Streetwise Professor

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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May 9, 2021

The Real Reasons For Ruling Class (and Corporate Class) Sinophilia

Filed under: China,Economics,Politics — cpirrong @ 3:54 pm

Niall Ferguson rightly worries about the ruling class’s infatuation with the Chinese system, and their clear desire to imitate it. Astoundingly, he fails to grasp the reason for this fanboy attraction.

Ferguson draws an analogy with Cold War I, during which he argues a process of “osmosis” threatened to make the US and the West generally more and more like the Soviet Union. But what is going on now is completely different. It is not an unthinking imitation driven by a need to compete, as in 1945-1991. It is a mixture of admiration (among the political class) and venality (among the corporate class). Yet Ferguson ignores these facts–which are far more disturbing than “osmosis”, which is an unconscious process. The ruling class’s affinity for the CCP model is anything but unconscious.

The West’s political class clearly envies the CCP’s autocratic powers, and strives to imitate them. This is most noticeable with respect to Covid policy, but it is not limited to that. Indeed, the political class fantasizes about using the extraordinary powers it seized based on the Covid pretext to reshape society generally.

The most forthright of the fanboyz is Canada’s effete Justin Trudeau–a perfect useful idiot for the CCP. He openly admires the Chinese dictatorship because, you know, it allows them to dragoon people into going green (amongst other things).

I could come up with other Trudeau examples, but I will spare you the torture of watching more of the twerp’s (cleaned that up) power worship/envy.

Although Trudeau is the most open in his admiration, it is clear that in the EU and the US the political class is itching to embrace China-like policies, whether it is massive “infrastructure” spending, draconian restrictions on liberty in the name of public health, or a social credit system (disguised, perhaps, in the form of vaccine passports or government cryptocurrencies which (a) China is racing to introduce in order to expand its social control, and (b) would almost certainly be non-anonymous to the government and linked with vast amounts of other personal information).

The Rosetta Stone to all ruling class policy initiatives is quite simple, people: you can make sense of any policy by asking what most enhances the ruling class’s power most, and deprives you of the most liberty and personal sovereignty. The ruling class envies the party/state power in the Chinese system, and hence is anxious to ape it at every opportunity.

That basic fact is missing in Ferguson’s article. Maybe it’s because he’s so embedded in the ruling class, although he from time to time takes contrarian positions.

Insofar as the corporate class is concerned, they are the 21st century version of Lenin’s 20th century aphorism about the capitalists who will sell communists the rope with which the latter will hang the former. Plus ça change, plus c’est la même chose. Slavering over the Chinese market, Western corporatists (I won’t say capitalists) are perfectly willing to countenance the enslavement of billions.

The ruling class and the corporate class crave power–the ability to control you, to coerce you. They see the power the CCP wields, and they want the same. Is not about emulating China to compete with China. It is about emulating China to emulate the domineering power of China’s political class. And to reprise Lenin again: “Who? Whom?” You are the whom.

This should be an obvious point, but Ferguson fails to make it.

The appropriate historical analogy here is not Cold War I, but the 1930s, when many in the Western ruling class openly admired the Italian Fascists, the Nazis, and the Bolsheviks because of the untrammeled power to reshape society that these malign movements possessed. The power to reshape society free from the resistance of the unenlightened proles is what the Western progressive political class desired, and desires, above all else. So they admired Mussolini then, and admire Xi now. Sinophilia (or more precisely, CCP-o-philia) is just the latest symptom of a very old disease.

These people are the enemies of freedom. They are your enemies. Respond accordingly.

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April 24, 2021

Two Self-Inflicted Diplomatic Wounds. But At Least We Don’t Have to Worry About Mean Tweets, Right?

Filed under: China,History,Politics,Russia,Turkey — cpirrong @ 9:07 pm

The Biden administration self-inflicted two serious diplomatic wounds in the space of a single day.

First, even though India is experiencing a wave of covid infections and deaths, its worse so far, the administration refused to relent on a ban (imposed by the Trump administration) on the export of vaccine ingredients.

Yes, the policy was originally Trump’s, but (a) you’d think that would be a bug not a feature with this administration, (b) India’s circumstances are far more dire today than they were when the ban was implemented, and (c) in the US, vaccine usage has nearly reached a saturation point, with many providers having shots wanting for arms.

India (both the government but especially the citizenry) has reacted extremely negatively due to this refusal, which is not surprising given the state of covid panic in the country. The United States should be courting India, not alienating it. After decades of hostility to the US (due not least because of US support for Pakistan, India’s post-independence antipathy to colonial powers or their allies, and dependence on Soviet/Russian weapons), India’s existential conflict with an aggressive China had created an opportunity to make India if not an ally, a country with which the US could cooperate on issues of common interest–most notably containing China.

