Streetwise Professor

June 10, 2021

Bad Day At BlackRock?

Filed under: Economics,Financial crisis,Politics,Regulation — cpirrong @ 6:16 pm

There has been something of a kerfuffle recently over the large scale purchases of single family homes by the likes of BlackRock and other institutional investors like pension funds. The criticism is somewhat redolent of the Occupy days, because it unites many on the left with some on the populist right, like J.D. Vance:

Understanding should come before judgment. So let’s try to figure out what is going on here. I don’t have a definitive answer, but my strong sense is that this phenomenon is ultimately a consequence of the 2008-2009 Financial Crisis, and the various policy responses to it.

One thing is clear is that the initial foray of institutional investors was a response to the Crisis. And no wonder. Massive amounts of single family homes were in foreclosure, and the biggest fire sale in American real estate history was underway. And in fire sales, those with “dry powder”–cash rich investors relatively undamaged by the crisis that sparks the sales–go bargain hunting. In 2009-2010, the bargains were in residential real estate, especially single family houses. And the “real money” investors like BlackRock and pension funds were best positioned to grab those bargains.

Here it is almost certain that the activities of BlackRock et al did elevate real estate prices. And a good thing, too, for the problem at the time was not that housing prices were too high, but too low. Without bargain hunters (or vultures, if you wish) housing prices would have been even lower, more homeowners would have been underwater, more of them would have been foreclosed, etc. Of course BlackRock et al were not doing this out of charity, but to make a buck. But they were responding to price signals and their actions almost certainly mitigated a horrible situation.

But as the WSJ article linked above notes, institutional investment in the housing sector has persisted after the fire sales ended–especially in places like Houston, Atlanta, and Nashville. This is characterized as a reach for yield strategy on the part of the institutional investors. The yield on rental property is apparently attractive relative to alternative investments. And no surprise: have you looked at bond yields recently? Like in the last 12 years? Is it any wonder that investors like pension funds (especially government funds that are hugely under water) are desperate for assets that generate a stream of cash flows at attractive rates?

But high yield suggests that prices are low in some sense, rather than high. (Price is in the denominator of the return calculation.) “Bubble” real estate markets are characterized by extremely low rental yields, not high ones.

Look at this another way. People are choosing to pay rent, rather than buy and make mortgage payments and forego income on the investment of a down payment amount. Why? Why are they paying rents that generate a high return for the housing owner, rather than buying homes and capturing that return themselves?

My answers will be somewhat speculative, but now the question is the important thing. Many individuals are choosing not to buy, and to pay rent instead. The rents that they are willing to pay are driven by the stream of benefits that they get from living in a single family home. Why don’t they outbid BlackRock or some state pension fund and pay a price that capitalizes that stream of benefits?

Note that there are clear advantages to occupiers owning. The Atlantic article linked earlier discusses the frictions associated with renting. Well, renter-landlord relations have been fraught always and everywhere. Rental contracts are not “complete”–they leave a lot of grey areas that give rise to conflict between owner and renter, and to opportunism by both. Those wasteful activities can be eliminated by having those who live in a home own it. That in and of itself should give individuals a bidding advantage over institutions when buying homes. Cut out the middleman and you cut out the transaction costs inherent in the landlord-tenant relationship.

So then what gives? Now for the speculation, which again revolves around the fallout from the Financial Crisis.

First, the leading diagnosis of the cause of the Financial Crisis was that it was too easy to get a mortgage. In response to this, post-Crisis legislation and regulation tightened up the home financing market. A lot. You can argue that the tightening was justified. You can argue that it went too far. But regardless, restrictions on the ability of individuals to finance a home purchase, or regulations that made it more expensive to do this, shifted the balance away from purchasing towards renting.

Indeed, if the likes of Elizabeth Warren were intellectually consistent (yeah I’m a comedian, I know), they should see the increased presence of Wall Street on Elm Street as a good thing, because it means that their endeavors to prevent another housing “bubble” have worked.

Second, the Financial Crisis took a severe toll on the balance sheets and creditworthiness of many individuals. Although these problems have dissipated, they haven’t disappeared. Combined with the more restrictive access to credit, these creditworthiness/balance sheet effects impede the ability of individuals to capture the high returns of home ownership, and they cannot compete on price with institutional investors who do not face such impediments.

Third–and this is perhaps the most speculative point of all–the Financial Crisis and the follow on Foreclosure Crisis arguably had an impact on the preferences of individuals, especially Millennials and Gen-Zs. Post-Crisis home ownership seemed less like a dream–it had a potential dark side. So many in those cohorts prefer to pay rent and give a high return to institutional investors and deal with the hassles of a landlord rather than buy and face the risk of financial ruin.

Fed policy may also play a role. It clearly has depressed returns on conventional fixed income investments–and has done so by design. That has made institutional investors look at non-traditional investments. But Fed policy alone can’t explain why yields on housing investments apparently haven’t fallen to the level of the low yields on bonds. There must be some other factor impeding the rise of housing prices to reduce the yields that the institutional investors are apparently capturing by buying and renting out single family homes. That brings us back to a search for factors (like those just discussed) that prevent individuals from outbidding institutional investors to capture the stream of returns from housing ownership (and to eliminate the costs that arise when the home occupier is not the owner).

In turn, this means that inquiry into this issue should focus on whether post-Crisis, there are excessive restrictions and costs imposed on individuals looking to finance home purchases. That is, are the post-2008 laws and regulations designed to prevent a recurrence of the housing boom too restrictive?

I don’t have an answer to that question, but again, posing the right question is where you have to start.

My provisional conclusion now is that institutional investors are doing what they do: responding to price signals in order to maximize risk adjusted returns. They are responding to incentives. To evaluate what is going on, it is necessary to evaluate whether those incentives have been distorted by ill-conceived policies.

