Streetwise Professor

December 5, 2018

Judge Sullivan Channels SWP, and Vindicates Don Wilson and DRW

Filed under: Derivatives,Economics,Exchanges,Regulation — cpirrong @ 10:52 am

After two years of waiting after a trial, and five years since the filing of a complaint accusing them of manipulation, Don Wilson and his firm DRW have been smashingly vindicated by the decision of Judge Richard J. Sullivan (now on the 2nd Circuit Court of Appeals).

Since it’s been so long, and you have probably forgotten, the CFTC accused DRW and Wilson of manipulating IDEX swap futures by entering large numbers (well over 1000) of orders to buy the contract during the 15 minute window used to determine the daily settlement price.  These bids were an input into the settlement price determination, and the CFTC claimed that they were manipulative, and intended to “bang the close.”  The bids were above the contemporaneous prices in the OTC swap market.

The Defendants claimed that the bids were completely legitimate, and that they hoped that they would be executed because the contract was mispriced because of a fundamental difference between a cleared, marked-to-market, daily-margined futures contract and an uncleared swap.  The former has a “convexity bias” and the latter doesn’t.  DRW did some IDEX deals with MF Global and Jefferies at rates close to the OTC swap rate, which it thought were an arbitrage opportunity, and they wanted to do more.  And, of course, they  received margin inflows to the extent that the contract settlement price reflected the convexity effect: thus, to the extent that the bids moved the settlement price in that direction, they expedited the realization of the arbitrage profit.

Here was my take in September, 2013:

Basically, there’s an advantage to being short the futures compared to being short the swap.  If interest rates go up, the short futures position profits, and the short can invest the resulting variation margin inflow at the higher interest rate.  If interest rates go down, the short futures position loses, but the short can borrow to cover the margin call at a low interest rate.  The  swap short can’t play this game because the OTC swap is not marked-to-market.  This advantage of being short the future should lead to a difference between the futures yield and the swap yield.

DRW recognized this difference between the swap and the futures.  Hence, it did not enter quotes into the futures market that were equal to swap yields.  It entered quotes at a differential to the swap rate, to reflect the convexity adjustment.  IDC used these bids to determine the settlement price, and hence daily variation margin payments.  Thus, the settlement prices reflected the convexity adjustment.  Not 100 percent, because DRW was trying to make money arbing the market.  But the settlement prices were closer to fair value as a result of DRW’s quotes than they would have been otherwise.

CFTC apparently believes that the swap futures and the swaps are equivalent, and hence DRW should have been entering quotes equal to swap yields.  By entering quotes that differed from swap rates, DRW was distorting the settlement price, in the CFTC’s mind anyways.

Put prosaically, in a way that Gary Gensler (the lover of apple analogies) can understand, CFTC is alleging that apples and oranges are the same, and that if you bid or offer apples at a price different than the market price for oranges, you are manipulating.

Seriously.

The reality, of course, is that apples and oranges are different, and that it would be stupid, and perhaps manipulative, to quote apples at the market price for oranges.

Here’s Judge Sullivan’s analysis:

[t]here can be no dispute that a cleared interest rate swap contract is economically distinguishable from, and therefore not equivalent to, an uncleared interest rate swap, even when the two contracts otherwise have the same price point, duration, and notional amount.  Put another way, because there is some additional value to the long party . . . in a cleared swap that does not exist in an uncleared swap, the economic value of the two contracts are distinct.

Pretty much the same, but without the snark.

But Judge Sullivan’s ruling was not snark-free!  To the contrary:

It is not illegal to be smarter than your counterparties in a swap transaction, nor is it improper to understand a financial product better than the people who invented that product.

I also wrote:

In other words, DRW contributed to convergence of the settlement price to fair value relative to swaps.  Manipulative acts cause a divergence between the settlement price and fair value.

. . . .

In a sane world-or at least, in a world with a sane CFTC (an alternative universe, I know)-what DRW did would be called “arbitrage” and “contributing to price discovery and price efficiency.”

Judge Sullivan agreed: “Put simply, Defendants’ explanation of their bidding practices as contributing to price discovery in an illiquid market makes sense.”

Judge Sullivan also excoriated the CFTC and lambasted its case.  He blasted it for trying to read the artificial price element out of manipulation law (“artificial price” being one of four elements established in several cases, including inter alia Cargill v. Hardin, and more recently in the 2nd Circuit, in Amaranth–a case that was an expert in).  Relatedly, he slammed it for conflating intent and artificiality.  All of these criticisms were justified.

It is something of a mystery as to why the CFTC chose this case to make its stand on manipulation.  As I noted even before it was formally filed (my post was in response to DRW’s motion to enjoin the CFTC from filing a complaint) the case was fundamentally flawed–and that’s putting it kindly.  It was doomed to fail, but the CFTC pursued it with Ahab-like zeal, and pretty much suffered the same ignominious fate.

