Streetwise Professor

April 9, 2022

When People Talk About Zero This or Net Zero That, Zero Is a Good Approximation of Their IQ

Filed under: China,Climate Change,CoronaCrisis,Economics,Politics — cpirrong @ 11:34 am

The optimal amount of any “bad” (e.g., crime, cancer) is very, very seldom zero.* This is because the marginal cost of reducing a harm increases (typically at an increasing, and often rapidly increasing, rate): eventually the cost of reducing the harm further exceeds the benefit, usually well before the harm is eliminated.

Unfortunately, a good fraction of the world is in the thrall of those with Zero obsessions who ignore this fundamental reality. COVID and climate are the two most telling examples.

Countries pursuing “zero COVID” strategies have subjected their citizens to draconian measures that have deprived them of the blessings of normal human interaction, and freedom of thought and movement. Children especially have been brutalized, losing two years of schooling, socialization, and even the ability to speak and understand and interpret the non-verbal due to absurd masking requirements.

This brutality has unsurprisingly reached its zenith (or nadir, if you prefer) in China, a nation of 1.3 billion governed by a despotic regime that has gone all in on Zero COVID. The outbreak of COVID in Shanghai after years of restrictions proves the futility of the objective. The CCP’s response to the proof of the futility shows its insanity.

In response to the outbreak, the regime has locked down a city of over 26 million people. And this ain’t your Aussie or Kiwi or American or Brit or Continental lockdown, boys and girls: this is a hardcore lockdown. Mandatory daily testing, with those testing positive sent right to hospital, symptomatic or no–despite the fact that this has overwhelmed the medical system and is depriving truly sick people of vital care. Children separated from parents. People locked in their abodes, often without adequate food. Pets slain.

It is draconian–and dystopian.

The other prominent example is “Net Zero” carbon emissions. This has become the idol which all the right thinking bow down before, especially in the West. Governments, financial institutions, and other businesses (especially in the energy industry) are judged based on a single criteria: do their actions contribute to achieving “net zero” emissions of greenhouse gases? And woe to those who do not pass this judgment.

It is absurd. And it is absurd because the monomaniacal focus on a single measure immediately banishes all considerations of trade-offs, of costs and benefits. The implicit belief is that the cost of carbon is infinite, and hence it is worth incurring any finite cost–no matter how huge–to achieve it.

And the costs are immense, have no doubt. In particular, the environmental costs–the production of battery metals involves massive environmental costs, for example–are huge. Yet they are ignored by people who preen over how green they are. Because to them, Only One Thing Matters.

This is beyond stupid. Those who will impose any cost, and force others to bear any burden, in order to achieve some Zero reveal that that number is a good approximation of their IQ.

Upon reflection, I believe that the worship of Zero is a mutation of the worship of central planning with dominated the pre-WWII era, and which was supposedly discredited by experience (e.g., the USSR) and intellectual argument (e.g., Hayek, von Mises). Central planning involved the determination by an elite of an objective to be achieved by a society, and the use of coercion–at whatever level necessary–to achieve that objective. Actually, compared to the Rule of the Zeroes, central planning was quite nuanced: it usually did involve some acknowledgement of trade-offs, whereas the Rule of the Zeros does not, with everything–literally everything–being subordinated to the One Zero.

But ultimately, central planning foundered on the reef of its internal contradictions. Attempting to impose a singular objective on a complex, emergent system consisting of myriad individuals pursuing their own idiosyncratic goals was doomed to failure. And it did. But only after inflicting tremendous costs in terms of human lives and human freedom, not to mention human prosperity.

The fundamental inconsistency between emergent and imposed orders meant that central planning required the application of massive coercion. The same is true in the Rule of Zeroes. This has been particularly evident in the case of COVID: what is going on in Shanghai proves this beyond cavil. But the same is inevitable for Net Zero. To impose a centrally dictated objective, and a unidimensional one to boot, on complex societies comprised of billions of individuals with extremely diverse preferences and capabilities is to wage war on human nature, and humanity. Sustaining it necessarily requires the application of massive, and massively increasing, coercion. Because it requires people to “choose” what they would not choose of their own volition.

The populism so scorned by the elite is a natural reaction to this fundamental inconsistency. Whether Le Pen prevails in France or no, the mere fact that it is a possibility reveals the seething discontent of large numbers of folks at the presumptions of their betters. And this is just the latest example of the disconnect between the Zeroes who presume rule, and those whom they presume to rule.

It is a disconnect born of a fundamental misunderstanding of the basic social reality that life involves trade-offs, and that different people value trade-offs differently. That supposedly Smart People have Zero understanding of this reality is a shocking commentary on our “progressive” age.

*Note that I do not say “is never zero.” That would be a paradox, no?

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March 24, 2022

The London Mulligan Exchange

Filed under: China,Clearing,Commodities,Derivatives,Economics,Regulation — cpirrong @ 3:58 pm

The LME restarted trading of nickel. Well, sort of. In the first five sessions prices were limit down, and trading stopped as soon as the limits were hit. The LME deemed two subsequent sessions “disrupted” and declared the trades in these sessions “null and void.”

In other words: more mulligans after the trade cancellations that followed the spike to $100K/tonne prices. The LME should change its name to the London Mulligan Exchange. Which is not a good look.

Departing LME CEO Matthew Chamberlain tried to shift blame last week, claiming that the problem was that the exchange did not have visibility into risk due to the fact that approximately 80 percent of Tsingshan’s nickel position was in the form of OTC trades with big banks, such as JP Morgan. This is weak excuse. It is highly likely that the banks hedged their Tsingshan exposure on the LME, so the exchange saw the positions, but just didn’t know for sure exactly who was behind them. But the LME has known for months (years actually) that Tsingshan was the elephant in the nickel ring, and that the banks who were short the LME were almost certainly hedging an OTC exposure. The LME should have been able to add two and two.