Of course, these policies were not created in a vacuum. They are the result of a political process that includes lobbying and rent seeking by institutional investors, among others. They have an incentive to harm potential competitors in the housing market. So any inquiry should also focus on whether these institutional investors have helped rig the game against individuals by pressing for the imposition of unwarranted restrictions on home financing. If so, censorious judgment would be warranted.

So is burgeoning institutional ownership of single family housing a 2020s version of Bad Day at Black Rock? A 2020s film noir? I don’t know. But I have the questions and some provisional answers.

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June 9, 2021

GiGi’s Back!: plus ça change, plus c’est la même chose

Filed under: Clearing,Economics,Exchanges,HFT,Regulation — cpirrong @ 2:45 pm

One of the few compensations I get from a Biden administration is that I have an opportunity to kick around Gary Gensler–“GiGi” to those in the know–again. Apparently feeling his way in his first few months as Chairman of the SEC, Gensler has been relatively quiet, but today he unburdened himself with deep thoughts about stock market structure. If you didn’t notice, “deep” was sarcasm. His opinions are actually trite and shallow, and betray a failure to ask penetrating questions. Plus ça change, plus c’est la même chose.

Not that he doesn’t have questions. About payment for order flow (“PFOF”) for instance:

Payment for order flow raises a number of important questions. Do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict? Are broker-dealers incentivized to encourage customers to trade more frequently than is in those customers’ best interest?

But he misses the big question: why is payment for order flow such a big deal in the first place?

Relatedly, Gensler expresses concern about what traders do in the dark:

First, as evidenced in January, nearly half of the trading interest in the equity market either is in dark pools or is internalized by wholesalers. Dark pools and wholesalers are not reflected in the NBBO. Moreover, the NBBO is also only as good as the market itself. Thus, under the segmentation of the current market, nearly half of trading along with a significant portion of retail market orders happens away from the lit markets. I believe this may affect the width of the bid-ask spread.

Which begs the question: why is “nearly half of the trading interest in the equity market either is in dark pools or is internalized by wholesalers”?

Until you answer these big questions, studying the ancillary ones like his regarding PFOF an NBBO is a waste of time.

The economics are actually very straightforward. In competitive markets, customers who impose different costs on suppliers will pay different prices. This is “price discrimination” of a sort, but not price discrimination based on an exploitation of market power and differences in customer demand elasticities: it is price differentiation based on differences is cost.

Retail order flow is cheaper to intermediate than institutional order flow. Some institutional order flow is cheaper to intermediate than other such flows. Competitive pressures will find ways to ensure flows that are cheaper to intermediate pay lower prices. PFOF, dark pools, etc., are all means of segmenting order flow based on cost.

Trying to restrict cost-based price differences by banning or restricting certain practices will lead clever intermediaries to find other ways to differentiate based on cost. This has always been so, since time immemorial.

In essence, Gensler and many other critics of US market structure want to impose uniform pricing that doesn’t reflect cost differences. This would be, in essence, a massive scheme of cross subsidies. Ironically, the retail traders for whom Gensler exhibits such touching concern would actually be the losers here.

Cross subsidy schemes are inherently unstable. There are tremendous competitive pressures to circumvent them. As the history of virtually every regulated sector (e.g., transportation, communications) has demonstrated for decades, and even centuries.

From a positive political economy perspective, the appeal of such cross subsidy schemes to regulators is great. As Sam Peltzman pointed out in his amazing 1976 JLE piece “Toward a More General Theory of Regulation,” regulators systematically attempt to suppress cost-based price differences in order to redistribute rents to gain political support. The main impetus for deregulation is innovation that exploits gains from trade from circumventing cross subsidy schemes–deregulation in banking (Regulation Q) and telecoms are great examples of this.

So who would the beneficiaries of this cross-subsidization scheme be? Two major SEC constituencies–exchanges, and large institutional traders.

In other words, all this chin pulling about PFOF and dark markets is politics as usual. Furthermore, it is politics as usual in the cynical sense that the supposed beneficiaries of regulatory concern (retail traders) are the ones who will be shtupped.

Gensler also expressed dismay at the concentration in the PFOF market: yeah, he’s looking at you, Kenneth. Getting the frequency?

Although Gensler’s systemic risk concern might have some justification, he still fails to ask the foundational question: why is it concentrated? He doesn’t ask, so he doesn’t answer, instead saying: “Market concentration can deter healthy competition and limit innovation.”

Well, concentration can also be the result of healthy competition and innovation (h/t the great Harold Demsetz). Until we understand the existing concentration we can’t understand whether it’s a bug or feature, and hence what the appropriate policy response is.

Gensler implicitly analogizes say Citadel to Facebook or Google, which harvest customer data and can exploit network effects which drives concentration. The analogy seems very strained here. Retail order flow is cheap to service because it is uninformed. Citadel (or other purchasers of order flow) isn’t learning something about consumers that it can use to target ads at them or the like. The main thing it is learning is what sources of order flow are uninformed, and which are informed–so it can avoid paying to service the latter.

Again, before plunging ahead, it’s best to understand what are the potential agglomeration economies of servicing order flow.

Gensler returns to one of his favorite subjects–clearing–at the end of his talk. He advocates reducing settlement time from T+2: “I believe shortening the standard settlement cycle could reduce costs and risks in our markets.”

This is a conventional–and superficial–view that suggests that when it comes to clearing, Gensler is like the Bourbons: he’s learned nothing, and forgotten nothing.

As I wrote at the peak of the GameStop frenzy (which may repeat with AMC or some other meme stock), shortening the settlement cycle involves serious trade-offs. Moreover, it is by no means clear that it would reduce costs or reduce risks. The main impact would be to shift costs, and transform risks in ways that are not necessarily beneficial. Again, shortening the settlement cycle involves a substitution of liquidity risk for credit risk–just as central clearing does generally, a point which Gensler was clueless about in 2010 and is evidently equally clueless about a decade later.

