Streetwise Professor

July 23, 2013

A Musical Interlude

Filed under: Music — The Professor @ 2:46 pm

Haven’t posted any tunes lately, but the last line of the last post brought this to mind:


Should We Permit Banks to Get Physical?

Who woulda thunk that commodities-especially ones like aluminum-would become such a huge story.  Maybe it’s the summer news doldrums, but in the last week there have been two major, related stories using up loads of ink and pixels.  The stories are: (1) the Federal Reserve’s announcement that it is evaluating whether to continue permitting banks it regulates trade physical commodities, and own physical assets like storage facilities and power plants used to transform commodities in space, time, or form, and (2) the role of banks like Goldman and Morgan in the industrial metals storage business.  The latter story was the subject of an extensive piece in the NYT on Sunday.  The stories are related because the metals warehouse controversy is Exhibit A in the case against allowing banks to be involved in physical commodities.

First the warehouse story.  I wrote about this issue back in January.  There is smoke here.  The premiums in physical aluminum above the LME in-store price is an indication of a bottleneck in getting material out of warehouses.  The question is whether this bottleneck is being artificially exacerbated by game playing-manipulation, perhaps-by the warehouse operators.  The NYT article does cast some light on some mysterious practices, but it does not seal the deal in my mind.  Not to say that manipulation is not occurring, just that the NYT piece doesn’t convince me.

One puzzle is that the operators of warehouses, who cannot own physical metal in them, pay third parties a bonus over the LME price approximately equal to the cash market premium in order to put their material in store, and thereby put themselves at the mercy of the loadout queue.  Presumably, those taking these deals only do so because they are compensated for the higher storage expenses they incur once their metal gets stuck in the roach motels.  If Goldman (or any other warehouseman) paid everyone these premiums, Goldman couldn’t make any money by running the roach motel: it would pay in premium what it collects in storage fees.  It would compensate the roaches for the costs of getting stuck in the motel.  Which suggests that they only pay some customers the premium to attract metal.  What would be interesting to know is how this would permit the warehousemen to collect storage for a longer period from others whose metal is in the warehouses, but who don’t get paid the bonus.  Are there side deals with the storers who receive the premiums?   Does the mere fact that there is more metal in the warehouses increase the ability of the operators to slow down load-out, and thereby collect storage for a longer period?    This seems to be the most curious practice, but the articles I’ve read don’t shed enough light on how they could be part of a manipulative scheme.

Tom Maguire of Just One Minute does a good job at debunking the math in the Times piece: the profits accruing to Goldman and the costs imposed on soda and beer quaffing consumers alleged by the Times don’t withstand scrutiny.  To which I would add another point.  Namely, these calculations assume that the cash premiums reflect an inflation in price.  Any uneconomic act that exacerbates the bottleneck in the transformation of metal in store to metal outside LME warehouses has effects on prices on both sides of the bottleneck: it reduces the price of metal in store, and increases the price at the Coca Cola or Budweiser facility.  So even if the premium is inflated, this does not mean that the price paid by consumers (directly or indirectly) is inflated by the same amount because part of the inflation is due to a depression of the in-store price.  Those with metal in store, or producers who put their metal into store, bear some of the cost.

Now on to the bigger issue, which the hue and cry over bankers owning metals warehouses is intended to illustrate: namely, whether banks should be involved in physical commodity markets.  This is the subject of a Senate hearing today, where one of the main anti-bankers, Ohio Senator Sherrod Brown, is leading the charge to get the banker-squids’ tentacles off our commodities.

I find most of the reasons advanced for keeping banks out of physical commodities, and the ownership of commodity transformation assets, to be unpersuasive.  What’s so special about commodities?  Are they uniquely risky?

I think not, and believe that there are good economic reasons for banks to enter into the commodities business.

In addressing this issue, it’s important to be specific about the kinds of risk involved.  Price risk, spread risk, and operational and reputational risks are perhaps the most important to consider.

The conventional view is that commodity prices are extraordinarily volatile, and hence pose extraordinary risks on those who hold them.  One thing to note is that for a leveraged investor like a bank it is possible to transform a relatively low volatility flat price exposure into a much riskier exposure.  So one thing that matters is whether, taking leverage into account, bank positions in commodities are riskier than their positions in more traditional lines of business.  Moreover, it is risk at the portfolio level that matters, and the correlation between the price exposures and other elements of the banks’ portfolios.  A highly volatile position may not increase portfolio risk substantially if it is uncorrelated with other exposures, or negatively correlated.

But there’s a more important point.  Most commodity trading by commodity trading firms and banks does not consist of punts on the flat price, on whether the price of oil or copper is going to rise or fall.  Instead, most commodity trading is a margin business or a fee business.  Money is made on margins or fees in transportation, storage, and processing.  These margins-spreads-tend to be much more stable than flat prices.  Asset ownership, or contractual control of physical assets (of the type that JP Morgan has over California power plants that have attracted FERC’s ire), is a position on the value and cost of transformation, and spreads and margins measure these values and costs.  The riskiness in these spreads/margins, and the ability to manage spread/margin risk through paper trades, is what drives the risk of bank commodity plays.  My reading of the coverage has turned up virtually no understanding of this issue.

