavor.

And it backfired stupendously. Why should they expect that doubling down on it will work any better?

So I have mixed thoughts about this. On the one hand, the Lie Swarm’s infestation of the current public discourse is disgraceful and dispiriting. On the other hand, it has proved a spectacular failure in achieving its objective, so if they want to double down on it, why stop one’s enemies when they are making a mistake?

* For those not familiar with Civil War or Reconstruction history, Forrest was the first Grand Wizard of the KKK. (It is beyond doubt that he was prominent in the KKK, but some dispute whether he was the Grand Wizard.) He also happened to be probably the only true military genius of the Civil War, in which he rose from private to Lieutenant General and earned (ironically) the sobriquet “Wizard of the Saddle.”

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November 15, 2016

Igor Sechin Takes His Revenge

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 12:07 pm

The Bashneft sale to Rosneft (which I wrote several posts about) is a done deal, but apparently there was some unfinished business. Namely, the business of  revenge.

On Monday Economic Development Minister Alexei Ulyukayev was detained for corruption. He allegedly took a $2 million bribe to “allow” the sale. Indeed, Bloomberg claims he was caught in the act:

Ulyukayev, 60, was detained on Monday “in the act” of receiving the cash, said Russia’s Investigative Committee. He was later charged with demanding the money from Rosneft PJSC to allow its purchase last month of the government’s 50 percent stake in regional oil producer Bashneft PJSC, the agency said in a statement. The economy minister denies any wrongdoing, his lawyer Timofei Gridnev told Business FM radio. Investigators moved that he be held under house arrest before he arrived for arraignment Tuesday at Moscow’s Basmanny Court.

Ah, Basmanny justice. Gotta love it.

This all seems quite bizarre. The Bashneft acquisition was clearly a source of intense conflict with the Russian government, with the government ministries–including Ulyukayev–initially expressing opposition. Then there was temporizing, with Putin seeming to come down on both sides of the issue. Then it was decided in Rosneft’s–that is, Igor Sechin’s–favor.

Presumably, Putin was the ultimate decider here. If so, Ulyukayev was in no position to “allow” anything. Maybe he had a chance to make his case, either directly to Putin, or indirectly via Medvedev. But once he lost, he would have been delusional to think he had any leverage over whether the deal would proceed.

Further, the timing is beyond strange. The deal was decided in September, and finalized on October 12, more than a month ago. So, did Ulyukayev give net 30 terms on the bribe? Net 60? Was it half now, half later? Is bribery really done on credit in Russia?

I would also venture that attempting to shake down Sechin and Rosneft is tantamount to suicide. Did Ulyukayev attempt such a risky thing? Did Sechin play along and then facilitate a sting by the Investigative Committee? Or was this a set-up job from the start?

One thing that is almost certainly true is that this is Sechin taking his revenge, and sending a message to others: look at what happens to those who cross me.

The Energy Ministry, under Novak, also opposed the deal initially. I wonder if he is sleeping well.

There are some comic elements to the story. Several stories breathlessly report a law enforcement leak saying that Ulyukayev’s phone had been tapped “for months.” Um, pretty sure it was tapped like forever.

Ulyukayev has a reputation as a “liberal” in Russia, and assorted Western dimwits expressed Shock! Shock! at his arrest. Prominent among these were Anders Aslund and my fellow professor and buddy Michael McFaul. I say dimwits for several reasons. First, is it news to them that the “liberals” in the Russian government are marginalized, and exist at the sufferance of people like Sechin who are in Putin’s inner circle? Second, are they so credulous as to believe that these liberals are untainted by corruption? Puh-lease. Ulyukayev appeared in the Panama Papers. Further, the “liberals” and “reformers” mainly go back to the Yeltsin period, and remember that  Yeltsin elevated Putin in exchange for foregoing any investigation or prosecution of the rife corruption of the Yeltsin administration. Ulyukayev was associated with Gaidar, who was also tied to corruption (although the publicly revealed instances were small beer by Russian standards).

There are no clean hands in Russia. This very fact is what usually keeps people in line, for they know the adage “for my friends, everything: for my enemies, the law!” Everybody is vulnerable to prosecution, because everybody is corrupt: actual prosecution is used sparingly, however, to punish those who have committed a political transgression.

