Streetwise Professor

August 16, 2018

Why ABCD Sing the Blues, Part II: Increased Farm Scale Leads to Greater Competition in Capacity and Less Monopsony Power

Filed under: Commodities,Derivatives,Economics,Politics,Regulation — cpirrong @ 6:34 pm

In “Why Are ABCD Singing the Blues?” I called bull on the claim that ag trading firms were suffering through a rough period because of big crops and low prices.  I instead surmised that gains in capacity, in storage and throughput facilities, had outstripped growth in the amount of grain handled, and that this was pressuring margins.  In yesterday’s WSJ, Jacob Bunge (no relation, apparently, to the grain trading family) had a long and dense article that presents a lot of anecdotal support for that view.  The piece also provides other information that allows me to supplement and expand on it.

In a nutshell, due to increased economies of scale in farming, farms have grown larger.  Many farms have grown to the point that they can achieve efficient scale in storage and logistics to warrant investment in storage facilities and trucks, and thus can vertically integrate into the functions traditionally performed by Cargill and the others.  This has led to an expansion in storage capacity and logistical capacity overall, which has reduced the derived demand for the storage and logistics assets owned and operated by the ABCDs.  Jacob’s article presents a striking example of an Illinois farmer that bought a storage facility from Cargill.

In brief, more integrated farms have invested in capacity that competes with the facilities owned by Cargill, ADM, Bunge, and smaller firms in the industry.  No wonder their profits have fallen.

The other thing that the article illustrates is that scale plus cheaper communication costs have reduced the monopsony power of the grain merchants.  The operation of the farmer profiled in the piece is so large that many merchants, including some from a distance away, are competing for his business.  Furthermore, the ability to store his own production gives the farmer the luxury of time to sell: he doesn’t have to sell at harvest time to the local elevator at whatever price the latter offers–which was historically low-balled due to the cost of hauling to a more distant elevator.  Choosing the time to sell gives the farmer the value of the optionality inherent in storage–and the traditional merchant loses that option.  Further, more time allows the farmer to seek out and negotiate better deals from a wider variety of players.

The traditional country market for grain can be modeled well as a simple spatial economy with fixed costs (the costs of building/operating an elevator).  Fixed costs limit the number of elevators, and transportation costs between spatially separated elevators gave each elevator some market power in its vicinity: more technically, transportation costs meant that the supply of grain to a country elevator was upward sloping, with the nearby farms willing to sell at lower prices than more distant ones closer to competing elevators.  This gave the elevators monopsony power.  (And no doubt, competition was limited even in multi-elevator towns, because the conditions for tacit collusion were ripe.)

Once upon a time, the monopsony power of elevator operators was a hot-button political issue.  One impetus for the farm cooperative movement was to counteract the monopsony power of the line elevator operators.  The middlemen didn’t like this one bit, and that was the reason that they excluded cooperatives from membership of futures exchanges, like the Chicago Board of Trade: this exclusion raised cooperatives’ costs, and was effectively a raising-rivals-cost strategy.  Brokers also supported excluding cooperatives because as members cooperatives could have circumvented broker commission cartels (i.e., the official, exchange-approved and enforced minimum commission rates).  This is why the Commodity Exchange Act contains this language:

No board of trade which has been designated or registered as a contract market or a derivatives transaction execution facility exclude  from membership in, and all privileges on, such board of trade, any association or corporation engaged in cash commodity business having adequate financial responsibility which is organized under the cooperative laws of any State, or which has been recognized as a cooperative association of producers by the United States Government or by any agency thereof, if such association or corporation complies and agrees to comply with such terms and conditions as are or may be imposed lawfully upon other members of such board, and as are or may be imposed lawfully upon a cooperative association of producers engaged in cash commodity business, unless such board of trade is authorized by the commission to exclude such association or corporation from membership and privileges after hearing held upon at least three days’ notice subsequent to the filing of complaint by the board of trade.

Put differently, in the old days the efficient scale of farms was small relative to the efficient scale of midstream assets, so farmers had to cooperate in order to circumvent merchant monopsony power.  Cooperation was hampered by incentive problems and the political nature of cooperative governance.  (See Henry Hansmann’s Ownership of Enterprise for a nice discussion.) The dramatic increase in the efficient scale of farms now means (as the WSJ article shows) that many farmers have operations as large as the efficient scale of some midstream assets, so can circumvent monopsony power through integration.  This pressures merchants; margins.

Jacob Bunge is to be congratulated for not imitating the laziness of most of those who have “reported” on the grain merchant blues, where by “reporting” I mean regurgitating the conventional wisdom that they picked up from some other lazy journalist.  He went out into the field–literally–and shed a good deal of light on what’s really going on.  And what’s going on is competition and entry, driven in large part by economic and technological forces that have increased the efficient scale of grain and oilseed production.  Thus, the grain handlers are in large part indirect victims of technological change, even though the technology of their business has remained static by comparison.