Moreover, the profitability of physical assets can provide a natural hedge for other bank businesses.  Most banking his highly pro-cyclical: it profits when the economy booms, and does badly when the economy tanks.  Some commodity assets are countercyclical.  Storage is a classic example.  The amount of oil or metal in storage-and revenues from storing these things-goes up when the economy weakens.  This is basic economics.  So metal or oil storage-a fee business-is a natural hedge against the strongly procyclical traditional banking and dealing businesses.

Taking these factors into consideration, it is wrong to believe that commodity businesses are unduly risky, compared to other banking activities.

Operational risks are perhaps more problematic.  A major oil spill, for instance, leads to substantial costs on the operator of the ship or pipeline or terminal that spills it.  A bank that owns or charters a tanker that ends up on a reef is potentially exposed to a substantial risk of loss.  But much of this risk can be passed on to insurance companies via the insurance market.  What’s more, the risk doesn’t go away if banks can’t touch physical oil: someone has to bear it.  The question is whether banks are less efficient bearers of this risk than others (where others include insurance companies).

Many of the stories that have come out in recent days focus on the reputational and legal risks associated with commodity trading.  For instance, JP Morgan’s impending settlement with FERC of allegations that it manipulated the California electricity markets has received considerable play.  Well, this is not a problem unique to commodities.  Traditional banking businesses, and other less traditional activities now widely considered to be legitimate activities for banks, have huge reputational and legal risks.  Consider Libor.  Or the Toure trial.  Or mis-selling.  Or mortgage servicing/foreclosures.

I could go on. And on. And on.  If you think that keeping banks out of commodities you’ll reduce their rep or legal risks, I have a bridge to sell you.

Furthermore, even if it is shown that banks have engaged in dodgy activity in commodities, that doesn’t mean that getting banks out of commodities will eliminate the dodgy activities.  Consider the warehouse issue.  If LME rules and cash market frictions make it profitable for warehouse operators to manipulate markets, forcing banks to sell off these assets won’t reduce the manipulation: the new owners will take ownership of the strategies along with the storage sheds.  Note that Glencore-not a bank!-has been accused of playing similar games.   Keeping banks out of commodities may affect who plays dodgy games, and profits therefrom, but won’t have much of an impact on the amount of dodginess in the markets.  That dodginess ultimately derives from economic opportunity (which is driven by frictions in the market) and regulation (flawed rules and rule enforcement mean that market participants calculate there’s a substantial probability of escaping punishment for misdeeds).  Barring banks from the market won’t change either of these things.  If crime pays, someone will commit it.  If you care about reducing the deadweight losses from manipulative activities, you shouldn’t really care about who profits from them.  You need to fix the problem at the level of incentives and enforcement of rules: keeping banks out of the market doesn’t do that.  Period.

The foregoing is basically a rebuttal-or at least a skeptical questioning-of the case against bank ownership of commodity assets, or participation in physical commodity markets.  What about the affirmative case for such participation?

For several years, in response to shrieks about the evil effects of the “financialization” of commodity markets, I’ve made the following basic point: a good deal of commodity trading is about allocating commodities over time, and allocating risk.  Both of these are fundamental financial functions: finance is about trading off the future and the present, and allocating risks.  Banks are linchpins of the financial system, and engage in intermediation of risk and of resources over time.  Why should we exclude them from a sector where the allocation of resources over time and the allocation of risk are vitally important?  That is the comparative advantage of banks: why keep them out?

Indeed, banks have gained market share in commodities in large part because they can perform the time- and risk-allocation functions more efficiently than others.  If banks have the lowest funding costs, it makes sense that they fund some inventories.  Banks have expertise in risk management and hedging, making it sensible that they utilize this expertise in the management of commodity price risks.  In other words, the success of banks in commodities is a feature, not a bug, because it reflects their comparative advantages in allocating risks and resources over time.

Moreover, there is often a synergy between financing and risk management activities, and banks can exploit these synergies.  For instance, one physical market activity that banks engage in is offtake agreements, whereby they provide say crude oil to a refinery, and receive the refinery’s output which they market.  This bundle of transactions involves a funding element-the bank is basically providing working capital to the refinery.  It also involves a risk management element: the bank is managing the price risks on the crude and refined product side (as well as the logistical/operational risks).

Crucially, by taking on the risk, the bank is reducing the moral hazard that would be involved if it was providing working capital financing to the refinery.  Yes, if it just extended loans or credit lines to the refinery, the bank would presumably impose requirements on the refinery to hedge its risks, but there are inherent agency problems associated with such an arrangement that can be avoided by putting the price risks on the bank.   Moreover, the operational and logistical risks cannot be hedged, and pose a potential moral hazard.

