Streetwise Professor

It is a challenge to identify the worst of the worst Federal agencies, but the Environmental Protection Agency is clearly a heavy favorite.  (The security organs are in a class by themselves.  Here I refer to civil regulatory agencies.)

In a strong effort to cement winning this dubious distinction, last week the EPA announced new tailpipe standards that reduce by 50 percent allowable emissions of CO2 (relative to an already reduced 2026 level).  This is transparently intended to throttle internal combustion engines (ICE) and jam electric vehicles (EVs) down our throats.

The administration is crowing about this:

“Three years ago, I set an ambitious target: that half of all new cars and trucks sold in 2030 would be zero-emission,” Biden said in a statement, adding that the country will meet that goal “and race forward in the years ahead.”

Biden said in a statement issued in his name—written by someone else, of course, because he couldn’t form these sentences by himself.

 In numbers pulled straight from its collective ass, the EPA claims the reduction in CO2 emissions will produce $100 billion in benefits annually, the vast bulk of which are due to chimerical gains from ameliorating climate change. 

As the much-missed Sonic Charm (still mordant on X, but not in the blogosphere) said: all large calculations are wrong.  And that goes exponentially for any calculation involving alleged climate benefits and costs.  Despite all the claims about scientific consensus (which should make you neuralgic in the aftermath of Covid, where almost all claims about The Science flogged by governments and the media have turned out to be the inversion of the truth), estimates of the impact of changes in CO2 emissions on climate are speculative in the extreme.  And those speculations pale in comparison to estimates of the impact of climate changes on welfare, including effects on wealth, income, and living standards.

Climate is a complex system.  Economies are complex systems.  Only fools and the evil have the hubris to claim to know how small changes in one variable will affect outcomes in the interaction between two complex systems. 

Where does the EPA fit here? Both, clearly. 

It is particularly perverse that the EPA is attempting to socially engineer economic outcomes—namely, what vehicles people drive—at a time when the manifold defects of EVs are becoming clearly manifest.  Their performance sucks in multiple ways, including limited range, declining range over time (as batteries age), poor performance in cold weather, and long recharging times (human time is valuable—did the EPA take that into account? I crack myself up sometimes).  Repair costs are astronomical.  And the putative environmental benefits are dubious when the entire vehicle lifecycle is considered, or when the environmental impacts of mining the myriad materials EVs need are taken into account.  Moreover, there are other environmental costs—notably substantial road degradation and substantially increased particulate emissions from tire wear, both due to the great weight of EVs.

Increased awareness of these effects is turning EVs into the Typhoid Marys of automobiles.  Sales are well below what had been projected as consumers have become aware of the clear inferiority of EVs relative to ICE vehicles in doing the things people want—and need—their vehicles to do.  EVs are clogging dealer lots, and they don’t want to buy more.  Resale values are in the tank.  Insurance costs are prohibitive. 

EVs are far more expensive to drive off the lot, and are more expensive to operate, than ICE vehicles.  Is it any wonder why Ford is drastically cutting its production of electric F-150s, and why every other auto manufacturer is hedging on its previous promises to go all electric in the near future?

Two rental car companies—Hertz and Sixt—have recently pulled the plug on their EV fleets (figuratively and literally) because the economics are so atrocious.  The disastrous Hertz plunge into electrics cost the CEO his job.   

EV skeptic Toyota is looking pretty damned smart now, ain’t it?

The inadequacies and defects of EVs are particularly pronounced for anyone who lives outside of a major metro area, and the more exurban or rural you are, the less suitable EVs are for you.  So this regulation represents another front in the war on suburban, exurban, and rural America.

And maybe that is part of the plan.  Recall my post on the war on cars generally.  They want you to walk the road to serfdom, and to jam people into villages (soothingly named “15 minute cities”), just like castellans did in the 11^th century. 

Put differently: from the perspective of the progressive, globalist types who want to eliminate personal mobility (for the proles, that is, not for them), all the aforementioned bugs of EVs are features because they drastically raise the cost of mobility. 

Not to mention the strains that increased EV usage will place on already creaking electricity grids and generation systems.  The interaction between this regulation, and the EPA’s equally (or even more malign) regulations of power plants, poses extreme risk to the nation’s electricity system.

To compound the lies, the administration claims that this will be a boon for the domestic automobile industry:

Biden added that U.S. workers “will lead the world on autos making clean cars and trucks, each stamped ‘Made in America.‘”

As. Fucking.  If.  This regulation will wreak havoc on the existing ICE-centric US auto industry (and the entire supply chain for it), with all of the baleful consequences that will have for capital value and employment.  The US industry has shown little prospect of having a comparative advantage in EV manufacturing.  Note the huge losses Ford has racked up on a per vehicle basis on its electronic version of the stalwart F-150.  GM’s EV operation has also frolicked in pools of red ink. 

