Streetwise Professor

Yesterday in the Rose Garden, Merkel and Obama said that the dreaded Third Stage sanctions on Russia if that country disrupts the Ukrainian election on the 25th. (Merkel phrased it “unable to hold the election.”)

But nobody that I’ve seen has asked the crucial question: what constitutes “disruption”, and disruption by Russia specifically? Is the election “disrupted” if it does not take place in some regions, such as Donetsk? Or would Obama and Merkel require the election to be canceled to  deem that it has been disrupted? What if the election is disrupted by local forces but under covert Russian direction? What evidence would Merkel and Obama require to assign responsibility to Russia? Would Merkel accept NSA intercepts as evidence?

This election disruption standard came out of thin air, and for all the world appears to be a team can-kicking exercise. Now Obama and Merkel have an excuse to do nothing for three weeks. Then when three weeks comes, and the elections turn into a chaotic fiasco, they’ll be able to find some other excuse. It was Ukrainian incompetence that caused the problem. There’s no reliable evidence that Russia deliberately disrupted the election. Something. Anything.

Regardless, Putin now has a guaranteed three weeks to continue to wreak havoc using spetsnaz and local irregulars (i.e., thugs). Ukraine may counterattack in one place, or a couple. But even if they succeed (and there is no reason to believe on past performance that they will), Ukraine is a big place and you can bet that a new Russian uprising will break out somewhere else.

Will he invade? I think not. Not because he couldn’t go through Ukraine like a hot knife through butter (or sh*t through a goose, as Patton used to say), but because holding the place would be hard, and outright invasion could even force Merkel and Obama into doing something half-way serious (kicking and screaming all the way). But because he can achieve his objectives by fomenting a civil war.

If it does come to civil war, it will be vicious, especially in the center of the country, in places like Kiev and Odessa, that contain large Ukrainian and Russian populations. (Civil wars are always most brutal in such borderlands. Like Sarajevo. Or in western Missouri in the Civil War.)

Merkel and Obama have basically signaled an unwillingness to act, and have given Putin a defined time window to act with no fear of punitive sanctions. And when that period ends, it will be extended, most likely. German industry (led by Hitler’s favorite firm, Siemens) are putting unrelenting pressure on Merkel. What’s more, the country is rife with “Russia understanders” like Hans Werner Sinn, who penned this egregious oped in the WSJ. Sinn and his ilk are like termites that have eaten away German resolve from within.

Which means I cannot see Germany acting, under any circumstances. Since Obama has already said that he prefers unity in inaction to acting alone (or with a coalition of the willing), Germany-by which I mean Siemens, BASF, Adidas, etc., and “understanders” like Sinn and Helmut Schmidt and the just plain corrupt like Gerhard Schroeder-therefore has a veto over American action.

The floor is yours, Vlad. All yours.

Every sentient being not in the tank for Russia recognizes that the Television Channel Formerly Known as Russia Today (i.e.,  RT) is spewing Kremlin agitprop 24/7. Heck, even the borderline sentient, like our Secretary of State, recognize this.

There is another widely followed outlet, this one online, that is vying with RT for the dubious honor of flacking most shamelessly for Putin: Zero Hedge. There are numerous posts daily that flog the Russian view, but few are more egregious than this one. The part comparing Crimea to the Falklands was rather amusing. As was the statement about Chevron being part of the Rockefeller empire. Yeah. Back in 1910. When it was Standard Oil of California. There was a lot of venting about the Rothschilds, and Jews generally. And WTF about the Yellowstone caldera?

You might say: “but that post is from another source.” But as I pointed out two-and-a-half years ago, this is a classic Soviet influence operation technique.

In that post I also noted the close affinity between RT and Zero Hedge. Some things don’t change.

To say I am not surprised is an understatement. Recall that Zero Hedge is run by Daniel Ivandjiiski, the son of an obvious Soviet bloc (Bulgarian, specifically) intelligence operative.

I’ve thought for years that ZH is a Kremlin influence operation. It is doing nothing now to disabuse me of that notion. To the contrary. It is cementing it.

There was another fiery derailment of a train carrying crude oil, this one in Lynchburg, Virginia. Some of the cars plunged into the James River, spilling oil into the stream that runs through Virginia via Richmond to the Chesapeake.

This is just the latest of a spate of such accidents. This is, to some extent, the inevitable consequence of the oil boom in the Bakken and Texas. The boom means that more oil has to move, and rail can adjust most rapidly to accommodate that need. Pipelines are cheaper and safer, but they take a while to build. Unfortunately, regulatory obstacles had impeded the more rapid buildout of pipelines.

To give an idea of how unexpected the oil-by-rail movement is, note that the US government (namely the Energy Information Agency) does not collect data on the volume of rail shipments. It tracks shipments by barge and pipeline, but not rail. Because oil by rail volumes were basically rounding error until the shale oil boom.

