Streetwise Professor

June 28, 2018

A Tarnished GEM: A Casualty of Regulation, Spread Explosions, or Both?

Filed under: Clearing,Commodities,Derivatives,Economics,Energy,Exchanges,Regulation — The Professor @ 6:28 pm

Geneva Energy Markets LLC, a large independent oil market maker, has been shuttered.  Bloomberg and the FT have stories on GEM’s demise.  The Bloomberg piece primarily communicates the firm’s official explanation: the imposition of the Basel III leverage ratio on GEM’s clearer raised the FCM’s capital requirement, and it responded by forcing GEM to reduce its positions sharply.  The FT story contains the same explanation, but adds this: “Geneva Energy Markets, which traded between 50m and 100m barrels a day of oil, has sold its trading book after taking ‘significant losses’ in oil futures and options, a person close to the company said.”

These stories are of course not mutually exclusive, and the timing of the announcement that the firm is shutting down months after it had already been ordered to reduce positions suggests a way of reconciling them. Specifically, the firm had suffered loss that made it impossible to support even its shrunken positions.

The timing is consistent with this.  GEM is primarily a spread trader, and oil spreads have gone crazy lately.  In particular, spread position short nearby WTI has been killed in recent days due to the closure of Canadian oil sands production and the relentless exports of US oil.  The fall in supply and continued strong demand have led to a rapid fall in oil stocks, especially at Cushing.  This has been accompanied (as theory says it should be!) by a spike in the WTI backwardation, and a rise in the WTI-Brent differential (and other quality spreads with a WTI leg).  If GEM was short the calendar spread, or had a position in quality spreads that went pear-shaped with the explosion in WTI, it could have taken a big hit.  Or at least a big enough hit to make it unviable to continue to operate at a profitable scale.

Here’s a cautionary tale.  Stop me if you’ve heard it before:

“The notional value of our book was in excess of $50 billion,” Vonderheide said. “However, the actual risk of the book was always relatively low, with at value-at-risk at around $2 million at any given time.”

If I had a dollar for every time that I’ve heard/read “No worries! Our VaR is really low!” only to have the firm fold (or survive a big loss) I would be livin’ large.  VaR works.  Until it doesn’t.  At best, it tells you the minimum loss you can suffer with a certain probability: it doesn’t tell you how much worse than that it can get.  This is why VaR is being replaced or supplemented with other measures that give a better measure of downside risk (e.g., expected shortfall).

I would agree, however, with GEM managing partner Mark Vonderheide (whom I know slightly):

“The new regulation is seriously damaging the liquidity in the energy market,” Vonderheide said. “If the regulation was intending to create a safer and more efficient market, it has done completely the opposite.”

It makes it costlier to make markets, which erodes market liquidity, thereby making it costlier for firms to hedge, and more difficult to enter and exit positions.  Liquidity reductions resulting from this type of regulation tend to be most acute during periods of high volatility–which can exacerbate the volatility, perversely.  Moreover, like much of Frankendodd and its foreign fellow monsters, it tends to hit small to medium sized firms worse than bigger ones, and thereby contributes to greater concentration in the markets–exactly the opposite of the stated purpose.

As Reagan said: “The most terrifying words in the English language are: I’m from the government and I’m here to help.” Just ask GEM about that.

June 18, 2018

Putin’s Very Useful Idiots

Filed under: Politics,Russia — The Professor @ 2:28 pm

This article is of interest primarily because it represents an inversion of, a retreat from, and a repudiation of, the collusion narrative:

[Former CIA Moscow station Chief Dan Hoffman] points to the infamous 2016 Trump Tower meeting, which he says was a deliberately discoverable Russian operation.

“I think what Vladimir Putin was thinking is the best way to soil our Democratic processes, link the Trump campaign in some conspiratorial way, because it’s Russia, back to the Kremlin.”

Two years on from that meeting, President Donald Trump and his team are still being investigated over allegations of Russian collusion.

. . . .

Mr Hoffman says the Trump Tower meeting has the Russian President’s fingerprints all over it.

“It wasn’t meant to be a clandestine operation, that’s the last place he would ever do that. There’s too much security, too much press, too many people there,” he said.

“What I think Vladimir Putin was doing, was deliberately leaving a trail of breadcrumbs from Trump Tower to the Kremlin.

“I see the full spectrum of Russian intelligence operations and frankly, if the media can find something that Russia did, like the meeting at Trump Tower, then it was meant to be found.”

. . . .

Mr Hoffman believes Mr Putin’s intention was to spark a media frenzy.

“[It was] kind of like a poison pill. Eventually the media will expose them,” he said. [Emphasis added.]