The most telling objection that might be raised against these arguments is that banks have gained market share in commodities because they are subsidized as a result of too big to fail.  I would note that the investment banks that made the first and biggest forays into commodities-Morgan Stanley, Goldman, Bear-did so when they did not have access to insured deposits for funding or to the Fed window, though one could argue that they still were subsidized by the belief that they were too big for the Fed to allow to fail.

But even if you buy into the subsidy argument, that’s no reason to single out commodities.  The subsidy leads to an excessive expansion of big banks generally, across all lines of business.   Meaning that keeping them out of commodities will not materially reduce the perverse effect of the subsidies.  Implicitly or explicitly subsidized banks will exploit that subsidy to the hilt, and if they can’t do it in commodities, they’ll do it somewhere else.  TBTF has to be tackled at the roots, not the branches or the leaves-and particular lines of business like commodities are the latter.

One last point.  It is beyond ironic that the banks are under attack for their commodity dealings.  GFMA wanted to hamstring banks’ competitors in commodity trading-namely, the commodity trading firms.  Perhaps they should have paid more attention to making the affirmative case for their participation in these markets, than they did attempting to raise their non-bank rivals’ costs.

The word karma comes to mind.

July 22, 2013

Yeah. He Was Totally There to Swim With the Manta Rays

Filed under: Military,Politics — The Professor @ 8:44 pm

Edward Snowden worked in Hawaii for Booz Allan Hamilton. By his own admission he took that job to get access to NSA databases, for the explicit purpose of stealing and revealing highly classified information.  He started working there in March, 2013.

We know, again by her own admission, that Laura Poitras was in contact with Snowden no later than January, 2013.  We also know that Poitras has a close, working relationship with Jacob Appelbaum.  Appelbaum shares a byline with her on a Der Spiegel interview with Snowden.

To give you an example, I just turned 30 and now that I’m halfway to death I…I uh just kidding…you can’t be halfway at 98%, but whatever happens it was murder…so…um…terrible…anyway…uh…I..I…I think it’s important to understand this…right.

I’m in Berlin right now because I had the really fucking awful unfortunate mistake of for my whole life dreaming to go to Hawaii, to go swimming with mantarays and dolphins and like all this other like you know unicorns and rainbows and all that stuff, right? We didn’t find any unicorns and rainbows; well, we actually found two rainbows but no unicorns. And uh, so I was in Hawaii in April for my 30th birthday. And 20 of my friends came. And it was like the most incredible thing I had ever experienced.

Like, if you want to feel loved, have 20 people fly for a really fucking long time to an island in the middle of an ocean, right, and to fly you there as a gift for your birthday. So I felt really loved and I felt like this is incredible, what a fantastic thing and what great friends, and I’m so lucky to have, you know, friends like this in my life.

Note particularly the lesson that Appelbaum attempts to convey with this story:

The problem with data retention is that it tells a story about you which is not necessarily true, and I’ve said this many times, but it is made up of facts, individual facts which may be correct, but the story that they tell depends on who’s telling the story. So the narrator of a story…So let’s say an analyst, looking at your data trial because of a grand jury, let’s say related to WikiLeaks, or let’s say to other things, the largest national security leak in human history. Well, can you imagine what that analyst is thinking, now that I’ve had the misfortune of finally living this childhood dream? Only to have two months later, a guy from Hawaii being stationed in Hawaii, leaking these documents. So here’s a great threat, I don’t actually trust that my country is a safe enough place. That I should wait around and see if justice still exists. So I came to Berlin because I thought it would be a much better place to write about some of the things that are taking place now.

He is trying to construct a counter narrative to explain his presence in Hawaii at the very time that Snowden was commencing his espionage.  To translate: “Don’t believe the obvious.  Don’t pay attention to anyone who says that I was in Hawaii to meet Snowden.  All of the circumstantial evidence is bullshit constructed by some NSA analyst.   I was there for my birthday with my wonderful friends and the manta rays.  Total coincidence that Snowden was there too.”

It is also quite revealing that he made these remarks in Germany.  The day before he left for Hawaii, he appeared on a panel hosted by Der Spiegel journalist Judith Horchert.  Der Spiegel has been a major outlet for Snowden/Poitras/Appelbaum revelations that have been targeted quite clearly at Merkel, who is currently in the middle of an election campaign.  Greenwald has promised that there would be future revelations that would be “explosive in Germany“:

Are new revelations from the NSA data trove going to drop in the next few days? Speaking on a political talk show on German public broadcaster ARD on Thursday night, Glenn Greenwald said he expected stories to appear in the coming days that would be even “more explosive” in Germany than reports previously published about cooperation between the National Security Agency and German intelligence authorities.