What will be the follow-on effects of this?  Well, for one thing, I wonder whether this will get the CFTC to re-think its taking manipulation cases to Federal court, rather than adjudicating them internally in front of agency ALJs.  For another, I wonder if this will make the CFTC more gun-shy at bringing major manipulation actions–even solid ones.  Losing a bad case should not be a deterrent in bringing good ones, but the spanking that Judge Sullivan delivered is likely to lead CFTC Enforcement–and the Commission–quite chary of running the risk of another one any time soon.  And since enforcement officials are strongly incentivized to, well, enforce, they will direct their energies elsewhere.  I would therefore not be surprised to see yet a further uptick in spoofing actions, an area where the Commission has been more successful.

In sum, the wheels of justice indeed ground slowly in this case, but in the end justice was done.  Don Wilson and DRW did nothing wrong, and the person who matters–Judge Sullivan–saw that and his decision demonstrates it clearly.

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December 3, 2018

Robert Mueller Deals More Collusion Crack to the Desperate Media Addicts

Filed under: Politics,Russia — cpirrong @ 7:35 pm

Last Friday, the Russia collusion crack addicts took another hit, supplied by their main source, Robert Mueller.  The Special Counsel announced a plea deal with Michael Cohen, in which the disgraced Trump fixer admitted that he had lied to Congress about his contacts with Russia regarding a potential Trump business deal.  According to the plea, Cohen was reaching out to the Russians well into 2016, after the time when Trump’s nomination appeared likely.

OMG!!!! THIS IS IT! TRUMP IS DONE! COLLUSION HAS BEEN PROVED! HE WILL HAVE TO LEAVE OFFICE! TOP OF THE WORLD! THERE IS A GOD! I CAN SEE HIS FACE!

Dudes, put down the pipe and check into rehab. Though to be honest, there’s nothing that can fix your addiction.  You don’t have a monkey on your backs: you have Bushman.

As is almost always the case with these pipe dreams, the media hot take is 180 degrees from reality.  Rather than showing Trump’s deep connections with Russia, and his obligation to Putin, it shows the exact opposite. Namely, it demonstrates that even as late as 2016 Trump had absolutely NOTHING going on in Russia, but was still begging for the opportunity to talk about business opportunities. (Or at least, his flunkies were.)

Indeed, to indicate just how  how much nothing he had going on, Cohen sent an email with an offer to Putin’s PR flack, Dmitri Peskov.  But wait! It gets better!  Cohen didn’t even have Peskov’s private email address, so he sent it to the address used for general press inquiries.  And to add insult to injury Peskov didn’t respond.  In fact, nobody responded, not even an intern saying “Thank you for your inquiry.”

In other words, Cohen rated the same response as Peskov probably gave to Nigerian princes offering the opportunity to make a vast fortune, in exchange for a little help.  That being no response at all.  He might have even given offers from Nigerian princes more thought.

Just as the Trump Tower meeting demonstrate beyond cavil that Trump had no deep connections in Russia, this farce demonstrates that Trump was not even remotely a player.  To use a Rumsfeld category, this represents evidence of absence.  Overwhelming evidence. If Trump was in deep with Putin prior to January, 2016, one of his flunkies wouldn’t have been sending plaintive pleas to a public email address.  And if Putin was hot to collude, there would have been an answer.

It’s not that complicated.  But then again, I’m not on crack.

Further, to the extent that Trump encouraged the outreach: (a) it’s kind of embarrassing, and (b) it’s hardly the actions of a man who thought he had the remotest chance of becoming president.  In fact, it screams the opposite.

If Cohen and the other person involved in attempting to gin up Trump business in Russia were acting on their own hooks, it would suggest they didn’t rate The Boss’ prospects too highly either.

The worst thing about this entire affair is that Trump relied on low-lifes like Cohen and Sater.  This hardly speaks highly of him.

So yet again, Mueller has delivered the collusion junkies a short term high in the form of a guilty plea to a process crime that does not get him any closer to proving that Trump colluded with Putin (or anyone else in Russia), let alone proving that he committed a crime (collusion per se not being illegal).  Indeed, this latest  “bombshell” merely proves yet again that when it comes to Donald Trump and Russia, there’s no there there.

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November 30, 2018

The Most Tragic Day of a Tragic War

Filed under: Civil War,History,Military — cpirrong @ 9:19 pm

The American Civil War was an extremely grim conflict from first to last, but few–if any–days of that war were as grim as 30 November, 1864.  On that bleak day, John Bell Hood launched his Confederate Army of Tennessee in an assault over 1.5 miles of open ground against a larger force of steely Union veterans behind strong entrenchments.  The result was predictable–to all but Hood, apparently: an epic slaughter of some of the finest infantry of that or any war.

The battle is known–to the extent it is known, which is too little–for the deaths of six Confederate generals, namely Cleburne (not of Texas, but for whom a town in the state is named because a brigade of Texans served under his command), Carter, Granbury (of Texas, and commander of that Texas brigade, for whom a Lone Star town is named), Strahl, Gist, and Adams.  Seven other brigade or division commanders were wounded.   No other battle took such a toll on general officers.

Officer casualties at Franklin were horrible, but the carnage in the ranks was almost as bad.  Many excellent formations were nearly obliterated.