The recent spate of accidents has led Warren Buffett to call for stronger regulation, most notably, a requirement for safer rail cars.  Buffett’s Berkshire Hathaway of course owns the nation’s second largest rail carrier, BNSF.

That Warren, always looking out for the public interest, and willing to sacrifice the interests of one of his major holdings to benefit us hoi polloi.

Not.

First, it’s long been known that some firms in an industry can benefit from the imposition of more stringent safety regulations. Yes, these regulations raise everybody’s costs, but some firms’ costs rise more than others. The less-impacted firms have an incentive to press for the regulations in order to raise their rivals’ costs. This raises market price. The effect on price more than offsets the effect on cost for the less cost-impacted firms.

Which means: always look askance at people like Buffett who are calling for regulation of their industry.

And this goes double for Buffett. For in addition to BNSF, Berkshire Hathaway owns the Union Tank Car Company, one of the largest manufacturers of oil tanker railcars. Meaning that some of the costs from requiring the purchase of more robust railcars goes from Buffett’s BNSF pocket into his UTLX pocket. He is, effectively, hedged against the rise in BNSF’s costs that would result from regulations requiring the use of safer cars. What’s more, his UTLX also pockets some of the costs incurred by his rivals. That’s a double win for Buffett. His rivals’ costs go up, raising prices for rail freight which benefits BNSF, and Buffett also books as profit (at UTLX) some of the higher costs his rivals incur.

Great work if you can get it.

So yeah, Buffett’s call for more stringent regulation of oil carrying railcars is totally altruistic. Totally.

It never ceases to amaze me how Buffett’s kindly grandfather shtick fools the world. He is utterly cynical in his actions and public statements. He demonizes derivatives, but engages in some huge exotic options trades. He claims he supports the estate tax out of interest of fairness and equity, not mentioning that his insurance businesses profit immensely from the estate tax (and that he can of course largely circumvent the tax). He has manipulated the silver market. And he poses as a defender of public safety, not mentioning his very strong economic interests in such regulation.

It’s not surprising that Buffett conceals his interests. What’s more surprising, and more discouraging, is that none of the media stories on his calls for tougher regulation that I have seen mention his economic interest. Reporters are either intimidated,  gulled by his shtick, or shockingly ignorant of how Buffett would benefit from rules requiring railroads to upgrade their car fleets.

Just because reporters are credulous dupes doesn’t mean you have to be. Don’t fall for the Buffett shtick. Don’t pay attention to what he says. Evaluate the costs and benefits of increased safety standards on oil-by-rail shipments on the merits.

And don’t limit your analysis to rail shipments alone. Consider too the effects of expediting the approval and building of oil pipelines. Pipelines aren’t perfect, but they have a much better safety record than rail. Not that Grandpa Warren will tell you that.

Back in Houston, with a few moments to catch up.

I mentioned Obama’s press conference in the Philippines yesterday. It deserves a more detailed treatment, because it is quite an amazing performance.

The incredible petulance-an Obama trademark-jumps out in even a cursory reading. But when you drill down, you’ll see a rather stunning farrago of shoddy reasoning and logical fallacies (with straw men and false choices taking center stage).

Here’s my annotated take on the presser, with my parenthetical comments in bold face:

PRESIDENT OBAMA:  Well, Ed, I doubt that I’m going to have time to lay out my entire foreign policy doctrine.  [Because he’d have to think it up first.] And there are actually some complimentary pieces as well about my foreign policy, but I’m not sure you ran them.

Here’s I think the general takeaway from this trip.  Our alliances in the Asia Pacific have never been stronger; I can say that unequivocally.  Our relationship with ASEAN countries in Southeast Asia have never been stronger.  I don’t think that’s subject to dispute.  As recently as a decade ago, there were great tensions between us and Malaysia, for example.  And I think you just witnessed the incredible warmth and strength of the relationship between those two countries.

We’re here in the Philippines signing a defense agreement.  Ten years ago, fifteen years ago there was enormous tensions around our defense relationship with the Philippines.  And so it’s hard to square whatever it is that the critics are saying with facts on the ground, events on the ground here in the Asia Pacific region.  Typically, criticism of our foreign policy has been directed at the failure to use military force.  [Really? This is typical?] And the question I think I would have is, why is it that everybody is so eager to use military force [Everybody? Please name five even moderately prominent national office holders or media figures who espouse this view. OK: Three. OK: One.] after we’ve just gone through a decade of war at enormous costs to our troops and to our budget?  And what is it exactly that these critics think would have been accomplished?

My job as Commander-in-Chief is to deploy military force as a last resort, and to deploy it wisely.  And, frankly, most [Most? Really?] of the foreign policy commentators that have questioned our policies would go headlong into a bunch of military adventures that the American people had no interest in participating in and would not advance our core security interests. [Again. Name names. As many as Three Finger Brown could count on his pitching hand.]

