Streetwise Professor

One of the great myths of commodity futures trading is the “roll return,” which Bloomberg writes about here (bonus SWP quote–but he left out the good stuff!, so I’ll have to fill that in here). Consider the oil market, which is currently in a contango, with the November WTI future ($45.99/bbl) trading below the December ($46.52/bbl). This is supposedly bad for those with a long ETF position, or an index position that includes many commodities in contango, because when the position is “rolled” forward in a couple weeks as the November contracts moves towards expiration, the investor will sell the November contract at a lower price than he buys the December, thereby allegedly causing a loss. The investor could avoid this, supposedly, by holding inventory of the spot commodity.

The flip side of this allegedly occurs when the market is in backwardation: the expiring contract is sold at a higher price than the next deferred contract is bought, thereby supposedly allowing the investor to capture the backwardation, whereas since spot prices tend to be trending down in these conditions, holders of the spot lose.

This is wrong, for two reasons. First, it gets the accounting wrong, by starting in the middle of the investment. The profit or loss on the November crude futures position depends on the difference between the price at which the November was sold in early October and bought in early September, not the difference between the price at which the November is sold and the December is bought in early October. Similarly, in November, the P/L on the December position will be the difference between sell and buy prices for the December futures, not the difference between the prices of the December and January futures in early December.  You need to compare apples to apples: the “roll return” compares apples and oranges.

On average and over time, the investor engaged in this rolling strategy earns the risk premium on oil (or the portfolio of commodities in the index). This is because the futures price is the expected spot price at expiration plus a risk premium. The rolling position receives the spot price at expiration and pays the expected spot price at the time the position is initiated, plus a risk adjustment. On average the spot price parts cancel out, leaving the risk premium.

Second, the expected change in the price of the spot commodity compensates the holder for the costs of carrying inventory, which include financing costs (very small, at present), and warehousing costs, insurance, etc. Net of these costs, the P/L on the position includes a risk premium for exposure to spot price risk, and in a well-functioning market, this will be the same as the risk premium in the corresponding future.

Moving away from commodities illustrates how the alleged difference between a rolled futures position and a spot position is largely chimerical. Consider a position in S&P 500 index futures when the interest rate is above the dividend yield. (Yes, children, that was true once upon a time!) Under this condition, the S&P futures would be in contango, and there would be an apparent roll loss when one sells the expiring contract and buying the first deferred. Similarly, comparing the futures price to the spot index at the time the future is bought, the future will be above the spot, and since at expiration the future and the spot index converge to the same value, the future will apparently underperform the investment in the underlying. But this underperformance is illusory, because it neglects to take into account the cost of carrying the cash index position (which is driven by the difference between the funding rate and the dividend yield). When buys and sells are matched appropriately, and all costs and benefits are accounted for properly, the performance of the two positions is the same.

Conversely, in the current situation using the roll return illogic, the rolled position in S&P futures will apparently outperform an investment in the cash index, because the futures market is in backwardation. But this backwardation exists because the dividend yield exceeds the rate of financing an investment in the cash index. The apparent difference in performance is explained by the fact that the futures position doesn’t capture the dividend yield. Once the cost of carrying the cash index position (which is negative, in this case) is taken into consideration, the performance of the positions is identical.

Back in 1992, Metallgesellschaft blew up precisely because the trader in charge of their oil trading convinced management that a stack-and-roll “hedging” strategy would make money in a backwardated market, because he would be consistently selling the future near expiration for a price that exceeded the next-deferred that he was buying. This “logic” was again comparing apples to oranges. By implementing that “logic” to the tune of millions of barrels, Metallgesellschaft became the charter member of the billion dollar club–it was the first firm to have lost $1 billion trading derivatives.

So don’t obsess about roll returns or try to figure out ways to invest in cash commodities when the market is in a contango/carry. Futures are far more liquid and cheaper to trade, so if you want exposure to commodity prices do it through futures directly or indirectly (e.g., through ETFs or index funds). Decide on the allocation to commodities based on the risk it adds to your portfolio and the risk premium you can earn. Don’t worry about the roll. If you decide that commodities fit in your portfolio, laissez les bon temps roullez!

Today Obama vetoed a bill that would permit families of those who perished on 911 to sue the Saudi Arabian government for supporting the hijacker/murderers. Earlier this week, the Senate defeated an effort led by Rand Paul to halt arms sales to the kingdom because of its ongoing war in Yemen.

The Saudis are feeling the pressure and are trying desperately to change the subject–to Iran. The gravamen of the Saudi case is that Iran is a major state sponsor of terrorism. There is, of course, something to this. Iran has indeed been a state sponsor of terrorism, and has directed its campaign against the United States and Israel for decades.