Case in point: the storied Missouri Brigade.  Arguably the best combat unit in the western theater, and arguably of the entire war, the brigade went into the battle with 696 men, of whom 419 (over 60 percent) were rendered hors du combat.  53 out of 56 officers–think about that for a minute, 95 percent–went down.  Although a pathetic remnant of the brigade tramped on to Nashville, to participate in the defeat there, for all intents and purposes the finest unit in the Army of Tennessee was wrecked beyond repair.

In some respects it is invidious to single out a particular brigade: virtually every Confederate formation was ravaged.

Virtually nowhere did the Confederates penetrate the Union entrenchments. General Adams made it literally half-way: he attempted to leap his horse over the rampart, only to have his horse–and himself–riddled by bullets in the attempt.  Adams was found dead on his horse, which had its forelegs on the Union side of the parapet, and the hind legs on the Confederate side.

The one exception was in Cleburne’s and Brown’s sector near the Cotton Gin and Carter House.  A blunder had resulted in two small Federal brigades (Conrad’s and Lane’s) of Wagner’s IV Corps division remaining several hundred yards in front of the main Union line, holding a thinly-manned rudimentary set of earthworks.  These men were overwhelmed by the assault of the two Confederate divisions and they broke for the rear, as sensible men will.   A cry went up from the Confederate lines: “Shoot them in the back! Follow them into the works!” And they did.  The defenders of the main line were hesitant to fire because Lane’s and Conrad’s men were in the way, and thus the Confederates were largely spared from the withering volleys that stopped their comrades on their right and left in their tracks, allowing Cleburne’s and Brown’s men to surge over the works.

But only for a short while.  Wagner’s third brigade, under Emerson Opdyke (which contained the 2d Board of Trade regiment, the 88th Illinois, by the way), launched a frenzied counterattack that resulted in hand-to-hand fighting around the Carter House (which stands today, along with outbuildings that still exhibit hundreds of bullet holes).  Supported by troops that had been driven from the works (including the 1st Board of Trade Regiment, AKA the 72nd Illinois), Opdyke drove back the Confederates.

But not far.  The rebels congregated in the ditch on the outside of the Union lines.  Because that was the safest place: to recross the field would have been suicidal.

For the next several hours, in the darkness of the late-autumn day, the contending forces slaughtered each other at point-blank range.  General Strahl was shot handing loaded muskets to his men.  Carried to the rear, he was shot in the neck and fatally wounded in the field beyond the ditch.  Men would thrust their muskets over the parapet one-handed, and discharge them into the seething mass on the other side.  Soldiers launched bayoneted rifles like spears into the masses on the other side of the line. Some became frenzied, and jumped on top of the works, only to be shot down.  By late in the evening, the ditch in front of the works was a crawling mass of wounded men, intermixed with the dead.

There is nothing like it in the Civil War.  Pickett’s Charge was similar in terms of numbers, and ground crossed, and ultimate result, but when the Confederates were repulsed, they withdrew.  That fight did not drag on for hours at point-blank range.  The carnage at Franklin did.

In the end, exhaustion caused the fight to ebb away, just as the lives of hundreds of men were ebbing away.  The Union army had bought the time to rebuild the bridges over the Harpeth River necessary to continue their retreat to Nashville, and stole away in the night.  The Confederates were too tired, and too bloodied, even to notice, let alone to try to stop them.

This was truly one of the great tragedies of a War full of them.  In a conflict full of futile and pointless assaults, Franklin stands out for futility and pointlessness.  The Union army ended up exactly where it would have if the battle had never been fought.  But a third of the 23,000 Confederates who made the assault were killed (around 1750) or wounded (5500).  The casualty rates were even higher in Cleburne’s and Brown’s divisions.  60 of 100 regimental commanders went down.

The Federals suffered about 2400 casualties, of whom 1100 (primarily in Conrad’s and Lane’s brigades)  were captured.  Only battles like Fredericksburg or Cold Harbor resulted in a similar disproportionate loss on the contending sides.

So why did this tragedy occur?  It clearly is the responsibility of one man: John Bell Hood.  I agree with (the General’s distant relation) Stephen Hood’s debunking of Wiley Sword’s claim that Hood’s judgment was warped by his reliance on laudanum to ease the pain of his horrific wounds (an arm crippled at Gettysburg, a leg lost almost at the hip at Chickamauga).   Accounts make it clear that Hood was outraged that his subordinates had let the Union army escape a trap at Spring Hill (to the south of Franklin), and this almost certainly dominated his thinking and made an attack seem to be the only option.  It has also been argued that Hood wanted to punish his army for its failure at Spring Hill, but I tend to doubt this interpretation.  He was mad (“as wrathy as a rattlesnake” in the words of one witness) at seeing what he considered to be a Jacksonian stroke come to naught, almost certainly exhausted, and predisposed to aggressiveness.  A deadly combination for the hardy and valiant men under his command.