So if you look at Syria, for example, our interest is in helping the Syrian people, but nobody suggests that us being involved in a land war in Syria would necessarily accomplish this goal.  [That’s right, actually. No one has suggested a land war in Syria.] And I would note that those who criticize our foreign policy with respect to Syria, they themselves say, no, no, no, we don’t mean sending in troops.  Well, what do you mean?  Well, you should be assisting the opposition — well, we’re assisting the opposition.  [Please. The US assistance is minimal, and explicitly does not include weaponry, especially the kind of weaponry the opposition needs to have a fighting chance. Throughout this answer, Obama avoids addressing head on the specific policies that those criticizing him have advocated. He bashes straw men, attacking things that haven’t been suggested, and ignoring the things that have been.] What else do you mean?  Well, perhaps you should have taken a strike in Syria to get chemical weapons out of Syria.  Well, it turns out we’re getting chemical weapons out of Syria without having initiated a strike.  [Intelligence agencies, including those in Israel and the US, believe that Syria has not disclosed all its CW or the facilities to produce them. More to the point: it is Obama that fetishized chemical weapons. Assad is wreaking a humanitarian crisis using conventional weapons and barrel bombs and the old standby of starvation. Obama ignores this, with his obsessive focus on CW. What’s more, even from a bloodless, geopolitical perspective, American inaction and indifference is handing a strategic victory to Iran and Russia.] So what else are you talking about?  And at that point it kind of trails off. [No. It doesn’t trail off, Barry. You just ignore it.]

In Ukraine, what we’ve done is mobilize the international community. [Who you gonna believe? Me or your lyin’ eyes? Obama is deferring to the least common denominator, compromised countries like Austria. This mobilization has obviously had a huge impact on VVP. Huge I’m tellin’ ya.]  Russia has never been more isolated. [And Putin obviously doesn’t give a sh*t. To deter someone you have to credibly threaten the ability to damage something they care about, not what you care about. Putin is consciously and publicly attempting to isolate Russia from the west, politically and culturally. In other words, Barry: you are Br’er Fox and Putin is Br’er Rabbit. By isolating him you are throwing him in the brier patch, which is exactly where he wants to be. Well played. Well played. And truth be told, the isolation that Putin might care about-namely cutting Russia off from the world financial system-has been avoided like the plague.]  A country that used to be clearly in its orbit now is looking much more towards Europe and the West, because they’ve seen that the arrangements that have existed for the last 20 years weren’t working for them.  And Russia is having to engage in activities that have been rejected uniformly around the world.  [And this rejection does what for Ukraine, actually? Putin is moving, through asymmetric means, virtually unopposed. All the moral dudgeon in Europe and the US won’t help Ukraine one whit.] And we’ve been able to mobilize the international community to not only put diplomatic pressure on Russia, but also we’ve been able to organize European countries who many were skeptical would do anything to work with us in applying sanctions to Russia.  [American sanctions are a joke. European sanctions would have to be put in steroids in order to achieve joke status.] Well, what else should we be doing?  Well, we shouldn’t be putting troops in, the critics will say.  That’s not what we mean.  Well, okay, what are you saying?  Well, we should be arming the Ukrainians more.  Do people actually think that somehow us sending some additional arms into Ukraine could potentially deter the Russian army?  [Yes. It’s not unreasonable. At all. The “correlation of forces” does not heavily favor Russia, especially when one considers the implications of occupying Ukraine, rather than just attacking it. Even modest increases in Ukrainian military capacity could tip the correlation against Putin.] Or are we more likely to deter them by applying the sort of international pressure, diplomatic pressure and economic pressure that we’re applying? [What? These things are mutually exclusive? Hardly. Why not both? And the opponents of your policy are advocating more robust economic actions against Putin and Russia. Again, you ignore the actual policies that your critics advocate, and wear yourself out attacking things they have never proposed.]

The point is that for some reason many who were proponents of what I consider to be a disastrous decision to go into Iraq haven’t really learned the lesson of the last decade, and they keep on just playing the same note over and over again.  [What a slur. Just who is advocating this, actually? Indeed, one major  lesson of Iraq-the challenge of occupation-favors arming the Ukrainians. The Russians have no doubt studied Iraq, and realize that a well-armed irregular force would make any attempt to occupy hell. So why not do it?] Why?  I don’t know.  [There’s a lot you don’t know, Barry.] But my job as Commander-in-Chief is to look at what is it that is going to advance our security interests over the long term, to keep our military in reserve for where we absolutely need it.  There are going to be times where there are disasters and difficulties and challenges all around the world, and not all of those are going to be immediately solvable by us.

But we can continue to speak out clearly about what we believe.  Where we can make a difference using all the tools we’ve got in the toolkit, well, we should do so.  And if there are occasions where targeted, clear actions can be taken that would make a difference, then we should take them.  We don’t do them because somebody sitting in an office in Washington or New York think it would look strong.  That’s not how we make foreign policy.  And if you look at the results of what we’ve done over the last five years, it is fair to say that our alliances are stronger, our partnerships are stronger, and in the Asia Pacific region, just to take one example, we are much better positioned to work with the peoples here on a whole range of issues of mutual interest.

