Streetwise Professor

I have often described Obama as an American Bourbon (as in Louis XVIII, not Old Granddad): he has learned nothing, and forgotten nothing. No single thing exemplifies this more than his stubborn refusal to blame radical Islam for the latest outrage, this one in Orlando.

Obama claims that his rationale is that he does not want to allow ISIS to claim that the US is at war with Islam. Well, that’s the whole point of adding “radical” as a modifier. It is to demonstrate that we do not have an indiscriminate hatred or fear or even dislike of all Muslims. Obama’s refusal to make this distinction suggests that he thinks that Muslims are too stupid to recognize that. Or perhaps he thinks so little of Americans that he doesn’t believe that we are truly capable of making discriminating judgments, and that he really believes were are all closeted–or not so closeted–Islamophobes. He’s insulting either Muslims, or Americans, or more likely both.

Regardless, would that there were a latter-day Talleyrand who would lean over to Obama and say: “But sire, they are most decidedly at war with us.”

Keynes once said  “When the facts change, I change my mind. What do you do, sir?” If Obama was his interlocutor, the reply would be: “Nothing. I am never wrong, and no new facts can contradict my original conclusion.” That’s exactly what leads to the Bourbon forget nothing-learn nothing syndrome.

Here’s why Obama’s mulishness is intensely unsettling to most Americans. They believe that his refusal to acknowledge a plain-as-the-nose-on-your-face fact has led to a conscious policy of ignoring threats for fear of offending Muslims. Orlando just provides more grist for that mill.

The shooter, Omar Mateen, flew more red flags than a Soviet May Day parade. The FBI investigated Mateen twice, and interviewed him three times. He had interacted with an American who went to Syria to become a martyr for ISIS. He was involved with Marcus Robertson*, a well-known jihadist and radical cleric who had been a bodyguard for the “Blind Sheikh.” He had attended an extremist mosque. He was well-known at his work for making extremist remarks.

But the FBI said “move along, nothing to see here!”, and the investigations were dropped. In the aftermath of Fort Hood (“workplace violence”), the dismissal of the investigation of the Tsarnaevs, and other episodes of denial and avoidance, people have a clear sense that Obama has made it plain to everyone below him in the chain of command that even the perception of Islamophobia is a far graver sin than letting a potential mass-murderer walk free–and it’s a career killer to boot.

It’s not just the refusal to utter the words “radical Islam” that conveys this message. “We can absorb attacks.” “ISIS is not an existential threat.” “You are more at risk of dying from a fall in your bathtub.” All of these send a message: Obama believes that Americans have an inordinate fear of terrorism.

Easy for a guy who drives around in an armored limousine called “the Beast” to say, isn’t it? Guy in an Orlando night club–not so much.

Yes, the probability of dying from terrorism is small. But people are rationally averse to low probability, extremely adverse events. And the question is whether these events can be prevented or deterred at reasonable cost, and whether it is the government’s responsibility to do so. Most Americans think yes. Obama evidently thinks no, or that the cost of perceived Islamophobia outweighs the benefit of preventing a mass murder or two.

It’s hard to believe, but the refusal to say “radical Islam” was among the least offensive things that Obama said today. He had the temerity to claim that attacks like Orlando are proof that ISIS is losing on the battlefield. As if there what happened in Orlando (or San Bernardino) involved the redeployment of any ISIS resource in Syria or Iraq, or that ISIS has no independent reason to attack the US. (I remind you that in his “ISIS is the jayvee” period, Obama asserted that ISIS had no intention of attacking the West as a reason for his insouciance. Wrong again, Carnac.) Further, he touted the 13,000 air strikes. Bean counting bullshit. How many strikes have been aborted? How many times has LBJ II vetoed a target? What is the operational impact of these airstrikes? Why was the air campaign so desultory for so long? Why has ISIS been given years of breathing room?

Obama has theories about Islam and terrorism. He has long held those theories, and he adamantly refuses even to modify them even in the face of a torrent of evidence. And pace Jefferson Davis, Americans have strong grounds to believe that many of their fellow citizens have died of that theory, including 50 people in a night club in Orlando.

* Robertson was interviewed this evening by Greta van Sustern. Considering it was an interview with a sick bastard who wants us infidels dead, it did have its amusing moments. Among other things, Mr. Robertson gave his weighty opinions on the presidential race. Among his pearls of wisdom was that Hillary would be dangerous as a president because as a woman she might get angry during her menses, and push the button.

Perhaps Mr. Robertson is a little bit shaky on the realities of the female reproductive system (which seems to be the case with most fundamentalist Muslim clerics), but I am pretty sure that Hillary is well past the age when menses, or even menopause, can have the slightest effect on her behavior.

Who wants to break the news to him? It could change his vote!

Andy Home has an interesting piece in Reuters. He provides information that strongly suggests that the LME copper contract has been squeezed. All of the tell-tale signs are there:

What the exchange terms a dominant long position emerged on the copper market last week.

This player controlled 50-80 percent of all LME open stocks, excluding metal earmarked for physical load-out, and had bulked this up with cash positions to the point that its overall position represented in excess of 90 percent of all available stocks.

That position was being rolled forward daily, forcing shorts to pay the backwardation price as they too rolled their positions.

The cash premium over three-month metal, the backwardation, had flexed out as wide as $27.75 per ton the previous week as the long tightened its grip on the London market’s nearby date structure.

Someone, it seems, was not prepared to pay the roll price and decided to deliver physical metal against their position. [LME stocks rose almost 40 percent in a few days.]

And they did so in a way to generate the maximum bang for their buck.

It seems to have worked.

That cash premium has evaporated. As of Thursday’s close, the cash-to-three-months spread was valued at $15 per ton contango.

The ripple effects have spread down the curve, LME broker Marex Spectron noting that the July-December spread eased $10 to $35 per ton contango over the course of Thursday.

The latest positioning reports, denoting the state of play as of Wednesday’s close, show the dominant long still holding 50-80 percent of stocks <0#LME-WHL> but with no equivalent cash position <0#LME-WHC>.