Ulyukayev clearly committed such a transgression, and hence he finds himself in the dock.

There is no reason to be shocked by this. It merely confirms that people like Sechin are the real power. But this is apparently a revelation to alleged Russia experts.

Bashneft is the Hope Diamond of oil companies: it seems to bring bad luck to anyone who touches it. Ural Rakhimov, the son of the boss of Bashkortostan (where the company is located), who profited from the corruptly done privatization of the company in 2002, but who apparently fled Russia when the privatization and subsequent sale came under government scrutiny. Vladimir P. Yevtushenkov, who bought Bashneft from Rakhimov, but then wound up under house arrest for 92 days for allegations related to the privatization: he walked only after the government seized Bashneft shares from Yevtushenkov’s holding company before performing the re-privatization Kabuki that ended with the company being bought by Rosneft. And now Ulyukayev.

Will the skein of bad luck end with Rosneft and Sechin? That’s a good bet, but not a lock. Who knows what changes in power are in store, especially as Putin ages, or if there is some economic or political shock?

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November 13, 2016

Let Them Use Canvas! A Vignette on the Dangers of Majoritarianism & the Benefits of the Electoral College

Filed under: Economics,History,Politics — The Professor @ 12:55 pm

In the aftermath of the stunning election result, we are witnessing much wailing and gnashing of teeth and rending of garments. One common whinge is that the result is illegitimate because Hillary apparently won (barely) the national popular vote, but was trounced in the Electoral College vote. I will pass over some of the issues this raises (e.g., that campaign strategies would have been different had the election been a national referendum/plebiscite) to focus on the benefits of the Electoral College.

The Electoral College is a departure from majoritarianism, one of many that the Founders deliberately incorporated into the Constitution. Meaning that the real debate is not over this particular deviation from national majoritarianism, but whether there should be any such deviations at all.

Put me down as a deviant, because I strongly believe that pure majoritarianism is a disaster. The tyranny of the majority is a real concern. To get all geeky about it, the core is empty in pure majoritarian games: no stable coalitions can form, and the outcome is chaos and shifting alliances of Peters conspiring to rob Pauls. The dangers of this are particularly great when there are few checks on the power of the state to transfer property and power from one group to another. There is also much greater potential for conflict and a greater incentive to spend resources to win the popular vote because small changes in the popular vote lead to discontinuously large changes in the distribution of power–including the power to expropriate. The stakes are much bigger, especially in closely divided polities.

If you want to see an example of what happens when there are fewer checks on the majority, look at California. It is no accident that California is Whinge Central post 11/8/16. The state voted strongly for Clinton: I may exaggerate only slightly that the net-wits called California for Clinton within 30 seconds of the polls closing.

But as Victor Davis Hanson has movingly shown, there are two Californias. (Joel Kotkin has written in a similar vein.) The coastal region, with Silicone Valley and Silicon Valley. Urban, expensive, and wealthy–with large pockets of plutocratic wealth. It draws its wealth disproportionately from high rent industries–entertainment and software tech. But there is another California, the interior. It is far poorer, and far grittier. It is heavily agricultural, and agrarian. It wrests what wealth it has from the earth, with sweat and toil. The only rents are to the land.

This is reflected in the electoral map, which is a microcosm of the US. There is a blue California on the coasts, and a red California in the interior. Even some places with large numbers of Mexican immigrants (e.g., Kern County) went for Trump. But the coast was solid Clinton.

In terms of population as well as wealth, Coastal California dominates. This means that in terms of state legislation and government, the interior of California is largely disenfranchised, and the governing elites have little reason to take the interests of the interior into account. This problem is exacerbated by the heavy use of referendums in California. Referenda are a strongly majoritarian institution, which do have a purpose, namely, placing a check on minorities that can use government to advance their interests. But this comes at a cost of allowing majorities to run roughshod over minorities.

There were several referenda on the ballot in California on Tuesday. Most were advanced by the coastal majority and involved issues that can and should be decided on a local basis, but which a highly ideological majority wanted to force on everyone. One example is the gun control measures that passed. But the example that is most telling to me is the referendum which banned the use of plastic grocery bags.