A lot of dots to connect here, folks.  Dots in time and space and persons.  Appelbaum, Snowden, Poitras, Greenwald; Hawaii and Germany; March-April, 2013.  The picture you get is pretty obvious.

Note: I’ve updated this post to incorporate an accurate transcription of Appelbaum’s remarks, in lieu of the machine generated transcription that was in the original post (though Appelbaum might have actually made more sense filtered through the machine!).  5 hours dealing with the Brazilian consulate over a visa issue (and no! it has nothing to do with Greenwald:-P)  left me a little weary and I took the lazy way out.  A huge thank you/hat tip to Catherine Fitzpatrick who provided the transcription in the comments, and I’ve pasted it into the post.  Please visit Catherine’s blogs Minding Russia and Wired State where she is giving the Snowden story intensive, extensive, and insightful coverage.

July 19, 2013

Beckists Heart Checkists

Filed under: Military,Politics — The Professor @ 6:20 pm

Snowden has revealed a fissure on the libertarian/classical liberal side of the political spectrum.  The binary, hardcore, anarcho-libertarians lionize him for revealing a vast security state that tramples the liberties of every American.  Others, like Richard Epstein, argue that defense and security are legitimate state functions, and are therefore far more accepting-though not completely so-of a surveillance apparatus focused on foreign threats that operates under some oversight from the legislative and judicial branches.  I’d count myself in the Epstein camp, and find the anarcho-libertarian objections to be overwrought at best, hysterical at worst, and largely oblivious to 4th Amendment jurisprudence.

Some of the Snowden fan club on the right is motivated by genuine principle, though in some respects that’s part of the problem: in slavish devotion to a theory, they don’t grapple with the hard trade-offs between liberty and national security.  But some of that fan club is driven by animus to Obama: they view this as just another cudgel to bludgeon Obama with.  I am no Obama fan, to be sure, but this is more of a matter of the country than the president.  Obama will be president for about 3.5 more years.  He inherited a security policy from his predecessors, and despite campaign rhetoric against it, has largely adopted that policy: the essence of that policy will survive him.  Damaging the NSA and other security efforts out of a desire to inflict damage on Obama is short sighted and destructive, and contrary to the interests of the country.

It also makes for strange bedfellows.  Most notably, between the likes of Glenn Beck and hard core anti-American lefties like Greenwald, Poitras, Appelbaum, and Assange.  It is impossible to exaggerate the anti-American animus of this lot.  They are quite open about it.  They are waging asymmetric warfare against the United States, with the aim of destroying it.  They say so explicitly.

And the hard core anti-American lefties like Greenwald, Poitras, Appelbaum, and Assange (and Snowden) are objectively (in Orwell’s terms) allies of Russia’s neo-Checkists, Putin and the FSB, who share their goal.  Note that never is heard a discouraging word from the mouths of Greenwald et al about human rights in Russia, in stark contrast to their shrieks about the dark night of fascism descending on the US.  Snowden lauds Russia as a human rights champion. Have any of this lot said anything about Magnitsky or Navalny?  As if.  The silence deafens.

And lo and behold.  Where does Snowden turn up?  In the land of SORM, which will turn out to be his Hotel California: he can try to check out, but he’ll never leave.  And every minute he’ll be up close and personal with the FSB.

Perhaps the Greenwald/Assange gang are explicitly cooperating with the FSB in some way.  Most likely not, but are just operating under the enemy-of-my-enemy-is-my-friend principle.  But it really doesn’t matter.  They are working hand-in-glove towards the same objective, and both are using Snowden.  They share the same interests, and their tag team efforts are complementary, even if they don’t cooperate explicitly.

By endorsing the Snowden-Greenwald-Poitras-Assange narrative, Glenn Beck and others on the right are therefore advancing a Checkist establishment that is bent on damaging the US.  All out of anti-Obama rage.

Beckists helping Checkists.  What a world we live in.

July 18, 2013

Vladimir Putin Is Not an Altruist

Filed under: Military,Politics,Russia — The Professor @ 2:57 pm

Putin has put a condition that Snowden must meet to stay in Russia: he must stop making disclosures that damage “our American partners.”  Putin even confesses astonishment that such words came from his mouth.

Everything about this is feigned, including the astonishment. Putin is not an altruist acting with US interests in mind.

There is a perfectly Machiavellian explanation for this desire to shut down Snowden’s disclosures.  Despite Snowden’s Maxwell Smart-like claim that he is immune to torture, and has given nothing to the Russians, it is almost certain that he has given them everything.  Indeed, his statements were almost certainly put into his mouth by the Russians who have him under complete control.  This information is more valuable, to the extent that the NSA does not know what the Russians have learned.  If NSA knows what has been compromised, it can focus its containment efforts and implement targeted fixes.  The less certain it is, the more diffuse and indiscriminate its efforts must be-and hence the less effective its efforts will be.