All the signs are there: a large long position, here both in physical metal and prompt LME contracts; a spike in the backwardation; a movement of metal into deliverable position; followed by a collapse in the backwardation. Also, the large long apparently liquidated the bulk of his position in LME contracts, as is necessary to profit. Right out of the book.

These episodes are chronic in the commodity markets, and on the LME in particular. They impose real deadweight losses (the costly movement of copper into LME warehouses being an example), and undermine the effectiveness of derivatives contracts as a hedging mechanism. Would that regulators pursued this conduct more vigorously, rather than obsessing over spoofing games, or chasing the “excessive speculation” will-o-the-wisp.

Venezuela’s economic and social collapse brings out the most idiotic “reporting” and commentary from the mainstream media. They are desperate to explain away the catastrophic failure of an avowedly socialist polity. They are also eager to recruit the country’s crisis to advance other progressive agendas, most notably climate change.

I thought I had read peak Venezuela stupid earlier this week in an Bloomberg article. (More on that below.) But I now know that I have seen peak stupid, because nothing can be more idiotic than this from a New York Times reporter:

And there’s no way that the Venezuelan government could print that much money to keep up with inflation. So what happens – they don’t. And there’s not enough money. There’s a shortage of money, just like there’s a shortage of electricity and water. It means, you know, paying for things and doing everything in your day-to-day life has become very, very challenging.

Hilarious! Who knew that hyperinflation occurs because the there’s “a shortage of money”?

This is New York Times economics “thinking” in a nutshell: that is, 180 degrees from reality.

News for Mr. Casey, courtesy of Milton Friedman: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

The corollary is that hyperinflation can be produced only by an extremely more rapid increase in the quantity of money.

Boy, I guess money was really short in Zimbabwe a few years ago (inflation rate 79.6 billion percent in 2008–Venezuela has some catching up to do!)

The rest of the interview with Mr. Casey proves that he is not short of economic comedy gold. John Hinderaker at Powerline has deconstructed it thoroughly, so I don’t have to. The implication is blindingly obvious: anyone who relies on the NYT for economic insight can find it only if they follow one rule: conclude the opposite of everything the Timesman (or -woman) says.

One would hope for better from Bloomberg (its Twitter handle is @business, after all), but one would be disappointed. For while the NYT tells you that hyperinflation in Venezuela is due to the lack of printing press capacity, Bloomberg tells you that the crisis is due to the “wilting away of the state.” (Wait–Marx told me that was a feature, not a bug! WTF?)

Yes, the Venezuelan state is collapsing. But it is collapsing not because of climate change or other factors beyond its control. It is collapsing because its previous hyperactivity wrecked the economy and destroyed civil society. Perhaps the adverse consequences of the drought was the death knell, but that was only possible because Chavism had already undermined society’s capacity to absorb another shock. It’s like blaming pneumonia for the death of an AIDS victim. Yeah, it’s what killed him, but it wouldn’t have killed him if his immune system hadn’t already been ravaged.

This attempt to blame Venezuela’s crisis (and Syria’s–the article is a twofer!) on climate change is beyond annoying because it fails to identify honestly the source of the state’s “lack of adaptive capacity”:

“Powerful groups, especially in corrupt states, use their power to capture resources,” says Homer-Dixon. “You get a polarization of wealth, a weakening of state capacity, and urban stress.” Although these kinds of changes are indirect effects of a drought, they are often the tipping point for social conflict. “We are seeing these things around the world now,” Homer-Dixon says. “As environmental stresses get worse, [their effects] become more common.”

Global water shortages are predicted to decrease global gross domestic product by as much as 14 percent by 2050, according to a recent report by the World Bank, which predicts that this “severe hit” will spur conflict and migration across the Middle East, Central Asia, and Africa. Even resource-rich countries previously considered to have stable economies, such as Brazil and Russia, have become more susceptible to environmental disequilibrium. Last year production of coffee, one of Brazil’s most important commodities, fell 15 percent as a result of drought. A lack of rain in Russia this fall damaged a quarter of its cereal crops. The last time the country’s harvest failed, rising global prices contributed to the Arab Spring in countries dependent on imported grain. [What? Um, there have been droughts for like forever. And steep declines in agricultural output are a historical norm. Further, Russian grain output is likely up this year. FFS. Agricultural output variability has been the norm since humans first scratched the ground with a stick. Before that, even: variability in the amount of stuff to gather predates the agricultural revolution.] Even Islamic State’s political power may soon be affected by drought. As water levels in Lake Assad in Syria plummet, Raqqa, the group’s stronghold, is facing severe shortages. Last year, Islamic State’s press officer, Abu Mosa, told Vice News that it would consider attacking Turkey to gain access to additional water resources.

Climate science has an explanation for why environmental forces can have this kind of destabilizing effect. Angel Muñoz, a postdoctoral research associate at Princeton, says, “Risk is just a multiplication of hazard by vulnerability.” Muñoz, who grew up in Venezuela and moved to the U.S. to study climate risk management, explains that a drought is a hazard, but what actually created this year’s mess was Venezuela’s lack of what he calls “adaptive capacity.” The drought was predicted months before it began—neighboring Colombia started water rationing in September 2015. Although Venezuela has far more natural resources than its neighbor, Colombia is not in such dire straits. “A society’s vulnerability is at least as important as the hazard,” Muñoz says.

As a result, when weak states [!] face environmental catastrophes like drought, “you might see the collapse of authoritarian regimes, as you did during the Arab Spring,” Homer-Dixon says. “But they’re probably going to be replaced with something just as bad, because a deeply divided society is still dealing with a materially stressed situation.”

The point is that authoritarian regimes–which invariably use their authority to control the economy and undermine private contract and markets–are brittle. That’s why they have less adaptive capacity. Some shock is the proximate cause (in the USSR, it was the decline of oil prices in 1986), but statist systems are brittle because in their mania for control they destroy the resilience of emergent orders.