This is an issue that is virtue signaling par excellence. Around the world (e.g., France) liberals have made the banning of plastic bags a major environmental issue, despite the fact that the environmental benefits of the ban are far more asserted than proven. In California in particular, most major coastal metropolises have banned plastic bags. Bully for them. But that was not enough for the coastal denizens: they had to force their preferences on the entire state.

As Tim Newman wrote several months ago in several excellent posts, the plastic bag ban imposes substantial inconvenience on many normal people, hits lower income people the hardest, and is basically yet another effort by the better thans to instruct the benighted proles:

And that was my point about the Soviet Union: the privileged imposing artificial material restrictions on society which hit those at the bottom hardest, all the while saying it is for their own good.

In summary, I’m not necessarily saying the ban on carrier bags is a bad thing.  I just take objection to people making the assumption that plastic use is in itself bad, alternatives better, and the ban good as if it these were self-evident truths; and the lifestyle preferences of the wealthy middle-classes being imposed on everyone else with nothing but condescending dismissal of the costs and inconvenience to those not so fortunate.

Exactly right.

In California, the coastal majority succeeded in imposing its will on a less wealthy minority. It did so with plastic bags (and bullets) by referendum: it does so on myriad other matters via the state legislature which it dominates. These elites are throwing a post-Trump temper tantrum–which has gone so far as for many to advocate California’s secession–precisely because the Electoral College has thwarted their ability to do the same in the US as a whole.

If you look at what California does to the political minority in the interior, you will see that the tyranny of the majority is a real thing. The majority doesn’t have to pay any heed to the rubes in the Central Valley–let them use canvas! The genius of the Electoral College is that it forces the popular majority to temper its ambitions and moderate its program in order to attract at least some support from–or at least, diminish the opposition from–other constituencies. The urban must make some accommodations to the rural and suburban. The coastal must make some concessions to flyover country.

This serves to reduce conflict between constituencies, and mitigates centrifugal and fissile forces in a large and extremely diverse nation. These are very good things. If you think that politics in the US is contentious and divisive now, you have no idea what it would be like without the Electoral College.

One of the left’s arguments against the Electoral College is that it was adopted in large part as an accommodation to the slave states. There is an element to truth in that, although it should be noted that small non-slave states (e.g., Connecticut) also supported it because they feared being ground under the heel of large states like New York and Virginia. But the role of slavery actually illustrates the politically and socially beneficial role of the institution.

Absent departures from majoritarianism like the Electoral College, it is unlikely that highly disparate regions like the North and the South could have come together to form a nation in the first place, or would have long avoided secession and armed conflict if they had. The Civil War occurred precisely when demographic and economic changes threatened to permit the majority North from imposing its will on the minority South. Anti-majoritarian institutions (not just the Electoral College, but the Senate) permitted a nation to be formed in the first place, and prevented secession and military conflict for over 70 years.

In the instance of slavery, the anti-majoritarian provisions of the Constitution protected an evil institution for decades.* But that fact does not mean that anti-majoritarian features are inherently bad. To the contrary. Pure majoritarianism can be oppressive, and that increases the potential for political division and conflict. The Electoral College requires a party to moderate its appetites and broaden its appeal. It does not eliminate conflict, but it does temper it. And it does so precisely because it constrains the ability of arrogant majorities to impose their will on diverse minorities. The Electoral College gives greater voice to minorities: without voice, the minorities are more likely to resort to exit or combat.

Which is exactly why the left in the US is currently freaking out about the Electoral College. Their hysteria is the best advertisement for this institution that I could possibly imagine.

* As a practical matter, a purely majoritarian Constitution, or a Constitution with fewer anti-majoritarian features, would not have shortened the life of slavery, and likely would have extended it. One possible result would have been that there was no United States, and the Southern states would have been free to perpetuate their institutions without interference. The Northern states would have had little or no incentive to interfere. (One strong economic motive for the North to fight secession was that the tariff system redistributed income from the South to the North, and secession undermined that. That provided an economic incentive for Massachusetts and New York to cohabit with South Carolina and Alabama, and to oppose their moving out.)