The price increases today and in the previous session suggest that the short covering is ongoing, and that the “I’m going to hang on to my position” rhetoric from Tsingshan, and the insinuations that the banks were allowing it to extend and pretend, are therefore not correct. It (and perhaps other shorts) are trying to reduce positions. Continued gyrations are therefore likely, and a default that would make recent “disruptions” look like child’s play is not out of the question. The fear of this is likely what is causing the LME to take actions (voiding trades) that only further blacken its already dusky reputation. To a fox caught in a trap, chewing off a leg is the best option.

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March 11, 2022

A Nickel is Now Worth a Dime: Is the LME Too?

Filed under: China,Clearing,Commodities,Derivatives,Economics,Energy,Regulation,Russia — cpirrong @ 12:18 pm

If you use the official LME nickel and copper prices from Monday, before the exchange stopped trading of nickel, you can determine that the value of the metal in a US nickel coin is worth a dime. As the shutdown lingers, one wonders whether the LME is too.

The broad contours of the story are understood. A large Chinese nickel firm (Tsingshan Holdings, largest in the world) was short large amounts of LME nickel, allegedly as a hedge. But the quantity involved seems very outsized as a hedge, representing something like two years of output. And if the position was concentrated in nearby prompt dates (e.g., 3 months) it involved considerable curve risk.

The Russian invasion juiced the price of nickel, not surprising given Russia’s outsized presence in that market. That triggered a margin call (allegedly $1 billion) that the firm couldn’t meet–or chose not to. That led its brokers to try to liquidate its position in frenzied buying on Monday evening. This short covering drove the price from the close of around $48,000 to over $100,000.

That’s where things got really sick. The LME shut the nickel market. It was supposed to reopen today, but that’s been kicked down the road. But the LME didn’t stop there. It decided that these prices did not “[reflect] the the underlying physical market,” and canceled the trades. Tore them up. Poof! Gone!

Now in a Back to the Future moment echoing the 1985 Tin Crisis, the LME is trying to get the longs and shorts to set off their positions. “Can’t we all just get along?” Well likely not, because it obviously requires agreeing on a price. Which is obviously devilish hard, if not impossible given how much money changes hands with every change in price. (In my 1995 JLE paper on exchange self-regulation, I argued that exchanges historically did not want to intervene in this fashion even during obvious manipulations because of the rent seeking battles this would trigger.)

So the LME remains closed.

Some observations.

First, told ya. Seriously, in my role as Clearing Cassandra during the Frankendodd era, I said (a) clearing was not a panacea that would prevent defaults, and (b) the clearing mechanism was least reliable precisely during periods of major market stress, and that the rigid margining mechanism is what would threaten its ability to operate. That’s exactly what happened here.

Second, clearing is supposed to operate under a “loser pays/no credit” model. That’s really something of a misconception, because even though the clearinghouse does not extend credit, intermediaries (brokers/FCMs) routinely do to allow their clients to meet margin calls. But here we evidently have a situation in which the brokers (or Tsingshan’s banks) were unwilling or unable to do so, which led to the failure of the loser to pay.

Third, by closing the market, the LME is effectively extending credit (“you can pay me later”), and giving Tsingshan (and perhaps other shorts) some time to stump up some additional loans. Apparently JPM and the Chinese Construction Bank have agreed in principle to do so, but a deal has been hung up over what collateral Tsingshan will provide. So the market remains closed.

For its part, Tsingshan and its boss Xiang “Big Shot” Guangda are hanging tough. The company wants to maintain its short position. Arguably it has a strong bargaining position. To modify the old joke, if you owe the clearinghouse $1 million and can’t pay, you have a problem: if you owe the clearinghouse billions and can’t pay, the clearinghouse has a problem.

The closure of the market and the cancelation of the trades suggests that the LME has a very big problem. The exact amounts owed are unknown, but demanding all amounts owed now could well throw many brokers into default, and the kinds of numbers being discussed are as large or larger than the LME’s default fund of $1.2 billion (as of 3Q21 numbers which were the latest I could find).

So it is not implausible that a failure to intervene would have resulted in the insolvency of LME Clear.

The LME has taken a huge reputational hit. But it had to know it would when it acted as it did, implying that the alternative would have been even worse. The plausible worst alternative would have been a collapse of the clearinghouse and the exchange. Hence my quip about whether the exchange that trades nickel is worth a dime.

Among the reputational problems is the widespread belief that the Chinese-owned exchange intervened to bail out Chinese brokerage firms and a Chinese client. To be honest, this is hard to differentiate from intervening to save itself: the failure of the brokerages are exactly what would have brought the exchange into jeopardy.

I would say that one reason Xiang is hanging tough is that the CCP has his back. Not CCP as in central counterparty, but CCP as in Chinese Communist Party. That would give Tsingshan huge leverage in negotiations with banks, and the LME.

So the LME is playing extend and pretend, in the hope that it can either strongarm market participants into closing out positions, or prices return to a level that reduce shorts’ losses and therefore the amounts of variation margin they need to pay.

I seriously wonder why anyone would trade on the open LME markets (e.g., copper) for reasons other than reducing positions–and therefore reducing their exposure to LME Clear. The creditworthiness of LME Clear is obvious very dodgy, and it is potentially insolvent.

Fourth, in an echo of the first point, this episode demonstrates that central clearing, with its rigid “no credit” margining system is hostage to market prices. This is usually presented as a virtue, but when markets go wild it is a vulnerability. Which is exactly why it is–and always was–vain to rely on clearing as a bulwark against systemic risk. It is most vulnerable precisely during periods of market stress.