Franklin illustrates like few battles the incredible deadliness of veteran soldiers by that stage of the war.  Whereas the brutal losses of the Overland and Petersburg campaigns had made Army of the Potomac regiments shadows of their former selves, re-manned with draftees with dubious combat effectiveness (as illustrated by battles like Ream’s Station), western Union regiments had seen extensive combat experience, but still had a strong core of veteran soldiers.

The Army of Tennessee had suffered in battle after battle (Perryville, Stones River, Chickamauga, the battles around Atlanta) but although these losses led to shrunken ranks, those who remained were lethally effective and brave beyond measure.  Veterans that they were, they were certainly under no illusions about their prospects as they stepped off from Winstead Hill for the long trudge to the Union lines at Franklin.  But forlorn hope or no, they attacked with a will.  Awesome is the only word for it.

Unfortunately, the field where these men underwent their agonies is largely unpreserved.  All of the trenches are gone.  The site of the climax of the battle around the Cotton Gin was scarred by a Domino’s Pizza for years.  Fortunately, preservationists have acquired that property, razed the structures, and have created a small park there, including a monument to Cleburne.  The Carter House exists, and preservationists are painstakingly buying property around it in an attempt to create a larger commemorative space.  But most of the Union line to the right and left was covered by pleasant suburban houses years ago.

Carnton Plantation, where the bodies of 4 of the slain generals were laid out after the battle, is still exists.  A Confederate cemetery is located on the grounds–one of the largest at any Civil War battlefield.  The fields around Carnton, where the Confederate right stepped off, are undeveloped, but the target of their assault is suburbia.

Although you can’t experience Franklin in the same way as you can Antietam, or Chickamauga, or Shiloh, or Gettysburg, perhaps that’s for the best.  Bucolic scenes with granite monuments cannot possibly convey the experience of those men who were sacrificed without prospect or purpose 154 years ago today.

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November 29, 2018

The Incident in the Kerch Strait: Validating Existing Lines of Conflict, Rather Than Portending a Forcible Shift in Those Lines

Filed under: Military,Politics,Russia — cpirrong @ 7:45 pm

The big news over the weekend was the Russian firing on, ramming of, and seizure of several Ukrainian naval vessels attempting to transit the Kerch Strait.  Most of the news coverage has been hopelessly inept, especially with regards to the background and legalities.  This piece from Defense News is the most coherent and thorough that I’ve read.

My quick take is that given international maritime law and the 2003 Russia-Ukraine agreement on the Sea of Azov, Ukraine is right de jure–especially in light of the fact that no major nation acknowledges Russia’s seizure of Crimea.  But Russia has the upper hand de facto.  As the expression goes, possession is nine-tenths of the law.  Russia has seized possession of both sides of the Strait, and has the military force to enforce that possession.  And it did.

Russian justifications for their actions are risible.  But their explanations of so many actions are risible.  That may be the point: “we say this bullshit that you know is bullshit and we know is bullshit to let you know we don’t give a shit what you think.”

As the Defense News article states, Ukrainian naval vessels had transited the Kerch Strait in late-September without Russian reaction.  But this time it was different.

Why?

Presumably in part because the September foray embarrassed the Russians, who have been ratcheting up interference with civilian vessels since that happened.  Moreover, as many have suggested, Putin may be looking to bolster his patriotic bona fides.  He certainly can’t be doing it to attract international favor, because the opposite has happened.

This raises an interesting thought: if Putin really thinks he needs a domestic political boost so badly that he is willing to draw international opprobrium (note that Trump canceled a meeting with him at the G-20 over this) to get it, what does that say about his domestic political position? Or at least his concerns about it.  A tsar confident in his domestic standing wouldn’t feel it necessary to incur the cost of such a provocation.

Not that the cost is likely to be that high.  The Germans, in typical fashion, harrumphed about how horrible this is, but in the same breath said “Nordstream 2 is a go!”  But the episode probably makes any sanctions relief even less likely.

Revealed preference suggests two alternatives: (a) Putin figured that sanctions relief was extremely remote in any event, so the cost wasn’t that high, or (b) Putin actually doesn’t mind sanctions despite their evident toll on the Russian economy.  With regards to (b), note that sanctions often work to the advantage of those in power (e.g., Saddam, the Mullahs).  Pieces like this suggest that might be a real possibility.

What was Ukrainian president Poroshenko’s rationale?  He was likely appealing to his domestic audience, although a humiliating capture of a part of Ukraine’s pitiful remnant of a fleet hardly seems calculated to boost his re-election prospects.  Perhaps he was hoping for this very outcome, in the expectation that it would lead western countries to rally to Ukraine’s defense.  If so, he’s rather clueless.  It’s not as if the US and EU are unaware of Russia’s continuing predation against Ukraine: they’ve clearly acquiesced to the current status quo of frozen conflict, and the events in the Kerch Strait will not change that.  Poroshenko likely threw away a few ships and a couple of dozen sailors for nothing.

But in some respects, this is not surprising.  The Ukrainians are the Sovok Palestinians: they never miss an opportunity to miss an opportunity, and routinely self-inflict gaping wounds.

His declaration of martial law in parts of the country in the aftermath is highly weird, and raises questions about his real motives.