Trump claimed that the US auto industry would face a bloodbath due to Chinese manufacturing of cars in Mexico.  That is nothing compared to the ensuing bloodbath—economic bloodbath; it’s a metaphor!—if the EPA guts the ICE industry. (“Guts” is a metaphor too! Can’t assume anything these days, right?)

These regulations are beyond sickeningly perverse.  They represent an extreme exercise of arbitrary power in the service of a delusional ideological agenda embraced by a tiny sliver of the citizenry. 

And when I say extreme, I mean by the standards of rational behavior, not by the standards of the current American administrative state. Sadly, what the EPA is doing has strong parallels in what virtually every other Biden administrative agency is doing—don’t get me started on GiGi’s SEC.  Or the FTC.  Or the DoL. 

Extremism in the exercise of administrative power is definitely a vice.  It is the enemy of personal freedom, personal choice, and economic prosperity. 

Rein in the administrative state?  Is that even possible?  Doubtful.  The only sure remedy is the Carthaginian one.

There’s been a bit of a hullabaloo of late regarding the resurgence of short volatility trades in equities. This comes at a time when volatility is low by historical standards, which has led some to conclude that the shorting of volatility is causing the low volatility.

Wrong, wrong, wrong–or at least the correlation between the two is insufficient to demonstrate causation. This is another example of the error of reasoning from a price/price change.

The “logic” here is particularly dubious for derivatives (“selling vol” is a synonym for selling options) because they are in zero net supply. Quantity bought is equal to quantity sold. So “short volatility trades come roaring back” also means “long volatility trades come roaring back.” Determining what drives what is not immediately obvious.

Here’s another story. Some believe volatility is to cheap and want to buy it. Or some what to hedge volatility risk, and at the current low levels it appears attractive to do so. So rather than pushing into the vol market, shorts are being pulled in.

You can’t tell which is happening just looking at the level of vol and open interest. And here’s the key thing: derivatives are risk transfer markets. What is determined in these markets are primarily risk premia. And so to see who’s pushing and who’s pulling, you need to look at risk premia.

The long pull story should see the vol risk premium rise, specifically implied vols should rise relative to expected future vols (in the physical measure). A crude proxy for this is implied vols rising relative to realized vols.

The short push hypothesis predicts the opposite. It doesn’t predict that the level of implied vol should fall absolutely: it predicts that implied vols should fall relative to realized vols.

And according to CBOE’s vol maven Mandy Xu, it’s the former and not the latter:

Second, if volatility selling strategies were to blame for the low levels of the VIX index, you would expect the volatility risk premium (VRP) to shrink as the implied-realized volatility spread narrows (i.e. the VRP is what option sellers aim to monetize and thus should decrease as more sellers enter into the market). Instead, what we’ve seen over the past year is the opposite — the S&P 1M volatility risk premium (as measured by the difference between the VIX index vs SPX 1M realized volatility) actually increased quite meaningfully, from 1.5% in 2022 to 3.6% in 2023. Implied volatility may be low, but it’s not trading particularly cheap compared to realized volatility (SPX 1M realized vol went from averaging 24% in 2022 to just 13% in 2023).

Xu also notes that the vol curve has been more skewed to the call wing, i.e., out-of-the-money call vols have been rising relative to ATMs. This could be explained by a demand to hedge against volatility spikes from today’s current levels (a scenario that played out in the “Volmageddon” of 2018). (Pay attention class–by which I mean my real, actual classes–we’ll be discussing that after Spring Break.)

So the short vol crowded trade driving down vols story is certainly logically weak and factually unsupported, and the alternative that the rise in vol-related derivatives notionals is driven by buyers does have support in the data.

Remember children: never argue from a price change. Especially in derivatives markets with arguments based on open interest/volume.

There does appear to be some interesting intermediation going on. There has been a lot of activity in individual stock options (e.g., Nvidia). It appears that some buying pressure has been accommodated by hedge funds selling those options, and buying index options. This is a form of spread trading (in a way not dissimilar from the infamous basis trades) that hedge funds specialize in. It would tend to contribute to higher notionals in index vol positions–both long and short. There is also spreading between short-dated (especially “zero day”) options and longer-dated options.

Regardless of the underlying driver here (index vol bets or individual stock vol bets) it does appear that the surge in volatility trading has been buyer driven, not selling driven, as indicated by the behavior of risk premia.