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August 15, 2018

The Zinke Firestorm: Mitigation of the Impacts of Climate Change vs. Using Climate Change as Justification for Reordering the World

Filed under: Climate Change,Economics,Politics — cpirrong @ 2:07 pm

Interior Secretary Ryan Zinke ignited a firestorm by blaming California wildfires on environmental extremists who oppose logging and other measures (e.g., controlled burns) to reduce fuel load, and denigrating the contribution of global warming.  For this, he has been accused of heresy, and no doubt many of those accusing him would like to consign him to the flames at the stake.

One particularly disturbing aspect about this debate is its polarity–it’s framed as forestry management vs. climate change.   And here, both Zinke and his critics are culpable.

It doesn’t have to be that way.  Policy on forest management can be analyzed quite independently of climate change.   Indeed, to the extent there is a dependence, logically one should be more supportive of measures to mitigate fire risk if you believe that other factors–including warming–have raised that risk.  That is, the warmists, and those who believe there is a connection between warming and fire risk, should be the biggest supporters of reducing the factors that increase the frequency and intensity of fires–and reducing fuel load would be at the top of the list.  These are measures that can be taken in the here and now, and which do not involve wrenching costs.

But that requires pragmatism, and that is something that is conspicuous by its absence on the environmentalist left.  Indeed, they largely view mitigation and other pragmatic, gradualist responses to climate change as a serious moral failing requiring a response befitting the Inquisition, culminating in an auto de fe.  That is, the response is religious in nature, and not logical or pragmatic.  Mitigation is about trade-offs, and evaluating costs and benefits.  These are not the terms of religious debate.

Indeed, I surmise that one of the reasons for raging against mitigation–and likely the most important reason, especially among the more strident–is that mitigation undermines the case for the totalitarian measures that many on the environmental left ardently support.  And if you think totalitarian is too harsh a word, I think you are quite wrong.  Fighting climate change is the justification by many on the left for a complete reordering of economic and social systems, achieved by coercion and force if necessary.

If mitigation reduces the harm, the case for such totalitarian measures is undermined.  And since for many on the left the primary value is not the environment per se, but a complete reordering of economic and social systems, this represents a mortal threat to their political agenda.

That is, environmentalism and climate change are largely instrumental–Trojan Horses, as it were.  This is why mitigation strategies are met with such intense hostility.  What’s the point in mitigation, if it deprives you of an opportunity to reorder society?

As a matter of rhetoric, people like Ryan Zinke (and Trump, for that matter) would be better to separate issues relating to mitigation of risk from the climate change issue, or to the extent that they bring up climate change at all, emphasize that mitigation is even more valuable to the extent that climate change does increase the risk of things like wildfires.  Do not let the Trojan Horse into the debate.  Emphasize that such measures can be a pragmatic response to a risk.  I think that would resonate much more with ordinary people, as much as it infuriates ideologues.


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August 13, 2018

Elon’s Magical Mystery Tour Gets More Magical By the Day: $80 Billion Is Only the Beginning

Filed under: Economics,Energy,Regulation — cpirrong @ 8:14 pm

The Elon Magical GoPrivate Mystery Tour gets more magical by the day.  Today Elon tried to do some ‘splainin’, but his explanation was effectively a guilty plea.  He said that he left a late-July meeting with the head of the Saudi investment fund convinced that it would fund the transaction.

Legal memo to Elon: “secured in my mind” is not the same as secured, secured, all legal and such.  Even if–especially if–you are a legend in your own mind.

Musk’s explanation is more of a guilty plea than a defense.  The intersection between “funding secured” and “conversations are ongoing” is a set of measure zero.

Then there’s the magical structure.  As I noted in an earlier post, he wants it all ways.  He wants to be a private firm, but still have a herd of small shareholders.  In other words, he wants a structure that does not exist, most likely because it violates the securities laws.

There’s also another issue that has received no real attention, though it should.  All of the figgerin’ I’ve seen so far just totes up the amount of money required to buy out Tesla shareholders at $420/share.

But that’s just the start!  Tesla has been a cash bleeder for years, and has gone to the secondary offering well again and again to raise the money necessary to fund its operations and capex.  There is no prospect of that ending soon–indeed, one of the reasons I suspect Elon is throwing this Hail Mary is the fundamental inconsistency between his recent assertions that no additional capital raises would be necessary and the need for further funds.

So any sugar daddies will not merely have to stump up as much as $80 billion to buy the outstanding equity–they will have to commit to fund it while it continues to be cash flow negative to the sum of ~$500 million-$1 billion per quarter.