Brittleness is different than weakness. The “weak state” formulation suggests a polity like Somalia or Afghanistan where the government’s writ does not extend beyond the capital, if it extends even that far. Or medieval Europe. The problem with Venezuela and Syria is that the state’s writ runs everywhere.

Regardless of the science regarding climate change, and in particular the science of attributing to climate change a particular type of event that has occurred on earth since far before recorded history, it is beyond dishonest and manipulative to ignore the real anthropogenic factor at work here: the destruction of a society’s adaptive capacity by a hyperactive state. If Venezuela is on the brink of anarchy, it is because the state was too strong, not because it was too weak.

What is particularly perverse is that climate change is being used to justify intense statist intervention on a global scale. This despite the fact that as the case of Venezuela (and other socialist paradises) demonstrates, humanity (and nature) have much to fear from a hyperactive state. The Bloomberg article is particularly dishonest because it insinuates the exact opposite.

@libertylynx suggested to me that the GOP is primarily responsible for the current unpopularity of capitalism in the US. I agree that this is largely the case. Here’s my first stab at an explanation.

At root it is due to a yawning gap between rhetoric and action. The GOP poses as the party of small government and free markets, but it is not, really. The disconnect was somewhat present during the Reagan administration, but it became progressively (pun alert!) more pronounced starting with Bush I, and particularly during the George W. Bush administration.

Bush II in particular was a big spender. Some of it was war-driven, but he was also profligate domestically. Perhaps most importantly, given the salience of housing to the 2008-2009 financial crisis which inflicted the most grievous blow to belief in the efficacy and efficiency of markets since the Great Depression, was that the Bush administration perpetuated the bias towards investment in housing exemplified by Fannie and Freddie. A truly market-oriented administration would have terminated Fannie and Freddie with extreme prejudice, but it grew apace during the Bush II administration. When combined with an expansive Fed and a flawed banking regulatory framework, the groundwork for a disaster was in place.

In many respects, this is similar to what happened during and after the Great Depression. That event was widely viewed as a failure of capitalism and the market system, when it was actually the result of a combination of bad Fed policy and a dysfunctional banking system that was the result of a political bargain that resulted in the proliferation of small unit banks that could not withstand a broad shock: see Friedman and Schwartz for an analysis of the former, and Calomiris and Haber for an examination of the latter.  The banking system that collapsed in the 1930s was a political artifact, and would have not developed the way that it did in the absence of a regulatory framework that was tailored to benefit very specific political constituencies.

The strong bias towards housing investment in the United States in the 1990s-2000s was also the result of a political bargain: alas, the same is true today, even despite the crisis. This political bargain was based on a coalition of politically connected firms (Fannie, Freddie, major banks, and construction) and populists. This bargain created incentives that led market participants to invest excessively in housing. When this came a cropper, the blame attached to those market participants who responded to incentives, rather than the political agents and political process that created those incentives.

In DC, Republicans talked a pro-market, small-government game, but did not govern that way. Republicans in Congress liked living a comfortable life in DC. They did not have a stomach for fighting the battle that a true pro-market, small government policy would have caused. They liked the sinecures of power too much to risk them, knowing in particular that pursuing such policies would unleash a storm of media criticism and make them unpopular with the bureaucrats and lobbyists who infest the place. So they made a few symbolic gestures, and spouted pro-free market, small government rhetoric, but really did nothing. The continued existence, let alone the growth, of Fannie and Freddie is testament to that.

When the storm hit in 2008, this came back to haunt them. More importantly, it came back to haunt the cause of free markets and smaller government. Since those giving lip service to those ideals were in charge when the storm hit, it was easy to blame the ideals, even though those spouting the rhetoric had done virtually nothing to advance them. Indeed, they had perpetuated, and in fact exacerbated, the market distortion that was the ultimate cause of the crisis. This presented a perfect opportunity for those in politics (the Democratic Party) and the media (an appendage of the Democratic Party) to attack the ideals that they despised.  It would have been better had the Republicans not pretended to be pro-market, as at least that would have limited some of the damage to popular beliefs and opinions about markets.

There are at least a couple of reasons for the Republican reluctance actually to fight the statist DC consensus, despite their rhetorical embrace of that fight.

One is the scars left by the struggles over the government shutdown in 1995-1996, and the impeachment battle that followed. Both fights were a distraction, and what’s worse, the Republicans handled both badly. They took a horrible beating in the media and elections–rightly so, in retrospect–and it got their minds right. The 1994 insurgents were supplanted by time servers and apparatchiks. Hasterts and Boehners and McConnells, and other assorted boneless wonders you’ve never even heard of. They were masters at the Kabuki performance of pretending to be pro-market and pro-smaller government, but really doing nothing to stem the tide.

The second reason is more fundamental, but in a way can explain the first. Politicians respond to incentives too. A good model for them is a pigeon in a Skinner Box. They soon learn to push the lever that results in the magical appearance of a food pellet, and not to push the lever that doesn’t.

Organized constituencies provide the food pellets in DC. There is no organized constituency for freer markets or substantially smaller government. There are constituencies for particular businesses and industries, and for government largesse. The benefits of free markets and smaller government are large, but diffuse. As Olson and Stigler and Becker and others showed long ago, diffuse and unorganized beneficiaries have little incentive or ability to influence policy. In contrast, particular businesses and industries do. Thus, careerist politicians intent on re-election and a comfortable life have little incentive to pursue market-oriented policies, but instead pursue policies that favor particular constituencies, including business constituencies.

Which means that even though many Republicans talk/talked about being pro-market, they are/were at most really pro-business. And there is a difference. A huge difference, as Adam Smith pointed out centuries ago, and Friedman repeated often decades ago. But that difference is not well-understood, which means that failures that occur when Republicans are in power tend to get blamed on the market system, or capitalism.