If through some miracle a nation embracing North and South had formed under a more majoritarian Constitution, it is highly likely that a more purely majoritarian system would have resulted in secession at a far earlier date, when the economic (especially industrial) and population balance was much closer, and the North probably would have been powerless to prevail over the South militarily. The Civil War came in a non-purely majoritarian system only when the economic imbalance between the sections became so pronounced that military advantage rested with the North, and even given that preponderance, it was barely able to prevail, and then only after epic bloodshed.

Thus, adopting the William Lloyd Garrison position that the Constitution was a bargain with the devil and the North would be morally purified by a separation with the South might have salved his conscience and those of other (primarily evangelical) abolitionists, it would not have freed one person from bondage, and may indeed have cursed many more to suffer from it for much longer.

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November 9, 2016

Blessed Are Ye Who Are Long Gamma

Filed under: Economics,Energy,Politics,Regulation — The Professor @ 9:03 am

Hillary Clinton made history last night. Just not quite the way she had expected. Rather than “shatter the glass ceiling” (gag), she was crushed as the roof caved in on a complacent, corrupt, and clueless establishment of which she was the exemplar. Donald Trump was the personification of the forces that defeated her and the “elite”, but pretty much only that: either by canny calculation or dumb luck he rode a deep current of popular discontent to achieve a stunning victory that saw at least five, and likely six, strongly Democratic states flip from D to R. The Democrats prevailed only in the leftist strongholds of the P-Coast, the Northeast, The Illinois Salient, and Governmentlandia (Virginia and Maryland). The rest of the country went red. Trump was the effect, not the cause. The vessel that floated on the tide, not the tide itself.

Blessed are ye who are long gamma. Those who have the flexibility and optionality to respond to uncertain developments are the winners here, for there will be uncertainty aplenty. The future with Hillary would have been drearily predictable: the future with Trump will be a wild ride.

Consider few representative areas.

The Supreme Court: Hillary would have chosen rigid leftist ideologues intent on remaking the country–not just its government and economy, but its social fabric. Trump? I have no clue, and either does anyone else. My guess that his court picks generally will be highly idiosyncratic with no unifying philosophical orientation–because Trump lacks one as well.

Government appointments: Hillary would tap from the Empire’s vast array of apparatchiks, most of whom would be statist to the core. The middle and lower level appointments would have teemed with the kinds of political cockroaches revealed in the light of the Podesta emails. As an outsider, Trump has no similar pool of bureaucrats-in-waiting. The transition process will likely be chaotic, and he will have to rely on a Republican establishment that he distrusts (and which distrusts him) to advance candidates. Again, the outcome is wildly unpredictable, and will probably result in a hodgepodge of appointments with no unifying ideology or philosophy, who will often work at cross purposes.

There will be new blood, which is a good thing: people from outside the ranks of the courtiers in DC and the coastal metropolises are desperately needed. These people will inevitably be high variance. But that is an inevitable part of the process of change.

Economic policy: Hillary would have continued the onslaught of regulations that has been producing an Amerisclerosis that rivals Eurosclerosis. Agencies like the EPA would have continued to propose and implement burdensome, growth-sapping regulations. She would have pushed the kinds of taxes on capital that are also inimical to growth (although her ability to get those through Congress would have been a very open question). Trump? He is an economic ignoramus, but it is likely that Congress will temper some of his wackier ideas. Further, he is open to reducing many of the regulatory monstrosities like those that the EPA has imposed, and to removing barriers to energy production and transportation. His tax ideas are unpredictable, but again they are not relentlessly hostile to investment and capital. And a big thing: there is an opportunity to fix Obamacare. Hillary would have fixed it by moving to single payer. There is an opportunity to move away from government control, not doubling down on it.

Regulatory policy and taxes will require cooperation with Congress. The relations between Trump and the Republican leadership are fraught, at best. Idiots like Max Boot are delusional if they think that a Republican House and Senate will give Trump carte blanche. But Trump views himself as a negotiator, and will no doubt engage in negotiations with Congress with zest. The outcome of those negotiations? Impossible to predict. Likely something best described by the old joke: “What is a giraffe? A horse designed by committee [or negotiation].” Again, tremendous uncertainty.