Going private deals are usually done for cash-flow positive companies.  They are levered up and use the cash flows to service the debt.  The PE dealmakers extract cash at the beginning, and definitely don’t plan to inject more cash for the indefinite future. That traditional framework obviously can’t work for Tesla.  So not only is the legal structure that Musk has mooted a figment of his imagination, the economic model is also fantastical.

But other than that, the deal sounds totally great, Elon.

One final note that makes me chuckle.  Elon made his big announcement on Twitter.  He has also blocked a lot of people on Twitter–including me in 2013 or 2014.  Well, selective disclosure of public information–giving it to some people earlier than others–violates Reg FD (“Regulation Fair Disclosure”).  So by (a) blocking me (and many others) on , and (b) running his big brain waves through Twitter, Elon might have committed other securities violations.





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August 12, 2018

As the old adage says, Erdo: Be careful what you ask for.  You might get it.  

Filed under: Economics,Turkey — cpirrong @ 6:40 pm

Turkish president Recep Tayyip Erdoğan is clearly insane, by the doing/saying-the-same-thing-repeatedly-and-expecting-different-results standard.

Apparently not content with the mere 22 percent drop in the TRY on Thursday and Friday which was attributable completely to his overheated, boneheaded economic rhetoric and his egging on a confrontation with the US, today he gave not one, not two, but three speeches that put his economic idiocy and bullheadedness on display.  And the markets reacted immediately, with the lira breaching 7 to the USD in early Asian trading.

Among the howlers:

Speaking in the northeastern city of Trabzon on Sunday, Erdogan warned business executives to not “rush to banks to withdraw foreign currency.”

He added that businesses should “know that keeping this nation alive and standing isn’t just our job, but also the job of industrialists, of merchants.”

“We are working day and night for alternative markets.”

Just what alternative markets is he talking about? Presumably steel and aluminum, which Trump imposed higher tariffs on on Friday.  But those aren’t the markets that matter now: it’s the currency and capital markets that matter, and every word out of Erdoğan’s mouth freaks out those markets even more.  Not least because talking about metals indicates a complete failure to grasp the true nature of the situation.

Importuning “industrialists and merchants” to take one for the team is futile.  They have already conceded, after taking brutal losses for heeding his earlier call.  The fact that Erdoğan seems oblivious to the fact that his previous nostrums have been disasters only convinces further those at home with money and those in the financial markets that he is utterly clueless–as do his continued imprecations against evil interest rates.

His chucklehead finance minister (whose main attributes appear to be that a) he is Erdoğan’s son-in-law, and b) he is less of a chucklehead than Erdoğan’s son) gave a don’t worry-be happy-everything will work out great talk to a group of assembled business leaders.  A Turkish friend said that Berat (not Borat!) Albayrak’s clownish performance was met by long faces from the assembled bankers and industrialists.

Erdoğan’s other stock response is that Turkey’s economic fundamentals are sound, but the country is being subjected to an economic attack from the US, and that he will fight back.  Arguendo, assume it is true that the US has targeted Turkey.  What is the best response, especially when someone like Trump is doing the targeting? Defiance is foolhardy, though perhaps emotionally gratifying in the short run, both to Erdoğan and his fervent followers.  A prudent leader would execute a tactical withdrawal in the face of overwhelming odds, and live again to fight another day.  You don’t fight battles you can’t win.  And again, Erdoğan’s apparent willingness to do so just stokes the panic.

Erdoğan says that he will find other allies.  Like who, exactly?  Speculation is that Russia, Qatar, and/or China might contribute financial support.

The first name makes me laugh.  Russia has its own issues right now, to put it mildly.  Its access to capital markets is extremely limited, and its currency is also under pressure.  Qatar is still battling an economic embargo with its Arab neighbors.  China’s own financial situation is somewhat tenuous now, and although it has shown a willingness to throw money down ratholes (cf. Venezuela) it is doubtful that it will stump up the tens of billions of dollars necessary to rescue Turkey from the brink, especially in the very limited time–maybe even hours–available.

And all of these candidates will no doubt think twice, and then think again, based on uncertainty of how Trump would react to their riding to the rescue of his current target.

Nope.  Erdo is on his own here.  And that’s the irony of all this.  Erdoğan asked for supreme power in Turkey.  He got it.  Now he owns all of it: the bad as well as the good.  As the old adage says, Erdo: Be careful what you ask for.  You might get it.

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August 10, 2018

Tesla: A Securities Lawsuit, But Not THE Securities Lawsuit

Filed under: Economics,Regulation — cpirrong @ 9:37 pm

Two class action lawsuits have been filed against Tesla and Elon Musk, claiming that he artificially inflated the price of Tesla stock through his going private tweets, thereby unleashing a “nuclear attack” that “completely decimated short sellers.”*

It is a plausible claim.  However, the damages here are likely to be minimal.  Tesla’s stock fell below the pre-tweet price within a day, as reality set in.  Therefore, only those who bought during that brief window of tweet-induced euphoria (and inflation)  would have a claim (and this would include shorts who covered).  Not likely a huge class here.