Does the incident portend a renewed Russian military assault on Ukraine?  I doubt it: it is more of an enforcement of existing redlines, rather than drawing new borders.  If the cost of bashing around a tugboat and a few minor combatants is bearable, the cost of a major move on the ground is a different matter altogether.

So the upshot is something like this.  The incident will not result in substantial increases in help for Ukraine.  It deepens and cements Russia’s isolation.  It is unlikely to portend a major escalation in the conflict.  In other words, it confirms and reinforces the status quo of a frozen conflict, rather than representing a new phase in the war.

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News for Barry: You Didn’t Build That

Filed under: Economics,Energy,Politics — cpirrong @ 9:59 am

Hard as it is to believe, it appears that Obama has become even more supercilious since his departure from the Oval Office.  All of his sneering grandiosity was on display during a visit to Houston.  (I hope you are sitting down for this: I didn’t attend!)

Being in Texas, Obama felt that he should be thanked for the dramatic growth in US oil production: “You wouldn’t always know it, but it went up every year I as president. That whole, suddenly America’s like the biggest oil producer and the biggest gas—that was me, people.”

I’m wracking my brain here, trying to recall something he said some years ago.  Oh yeah, I remember now: “If you’ve got a business, you didn’t build that.”

Barry: you definitely didn’t build that.  Yet you claim credit anyways.  You remind me of the rooster that believes the sun rises because he crows.

Long-time commenter Howard Roark noted to me on Twitter that the “you didn’t build it” remark was arguably the worst of his many execrable utterances.  That’s probably true, and he makes it all the worse by claiming credit for building something which he had less than bupkis to do with.

Obama also claimed credit for the economy’s recent performance.   He noted, in essence, that the first derivative in GDP was positive during his term, so that he is responsible for the first derivative being positive now.  Apparently the man who is so smart that he can apply the theory of relativity to constitutional law doesn’t understand second derivatives.  Economic growth has accelerated markedly under the Trump administration, and has achieved 3.5 percent growth, something that Obama dismissed as an impossibility when he was criticized for the anemic 1-2 percent growth rate in the aftermath of the Financial Crisis (when one would have expected growth at a rate above long term trend, not below). (I love the title of the linked paper, by the way.  Hilarious!)

But Obama was done.  After claiming credit for building everything, he shared his deep thoughts on identity politics:

“Which is why, by the way, when I hear people say they don’t like identity politics, I think it’s important to remember that identity politics doesn’t just apply when it’s black people or gay people or women,” Obama said. “The folks who really originated identity politics were the folks who said Three-Fifths Clause and all that stuff. That was identity politics … Jim Crow was identity politics. That’s where it started.”

He’s largely correct that Jim Crow and “all that stuff” was identity politics.  But rather than using this to show that identity politics is fundamentally wrong, he uses it to somehow validate its current incarnation.  It happened before, so you can’t criticize it now.  Two wrongs make a right.   You did it to us, so we get to do it to you.

Please go away.  So we can miss you.  Except that I won’t.  But go away anyways.

 

 

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November 27, 2018

The Overlords of the Overton Window

Filed under: Economics,Politics — cpirrong @ 8:28 pm

Facebook, YouTube, and in particular Twitter have been bingeing on banning of late.  The targets of these proscriptions have been anything but random: those who do not perform proskynesis before the current gods of the left.  This means that conservatives and libertarians are disproportionately affected, but even some who do not fall into those political categories are at risk.

The environment has become so hostile that at least one prominent figure, Instapundit (Glenn Reynolds, a law professor, of all things), has said “you can’t fire me, I quit!” and left Twitter.  Others less prominent have made similar decisions, and others have self-censored.

In essence, the operators of social media platforms present a Hobson’s Choice: You can censor yourself, or they will censor you.  The end result is the same: systemic biases against expression of certain political, religious, and socio-cultural opinions on the most widely used social media platforms. Twitter, Facebook, and Google are the Overlords of the Overton Window, and largely dictate the range of acceptable public discourse.

The Overton Window has always existed, but what is acceptable to express has heretofore been the result of a more decentralized, emergent process.  There was give-and-take.  There were actually multiple windows, and entry and exit were easier.  There was no centralized authority who could dictate what was acceptable: what was acceptable emerged.

What is disturbing, and positively Orwellian, about the Window today is the aggressive role of an extremely ideological, self-appointed set of censors who face little competition and who largely can control access to the means by which opinion is now expressed.  The centripetal force of virtual social networks give exceptional power to those who control access to those networks. By conditioning access on adherence to their views, the psychopaths who control these networks (and tell me honestly that you don’t believe that Zuckerberg and Dorsey are psychopaths) can coerce acceptance of their beliefs.  The technology of networks tends towards monopoly, and those who control these monopolies exercise disproportionate control over the expression of opinion, belief, and thought.

That is, traditionally the Overton Window was more consensual.  It is now increasingly the dictat of a narrow and insular set of individuals who by the whims of competition in network markets have achieved considerable power.