So GiGi hasn’t really changed. He is sill offering nostrums based on superficial diagnoses. He fails to ask the most fundamental questions–the Chesterton’s Fence questions. That is, understand why things are they way they are before proposing to change them.

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May 30, 2021

Intelligent Design vs. The Missing Link (or the Virus Gnomes)

Filed under: CoronaCrisis,Politics — cpirrong @ 5:50 pm

The raging debate over the covid lab leak theory reminds me of the Intelligent Design vs. Evolution debate, with the lab leak theory playing the role of ID and the natural origins theory playing that of Evolution.

There is a huge difference, however. Here we have a strong candidate for the Intelligent Designer: “Bat Woman” Shi Zhengli, and her team at the Wuhan Institute of Virology. Madam Shi has both capability and opportunity. She has a long history of engaging in the genetic engineering of viruses, with the specific goal of increasing and evaluating their virulence in humans (“gain of function research”). As her monicker demonstrates, this includes a specialization in modifying viruses found in bats, which even the evolutionists acknowledge is the original source of covid. There is recent evidence that she had (almost certainly uniquely) access to the raw material (bat viruses from a cave 1000+ miles from her lab) that a modern day Dr. Frankenstein could combine with other genetic material to produce covid.

There are reputable scientists who have recently released a paper claiming that covid-19 was created in a lab. I do not have the expertise to evaluate their claims, but I think it is beyond cavil that Shi had the ability to do what they claim.

Against this we have the evolutionists, who at this stage remind me of the South Park Underpants Gnomes:

  1. Bats.
  2. ????
  3. Covid-19!

Or to use an evolutionary metaphor, they have a huge missing link problem. Despite intense efforts, they have yet to identify the intermediate species between bats deep in a cave and humans in Wuhan. They have hypothesized such a link (or links) and asserted that their hypothesis is truth. This is unscientific. Absence of evidence is not evidence of absence, but unless and until the chain of transmission can be demonstrated, the hypothesis remains only that, and the longer we go without identifying the chain the less likely it is that it ever existed.

In stark contrast, the entire possible causal chain in the lab leak hypothesis is known, and extremely plausible, and there is circumstantial evidence that it indeed operated.

Right now, in my opinion the burden of proof is on the Evolutionists. They have far less evidence on their side than the Intelligent Designers.

I of course use the term “Intelligent Design” sarcastically, but not in the way that you might think (to cast aspersions on the lab leak hypothesis, given the low scientific standing of Intelligent Design Theory). No, the sarcasm relates to what Shi (and other scientists around the world) are designing: these are smart people, but how intelligent is it to create deadly pathogens that can escape into the human population–as even defenders of that research acknowledge is a possibility?

And of course, one of those defenders is none other than Dr. Anthony “The Dervish” Fauci. In 2012 he said thus:

In an unlikely but conceivable turn of events, what if that scientist becomes infected with the virus, which leads to an outbreak and ultimately triggers a pandemic? Many ask reasonable questions: given the possibility of such a scenario – however remote – should the initial experiments have been performed and/or published in the first place, and what were the processes involved in this decision?

Scientists working in this field might say – as indeed I have said – that the benefits of such experiments and the resulting knowledge outweigh the risks. It is more likely that a pandemic would occur in nature, and the need to stay ahead of such a threat is a primary reason for performing an experiment that might appear to be risky

What are these supposed benefits? Well, the Underpants Gnomes again come to mind: ???

Supposedly the idea is that we can get ahead of nature by creating deadly things that nature might produce through evolution and create cures in advance.

OK. I’ll bite. Name one cure produced by this type of research. Just one.

I have never seen a defender or advocate of this research point to a single example.

And indeed, it seems wildly implausible that this is very likely at all. What are the odds that nature would produce something so similar to what is produced in the lab by Dr. Shi or anybody else that a hypothetical vaccine for the Frankenstein creation would work on the evolved virus? Look at flu vaccines. They are frequently useless because the specific strains of virus they target happen NOT to be the one that crops up in a given year. Vaccines are not like hand grenades or horseshoes. Close is not good enough. A miss is as good as a mile.

Covid vaccines are very specifically targeted. The hysteria over covid variants is due in large part to concern that a vax that works on one variant won’t work well on other, very closely related ones.

But we are to believe that a vaccine (which again, has never been developed in reality) to treat a lab-created virus will be efficacious against another one that evolved independently?

So maybe GOF research creates the most deadly strain of pathogen, could–in theory–give us a defense against that specific or very closely related strains. But what good is that if other really deadly (if not quite so deadly) pathogens evolve, against which the unicorn vax is useless? And what are the odds that the most deadly pathogen would evolve naturally?

That is, how can (in Fauci’s words) you really “get ahead of the threat”? This is an especially valid question for evolutionists (whose ruling model is one of random variation plus natural selection): what are the odds that a threat that is created in the lab will help deal with a threat that evolves by a random process? Gain of Function seems to presume some sort of viral teleology. Which is to say, that nature acts by intelligent design that mirrors what is done in the lab. Human Intelligent Designers can “get ahead of” nature’s Intelligent Designer.

Ironic, eh?

So, GOF basically means create something really deadly that is unlikely to evolve naturally and which is also unlikely to permit developments of vaccines against what evolves naturally. This means that the odds of GOF research producing something that will protect against naturally occurring pathogens is vanishingly small.

But the risk of a lab leak is real, and non-trivial–as historical experience demonstrates and even Fauci acknowledges.

So how is this risk-reward trade-off intelligent?