Further public disclosures, though embarrassing to the NSA and the US, will provide information about what Snowden accessed and stole.  Even a revelation about a piece of information held in a particular location will alert NSA that other information in that location has been compromised. Yes, forensics will help it track those things down, but not perfectly.  Every piece of information NSA has about what has been compromised is extraordinarily valuable.  Meaning that Putin and the FSB have every incentive to keep that information to themselves.  Meaning that further public revelations harm Putin.

Don’t let Putin fool you folks. He does not have US interests in mind.  To the contrary.  Knowledge is power.  He knows what he has: NSA doesn’t know, for sure.  Therefore, public disclosures about NSA operations reduce Putin’s power.  Which gives him an extremely strong motive to use his control of Snowden to reduce the flow of Snowden’s information from Greenwald, Poitras, etc.

I repeat: Putin is not altruistic to the US, and operates according to a zero sum mindset in which anything that helps the US hurts Russia.  If he is demanding Snowden’s leaks stop, it is precisely because this helps Russia, and hurts the US.

Pandora’s Box, Without the Hope: Eta Rossiya

Filed under: Politics,Russia — The Professor @ 10:40 am

Alexi Navalny was convicted of bribery and sentenced to five years imprisonment.

This result was inevitable.  To charge was to convict. And five years is just the appetizer.  The Investigative Committee is already cooking up course after course of new charges that will keep Navalny in jail until, well, until a revolution or his death, most likely.  Knowing that, his decision to stay and fight is extraordinarily brave to the point of foolhardiness.  You need not agree with his agenda or some of his affiliations to respect his courage.

Following events on Twitter this morning did produce one surprise: many Western journalists in Russia seemed surprised.  Well not surprised, perhaps, but disbelieving.  The charges against him were so absurd, the proceedings so Kafkaesque, and the implications so darkly portentous that even those with no illusions about Putin and Putinism or Russia’s current trajectory seemed to want desperately to believe that the inevitable would not occur.  They apparently retained some sliver of hope until the judge droned out his verdict and sentence. Even Pandora’s Box held hope, after all: Russia, and Russian courts, hold none.  That was the message behind the Potemkin legalities in Kirov.

Abandon hope, all ye who enter here.

And not just journalists were surprised.  Markets were too.  Russian stocks dropped about 2 percent on the news-which shouldn’t have been news.  Apparently traders were also in denial until reality became undeniable.

The reaction of governments around the world was primarily to acknowledge meekly the injustice perpetrated in Russia, and then change the subject.  The European responses were especially pusillanimous..  Putin’s obduracy has convinced Western governments that resistance is futile, and that accommodation-appeasement, really-is the only way forward. “Men without chests” is a line that comes to mind.  So Putin will smirk, pocket this victory, and begin planning his next push.

That this is being played out against the backdrop of the Snowden affair, in which said grandiose narcissist hacker (but I repeat myself) extols Russia as a stalwart defender of human rights only accentuates the absurdity and deepens the gloom.*  An individual who would receive a high powered legal defense and extensive procedural protections were he to submit to trial in the US gives “human rights” cover to a regime with a totally instrumental view of the legal system, which it views as a knout to bludgeon its political enemies, with barely a peep of resistance from the outside world.

We live in a new, low, dishonest decade.

* Snowden, by the way, has allegedly revealed to his Kremlin stooge, faux human rights activist “lawyer”, Anatoly Kucherena, that he would not feel safe going to Latin America, and hence is staying in Russia.  (Since Kucherena is the source of this story, take with a grain of salt.)  So he what, figured this out in the last two weeks?  Remember at the beginning of July he said he would not seek asylum in Russia but would go to Venezuela or Bolivia or Ecuador as soon as it was possible.  He just figured out that the US was out to get him?  I thought that was his point all along?  Or maybe, it’s just that Snowden is calling his own shots, but that the FSB is.  I’d make book on that.  All the more reasons to start calling bluffs.

July 16, 2013

Steyer. Rhymes With Liar.

Filed under: Uncategorized — The Professor @ 2:55 pm

Tom Steyer, enviro hedge fund billionaire and die-hard opponent of the Keystone XL pipeline to the Gulf (and, BTW, major Dem fundraiser) is trying a different tack in his attempts to kill Keystone.  He is claiming that it would raise gas prices, and thereby cost American consumers billions.

First, you’d think Steyer would think that higher prices are a good thing: people would consume less of that bad oil stuff if the price is higher.  Which might raise a question in your mind: how can an increase in oil output in Canada, with the oil be transported through the US, lead to lower consumption in the US? If so-you’re thinking!  Unlike the interviewer who doesn’t call bullshit on this outlandish claim.

Steyer’s objection to Keystone is that it would facilitate the carbon-intensive production of petroleum from Canadian oil sands.  Meaning that he believes that Keystone will cause an increase in oil output.  But, he also wants us to believe that this increase in output in oil in Canada will lead to a decline in consumption of oil in the US, because that’s the only way that US consumers can end up spending more on gasoline, etc.