No, the mother of Tesla class actions awaits a big stock price drop, which would likely follow either a disclosure of past mis-statements and fraud, or an SEC announcement of litigation against the firm.  (Hey, has the statute of limitations run out on the 2013 squeezes?)  I think it’s a matter of time, but who knows?

The whole going private thing looks more bizarre by the day, especially given Elon’s odd ideas about what going private means:

Tesla Inc. Chief Executive Officer Elon Musk and advisers are seeking a wide pool of investors to back a potential take-private of the automaker to avoid concentrating ownership among a few new large holders, according to people familiar with the matter.

Tesla is holding early discussions with banks about the feasibility and structure of a possible deal, the people said, asking not to be identified as the details aren’t public. They are canvassing investors including large asset managers, the people said.

Billionaire founder Musk would prefer to amass a group of investors who could each contribute part of the funds because he wants to avoid having one or two large new stakeholders in the company, the people said. Deliberations are at an early stage and the company hasn’t yet formally hired a bank to work on the process or made a final decision on how to proceed, they said.

In other words, Elon wants his cake and to eat it too.  He wants diffuse ownership and total control, and to deny the diffuse owners the investor protections that a public listing brings with it.

Come to think of it, Elon wants to bring the Russian model to the US–think of Rosneft, Gazprom.

The Tesla board of sheep–I mean, directors–is apparently scrambling furiously to try to recover from Elon’s blunder by “investigating” a going private transaction.  A little late!

I really want to know who Tesla’s O&D insurer is, so I can short it.

*Pedantic pet peeve.  You can’t “completely decimate” anything–that’s an oxymoron. Decimate means execute one out of ten.  It was a punishment exacted against mutinous Roman legions.  I think the word the lawyers are looking for is “annihilate.”

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There is Much Ruin in a Country, Turkish Edition

Filed under: Economics,Politics — cpirrong @ 6:58 pm

In June, I spent 9 days in Turkey.  For someone as interested in history as I am, it was a phenomenal visit.  From the Hittites to the tomb of Midas in Gordium to Ephesus to Cappadocia, it is a series of historical marvels, and I only scratched the surface.

Since I am fascinated by Mustafa Kemal Ataturk, one of the most interesting historical figures of the 20th century,  one of the highlights of my visit was a trip to his mausoleum and museum in the Atakabir in Ankara.  The visit was particularly timely, given that Ataturk’s legacy and handiwork is currently at risk.

The political environment in Turkey was febrile during my visit.  I left exactly one week before the (snap) presidential election, and the deep political divisions in Turkey between the Islamist followers of Recep Tayyip Erdoğan (concentrated in central Anatolia, where I visited) and the remaining adherents of Kemalism (mainly in the west, centered in Izmir, where I visited as well) were on full display.

I had some thoughts (hopes, maybe) that enough Turks would realize that Erdoğan would use an election victory to Islamize and revolutionize (and not in a good way) the country further, and would deny him an outright victory that would allow him to realize his Ottoman pretensions.  But the tribal loyalties to Erdoğan are too wide, deep, and intense, and he won a victory.  Not a landslide, but not all that close, either.

And true to form, he took a couple of point election win as an invitation to act out his political and economic fantasies.  Turkey has fared well growth-wise for the past decade-plus, but it exhibits many of the fragilities of an emerging market, and especially a fast-growing emerging market.  Navigating this situation requires prudence, and some willingness to let the monetary authorities rein in excess.

But these are two things that Erdoğan quite clearly lacks, and indeed scorns.  In particular, he has a fixation about interest rates, which he believes are evil, and should be zero.  His natural inclinations are egged on by some of his biggest business supporters, who are construction magnates addicted to cheap credit.

Fear of Erdoğan’s monetary profligacy had already caused substantial declines in the lira prior to the election, and his statements shortly before the election on Bloomberg TV about taking control of monetary policy caused a further selloff. Then post-election, he appointed his son-in-law as finance minister.  (I guess it could have been worse: at least he did not appoint his truly idiotic son.) That stoked fears even more.

Then, post election, he has gotten into a confrontation with the US over buying S-400 air defense systems from Russia, and over the arrest of an American pastor accused of treason.  He has refused to give an inch on the preacher, despite warnings from the US, and a shot across the bows in the shape of sanctions imposed on two Turkish government ministers.

This is an utterly stupid and pointless conflict, and likely reflects Erdoğan’s obsession with FETO and the Gülenist movement led by his former confrere, and now archenemy, Fetullah Gülen–an obsession that has been at a fever pitch since last July’s abortive coup.  One needs to pick battles carefully, and this is not one that a rational man would choose to fight.