In other words, the politicians and journalists (and special prosecutors?) who have freaked out about the Trump Tower meeting are the ones who fell for Putin’s machinations. It is the politicians and journalists (and special prosecutors?) who have been Putin’s instrument in destabilizing American democracy.  It is they who have been Putin’s pawns, not Trump.  In their unreasoning hatred of Trump, they fell right into a trap that Putin laid.

This was my first reaction to the Trump Tower meeting “bombshell” back in 2017.  It’s not that complicated to figure this out–there would have been no reason for the meeting if Trump had been colluding with Putin all along.  It is the allegations of collusion that have advanced Putin’s interest, not collusion itself–and setting up a meeting like that in June, 2016 was an obvious way of stoking those allegations.  But to see someone from the CIA endorse this rather obvious logic is quite interesting.  It signals that the collusion story is effectively dead, and never should have drawn a breath in the first place.

Von Mises (not Lenin) wrote that communists called western liberals who were “confused and misguided sympathizers” for the USSR “useful idiots.”  (This phrase is typically attributed to Lenin.) Today’s western media and establishment politicians are fully deserving of the epithet.  But they do the 1920s and 1930s-era unwitting dupes for Lenin and Stalin one better: rather than being sympathizers (confused or otherwise) they advance the objectives of someone they claim to despise in every way, and in so doing they damage the very thing they claim they are protecting. Given this, “useful idiot” seems rather generous, doesn’t it?

Never Interrupt Your Enemy When He Is Making a Mistake–Immigration Edition

Filed under: Politics — The Professor @ 1:56 pm

In his biography of Joseph Chamberlain, British politician Enoch Powell (who would eventually illustrate his aphorism) said: “All political lives, unless they are cut off in midstream at a happy juncture, end in failure, because that is the nature of politics and of all human affairs”.  The next political life to end in failure may be that of Angela Merkel, who is facing a revolt from her CDU’s long time coalition partner the CSU.  CSU leader and Interior Minister Horst Seehofer, an adamant foe of Merkel’s immigration policy, had proposed a policy which included denying entry into Germany of individuals who had already registered for asylum in other countries–as they are obliged to do under EU law.  Merkel threatened to veto Seehofer’s initiative, and he said he would proceed regardless, forcing Merkel to fold, or to sack him, which would no doubt bring down her government.  Merkel begged for time to negotiate with Greece and Italy and other “front line” states.  Seehofer gave her two weeks.   Since the other countries don’t seem to be in much of a negotiating mood, there is a very good chance that in 14 days matters will come to a head and Merkel could well be forced to exit.

Insofar as negotiating is concerned, I am in Italy now, and if you are following the news you will know that new the Italian government is taking a hard line on immigration.  It has already turned away one ship of refugees, and has told NGOs that it will turn away two more already at sea.  The Italians are fed up with immigration, and German diktats on the subject (and on other matters too), and certainly cannot be seen to knuckle under to Merkel in their first weeks in office.

For her part, Merkel is doing her best to prove Churchill right about Germans being either at your throat, or at your feet:

The German chancellor turned to neighbors, including Austria, Greece, Italy and Bulgaria, for help as a fierce dispute over immigration threatens to topple her three-party coalition.

Immigration may be the proximate cause of Merkel’s demise, but ultimately it is a matter of hubris that comes with long tenure in office.  Such hubris is one of the main causes of the near inevitable failure that Powell wrote about.  It leads to riding roughshod over even–and perhaps especially–political allies who dare question, and those trampled underfoot nurse their grievances and look for their opportunity to exact revenge.  Hubris also tends to make politicians so convinced of their own rectitude and brilliance that they become deaf and blind to the legitimate criticisms of others.  These things have brought down far more consequential and admirable figures than Merkel: Margaret Thatcher comes to mind.

Ironically, it was a stand on immigration–the exact opposite of Merkel’s, in fact–that brought Powell’s career to an end (with his incendiary “Rivers of Blood” speech).  In Europe and the US, it is now the most divisive issue on the political agenda, pitting the establishment elites against the hoi polloi.  In his inimitable fashion, Trump took the opportunity presented by Merkel’s distress to put the boot in, tweeting “The people of Germany are turning against their leadership as migration is rocking the already tenuous Berlin coalition. Crime in Germany is way up. Big mistake made all over Europe in allowing millions of people in who have so strongly and violently changed their culture!”

Translation: So, you want to f*** with me at the G-7 Angela? You ran for another term as chancellor to thwart me? Let’s see how that works out for you, shall we?  Who’s going to outlast whom? Want to bet on it?