But it is more than a little disgusting to hear the Saudis cast aspersions about terrorism. The modalities of Iranian efforts differ from those of Saudi Arabia. But it is indisputable that Saudi Arabia is responsible for more terrorism that has killed more Americans than the Iranians have been.

Indeed, Iran’s methods are in many ways more conventional and less insidious than those emanating in Saudi Arabia. Iranian terrorism (and unconventional warfare) efforts are indeed carried out at the direction of state organs, and often work through quasi-state organizations (such as Hezbollah). In contrast, the archaic nature of the Saudi state, with its immense royal family with numerous wealthy members, means that the concept of “state support” is much more amorphous. Saudi Arabia is not a state in the western sense, or even in the Iranian sense. This makes Iran in some respects a much more conventional adversary than Saudi Arabia.

Furthermore, Saudi Arabia’s contribution to terrorism around the world has been demonstrably far greater than Iran’s. The funding of Wahhabi mosques and madrassas throughout the Middle East, Southwest Asia, the Balkans, Africa, and the Caucasus–and Europe and the United States–has inculcated the poisonous Islamist ideology that has created terror. Most of this money has not been spent to support explicitly terrorist groups or terrorist acts. But it has created the ideological and religious infrastructure that has been the catalyst for these groups and acts. However bad as Iran has been, objectively speaking Saudi Arabia and other oil tick states of the Gulf have been far worse. With allies like these, we need no enemies.

Furthermore, the diffuse and ideological nature of the Saudi support for terrorism makes it much more difficult to combat than Iran. Not to say that Iran is an easy adversary, but the very fact that it is a fairly conventional (if revolutionary) state makes it a more addressable foe than Saudi Arabia. The Saudi state may not support terrorism in the same way that the Iranian state does (though it might), but that actually greatly complicates the task of the terrorism that emanates from Saudi territory, Saudi citizens, and Saudi money.

One can sense that the Saudis feel that they are facing an existential crisis, fed in large part by Obama administration policy towards Iran. The Iranian nuclear deal and the lifting of sanctions has stoked these anxieties. The Saudis are deeply insecure, in part because there is a large and alienated Shia population in the major oil producing provinces. Iran is a larger and more educated country that has dominated its Arab neighbors for centuries. Low oil prices have gutted the Saudi economy and are placing tremendous budgetary strains on the country.

Fear of Iran drives the bloody–and (typically for an Arab army)–inept and indecisive war in Yemen, in which Saudi Arabia has succeeded in using American technology to kill large numbers of Yemenis (including numerous civilians) with no discernible strategic effect. It also drives the strong Saudi support for the opposition in Syria, because the Saudis view Assad as an Iranian vassal who is an important part of an “Shia crescent” that threatens the Sunni countries of the Middle East, of which Saudi Arabia considers itself the leader: it is clearly their paymaster. The Saudis being Saudis, they have no qualms in supporting extreme jihadist elements: indeed, that is their preference.

This demonstrates the drooling incoherence of Obama policy in the Middle East. Empowering Iran through the nuclear deal has fed Saudi fears that lead them to intensify their various proxy wars against Iran, and the administration has responded by supporting the Saudis in these wars, quite robustly in Yemen, more equivocally in Syria. If the Saudis succeed in Syria this will empower Salafist elements that are viciously anti-American. In essence, the Obama administration has succeeded in stoking both sides in the conflict, which helps explain its clear escalation in the past two years.

The Saudis have oil–the largest reserves in the world. That is the American–and world–interest in Saudi Arabia. But (a) the Saudis want to sell their oil, and (b) protecting the Saudi oil fields does not necessitate supporting or even acquiescing to Saudi Arabia’s support for Wahhabist radicalism that is spreading death and destruction from Southeast Asia to Central Africa and pretty much everywhere in between–and even to the shores of the United States.

Indeed, US policy should be aimed at finding how to contain Saudi influence, rather than enable it. But old mindsets and Saudi money have prevented that. In the 1970s and 1980s, the Saudis insinuated themselves as allies of the US, united with us against common enemies: Iran and the Soviet Union. I remember distinctly that in the aftermath of the Iranian Revolution, and during the Hostage Crisis, the Saudis portrayed themselves as the moderate Muslims, and the Iranians as the radicals. With Americans held in Tehran, and mobs in the streets shouting “Death to America,” that sounded plausible. Nigh on to 40 years of painful experience have shown, however, that Saudi Arabia is anything but the voice of moderate Islam: it is the wellspring of violent radicalism.

Furthermore, the Soviet Union is no more. Whatever geopolitical rationale there was for supporting Saudi funding of Muslim fighters in the 1980s, it has long past, and in retrospect, looks like the benefits that we gained were not worth the decades of terror that came in the bargain.

In sum, indulgence of Saudi radicalism was based on ignorance of their true character which we should now be well past, and on a strategic situation that no longer exists. The time for indulgence is therefore long over.