The escalation of this conflict has been mirrored by further declines in the lira.

Perhaps Erdoğan could have gotten away with this with Obama, or a Bush, or a Clinton in the White House.  But it is beyond insane to wave a red flag in front of Trump, and Trump has responded predictably to what he perceives to be a challenge.

Today Erdoğan gave a speech that was intended to ease fears, but it didn’t.  It fed them, as his answer to the currency crisis was for Turks to sell foreign currency and buy lira.  Great plan! Except the Turks who adore Erdo don’t have dollars and euros, and the Turks who have dollars and euros pretty much hate Erdo.  So the speech triggered an implosion in the lira.

At which point Trump put the boot in, announcing punitive tariffs on metal imports from Turkey (steel being a particularly big industry there), embellished with a Trumpian suck-on-this-one-Recep tweet.  The free-fall intensified. Now a full-fledged crisis looms, and Erdoğan is constitutionally temperamentally incapable of dealing with it, as this would require him to make a humiliating public climb-down on firmly held beliefs and positions–the most notable of these being the greatness and destiny of Recep Tayyip Erdoğan.

So Erdoğan has doubled down, ranting about economic warfare and economic hitmen.  That may play in Anatolia, but it won’t in the currency and capital markets.

Once upon a time the military would have stepped in.  But Erdoğan has neutered it as a political force.  Some of the neutering took place after the coup, but the utter incompetence of the coup suggests that his earlier efforts to destroy the foundations of Kemalism had made considerable progress.  (The coup was so botched that it is not unreasonable to think that Erdoğan let it proceed, knowing it would fail and that he could exploit it.  Indeed, it’s not outside the realm of possibility that he facilitated it.  He has certainly been the beneficiary.)

Erdoğan is sometimes compared to Ataturk.  Ataturk was a transformative figure, and Erdoğan certainly wants to be one, and has indeed already engineered considerable transformation of Turkish state and society (although in this he was aided greatly by demography, which has seen the population of the Anatolian heartland explode and the population of the Rumelian regions stagnate.)

But although Mustafa Kemal had grand visions to Make Turkey Great Again, he was remarkably prudent in his actions.  Most importantly, whereas Erdoğan has pretensions to make Turkey a regional hegemon, and indeed, a new Ottoman Empire, Ataturk concentrated on nation building at home.  He was incredibly wise in avoiding entanglements in the looming European war, and his successor İnönü followed that lead and stayed out of WWII. Erdoğan’s involvement in Syria was a catastrophe from the word go, and his religiously-driven antagonism towards Israel, a natural ally, has been foolish in the extreme.

Under Ataturk and his successors, by focusing on domestic changes, Turkey had the breathing space to construct a functioning state and avoided the disaster that afflicted every other country in Eurasia from 1939 to 1945.   Erdoğan is not so wise.

Where does it end?  I can’t seeing it end well.  Erdoğan will likely be able to rely on his fervent political base to remain in power, and has shown no reluctance to crush opposition by any means necessary.  He has already used, and likely will continue to use, the economic crisis to stoke the us vs. them passion that has been an important part of his political success.  Turks are nationalistic (a legacy of Ataturk, ironically), many past the point of chauvinism.

We see too many examples from around the world (Venezuela, Syria, Iran) of how autocratic leaders can survive economic crisis.  Turkey is not even close to becoming one of those basket cases, and if a Maduro can hang on, so can Erdoğan.  As Adam Smith said, there is much ruin in a country, and Recep Erdoğan is likely to show how much ruin there is in the Turkish nation.

An aside. Trump has been playing Godzilla the currency markets.  Yes, Turkey is the worst (well, not counting hyperinflating Iran and Venezuela), but most other emerging market currencies have been cratering, and the dollar has been advancing.  Of particular interest is the decline in the ruble (and the simultaneous sharp drop in Russian stock prices).  Sanctioning Russia over Skripal, and the threat of more, have caused the RUB to fall by around 8 percent, 5 percent on Thursday alone.

Obviously he’s in Putin’s pocket.

Well, if he is, he’s picking it.  So much for collusion.

Putin has been conspicuously silent through this, and Russia has made sounds about trying to reach some rapprochement with the US.  Of course, Medvedev was trotted out to denounce the US.  But that just illustrates that Putin is playing it smarter than Erdoğan: Medvedev is meaningless, and his only role is to take the heat for Putin.  `

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August 8, 2018

Trumpophobes Live Out Proverbs 26:11

Filed under: Politics — cpirrong @ 7:35 pm

When I was growing up, network TV was pretty much all there was, and summer was the time of re-runs.  The Trump-Russia collusion obsessives remind me of those old days, because currently they are re-running–and re-running–the Trump Tower meeting. This is in essence a re-run of a re-run, because this was a story about a year ago, when it was recounting events of a year before that–July, 2016.