The S&L crisis of almost 30 years ago provides a good example. The S&L industry was the creation of law and regulation resulting from a political bargain: again see Calomiris and Haber. Inflation devastated the industry, and in response it called for elimination of restrictions on how S&Ls could invest. This was done in the name of deregulation and freeing markets, but the most important government interventions were left in place. In particular, deposit insurance remained, and government regulators refused to shut down insolvent thrifts. The mixture of freeing up the asset side of the balance sheet when (a) liabilities were insured, and (b) S&Ls had no equity, was toxic in the extreme. With insured liabilities and no equity, S&Ls had a tremendous incentive to add risk, and the deregulation of the asset side of the balance sheet gave them the ability to do so. They took on said risk, it ended badly, and taxpayers were on the hook for $200 billion or so as a result. Real money back then!

Was this a failure of deregulation, and a damning verdict on markets? I would say no: the fraught condition of the S&Ls was the product of previous government regulation and policy, and the perverse incentive to take on risk was inherent in another policy—deposit insurance. An organized political constituency (S&L operators) influenced Congress to loosen some regulations that made the perverse effects of the other regulations and policies even more acute.

In other words: they wanted to deregulate in the worst way, and they did. They did so because the deregulation was designed to benefit particular businesses, not to create a free market in banking. Pace the theory of the second best, elimination of something (restrictions on S&L investment) that would be an imperfection in the absence of other imperfections made things far worse when other imperfections (deposit insurance, forbearing regulators) remained in place.

But the narrative that came out of the S&L debacle was one of market failure, not government failure. Deregulation and markets took the blame, when what had really happened is that politicians responding to incentives (the importuning of an organized constituency) changed the laws in ways that created perverse incentives for business, and ultimately all this perversity begot something wretched indeed. The crisis was played out on Main Street, but its origins lay squarely on Pennsylvania Avenue.

The takeaway from all this is rather depressing. It means there is an inherent political bias against pro-market policies because markets, and the beneficiaries of markets, do not form an organized political force. The difficulty of voters to distinguish pro-business policies from pro-market rhetoric often used to advance them means that economic crises (the Great Depression, the S&L collapse, the 2008 Crisis) that are strongly rooted in government failure are blamed on markets instead, which perversely results in even more government intervention.

So this is why Republicans damage the cause of free markets and small government. They spout pro-market and small government rhetoric, but for reasons of political economy, really do little that actually advances free markets or reduce the size of government. But when some government policy creates incentives that lead to a bad market outcome, their rhetoric boomerangs on markets, not government.

The post-crisis years have been a period of slow growth and economic sclerosis. This is largely attributable to the explosion of regulation that has taken place since 2009. The narrative that helped spark this explosion is that markets failed. Alas, Republicans did much to advance that narrative, albeit inadvertently. But advance it they did, and the malign effects will be felt for decades to come.

In brief, Republican politicians may be subjectively pro-market and pro-capitalism, but objectively they have done grievous harm to markets and capitalism.

A couple of weeks ago the CFTC voted to revise its position limits regulation. My verdict: it makes the regulation less bad. Sort of like a strawberry tart, without so much rat in it.

The most important part of the revision is to permit exchanges and SEFs to recognize certain non-enumerated hedges as bona fide hedges that don’t count towards the position limit. In the original proposal, only eight hedges were enumerated, and only enumerated hedges were treated as bona fide hedges.

This drew substantial criticism from industry, particularly from end users, because the list of enumerated hedges was quite limited, and failed to incorporate many commonly utilized risk management strategies. Thus, more participants were at risk of being constrained by position limits, even though their purpose for trading was primarily to manage risk.

The CFTC’s fix was to permit market participants to apply annually to an exchange (“designated contract market”) or SEF for a non-enumerated bona fide hedge. The participant submits information about the hedging strategy to the exchange or SEF, which reviews it and determines whether it meets the criteria for bona fide hedges and grants an exemption for positions entered pursuant to this strategy.

This does help hedgers escape limits intended to constrain speculators. But the review process isn’t free. Moreover, the process of application and approval will take some time, which limits the flexibility of market participants. They have to foresee the kinds of strategies they would like to employ well in advance of actually implementing them.

At most this mitigates a harm, and at a cost. The speculative position limit provides no discernible benefit in terms of market stability or manipulation prevention (for which there are superior substitutes), but imposes a heavy compliance burden on all market users, even those who would almost certainly never be constrained by the limit. Moreover, the rule constrains risk transfer, thereby undermining one of the primary purposes of futures and swap markets. The bona fide hedging rule as originally proposed would have constrained risk transfer further, so basically expanding the universe of bona fide hedges removes a piece of rat or two from the tart. But it’s still appalling.

The revision also clarifies the definition of bona fide hedge, eliminating the “incidental test” and the “orderly trading requirement.” As currently proposed, to be a bona fide hedge, a position must reduce price risk. (I deliberately chose that particular link for reasons that I might be at liberty to share sometime.) That is, it cannot be used to manage other risks such as logistics or default risks. This is what the statute says, and was the way that the old regulation 1.3(z)(1) was written and interpreted.

Perhaps the most important result of this process is that it stands as a rebuke to Elizabeth Warren for the calumnies and slanders she heaped upon the Energy and Environmental Markets Advisor Committee, and me personally. One of the main complaints of participants in the EEMAC meetings was that the bona fide hedging rule as originally proposed was unduly restrictive. I dutifully recorded those complaints in the report that I wrote, which caused Senator Warren to lose it. (I cleaned that up. Reluctantly.) (The report is circulating in samizdat form. I will find a link and post.)

Well, apparently all of the Commissioners, including two strong supporters of the position limit rule, Massad and Bowen, found the criticisms persuasive and, to their credit, responded constructively to them. So, Liz, if supporting a broadening of bona fide position limits makes one an industry whore, that epithet applies to the Democratic appointees on the Commission. I presume you will take it up with them in your tempered, reasoned way.

But I note that Ms. Warren has been notably silent on the Commission’s action. Go figure.

It is now likely that the position limit rule will finally slouch its way into the rulebook. This is unfortunate. All that can be said is that due to this action it isn’t as bad as it could have been, and as bad as it is, it is nothing compared to the monstrosity that is being created in Europe.