But Saudi money has bought influence. It has bought politicians, of both parties: it was nauseating, for example, to see Lindsey Graham’s impassioned defense of Saudi Arabia in his speech against the Paul bill, and of course the Saudis have lavished money on ex-presidents from both parties and potential future ones (namely Hillary). It has bought think tanks. It has deeply corrupted American politics. It is therefore highly doubtful that its influence can be easily purged.

That’s why it has been encouraging to see the the Paul bill go as far as it did, and to see the 911 victims bill pass. Yes, I understand that the concerns that the logic of the the bill could be turned against the US. But it should be a wake up call to DC that many Americans understand the nature of the Saudi regime and the threat that it poses far better than the foreign policy establishment. A wise administration would attempt to find an alternative that would address the sovereign immunity concerns but at the same time make Saudi Arabia pay a price for its multifaceted support for Islamic radicalism and Islamic terrorism around the world. Instead, Obama caves to the Saudis and vetoes the bill, and fights against the Paul bill, and enables Saudi efforts in Yemen and Syria.

Iran is a problem, but it is a nation that can be confronted and contained (if not easily tamed) using conventional American power. Saudi Arabia poses problems that we have yet to find a solution to. And our biggest problem is that we (or at least our “elite”) haven’t even fully acknowledged that it is a problem, in large part because Saudi money has suborned our politics.

If there is a more conceited, self-important group of twits than the national news media I am not aware of it. Its members view themselves as the arbiters of American politics. They make the rules, and enforce them. And woe betide anyone who dares defy them. Especially after they broke Nixon, they believe they can even get presidents to bend to their will. Presidents come and go, after all. The media is there forever.

Today they thought they were going to break Trump. After Trump announced an event at his hotel in DC, and intimated that he would make a statement on the Obama birther issue, the press let its imagination run wild. They believed–get this–that Trump would hold an event at his own hotel where his name and image are everywhere (including on the bottles of water in the fridges!) and abase himself before them, confessing his sins about insinuating that Obama had not been born in the US and subjecting himself to a barrage of their gotcha questions.

This tells you just how far up their own colons they live. It also tells you how clueless they are. Trump has shown time and again that he does not play by the conventional rules of DC, the rules that the national media presumes to enforce, and that he has zero deference for the media: he uses them, rather than the other way around. He has shown time and again that he makes his own rules. And so he did today. He did not just puncture the media’s presumptions. He stomped, crushed, mangled, spindled and mutilated them. Then emptied his bladder on them for good measure.

As it played out in reality, as opposed to the imaginations of the national media, his event was mainly rah-rah about his new real estate project. Further he trotted out dozens of retired flag officers and war heroes to provide backdrop. Then, after promoting his project, at the very end of his appearance, he said:

Hillary Clinton and her campaign in 2008 started the birther controversy. I finished it. You know what I mean. President Barack Obama was born in the United States, period. Now we all want to get back to making America strong and great again.

So not only did he not don (no pun intended!) sackcloth and ashes and beg forgiveness for being a birther he said he ended birtherism and that Hillary started it. Political jujitsu of the first order.

The noise you heard this afternoon was thousands of media heads exploding. Just Google something like “Trump birther press conference” and you’ll see outraged article after outraged article. “We were played. We were Rick Rolled.” And on and on and on.

The press pool stamped their little feet and held their breath, and not only vowed not to show the pool footage of the event, but to erase it. That’ll learn him!

Er, another indication of the media’s failure to recognize that the world has changed. They are no longer the gatekeepers. They cannot decide who sees what. There are other recordings of the event. There are numerous other channels–YouTube, Twitter, etc.–through which those recordings can spread. Their outraged articles and on-air rants will only intensify the Banned in Boston/Streisand Effect and will ensure that the attempt to censor will only make more people want to see it. It will go viral.

Yet another indication of the media’s obliviousness: they actually believe that people will care that Trump has affronted their amour propre. As if. Rather than sympathizing with the media for being tricked by Trump, far more people will indulge in schadenfreude. The media are heartily disliked by vast swathes of Americans, who will enjoy nothing more than witnessing them getting their comeuppance precisely at the moment that they thought they would demonstrate their dominance.

This episode is another illustration of (a) elite failure, and (b) the dramatic change in political norms. The elite establishment is offended that Trump does not obey their rules. But to a very large number of Americans–whom Hillary slurred as “deplorables,” an epithet that many have now embraced with pride–this is precisely Trump’s appeal. They think the rules are rigged against them. They don’t want no water: they want somebody to burn the motherf*cker down.  These people believe the elite has failed them, and what’s more, the elite has failed to recognize it: a double failure, and perhaps a fatal one.  They revel in the humiliation of the elite.