All commodity markets are experiencing large price movements that are creating extraordinary variation margin flows, potential positive feedbacks, and the prospect for troubles at other clearers. Further, the broader economic fallout from the Ukraine war (which includes, for example, a large recession resulting from the commodity price shocks, or a Russian debt default) has the real potential to disrupt equity and bond markets. This would put further strains on the financial markets, and the clearing system in particular. Central Banks–notably the Fed–had to supply a lot of liquidity to address shocks during the Covid Panic of March 2020. Two years later, they may have to ride to the rescue again.

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January 20, 2022

Joe Biden Just Raised the Risks of the Wrong War, In the Wrong Place, at the Wrong Time

Filed under: China,History,Military,Politics,Russia — cpirrong @ 4:45 pm

In January, 1950, Secretary of State Dean Acheson gave a speech outlining the US’s security perimeter–and conspicuously excluded South Korea. Within 5 months, with Stalin’s blessing, North Korea invaded. The opening stages of the Korean War were an absolute military disaster for the US. The rest of it wasn’t great shakes.

Yesterday Biden sent a similarly equivocal signal to Putin on Ukraine, insinuating that Russia had Biden’s blessing to invade Ukraine. As long as the invasion isn’t too big! Whatever that means. The administration then attempted to clean up this shocking statement by saying that any incursion would bring a strong US response. (Cleaning up after Biden is akin to cleaning up after a Barnum and Bailey Circus parade.)

There are war hawks in the US who want to confront Russia militarily if Putin does cross the border, bigly or otherwise–as Biden arguably just invited him to do. This is absolutely insane.

Look at the “correlation of forces.” It decidedly favors Russia. This is especially true in the air, where absent Nato intervention Russia will have not just air superiority but air dominance from the get go.

Yes, the one realistic way that Nato could materially contest a Russian invasion would be by pitting its air forces against Russia’s. (It’s capability on the ground is essentially nil.) It could probably do so decisively. But for what? And assuming it did achieve control of he air, would Nato use air power against Russian ground forces? Logistic resources within Russia? If not, could they change the result on the ground, other than make Russia’s task bloodier and harder? Almost certainly not. When it becomes evident that putative control of the air would not likely change the end result on the ground absent further action, wouldn’t the inexorable logic of conflict push the US/Nato to attack Russian troops and logistics from the air?

Any of these alternatives would bring the US and Nato into direct conflict with Russia where the potential for escalation in many dimensions is high. And again, for what? What American interest (or Nato interest for that matter) is advanced by contesting Russia for Ukraine? Is there any benefit remotely worth the risk of a war, let alone one between nuclear powers that could escalate? I cannot think of any, and those advocating a military response to a Russian invasion have certainly not advanced any.

And it must be emphasized that this would be the wrong war, in the wrong place, at the wrong time. The main beneficiary of which would be China. A futile attempt to save Ukraine would expose the US and its allies to risks of bigger losses in Asia.

Ukraine’s operational situation is dire, and becoming more so. In particular, as if the overmatch wasn’t already severe enough, recent Russian movements in Belarus pose a severe threat. A movement into Ukraine from Belarus would outflank the country’s one major geographic obstacle–the Dnieper (defending which would already concede loss of a third of the country). Ukraine’s only real chance is to hold the Dnieper–and even that would probably require US/Nato involvement. An attack from Belarus would eliminate even that chance.

A Korea outcome is probably the best the US could gain. And again for what? And at what cost, in blood, treasure, and strategic compromise in other theater?

The latest brilliant idea is for Ukraine to wage a guerrilla war against Russian invaders. There are stories circulating that the CIA is helping train organize such resistance, and Canadian special forces who could also do that are in country.

Yes, it took the USSR a decade to restore full control of Ukraine after WWII. And the Russian Civil War in Ukraine was brutal and multi-sided, with Reds v. Whites v. Greens. So it is possible that a Russian occupation could be bloody and costly. Would Putin be deterred by that? Is it worth running the risk of turning Ukraine into Syria or Libya to find out? Would that be better than Russian domination of Ukraine? Yes, Putin is an autocrat, but he isn’t Hitler or Stalin, and Russia isn’t the USSR.

And again, for what?

This is a completely unforced error. Regardless of whether you think Putin is genuinely fearful of Nato incorporating Ukraine, or whether that is just a convenient excuse for him to advance his imperial project, there was never any reason to bring Ukraine into Nato and thereby increase greatly the risk of confrontation. As I’ve said before, its inclusion raises the risk of conflict and detracts from rather than adds to Nato capability.

By dangling this as a possibility, the US and Nato predictably triggered a reaction that leaves them with the unpalatable choice of fighting a war over a country that is not vital to their interests or looking feckless and duplicitous by dangling the prospect of protection and then shrinking from providing it. It also provides Putin with a pretext to challenge all of Nato’s earlier eastern expansion. This juncture would never had been reached had the US and Nato not made promises that were never in its interest to keep. But they did, and that has put them in this dilemma.

My main fear at present is that Biden (or those who are actually making the decisions) will feel compelled to be butch and commit the US to a conflict involving such a huge asymmetry between gains and losses. Hell, even “winning” would involve more loss than walking away would.

How will it play out? I don’t know. Games of chicken are always hard to predict. Especially when one of the players is politically desperate and mentally compromised. And that, alas, is fair description of the president of the US in 2022.

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January 7, 2022

Kazakhstan: Putin Putting the Band Back Together

Filed under: China,Military,Politics,Russia — cpirrong @ 6:51 pm

Kazakhstan has been rocked by days of massive unrest, including attacks on government buildings (including the presidential palace), and large numbers of killed among both security forces and civilians.