Just how does that work, exactly?

He relies on a study by a “consumer advocacy group” that claims that since Canadian oil is backed up in the Midcontinent by the lack of transportation to carry it to the Gulf of Mexico, uncorking that bottleneck would raise Midwest gasoline prices because it would reduce supply in that region.  He-and the study-note that there is a big discount of Canadian crude prices to GOM prices due to the bottleneck.  He claims that the building of Keystone would raise the price of Canadian crude, and this would be passed on to American consumers.

Which is totally bogus.  You’d think a big hedge fund billionaire guy would know about prices being determined at the margin, and about derived demand, and about refining and transportation margins.

Gasoline prices in the Midcontinent are determined by the marginal source of crude oil, and refining capacity.  In some parts of the Midcon, imported crude is still the marginal supply source.  And even where it isn’t, refining capacity is the bottleneck, meaning that the primary impact of the transportation bottleneck is to fatten refining margins in the Midcontinent.  The big Canadian price discount reflects high transportation costs, and refining capacity constraints.   The biggest beneficiaries of the bottleneck are not Midwestern consumers, but Midwestern refiners and suppliers of transportation, such as BNSF.  (Is Steyer long Midcon refiners?  Rail stocks? I wonder.)

Basic economics tells you what would happen if Keystone XL goes into operation.

First, output of Canadian oil sands will go up.  That’s exactly what Steyer fears.  If that output doesn’t go up, what the hell is he worried about?  It will go up because the derived demand for Canadian oil sands will go up because the cost of transforming it into refined products will decline.

Second, some of the increase in Canadian output will flow to the GOM-that’s the whole reason for Keystone.  Some of these barrels will displace barrels that would otherwise be imported, primarily from Venezuela and Mexico.  That reduces the risk of an ocean spill of crude: that’s a definite environmental plus.

As a first approximation, given that refining is a bottleneck in the Midcon, refinery output there will not decline, or will decline marginally.  That, plus the facts that (a) the decline in US imports will tend to reduce world prices, and (b) the marginal barrel driving the price of some Eastern US and Midcon oil is the import price, means that prices in the Midcontinent will be fairly steady.

Output of refined products at the Gulf will increase.  Some of the additional output will be exported, but some will be consumed in the US, lowering prices in the Gulf region, and in regions that the Gulf refineries supply-like the East Coast.  (Note that the shale boom has led to a similar boom in the production of Jones Act shipping that is used to transport refined products from the Gulf to other markets in the US.  Keystone would have the same effect.  More shipping means more consumption means lower prices.)

In brief: approving XL would have small effects on prices in the Midwest, and reduce prices pretty much everywhere else in the US, at least in those regions supplied by Gulf Coast refineries.

And yes, all this would lead to Canadian oil sand producers getting a price that is closer to the world price, as Steyer claims.  But he is totally full of it to claim that this increase in the Canadian price will translate into a commensurate rise in the price paid for refined products by US consumers.  Totally. Full. Of. It.  (I’ll leave it to your imagination what “It” is.)

How can Canadian crude prices rise and refined product prices fall?  Easy as pie.  Reduce all the margins in the middle.  The transportation margin.  (Sorry, Warren-speaking of the mendacious.)  The refining margin in the Midcontinent. (Sorry, BP.)

The economics are almost trivial.  Reduce a bottleneck-a cost of transforming Canadian oil sands into refined products-you (a) reduce overall costs and increase output, and (b) reduce the margins of those who profit from the bottleneck.  If you increase output, prices fall, although the price impact depends on which side of the bottleneck you’re on: they fall more on the far side of the bottleneck than on the near side.

You’d think a hedge fund billionaire would know this.  So he’s either the dumbest hedge fund billionaire in captivity, or the most mendacious.

I’ll start making book on that bet.

Commodities are all about transformations in space, time, and form.  Keystone will reduce the cost of those transformations, which will inevitably-inevitably-lead to lower costs to consumers.

I would really like to hear Steyer respond to a simple question: “You think Keystone XL is bad bad bad bad bad because it will lead to increased output and consumption of those horrible fossil fuels and therefore increased output of CO2.  How is it possible that an increase in output and consumption will lead to higher prices?”

Do demand curves slope up in Tom Steyer’s world?  Is oil a Giffen good?

Who knew?!?

No.  We know the real story.  Steyer is being manipulative, and willing to say anything that will stoke political opposition to Keystone.  Knowing the sensitivity of the Median Voter to gasoline prices, he is trying to bamboozle said MV into opposing Keystone by scaring him (or her) into believing that it will raise Mr. (or Ms.) MV’s gas prices.

If he has to controvert the Law of Demand to do it-so be it.