One of the most explicit examples of how this operates relates to the issue of transgenders–an issue you that probably was so obscure to you that it never penetrated your consciousness until recently.  Twitter has recently banned people–including someone who would best be described as a hard-core feminist–for challenging this newly decreed orthodoxy.  Twitter has just announced a policy of banning people who “misgender” (e.g., call individuals with testicles “he” though they identify as women) or “deadname” (e.g., use the name Robert to refer to someone born with testicles and named Robert by his parents, but who now identifies as Roberta).

This is revealing on several dimensions.  First, it reveals that social media has an Animal Farm-like hierarchy.  Female feminists are pretty high up on the hierarchy, but somewhere below transgenders.  So if a female feminist transgresses the transgender norm, she becomes a non-person.  Better stick to attacking those lower in the hierarchy, like straight white males!

Second, a marginal (and arguably minuscule, in terms of numbers) group is sanctified, and obeisance to that group becomes a litmus test for acceptance, and freedom from attack/banning.  Question the sanctified, and you are a non-person, and anathematized.

The marginal and extremely unconventional nature of the group is extremely important to the process.  Who cares if you affirm that ice cream is great?  But affirming that the extremely marginal and unusual are great does not come naturally, and indeed, it is costly to those of a more traditional bent.  It is also costly because it takes some effort to figure out what you are supposed to affirm, especially since it is outside your realm of experience.

But the cost is the point!  You have to pay the cost in order to avoid ostracism.  To demonstrate your fealty.  Bending the knee is deeply symbolic precisely because people naturally rebel against it.  Because it is psychically costly.  Those with strength of will are ostracized, and those made of softer stuff validate the beliefs of the overlords by worshipping their gods.

This is the way that cults operate.  Acquiescing to bizarre beliefs and engaging in bizarre rituals demonstrates fealty to the cult.

And don’t think that this will end when all users of Twitter and Facebook get their minds right and adopt Mark’s and Jack’s dictated opinions regarding transgenders (which are likely purely instrumental).  At such point, transgenders become totally useless.  Totally. New tests of loyalty and conformity will become necessary.  A new group will be sanctified.  I shudder to think what it will be, but I guarantee it will happen.  And at that time transgenders will become as irrelevant as past causes célèbres, e.g., gays.  (Don’t hear much about them anymore, do you? Old news.  Hence not useful.)

One often-heard viewpoint expressed by usually conservative and libertarian people is that this is, if not OK, something we have to accept because it is not the government that is imposing restrictions on freedom of expression.  These are private individuals in control of private entities.

This is seductive logic, but it is extremely defective because it ignores objective realities.

The concern about government restriction on freedom of speech is that it has a monopoly of force that it can use to overawe and oppress.  Further, government restrictions on speech reduce accountability of government, and therefore undermine checks on its power.

We should have similar grave concerns about private individuals and private enterprises that utilize their right to control access to near-monopoly platforms to overawe and oppress.  Further, these are intensely political entities whose controlling personalities desire to exercise political power, preferably with limited or no accountability.

The line between public and private that is often drawn here is completely imaginary.  No, these are not government entities.  But they are entities that desire to exercise great influence over the government, through various means. and to exercise control over individuals in ways governments have only fantasized about.  (The symbiosis between Google and the government of the PRC is not an accident, comrades.)

Checking their power is therefore completely consistent with a belief in the primacy of individual liberty.  Indeed, given the steady erosion in limits on government, shackling those who exert disproportionate influence on government and the political process is all the more vital to those who champion individual freedom.  (This is exactly why Facebook and Twitter and Google should be the LAST entities you want determining what is, and what is not, acceptable political speech, and what is fake news, and why the insistence by politicians that they do so is the bootleggers-and-baptists problem from hell.)

Those who care about individual liberty must strive to reduce the power to coerce, regardless of whether that coercive power is wielded by a government, or an individual, or a non-government entity.  Coercion is the thing.  Not the identity of the coercer.

Further, as I’ve noted several times before, the classical liberal/limited government tradition has recognized the dangers of private monopoly, and has constrained it through the imposition of open access and non-discrimination requirements.  If such requirements are justified for innkeepers and stagecoaches and railroads, they are more than justified for social media platforms, especially given the public goods nature (in the strict economics sense of the term) of their output–something that cannot be said of innkeepers and stagecoaches and railroads.

So, echoing Lenin, what is to be done?  One thing is clear: direct approaches are fruitless.  If Glenn Reynolds censors himself, that just saves Jack Dorsey the trouble.  The end result is the same: Jack wins.

A la Liddell-Hart, Fuller, or Sun-Tzu, an indirect approach is necessary. I’m not sure what that approach should be, but these military thinkers (no, that’s not always an oxymoron) have identified key aspects of it.  Identify the enemy’s center of gravity (and we should indeed view these people and companies as our entities).  Then don’t attack their strong points, but find their blind spots, their vulnerabilities, and strike at those.  Find the back door to the center of gravity.

And in thinking through the problem, don’t get hung up on false distinctions between public and private.  This is only to play into the hands of those who want to dominate you.