The supposed catalyst for the uprising was a rise in liquid petroleum gas (LPG) prices–LPG being a fuel widely used for cooking, heating, and transportation.

This is plausible. Authoritarian regimes can persist despite a deeply unhappy populace because of coordination problems, exacerbated by preference falsification. A rise in the price of food and fuel hits the entire population, and can serve as a focal point on which masses can rally in coordinated opposition. Many rebellions and revolutions start for such reasons, but once they start they are difficult to contain even if the government reverses the initial catalyst, as Kazakh president Tokayev did with LPG. The opposition has coalesced. People know that many share their broader disgust with the rulers. And their is courage in numbers. So even though the spark has been extinguished, the fire can continue to burn.

But I suspect there is more to it than that. Intra-elite conflict is also likely an important driver. Tokayev had succeeded Nazarbayev, but the latter remained powerful, chairing the Security Council. Shortly after fighting erupted Tokayev fired Nazarbayev. Shortly after that, Nazarbayev and his family fled the country. Tokayev also restored the name of the capital (Astana) in lieu of Nur-Sultan (which was an homage to Nazarbayev). It is therefore likely that a conflict between factions is the real underlying cause of the uprising.

One striking thing is that the oppositionists appear to be fairly heavily armed. That would make sense if many of them are effectively militias for one of the elite factions.

Russia, using the beard of the Collective Security Treaty Organization (a poor simulacrum of the USSR), has intervened, sending paratroops to assist Tokayev in crushing the revolt. Apparently ground troops are also massing at the border, and units from the Far East are also being mobilized.

The speed with which Russia reacted is intriguing. It suggests considerable foreknowledge. Perhaps they had good intelligence, could see what was developing in the country, and were ready to act lickety-split if things went pear shaped–as they did.

Or perhaps the Russians knew because they were behind it. They have exploited unrest in Belarus to bring that country largely under Russian control. They are likely to do the same here. It wouldn’t be the first time a country stoked a revolution in another in order to provide a pretext to move in.

But regardless of whether gaining greater control over Khazakstan by intervening to stamp out a rebellion they stoked is part of a plan, or the uprising merely presents an opportunity to do so, there is little doubt that this will be yet another step in Putin’s ambition to put the band (i.e., the USSR) back together.

And Putin does believe he’s on a mission from God.

That’s the goal, surely. But it is easier said than done. Kazakhstan is an immense country. In point of comparison, it four times the size of Afghanistan. Unrest has already spread to all major cities. Yes, it looks like the capital of Astana (at least the government areas) is back under control, but securing many far flung cities and maintaining lines of communication would require far more troops than Russia has. (Recall how quickly it secured Kabul in 1979. Recall how securing Kabul did not translate to controlling the country.) And securing the countryside–forget about it.

Indeed, the immensity of the task is one reason to believe Russia did not foment the uprising, but is instead extemporizing.

Further, this presents a great opportunity for the United States to wage asymmetric warfare against Russia. You know that will be alleged–hell, the government has already blamed it on foreigners. In this case, it is likely to be true. Which will increase the cost of Russian intervention.

Another couple of points. First, although Russia has garnered all the attention, the elephant in the room is China. China borders Kazakhstan. Crucially, Xinjiang borders Kazakhstan, and China is neuralgic about that Muslim province. Moreover, China has extensive economic interests in Kazakhstan. Even though Putin and Xi have been lovey-dovey of late, that’s only been where their interests aligned. There is some alignment of interests in Kazakhstan–neither wants to see it descend into chaos or worse yet assert its independence–but Xi also has no interest in seeing Russia become dominant there and muscle out China. Russia attempting to dominate Kazakhstan will create friction in China.

Second, Ukraine may catch a break for once. The paratroops that Putin dispatched to Astana would be the spearhead of any invasion of Ukraine. Moreover, Russian military capacity (manpower, logistics) is likely insufficient to execute two large operations over such vast spaces (and on two different axes to boot). As noted above, Kazakhstan’s vastness can easily gobble up large numbers. If the Russian involvement in Kazakhstan proves more than fleeting, and especially if it absorbs tens of thousands of troops (not to mention the logistical resources necessary to operate in such a huge country), its ability to attack Ukraine will be reduced commensurately.

Sometimes revolutionary fervor dies out almost as quickly as it starts. But sometimes it doesn’t. Geography alone makes crushing the revolution difficult. And those difficulties may make Kazakhstan Putin’s Ulcer.

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December 26, 2021

No Blood For Batteries?

Filed under: China,Climate Change,Economics,History,Military,Politics,Russia — cpirrong @ 5:46 pm

The latest hyperventilation over Russia relates to the alleged involvement of the Wagner Group–Russian mercenaries/paramilitaries–in Mali. Wagner is run by “Putin’s Chef,” Yevgeny Prigozhin.

Russia denies involvement. Wagner denies involvement. Mali denies involvement. Since none of them are remotely trustworthy, I will accept as true that Wagner (or some other Russian entity) is involved.

At one level, one could answer “So what?” or even “Good!” Western militaries, notably American and French, have been involved in the Sahel for years. The US involvement has been marked by some tragic events, notably the destruction of a US Army Special Forces team in Niger and a murder of a Green Beret by other US special operations members in Mali. France recently withdrew its troops from Mali after 8 years of inconclusive fighting that resulted in the deaths of 52 French soldiers, including a highly decorated special operator. (And which also saw two coups in Mali. So much for creating stability.)

The American and French efforts had little effect on Muslim insurgents. So why not let the Russians have a go, if the real objective is to kill Salafists–and the objective isn’t worth American or French lives?