With respect to economic policy, personnel will matter here. Again, Hillary’s appointments to agencies like EPA, SEC, FERC, FTC, FCC, and CFTC would have been tediously predictable statists intent on extending government control over the economy. Trump’s appointments are much more likely to be a very mixed bag, leading to less predictable outcomes. I do think it is likely, however, that there will be many fewer regulatory control freaks. Thus, I expect that at the CFTC, for instance, a Trump commission will jettison economic inanities like Reg AT and position limits.

Foreign policy: Hillary has a strong interventionist, not to say warmongering, streak, and would have almost certainly been more aggressive in Syria than Obama has been, with very sobering consequences (including a substantially increased risk of confrontation with Russia). Trump’s predilections seem much less interventionist, but events, dear boy, events, can lead presidents to do things that they would prefer not to. And given Trump’s mercurial nature, how he will respond to events is wildly unpredictable.

He will have to deal with other major issues, notably China. He will approach these like a negotiator–including, I expect, large doses of bluff and bluster–and the outcomes of these negotiations will be even harder to predict than those of his negotiations with Congress. (One issue that could have both domestic and foreign policy effects is that I conjecture it is likely that the Sequester will die under Trump, whereas it would have continued with a divided government.)

It is clear, therefore, that Trump will disrupt the system, both domestically and internationally, whereas Hillary would have perpetuated it. And I am not unduly concerned about extreme disruptions, because the inherent complexity of the American system of government, the tension between Trump and Congress, and quite frankly, Trump’s limited attention span will temper his more extreme impulses.

Further, shaking up the system is a good thing, for the system is dysfunctional and corrupt. Hillary would have continued our relentless slouch to cryptosocialism and would have cemented the rule of a contemptible and remote establishment: the possibility of an upside is greater with Trump, even if by accident. Hillary would have delivered us sclerosis on purpose.

I would also suggest that a Hillary victory would have increased the likelihood of a bigger cataclysm in the future. She and her acolytes would have disdained and dismissed the forces that in the event propelled Trump to victory. She would have doubled down on the policies that have contributed to our present discontent. As a result, that discontent would have only increased, thereby increasing in turn the likelihood of an even bigger political spasm in the future.

To put things differently: with Trump, we will be on a roller coaster. With Hillary, we would have been on the luge.

I think Trump will be a transitional figure. Transitioning to what, I have no idea. But given the deeply dysfunctional nature of the status quo, transition holds out hope. Shaking up a decrepit and corrupt system creates the possibility for change. Creative Destruction is a possibility with Trump. With Hillary, no.

All this said, the Empire will strike back. It will wage a relentless war from its redoubts in the media, and to a lesser degree, the courts. Look at what the Remain crowd is doing in the UK in its attempt to undo its loss at the polls. That will happen here too: there will be a Thermidor, or at least an attempted one. And that battle will produce uncertainty.

And not all of the Empire’s minions are Democrats: the Republican establishment will fight Trump from within the citadel. This political warfare adds the prospect of even more uncertainty. Again, a reason to be long gamma.

I cannot say I predicted this, because I didn’t. I do think it is fair to say that I limned the outlines of what has transpired. This came in two parts. First, I noted that as with Brexit, this possibility was far more likely than elite opinion believed. A complacent elite sat smugly atop the volcano, blithely ignorant of the pressure of deep popular disdain pushing up the earth under their feet, disdain powered by the financial crisis, bloody and inconclusive wars, and an anemic economy. Talking only to one another, the elite received no feedback about what voters were thinking and feeling.  Existing in an echo chamber made them vulnerable to shock and surprise. Moreover, their contempt for those not in their class also led them to think that such feedback was irrelevant, because these little people didn’t matter. They knew better.

But the little people, largely without voice in the forums in which the elite communicate and interact, nursed their injuries, bided their time, and took their revenge.

Second, Hillary is a horrible person, and a horrible candidate–or should I say deplorable? Look at the vote totals vs. Obama in 2012. To say she underperformed is an extreme understatement. She underperformed because she had nothing new to offer, and indeed, the old conventional liberal stuff she was offering was long past its sell-by date. Add to that her horrible personal packaging (the corruption, the endless scandal, the inveterate lying) and she was crushed by an inarticulate political novice carrying more baggage than the cargo hold of an Airbus A380.