That underlying dynamic is still there, but this thoughtless refusal fuels the latent suspicions of the US among many Indians and makes such cooperation far, far more difficult. It benefits the health of Americans virtually not at all, but alienates a country we should be courting.

The second self-inflicted wound involves Biden’s official recognition of the Armenian genocide by the Ottoman Empire during the depths of WWI. (Do not underestimate how this war scarred Turkey. The Ottoman Empire suffered a greater percentage loss of population during the war than any other nation, even if one deducts the Armenian dead. The Ottoman Empire was dismembered, and Turkey itself was almost devoured in the aftermath. Only Ataturk’s miracles in the War of Independence saved Turkey from being divided among the Western powers and the Greeks, and left as an Anatolian rump that no one else wanted.)

Yes, the fate of Armenians was horrible. Well over a million died. Numberless others were displaced, often to desolate camps in the Syrian desert. If you meet someone whose name ends in “ian” they are almost certainly the descendants of the Armenian diaspora. (Those with names ending in “yan” are usually post-Soviet emigres). Their martyrdom was widely acknowledged in the US. In my parents’ era, children were told to eat their vegetables, because of the starving Armenians.

Like all historic episodes, especially those that occurred in the crucible of WWI, the story is complicated. But regardless of where the guilt lies, it happened more than a century ago. Those who committed the atrocities, and those who suffered them, have long since died.

But living Turks of all political persuasions are neuralgic about being blamed for these long-ago events. Even ardent Erdoğan haters in the CHP are of one mind with him on this issue: calling what happened in the long-dead Ottoman Empire a genocide is a red line. Those who do so are Turkey’s enemies.

Turkey’s response was immediate. It recalled its ambassador to the US, and its foreign minister gave a bitter statement, claiming that this will irreparably harm Turkish-US relations. He also said that the US should not cast stones, given its historical treatment of Native Americans. (The administration’s repeated condemnations of America’s historical actions make it a particularly attractive target for such barbs.)

Many in the US, particularly in the Armenian community, dismiss this. They say that it will blow over.

Don’t be so sure. Under Erdoğan Turkey has been wobbling away from the American (and Nato) orbit. Given Erdoğan’s dicey domestic circumstances, stoking the resentment and taking real steps to distance the country from the US are natural political moves. Russia will clearly notice–and seize upon–the opportunity. Erdoğan will be quite open to their blandishments.

And do not underestimate the power of Turkish nationalism. In my experience, they are among the most chauvinistic people in the modern world. (Han Chinese are the only rivals for the title.) They are not postmodern or post-nationalist, like most Europeans. This is deadly serious to them. It will not blow over.

Turkey has geopolitical importance, not least because of its geographic position. It has been a difficult country for the US in recent years, in large part because of its mercurial and grandiose leader. Provoking it unnecessarily will bring the US many policy headaches. Virtually at the same moment as Biden’s announcement, Turkey escalated its conflict with America-aligned Kurds in Iraq. The genocide announcement will make it all the more difficult to try to manage that conflict.

And for what? This gesture will not bring anyone back from the dead. It will not undo what has been done. America helped in the best way possible–by welcoming tens of thousands of Armenians. (Including the Kardashians. Isn’t that sacrifice enough?) It is moral preening that will not reverse past atrocities, nor prevent future ones. And it is contrary to US national interests.

And Turks–including in particular Turks in the US–believe that Biden’s action does not even rise to the level of moral preening. In their eyes it is corruption, political venality, repaying Armenian-Americans (in California in particular) for massive campaign contributions, given in exchange for his promise to do what he just did. Given the absence of any other plausible explanation, this seems very reasonable. And very despicable

One day, two pointless gestures that do significant damage to relationships with two geopolitically important nations with which the US has had difficult relations. I see zero upside for US interests in these actions, and much downside. God help us if these are harbingers of US policy over the next four years–which alas is extremely likely.

But hey. At least we don’t have to worry about mean tweets, right?

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Why Is Proof of Efficacy Required for Pharmaceutical Interventions, But NOT Non-Pharmaceutical Ones?

Filed under: China,CoronaCrisis,Economics,Politics,Regulation — cpirrong @ 11:43 am

Under Federal law, a pharmaceutical intervention must be proven safe and effective before it is marketed to the public. If after introduction it proves unsafe or ineffective, the Food and Drug Administration can rescind its approval.

Note the burden of proof: the manufacturer must prove safety and efficacy. Safety and efficacy are not rebuttable presumptions.

Would the same be true of non-pharmaceutical interventions (NPIs). This neologism (neoanacronym?) is used to describe the policies that have been imposed during the Covid Era–most particularly, lockdowns and masks.

Neither had been proven safe or effective prior to their wholesale–and I daresay, indiscriminate–use. Lockdowns in particular had never been subjected to any clinical experiment or trial. Indeed, the idea had been evaluated by epidemiologists and others, and soundly rejected. But a policy first introduced in a police state–China–spread just as rapidly as the virus to supposedly non-police states despite it never having been proven efficacious or safe.