The pre-Brexit dynamic was very similar, and we saw what happened there. The old verities are cracking. The old rules are being flouted. The old rulers are despised. And they just don’t get it, and don’t know how to handle it.

This is an ominous moment for the media. Not only were they frustrated by Trumps failure to bend to their rules, his in-your-face demonstration that you can break the rules and survive will encourage others to do the same. In large part, the media’s power is predicated on the deference of politicians. Lose that deference, and the power is lost. So this is not just about the 2016 election. It is about elections after that. Perhaps Trump is a one-off. But success breeds imitators. Trump has successfully broken the rules, and that could lead to their demise.

CFTC Chair Timothy Massad has come out in support of a one year delay of the lowering of the de minimis swap dealer exemption notional amount from $8 billion to $3 billion. I recall Coase  (or maybe it was Stigler) writing somewhere that an economist could pay for his lifetime compensation by delaying implementation of an inefficient law by even a day. By that reckoning, by delaying the step down of the threshold for a year Mr. Massad has paid for the lifetime compensation of his progeny for generations to come, for the de minimis threshold is a classic analysis of an inefficient law. Mr. Massad (and his successors) could create huge amounts of wealth by delaying its implementation until the day after forever.

There are at least two major flaws with the threshold. The first is that there is a large fixed cost to become a swap dealer. Small to medium-sized swap traders who avoid the obligation of becoming swap dealers under the $8 billion threshold will not avoid it under the lower threshold. Rather than incur the fixed cost, many of those who would be caught with the lower threshold will decide to exit the business. This will reduce competition and increase concentration in the swap market. This is perversely ironic, given that one ostensible purpose of Frankendodd (which was trumpeted repeatedly by its backers) was to increase competition and reduce concentration.

The second major flaw is that the rationale for the swap dealer designation, and the associated obligations, is to reduce risk. Big swap dealers mean big risk, and to reduce that risk, they are obligated to clear, to margin non-cleared swaps, and hold more capital. But notional amount is a truly awful measure of risk. $X billion of vanilla interest rate swaps differ in risk from $X billion of CDS index swaps which differ in risk from $X billion of single name CDS which differ in risk from $X billion of oil swaps. Hell, $X billion of 10 year interest rate swaps differ in risk from $X billion of 2 year interest rate swaps. And let’s not even talk about the variation across diversified portfolios of swaps with the same notional values. So notional does not match up with risk in a discriminating way.  Further, turnover doesn’t measure risk very well either.

But hey! We can measure notional! So notional it is! Yet another example of the regulatory drunk looking for his keys under the lamppost because that’s where the light is.

So bully for Chairman Massad. He has delayed implementation of a regulation that will do the opposite of some of the things it is intended to do, and merely fails to do other things it is supposed to do. Other than that, it’s great!

When I was in Singapore last week I spoke at the FT Asia Commodities Summit. Regardless of whether the subject was ags or energy or metals, China played an outsized role in the discussion. In particular, participants focused on China’s newish “supply side” policy.

There is little doubt that the policy–which focuses on reducing capacity, or at least output in steel, coal, and other primary industries–has had an impact on prices. Consider coking coal:

Coking coal, the material used by steelmakers to fire their blast furnaces, has become the best performing commodity of 2016 after surging more than 80 per cent over the past month on the back of production curbs and flooding in China.

Premium hard Australian coking coal delivered to China hit $180.9 a tonne on Friday, this highest level since price reporting agency Steel Index began publishing assessments in 2013. It has risen 131 per cent since the start of the year, outpacing gold, silver, iron ore and zinc — other top performing commodities.

The main driver of the rally — which has also roiled thermal coal — is Beijing’s decision to restrict the number of working days at domestic mines to 276 days per year from 330 previously.

This policy is aimed at the improving the profitability of producers so they can repay loans to local banks. But it has reduced output and forced traders and steel mills to buy imported material from what is known as the seaborne market.

80 percent. In a month.

Or thermal coal:

Newcastle thermal coal is heading for the first annual gain in six years as China seeks to cut overcapacity and curb pollution. While the timing of the output adjustment is unavailable, it may start in September or October after recent price gains, Citigroup said in the report dated Sept. 8. Bohai-Rim is 26 percent higher from a year ago, when it was 409 yuan, while Newcastle has climbed as much as 40 percent this year.

The phrase “supply side reform” actually fits rather awkwardly here, at least to a Western ear. That phrase connotes the reduction of regulatory and tax burdens as a means of promoting economic growth. But Supply Side Reform With Chinese Characteristics means increasing the government’s role in managing the economy.