This whole line of research seems to represent exactly the kind of scientific hubris that Mary Shelly wrote about two centuries ago. The “get ahead of the threat” rhetoric seems like propaganda intended to gull people into accepting Dr. Frankensteins pursuing their hubristic ambitions.

I am open to persuasion, which would have to take the following form. A rigorous calculation of the probability that a given GOF research effort will make it possible to accelerate meaningfully the development of a vaccine or therapy against a naturally evolved pathogen vs. a calculation of the probability that the pathogen created by this given effort will escape the lab.

Until I see such a demonstration, I will conclude that GOF should be banned, and its Dr. Frankenstein practitioners relegated to other, more benign tasks.

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May 27, 2021

Dr. Tony Dervish

Filed under: CoronaCrisis,Politics — cpirrong @ 6:43 pm

I have despised and distrusted Dr. Anthony Fauci from the very onset of the Covid crisis. I was aware of his dubious–to put it mildly–role in the AIDS issue in the ’80s. But my extremely negative priors were based more on the fact that he has been at the top of the bureaucratic food chain in DC for decades, which can only mean that he is a apparatchik who cultivates power and seeks rents, rather than a man who cultivates science and seeks truth.

I think I was very early to the game. When I tweeted something critical about him in March, a couple of friends chided me for dissing “Dr. Fauci.” They are now staunch Fauci foes.

If anything, events have shown that my priors were far to generous: my posteriors are unbounded from below.

The man has pirouetted on virtually every covid-related issue. Masks. Means of transmission. Vulnerability of children. Lockdowns. He has always taken the politically expedient position of the moment. Pre-November, moreover, his words and deeds were almost invariably calculated to damage Trump. And no wonder, given the mutual antipathy between Trump and the bureaucratic establishment in DC.

But Dr. Dervish’s most disgusting spin has been from heaping scorn on the Wuhan lab leak theory to his recent acknowledgement that gee, yeah, it’s a plausible hypothesis that needs to be investigated.

Who knew? Really? Well knock me down with a feather.

Like many of the government party and ruling class (e.g., Glenn Kessler of Pravda on the Potomac), Fauci (survivalist that he is) was forced into this spin by facts. But this is little excuse. The circumstantial case for the culpability of the Wuhan Institute of Virology was always quite strong. Strong enough that it should not have been dismissed out of hand–let alone characterized as conspiratorial (and racist) lunacy as a justification for not investigating. But some recent facts of the barking dog and non-barking dog variety have only strengthened it. The illness of 3 WIV employees immediately prior to the outbreak. The connection between WIV and a bat-infested cave 1000+ miles away where (a) several individuals had contracted covid-like symptoms, and (b) the WIV had dispatched researchers to collect samples. The failure to find any animal intermediaries between the bats and people (again–who were separated by 1000+ miles).

So like a cornered cockroach, Fauci has had no choice but to admit the obvious.

And Fauci comes to this with very dirty hands indeed. He has bobbed and weaved for weeks about his role in funding WIV. He almost certainly lied about it in Congressional testimony. When forced to tell the truth slowly, he acknowledged the funding but claimed it was impossible to know whether it had gone to “Bat Woman’s” “gain of function research.” His latest spin is that it would have been a “dereliction of duty” not to cooperate with WIV on coronavirus research–all the while expressing ignorance as to whether this institution was engaged in GOF research.

WELL WHY THE HELL DON’T YOU KNOW? This is your excuse, Sergeant Schultz? “I KNOW NUTHINK?” Really? For this you are the highest paid employee in the U.S. government?

Very few in Washington have been willing to challenge this superannuated elf. Only Rand Paul has had the stones to shirtfront Fauci time and again. Other Senate Republicans (and most in the House), you ask? Surely you jest. Worthless and craven governing uniparty POS almost without exception.

As a result, there is little doubt that, like Blattella germanica, this bureaucratic cockroach will survive, and even thrive. Rand Paul, on the other hand, should rightly fear assassination.

This is where we are.

After terminating a Pompeo-initiated effort to investigate the lab leak theory, whoever has his/her hand up the back of Joe Biden’s/Charlie McCarthy’s shirt has ordered the intelligence community to investigate.

Yeah, that inspires confidence, don’t it?

Can you say “whitewash” these days? If you can, I guarantee that’s what this “investigation” will be.

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May 21, 2021

Media Delenda Est

Filed under: Energy,Politics — cpirrong @ 6:13 pm

Last week CNN ran a story on the Colonial Pipeline shutdown that claimed that Colonial had not paid a ransom to the ransomware attackers. According to CNN, based on four anonymous sources, the hackers had exfiltrated data from Colonial’s billing system, but that the cyber response team had located the data on a server in the US, and prevented the data being sent outside the US, thereby eliminating the need to pay ransom.

I called bullshit immediately after reading the story:

There’s a thread if you’re interested, but I will summarize it. First, the incident was described as a ransomware attack from the first. But ransomware does not involve exfiltration of data. Instead, the attacker encrypts the target’s computers, and demands ransom in exchange for the decryption key or tool. Exfiltration of data is more commonly described as a “leakware” attack. But leakware wouldn’t explain all the facts. Notably, just exfiltrating data would not have prevented Colonial from operating its system: thus, leakware can’t explain the shutdown, though ransomware could.

And lo and behold, the very next day:

And yes, it was ransomware:

Once they received the payment, the hackers provided the operator with a decrypting tool to restore its disabled computer network. The tool was so slow that the company continued using its own backups to help restore the system, one of the people familiar with the company’s efforts said.

Ransomware would explain a shutdown. Colonial couldn’t use its computers. (Supposedly the computers in question related to billing rather than pipeline operations. But a pipeline ain’t going to operate if it can’t bill properly for tens of millions of dollars of product.)