One of the most disreputable tactics of those who sound alarms about anthropogenic climate change is to conscript any weather-related disaster to advance their cause. Case in point: the recent wildfires in and around Fort MacMurray, Alberta, Canada:

Experts say climate change is contributing to the wildfires raging across Canada, and the increasing frequency of such fires may overwhelm one of Earth’s most important ecosystems, the boreal forest.

In just over a week, an out of control blaze has charred more than 2,290 square kilometers (884 square miles) of land and forced the evacuation of 100,000 people from Fort McMurray in Alberta, Canada.

Dominated by conifers like pine and spruce, the boreal forest sweeps across Canada, Russia, Alaska and Scandinavia making up about 30 percent of the world’s forest cover, and absorbing a big chunk of carbon from the atmosphere.

As crucial as the boreal forest is at reducing the impact of human-driven fossil fuel emissions, it is also increasingly fragile, and expected to become hotter, drier, and more prone to fires in the future.

“Western Canada, including in particular the region in Alberta containing Fort McMurray, has warmed quite a bit more than the global average,” said scientist Michael Mann, author of “Dire Predictions: Understanding Climate Change.”

With the Arctic region warming twice as fast as the rest of the planet, climate model projections place central and western Canada in the “bullseye of enhanced warming,” he told AFP.

Michael Mann. Of course.

The past months have seen a strong El Nino which has caused anomalous weather throughout the world, and in the western hemisphere in particular. It has brought heavier than normal rains to some areas, and drought to others. My immediate suspicion was that El Nino contributed to the warm dry conditions, low snow pack, etc., that set the stage for the Alberta fires. And indeed, that’s the case.

It’s also necessary to put this in perspective. Even in normal years, there are fires in the boreal forests of Canada. Indeed, about 29,000 square kilometers burn in Canada each year. When I looked at the height of the fires, the Fort MacMurray fire had consumed about 2900 square kilometers, or about 10 percent of the annual average in Canada. This also represents about .015 percent of Canadian boreal forest area.

The fire got attention not so much because of its size, but because it occurred in a populated area (something of a rarity in that area), and one that happens to be a major oil producing center.

But the cause is too important to let facts interfere with the narrative. The fires were dramatic, and to the credulous it is plausible that global warming is to blame. So Mann et al could not let this opportunity pass.

Exploiting weather to raise alarms about climate is not the only disreputable tactic these people employ. Another is to attempt to intimidate through the legal process those who dare challenge their orthodoxy. This tactic has reached a new level in California, where a bill with the Orwellian title “California Climate Science Truth and Accountability Act of 2016” has cleared committees in the state Senate:

“This bill explicitly authorizes district attorneys and the Attorney General to pursue UCL [Unfair Competition Law] claims alleging that a business or organization has directly or indirectly engaged in unfair competition with respect to scientific evidence regarding the existence, extent, or current or future impacts of anthropogenic induced climate change,” says the state Senate Rules Committee’s floor analysis.

What does “engage in unfair competition with respect to scientific evidence” even mean? As an industrial organization economist by training, and practice, I know that the concept of “unfair competition” is slippery at best even in a straightforward economic context, and (speaking of Orwellian) that unfair competition laws have been used primarily to stifle competition rather than promote it. How unfair competition concepts would even apply to scientific debate is beyond me.

But that’s not the point, is it? The point of this law is to utilize another law that has proved very convenient at squelching competitors in the name of competition in order to squelch debate about climate change and climate policy. This is antithetical to science yet is done in the name of science: it is also a perfect example of the thuggery that the warmists routinely resort to when they cannot prevail in an open discussion.

When writing about Dickens, Orwell said something that relates to this issue as well:

It is the face of a man who is always fighting against something, but who fights in the open and is not frightened, the face of a man who is generously angry — in other words, of a nineteenth-century liberal, a free intelligence, a type hated with equal hatred by all the smelly little orthodoxies which are now contending for our souls.

The smelly little orthodoxy epitomized by Michael Mann and Kemala Harris (the AG of CA, and soon to be Senator, who is a leader of the movement to prosecute climate change dissenters) indeed hates free intelligence, and free debate. And nineteenth century liberals, for that matter.

Have the progressives (particularly in California) who shriek about Peter Theil using the legal system to go after Gawker uttered a peep of protest against the employment of the far heavier hand of the state to silence debate about climate change? Not that I’ve heard. Free speech for me, but not for thee, is their motto.

Those who claim that science is undeniably on their side should have no fear of debate, and should not feel compelled to use coercion to stifle that debate. That they do means that they lack confidence in the truth of their message and their ability to persuade. It also means that they have a hearty disrespect for the ability of the American people to listen to and evaluate that debate with intelligence and fairness. In other words, what we are seeing in California is another example of a self-anointed elite that heartily disdains the hoi polloi, believing that it is their right and obligation to use any means necessary to impose their beliefs.

This is a recipe for social strife, especially since the climate change debate is by no means the only place where this attitude is regnant. This is precisely why battle is now raging between elitism and populism. Sad to say, that battle is likely to become even more intense in the coming months and years.

Venezuela is on the verge of economic collapse and social disintegration. Here’s the NYT’s diagnosis:

The growing economic crisis — fueled by low prices for oil, the country’s main export; a drought that has crippled Venezuela’s ability to generate hydroelectric power; and a long decline in manufacturing and agricultural production — has turned into an intensely political one for President Nicolás Maduro. This month, he declared a state of emergency, his second this year, and ordered military exercises, citing foreign threats.

Do you see what’s missing? Not a single mention of socialism, Chavism, Bolivarian socialism, etc.

Other countries have suffered similar shocks without descending into dystopian chaos like Venezuela. Many countries in South America, for instance (notably Columbia and Brazil), have suffered from the decline in commodity prices and the drought, and are doing poorly economically, but are not plagued by empty store shelves, myriad shuttered factories and stores, and the imminent threat of social violence. Brazil has suffered from a lack of hydropower due to the drought, but has imported LNG to keep the lights on. Venezuela can’t afford to.