So why do the Trumpophobes keep returning to this story, like a dog returning to its vomit?  Well, for one thing, the fact that they have to keep flogging this is proof positive that there have been absolutely no material developments on the collusion front, so they have to go back to this subject, presumably to barf it back up again so they have something to tide them through future lean times on the collusion beat.

That is, the necessity of recycling old news is proof positive that there is no new news.

It’s also incredibly amusing that they don’t recognize that the Trump Tower story not only does nothing to move the impeachment or indictment needle–it actually contradicts the collusion meme, and for a bonus implicates their beloved Hillary in a far more nefarious plot.

As I said from the time the story first broke: if the Trump campaign was hot to pursue over-the-transom offers of dirt on Hillary from marginal Russian figures, it could not have previously been a  party to a quid pro quo arrangement with Putin et al whereby the Russians hacked the Dems in exchange for some future benefit in the remote chance (as believed by everyone–including the Russians at the time) Trump won.  So if you believe the Trump Tower meeting matters, as a matter of logic you must acknowledge that allegations of a pre-existing agreement are false.  (Yes, I know–expecting logic from this lot is delusional!)

Moreover, the Trump team got nothing.  The promises of dirt were just bait to get a meeting for the Russians to yammer on about the Magnitsky Act and Bill Browder.  So at most the Trump team was guilty of bad intent.  But if getting dirt on the opposition from Russians is bad–or  even illegal–then Hillary and the Democrats are far more guilty than Trump.  They spent a large sum of money to hire Steele to gather dirt on Trump from Russian sources (still undisclosed–assuming they even exist).  Further, they actually received information, and shopped it around, with Steele eventually leaking to friendly journalists before the election.  And even worse, the Steele dossier was vectored to the FBI in an attempt to spark a counterintelligence operation, and perhaps criminal action, against Trump.  And even worse than that, in the spirit of reruns, the dossier was the centerpiece of an effort to kneecap the incoming president.

(Given the connections between the Russian in the meeting, Natalia Veselnitskaya, and Fusion GPS–and hence Steele–there is also the possibility that the meeting was a setup.  I could speculate on who would have an interest in such a setup,  and the ability to set it in motion.  I leave that as an assignment for the class.)

Compare all that to a meeting that came to naught, and you must conclude that if the Trump Tower meeting was beyond the pale, the actions of the Hillary campaign were beyond the bounds of the Milky Way.  There was bad intent (by the Trumpophobe standards implicit in the hyperventilating about the Trump Tower meeting), and the intentions were realized (whereas that was not the case in the Trump Tower meeting).

Proverbs 26:11 reads: “As a dog returns to his vomit, so a fool repeats his folly.” I’m not a Bible quoter, as a rule, but in this case the proverb fits too well to pass up.  By repeatedly returning to the subject of the Trump Tower meeting, the Trumpohobe fools repeat their folly.  Over and over again.


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August 7, 2018

Always Remember–Elon Rhymes With Con

Filed under: Economics,Energy — cpirrong @ 6:26 pm

Today on Twitter Elon Musk floated the possibility of taking Tesla private.  Perhaps coincidentally, it was revealed that the Saudis have accumulated a stake in Tesla worth a couple of billion.  Adding two and two, many have leaped to the conclusion that the Saudis will be in essence the private equity firm behind the deal, perhaps as part of some futuristic hedge against the end of oil.

As with all things Elon, look for the con.  Case in point.  He hyped the Tesla takeover of Solar City as the creation of a visionary vertically integrated clean energy company.  I saw it as a way of preventing an embarrassing bankruptcy of Solar City, and of bailing out Musk relatives using Tesla shareholder money.  The wind-down of Solar City’s business pretty much has proven me correct.  And  all talk of the visionary vertical integration strategy has ceased.  Indeed, the lack of discussion of the solar business reminds me of the old expression “don’t speak ill of the dead.”

So what’s the angle here?  I conjecture as follows.  Tesla is still losing money hand over fist.  It is burning less cash–but only because it has slashed expenses and capex–which puts a crimp in its growth plans.  And “burning less” is a relative statement–it is still a world class incendiary.

In the past Elon has fed the cash machine with stock and bond sales.  But he has publicly stated repeatedly that no future capital raises will be necessary.  It is clear, however, that such promises are not credible.  He has also promised that profits are just around the corner.  But that promise is also hardly credible, especially after serial failures to deliver on past promises.

This puts Elon in a bind.  He needs money, but a capital raise would (a) hammer is already tottering reputation, and (b) more seriously, create a huge risk of shareholder lawsuits and an SEC securities fraud case.