You’ll note I have not quoted from the 12 May CNN article. That’s because after the revelation that the original story was bullshit, CNN replaced it with this drivel (which is where you are directed if you click the link in my first tweet).

Although CNN admits its original story that no ransom was paid was wrong, the schmucks still can’t fully admit how wrong they were:

CNN was previously told by multiple sources that Colonial Pipeline had not yet paid the ransom, but two sources said on Thursday that the company did pay as it sought to retrieve the stolen information. It is not clear when the payment was made.

The information was NOT STOLEN, losers.

CNN was lied to. Obviously. Which raises two questions.

First, given that the story was obviously fishy, why didn’t CNN figure that out? I saw through it immediately. Meaning that CNN reporters are either complete morons, or they deliberately went with a story that they knew was bilge.

Second, and more importantly, why hasn’t CNN named the liars? The four liars.

Oh, but journalists can’t burn their sources dontcha know. Well, if your sources screw you, screw them back. If you don’t, then you have revealed an ugly reality: journalists would rather maintain access to liars in powerful places, and be accessories in spreading their lies, than to call out the liars and lose access to them. Access to lying liars trumps truth. Every time.

This perpetuates the cycle of lies. There is NO accountability for lying. None. Zero. Zip. Nada.

Or maybe CNN doesn’t think its sources screwed them. Maybe they were in on it all along.

So the lying goes on and on and on and journalists at CNN and every other major media outlet knowingly spread the lies day after day after day.

Word to the wise: do not believe a single word in a story that relies on anonymous sources. Not. A. Single. Word. Anonymous sources can lie with impunity. And given that, you know that they will, and do.

The media is just one American institution that needs to be torn up, root and branch. It is too corrupt, and its relationship with political (and bureaucratic) power too incestuous, to be reformed. CNN’s Colonial Pipeline story glaringly reveals that truth, and the truth that the modern media is built on lies.

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May 9, 2021

Combat Is Not Gender Normed, or Died of a Theory. Literally.

Filed under: Military,Politics — cpirrong @ 5:58 pm

One of the developments that has distressed me most over the past years is the descent of the US military into what is now called wokism. The descent began long before the term “woke” gained currency, but it has accelerated since it has, and especially post-20 January.

One of the primary stress points has been over the role of women in combat, especially in the infantry. Clearly here a decisive–and arguably the decisive–issue is physical capacity, notably strength and body mass.

Combat is extraordinarily difficult physically (and mentally as well). It taxes every muscle and sinew. Even movement to combat is physically punishing, especially given the increasing weight of material (including body armor) that the modern soldier must hump before firing a shot.

After WWII, the US Army surveyed veterans. One question they asked was what needed to change in basic training. The overwhelming answer was more physical fitness training. A lot more. Soldiers who had served in the ETO and the jungles of Asia responded that extended combat was far more physically demanding than they had been trained to handle.

In its efforts to integrate women, including into combat billets, the military has had to try to overcome what should be immediately obvious to any sentient being: men are stronger than women. (If this statement offends you, so be it: I am not going to bend to your denial of reality.)

The flash point here has been physical fitness testing. Recently the military adopted a new “Army Combat Fitness Test” (note the word “combat” in the title, as opposed to the old “Army Physical Fitness Test”). The intention was that the test standards would apply equally to women and men, to make sure all had the physical strength required for combat.

The only way this could happen if the test was no test at all. To the extent that the test does impose physical challenges even remotely similar to those required in combat, it was inevitable that women would fail at a far higher rate than men.

And lo and behold, that’s exactly what happened.

But rather than questioning whether this undermined entirely the case for even thinking about letting women serve in infantry units (or other MOS demanding physical strength), the Army is consider gender norming the tests.

Combat is not gender normed. Period.

I say again: combat is not gender normed. A gender normed “combat fitness test” is an oxymoron that makes “military intelligence” look like the epitome of consistency.

I often use Jeff Davis’s phrase “died of a theory.” Here, that will be literally true. People will die. Wars will be lost. The nation’s survival may be at stake.

There are few things more serious–existential even. Serious people–including bad ass women in the military who can hack it physically (there are exceptions to every rule)–understand this. But the US military is currently in the hands of very, very unserious people–and has been for a long time. These are people in thrall to a theory, and are willing to send service men and women to their deaths (and jeopardize the security of the nation) rather than choose reality over theory.

The incoherence of the theorists is also striking. The feminist left argues that men are predisposed to violence and aggression, and are certainly more violent and aggressive than women: indeed, they direct much of their violence and aggression towards women, who are incapable of defense because of their lesser physical strength and aggression. Well, a comparative advantage in violence is an attribute in the military, and this comparative advantage recommends–compels!–that men specialize in socially sanctioned violence–notably in combat arms in the military–and that women specialize in other things.

This is not an assertion of superiority, dominance, or hierarchy. It is a basic point about comparative advantage and specialization. A basic point that is grasped by few, and basically by none on the left, whose obsession with simplistic notions of equality leads them to shrink with horror from the ideas of comparative advantage and specialization.

Yet the same leftist feminists–whose theories have captured the US defense establishment–argue that men and women should not so specialize, but that women and men should both close with enemies in violent combat. In the name of equity. Or something. Like I say, the theorists and the theory are incoherent, so explaining this patent contradiction is beyond the powers of mere mortals.

Various strains of Critical Theories predicated on perverted concepts of equality and delusional views of reality have attacked the brains of those at the pinnacle of the uniformed and civilian hierarchies. I am reminded of this line from Patton’s legendary speech to the Third Army:

The bilious bastards who write that stuff for the Saturday Evening Post don’t know any more about real battle than they do about fucking

Alas, the bilious bastards who want to gender norm “combat fitness tests” are no longer merely editors and writers for newsweeklies.* They run the US military. God save us.