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November 25, 2018

There Is a Great Deal of Ruin In a Nation, Venezuelan Edition (With Broader Lessons)

Filed under: Economics,Politics — cpirrong @ 8:03 pm

Igor is not pleased with Maduro’s Venezuela, which is stiffing him:

The head of Russian oil company Rosneft (ROSN.MM), Igor Sechin, flew to Caracas this week to meet Venezuelan President Nicolas Maduro and complain over delayed oil shipments designed to repay loans, two sources briefed on the conversation said on Saturday.

The visit, which was not publicly disclosed, is one of the clearest signs of strain between crisis-stricken Venezuela and its key financier Russia.

Over the last few years, Moscow has become Venezuela’s lender of last resort, with the Russian government and Rosneft handing Venezuela at least $17 billion in loans and credit lines since 2006, according to Reuters calculations.

State oil company PDVSA is repaying almost all of those debts with oil, but a meltdown in its oil industry has left it struggling to fulfill obligations.

Sechin and a large delegation of executives met with officials at PDVSA in a Caracas hotel this week. Sechin also met with Venezuela’s leftist leader Maduro, and chided him over oil-for-loans shipments that are behind schedule.

“He brought information showing that they were meeting obligations with China but not with them,” said one source with knowledge of the talks.

Two things strike me about this story.

First: Hahahahaha.  Suckers.

I remember vividly snickering at those who thought the Chinese and Russians were sooooo smart to extend credit to the Venezuelans..  How this was a geopolitical masterstroke.

Really?  How’s that working out?  Obviously not well.  Ask Igor!

Tell me again how it is GENIUS! to lend money to a country that is imploding because it is in the thrall of an insane crypto-socialist ideology.  Venezuela’s trajectory was obvious at the time the Chinese and Russians thought they would lend it money.  Seriously: lending to socialists is hardly ever a paying proposition, and lending to Bolivarian socialists was certainly so.

But by all means, keep pouring money down ratholes! Be my guest!

Second.  The Venezuelan experience demonstrates the truth in Adam Smith’s aphorism about there being “a great deal of ruin in a nation.”  The torment of Venezuela is extreme.  The populace lives in utter penury, which only grows worse by the day.  The inflation rate is currently in the 6 figures, and is on track to reach 7 figures late by the end of this year, or early in the next.   This is Weimar-Hungary-Zimbabwe territory.  Crime is rampant.  Human degradation is everywhere.

Yet the Maduro regime is largely secure.  It maintains the loyalty of the security forces, and this has deterred a serious popular uprising.   Indeed, the economic catastrophe is not causing Maduro to relent: to the contrary, it spurs him to crack down even more intensely.

This situation has been developing for years.  Indeed, you can pinpoint the decisive moment, and it relates to Sechin’s current target–national oil company PDVSA. In the aftermath of an abortive US-supportive coup in 2002, Maduro’s predecessor Hugo Chavez responded to opposition within the company by purging the technically and managerially competent, and replacing them with loyalists.  What was once one of the most competent national oil companies in the world began its descent into failure, and the entire country followed in its wake.

There is a broader lesson here: Smith’s dictum, empirically validated in Venezuela, implies that expectations that economic pressure on rogue regimes will lead them to moderate their behavior, or result in their overthrow, are chimerical.  Rogue regimes respond to pressure and economic failure by intensifying oppressive measures.  By doing so, they can survive for a very, very long time.

The problem of coordinating opposition against a steely regime is difficult to overcome.  Usually, such regimes fall only when they attempt to respond to popular discontent through “reforms” and a softening of repression (cf. Gorbachev in the USSR).  Hard men like those in Venezuela or Iran understand this lesson, and have no intention of relaxing their grips.

That is, economic failure, whether internally created (as in Venezuela) or the result of internal dysfunction exacerbated by external pressure (as in Iran or North Korea) almost never results in the collapse of repressive regimes.

This is not to say that economic sanctions or other forms of economic pressure are not justified.  It is just that the expectations for such acts must be realistic, and the goals chosen accordingly.  Realistically, economic pressure can reduce the capabilities of rogue regimes to wreak havoc outside their borders.  It cannot truly threaten the existence of these regimes.

Since there is so much ruin in countries–especially highly repressive ones–expecting to change them by ruining them is futile.

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Thank You, Verified Humans

Filed under: Uncategorized — cpirrong @ 7:06 pm

Thanks to those who proved their humanity by responding to my post from last night.  Yes, there is obviously a problem with the Site Sphinx, who asks you to prove you are human, but provides no way to do so.

I’ve provided the screen shots of the impossible-to-interact-with “You must prove you are human” riddle to my hosting service.  Hopefully this will be rectified quickly.  I’ll post when it is.

Update: Boy, that was fast.  Apparently my hosting service corrected the problem shortly prior to my posting.  Thanks for those who left comments.  Cheers.

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November 24, 2018

Where Did Everybody Go?

Filed under: Uncategorized — cpirrong @ 8:15 pm

No comments in the last couple of weeks.  I can think of two explanations: I’ve finally succeeded in my life’s ambition of offending everyone, or, there is some technical issue. Or maybe I’ve shadowbanned myself on my own blog!