There is an old Latin expression (attributed to Caesar by Plutarch): “De gustibus non est disputandum.” Tastes (or preferences) are not disputable, and everyone has the right to their own.  In democratic polities, this would imply that the hoi polloi has the right to its preferences on matters like immigration, and those should be respected–especially if those advocating such views prevail at the polls.  But today’s establishment will have none of that.  The preferences of large numbers of Americans and Europeans (and arguably a comfortable majority thereof) are subjected to intense dispute, hostility, scorn, and abuse by the establishment.

This is amply illustrated by today’s freak out by the better thans regarding the separation of children of from adults (who may or may not be their parents) caught entering the country illegally.  Put aside the fact that this is not a new policy dreamed up by Trump in a tweetstorm–the Obama administration did it as well (not as if that would make it right, if it isn’t, but to illustrate the hypocrisy of those shrieking about the issue today).  Put aside the fact that holding children with adults makes them much more vulnerable to abuse.  Put aside the fact that families who apply for asylum at an authorized port of entry are not separated–only those who request asylum as a fallback strategy after being caught trying to enter the country illegally.  Let’s just consider the politics.

Progressives on both sides of the Atlantic seem to think that heaping abuse–including routinely accusing those who implement or support the policy of being Nazis (with ex-NSA director Michael Hayden being among those disgracing themselves with such accusations)–will somehow advance their political cause.  Their stupidity and utter imperviousness to evidence and experience  is really quite astounding.  It is exactly this sort of behavior that got them Brexit, and Trump, and the AfD in Germany, and a populist victory in Italy, and populist governments in eastern Europe.  Yet they seemingly think that insulting people even more viciously and even more loudly will work THIS time.

In fact, it is playing right into their enemies’ hands–Trump’s in particular.  Want to galvanize a Trump turnout in the midterms?  Shriek about immigration and how anyone who wants to impose restrictions on it is a Nazi.

So be my guest–go right ahead.  Knock yourself out with the Nazi thing. I certainly won’t object.  Because as Napoleon said: never interrupt your enemy when he is making a mistake.

 

June 6, 2018

Putting Germany First

Filed under: History,Politics,Russia — The Professor @ 1:24 pm

Angela Merkel is set to challenge Donald Trump’s America First agenda at the G-7, presumably to the strains of Deutschland über alles.

This is just another illustration of Germany’s utter lack of self-awareness, because criticizing America First is rather jarring coming from Merkel and her country’s political elite, which espouses Germany First in all but the slogan.  But actions speak louder than words.

Consider the record of the last few weeks.  The German elite threw an absolute tantrum at the prospect of an anti-EU government in Italy, and strongly backed the Italian president when he rejected such a government.  The German budget minister, Guenther Oettinger said “The markets will teach the Italians to vote for the right thing.”

This was yet further evidence of German tone-deafness, because the backlash against his remark, and the real possibility that the Italian reaction would be to have another vote that would strengthen the populists even more, unleashed another market meltdown. This forced the EU, led by Jean-Claude Juncker, to go into damage control mode and force Oettinger to apologize and to get German politicians to put a cork in it generally, lest they do even more damage.

Oettinger, in other words, had committed a gaffe.  That is, he said exactly what he really believed–and you know that the German establishment believes exactly the same.

Another case in point.  Completely oblivious to the optics of Germany and Russia cooperating to benefit at the expense of the Poles (e.g., the three partitions, Molotov-Ribbentrop), Merkel and Germany are unwilling to give the time of day to the Poles’ objections to the Nord Stream II pipeline. Germany has also been extremely critical of Poland’s democratically elected government, and is leading the charge in the EU to cut aid to Poland (and Hungary) for “violating the rule of law.” Like the Italians, the Poles apparently just got it wrong when they voted and are in need to Teutonic guidance.

Altogether now: “Deutschland, Deutschland über alles, Über alles in der Welt . . . ”

I’ve already mentioned in a previous post the obliviousness of Germany’s anger at Trump for interfering with its ability to do business with a state that has vowed-repeatedly-to exterminate Israel.  Yes, Angela did criticize Khamenei’s characterization of Israel as a “cancerous tumor” that Iran would eliminate, but again, actions speak louder than words.  Germany’s preferred policy–a continuation of the JCPOA, with a bonanza of European (and especially German) investment in and trade with Iran-would do far more to assist Iran in realizing its objective than Merkel’s words will impede it.

Merkel is apparently of the belief that she’s not advancing German interests.  Oh, no! She’s the defender of the “liberal international order”:

Chancellor Angela Merkel of Germany told Mr. Obama that she felt more obliged to run for another term because of Mr. Trump’s election to defend the liberal international order. When they parted for the final time, Ms. Merkel had a single tear in her eye. “She’s all alone,” Mr. Obama noted.