*There are obviously many in the Pentagon, including those holding flag ranks, who know battle. That actually makes it worse. Most likely out of the intersection of careerism and a political class in thrall to the theory, they are willingly collaborating with–nay, directing–policies that they know are are in conflict with basic reality and which jeopardize lives and the nation’s security.

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The Real Reasons For Ruling Class (and Corporate Class) Sinophilia

Filed under: China,Economics,Politics — cpirrong @ 3:54 pm

Niall Ferguson rightly worries about the ruling class’s infatuation with the Chinese system, and their clear desire to imitate it. Astoundingly, he fails to grasp the reason for this fanboy attraction.

Ferguson draws an analogy with Cold War I, during which he argues a process of “osmosis” threatened to make the US and the West generally more and more like the Soviet Union. But what is going on now is completely different. It is not an unthinking imitation driven by a need to compete, as in 1945-1991. It is a mixture of admiration (among the political class) and venality (among the corporate class). Yet Ferguson ignores these facts–which are far more disturbing than “osmosis”, which is an unconscious process. The ruling class’s affinity for the CCP model is anything but unconscious.

The West’s political class clearly envies the CCP’s autocratic powers, and strives to imitate them. This is most noticeable with respect to Covid policy, but it is not limited to that. Indeed, the political class fantasizes about using the extraordinary powers it seized based on the Covid pretext to reshape society generally.

The most forthright of the fanboyz is Canada’s effete Justin Trudeau–a perfect useful idiot for the CCP. He openly admires the Chinese dictatorship because, you know, it allows them to dragoon people into going green (amongst other things).

I could come up with other Trudeau examples, but I will spare you the torture of watching more of the twerp’s (cleaned that up) power worship/envy.

Although Trudeau is the most open in his admiration, it is clear that in the EU and the US the political class is itching to embrace China-like policies, whether it is massive “infrastructure” spending, draconian restrictions on liberty in the name of public health, or a social credit system (disguised, perhaps, in the form of vaccine passports or government cryptocurrencies which (a) China is racing to introduce in order to expand its social control, and (b) would almost certainly be non-anonymous to the government and linked with vast amounts of other personal information).

The Rosetta Stone to all ruling class policy initiatives is quite simple, people: you can make sense of any policy by asking what most enhances the ruling class’s power most, and deprives you of the most liberty and personal sovereignty. The ruling class envies the party/state power in the Chinese system, and hence is anxious to ape it at every opportunity.

That basic fact is missing in Ferguson’s article. Maybe it’s because he’s so embedded in the ruling class, although he from time to time takes contrarian positions.

Insofar as the corporate class is concerned, they are the 21st century version of Lenin’s 20th century aphorism about the capitalists who will sell communists the rope with which the latter will hang the former. Plus ça change, plus c’est la même chose. Slavering over the Chinese market, Western corporatists (I won’t say capitalists) are perfectly willing to countenance the enslavement of billions.

The ruling class and the corporate class crave power–the ability to control you, to coerce you. They see the power the CCP wields, and they want the same. Is not about emulating China to compete with China. It is about emulating China to emulate the domineering power of China’s political class. And to reprise Lenin again: “Who? Whom?” You are the whom.

This should be an obvious point, but Ferguson fails to make it.

The appropriate historical analogy here is not Cold War I, but the 1930s, when many in the Western ruling class openly admired the Italian Fascists, the Nazis, and the Bolsheviks because of the untrammeled power to reshape society that these malign movements possessed. The power to reshape society free from the resistance of the unenlightened proles is what the Western progressive political class desired, and desires, above all else. So they admired Mussolini then, and admire Xi now. Sinophilia (or more precisely, CCP-o-philia) is just the latest symptom of a very old disease.

These people are the enemies of freedom. They are your enemies. Respond accordingly.

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April 30, 2021

If You Woke Up With Wood . . . You’re Rich!

Filed under: Commodities,CoronaCrisis,Derivatives,Economics — cpirrong @ 6:33 pm

Especially if it’s lumber. Not so much if it’s timber or logs.

Lumber prices have been on a tear recently. The CME lumber futures price has risen inexorably for weeks:

The softwood lumber PPI has increased 73 percent from April of last year, when Covid cratered all markets (including all commodity markets in particular) to March of this year. As the graph above shows, the price increase in the last month alone will add almost 100 precent to that. The plywood PPI is up 43 percent. The PPI for logs, timber, and pulpwood has not risen nearly as much over the April 2020-March 2021 period–only 7 percent.

So what’s going on? This podcast has a pretty good explanation, which comports with the analysis that follows. My main objection is that it repeatedly refers to the market as “broken.” No. A market is broken when it sends the wrong price signals. It is not broken if it sends the right signals, even if you don’t like them. That’s what’s going on here. Prices are signaling a major change in demand patterns that is straining a productive capacity oriented to the old patterns.

The podcast claims that log and timber prices are down. That’s not consistent with the PPI data, which does demonstrate some uptick in log/timber prices. I have also seen reports that timber/log prices are firm in western Canada. But it is obvious that the spread between lumber and timber has widened dramatically.

Which provides a perfect opportunity to apply what I teach in my commodities classes: Find the bottleneck. In a reasonably competitive market, the spread between two commodities, one that can be transformed into the other, equals the cost of that transformation. Sawmills transform logs into lumber, so if the spread between the prices of these things blows out, that shows you where the bottleneck is–at the mills.

The podcast largely confirms that. The sawmill sector has contracted and consolidated in recent years for a variety of reasons. The Covid-induced economic shock of last year also led to the idling of capacity. Now demand has come roaring back. There is a building boom, driven by an exodus from cities and a substitution of things for services. The turnaround has been so abrupt that sawmill capacity has not been able to adjust to keep up. It of course takes a long time to build new mills, and the decision to do that depends on expectations about long-term demand. It is quicker and more economical to restart idle mills, and to add shifts, and that is happening. But it can’t happen overnight.