Further, it is clear that Elon finds many aspects of running a public company distasteful.  He particularly hates analysts (stock analysts, not psychiatrists, though maybe he hates them too!) who question his judgment, his statements, and sometimes his sanity.

He also hates short sellers.

So how to escape these problems? Easy–go private! Especially if the world’s deepest pockets are behind it.  No need for a public capital raise.  No more pesky outsiders questioning his competence, strategy, or behavior.  No more short selling a-holes.

The trifecta.

Of course, maybe Elon is just attempting to goose the stock price and inflict some pain on the shorts.  But if this is the case, he is digging his securities fraud hole deeper.

As for the Saudi angle.  A big bet on Tesla would be a rather foolhardy way to hedge against the end of oil.  It is a hedge rife with idiosyncratic risks–Tesla’s mercurial CEO being just one of them.  A more diversified strategy–investing in battery technology, and cobalt mines, and the like–would make more sense.

It will be entertaining to watch this spectacle unfold.  The one thing I can be sure of is that the story that Elon tells will not be the true story.  So look for the angle, and watch for the con.  My conjecture is plausible, but it is not the only possible scenario.  But whatever scenario plays out, it is likely to be as crooked as a dog’s leg.

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August 1, 2018

This Is My Shocked Face: Blockchain Hype Is Fading Fast

Filed under: Blockchain,Commodities,Cryptocurrency,Economics — cpirrong @ 7:02 pm

Imagine my great surprise at reading a Bloomberg piece titled: “Blockchain, Once Seen as a Corporate Cure-All, Suffers Slowdown.

That was sarcasm, by the way.  I’ve long and publicly expressed my skepticism that blockchain will have revolutionary effects, at least in the near to medium term.  In my public speaking on the topic, I’ve explored the implications of three basic observations.  First, that blockchain is basically a way of sharing/communicating information, which can in turn be put to various uses.  Second, there alternative ways of sharing/communicating information, with different costs and benefits.  And third, it is necessary to distinguish between sharing information within an organization and between organizations.

Much of the hype about blockchain relates to the potential benefits of more efficient sharing and validation of information.  But this does not address the issue of whether blockchain does this more efficiently than alternative means of sharing/communicating/validating.  As in all institutional/technology issues, a comparison of alternatives is necessary.  This comparison has been sadly lacking in public discussions of the potential for blockchain, beyond incantations about blockchain eliminating the need for trusted third parties which is (a) often untrue (in part because trusted parties may be required to enter information into a blockchain, and (b) is not necessarily a feature, because trusted third parties may be able to operate more efficiently than consensus based systems employed on a blockchain.

The most developed implementation of blockchain (Bitcoin) involves very large cost to solve a particular problem that (a) is unique to cryptocurrency, and (b) is not necessarily important in other contexts–namely, the double spend problem in crypto.  Maybe blockchain is the best way to solve that particular problem (which itself begs the question of whether cryptocurrency`is an efficient solution to any economic problem), but that doesn’t mean that it will be a more efficient way of solving the myriad types of opportunism, fraud, and deceit that plague other kinds of transactions.  Double spend is not the alpha and omega of transactional challenges.  Indeed, it might be one of the most trivial.

Thinking in Williamsonian transaction cost terms, where the transaction is the unit of analysis, transactions are highly diverse.  Different kinds of transactions are vulnerable to different kinds of information and opportunism problems, meaning that customized blockchain approaches are likely necessary.  One likely cause for the waning enthusiasm mentioned in the Bloomberg article is that people are coming to the recognition that customization is not easy, and it may not be worth the candle, compared to other ways of addressing the same issues.  Relatedly, customization makes it harder to exploit scale economies, and recognition of this is likely to be making initially enthusiastic commercial users less keen on the idea: that is, it may be possible to use blockchain in many settings, but it may not be cost-effective to do so.

The siloed vs. cooperative divide is also likely to be extremely important, and the Bloomberg article mentions that issue a couple of times.  The blockchain initiatives that do seem to have been implemented, at least to some degree, as with Maersk in container shipping or Cargill with turkeys, are intra-firm endeavors that do not require coordination and cooperation across firms, and can exploit the governance structure that a firm has in place.  Many of the other proposed uses–for instance, in trade finance, or in commodity trading, both of which require myriad parties in a single transaction to communicate information among one another–are inherently multilateral.

This creates all sorts of challenges.  How can commercial rivals cooperate?  How are the gains from cooperation divided?–this is a problem even when participants supply complementary services, such as a trading firm, banks providing trade finance, and the buyer and seller of a commodity.  As oil unitization has shown, battles over dividing the gains from cooperation can dissipate much of those gains.  Who gets to see what information?  Who makes the rules?  How?  How are they enforced? What is the governance structure?  How is free riding prevented?  Who pays?