And that may not always be sexy.  That may not always attract a lot of attention, and it doesn’t make for good argument on Sunday morning shows.  But it avoids errors.  You hit singles, you hit doubles; every once in a while we may be able to hit a home run.  But we steadily advance the interests of the American people and our partnership with folks around the world.

Obama came to prominence as a critic of the Iraq War. That’s how he made his mark, and it is clear that is how he defines himself. He is the un-general, un-fighting the last war. He has Iraq Syndrome, which is like Viet Nam Syndrome, except worse.

In his mental universe, the US policy establishment is populated with mouth-breathing warmongers who see only military solutions to strategic and geopolitical problems. In his mind, Obama is Horatio at the Bridge, holding back these barbarian hordes. This is profoundly insulting to those of goodwill who happen to disagree with Obama. But Obama cannot possibly conceive that anyone who disagrees with him is of goodwill. His is a truly Manichean worldview: those who agree with him are good, those who disagree are evil.

In fact, many of his critics have argued consistently that his deference to the Assads and Putins and Khamenis of the world has made military conflict (and conflict waged on terms unfavorable to the US) more likely, not less. With respect to Putin in particular, the critics have argued that acquiescing to South Ossetia and Abkhazia, terminating missile defense in eastern Europe, signaling a willingness to be “flexible” after re-election, and most notably, utterly caving in Syria has greatly emboldened Putin, thereby increasing not reducing the risk of military conflict. (When Obama took office, who was seriously discussing the credibility of our commitment to enforce Article 5 of the Nato Charter in the event of a Russian attack on Estonia, Latvia, or Lithuania?)

But Obama either will not or cannot see this. He is completely convinced that he is enlightened and good, and that his critics are benighted and  evil. Seeing the world in these harsh contrasts, he is incapable of change in response to reality.

Bush was criticized, and rightly so, for his black-and-white view of the world. But Bush was capable of making mid-course corrections in response to incontrovertible evidence of failure.

By contrast, Obama makes Bush look like a paragon of subtlety and flexibility.

In The Sound and the Fury, Faulkner wrote: “For every Southern boy fourteen years old, not once but whenever he wants it, there is the instant when it’s still not yet two o’clock on that July afternoon in 1863 [i.e., the moments before Pickett’s Charge].” Obama is far worse. In his mind, every instant, it is Iraq, circa March 2003. He sees everything through that prism. This is a crippling limitation. And a crippled United States unleashes the most reprobate actors in the world, the most notable of whom at present is Vladimir Vladimirovich Putin.

The day that Geneva was announced, I ridiculed the idea that the OSCE would be able to enforce any deal to withdraw anti-Kiev forces from government buildings, check points, etc.  The seizure of an OSCE delegation in Slavyansk by the Russians/Russian tools, and the subsequent public display of the European members of this team, proves that ridicule was more than justified. It is the punchline to the joke that is Geneva.

Despite the seizure and humiliation of a group of European military personnel carrying diplomatic passports, the Euros are still shrinking from doing anything that might risk offending Vlad. Because he might turn off their precious gas. Or maybe Siemens won’t get as much business.

The NYT reports that the administration is shrinking right along with them, not wanting to embarrass the poor dears by imposing punitive sanctions.

Speaking of jokes, here is Obama’s standup routine:

“The notion that for us to go forward with sectoral sanctions on our own without the Europeans would be the most effective deterrent to Mr. Putin, I think, is factually wrong,” Mr. Obama told reporters in Asia, where he is traveling. “We’re going to be in a stronger position to deter Mr. Putin when he sees that the world is unified.” He added: “For example, say we’re not going to allow certain arms sales to Russia — just to take an example — but every European defense contractor backfills what we do, then it’s not very effective.”

Sorry. The world unified in pusillanimity is hardly a deterrent to Putin. The US and a few stalwart allies acting on their own in a robust way would be much more effective.

Obama totally lost it in Asia in response to a question by Fox News’s Ed Henry:

“As you end this trip, I don’t think I have to remind you there have been a lot of unflattering portraits of your foreign policy right now,” Henry said. “And rather than get into all the details or red lines, excedera, I’d like to give you a chance to lay out what your vision is more than five years into office, what you think the Obama doctrine is in terms of what your guiding principle is on all of these crises, and how you answer those critics who say they think the doctrine is weakness.”

“Well, Ed, I doubt that I’m going to have time to lay out my entire foreign policy doctrine,” the President responded, adding “And there are actually some complimentary pieces as well about my foreign policy, but I’m not sure you ran them.”