But this level is likely a very superficial one, and that is likely why there has been such alarm at Russian involvement. West and central Africa, including the desolate Sahel region, are now the cockpit of a 21st century version of a “great game” not so much because of ISIS or Al Qaeda, but because of . . . batteries.

And unlike the Great Game of the 19th century, which involved Russia and Great Britain, the 21st century game in Africa involves Russia, the West (especially but not exclusively the US), and notably China. The largely desolate and desperately poor region which the world’s richest nations are contesting is of increasing importance because it is disproportionately endowed with materials like lithium, copper, and cobalt, all essential for the manufacture of batteries or other components for electric vehicles that the alleged green elites in the West claim will be our climate salvation.

And don’t think that the Salafists are solely motivated by religious fervor–they no doubt understand the economic calculus as well. If oil made Saudi Arabia, another otherwise desolate and impoverished region, what economic power could control over lithium, copper, and cobalt create? Oil fueled Wahhabism. EV materials could well fuel another radical Islamist movement.

A rallying cry of the left, and especially the environmentalist left, from the 70s onward was “no blood for oil!” No doubt their CO2 monomania, and the resultant obsession with electrifying everything and especially electric vehicles, has blinded them to the inevitable if unintended consequences of their idée fixe.

Specifically, realizing their vision will require vast amounts of materials. Put aside the environmental consequences of mining for these materials. Focus on the geopolitical consequences. These minerals are found disproportionately in vast, violent, and largely ungoverned spaces. Control over them can be achieved only by violence, and even if violence was not necessary, the incentive for unscrupulous governments and corporations to utilize violence to capture the rents these resources promise (especially in an electronic world) is great indeed.

Furthermore, the powers contending for these resources are facing off on every continent, and are armed with nuclear weapons. What starts in Africa is unlikely to stay in Africa. And something could very well start in Africa. Great Power conflicts almost erupted in Africa on several occasions in the era of imperialism, when the economic stakes were far smaller: what did Fashoda matter, really? Yet Britain and France almost went to war over it. The stakes are far larger now.

Especially in a world obsessed with replacing petroleum with electricity.

Methinks that the evident panic over Russians in one of the world’s armpits really has little to do with the stated reasons: again, why would France or the US mind if Russians killed Salafists, and took the casualties necessary to do it? Instead, the panic is over the prospect of an impending struggle between the US/Western Europe, China, and Russia over a vital economic resource in an ungoverned region that requires organized violence to control it.

Environmentalists are so absorbed in their monomania that they are oblivious to the unintended consequences thereof. They have lectured us for years about no blood for oil. What about blood for batteries? Because that is the inevitable consequence of replacing the former with the latter.

They need to be forced to face this reality and to own the consequences of their obsessions. Now.

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December 16, 2021

You’ll Travel the Road to Serfdom on Public Transport–Oh Joy!

Filed under: China,History,Politics — cpirrong @ 6:57 pm

The private automobile has been the greatest liberating invention in history. Before the automobile, individual horizons extended a few miles for most. With the privately-owned car, billions of people have been able to travel where they want when they want. It has made it possible to separate considerably the workplace from the living place. It has expanded the range of stores and restaurants and service suppliers available to people. It has made travel–sometimes at a whim–possible in ways it was not possible before its widespread use.

So of course the world’s “elites” hate the automobile. Because they hate personal freedom.

A couple of data points.

First, consider this from the UK: “Car Ownership Could End in Massive Overhaul of UK Roads.”

A few excerpts (but read the whole thing):

GOVERNMENT transport ministers have backed calls to end private ownership of vehicles in a major overhaul.

She said the country needed to move away from its “20th-century thinking centred around private vehicle ownership”.

She added it was “staggering” almost two-thirds of trips were conducted by lone drivers.

How dare those proles weight the benefits and costs of going where and when they want alone vs. coordinating with others!

The Government has repeatedly stressed the need to switch from a reliance on cars to other forms of transport.

Oh, if the government says so . . . Better not disagree with our betters, given how remarkably competent governments are!

They said this was one of the “biggest opportunities” to switch short car journeys to cycling and walking.

In the rain? In the snow? When it’s 90 degrees? When its 20 degrees? At night? If you are elderly or infirm? If you’ve worked all day and really don’t want to walk 3 fucking miles? If you are going to the grocery store to pick up a week’s groceries for a family of 4?

I could go on.

Supposedly new technology will allow various forms of ride sharing.

Have they heard of Uber? Lyft?

People have always had the option to ride share. They typically choose otherwise. For obvious reasons. They have more options now. And again, they typically choose otherwise.

One wonders if these people actually live in the real world.

They also tout public transport. Which has been the hobby horse of the control freaks since forever, and with few exceptions driven by urban density and legacy investments has been a massive financial black hole. Further, although sitting in traffic is often a bad experience, being tied to public transport and exposed to the crowding, crime and assorted lunatics that it entails, not to mention the lack of flexibility, is quite often far worse than driving bumper-to-bumper. Which is why people choose not to use it, and why it is a financial black hole.

Again, let people choose. But no–that’s not the elite way! We’re too stupid to choose. We choose wrong.

Another data point:

“The Government is Your Next Car Passenger.”

Section 24220 of the [“infrastructure” law], titled Advanced Impaired Driving Technology, directs the secretary of transportation to issue a rule within three years requiring advanced impaired driving technology in all new vehicles, although the rule may be delayed if the technology is not ready for implementation. Automakers have up to three years after the rule is issued to comply.