A year’s experience has produced the evidence. Greetings, fellow lab rats!

And the evidence shows decisively that lockdowns are NOT effective at affecting any medically meaningful metric about Covid. This American Institute of Economic Research piece provides an overview of the evidence through December: subsequent studies have provided additional evidence.

Furthermore, lockdowns have been proven to be unsafe. Unsafe to incomes, especially for those whose jobs do not permit working from home. Unsafe for physical health, in the form of inter alia deferred cancer diagnoses and treatment for heart attacks and strokes and greater substance abuse (with higher incidence of overdoses), as well as delayed “elective” surgeries that improve life quality. Unsafe for mental health. Unsafe for children, in particular, who have experienced debilitating social isolation and profound disruption in their educations. (Although given the trajectory of American public education, especially post-George Floyd/Derek Chauvin, feral children might be better off than those subjected to the tortures of a CRT-infused curriculum and CRTKoolAid drinking “educators.”)

Masks are not as devastating as lockdowns, but they have also been shown to be ineffective and also unsafe, especially for those who must wear them for extended stretches–which includes in particular children at school.

(Remember “For the children”? Ah, good times. Good times.)

Drug regulation was one of the first major initiatives of the Progressive Era, and the 1962 FDA Amendments that imposed the efficacy requirement were also driven by progressives. My assessment of the economic evidence (especially the literature spawned by my thesis advisor, the great Sam Peltzman) is that the efficacy requirement in particular has been harmful, on net, because it delayed and in some cases prevented the introduction of beneficial therapies.

But even if–especially if–you accept the progressive-inspired conventional wisdom regarding pharmaceutical intervention regulation, you should be dismayed and even furious that the same logic that has NOT been applied to NPIs. The underlying principle of drug regulation has been “show me”: show me something works. The underlying principle of Covid Era ukases has been: “Evidence? Evidence? I don’t have to show any stinkin’ evidence.” Indeed, it’s been worse than that: those who demand evidence, or even politely point out the lack of evidence, are branded as heretics by the very same “progressives” who believe religiously that requiring proof of efficacy of drugs is a good thing.

How to square this circle? How to explain this seeming contradiction?

I think it is as plain as the nose on your face. Power. In particular, power exercised by progressive technocratic elites. The FDA acts empower a progressive technocratic elite. Lockdowns and mask mandates empower a progressive technocratic elite–far beyond the wildest dreams of the most zealous FDA bureaucrat. (They also empower idiot politicians who imagine themselves to be part of some elite.) They are both premised on the belief that individuals are incompetent to choose wisely, and must be coerced into making the right choice. Coerced by credentialed elites who are better than you proles.

So an apparent logical inconsistency–proof of efficacy for thee, but not for me–is in fact no inconsistency at all. They are both who, whom. A soi disant elite (ha!) always pushes the alternative that gives them the most power, and deprives you of the most choice. Who (the progressives): Whom (you).

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April 17, 2021

Putin Calls Biden’s Bluff: Xi No Doubt Watches With Amusement

Filed under: China,History,Military,Politics,Russia — cpirrong @ 6:20 pm

Domestically, the US political situation is dysfunctional. On its best days. To compound the dangers, the international situation is fraught.

At present there are two smoldering hotspots involving world powers (and arguably superpowers) that could suck the US into a confrontation with such powers–Taiwan and Ukraine.

China has ramped up the rhetoric over Taiwan. It has also increased its provocative military behavior around the island.

Russia has amassed a 50,000 man plus military force, heavily armed and armored, on the borders of Ukraine.

Taiwan and Ukraine have been hotspots for years, but it is at least plausible, and in my view likely, that the increase in tensions is the direct result of the change in administrations. That is, China’s Xi and Russia’s Putin are testing Biden. Or they believe they have already found him wanting in the fortitude and strategic departments.

Who can blame them, really?

In Ukraine in particular, the Biden administration has played things in about the worst way imaginable, and has no doubt convinced Putin that they are weak.

Most notable was the embarrassing exhibition involving the supposed dispatching of two US destroyers into the Black Sea. The Russians reacted quite aggressively, and last week it was announced that no ships would be transiting the Bosporus after all.

I thought it was a horrible idea to send the ships in any event. Play out the game. If deterrence fails, and Russia and Ukraine recommence the hostilities that (sort of) ended 7 years ago, then either the DDGs would have to turn tail (which would not be a good look), or they could get involved in combat with the Russians. Even overlooking the dire consequences of armed confrontation between the US and Russia, the ships would have been able to accomplish little, and would be at extreme risk. Yes, they are very capable platforms, but are intended to operate as part of a carrier battlegroup. Operating independently, they would have little influence on a battle in Ukraine, and would be extremely vulnerable operating within range of dominant land-based air and missile forces. Which is why they almost certainly would have turned tail.