Sadly, it is the Bank for International Settlements (BIS) that has pushed the “vol shorts have pushed down implied vols (absolutely–but not relative to realized vols). So it’s fair to say that the BIS is riding the volatility short bus. Which is embarrassing.

The “Cathars”–the target of (a) the first intra-Europe crusade (and arguably the first crusade period*) that resulted in the deaths of 10s of thousands (often by fire) and the desolation of vast swathes of southern France, and (b) an inquisition that killed more–are a source of fascination and mystery. They left little of a written record, and most of that which is “known” about them was written by a Catholic Church that ruthlessly persecuted them as “heretics.” Thus, what their “heresies” actually were is unknown.

In his fascinating The Rest is History Podcast, historian Tom Holland conjectures that their heresies had nothing to do with dualism or celibacy or any of the other theological sins with which they were charged. Instead, the Cathars’ (not something they called themselves, by the way) crime was essentially that they were rustics who were not willing to conform with aggressive reforms adopted by the Catholic Church in the early-13th century. In particular, they were in a way proto-Protestants who believed that salvation was not dependent on the intermediation of priests, bishops, archbishops, and Popes. One could become a “bon homme” destined for heaven by one’s own conduct and faith without priestly intermediation. This clashed with Pope Innocent III’s aggressive centralizing efforts to enforce the primacy of the priesthood and the formal church.

Put simply, this was a clash between self-governing rural traditionalists and an extremely assertive–and in fact murderous–bureaucratic government with universalists pretensions insistent on controlling the private and public lives of everyone.

Voltaire said that history does not repeat, but humans do. Viewing the current political landscape in the United States and Europe speaks to Voltaire’s veracity.

Case in point, the currently raging hysteria regarding “white rural rage” and “Christian nationalism” in the United States. Though the United States government has not–at least not yet–channeled its inner Innocent III and launched a murderous crusade against American rustics, the aforesaid hysteria echoes the Albigensian Crusade. (“Albegensian” was another epithet applied to the Cathars, and was a reference to Albi, Italy, which was a Cathar stronghold.)

Specifically, the heresy of non-urban Americans is that they fail to–refuse to–subordinate themselves to a zealous and distant bureaucracy, and who adhere instead to traditional beliefs about freedom, local control, and religious observance. Since those beliefs are inimical to a clerical class which arrogates to itself authority on all matters of belief, they are a threat to the establishment “elite” and must be crushed.

Hence the hysteria.

Although the Cathars resided in what is now France (though a “French” identity is an anachronism would have been alien to them), their experience rhymes with various events in American and British history in which rural peoples resisted centralizing government authority.

Case in point. The Hatfield-McCoy Feud of the 1880s-1890s was made into urbanist pornography–it was the subject of rapt and lurid coverage in big city dailies–in large part because it was a narrative that “othered” mountain people who resisted “progress” and attempted to maintain their autonomy. A major driver behind the legal consequences of the feud was that the Hatfields owned large tracts of timber and coal land coveted by large coal producers in particular. (Timber–used in mine construction–was a vital resource. One of my Hatfield ancestors was a timber cutter for coal mines.). (The Coal Wars of the 1920s was an aftershock of the victory of the large mining companies.)

Also in the late-19th century, the propaganda war against moonshiners was also directed at people who insisted on traditional practices that clashed with the interests of a distant government. But it goes back further than that. The Whiskey Rebellion and the subsequent military campaign against it (led by George Washington and importantly Alexander Hamilton) similarly involved a conflict between rustics (for whom alcohol was an essential staple of commerce) and a central government grasping for revenues.

But it goes even further back, and farther ashore. The actions of the British government (and the more settled and urbanized Lowland Scots) against the Highland Scots in the 18th century were driven by similar forces and accompanied by similar pejorative narratives. (Cf. Rob Roy.). Ditto the centuries-long depredations of England (and then Great Britain) in Ireland.

In brief, the current moral panic in “elite” circles about rural (really non-urban) whites is yet another example of an ages-old struggle between an arrogant, centralizing “elite” power structure and those who would quite prefer to live outside it, thank you very much. Heresy now and then is non-conformity and refusal to take the knee before central authority.

That is, it is about control, control, control. Period. The current chapter in this very long-running saga is particularly Orwellian because the war against the rural Other is waged in the name of “democracy”–i.e., self-government–when in fact what the “elite” desires is antithetical to true self-government. (It is also particularly disgusting because of its overt racism.)

Perhaps it is not coincidental that I am a (maternal) descendent of Hatfields, moonshiners, and Whiskey Rebels. For it is abundantly clear where my sympathies lie.

*The word “crusade” was not used in the 11th-12th centuries to describe the Christian campaigns in the Holy Land. Its first recorded usage was to describe the war waged on the Cathars.