To put it bluntly: there is no freaking way to reconcile Steyer’s opposition to Keystone based on its stimulating the production of Canadian tar sand oil with his claim that Keystone will raise gasoline prices in the US.  I am pretty sure that he knows that.  Which is why Steyer rhymes with liar.

товарищ Snowden or Señor Snowden? Time to Call Some Bluffs

Filed under: Military,Politics,Russia — The Professor @ 12:07 pm

Today Snowden officially applied for temporary asylum in Russia.  Given that the process takes months, can be renewed, and Snowden can leave the airport and travel in Russia while the application is pending, the operating assumption should be that he has de facto asylum in the Russian Federation, with Putin’s blessing.

This immediately raises the question: is it better for US interests for Snowden to have asylum in Russia, and reside there, or have asylum in and reside in Venezuela, Bolivia, Ecuador, or Nicaragua?

I think the answer is blindingly obvious: Far better Señor Snowden than господин Snowden (or, perhaps more accurately, товарищ Snowden).  The longer he is in Russian hands, the more information they can squeeze from him.  We have less ability to squeeze Russia, and Russia is geopolitically important whereas the Latin American countries are far less so, meaning that a standoff with them is less costly to the US than a standoff with Russia.

So the US should call several bluffs, simultaneously, by indicating that it will take no measures to interfere with Snowden’s travel to Venezuela, etc.

This would call Putin’s bluff.  He has claimed that he wants Snowden out, but that the US has imposed a blockade on his movements.  So Putin either comes off a liar (most likely outcome) or says hasta la vista, señor!  If Putin concocts some excuse to keep Snowden in Russia, we can respond accordingly.

This would call the bluffs of Venezuela, etc.  Easy to offer asylum when you think he can’t take it: not quite so easy when he might.

And it would call Snowden’s bluff.  He will be free to go to the Venezuelan or Bolivan or Ecuadoran or Nicaraguan embassies, or all of the above, and request asylum and obtain travel documents. Whether he does so will tell us whether  he the Russians’ prisoner, or their collaborator.

Everyone is supposedly hot to trot.  Snowden says he wants out of Russia.  Russia says it wants Snowden out.  The Latin Americans say they’re tickled to have him.  So this should all be resolved very quickly-if everyone is telling the truth, and not bluffing.  If it isn’t resolved quickly, we’ll have a far better idea of who is bluffing and what they are hiding, and we can act accordingly.

We can’t be worse off playing this strategy than by standing pat and maintaining the blockade, if one exists.  Snowden in Russia indefinitely is the worst outcome for the US.  If we say we’re standing back and not impeding Snowden’s travel, we can obtain information about the preferences and strategies of Putin, the Venezuelans, Snowden, etc.; put Putin in a more complicated situation; potentially deny information to the Russians; and increase the odds that we eventually apprehend him.

One last thing.  Snowden’s lawyer, Anatoly Kucherena (whom I wouldn’t trust as far as I could throw the Kursk), supposedly gave Snowden a copy of a Russian book of ABCs.  Word of advice Eddie: beware the false friends.

July 12, 2013

Edward Snowden: Victim of Stockholm Syndrome, or Willing Collaborator?

Filed under: Military,Politics,Russia — The Professor @ 7:01 pm

Edward Snowden emerged from hiding, briefly, to deliver a statement and meet with a group of representatives of human rights organizations.  The timing and location of, and audience for, his statement make it despicable beyond belief:

Yet even in the face of this historically disproportionate aggression, countries around the world have offered support and asylum. These nations, including Russia, Venezuela, Bolivia, Nicaragua, and Ecuador have my gratitude and respect for being the first to stand against human rights violations carried out by the powerful rather than the powerless. [Does this mean that human rights violations by the powerless are OK? If they’re powerless, how do they violate rights?] By refusing to compromise their principles in the face of intimidation, they have earned the respect of the world. It is my intention to travel to each of these countries to extend my personal thanks to their people and leaders.

Yes, Russia, that stalwart defender of human rights.  It would be funny if it wasn’t so sick.

Meeting with human rights organizations in a country which is strangling human rights organizations like a hungry python.  Which prosecutes-and persecutes-them as “foreign agents.”  Meaning, mainly, agents of the United States.  So I guess that makes it just hunky dory with Eddie.

But they’re softies!  At least according to Prosecutor General Yury Chaika, who is calling for an intensification of pressure on NGOs:

Russia’s chief prosecutor this week stepped up pressure on nongovernmental organizations, publicly denouncing their violations of a restrictive new law and accusing Kremlin human rights advisers of serving “foreign agents.”

On Tuesday, Prosecutor General Yury Chaika told President Vladimir Putin that 215 NGOs had failed to register as foreign agents despite aNovember law obliging them to do so if they have foreign funding and engage in political activity.

A day later, Chaika told Russia’s upper house of parliament that even Putin’s own human rights council included “four representatives of non-commercial organizations that perform the functions of a foreign agent” and three more who did so before the law took effect. He did not specify whom he meant or what precisely they had done.