A better description would be that this is The New Deal With Chinese Characteristics. FDR’s New Deal was largely a set of measures to cartelize major US industries, in an effort to raise prices. The economic “thinking” behind this was completely wrongheaded, and motivated by the idea that there was “ruinous competition” in product and labor markets that required government intervention to fix. Apparently the higher prices and wages were supposed to increase aggregate demand. Or something. But although the New Deal foundered on Constitutional shoals only a few years after its passage, in its brief existence it had proven to be an economic nightmare rent by contradictions. For instance, if you increase prices in an upstream industry, that is detrimental to the downstream sector for which the upstream industry’s outputs are inputs. According to scholarship dating back to Milton Friedman and Anna Schwartz, and continuing through recent work by Cole and Ohanian,  interference in the price mechanism and forced cartelization slowed the US’s recovery from the monetary shock that caused the Great Depression.

The motivation for the Chinese policy is apparently not so much to facilitate the rationalization of capacity in sectors with too much of it, but to increase revenue of firms in these sectors in order to permit them to pay back debt to banks and the holders of wealth management products (which often turn out to be banks too). Further, the policy is also driven by a need to sustain employment in these industries. Thus, the policies are intended to prop up the financially weakest and least efficient companies, rather than cull them.

So step back for a minute and contemplate what this means. Through a variety of policies, including most notably financial repression (that made capital artificially cheap) and credit stimulus, China encouraged massive investment in the commodities and primary goods sectors. These policies succeeded too well: they encouraged massive over-investment. So to offset that, and to mitigate the financial consequences for lenders, local governments, and workers, China is intervening to restrict output to raise prices. Rather than encouraging the correction of past errors, the new policy is perpetuating them, and creating new ones.

Remind me again how China’s government got the reputation as master economic managers, because I’m not seeing it. This is an example of a wasteful response to wasteful over-investment: waste coming and going. Further, it involves an increase in government intervention, which obviously has those in favor a more liberal (in the Smithian sense) free market policy rather distraught, and which foreshadows even more waste in the future.

The policy is also obviously fraught with tensions, because it pits those consuming primary and intermediate goods against those producing them–and against the banks who are now more likely to get their money back. That is, it is a backdoor bank (and WMP) bailout, the costs of which will be borne by the consumers of the goods produced by industries that were supersized by past government profligacy.

Ironically, the policy also stokes something that the government purports to hate: speculation. Policy volatility encourages speculation on the goods and industries affected by these policies. The large movements in prices in the coal and iron-steel sectors in response to policy changes provide a strong incentive to speculate on future policy changes.

Further, it creates the potential for moral hazard in the future. Future lenders (and purchasers of WMP) will look back on this policy and conclude that the government may well undertake backdoor bailouts if the companies they have lent to run into difficulties. This is hardly conducive to prudent lending and investment.

This is not foresighted policy. It is extemporizing to fix near-term problems, most of which were created by past measures to fix near-term problems. There is a Three Stooges aspect to the entire endeavor.

Of course, it’s an ill wind that blows no one any good. Glencore is no doubt very grateful for Chairman Xi’s heavy-handed policy intervention. It has probably played a larger role in bringing the company back from the brink than did the company’s prudent efforts to cut debt. But it is probably too late, alas, for Peabody Coal, and Arch Coal, and all those “coal people” whom former empathizer in chief Bill Clinton mocked last week. The ingrates!

The bottom line is that China is the 800 pound gorilla of the commodity markets, and shifts in its policies can lead to huge moves in commodity prices. Given that these policy shifts are driven by the crisis du jour (e.g., commodity producer shakiness threatening to make banks and local governments shaky) rather than good economics, and that these policy shifts are difficult to predict given the opacity and centralization of Chinese decision making, they add to substantial additional volatility in commodity prices and commodity markets: who can read the gorilla’s mind (which he changes often)?, and woe to those who read it wrong.

The Washington Post has had just quite enough of this Hillary email stuff, thank you, and has sent out the Official Narrative, in the form of an editorial:

JUDGING BY the amount of time NBC’s Matt Lauer spent pressing Hillary Clinton on her emails during Wednesday’s national security presidential forum, one would think that her homebrew server was one of the most important issues facing the country this election. It is not. There are a thousand other substantive issues — from China’s aggressive moves in the South China Sea to National Security Agency intelligence-gathering to military spending — that would have revealed more about what the candidates know and how they would govern. Instead, these did not even get mentioned in the first of 5½ precious prime-time hours the two candidates will share before Election Day, while emails took up a third of Ms. Clinton’s time.

. . . .

Ms. Clinton is hardly blameless. She treated the public’s interest in sound record-keeping cavalierly. A small amount of classified material also moved across her private server. [Not so much rat in it!] But it was not obviously marked as such [er, so?, and is she so stupid that she needs a BIG BOLD LETTERS TO TELL HER WHAT IS CLASSIFIED?], and there is still no evidence that national security was harmed. Ms. Clinton has also admitted that using the personal server was a mistake. The story has vastly exceeded the boundaries of the facts.