The Russians would have known this, and playing out the game, would have realized that two DDGs would not effect their operations in Ukraine. So the deterrence value of the deployment would have been close to zero; the upside of the deployment negligible; and the potential downside huge.

In other words, don’t make non-credible bluffs. That’s exactly what the administration did, before backing down. Thereby revealing that it was bluffing, and had no intention of backing it up.

This came to mind:

(That was John Cleese as Putin at the end.)

The worst possible way to play this, regardless of whether you believe that the US should risk a confrontation with Putin over Ukraine, or not. The. Worst.

It’s sickly ironic that this climbdown from a confrontation with Putin occurred about the same time that one part of the administration discretely acknowledged that the “Russian bounties on American soldiers in Afghanistan” story was a complete crock. That story was flogged incessantly over the summer to reinforce the narrative that Trump cowered before Putin, and was running away from Afghanistan as a result. Well, the story was bullshit, so there was no cowering. It is the Biden administration that is demonstrably cowering. (Even while the Pentagon was backing off the bounties story, others in the Biden administration were continuing to assert it.)

That story was another flagrant example of media mendacity. The NYT journalists who wrote it should be consigned to oblivion–but they won’t be. If they were lied to by their anonymous sources, they should call them out–but they won’t. So there is NO accountability for lying, or for trading in lies (as the NYT journalists and so many other journalists do). They used to say never trust anyone over 30. That was always a dubious statement. It is anything but dubious to say never trust any journalist, regardless of age.

Furthermore, Biden cemented his image of weakness before Putin by offering to meet him in a summit–at least, you can be sure that this offer cemented an image of weakness in Putin’s mind. It makes it look like Biden is coming to Putin as a supplicant.

Another own goal.

And shifting to the other end of the world, you know Xi is watching this very, very closely.

The coming months could be worrisome, indeed.

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March 18, 2021

Putin on the Brain–Assuming Biden Has a Functioning Brain

Filed under: China,Politics,Russia — cpirrong @ 7:10 pm

Low oil prices, economic malaise (with stagnating GDP and declining real personal income), and demographic decline have combined to enervate Russia, and undermine Russian power. Seven years ago Putin invaded Crimea, and was top of the world, ma!–now he is a peripheral nuisance, far more focused on internal issues and concerns over succession and legacy, with an occasional turn at playing international spoiler.

But he looms large in the imaginations of American Democrats. He is the bogeyman who is the root of all evil. His machinations made Trump president, right? What could be worse than that? To this day, the American intelligence community (proving yet again that phrase to be an oxymoron) claims that he intervened in the 2020 election (yet provides absolutely no factual basis to support that claim). Everything bad in the world, they trace back to Putin. They have Putin on the brain.

Get real people. Putin reached his zenith in 2008: indeed, I can date it almost exactly to 8/8/8, with the invasion of Georgia. Thereafter, the financial crisis and the concomitant crash in oil prices gutted Russia’s economy, and put paid to Putin’s plan to exploit high energy prices to propel Russia back to being a superpower. The succeeding 12+ years have been a litany stagnation interrupted by periods of severe depression. Putin and Russia have been marginalized–objectively, anyways.

But Biden–with a big assist from the handmaiden media that has been flogging the Putin-as-Voldemort line since 2016–handed Putin an opportunity to get attention and twist America’s tail. In an interview with George Stephanopolous, simulacrum president Joe Biden agreed when asked whether Putin was “a killer.”

Putin didn’t miss a beat. He trolled Biden brilliantly. He turned the other cheek, and wished Biden good health:

This was no doubt a jab at the fact that Biden is clearly anything but healthy.

He challenged Biden to a debate, mano a mano:

That would be a riot: I would pay large $ to watch that on PPV. And quite frankly, Putin would trounce Biden, even if this “open direct discussion” was in English, given the simulacrum president’s obvious mental decline. And don’t think for a moment that Putin is not well-informed (better than Americans, certainly) about Biden’s actually physical and mental condition, which emboldens them to propose something he knows Biden (or more realistically, his puppeteers) could never agree to. (Ironically, the hysteria over Russian hacking gives great credence to this claim.)

I don’t think Obama did a lot of things right, but largely ignoring Putin was one of them. (Though he was an idiot in trying to play up the hapless Medvedev.) The obsessive attention that Democrats have given Putin post-Obama elevates his prestige and importance far beyond what the correlation of forces would justify.

So Biden gives Putin a perfect opportunity to troll him, and you can’t believe for a second that Vova would pass on it.

The obsession with Putin and Russia is particularly perverse given that the real strategic challenger to the US is China: focusing on Russia is a distraction from the real threat. But whereas Biden believes that deference to “cultural norms” justify giving China justifies soft-pedaling what is arguably genocide and a host of other grotesque repressions orchestrated by Xi, he gives no such deference to Russia and Putin. So I guess only non-white dictators get a pass because of “cultural norms.” Pretty progressive, right?