I have received a couple of communications from people who said they have not been able to get past the Site Sphinx, AKA Captcha.  I have this vision of the bones of commenters lying in front of the voracious beast, having failed to solve her riddle: “Prove you are not a robot.”

I have an inquiry into my hosting service, but in dealing with them it would be helpful to document the problem.  So if you’ve had a problem, please let me know via Twitter @streetwiseprof or LinkedIn.

Thanks and apologies, and apologies and thanks.

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The Most Annoying and Pathetic Geopolitical Entity Ever? I Think So!

Filed under: Cryptocurrency,Economics,Politics — cpirrong @ 7:59 pm

There may be a more annoying geopolitical entity in history than the EU, but I’ll be damned if I can think of one.

In recent weeks, a group of northern EU states centered on the Netherlands have formed the “Hanseatic group” to represent their positions, regarding the Italy situation in particular.  This has outraged the French and the Germans.  In response to the blonde upstarts, French economy minister Bruno le Maire lashed out:

Speaking at a dinner with his Dutch counterpart Wopke Hoekstra in Paris on Thursday, Bruno Le Maire said he was “not comfortable” dealing with the Hanseatic group — eight to 10 countries that have agreed common positions calling for more national responsibility and stronger rules in the eurozone.

“Let’s imagine that France tries to create a club of the southern countries with Portugal, Italy, Spain — what would be the reaction of the other member states? Do you think that it would be a positive one? Do you think it would improve the situation of Europe?” Mr Le Maire told the Financial Times.

“I am not comfortable with the idea of creating new circles, new clubs, new leagues within Europe. If you want to create new divisions between the north and the south, or the west and east, you will never have France on your side,” said Mr Le Maire, who has spearheaded French ambitions to reform the eurozone in a partnership with Germany.

Some Franco-German initiatives, such as a blueprint for a eurozone budget, have met resistance from countries led by the Netherlands. The group has also advocated tougher enforcement of budgetary rules and moves towards debt restructuring in the eurozone to be agreed by EU governments next month.  (Emphasis added.)

Did you catch that?  Franco-German ambitions to reform the eurozone–OK!  Lilliputian resistance–BAD!!!!

When the hypocrisy was pointed out, Bruno a dit non! non! non! C’est totalement différent!

When asked whether the Franco-German alliance was not a “club”, Mr Le Maire said: “That is totally different. This is not a club. This is what is at the core of the European ambition: peace between France and Germany. This is at the core of the European Union.”

So, is M. Le Maire suggesting that absent the EU, jackbooted Germans would soon be marching in the shade along the tree-lined French roads?  If he is, that’s quite the insult to Germany, non?  But if he is, he is utterly delusional: to quote Patton, the post-post-modern Germans couldn’t fight their way out of a piss-soaked paper bag, and what’s more, have no desire even to try.  They’ve found alternative means to achieve dominance over the continent, and the French are now their (junior) allies in that endeavor.  A key part of that strategy is divide-and-conquer, and “clubs” like the Hanseatic one threaten that gambit.

Germano-French ambitions extend beyond Europe.  They want to leverage their dominance in the EU to a position of world influence.  Fortunately, here their efforts have proven again and again to be laughable.

A particularly juicy example is the hilarious efforts of the EU to set up a special purpose vehicle to facilitate trade with Iran in defiance of US sanctions, pour epater le bête orange.  They have made grandiose announcements.  Only one problem: European companies don’t want to touch this with a ten foot pole.  Make that two problems: no European government wants to touch it either:

So up to now the commission has been unable to find a home for the SPV. Not even a post restante address. No EU country has offered to host it. The sad SPV has been wandering between railway stations and airports, without a nationality, a bank account or even a real name. If I passed it on the street, I would put a euro in its hat.

Har!

And as I’ve pointed out since the day of the announcement, it is an utterly pointless exercise because it addresses every issue except the one that matters: secondary sanctions.  Once the US seized upon this mechanism, any attempt to circumvent sanctions by avoiding the dollar became utterly pointless: do a barter deal, or a Euro deal, or a Venezuelan crypto bolivar deal with a sanctioned Iranian company, and the Treasury will still hammer you.  So, if you want to do all your biz in cryptobolivars–knock yourself out! But if you want to do any business with the USD at all, think twice about dealing with a sanctioned entity by an SPV or any other way.  And pretty much every European company has decided that one thought is sufficient.

M. Le Maire seems to be getting a glimmer of a clue that the EU is a geopolitical lightweight:

“I’m not sure the Hanseatic League would be in a position to face the competition with China and the US”, he said. “If we are creating closed clubs, alliances within the EU then we run the risk of losing time and weakening our common project.”

Bruno. Dude: the EU is not in a position to face competition with China and the US.  This is proven daily.

So under German-French “leadership” the EU is likely to lurch along like it has been for years.  Compensating for their inability to achieve their vaulting global ambitions by beating up on the EU’s smaller members.  Annoying.  But in the end, risible and pathetic.

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