It is beyond ironic that the Washington Post, of Watergate fame, has forgotten the main lesson of that scandal–a lesson it first drew and has pushed repeatedly over the years: it’s not the crime, it’s the coverup. Watergate was a “two bit burglary” that blew up into a presidency-ending national crisis because of Nixon’s efforts to conceal. That Nixon was capable of such conduct was widely believed even before it was proved precisely because of his longstanding reputation for dishonesty and trickery.

What makes the email controversy so damaging to Hillary is not so much the emails themselves (though I take issue with the WaPo’s attempt to sanitize and minimize their import), but the barrage of lies that she has unleashed in an attempt to explain her conduct. The lies are transparently such to those who have an even passing familiarity with the facts. Further, Hillary is such a bad liar that her deceit is likely obvious to many who don’t.  Adding to this is the fact that Hillary’s shiftiness on the email issue reinforces her longstanding Nixonesque reputation as a power-hungry liar. Hence, the longer the email controversy drags on, the lower Hillary’s trustworthiness ratings (never high to begin with) plunge.

Furthermore, that Hillary feels compelled to lie indicates to many that there must be something to hide. Meaning that the lies give the lie to the WaPo’s claim that there is nothing to see here, and we should all move on.

This is why the WaPo and the NYT and a phalanx of establishment journalists savage Matt Lauer and anyone else who asks her about the emails, and why they are so frantic to rule the issue over, done, irrelevant, and out-of-bounds. Every question about the subject obligates her to tell another lie–or lies, plural–further cementing her pantsuit-on-fire image. So the questions must stop! Now!

This may succeed in getting Matt Lauer’s mind right, and the minds of others who want to remain accepted members of the tribe. But this reveals yet another problem with the WaPo’s editorial: it reads like yet another diktat from the Better Thans to the Lesser Thans, instructing them on what to think. Once upon a time that might have worked. But truth be told (though not by Hillary!) these days the Lesser Thans have a very low opinion of the Better Thans, and are more likely to bridle at such attempted instruction, rather than knuckle under. The Brit Better Thans tried to do the same thing, and were rewarded with a stinging Brexit rebuke.

In other words, in the face of populist unrest, presumptuous patrician instruction is likely to have the opposite of the intended effect.

But what else have they got? They go with what they know. And the pronouncements to “pay no attention to the server behind the curtain” betray more than a little establishment panic. The media and political elites are clearly more than a little unnerved by the fact that Hillary has had no more success shaking off Trump than she has had shaking off that racking cough.

In addition to playing defense (“no more email questions!”) the media and the Democratic establishment are playing offense against Trump. Bizarrely, their main weapon in this attack is Putin. I see no evidence that these increasingly frenzied assaults are having the slightest effect. Part of the reason for that is post-Cold War, the vast majority of Americans don’t give a damn about Russia, and couldn’t care less what Putin does to his own country, or even to countries on his borders. But there is another reason as well: the sudden emergence of Putin as a Democratic bogeyman seems more than a little insincere.

Well, it seems outrageously insincere, actually, to anyone with a memory that stretches back four years, or seven. Go back seven years, and you come across the image of  a buffoonishly grinning Hillary pressing the reset button with Lavrov, and announcing a new age of Russia-US relations. Go back a mere four years, and you see the same people screeching about Putin now ridiculing Romney for suggesting that Russia and Putin are a threat. Go back four years, and you see these people seeing nothing amiss in Obama whispering a Message to Vladimir to Dmitri Medvedev:

President Obama: On all these issues, but particularly missile defense, this, this can be solved but it’s important for him [Putin!] to give me space.

President Medvedev: Yeah, I understand. I understand your message about space. Space for you…

President Obama: This is my last election. After my election I have more flexibility.

President Medvedev: I understand. I will transmit this information to Vladimir.

So, in 2012 the people now claiming Putin is the evil puppet master who will jerk Trump’s strings were totally fine with Obama canoodling with selfsame Putin, and snarked at Romney “the 80s called and want their [Cold War] foreign policy back” when he claimed that Putin was a threat.

So were they clueless in 2012? If so, will they man up and admit it? Or are they opportunistic now? (Personally, I’m going with “both.”)

Hillary is still the likely winner, but it is far too close for comfort for the elite media and the political establishment (primarily on the Dem side, but not exclusively so). So the drones are swarming to defend the queen. But I seriously doubt that their Putin sting is all that venomous, and if I am right Hillary may well be frustrated in her ambition. If that happens, no head in throwing distance of a lamp will be safe.