Further, Venezuela’s descent into catastrophe started long ago, and serious problems were clearly manifest in 2014 and before when the price of oil was over $100/bbl and the drought had not reduced hydropower output.

Venezuela’s current crisis had its roots with Chavez’s triumph in the 2002-2003 general strike, and the subsequent firing of 18,000 PDVSA employees. In the years that followed, foreign investors were expropriated, as were domestic businesses, all in the name of socialism. The government has imposed price controls on an every widening array of goods. As shortages increased and inflation spiked, the government increased the scope of price controls and enforced them in a draconian way, including through the dispatching of red shirted goons to seize offending businesses.

The results of all this should have been eminently predictable: shortages and a collapse of economic activity. It is those policies that caused the “long decline in manufacturing and agricultural production.”

If the NYT read it’s own freaking archives, it might have realized that this problem was looming well before the oil price decline and the drought:

Venezuela is one of the world’s top oil producers at a time of soaring energy prices [hahaha], yet shortages of staples like milk, meat and toilet paper are a chronic part of life here, often turning grocery shopping into a hit or miss proposition.

Some residents arrange their calendars around the once-a-week deliveries made to government-subsidized stores like this one, lining up before dawn to buy a single frozen chicken before the stock runs out. Or a couple of bags of flour. Or a bottle of cooking oil. (Emphasis added.)

Mind well the date of the article: April 21, 2012. Four years ago. When the Brent price was about $118/bbl.

This title of the NYT piece is hilarious: “With Venezuelan Food Shortages, Some Blame Price Controls.”

Hey, NYT: by “some” do you mean people with an economics IQ of above 80? (A category which would exclude the editorial staff and most of the news room.)

What is happening in Venezuela is a perfect illustration of something that Adam Smith recognized 240 years ago. It takes perverse government policy to turn an adverse supply or demand shock into shortages and economic catastrophe:

Whoever examines with attention the history of the dearths and famines which have afflicted any part of Europe, during either the course of the present or that of the two preceding centuries, of several of which we have pretty exact accounts, will find, I believe, that a dearth never has arisen from any combination among the inland dealers in corn, nor from any other cause but a real scarcity, occasioned sometimes perhaps, and in some particular places, by the waste of war, but in by far the greatest number of cases by the fault of the seasons; and that a famine has never arisen from any other cause but the violence of government attempting, by improper means, to remedy the inconveniences of a dearth. (Emphasis added.)

That is a perfect description of what is happening in Venezuela.

But various economic morons on the left (but I repeat myself) like Bernie Sanders, Jeremy Corbyn, Sean Penn, and Danny Glover (to name just a few) have been cheering Chavism and Bolivarian socialism for attacking the inequalities spawned by capitalism red in tooth and claw. In a perverse way, it has indeed succeeded in reducing inequality–by making everyone largely equal in their abject misery.

Perhaps there is a silver lining to the food shortages. They reduce the need for toilet paper, which ran out long ago (due to price controls, naturally).

The New York Times prides itself on carrying all the news that’s fit to print. Apparently the news about the impact of price controls hasn’t reached it yet, even though observant folks picked up on it about the time of Diolcetian’s Edict on Prices, a mere 1715 years ago.

This economic cluelessness by the NYT is precisely why its criticism of me doesn’t bother me. Such boundless economic ignorance (which is shared by a vast swathe of its readers, including notably Elizabeth Warren) renders its criticism meaningless. Anyone so stupid, or so ideologically blinded, that they fail to recognize that Venezuela’s problems have everything to do with perverse government policy has nothing to say about economics that is worth paying the slightest heed.

Obama gave his long-awaited speech in Hiroshima yesterday. No, he did not apologize for Truman’s decision to drop the bomb. In many ways, what he says was actually worse.

Most of the speech was vapid banalities. War is bad. (Who knew?) War has been part of the human condition since the beginning of recorded history. (Really?)

Most of the rest was moral preening and the uttering of grandiose but completely empty and unrealistic solutions to the scourge of nuclear weapons. According to Obama, nothing short of a “moral revolution” is required.

What, pray tell, in the vast sweep of human history gives the faintest hope that such a “moral revolution” is remotely possible? Perhaps Obama has enlisted the help of invisible magic unicorns. Or angels.

Indeed, given Obama’s track record with gaseous speeches such as these, you might want to become a prepper, rent a backhoe, and start building your bomb shelter. For instance, Obama’s searching criticism of the history of the relationship between the West and the Muslim world, an his soaring call in his Cairo speech for a fundamental transformation–a revolution, if you will–in that relationship ushered in a period of even greater violence in the Muslim world, and a serious decline in the relationship between Islam and the West.

The Middle Eastern dystopia that slouched in the wake of Obama’s Cairo speech makes me shudder for what will follow in the aftermath of this one. Reading Obama’s Hiroshima speech in light of the dismal aftermath of his Cairo vaporings should lead the Bulletin of Atomic Scientists to move the Doomsday Clock to within a few seconds of midnight.

As for why Obama’s speech was in some ways worse than an outright apology, it was an exercise in moral equivalence that did not distinguish between the combatants in WWII, but lumped them into one mass engaged in a conflict that was undistinguishable from the conflicts that mankind has waged since pre-historical times:

The world war that reached its brutal end in Hiroshima and Nagasaki was fought among the wealthiest and most powerful of nations. Their civilizations had given the world great cities and magnificent art. Their thinkers had advanced ideas of justice and harmony and truth. And yet the war grew out of the same base instinct for domination or conquest that had caused conflicts among the simplest tribes, an old pattern amplified by new capabilities and without new constraints.

In the span of a few years, some 60 million people would die. Men, women, children, no different than us. Shot, beaten, marched, bombed, jailed, starved, gassed to death. There are many sites around the world that chronicle this war, memorials that tell stories of courage and heroism, graves and empty camps that echo of unspeakable depravity.