The President then went on to attack those criticisms, point by point, noting that “Typically, criticism of our foreign policy has been directed at the failure to use military force,” and asking “why is it that everybody is so eager to use military force after we’ve just gone through a decade of war at enormous costs to our troops and to our budget? And what is it exactly that these critics think would have been accomplished?”

“My job as Commander-in-Chief is to deploy military force as a last resort, and to deploy it wisely,” he continued. “And, frankly, most of the foreign policy commentators that have questioned our policies would go headlong into a bunch of military adventures that the American people had no interest in participating in and would not advance our core security interests.”

On Syria, the President pointed out that his critics “say, no, no, no, we don’t mean sending in troops,” and asked “Well, what do you mean?”

“Well, you should be assisting the opposition — well, we’re assisting the opposition,” President Obama said, then asked “What else do you mean? Well, perhaps you should have taken a strike in Syria to get chemical weapons out of Syria. Well, it turns out we’re getting chemical weapons out of Syria without having initiated a strike. So what else are you talking about? And at that point it kind of trails off.”

On Ukraine, the President asked of those critics, “What else should we be doing? Well, we shouldn’t be putting troops in, the critics will say. That’s not what we mean. Well, okay, what are you saying? Well, we should be arming the Ukrainians more. Do people actually think that somehow us sending some additional arms into Ukraine could potentially deter the Russian army? Or are we more likely to deter them by applying the sort of international pressure, diplomatic pressure and economic pressure that we’re applying?”

“The point is that for some reason many who were proponents of what I consider to be a disastrous decision to go into Iraq haven’t really learned the lesson of the last decade, and they keep on just playing the same note over and over again,” the President said. “Why? I don’t know.”

Appalling. Proof that Obama is the thinnest skinned president ever. And his response has the opposite effect of what he intended: it lends credence to the criticism. It is also classic Obama. Dishonest and partisan. Blaming his political opponents or his long-departed predecessors for his failures. Total war against an army of straw men.

No one is seriously arguing for military involvement in Ukraine. But they-we, for I am included-are arguing for far more robust economic measures.  Funny Obama totally ignores that. He knocks down arguments no one makes and ignores the ones they do.

That’s our Obama.

Henry, or someone else, should have demanded that Obama name one serious figure advocating a replay of Iraq in Ukraine. One.

The record speaks for itself. Obama’s foreign policy is a concatenation of clusterf*cks. Syria. Ukraine. Israel-Palestine.

Speaking of the last issue. Kerry was quoted making a remark saying that if it continues on its present course, Israel will turn into an apartheid state. He made these remarks in front of Russians. Who duly leaked them.

Why would he say anything with any Russian in earshot, especially in the aftermath of the “f*ck the EU” leak fiasco?

With such clueless morons in charge, no wonder US credibility and influence is imploding. But if you challenge Obama on the implosion, he explodes.

This is where we are, and it is not a good place to be.

Traveling and family obligations, so limited time to comment on events. But an opportunity (sitting at the gate in Greenville) to take a few quick hits.

The US announced some additional sanctions today. To indicate how lame these sanctions are, the Russian market (MICEX) was up 2.35 percent when the names on the list (or more accurately, the names that weren’t on the list) were announced.

One notable name: Sechin. Roseneft was down 1.7 percent, and BP, tied to the hip with Rosneft, was down about two percent.

Other than that. Zip. In an inversion of the usual expression, this was a situation to sell the rumor and buy the fact.

The Euro list comes out tomorrow. It is rumored to be even more lame than the US list.

Over the weekend in Malaysia, Obama made it clear that he would coordinate sanctions with the Euros, and that the US would not impose unilaterally sanctions that were much tougher than what the Europeans will agree with. Meaning that given that the EU requires unanimous approval for its actions, Obama is deferring to the Austrians and the Slovenians and the Germans, who are utterly compromised by Russian influence and cash.

Most likely, Obama really wants to do nothing. This allows him to do that while claiming he’s all for solidarity and diplomacy and action. This is the negation of leadership. Leading from behind doesn’t even come close to describing this.

And to think that Obama ran on eliminating cynicism from US foreign policy.

We’ve seen this script before, in Syria. Kerry comes out and makes an angry denunciation, followed by threats. Followed by  . . . nothing.

All the circumstances in Syria were much more favorable to justify action. A true humanitarian crisis. Viable military options, not least because there would not be a direct confrontation with Russia. Crimes against humanity.

Kerry compared Assad to Hitler. Obama threatened to attack. But then the US grabbed the first fig leaf Putin proffered, and bugged out.

If the US will not act aggressively in Syria, it won’t act aggressively-even with respect to sanctions-in Ukraine.

The US sanctions announced today were intended to strike at Putin’s inner circle, but not at Putin himself. Presumably the threat is that he could be targeted next. The NYT ran an article over the weekend about trying to track down Putin’s money.

Fat chance.

First, even if Putin’s name is listed at the owner of some company or companies, they would be separated from the real money by a labyrinth of shell companies, trusts, etc.