Ironically, where the gains from cooperation are seemingly biggest–where there are large numbers of potential participants–is exactly where the problems of coordination, negotiation, and agreement are likely to be most daunting.

I’ve drawn the analogy between these cooperative blockchain endeavors and commodity exchanges, which (as I showed in a 1995 JLS paper) were formed primarily as ways to reduce transactions costs via cooperative rule making and enforcement.  The old paper shows that exchanges faced serious obstacles in achieving the gains from cooperation, and often failed to do so.  Don’t expect blockchain to be any different, especially given the greater complexity of the transactional problems that it is being proposed as a fix.

Thus, I am not surprised to read things like this:

“The expectation was we’d quickly find use cases,” Magnus Haglind, Nasdaq’s senior vice president and head of product management for market technology, said in an interview. “But introducing new technologies requires broad collaboration with industry participants, and it all takes time.”

or this:

Most blockchains also can’t yet handle a large volume of transactions — a must-have for major corporations. And they only shine in certain types of use cases, typically where companies collaborate on projects. But because different businesses have to share the same blockchain, it can be a challenge to agree on technology and how to adopt it.

One of my favorite illustrations of the hype outstripping the reality is the endeavor launched with much fanfare in the cotton market, where IBM and The Seam announced an endeavor to use the blockchain to revolutionize the cotton supply chain.   It’s been almost two years, and after the initial press releases, it’s devilish hard to find any mention of the project, let alone any indication that it will go into operation anytime soon.

Read the Bloomberg article and you’ll have a better understanding of R3’s announcement of an IPO–and that they might have missed their opportunity.

In 2017 and a little before, Blockchain was a brand new shiny hammer.  People have been looking everywhere for nails to pound with it, and spending a lot of money in the effort.  But they’re finding that many transactional problems aren’t nails, that there are other hammers that might do the job better, and there are other problems that require many parties to agree on just how the hammer is to be used and by whom.  Given this, it is not surprising that the euphoria is fading fast.  The main question that remains is in what shrunken domain will blockchain actually be employed, and when.  My guess is that the domain will be relatively small, and the time until employment will be pretty long.

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July 24, 2018

Who Knew Igor Was a Deadhead?: Sechin Plays Shakedown Street

Filed under: Economics,Energy,Politics,Russia — cpirrong @ 6:14 pm

The Sechin business model is clearly not to generate profit through canny investment, careful stewardship of capital, and containing cost.  Rather, it could be called The Rent Seeking Variations.

One of Sechin’s favorite variations is to pump up a flagging bottom line by shaking down his erstwhile partners.  The classic in this genre is the takeover of Bashneft at a knockdown price extracted by putting its owner Sistema under extreme legal pressure, which Sechin followed by suing Sistema for alleged misappropriations, which were only vaguely pleaded, and which if anything suggested that Rosneft was delinquent in its due diligence.

Sechin is now replaying this gambit, this time with its partners is Sakhalin I–which include ExxonMobile.  Again, the allegation is lacking in specifics.  Rosneft accuses the partners of “unjust enrichment” in 2015 and 2016.  In a world-class, epic act of projection, Rosneft accuses Exxon Neftgaz and the others of “interest gained by using other people’s money.”

The case was filed on Sechin’s home court–the arbitrage court on Sakhalin.  I seriously doubt that Exxon would have put itself into a situation where it was at the mercy of a Russian kangaroo court, so no doubt the first battle will be jurisdictional.

Sechin succeeded against Bashneft and Sistema in large part because Russia put its main shareholder Vladimir Yevtushenkov in jail at one point, and clearly was in a position to do it again.  ExxonMobil and the others in the partnership are less vulnerable, and Exxon in particular is used to these sorts of bruising battles.  So Igor has his work cut out for him.

For a while–during the Tillerson years–Exxon and Rosneft were chummy.  Sanctions put a kaibosh on the relationship, and this is clearly a signal that they are sooooo over.  Which just leaves Rosneft even more isolated than before, and unlikely to attract technology, expertise, and money from a major foreign power anytime soon absent some exchange of hostages that will curb Sechin’s predatory instincts.

The fallout for Russia more broadly is also clearly negative.  This is just another indication of its opportunistic and predatory approach to foreign investment, which just will raise further barriers to such investment in the future.

Operating on Shakedown Street can be lucrative in the short run, but pretty soon you run out of suckers to shake down.

Perhaps counterintuitively to some, this is an indication of why freaking out over Russia is so overdone.  Its internal dysfunction has hampered, hampers, and will hamper in the future its economic performance, and hence its potential to build capability to challenge the US in a serious way.   Yes, it can be a pain, but the very aspects of its system that make it so objectionable also serve to undermine its ability to pose a serious threat to any major power.

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