Putin is a pain. He has malign intent. But whether someone is a threat depends on both intent and capability. Russia’s capability has been waning inexorably for over a decade. Obsessing on intent while capability erodes and the capability and bad intent of another actor (China) grow is idiotic. But that’s where we are. Putin is relevant primarily because Democrat obsessions make him so. Biden’s latest gaffe will only make it worse.

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January 25, 2021

LNG Skyrockets: Is Excessive Reliance on Spot Markets to Blame, and Will This Cause Contracting Practices to Change?

Filed under: China,CoronaCrisis,Derivatives,Economics,Exchanges,LNG — cpirrong @ 8:26 pm

After languishing in the doldrums in the Covid era, and at times touching historic lows, the price of LNG delivered to Asia skyrocketed in recent weeks before plunging almost as precipitously:

As always happens with such big price moves, there has been an effort to round up suspects. Here, since the visible price increase occurred in the spot market, the leading culprit is the spot market–something that has been growing rapidly in recent years, after being largely non-existent prior to 2014 or so.

For example, Reuters’ Clyde Russell writes:

What is more likely is that some buyers misjudged the availability of spot cargoes, and when hit with a surge in demand found themselves unable to secure further supply, thus bidding up the prices massively for the few cargoes still available.

Frank Harris of Wood Mackenzie opines:

“Buyers are going to become aware that you may not always be physically able to source a cargo in the spot market regardless of price,” Mr Harris says. “The most likely outcome is it shatters some of the complacency that’s crept into the market over the last 12-18 months.”

It is incorrect to say that a shortage of spot cargoes per se is responsible for the price spike registered in the spot market. It is the supply of LNG in toto, relative to massive increase in demand due to frigid weather, that caused the price increase. How that supply was divided between spot and non-spot trades is a secondary issue, if that.

The total supply of LNG, and the spatial distribution of that supply, was largely fixed when the cold snap unexpectedly hit. So in the very short run relevant here (days or weeks), supply in Asia was extremely inelastic, and a demand increase would inevitably cause the value of the marginal molecule to rise dramatically. Price is determined at the margin, and the price of the marginal molecule would be determined in the spot market regardless of the fraction of supply traded in that market. Furthermore, the price of that marginal molecule would likely be the same regardless of whether 5 percent or 95 percent of volume traded spot.

If anything, the growing prevalence of spot contracting in recent years mitigated the magnitude of the price spike. Traditional long term contracts, especially those with destination clauses, limited the ability to reallocate supplies efficiently to meet regional demand shocks. The more LNG effectively unavailable to be reallocated to the buyers that experienced the biggest demand shocks, the less elastic supply in the spot market, and the bigger the price increase that occurs in response to a given demand shock. That is, having less gas contractually committed, especially under contracts that limited the ability of the buyers to sell on to those who value it more highly, mitigates price spikes.

That said, the fundamental factors that limit the total availability of physical gas, and constrain the ability to move it from low demand locations to high demand locations in the short time frames necessary to meet weather-driven demand changes (ships can’t magically and instantaneously move from the Atlantic Basin to the Far East), mean that regardless of the mix of spot vs. contract gas prices would have spiked.

Some have suggested that the price spike will lead to less spot contracting. Clyde Russell again:

The question is whether utilities, such as Japan’s JERA, continue with their long-term vision of moving more toward a spot and short-term market, or whether the old security blanket of oil-linked, but guaranteed, supplies regains some popularity.

It’s likely LNG buyers don’t want a repeat of the recent extreme volatility, but perhaps they also don’t want to return to the restrictive crude-linked contracts that largely favoured producers by guaranteeing volumes at relatively high prices.

The compromise may be the increasing popularity of short-term, flexible contracts, which can vary from a few months to a few years and be priced against different benchmarks.

Well, maybe, but color me skeptical. For one thing, contracts require a buyer and a seller. Yes, buyers who didn’t have long term contracts probably regretted paying high spot prices–but the sellers with uncommitted volumes really liked it. The spike may increase the appetite for buyers to enter long term contracts, but decrease the appetite of sellers to enter them. It’s not obvious how this will play out.

I note that the situation was reversed in 2020–buyers regretted long term contracts, but sellers were glad to have them. Ex post regret is likely to be experienced with equal frequency by buyers and sellers, so it’s hard to see how that tips contracting one way or the other.