Second, paper and electronic records or ownership are essential in countries subject to the rule of law because third party enforcement is relied upon to protect property rights and ownership.

That is NOT the way Putin needs to rely on such mechanisms to enforce his access to and control over his property. Russians are notorious for making huge deals verbally, and relying on, umm, informal means to enforce contracts. Putin’s deals are sealed with a handshake-if that. Maybe there is a piece of paper in his safe. But he has the power of a very scary security apparatus at his beck and call. That is what he relies on to secure his property. No need for the formalities of ownership when the real enforcers are under one’s command.

And this is precisely why he so desperately needs to hold onto power. That power secures his wealth. This also means that trying to trace his wealth and property is a fool’s errand.

There is a Midas-like aspect to Putin’s fortune. There are constraints on his ability to consume it. But he definitely cannot consume it if he loses power. Which is why, like all autocrats, he will only leave office horizontally, at room temperature.

With that happy image in mind, some musical entertainment in honor of Igor Sechin, today’s only meaningful sanctions target. The man with the hockey hair.

I have been working since last year on a whitepaper (sponsored by Trafigura) on The Economics of Commodity Trading Firms. After about a month of limited theatrical release, the paper is now publicly available at the link.

Even if I do say so myself, the paper provides a pretty thorough overview of commodity trading firms, ranging from their economic function as “agents of transformation” (of commodities in space, time, and form), to risks and risk management, to corporate structure (private vs. public), to capital structure, to asset ownership, to the systemic risks (or lack thereof) of commodity trading.

One of the main takeaways for me was the diversity of commodity trading firms. Making generalizations is difficult. Another takeaway (related, in a way) is that some of the conventional wisdom about these firms (e.g., there is a general trend to asset ownership and vertical integration) is not correct.

But rather than discuss the report extensively here, I leave it to you all to read it. Comments welcome.

An exchange chairman believes that all trading should take place on exchanges. In commenting on securities market structure, CME Group Chairman Terry Duffy criticizes fragmentation-especially the existence of dark pools-and touts the lack of fragmentation in futures trading.

The concentration of trading activity on futures exchanges, as opposed to the fragmentation across different exchanges (as well as off-exchange venues) in equities is due to a major difference in the treatment of orders. In futures markets, exchanges own their order flow: hypothetically, if there was another exchange posting a better price in a particular product, CME would not be obligated to direct an order to that better-priced market. When exchanges own their order flow in this way, traders direct orders to the exchange where they expect to get the best price. This is typically the market where most traders are. This creates a centripetal force that causes all activity to tip to a single dominant exchange. That is why CME, Eurex, ICE, etc., have monopolies or near monopolies in the products they trade. (And yes, Terry, even though no one is stopping anyone from competing with you, this order flow effect means that no one can do so effectively, leaving you a de facto monopoly. Only LIFFE’s idiocy in its battle with Eurex in 1998 allowed the Germans to get trading in the Bund futures to tip their way.)

This is the way it used to be in equities too. Prior to the late-2000s, the NYSE effectively owned its order flow, and 80-85 percent of trading volume in NYSE listings took place on the NYSE. The remainder occurred on “third markets” that catered to the verifiably uninformed (more on this below).  But in 2005 the SEC changed the rules in a fundamental way. It passed RegNMS, which socialized order flow by requiring exchanges to route orders to others displaying better prices. Within a very short period, a handful of exchanges executing between 8-20 percent of volume competed fiercely with one another. The NYSE’s effective monopoly had been broken.  This is why Goldman paid $6.5 billion for a specialist unit in 2000, and sold it for $30 million this year. The 2000 price capitalized monopoly rents: there are none to capitalize in 2014.

Duffy says he’s fine with this kind of fragmentation  of trading across exchanges with the associated intense competition (though that’s very easy for him to say because he doesn’t have to worry about that outcome given the lack of a RegNMS-type rule in futures markets), but he thinks dark pools should be shut down.

To evaluate this position, you need to understand what role dark pools play. Just like third markets and block markets of the pre-RegNMS era, dark pools (and internalization of retail order flow) are a ways of screening out informed traders. This reduces the costs of the uninformed who can trade on dark pools be reducing their vulnerability to adverse selection. This is good for them, but the overall effects are much harder to understand. Order flow on exchanges becomes more toxic (i.e., a higher proportion of the order flow is informed) which raises adverse selection costs on exchanges, and thereby raises trading costs there.

The net effect of this is very difficult to determine. This is another application of the second best. Since exchanges may have market power, the additional competition from off-exchange venues can improve efficiency even if it raises adverse selection costs for some traders. Moreover, as I’ve argued in my HFT posts recently, since some informed trading is of the rent seeking variety, by reducing the returns to informed trading dark pools can reduce wasteful investments in information.

This means that Duffy’s criticism of dark pools might be right. But it might be wrong.