I did not have the courage of my convictions to predict that these two factors would result in a Trump victory. I thought Jacksonian America was too small to prevail. I too was in the thrall of conventional wisdom to some degree.

If you asked me to describe my mood, I would echo the title of a Semisonic song: Feeling strangely fine. Part of that feeling, I must admit somewhat guiltily, is due to schadenfreude: the hysteria of those whom I despise is quite enjoyable to witness. But part of it is that I think I am long gamma, and that the US is long gamma too. The old system and the old establishment have crushed American dynamism. Shaking up that system has more upside than downside, and whatever you think about Trump, you have to know he will shake things up.

I’ll close by quoting about the most un-Trump-like president I can think of: Eisenhower. “If you can’t solve a problem, enlarge it.” In other words, disrupt. Get out of the box. Don’t continue down the same endless path: try something new. The United States has been facing many insoluble problems, political, economic, strategic. The establishment had no clue at how to solve these problems, and their attempts to try the same things expecting different results put us on a slow road to ruin. Or maybe not so slow. A disruption was needed. An overthrow of the elite was imperative. Those things will in some respects enlarge our problems, by creating turmoil. But out of that enlargement there is the prospect of solutions–and yes, the prospect of catastrophe.

I don’t think that Trump himself will be the architect of those solutions. His role will be to tear down–he’s already done that to a considerable degree. Others will have to build up. Who that is, I don’t know. What construction will emerge, I don’t know. But there is far more upside now than there would have been with President Hillary Clinton. And that is reason to feel fine, strangely so or not

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November 8, 2016

WTI Gains on Brent: You Read It Here First!

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Politics,Regulation — The Professor @ 8:22 pm

Streetwiseprofessor, August 2011:

WTI’s problems arise from the consequences of too much supply at the delivery point, which is a good problem for a contract to have.  The price signals are leading to the kind of response that will eliminate the supply overhang, leaving the WTI contract with prices that are highly interconnected with those of seaborne crude, and with enough deliverable supply to mitigate the potential for squeezes and other technical disruptions.

. . . .

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.

Bloomberg, November 2016:

In the battle for supremacy between the world’s two largest oil exchanges, one of them is enjoying a turbo charge from the U.S. government.

Traders bought and sold an average of almost 1.1 billion barrels of West Texas Intermediate crude futures each day in 2016, a surge of 35 percent from a year earlier. The scale of the gain was partly because of the U.S. government lifting decades-old export limits last year, pushing barrels all over the world, according to CME Group Inc., whose Nymex exchange handles the contracts. By comparison, ICE Futures Europe’s Brent contract climbed by 13 percent.

WTI and Brent have been the oil industry’s two main futures contracts for decades. In the past, the American grade’s global popularity was restrained by the fact that exports were heavily restricted. Now, record U.S. shipments are heading overseas, meaning WTI’s appeal as a hedging instrument is rising, particularly in Asia, where CME has expanded its footprint.

“You have turbo-charged WTI as a truly waterborne global benchmark,” Derek Sammann global head of commodities and options products at CME Group, said in a phone interview regarding the lifting of the ban. “You’re seeing the global market reach out and use WTI — whether that’s traders in Europe, Asia and the U.S.”

This should surprise no one–but the conventional wisdom had largely written off WTI in 2011. Given that economic price signals were providing a strong incentive to invest in infrastructure to ease the bottleneck between the Midcon and the sea, it was inevitable that WTI would become reconnected with the waterborne market.

Once the physical bottleneck was eased, the only remaining bottleneck was the export ban. But whereas the export ban was costless prior to the shale boom (because it banned something that wasn’t happening anyways), it became very costly when US supply (especially of light, sweet crude) ballooned. As Peltzman, Becker and others pointed out long ago, politicians do take deadweight costs into account. In a situation like the US oil market, which pitted two large and concentrated interests (upstream producers and refiners) against one another, reducing deadweight costs probably made the difference (as the distributive politics were basically a push).  Thus, the export ban went the way of the dodo, and the tie between WTI and the seaborne market became all that much tighter.