This conjecture about the price spike leading to more long term contracting also presupposes that the only way of managing price risks is through fixed price contracts (or oil-indexed) contracts for physical supply. But that’s not true. Derivatives allow the separation of who bears price risk from the physical contracting decision. A firm buying spot (and who is hence short LNG) can hedge price risk by purchasing JKM swaps. This has the additional advantage of allowing the adjustment of the size of the hedge in response to more timely information regarding likely quantity requirements, price projections, and risk appetite than is possible with a long term contract. That is, derivatives permit unbundling of price risk from obtaining physical supplies, whereas long term contracts bundle those to a considerable degree. Moreover, derivatives plus short term/spot acquisition of physical supplies allows more flexible management of supply, and management of supply based on shorter term forecasts of need: these shorter term forecasts are inherently more accurate than forecasts over contracting horizons of years or even decades.

So rather than lead to more long term contracts, I predict that this recent price spike is more likely provide a fillip to the LNG derivatives market. Derivatives are a more flexible and cheaper way to manage price risk than long term contracts.

This is what happened in the pipe gas market in the US post-deregulation. Spot/short term volumes grew dramatically even though price spikes were a regular feature of the market: market participants used gas futures and swaps and options to manage these price risks, and benefited from the greater flexibility and precision of obtaining supplies on a shorter term basis. This shifted a lot of the price risk to the financial sector–which is the great benefit of the much bewailed “financialization” of commodity markets.

The same is likely to occur in LNG.

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September 12, 2020

I’m So Old I Can Remember When Trying to Prevent Panic Was Considered a Hallmark of Leadership

Filed under: China,CoronaCrisis,Politics — cpirrong @ 12:27 pm

In what perhaps may become a new feature, in response to a Twitter request by @Esq_SD, here are my thoughts regarding (a) the new Woodward book, and (b) the Israel-UAE (and now Israel-UAE-Bahrain) peace deals.

With respect to the Woodward book, I wouldn’t read his has-been droning on a dare, a bet, or for a date with Gisele Bündchen. So all I can do is respond to the alleged bombshell in the book, namely that “Trump lied [about COVID] and people died!”:

“To be honest with you…I wanted to always play it down. I still want to play it down, because I don’t want to create a panic.”

This is a completely defensible, and indeed laudable, course to take. Panic makes bad situations worse. Panic kills. Always.

Historically, those in authority who have panicked, or more importantly through intemperate word or deed, caused those who they led or governed or ruled to panic, have created disaster. Those who contributed to maintaining calm even in dire straits have often proven instrumental in overcoming those circumstances.

I’m so old that I can remember being taught in school about a president who said “the only thing we have to fear, is fear itself”–and that he was admired for saying so.

But now, that president’s political heirs are saying in effect “the only thing we have to sell is fear.”

I am reminded of the first lines of Kipling’s If:

If you can keep your head when all about you   
    Are losing theirs and blaming it on you,

Kipling thought this was admirable. It’s now apparently worthy of contempt.

And ain’t it an accurate description of the situation Trump faces?

My criticism–more of a lament, actually–is that Trump did not succeed in stemming panic. Even before Trump spoke to Woodward on 19 March, I had started to call the policy response to COVID-19 a “panicdemic.”

And it only got worse from there. And in certain quarters, the panic continues unabated. This is particularly appalling, given that perhaps, given the ignorance of the early days, there were grounds for fear in March. But given all of the evidence amassed in the past six months, it is now beyond obvious that those fears were vastly overblown.

Yet the fear mongers keep mongering. Just look at the UK, where BoJo (whose erratic behavior makes Trump look like Seneca the Younger) has clamped down again. Or Victoria, in Australia (I’m being specific as an acknowledgement to Ex-Global Super-Regulator on Lunch Break’s admonition that there is more to Australia than Melbourne), or New Zealand, both of which have adopted the insane eliminate-the-virus strategy

The panicked policy responses have wreaked havoc, and inflicted far more damage than the virus itself. So would that Trump’s efforts to tamp down the panic been far more successful. But I certainly will not join the baying chorus attacking him for going against character, and choosing understatement over hyperbole.

As for the Mideast peace deals. What? You haven’t heard about them? Well, that’s understandable, because the media has been speaking sotto voce on the subject. And that tells you just how epochal the deals are.

They obviously can’t say the deals are a bad thing. They clearly are a good thing, but they can’t say that, because that would be a boon for Trump, and we can’t have that, can we? Especially with an election in 7 weeks. So the media silence (and the silence of the Democrats) is as ringing an endorsement as one could imagine.

You can bet your bottom dollar that if Obama had shepherded such a deal to completion, the media would be singing his praises from the rooftops. (As if Obama ever could have achieved this, given his inveterate hostility to Israel and his obsession in consummating a deal with Iran.) But since Trump’s fingerprints are on it, the most substantive diplomatic realignment in the Middle East in decades is all but ignored.

As is the deal in another allegedly intractable conflict, between Kosovo and Serbia. Richard Grenell’s scathing takedown of the press for its indifference to and palpable ignorance of the the importance of the rapprochement was fully justified. (Ironically, Grenell would check various intersectional boxes, but one box that he checks–Trump Republican–puts him beyond the pale of the pale.)