I am on my last day in Singapore, where I participated in the rollout of Trafigura’s Commodities Demystified hosted by IE Singapore.  The event was very well attended (an overflow crowd) and the presentation and new publication (which builds off the conceptual framework of my 2013 white paper The Economics of Commodity Trading Firms) was well-received. It helps fill a yawning gap in knowledge about what commodity traders are and what they do.

In addition to that event, I spoke as a panelist at the FT’s Commodities Asia Summit. One of the main speakers was Charles Li, CEO of Hong Kong Exchanges and Clearing, who laid out his ambitions for plans in mainland China. Things started out well. Whereas expectations were that HKEx would create a modest spot metals trading platform in China (because it doesn’t have and is unlikely to receive a license for trading futures), Li stated that HKEx (which owns the LME) would attempt to create a “lookalike” LME metals warehousing system. In the aftermath of the Qingdao fiasco this could be a very salutary development.

I would suggest caution, however. This may be easier said than done. While Li was describing this, my mind immediately turned to a paper I wrote over 2 decades ago about the successes and failures of commodity exchanges. One of the signal failures occurred when the Chicago Board of Trade attempted to tame the depredations of grain warehouses in the 1860s. Public storage was rife with all sorts of fraud and illicit dealing. The quality and quantity of grain being stored was a mystery, and warehousemen played all sorts of games to exploit their customers. The CBT, acting in the interests of traders who relied on the warehouses, attempted to impose rules and regulations on them, but failed utterly. Eventually the State of Illinois had to pass legislation to rein in some of the warehousemen’s more outrageous actions. Furthermore, larger traders integrated into warehousing, and eventually public storage became primarily ancillary to futures trading (i.e., to facilitate delivery against futures).

The CBT’s problem is that it did not have an adequate stick to beat the warehousemen into compliance. They were kicked out of the exchange, but the gains of being able to trade futures were smaller than the gains from operating warehouses outside the CBT’s rules.

Public warehousing has proved problematic in commodities to the present day. The LME’s travails with aluminum warehousing are just one example, but others abound in commodities including coffee, cocoa, and cotton. In cotton, for instance, even though warehouses are subject to federal regulation, there are chronic complaints that warehousemen do not load out cotton promptly, in order to enhance storage revenues.

So I wish Mr. Li luck. He’ll need it, especially since lacking the ability to deny those violating the warehouse rules from futures trading, he won’t even have the stick that proved inadequate for the CBT. Public warehousemen has long proved to be a very recalcitrant group, over time, place, and commodity.

Li specifically criticized the speculative nature of China’s futures exchanges, and claimed that his new venture would be for physical players, and that it would not be “another financial speculation forum.” But his follow on remarks gave a sense of cognitive dissonance. He said the system would allow banks and hedge funds to participate in the market.

More disconcertingly, he highlighted the effects of financial repression in China (without using the phrase), which leads investors looking for higher returns than are available in the banking sector to turn to alternative investment vehicles. Li specifically mentioned wealth management products, and suggested that metals stored in the warehouses his new venture would oversee could form the basis for such products. I understood him to say that while the warehouses would facilitate the typical function of commodity storage, i.e., filling and emptying in order to accommodate temporary supply and demand shocks, there would also be the possibility that metal would be locked up for long periods to provide the basis for these wealth management products. What I envision is something like physical metal ETFs that have been introduced in the West. These are primarily in precious metals. JP Morgan proposed a similar vehicle for copper, but backed off due to the pressure from Carl Levin and others a couple of summers ago.

In other words, the new warehousing system would be part of the shadow banking system thereby providing a new speculative vehicle for Chinese investors desperate to circumvent financial repression. Hence my cognitive dissonance.

I would also note that even a purely physical spot exchange can be a speculative venue, through buying and selling and borrowing/carrying warehouse receipts. The New York Gold Exchange of Black Friday infamy was hugely speculative, even though it was purely a spot physical exchange.

I also heard Li to say that the venture would guarantee transactions, though I didn’t fully catch what would be guaranteed. Would the exchange be insuring those storing their metal against a Qingdao type event? If so, that’s a pretty audacious plan, and one fraught with risk.

This was just a speech at a conference. It will be interesting to see a fully-fleshed out plan. It will be particularly interesting to see how the enforcement mechanism for the warehouse regulation will work, and it will be especially particularly interesting to see whether this venture is indeed just viewed as a mechanism for improving the efficiency of the physical metals market in China, or whether it will be a clever way to tap into the intense interest of investors large and small in China to speculate and find better returns than those on offer in the banking system. That is, will this be another speculative venue, but one masquerading as a staid market for physical players. Given the way China works, I’d bet on the latter. Pun intended.

When it comes to condemning Hillary Clinton’s mendacity, I take second place to no one. But even I am stunned by the revelations in the holiday Friday FBI dump. The audacity of her mendacity is staggering.

Where even to begin? There is so much.