This all means that it’s not quite right to say that CME’s WTI contract has been “turbocharged by the federal government.” Shale it what has turbocharged everything. The US government just accommodated policy to a new economic reality. It was along for the ride, as are CME and ICE.

ICE’s response was kind of amusing:

“ICE Brent Crude remains the leading global benchmark for oil,” the exchange said in an e-mailed response to questions. “With up to two-thirds of the world’s oil priced off the Brent complex, the Brent crude futures contract is a key hedging mechanism for oil market participants.”

Whatever it takes to get them through the day, I guess. Reading that brought to mind statements that LIFFE made about the loss of market share to Eurex in early-1998.

The fact is that there is hysteresis in the choice of the pricing benchmark. As exiting contracts mature and new contracts are entered, market participants will have an opportunity to revisit their choice of pricing benchmark. With the high volume and liquidity of WTI, and the increasingly tight connection between WTI and world oil flows, more participants will shift to WTI pricing.

Further, as I noted in the 2011 post (and several that preceded it) Brent’s structural problems are far more severe. Brent production is declining, and this decline will likely accelerate in a persistent low oil price environment: not only has shale boosted North American supply, it has contributed to the decline in North Sea supply. Brent’s pricing mechanism is already extremely baroque, and will only become more so as Platts scrambles to find more imaginative ways to tie the contract to new supply sources. It is not hard to imagine that in the medium term Brent will be Brent in name only.

Since WTI will likely rest on a strong and perhaps increasing supply base, Brent’s physical underpinning will become progressively shakier, and more Rube Goldberg-like. These different physical market trajectories will benefit WTI derivatives relative to Brent, and will also induce a shift towards using WTI as a benchmark in physical trades. Meaning that ICE is whistling past the graveyard. Or maybe they are just taking Satchel Paige’s advice: “Don’t look back. Something might be gaining on you.” And in ICE Brent’s case, that’s definitely true, and the gap is closing quickly.

 

 

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November 3, 2016

Jesus Just Left Chicago

Filed under: Sports — The Professor @ 7:03 pm

Last night occurred the greatest World Series game in modern memory. The good guys won.

My dad used to say “I wouldn’t stand in line to watch Jesus Christ pitch for the save in the 9th inning of the 7th game of the World Series.” (He never indicated whether that statement was conditional on the Cubs being in the World Series. Perhaps he thought that was a set of measure zero, and not because he didn’t believe in the Second Coming.) I guarantee that he would have stood in line for last night’s game, Jesus or no Jesus.

And speaking of The Savior, it looks like Jesus just left Chicago, after having performed a miracle. The Cubs did not make it easy, either in the series as a whole, or in the deciding game. They fell behind 3 games to 1. Then after a dicey win in game 5 and a semi-blowout in game 6, they got a 4 run lead in game 7, only to watch it fall apart with two outs in the 8th. After an agonizing rain delay, they raced out to score two runs in the 10th, and hung on to win. A truly miraculous comeback.

For my part, I was fairly laid back throughout the playoffs. This was, in retrospect, a psychological defense against yet another disappointment. But by the middle innings of game 7, what had appeared a remote prospect only a few days before seemed a real likelihood. I was no longer laid back, but instead hung on every pitch and watched with rising anticipation only to be crestfallen when the Indians tied it in the 8th. I sweated through the bottom half of the 9th, exulted during the top half of the 10th, and then hung on for dear life through a shaky bottom half.

Although I slept in late this morning, I awoke exhausted. I felt like I had played all 10 positions–including DH!–for all 10 innings.

It didn’t have to be that hard. Their defense–which some claim is the best in baseball history–had some breakdowns. I am loath to criticize Joe Maddon, given what the Cubs have achieved under his managing, but some of his moves in the last 2 games put me on edge. I couldn’t understand leaving in Chapman to pitch the 9th inning in game 6 with a 6 run lead. I figured they were very likely to need him in a tighter situation in game 7, and worried about him having little left in the tank on Wednesday after pitching extended stints in consecutive games. And so it was.