These two achievements also give the lie to the oft-repeated slander that the Trump administration is isolationist, withdrawing America from the world, and in particular, abandoning the Middle East.

Letting Syria go to shit–stay shit would be more accurate–is not abandoning the Middle East. It is prudent to avoid getting involved in . . . what’s the word that Democrats always used to throw around? . . . ah . . . quagmires, that’s it. Drawing down in Iraq–after largely vanquishing ISIS–is prudent. Economy of force and concentration on strategic priorities is prudent: getting involved and staying involved everywhere is strategic idiocy.

It is particularly ironic that Trump has been routinely savaged as a war monger, yet he–in the teeth of furious opposition from the Pentagon and the State Department apparatchiks other elements of the Deep State–has steadfastly–and patiently–whittled away at American military presence in fruitless conflicts, and used diplomacy to advance American interests and reduce conflicts, thereby avoiding additional military commitments.

We are well into a new era of great power rivalry, specifically with China. Prudent strategy focuses on those arguably existential conflicts, and avoids peripheral ones, or attempts to mitigate them through diplomacy. The peace deals, the drawdowns in Iraq and Afghanistan, and the waging of asymmetric conflict against China (cf., TikTok, Huawei, visas to Chinese students, prosecuting academics who whore for China) are all elements of such a prudent and foresightful strategy. Trump’s adoption thereof is more likely instinctual than intellectual, but his instincts are correct and he has had the fortitude to pursue them despite the inveterate opposition of the idiots in the Establishment. These policies do not represent an abandonment of American influence, but a concentration on The Objective.

Clauswitz–and Sun Tzu–would understand, even if the DC Mandarins are clueless.

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April 11, 2020

A Cultural Revolution in the Corps?

Filed under: China,Military,Politics — cpirrong @ 5:25 pm

The Marine Corps credo is that every Marine is a rifleman. This credo reflects, and is reflected in, the Corps’ history of and excellence at close combat. From Belleau Wood to Guadalcanal to Tarawa to New Georgia to Peleliu to the Marianas to Iwo Jima to Okinawa to Inchon/Seoul to Chosin to I Corps (in Vietnam) to Kuwait and to Iraq and Afghanistan, the Marines have closed aggressively with the enemy and killed them, often at very high cost to themselves. Aggressive close quarter combat has been the Marine way of war for more than a century, and they think (with reason) that they do it better than anybody, ever.

The new commandant of the Marine Corps, General David Berger, has announced a radical new vision that is diametrically opposed to this historical tradition. Rather than close and kill, General Berger aims to reshape the force in order to permit it to operate in enemy held regions, and attrite the enemy’s air and naval forces with fires, primarily anti-ship and anti-aircraft missiles.

And for enemy number one, read “China.” Enemy number two? There is no enemy number two. This is all about China, and the South China Sea.

This would involve a dramatic change in Marine force structure. Fewer infantry battalions. Less tube artillery–but more missiles. No tanks. Zip. Zero. Nada.

Somewhat unaddressed in Berger’s vision document is how the “small Marine forces” that he envisions will “deploy” to islands “in close and confined seas in defiance of adversary long-range precision ‘stand-off capabilities.’” Presumably they will have to fight their way in–just like they did across the Pacific 1942-1945. How this is to be done remains very unclear, especially if close combat capability is reduced.

One of the most striking things about this document is the laser-like focus on China. In some respects, this is encouraging, because China is and will remain the primary threat to the US and US interests. And the Chinese anti-access/area denial plan of creating strategic depth by contesting a ring of island defenses (and indeed, even building the islands) bristling with missiles does require a major shift in US doctrine in response.

The document also demonstrates an admirable appreciation of the complementarity between air and naval forces, especially in the vast Pacific theater. Berger’s vision clearly entails close cooperation between the Navy and Marines to fight and dominate a powerful enemy in the western Pacific.

But one thing that history has demonstrated is that you often don’t get the war you plan for–in part because that’s not the war your enemy wants to fight precisely because that’s what you want him to do. Having a force specialized to execute a single operational concept provides little capability to fight other kinds of wars. And one thing that has helped the Marines survive the budget wars of the 20th and 21st centuries is its demonstrated flexibility in carrying out myriad different missions, from fighting furtive guerrillas in Central American jungles to digging out entrenched Japanese on Pacific islands to making hell-for-leather armor and infantry attacks across desert landscapes in the Middle East. Berger’s proposed force will not be able to perform such varied missions, or at least will have far less capability to do so. Is this a wise choice? Tough call.

One challenge Berger will face is in DC. I seriously doubt the appetite of the Pentagon, or especially the Congress, to embrace and fund such a dramatic transformation.