The difference between WWII, and the War of Austrian Succession, say, let alone some unrecorded tribal conflict, is blindingly obvious, and that difference matters. Why people were “shot, beaten, marched, bombed, jailed, starved, gassed to death” matters. And the responsibility matters, and it is indisputable that the responsibility for this ghastly record is by no means equally shared: it rests disproportionately on Germany and yes, Japan. To ignore these fundamental facts is unpardonable. To do so in the context of a speech at Hiroshima insinuates that the act that ended one part of the war was morally indistinguishable from the events that led up to it, and therefore obscures any moral line between those who initiated the conflict and carried it out with horrific brutality, and those who ended it.

Then there is this wretched paragraph:

The wars of the modern age teach us this truth. Hiroshima teaches this truth. Technological progress without an equivalent progress in human institutions can doom us. The scientific revolution that led to the splitting of an atom requires a moral revolution as well.

This suggests in a very Hegelian/progressive way that the dropping of the atomic bomb was the result of some some inexorable technological process that had slipped human control. It is a statement about a historical process that is utterly ahistorical–more of Obama’s trademark historicism, in other words. It does not put the decision in the very specific historical context of the time. It suggests that the decision to drop the bomb was worse than the alternatives, but does so in a cowardly way because it does not address those alternatives and argue that they were better than dropping the bomb.

It also suggests that the man who made the decision was morally defective, and in need of some moral reformation. This is utterly unfair. Truman had a wrenching choice to make.  A decent successor to his office would recognize that, and give it proper deference. But Obama did not do this, and instead continued his tiresome role as a moral titan instructing lesser beings. All in all, an utterly appalling performance, but a totally unsurprising one.

Obama’s amnesia is, unfortunately, widely shared. American attitudes about Hiroshima and Nagasaki have changed dramatically since the war, and no doubt Obama’s implicit condemnation will be viewed favorably by large numbers of Americans, perhaps a majority. In some respects, this reflects the fact that in the experience of most Americans, the Japanese are a peaceful, quiet, diligent and inoffensive people: few are familiar with the bestiality of Japanese conduct from 1931 through August, 1945. Therefore, it is hard for many to comprehend how something as horrific as Hiroshima and Nagasaki could possibly be justified.

But to do this is to totally misunderstand the basic fact that modern Japan and modern Japanese are pacific, benign and enlightened precisely because of the bomb. Only the utter destruction of a militarist society that was enthusiastically supported by the vast bulk of the citizenry, and which spawned untold miseries across Asia, could have turned the Japanese into a pacific people. Nothing short of the bomb (or an invasion that would have led to more destruction and more death) would have scared the Japanese straight.

Although Obama did not apologize, many other commentators have used the occasion of Obama’s speech to regurgitate their condemnation of the dropping of the bomb and to suggest that an apology is the least that the US owes the Japanese, and the world. It would take me seventy years to go through the verbal sludge that has oozed forth in the last seven days, so I will limit myself to a brief discussion of the worst.

This piece was written by one Jeffrey Lewis, who styles himself in his Twitter bio as “one of the pointier heads in all of nuclear wonkdom.” It would be more accurate to say “one of the emptier heads in all of nuclear wonkdom.” Or at least I hope to God that’s the case, because we’re doomed if he isn’t. For Mr. Pointy Head wrote one of the most cosmically stupid lines I have read in my life:

The historical debate in the United States over Hiroshima, as best I can tell, began as a debate over responsibility for the Cold War.

It is the case that this has been a debate in the fever swamps of the left, who are sure that Truman dropped the bomb as the opening salvo of the Cold War, and that Stalin was the real target. But in the saner precincts of the United States (and even in those very rare academic precincts that can be considered sane) the historical debate began, and continues, as a debate over whether dropping the bomb was the best way to end WWII in the Pacific. The key issues in the debate were from the beginning and remain things like: Would moving away from unconditional surrender have led to an end of the war? How many casualties would the Allies have suffered if they had invaded? How many casualties would the Japanese have suffered if the Allies had invaded? How many Japanese would have died if the US had attempted to continue to firebomb and starve Japan into submission, instead of dropping the bomb? Would dropping the bomb on an uninhabited location, with Japanese witnesses, have convinced the Japanese to surrender?

But if you read Lewis’s piece, you’ll note that something is missing: World War Two! How anyone can discuss the dropping of the bomb and ignore altogether the Solomons, New Guinea, the Philippines (especially Manila), Iwo Jima, Okinawa, Kamikazes, Operations Downfall, Coronet and Olympic, western POWs, huge populations under brutal Japanese control in China and elsewhere in Asia, etc., etc., etc., boggles the mind. But no. In Lewis’s mind it’s all about the Cold War.

The closest that Lewis comes to recognizing the reality of the grim choice facing Truman is this smart-assed line: “And that’s why your granddad didn’t die on some god-forsaken beach code-named after a car.” Would that Paul Fussell or Eugene Sledge or other less literary veterans who were spared unspeakable horrors by the bomb were alive to put this little puke in his place.

Lewis is a product of the same leftist miasma that produced Barack Obama. I have little doubt that his views resonate with Obama, and that the President primarily chooses not to express such views as forthrightly as Lewis does out of political expediency, rather than out of conviction. But in truth, Obama said much the same in his remarks in Hiroshima. By orating about Hiroshima in soaring moral terms completely untethered to the horrific choices facing Harry Truman and the American military leadership, Obama slanders them and does a grave disservice to the truth.

This article claims that “Oil traders are borrowing from banks to store crude at a loss.” Almost certainly not.

The calculation is based on contangos in Brent crude. But the vast bulk of the oil being stored at sea is in Singapore, and is not BFOE, from what I can gather.  This makes all the difference.