One thing is definitely true. Market structure has huge distributive effects. Although the rules on dark pools have very uncertain efficiency effects, there is no doubt that these rules affect the distribution of costs and benefits across different types of traders. It is precisely these distributive effects which make the battles over market structure so divisive and protracted.

I’d also note that Duffy ignoring some features of futures markets, and derivatives markets generally, that perform functions similar to dark pools. For instance, CME allows block trading. Indeed, it is engaged in a tussle with the CFTC, which wants to reduce the amount of block trading in order to force more volume into the order book.

But block trades are a way that less-informed large traders can reduce adverse selection costs. They have long performed this function in equity markets, and are now doing so in futures. And by stripping out that order flow from the order book, block trades have the same effects as dark pools.  Blocks are a form of fragmentation.

Block markets are non-anonymous: that’s how they screen out the informed. Block traders won’t deal with those they believe likely to be informed, and by trading face-to-face traders can develop reputations for not being informed and profiting systematically at the expense of their counterparties.

Well, wouldn’t you know it, but this is how OTC derivatives markets work too. The lack of price transparency in OTC markets is often bewailed, but OTC markets are transparent in another important way that exchanges are not: they offer counterparty transparency, whereas exchanges are counterparty opaque. This benefits, say, firms that are trading to hedge in large volume (who are likely to be uninformed). It’s not a surprise that trading activity migrated from OTC to blocks on CME and ICE after Frankendodd made swaps trading more expensive. Both futures blocks and swaps are ways of reducing the execution costs of large, likely uninformed traders.

Put differently: blocks (and swaps) are a form of fragmentation, in the sense that they divert trading activity away from the limit order book. So Duffy shouldn’t be quite so sure about the superiority of the futures market model. It is fragmented in its own way, and has a lot more market power. But of course Duffy likes the last part, though he would never admit it.

Marx said that history repeats itself, first as tragedy, then as farce.

Perhaps the best interpretation of Geneva, 2014, is that it is the farcical doppelgänger of Munich, 1938.

It was apparent to anyone not willfully blind that Geneva was doomed to failure. There was no enforcement mechanism. And within hours, it became clear that the Russians intended to use the agreement as a reason to ratchet up its offensive against the Kiev government, and had no intention to force evacuation of any buildings by its forces in eastern Ukraine. The Russians are demanding that the Kiev government go after any group that Moscow does not like.

And you know what will happen. The Russians will use the failure of Kiev  to bend to their will as a pretext for refusing to do anything in Donestk, and for invading or supporting separatists.

I have to conclude that Kerry enjoys getting punked by Lavrov in Geneva. If he doesn’t, why does he do it so regularly?

Insofar as enforcement is concerned, the Geneva agreement lays out a special role for the OSCE. But check out this organizations description of its activities in Ukraine. Totally passive. Merely an observer. I’ve heard of alpha males. I’ve heard of beta males. OSCE comes off as omega males. Who have been eunuched.

And not surprisingly, the Russian forces in eastern Ukraine are totally blowing them off.

But don’t worry, OSCE is going to persuade them with sweet reason!:

After a meeting in Kiev on Saturday with diplomats from the four parties to the Geneva accord, Swiss envoy Christian Schoenenberger, whose country is chair of the OSCE, said its monitors had already spoken to the separatists: “For the time being the political will is not there to move out,” he said.

“That’s the task of the monitors, to create this political will, inform the people, so eventually they will understand that the best option for them is to move out,” he told reporters.

I don’t know whether to laugh, cry, or pound my head against the wall.

The article I linked to is titled “Surrender talks set with separatists in Ukraine.” It is beyond obvious that it is OSCE whose surrender is being negotiated.

But the farce does not end with Geneva. Perhaps stung by the criticism of his dancing to organ grinder Vladimir’s tune, Eddie Snowden penned a defense of his conduct that ran in the Guardian. Never fear, people, the article had its allotted content of narcissistic Snowden gasbaggery. (Just how many times do you have to mention risking your life, Ed.) But the best (and by best, I mean worst) part was this:

Moreover, I hoped that Putin’s answer – whatever it was – would provide opportunities for serious journalists and civil society to push the discussion further.

When this event comes around next year, I hope we’ll see more questions on surveillance programs and other controversial policies. But we don’t have to wait until then. For example, journalists might ask for clarification as to how millions of individuals’ communications are not being intercepted, analysed or stored, when, at least on a technical level, the systems that are in place must do precisely that in order to function.

I have to say it. What planet does this guy live on?

Journalists? You mean the ones that are beaten or killed if they challenge Putin? (The name Politkovskaya ring a bell, Ed?) Civil society? You mean the individuals and organizations that Putin and the Russian state have relentlessly ground into the dust over the past several years?

And just what answer would Snowden expect Putin to deliver to any journalist-with-a-death-wish who poses these questions?