Another challenge will be from the Corps itself. This proposal is at odds with Marine tradition and self-image and culture. Closing with the enemy and killing him is what Marines do. More importantly, it’s what they believe they do better than anyone in the world, or anyone in history, for that matter. Remaking Marines from riflemen into missileers involves more than swapping out old weapons for new, or writing new operational manuals. It involves inculcating a whole new mindset. This is difficult to do in any organization, but is particularly difficult in one with such a deep commitment to and a well-justified pride in a traditional way of waging war.

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April 5, 2020

The Case of Captain Crozier and the Coronavirus

Filed under: China,Military,Politics — cpirrong @ 3:33 pm

Ex-Global Super-Regulator on Lunch Break asked me to opine on the relief of Captain Crozier from command of the USS Theodore Roosevelt, CVN-71. At present, I don’t have the information to make a firm judgment one way or the other. Depending on circumstances that I (and anyone else not in the Department of the Navy or Captain Crozier himself) cannot observe, I can see things going either way. (And I note, that even if I was a principal, the lessons of Rashomon should be kept in mind.)

Based on what is in the public record, the presumption must be that Captain Crozier’s actions in either leaking his letter, or disseminating it in a way that was almost certain to result in its leaking, were highly irregular, and prejudicial to good order and discipline.

But this is a rebuttable presumption. The problem is that the public does not have the information to rebut it, or to not do so. I can imagine realistic scenarios that cut either way.

I can imagine a scenario in which Captain Crozier had reasonable grounds to believe that the Navy Department (and the Pentagon generally) was insufficiently sensitive to the acute situation on the Roosevelt, and felt compelled to take extraordinary actions in order to make them aware. Bureaucracies frequently prefer to suppress information (cf. the CCP), or are so used to operating according to routine that they are incapable of handling the non-routine.

That said, if that was Captain Crozier’s belief, he should have resigned his command (and his commission) and stated forthrightly the reasons for doing so. Engineering a leak is unmilitary, and reeks of political calculation. I understand that is the way that DC plays the game, but that doesn’t make it honorable to play by corrupt rules.

I can also envision a scenario in which Captain Crozier’s understandable focus on his ship and his crew blinded him to measures that his superiors were taking to balance the interests of the crew and operational and strategic interests of the United States.

It is legendary that the first question that presidents ask during an international crisis is: “Where are the carriers?” They are the primary and most rapidly deployable asset in such crises. Making one unoperational is a weighty decision with major consequences, especially in fraught times: note China’s aggressiveness in the South China Sea at the very moment the world is gripped with the coronavirus panic.

Indeed, Captain Crozier alluded to this when he said in his letter that: “If required the USS Theodore Roosevelt would embark all assigned Sailors, set sail, and be ready to fight and beat any adversary that dares challenge the US or our allies.” If only it were that easy. It has taken days to disembark the crew and accommodate them in Guam. It would take that many days, or more, to reembark them and make the ship operational. Remember Kipling’s “unforgiving minute”? Patton did–and rightfully castigated his superiors for failing to do so.

Capt. Crozier then went on to say that conditions on the ship conflicted with CDC guidelines. But CDC (civilian) guidelines are created to address different situations with different trade-offs than the military must deal with.

And that is the fundamental tension (i.e., trade-off) here. Operational availability of one of the US’s most important military assets and a health risk to its crew. Captain Crozier understandably emphasized the latter. His superiors had to give much more weight to the former than did the Captain.

We don’t know what measures the Navy Department/Pentagon were taking to try to balance these very difficult considerations. Absent such information, I for one reserve judgment.

This episode implicates larger issues that I have mentioned several times.

The first is the shocking lack of data upon which decision makers have to act. What is the real health risk to the crew (which consists primarily of young, healthy individuals)? We don’t know. Why are we ignorant? In large part because of a failure to implement a random testing regime (which I outlined weeks ago) that would produce more reliable information. It is appalling that months after the risks began to crystalize that we still have to rely on data plagued with severe biases inherent in the method of collecting them.

The second is the grim calculus of trade-offs, never mind whether we have the information to make informed trade-offs. Of course we want to save lives–but not at infinite cost. To reprise a previous post, we don’t want to destroy the country to save it.

This is a grim calculus that wartime militaries must always face. They say there are no atheists in foxholes–but at the same time, there have to be utilitarians in headquarters.

Mind you that I do not write as someone who reflexively defers to command authority. The fact I chose not to remain in the Navy is the chief exhibit in that case: as I often say (including under oath in depositions) I left Navy because that’s where I learned I have issues with authority. Further, when a plebe at Navy, my final essay in the leadership course argued that disobedience of orders was justified in some circumstances: this did not go over well! (Which was a big part of my practical education that informed my decision to leave.) So I totally get that Captain Crozier may well be in the right. But I also get that he might not be. But what I get most is that I don’t know–nor do you–whether he is or not.

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