Now, as written (though vaguely) this technology will be limited to detecting/monitoring “impaired driving.” Potentially laudable. But this is the camel’s nose under the tent. The future possibilities are endless. Speed control: all cars in Europe after 2022 must be fitted with speed limiters. Driving is bad for the climate, right? So driving must be limited directly or indirectly, and governments are hot to do that. One proposal in the US is impose a mileage tax. A system that can monitor if you’re buzzed can certainly count how many miles you drive, sober or drunk, send the results to the IRS or whomever, so that you can be charged accordingly. Or maybe you’ll get a mileage ration, and your friendly government sensor will shut down your vehicle when you’ve reached it.

Again the common theme here is that governments do not like the autonomy that private automobiles provide and are moving to impose, inch by inch, limitations on that autonomy. Leftists have always hated the automobile. They’ve always loved public transport. The former gives you freedom. The latter gives them control.

Guess which one they want, and will do anything to achieve?

And it’s not just automobiles. The elite–including the private jet elite–hates airline travel that lets the proles visit family or have a holiday at a pleasant location. Whether through carbon taxes or carbon credit pricing they will squeeze mass air travel like a python.

The main characteristic of serfdom was that people were tied to the land. Serfs moved or traveled at the sufferance of their lords, who almost never granted it. Restrictions on personal mobility whether by car or plane are not quite so draconian, but they rhyme. You will travel the road to serfdom on public transport.

Right now these restrictions are but specks on the horizon. But that is no reason whatsoever to discount them. They are part of a broader agenda, and the mere existence of that agenda and the conviction–and power–of those who advance it makes these restrictions a very, very real possibility.

Whether you want to call them leftists, or progressives, or globalists, or transnational progressives, etc., the “elites” in and out of government (e.g., the WEF, people like Bill Gates or George Soros or Jeff Bezos or Larry Fink) are central planners at heart. They are like Adam Smith’s Men of System, who believe (a) they can arrange society, and people in society, like pieces on a chessboard, (b) only they are possessed of the special knowledge and intelligence to do that arranging, (c) their arrangements are completely rational, and crucially (d) you are too ignorant and/or stupid and/or selfish to know what is rational for society and that as a result you make irrational choices. So your choices MUST be sharply constrained, if not taken away altogether.

For your own good, you know.

Note: most of these people admire China.

It’s all about control, in other words. And if you have been paying attention–hell, if you’ve been sentient–for the past two years you will realize that the push to control you is omnipresent. COVID–or more exactly, the responses to COVID–should give you all the evidence that you need. Most policies, whether it be lockdowns, or masks, or mandated “vaccinations” of dubious efficacy and largely unknown risk profiles, or vaccine passports, and on and on and on, make little if any sense as health measures: at the very least they are not backed by evidence that even remotely matches the fervor with which they are imposed and advocated.

But they do make perfect sense if you conjecture that the real objective is to expand and cement the control of the “elites” over vast swathes of your life. Everything in the last two years has been about depriving you of choice, and giving control of your life to bureaucrats and politicians and the plutocrats who exercise undue influence over them.

That is why these emerging threats to your personal mobility, and the autonomy that provides, need to be taken deadly seriously. They are just one piece of a far broader assault on liberty and autonomy, and a campaign intended to make you just another brick in the wall.

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October 22, 2021

Back, Back, Back–And It’s Outta Here!

Filed under: China,Commodities,Economics,Energy,Manipulation,Regulation — cpirrong @ 6:06 pm

No, this is not a post about baseball, with an outfielder running to the wall only to watch a home run soar over his head. It’s about the copper market, where backwardation (a positive difference between the price for immediate delivery–“cash”–and a futures price) has soared, and inventories have gone yard.

The peak of the frenzy was Tuesday of this week, when at one point the cash-threes backwardation on the London Metal Exchange (LME) soared to $1050/tonne (them’s metric tons, y’all).

That was apparently an intraday price, because the official PM cash-threes back on that day was a mere $382.

The LME is unique in that it trades contracts for specific dates, and so there is a “tom-nex” spread too: the difference between the price for delivery tomorrow, and the price for delivery the day after that. Last Friday, this “daily back” reached $175/tonne–meaning copper delivered Monday was worth $175 more than copper delivered Tuesday. The tom-nex remained over $100 on Monday and Tuesday.

Backwardation on COMEX copper has also jumped recently. Here’s the October 21-January 22 spread(HGV1-HGF2).

Meanwhile, inventories have plummeted, declining to a mere 14,500 tonnes on Tuesday, down from around 250,000 MT in late-August:

So what’s going on? Let me first consider a fundamentals-based story.

The spreads between futures with different maturities for a storable commodity send signals on how to allocate resources over time. When demand is high/supply is low today relative to what is expected in the future, it is optimal to draw down inventories, and prices move away from “full carry” (i.e., spreads that cover the cost of carrying inventory) to incentivize this drawdown. With extreme (but expected to be fleeting) temporal imbalances, it can be optimal to consume all inventories and meet future demand out of future production (because future demand is expected to be lower or supply higher than at present). These extreme temporal imbalances lead to large backwardations to punish storage.

As an aside, that’s why this statement in a Reuters article is incorrect:

Backwardation is supposed to attract metal but this week’s deliveries into LME warehouses have so far amounted to a meagre 9,775 tonnes despite the biggest incentive in the market’s history.

No! Backwardation punishes stockholding–it’s an incentive to move stuff out to be consumed today rather than hold it into the future when it is anticipated to be more abundant.

In some respects, what is going on in copper is similar to what happened in lumber, which I wrote about some months ago. The lumber market went into a huge back due to tight fundamentals and inventories were low.

The good news here is that these price signals indicate that the extreme imbalance is expected to be temporary: copper is scarce today relative to what is expected to be the case some months from now. That’s pretty much what happened in lumber.