Snowden’s Guardian piece comes off as more of a taunt than serious defense. He was only allowed to ask his question because the FSB approved it, and set up the entire apparatus for him to ask it. The Guardian article means nothing, because the Russians have to at least attempt to maintain the pretense that Snowden is not the organ grinder’s monkey that he actually is.

To show how farcical this is, check out Kucherena’s explanation of the situation:

Mr. Snowden’s Russian lawyer, Anatoly Kucherena, denied his client had been pressured to participate.

“He decided to do this himself. There was no negotiation with the Kremlin,” he said. “Edward had the opportunity, so he asked the question.” Questions could be submitted ahead of the event in writing or in video form via a website or mobile application.

Um, just how did this “opportunity” magically appear?

Kucherena’s risible attempt to claim that this was not an FSB-arranged performance is the most telling proof that it was an FSB-arranged circus.

One more item in the farcical chronicles.  German FM Frank-Walter Steinmeier is pimping for Putin harder than ever:

German Foreign Minister Frank-Walter Steinmeier said he wished as much emphasis would be placed on preventing an escalation of tensions with Russia over Ukraine as there is at the moment in threatening economic sanctions.

In an interview to appear in Germany’s Bild am Sonntag newspaper on Sunday, Steinmeier appeared to be referring to threats from the United States as well as from within Germany about the need for economic sanctions against Russia.

“I sometimes wish that the same engagement being used for the debate about sanctions would also exist when it comes to avoiding a further escalation,” Steinmeier told the Sunday newspaper, according to excerpts released before publication.

Yeah, because Putin is putting so much effort into avoiding escalation.

Steinmeier is a snake at the bosom of the western alliance. Germany is totally compromised, and the US must accept that when crafting its own actions, such as they are. Germany is giving more proof by the day that whatever resources NSA devoted to spying on it, it was not enough.

One piece of news is that the US is considering going after Putin’s billions. I’ll believe it when I see it. For now, that appears to be just another part of the FUD campaign that the US is waging in place of actually doing something. But FUD doesn’t work unless the threats are credible, and the threats aren’t credible unless you carry through on them. Obama has repeatedly failed to do so, and as a result, these whispered and leaked threats will have zero effect whatsoever.

I fear the farce will be with us, for many years to come. The current farce stems from a fatal lack of will in the west, and that is not going away anytime soon.

In his Atlanta Fed paper, Stiglitz uses second best considerations in his argument against HFT. My basic response is that second best considerations cut both ways.

Put simply, second best considerations mean that if one optimality condition is violated, then it may be efficiency enhancing to violate another optimality condition: or, one “market failure” can mitigate another. A simple example would be that it might be better for a polluting industry to be monopolistic or oligopolistic instead of competitive.  The monopolist’s reduction of output offsets the incentive to produce too much that occurs when there is an externality.

In the context of HFT, my second best argument is that since informed trading can be rent seeking, things that might otherwise be inefficient, such as anticipating orders or engaging in “arms races” to enhance trading speed, can be efficiency enhancing.

This is not a new theme with me. In fact, it’s quite old. I wrote a paper in 1998 titled “Third Markets and the Second Best” that applied this argument to off-exchange trading, and the free riding off of price discovery on exchanges. I discussed this further in my 2002 JLEO paper, “Securities Market Macrostructure: Property Rights and the Efficiency of Securities Trading“.

In these papers, I showed that off exchange trading venues-third markets-that free ride off of the prices produced by exchanges and limit trading to the verifiably uninformed can be efficiency enhancing even if this exacerbates adverse selection problems on the exchange because this free riding mitigates two problems: the market power of dominant exchanges (where the market power arises from the liquidity network effect) and rent seeking informed trading (i.e., the expenditure of real resources to obtain information in order to extract profits by trading with the less-informed who buy and sell for portfolio balance or risk management reasons).

Similar arguments can be applied to dark pools today. Indeed, many dark pools (and internalization) perform a similar function to third markets back in the day: they are venues that use various means to screen out informed traders, in order to reduce execution costs for the verifiably less-informed. This loss of uninformed order flow on “lit” exchanges tends to increase adverse selection costs there, but the same competition and rent seeking informed trading second best considerations arise here, meaning that the costs of lower liquidity on exchanges may be more than offset by other benefits.

And many of the very same considerations apply to HFT. Thus, contra Stiglitz, second best considerations do not unambiguously favor the adoption of restrictions on HFT.

Indeed, the thing that is most striking about the trading of financial instruments is that there are so many potential violations of optimality conditions that the entire analysis of market structure becomes an exercise in the theory of the second best.

Which can be a problem. For as George Stigler said, “Well, there are second best considerations” is a conversation stopper. But the conversation about market structure isn’t going to stop anytime soon, so we have to grasp the nettle of the second best if that conversation is going to shed more light than heat. It is good that Stiglitz makes the second best issue explicity. If only he had applied this reasoning more consistently, and recognized that informed trading can be a deviation from optimality which can be addressed by things that seem in isolation to be inefficient.