I groaned when he removed Lester in the 8th inning of game 7. He had retired the first batter on a routine grounder, struck out the next batter, and the hit he then surrendered was a weak infield grounder. He was still in command–leave him in until the tying run was at the plate, at least. They used to call Sparky Anderson Captain Hook for his haste in yanking pitchers. Madden makes Sparky look like a piker.

Then Chapman’s pitch selection freaked me out. Nothing but fastballs, even though Cleveland was not swinging and missing. I don’t care if you throw 100+: if you don’t change speeds major league hitters will eventually catch up with your fastball, and the Indians did. As my friend Tom Kirkendall pointed out, this might have been an indication of fatigue: tired pitchers are worried about hanging the breaking ball. But I seriously believe that it would have been better to throw an 89 MPH spinner than to throw only fastballs when hitters are sitting on them. (He got strikes on the 3d out in the 8th with his slider, and threw some good ones in the 9th as well.)

At the plate, I was mystified that Heyward–a double play waiting to happen–wasn’t bunting with a runner on first, especially since Maddon is usually fond of the bunt. Then Baez (on his own?) tries to bunt with two strikes and the lead runner on third.

I shudder to think what my blood pressure was at this point.

But all’s well that ends well.

Ben Zobrist drove in the go ahead run on a piece of excellent two strike hitting, and was named series MVP. Other than that hit (which is a big caveat, I know) he didn’t do much, so I don’t think he deserved it. If Chapman had held on, he would have won it in a walkover. But, as we know, he didn’t. I would have given it to Kris Bryant, who hit consistently and played an excellent third base. But he arguably won game seven with his legs: how often do you say that about a third baseman? He scored on a short fly ball to left, and from first on a Rizzo double. Those were not routine runs. They were truly difference makers in the game, but were sort of lost in the extra inning drama. And the smile on Bryant’s face when the game ending ground ball was hit to him will be an enduring memory.

What is perhaps most remarkable about the series is that a very young team came through in the clutch time and again. One would normally expect that a young team–and the Cubs are extremely young–would buckle after falling behind in the series and being on the schneid for the entire middle games, and especially in game 7 after surrendering a decent-sized lead. But they rallied in adversity. I can’t think of any parallel in recent baseball history. You couldn’t expect a veteran team to do what a collection of young players did.

One of the indications of youth throughout the series was a tendency to expand the strike zone, and to refuse to go with the pitch even though it was apparent that the Indians were intent on keeping it away, and even when a single would have been big. But last night, two of the biggest culprits–Contreras and Baez–drove the ball the opposite way on outside pitches and drove in runs, Contreras with a double, Baez with a homer.

When these guys mature and become more disciplined at the plate, the Cubs could have Murderers’ Row II.

I said at the outset that the good guys won. This is not to say that the Indians were bad guys, either in personality or performance. To the contrary. They were worthy and admirable adversaries. They didn’t lose. The Cubs won, and barely. The Indians played well, played hard, and have nothing to hang their heads about.

The Indians’ main weakness was depth in starting pitching. Kluber was excellent, but you can’t expect a pitcher to dominate the same team three times in a week. Familiarity doesn’t breed contempt, but it does tend to breed hits. The Indians’ other deficiency was outfield defense. A slip in right field in game 2. An Alphonse and Gaston routine in game 6 that allowed 2 runs to score. A high throw on the sac fly that Bryant scored on. When in Wrigley, Cleveland outfielders played the wall like it was covered in poison ivy, as if they were channeling old time Cub Lou “The Mad Russian” Novikoff.

“Wait ’til next year” was a recurrent theme in the Pirrong household, and in many other Cub fan households for literally decades. I will look forward to next year, but the waiting is over. After more than a century of futility, they have finally won it all. After years of looking forward to next year, 2016 is a year that all Cubs fans will look back on with fondness, for decades to come, even if success becomes the norm, rather than the extreme exception.

I know that there are many families like mine, for whom the championship came too late for a life-long Cubs fan to witness. I’ve already written about my dad and grandfather. A Naval Academy classmate wrote me that the experience was bittersweet, because his grandparents weren’t around to see it. I know there are many more like us. But I will rejoice not just for me, but for my dad. And my daughters (who have also become avid fans) will not have to regret that their dad never saw the Cubs win the World Series. For that I am deeply grateful.

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