. . . .

In his address to the Federation Council on Wednesday, Chaika singled out Golos, as well as human rights group Memorial, saying they had channeled funding through an elaborate network of fronts in order to shirk the registration requirement.

Chaika also implicated the US, British and German embassies, among others, in funding “17 organizations engaging in political activity, in violation of the 1961 Vienna Convention.”

Those organizations, he said, had “interfered in our country’s politics and violated commonly accepted norms of international law.” He did not name the organizations.

In his meeting with Putin, Chaika said practically no groups had registered as foreign agents: “The registry is empty.”

Last week, Putin reiterated his stance regarding foreign-funded NGOs at a meeting with members of his human rights council.

“If people engage in domestic politics and receive money from abroad,” the president said, “society has the right to know what that organization is and whose money is funding it.”

So yeah, Russia is all about human rights.  These are the people Snowden praises.

But it’s even worse, given the timing.

Yesterday, a Russian court sentenced posthumously a real whistleblower to 9 years of imprisonment, Sergei Magnitsky.  A man brutalized and murdered by representatives of the very government that Snowden lauded today.  Has he no shame?

And I could go on.  And on.  And on.

Snowden is asking for temporary asylum from Russia, until he can make his way to some other avatar of human rights, like, say, Venezuela.  It seems that Snowden’s definition of human rights is anything that protects the rights of one human who goes by the name of Edward J. Snowden.  As for anybody else?  Well, they’re just not that important in the scheme of things.  The prosecution of one man is a tragedy, the prosecution of many is a statistic, apparently.

In his attempt to walk the fine line in dealing with US fury at their sheltering of Snowden, Putin conditioned asylum on Snowden’s agreement not to do anything that damages the US.  No problem! says Snowden: he hasn’t done anything to hurt the US.  Because, of course, he’s the Omniscient Conscience of the World, so if he says so, it must be true.

The most charitable interpretation of Snowden’s performance is that he is suffering from extreme Stockholm Syndrome, sucking up to his Russian “hosts” out of self-preservation.  More malign interpretations are as plausible, or more so.  For instance, his obsession with damaging the US makes him willing to cooperate with anyone, including egregious human rights violators like Russia.  If this is the case, one wonders whether his willingness to do so developed in Moscow (reinforced by his rather craven obsession with self-preservation of his grandiose self), or whether he has been working with-or for-them for some time.  After all, he contacted Poitras and Greenwald before he took the Booz Allen Hamilton job with the specific intent of stealing and disclosing highly classified information: might he have contacted the Russians too?   (The latter is a theory advanced by Catherine Fitzpatrick, who has legitimate human rights cred, by the way.)

Snowden’s grandiosity and narcissism are so intense that he is willing to laud a government that is systematically strangling human and civil rights as a great champion of human rights.  I would call that loathsome, but that word seems entirely inadequate.

July 11, 2013

Where Have You Read This Before?

Filed under: Clearing,Derivatives,Economics,Financial Crisis II,Politics,Regulation — The Professor @ 7:25 pm

Marco Dialosa of the Pension Insurance Corporation echoes some SWP clearing themes in an interview on (sorry we didn’t connect in London last month, Julia):

Q. Given the liquidity squeeze that will result from CCP clearing, where do you see the liquidity coming from?

A. We believe that the amount of high quality liquid assets on balance sheets will increase. We see the repo market as a mean to provide liquidity for cash variation margins. What is less clear at this stage is whether the repo market is the right place for collateral transformation and how this market will behave in times of stress. One of the unintended consequences of the clearing initiative is that it may be transferring systemic risk away from the OTC world into the repo market.

Q. Does the movement of systemic risk away from OTC world and into the repo market an unintended consequence concern you or do you view it as just inevitability?

A. It is an unintended consequence in our view. The OTC market is akin to an ecosystem, it is in a stable equilibrium. A small change in a particular parameter (i.e. central clearing) will be corrected by some negative feedback that will bring the parameter back to its original point of balance. It is extremely difficult to eliminate systemic risk in practice without disrupting the balance of the whole system.

Just so.  Most of the effects of clearing mandate are to redistribute risk, not to reduce it.  Moreover, the equilibrium in the system will adjust in response to an exogenous policy shift: the “negative feedback” will attempt to find a way to replicate the old equilibrium as closely as possible, given the constraints imposed by the new rule or regulation.

In other words: you need to take a systemic approach to analyzing systemic risk.  You have to understand how a change imposed on one part of the system is going to be transmitted to other parts of the system, and how those other parts are going to respond to this impulse.   Systems achieve a particular configuration for particular reasons, and it is very difficult to change these configurations fundamentally.  The particular reasons that led to its particular configuration lead to the negative feedbacks that Dialosa mentions.  And a good thing too.  Negative feedback is a stabilizing force.

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