What self-sacrifice!

Tell me: just exactly where does Iran fit into the “liberal international order”? Russia? China? All of these are avowedly opposed to that order, and say so at every opportunity.  All are clearly revisionist powers. But in her hatred for Trump (and likely for the US generally), Merkel is more than willing to reach out to them.  Subjectively, Angela is all about the “liberal international order.” Objectively, quite the opposite.

You may dislike Trump’s America First/MAGA agenda and rhetoric.  But it does have one thing all over Merkel’s: honesty.

June 2, 2018

A Day at Antietam

Filed under: Civil War — The Professor @ 6:39 pm

Ever since I was 9, and my grandparents took me on an epic road trip to Shiloh, Vicksburg, Chickamauga, Chattanooga, Richmond, Petersburg, the Seven Days, Fredericksburg, Spottsylvania, Wilderness, Chancellorsville, Antietam, and Gettysburg, visiting Civil War battlefields has been an important pastime for me.  I’ve been to every major field multiple times, and the site of pretty much every action worthy of the name battle at least once (with the exceptions of Jenkins’ Ferry, Olustee, and Poison Spring).

If you had to ask me to choose just one to go to, I would pick Antietam/Sharpsburg, where I visited today (for the 11th time, give or take).  Why? Several reasons.

It’s relatively compact.  I walked the entire field in about 5 hours.  And I mean the entire field.  From Cornfield Avenue to the North Woods (Poffenberger Farm) down the old Hagerstown Pike to the West Woods, into the West Woods all the way to the line of Sedgwick’s furthest advance, over to Dunker/Dunkard Church, up the Smoketown Road back to the Corn Field.  Then over to Mumma’s Lane up to the Sunken Road, into the field where Richardson’s division charged, and then over to the end of the road where Barlow and the rest of Caldwell’s brigade broke the line.  The only drive was from there to the other side of the Boonsboro Pike, where I walked most of the road down to the 40 Acre Cornfield (where Gregg turned the Union left after Hill’s epic march from Harpers Ferry), into the cornfield, and then down to Burnsides’ Bridge. All in all ~11 miles.

It is sobering to think that one can walk in half a day an area that saw the greatest slaughter that has occurred on any single day in American history.  The concentration of carnage was awful–and only seeing how small the battle area is can make that plain.  The contrast between the tranquility and quiet of the field today (where often I heard only the chirps of birds, and was accompanied only by gophers, rabbits, and deer) and the chaos and noise that prevailed 156 years ago is also somewhat eerie.

The Battlefield Park also encompasses virtually the entire area in which fighting took place, and the landscape is relatively unchanged–it is one of the best preserved and most complete fields, and most vistas are free of modern visual pollution.  One can therefore get a more comprehensive and undistracted perspective of the battlefield than is possible anywhere else.  Further, it is much less crowded, and much less touristy than Gettysburg. Sharpsburg the town is charming, and again, much less touristy than the Pennsylvania burg an hour’s drive north.  Not a ghost tour sign in sight.  Thank God.

Unlike Chickamauga and Shiloh, which are densely wooded, much of the ground at Antietam is open and rolling, giving pleasing perspectives and panoramas.  Further, one gets a great sense of the role that terrain played in the battle.  For instance, one can walk over the crest where the Irish Brigade advanced immediately in front of the Sunken Road and see how close the Confederate line was, and understand how devastating the shock would have been as the Union line took fire once it became visible from the road, a mere few yards away.  One can visualize how short the distance between the lines was (there, and a little to the north where French’s division charged), and remark at how intense the fire must have been to make it impossible to charge successfully over so few yards.  (The only comparable place I can think of is The Nek at Gallipoli–and there the Turks had Maxim guns to mow down the Australian Light Horse as they tried to cross the 30 yards between the trenches.)

The vistas and ability to appreciate the terrain is perhaps best on the southern part of the field, where the IX Corps advanced after crossing the Antietam.  I had given that area short shrift in previous trips, but made up for it this time.  Here the country is almost completely open, with several prominent ridge lines that allow one to observe and imagine the scope of the struggle.

Here’s a panorama view taken from just north of the 12th Ohio monument, overlooking the 40 Acre Corn Field where Gregg’s brigade smashed the IX Corps left, and turned the tide of the battle.  (Although it should be noted that Gregg’s brigade gets too much credit–Archer, Branch (who was killed) and Toombs also played pivotal roles in stopping the final Union advance.)  If anyone’s interested, I can post the rest of the album of photos I took today.

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