A transportation bottleneck is exacerbating the problems. Shortages of railcars and trucks are limiting the ability of sawmills to satisfy demand. These shortages reflect in part a commodities boom generally. Chinese demand for US ag products (which has sent corn prices soaring) is contributing to that, but the transportation sector has been robust generally since its doldrums of a year ago. In that time the Dow Jones Transportation Average is up 128 percent off its Covid bottom, and is 40 percent above its pre-Covid collapse level.

Transportation bottlenecks tend to widen spreads at all levels of the value chain, from timber farm to mill, and from mill to lumber yard.

Lumber inventories are at barebones levels, as one would expect in such circumstances. When the supply-demand balance is tight today relative to what is expected in the future, the efficient thing to do is to draw down inventories and to consume everything that is being produced. This is leading, exactly as theory would predict, to a pronounced backwardation in lumber prices:

Note there’s an almost 30 percent backwardation going out six months. That’s very steep. Very Although I wouldn’t put too much weight in the distant deferred prices (given the absence of volume and open interest) one, it appears that the curve flattens out after the six month point.

So what’s going on is commodity economics 101. A surge in demand after a sharp fall (which led to reductions in transformation capacity) caused the lumber market to hit constraints–constraints in the amount of available inventory, and constraints in the capacity to transform a raw product (timber) into a consumable one (lumber). This in turn caused spreads (calendar spreads and the spread between finished and raw prices) to blow out. Market participants are responding to these price signals. The backwardation suggests that the constraints will ease by the end of the year. That of course is a forecast based on current information. Things could change.

So things ain’t broke. Indeed, what is happening in the lumber and timber markets is a symptom of a robust economic recovery, at least in the housing and goods sectors. It also reflects an apparent ongoing structural shift post-Covid (and post urban disturbances of the last year), namely, a desire to move out of cities driven by the recognition that more people can work remotely, and the declining amenities of cities (largely the result of lockdowns and their aftermath, and an upsurge in crime). Such an abrupt and seismic shift inevitably bumps up against constraints determined by past investments tailored to accommodate the old consumption patterns. That affects prices, and prices signal the need for new investments to alleviate the bottlenecks. This too shall pass, and within some months the bottlenecks will ease, as. participants all along the value change respond to the extraordinary price signals we see today.

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April 24, 2021

Two Self-Inflicted Diplomatic Wounds. But At Least We Don’t Have to Worry About Mean Tweets, Right?

Filed under: China,History,Politics,Russia,Turkey — cpirrong @ 9:07 pm

The Biden administration self-inflicted two serious diplomatic wounds in the space of a single day.

First, even though India is experiencing a wave of covid infections and deaths, its worse so far, the administration refused to relent on a ban (imposed by the Trump administration) on the export of vaccine ingredients.

Yes, the policy was originally Trump’s, but (a) you’d think that would be a bug not a feature with this administration, (b) India’s circumstances are far more dire today than they were when the ban was implemented, and (c) in the US, vaccine usage has nearly reached a saturation point, with many providers having shots wanting for arms.

India (both the government but especially the citizenry) has reacted extremely negatively due to this refusal, which is not surprising given the state of covid panic in the country. The United States should be courting India, not alienating it. After decades of hostility to the US (due not least because of US support for Pakistan, India’s post-independence antipathy to colonial powers or their allies, and dependence on Soviet/Russian weapons), India’s existential conflict with an aggressive China had created an opportunity to make India if not an ally, a country with which the US could cooperate on issues of common interest–most notably containing China.

That underlying dynamic is still there, but this thoughtless refusal fuels the latent suspicions of the US among many Indians and makes such cooperation far, far more difficult. It benefits the health of Americans virtually not at all, but alienates a country we should be courting.

The second self-inflicted wound involves Biden’s official recognition of the Armenian genocide by the Ottoman Empire during the depths of WWI. (Do not underestimate how this war scarred Turkey. The Ottoman Empire suffered a greater percentage loss of population during the war than any other nation, even if one deducts the Armenian dead. The Ottoman Empire was dismembered, and Turkey itself was almost devoured in the aftermath. Only Ataturk’s miracles in the War of Independence saved Turkey from being divided among the Western powers and the Greeks, and left as an Anatolian rump that no one else wanted.)

Yes, the fate of Armenians was horrible. Well over a million died. Numberless others were displaced, often to desolate camps in the Syrian desert. If you meet someone whose name ends in “ian” they are almost certainly the descendants of the Armenian diaspora. (Those with names ending in “yan” are usually post-Soviet emigres). Their martyrdom was widely acknowledged in the US. In my parents’ era, children were told to eat their vegetables, because of the starving Armenians.

Like all historic episodes, especially those that occurred in the crucible of WWI, the story is complicated. But regardless of where the guilt lies, it happened more than a century ago. Those who committed the atrocities, and those who suffered them, have long since died.

But living Turks of all political persuasions are neuralgic about being blamed for these long-ago events. Even ardent Erdoğan haters in the CHP are of one mind with him on this issue: calling what happened in the long-dead Ottoman Empire a genocide is a red line. Those who do so are Turkey’s enemies.

Turkey’s response was immediate. It recalled its ambassador to the US, and its foreign minister gave a bitter statement, claiming that this will irreparably harm Turkish-US relations. He also said that the US should not cast stones, given its historical treatment of Native Americans. (The administration’s repeated condemnations of America’s historical actions make it a particularly attractive target for such barbs.)

Many in the US, particularly in the Armenian community, dismiss this. They say that it will blow over.