So why the temporary scarcity (relative to expected future scarcity)? One plausible explanation is energy prices, which are high now going into the high-demand winter season in the Northern Hemisphere. Due to supply responses that can occur in a period of months but also the seasonal decline in heating and power related energy demand, these prices are likely to fall. Metals refining is energy intensive, so such a rise in energy prices pushes up the metals supply curve today relative to what’s expected in the future: this can produce exactly what we’re seeing in copper, and is also becoming evident in zinc, nickel, and aluminum.

China is of paramount importance in metals refining, so the artificial shortage of power there (caused by price controls and high fuel prices) is exacerbating this problem. Power cutbacks to intensive energy consumers are exacerbating the short term supply disruption.

This points out how the world is hostage to Chinese policy–and Chinese policy mistakes. China has become so important in this area not because it sits atop large, cheap supplies of ores. Low labor costs made it cheaper to locate refining there, even taking into account transport costs. But also, Chinese subsidies of various sorts–financial suppression that makes capital cheap and subsidized power prices–have attracted arguably excessive amounts of capital to metals refining there. And add to that the relative indifference of China to pollution–and metals refining can pollute the air, the water, and the earth: lower environmental standards lead to lower costs and a great incentive to locate production in China.

The fallout from a concentration of metals refining capacity in China is reverberating around the world right now. Not just copper but a variety of metals are going haywire because of the energy-driven supply disruptions in China. Magnesium is just another example.

The former is a fundamentals-based story (albeit one in which central planning has distorted the fundamentals). Is this all that is going on?

Corners can also cause soaring backwardations. The LME was sufficiently concerned about the situation in the market to impose a limit on the amount of daily backwardation to .5 percent of the cash price (which is still a 180 percent annual rate boys and girls). The cash-threes backwardation has fallen by almost two-thirds (to $116/MT today) in the days since.

Fingers have been pointed at Trafigura for loading out large amounts of inventory, thereby exacerbating the tightness. Trafigura says it did so to meet obligations to customers. This would be consistent with the fundamentals story.

But . . .

It is not unknown for firms with large inventory holdings to remove them from the LME to create an “artificial” tightness, or to provide a cover story for a corner. Moreover, if a single firm owns enough inventory to be able to deplete stocks materially on its own, it doesn’t take too large a paper position for it to have a literal corner. Or even if one firm hasn’t cornered, a small number of firms with large physical and paper positions can have a nice little oligopoly that allows them to exercise market power, of which large backwardations are a symptom–and a source of profit. Think of how much money the holder of a large prompt position could make rolling that over at $100+ per day, day after day.

Put differently, fundamental tightness can create market power, and the exercise of this market power can greatly exacerbate backwardations.

The sharp drop in the cash-threes back after the LME intervened lends some plausibility to this explanation. However, a definitive diagnosis requires a deep dive into who was doing what that is not possible based on currently available public information. I am just laying out possibilities here.

Exercising market power in a tight market is sometimes referred to as a “natural corner” and has given some firms that have exercised market power a “get out of jail free” card in the United States.

I’ve just completed a paper on “natural squeezes” that critiques this flaw in US manipulation law. I’ll post it soon.

But when all is said and done, what is going on in copper now is possibly such a natural squeeze: a temporary tight supply and demand situation exploited to exercise market power. Maybe someday we’ll find out.

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September 28, 2021

I Have Returned

Filed under: China,Military,Politics — cpirrong @ 9:30 am

Howdy. Miss me?

My absence was due to a long deferred vacation (a week spent in Paris) and my annual teaching gig at the University of Geneva (which fortunately returned to in person instruction after a year online).

I was originally supposed to go to the Netherlands first, to give a talk at the Erasmus University Leadership in commodity trade & supply networks program (which I also teach in). However, due to the US being, er, “promoted” to being an Orange country (though no longer a Bad Orange Man country!), doing so would have required 10 days quarantine. So I did the talk online, and went to Paris instead.

Given the news accounts of anti-Pass Sanitaire demonstrations and a first hand description of the nightmarish application of that system in the provinces, I had my reservations about how that would go.

Fortunately, however, in Paris anyways the PS BS was rather lightly applied. I started to rate restaurants and other businesses on a GAF scale. Roughly half gave zero fucks. They didn’t even check. A few gave half a fuck, or maybe one fuck, and subjected my awesome CDC card to a cursory glance and did not bother to check whether the name on it matched my passport. One place, near Luxembourg Gardens, required me to show it to 3 different waiters, including apparently the head waiter.

Nor did I see any evidence that the authorities were monitoring compliance. The main evidence of police presence was convoys of cops in tactical gear on motorcycles or in paddy wagons (Pierre wagons?) racing around the boulevards on Saturday (protest day! yay!) sirens wailing.

More than a week prior to departure, I applied online for “Demande de conversion d’un certificat de vaccination étranger en passe sanitaire français (étrangers).” Didn’t hear anything until 2 days after my return, when the French government (a) acknowledged receipt of my “dossier”, and (b) in a separate email, told me that my dossier had been rejected . . . since I had departed France.

We’re in the best of hands, non?

What France did GAF about during my visit was the Australia-UK-US defense deal, which shtupped the French out of a $90 billion contract to build conventional submarines for Australia, and replaced it with a deal to provide nuclear subs and nuclear technology to Australia. The French were incandescent with rage, and it was the lead subject on most news programs for almost my entire trip. (Energy prices were #2 on the hit parade–I’ll post on that in due course.)

Given France’s history of defense unilateralism (de Gaulle, anyone?) the outrage is a bit hard to take. Moreover, as is often the case with such contracts, France’s performance on deadlines and costs was poor, angering the Australians. (Maybe their dilatory response to requests for a PS is representative of their general attitude to timely performance.) Further, from a capability and geopolitical perspective, nuclear boats are far more suitable to contribute to collective defense in the Asia-Pacific, and against China in particular–which is why China was also incandescent with rage. (A good sign! Though they freak out about everything so it’s not that meaningful an indicator.) (Although the extended timeline for delivery means that any real contribution will benefit any college-aged readers I have.)