• The woman who was the primary classifying officer of the State Department claims ignorance as to the meaning of (C) (designating “confidential”)  at the beginning of paragraphs in various documents she reviewed, and which had passed through her server. During her interview with the FBI, she averred that it just was an alpha order designation. Which would make total sense, except these documents had no paragraphs designated (A), (B), (D), (E), etc., and had multiple (C)s. Maybe Hillary didn’t learn the A-B-C song as a child. The chutzpah required to say something so risible with a straight face is beyond measure.
• Said same classifying officer claimed she had no knowledge that the designation NOFORN meant not for distribution to foreigners.
• She claimed lack of memory for many details relating to her email, classified documents, etc., because of the concussion suffered in 2012. But if you dare question her health, you are a raving conspiracy loon. In a typically Clintonian fashion, she wants things both ways. She’s brain damaged when it helps her, she’s the smartest woman in the world when it helps her.
• She (again remembering that “she” was the designated classifying officer) said she trusted that her subordinates not to send her any classified information. She also claims she never sent any classified information. So we are to believe that the Secretary of State never had any communications that were relevant to the national security of the US, and would damage said security if released.
• Her original story was that she wanted a private server so she only had to deal with one device, e.g,. Blackberry. Turns out she had 8(!) at one time or another. Oh, and 5 fricking iPads. None of the devices have been recovered, and 2 of the iPads are AWOL. Supposedly at least two of the Blackberries were destroyed. With a hammer. By one of her flunkies. “If I had a hammer, I’d hammer my Blackberry in the morning, I’d hammer it in the evening, all over this land.” The other Blackberries? Who knows? Check eBay or DealDash.
• The movement of her material from the home server to the new bathroom server at Platte River Networks was a complete FUBAR. The material could not be moved remotely (as if that was secure). So a computer containing the email archive was shipped from NY to Colorado, but even then the transfer was not easy due to an Apple Mail-Microsoft Exchange incompatibility. So it was uploaded to Gmail, and then downloaded onto the PRN server. Totes secure. And some 900 of the messages remained on Gmail.
• But it gets better! The PRN drone shipped the laptop and a thumb drive containing the archive back to a Hillary staffer via UPS or USPS (he can’t remember which). They were never received. I should say allegedly never received, because you can never believe anything this lot says, especially when the disappearance is oh so convenient. Maybe they will reappear on a White House table in  5 years, like Rose Law Firm billing records.
• Late in 2014 Clinton consiglieri Cheryl Mills informed PRN that the email retention policy had changed (how convenient!). PRN was instructed to irrevocably delete all messages on the PRN server over 60 days old (which would include everything relevant from her time at State) using BleachBit. The drone at PRN did delete the email, but neglected to BleachBit them.
• After the NYT broke the story about the private server, and after the House had subpoenaed her emails, the PRN drone had a conversation with Clinton staffers. After realizing that he had deleted but not wiped the emails from the PRN server, he said “oh shit” (his words) and then merrily proceeded to BleachBit them. In full knowledge that they were under subpoena. The Clinton crowd will no doubt attempt to pin this all on him, but his come to Satan moment occurred after he had a conference call with Clinton staff. The inference is immediate.

I could go on (and on and on), but you get the idea. The sewer of lies, coverups, willful destruction of documents, and egregious breaches of national security is bottomless.

In a way, I am less livid at Hillary, Cheryl Mills, and that entire crowd. They are mendacious by nature. Slugs gonna do what slugs gonna do.

No, the objects of my greatest scorn are James Comey, the FBI, and the DOJ. They were obviously just going through the motions with this investigation. What the FBI grudgingly released only under pressure from the House reveals a pattern of conduct extending over years that would warrant indictment under either the statutory negligence standard, or even the fictitious intent standard that Comey invented to rationalize recommending no charges against her. The circumstantial evidence of intent screams out, from the day that the private server was first considered, to the day that it was wiped clean, to the day she told barefaced lie after barefaced lie to the FBI.

When someone destroys documents, the law is that the finder of fact should draw a negative inference about the content of those documents. One doesn’t destroy what makes one look good, so the logical inference is that the documents make one look bad. And here the inference is that Hillary intentionally flouted the law in order to shield her communications from any public scrutiny or oversight, in order to escape accountability for her actions.

But the FBI and the DOJ ignored all of this, and gave Clinton a pass. In so doing, they are accessories to and enablers of her mendacity and corruption. In so doing, they demonstrate that the system has been deeply corrupted. Perhaps irredeemably so. The powerful and protected get a pass. The rule of law has gaping exceptions that exempt the privileged. Accountability is an alien concept.

DC is an Augean Stables that would give pause to Hercules, if there was a Hercules in sight. But there’s not. So the shit just gets deeper by the day.