Don’t be so sure. Under Erdoğan Turkey has been wobbling away from the American (and Nato) orbit. Given Erdoğan’s dicey domestic circumstances, stoking the resentment and taking real steps to distance the country from the US are natural political moves. Russia will clearly notice–and seize upon–the opportunity. Erdoğan will be quite open to their blandishments.

And do not underestimate the power of Turkish nationalism. In my experience, they are among the most chauvinistic people in the modern world. (Han Chinese are the only rivals for the title.) They are not postmodern or post-nationalist, like most Europeans. This is deadly serious to them. It will not blow over.

Turkey has geopolitical importance, not least because of its geographic position. It has been a difficult country for the US in recent years, in large part because of its mercurial and grandiose leader. Provoking it unnecessarily will bring the US many policy headaches. Virtually at the same moment as Biden’s announcement, Turkey escalated its conflict with America-aligned Kurds in Iraq. The genocide announcement will make it all the more difficult to try to manage that conflict.

And for what? This gesture will not bring anyone back from the dead. It will not undo what has been done. America helped in the best way possible–by welcoming tens of thousands of Armenians. (Including the Kardashians. Isn’t that sacrifice enough?) It is moral preening that will not reverse past atrocities, nor prevent future ones. And it is contrary to US national interests.

And Turks–including in particular Turks in the US–believe that Biden’s action does not even rise to the level of moral preening. In their eyes it is corruption, political venality, repaying Armenian-Americans (in California in particular) for massive campaign contributions, given in exchange for his promise to do what he just did. Given the absence of any other plausible explanation, this seems very reasonable. And very despicable

One day, two pointless gestures that do significant damage to relationships with two geopolitically important nations with which the US has had difficult relations. I see zero upside for US interests in these actions, and much downside. God help us if these are harbingers of US policy over the next four years–which alas is extremely likely.

But hey. At least we don’t have to worry about mean tweets, right?

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Why Is Proof of Efficacy Required for Pharmaceutical Interventions, But NOT Non-Pharmaceutical Ones?

Filed under: China,CoronaCrisis,Economics,Politics,Regulation — cpirrong @ 11:43 am

Under Federal law, a pharmaceutical intervention must be proven safe and effective before it is marketed to the public. If after introduction it proves unsafe or ineffective, the Food and Drug Administration can rescind its approval.

Note the burden of proof: the manufacturer must prove safety and efficacy. Safety and efficacy are not rebuttable presumptions.

Would the same be true of non-pharmaceutical interventions (NPIs). This neologism (neoanacronym?) is used to describe the policies that have been imposed during the Covid Era–most particularly, lockdowns and masks.

Neither had been proven safe or effective prior to their wholesale–and I daresay, indiscriminate–use. Lockdowns in particular had never been subjected to any clinical experiment or trial. Indeed, the idea had been evaluated by epidemiologists and others, and soundly rejected. But a policy first introduced in a police state–China–spread just as rapidly as the virus to supposedly non-police states despite it never having been proven efficacious or safe.

A year’s experience has produced the evidence. Greetings, fellow lab rats!

And the evidence shows decisively that lockdowns are NOT effective at affecting any medically meaningful metric about Covid. This American Institute of Economic Research piece provides an overview of the evidence through December: subsequent studies have provided additional evidence.

Furthermore, lockdowns have been proven to be unsafe. Unsafe to incomes, especially for those whose jobs do not permit working from home. Unsafe for physical health, in the form of inter alia deferred cancer diagnoses and treatment for heart attacks and strokes and greater substance abuse (with higher incidence of overdoses), as well as delayed “elective” surgeries that improve life quality. Unsafe for mental health. Unsafe for children, in particular, who have experienced debilitating social isolation and profound disruption in their educations. (Although given the trajectory of American public education, especially post-George Floyd/Derek Chauvin, feral children might be better off than those subjected to the tortures of a CRT-infused curriculum and CRTKoolAid drinking “educators.”)

Masks are not as devastating as lockdowns, but they have also been shown to be ineffective and also unsafe, especially for those who must wear them for extended stretches–which includes in particular children at school.

(Remember “For the children”? Ah, good times. Good times.)

Drug regulation was one of the first major initiatives of the Progressive Era, and the 1962 FDA Amendments that imposed the efficacy requirement were also driven by progressives. My assessment of the economic evidence (especially the literature spawned by my thesis advisor, the great Sam Peltzman) is that the efficacy requirement in particular has been harmful, on net, because it delayed and in some cases prevented the introduction of beneficial therapies.

But even if–especially if–you accept the progressive-inspired conventional wisdom regarding pharmaceutical intervention regulation, you should be dismayed and even furious that the same logic that has NOT been applied to NPIs. The underlying principle of drug regulation has been “show me”: show me something works. The underlying principle of Covid Era ukases has been: “Evidence? Evidence? I don’t have to show any stinkin’ evidence.” Indeed, it’s been worse than that: those who demand evidence, or even politely point out the lack of evidence, are branded as heretics by the very same “progressives” who believe religiously that requiring proof of efficacy of drugs is a good thing.

How to square this circle? How to explain this seeming contradiction?

I think it is as plain as the nose on your face. Power. In particular, power exercised by progressive technocratic elites. The FDA acts empower a progressive technocratic elite. Lockdowns and mask mandates empower a progressive technocratic elite–far beyond the wildest dreams of the most zealous FDA bureaucrat. (They also empower idiot politicians who imagine themselves to be part of some elite.) They are both premised on the belief that individuals are incompetent to choose wisely, and must be coerced into making the right choice. Coerced by credentialed elites who are better than you proles.

So an apparent logical inconsistency–proof of efficacy for thee, but not for me–is in fact no inconsistency at all. They are both who, whom. A soi disant elite (ha!) always pushes the alternative that gives them the most power, and deprives you of the most choice. Who (the progressives): Whom (you).

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