This is an example of what has long been a puzzle in economics in which futures prices in a central market (like Brent futures) are at less than full carry but inventories are held at other locations, or in non-deliverable grades (in the central market).  People are puzzled because they don’t take into account transformation costs. It would be impossible for some locations/grades to be at a carry that incentivizes holding inventory while other locations/grades are in backwardation if there are no frictions (costs) in transforming a commodity from one location to another, or from one grade to another: take the stuff out from storage in the market that is at full carry, move it to the central market that is in backwardation, and capture that backwardation (i.e., the premium for immediate consumption/delivery). But if there are frictions, the costs of transforming (e.g., shipping) the commodity to the central market may exceed the backwardation/premium for immediate delivery, making it unprofitable to make that transformation to capture that premium.

This means that a commodity that is costly to transport, or where there are bottlenecks in the logistical or refining processes, will have different forward curves at different locations (or for different grades). Where inventories are held, the price structure will cover storage costs: where the price structure doesn’t cover storage costs, inventories will not be held. Similarly, if some grades of a commodity are stored, the forward curve specific to that grade will cover storage costs.

A good example is Iranian heavy crude in the spring and summer of 2008. At a time when light sweet crudes (WTI and Brent) were in backwardation, and oil prices were reaching record highs, 14 or so supertankers of Iranian crude were swinging at anchor. Why? The demand was for light sweet crude to make low sulphur diesel to meet new European regulations: due to bottlenecks in refining in Europe (European refineries being unable to economically process heavy sour Iranian crude into LSD), there was strong demand for sweet crude that was cheap to refine into LSD, and little was in storage.  As a result,  WTI and Brent prices were high, and their futures curves were in backwardation. However, there was weaker demand for heavy sour crude because of its unsuitability for producing LSD. Also, many refineries that were optimized to process sour Iranian crude were down for maintenance. As a result, Iranian crude sold at a very large discount to WTI and Brent, and the forward price structure for that crude made it economical to store it.

Moving forward to the present, storing non-Brent crude in Asia can be economical even if time spreads do not cover the cost of storage Brent in NW Europe. Even though the lack of carry in the Brent market indicates a high demand for BFOE, the cost of transporting crude from Asia may make it uneconomical to ship it to Europe to meet the high demand for oil there. Moreover, the grades of crude being stored on tankers in Asia may not be competitive with Brent. Similarly, demand is not high enough in Asia to make it profitable to refine all of the supply there. So it is uneconomic to move it to Europe, and it is uneconomic to refine all of it. Therefore, store some of it in Asia even when Brent time spreads are narrow.

Furthermore, the apparent squeezes in Brent mean that some of the demand for it is artificial, and that Brent spreads do not reflect the competitive economics of storage. That is, if there are squeezes or even anticipations of squeezes, Brent calendar spreads are artificially high due to the exercise of market power. It is particularly misguided to use Brent spreads to evaluate the economics of non-Brent storage in this case. (The major reason that squeezes can work is that it is impossible to transform non-Brent crude into Brent.)

Oil traders operate on very thin margins. They are not going to make uneconomic trades. Period. If they are storing oil on ships in Singapore, it is because it pays to do so.

So why the claim that they are storing at a loss?

It’s like the old story of the drunk looking for his car keys under the streetlamp, because the light is better there. It is easy for outsiders to observe Brent spreads, or WTI spreads: just look at a Bloomberg screen, or even futures settlement prices. Singapore spreads, not so much. Traders search to collect information about prices and price structures in an opaque market like Singapore, and can use that to evaluate the economics of storage opportunities. But you or I or journalists or even analysts at Morgan Stanley have a far tougher time doing that.

So the outsiders look under the Brent futures streetlight, and conclude that storing oil doesn’t pay. But the oil isn’t under the streetlight. It’s being stored in the dark. And those who can see in the dark are storing it there because they can see that it pays.

Cue Gomer Pyle. It is now being reported that Glencore was not just bigfooting fuel oil in Singapore, but it was the firm stomping on Brent as well. It took delivery of 15 or more cargoes of the 37 available for June loading. There is also talk that the firm had accumulated a position in excess of the 37, and had already had contracts to sell Brent to refineries in Asia and Europe.

Thus all the elements of a squeeze were in place. A position bigger than deliverable supply, and a grave pre-dug to bury the corpse. It was able to liquidate some of its position (25 cargoes or so, or more than 15 million barrels) at an artificially high price (as indicated by the flip from contango to backwardation in the last couple of weeks of trading).

The July contract has also flipped into a backwardation, suggesting that the play is on again.

Two (and perhaps three, if Glencore is behind what’s going on now) squeezes in short order is pretty audacious, even for Glencore. Makes me wonder if this is part of the company’s resurrection plan. Trading needs to perform in order to offset the carnage in the mining operation. That means taking more risks. Including regulatory and legal risks. Though truth be told, both the UK and Singapore have been quite supine in responding to market power manipulations for years. For instance, with all the squeezes that have taken place on the LME over the years, what have UK regulators ever done? What have they ever done in Brent? Or in the softs, where some pretty big squeezes have taken place in cocoa and coffee in recent years?

Inspector Clouseau would be proud.

The bigger risks are economic and commercial. Squeezes can be very profitable, but they can go horribly wrong. Recall that Glencore’s qua Glencore’s genesis was Marc Rich’s failed attempt to squeeze the LME zinc market in 1992. Marc Rich & Co. lost around $200 million, which resulted in a coup led by Ivan Glasenbeg that ousted Rich, and the renaming of the company as Glencore.

But desperate times sometimes call for desperate measures. Yasuo Hamanaka comes to mind. When his massive rogue trading operation was teetering on the precipice, needing a big profit in a hurry he carried out a massive corner of LME copper in December 1995. He wrote his co-conspirator “this is our last arms” (quoting from memory). In other words, do or die.

I’m not saying that Glencore’s problems are at all similar to Hamanaka’s, but the company does have big issues, and a need to make a lot of money in a hurry. The kind of issues that can lead big risk takers to take bigger risks, and push the envelope. The envelopes in Brent and Singapore fuel oil are pretty expansive, but Glencore seems to be pushing them nonetheless. Not part of the official resurrection plan, but most likely part of it nonetheless.