That said, the way that the deal and announcement were handled was appalling. It was a public humiliation for France, and indeed, almost seems like a deliberate humiliation. Given the antagonism between Macron and BoJo that can’t be ruled out. This puts paid to Biden’s “rebuilding alliances” BS. Right now the French are pining for mean tweets. Sticks and stones may break my contracts, but tweets will never hurt me.

The Geneva portion of my trip was excellent. I always enjoy teaching in the master of commodity trading program at UNIGE, and the students this year were a particularly good group. Not surprisingly, the Swiss were a little more manic about COVID documentation than the French, but there were many restaurants there that achieved the precious Give Zero Fucks rating. The one exception being a place that had never heard of J&J or its vaccine, or that it was one dose, or that it was approved in Switzerland.

Getting tested to return was something of a hassle, with few appointments on offer. But Swiss physicians apparently collect a little swag on the side (paid in cash!) by giving tests, so I had a new experience–my first ever appointment with a gynecologist, who blessedly only looked up my nose.

Hopefully the pace of posting will pick up over the next few days. The rest of today is a loss, but there’s much to comment about so I’ll leave you waiting in breathless anticipation.

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July 12, 2021

Elon’s On Fire!

Filed under: China,Climate Change,Cryptocurrency,Energy,Tesla — cpirrong @ 6:29 pm

No. Wait. That was a Tesla in Taiwan City.

But Elon did ignite some (metaphorical) pyrotechnics in a Delaware Chancery courtroom with his fiery defense of the Solar City deal of 2016. My criticism of the deal at the time–which inspired some of my better lines, IMO–is the gravamen of the shareholder lawsuit against Musk. Namely, that the Tesla purchase of Solar City was a bailout of a sinking Solar City, mainly driven by Elon’s desperation to avoid a blow to his reputation as a visionary genius.

Nothing in what I’ve read about Elon’s testimony changes my mind. Ya sure the Tesla board was totes independent of him. Ya sure he did not dominate the board. Ya sure the deal made sense on the merits. Whatever, dude.

All that said, I surmise that the plaintiffs have a difficult hill to climb. Proving, legally, in court, what we all know to be true is sometimes a very difficult thing. That’s probably a good thing, but that’s a statement about the average–not any particular case.

That said, since the Solar City deal Tesla’s stock price, unlike Elon, has gone to Mars. It’s about 20 percent off its all time high in January, but still about 15 times above its June, 2015 price, which I thought was inflated then. So what do I know?

The most logical explanation to me is that $TSLA is not so much a bet on Tesla qua Tesla, or Musk qua Musk, but on government policies around the world that seem hell bent on forcing us all to drive electric cars, never mind fire risks (and Taiwan City is not a freak event), or the environmental costs of mining, or the insanity of renewables, or the increasing inability of electrical grids to handle existing demands let alone massive new ones such as that arising from electric autos, or on and on and on and on. Tesla is a first mover in electric vehicles, governments are compelling the shift to electric vehicles regardless of all the myriad problems, so Tesla stock booms. It’s not an efficiency story or an innovation story. It’s a wealth creation (for Tesla shareholders) by wealth destruction (the rest of us) story.

A couple of other Tesla/Musk-related comments that have struck me recently but not sufficiently to catalyze a post.

Tesla is having problems in China. Musk assiduously courts China. Musk makes huge sunk investments in China. China shtups Musk.

This storyline alone is sufficient to make you question Musk’s acumen. Did he really think that China would not act opportunistically? FFS. Opportunism ‘R Us is the CCP motto. Look at how the CCP is shtupping domestic tech companies (and those foolish enough to invest in tech company IPOs). If that’s what they do to “their” companies, what can foreign devils expect? Foreign devil Elon apparently thought he was special. He ain’t.

Crypto. Elon’s pronouncements can cause massive movements in cryptocurrency prices. This alone is enough to demonstrate the utter arbitrariness of crypto. Why should the value of anything depend on the musings of a mercurial and megalomaniacal individual other than the things that individual can control? Especially when said mercurial and megalomaniacal individual no doubt derives immense glee from watching people jump to his tune? That incentivizes him to say ever more outlandish things. Which the KoolAid drinkers respond to, which just incentivizes him more.

Why do his musings matter? Because people believe they matter.

In coordination games sunspot equilibria exist. In sunspot equilibria, values/prices change in response to a variable that people think matters, even though it is totally unrelated to fundamentals. Currencies–including cryptocurrencies–have a coordination game aspect where expectations matter. The value of currency (or a cryptocurrency) depends on what people think its value is, or what they expect it to be. If people believe that variable X–e.g., what Elon Musk tweets–matters, then X will matter.

That is apparently the case with crypto: whatever Elon says, cryptos do, at least to a considerable degree. What is more bizarre is that whereas “sunspots” are exogenous, Elon’s pronouncements are endogenous–he says what he says almost surely based on the fact that he knows that what he says will move prices. Yeah, that’s exactly the kind of power you want to give a megalomaniac.

Exogenous/extrinsic uncertainty can lead to excessive volatility. Crypto suggests that endogenous uncertainty a la Musk creates massive excess volatility.

So you want to “invest” in crypto why, exactly? To speculate on Elon’s mood swings and narcissism? To speculate on how other speculators speculate on Elon’s mood swings and narcissism? To speculate on how other speculators speculate on how speculators speculate on Elon’s mood swings and narcissism. (To complete this post, continue ad infinitum.)

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