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 16, 2022

The Current Volatility Is A Risk to Commodity Trading Firms, But They are Not Too Big to Fail

The tumult in the commodity markets has led to suggestions that major commodity trading firms, e.g., Glencore, Trafigura, Gunvor, Cargill, may be “Too Big to Fail.”

I addressed this specific issue in two of my Trafigura white papers, and in particular in this one. The title (“Not Too Big to Fail”) pretty much gives away the answer. I see no reason to change that opinion in light of current events.

First, it is important to distinguish between “can fail” and “too big to fail.” There is no doubt that commodity trading firms can fail, and have failed in the past. That does not mean that they are too big to fail, in the sense that the the failure of one would or could trigger a broader disruption in the financial markets and banking system, a la Lehman Brothers in September 2018.

As I noted in the white paper, even the big commodity trading firms are not that big, as compared to major financial institutions. For example, Trafigura’s total assets are around $90 billion at present, in comparison to Lehman’s ~$640 billion in 2008. (Markets today are substantially larger than 14 years ago as well.). If you compare asset values, even the biggest commodity traders rank around banks you’ve never heard of.

Trafigura is heavily indebted (with equity of around $10 billion), but most of this is short term debt that is collateralized by relatively liquid short term assets such as inventory and trade receivables: this is the case with many other traders as well. Further, much of the debt (e.g., the credit facilities) are syndicated with broad participation, meaning that no single financial institution would be compromised by a commodity trader default. Moreover, trading firm balance sheets are different than banks’, as they do not engage in the maturity or liquidity transformation that makes banks’ balance sheets fragile (and which therefore pose run risk).

Commodity traders are indeed facing funding risks, which is one of the risks that I highlighted in the white paper:

The extraordinary price movements across the entire commodity space have resulted in a large spike in funding needs, both to meet margin calls (which at least in oil should have been reversed with the price decline in recent days–nickel remains to be seen given the fakakta price limits the LME imposed) and higher initial and maintenance margins (which exchanges have hiked–in a totally predictable procyclical fashion). As a result existing lines are exhausted, and firms are either scrambling to raise additional cash, cutting positions, or both. As an example of the former, Trafigura has supposedly held talks with Blackstone and other private equity firms to raise $3 billion in capital. As an example of the latter, open interest in oil futures (WTI and Brent) has dropped off as prices spiked.

To the extent margin calls were on hedging positions, there would have been non-cash gains to offset the losses on futures and other derivatives that gave rise to the margin calls. This provides additional collateral value that can support additional loans, though no doubt banks’ and other lenders terms will be more onerous now, given the volatility of the value of that collateral. All in all, these conditions will almost certainly result in a scaling back in trading firms’ activities and a widening of gross margins (i.e., the spread between traders’ sale and purchase prices). But the margin calls per se should not be a threat to the solvency of the traders.

What could threaten solvency? Basis risk for one. For examples, firms that had bought (and have yet to sell) Russian oil or refined products or had contracts to buy Russian oil/refined products at pre-established differentials, and had hedged those deals with Brent or WTI have suffered a loss on the blowout in the basis (spread) on Russian oil. Firms are also likely to handle substantially lower volumes of Russian oil, which of course hits profitability.

Another is asset exposure in Russia. Gunvor, for example, sold of most of its interest in the Ust Luga terminal, but retains a 26 percent stake. Trafigura took a 10 percent stake in the Rosneft-run Vostok oil project, paying €7 billion: Trafigura equity in the stake represented about 20 percent of the total. A Vitol-led consortium had bought a 5 percent stake. Trafigura is involved in a refinery JV in India with Rosneft. (It announced its intention to exist the deal last autumn, but I haven’t seen confirmation that it has.). If it still holds the stake, I doubt it will find a lot of firms willing to step up and pay to participate in a JV with Rosneft.

It is these types of asset exposures that likely explain the selloff in Trafigura and Gunvor debt (with the Gunvor fall being particularly pronounced.). Losses on Russian assets are a totally different animal than timing mismatches between cash flows on hedging instruments and the goods being hedged caused by big price moves.

But even crystalization of these solvency risks would likely not lead to a broader fallout in the financial system. It would suck for the owners of a failed company (e.g., Torben Tornqvuist, who owns ~85 percent of Gunvor) but that’s the downside of the private ownership structure (something also discussed in the white papers); Ferrarri and Bulgari sales would fall in Geneva; banks would take a hit, but the losses would be fairly widely distributed. But in the end, the companies would be restructured, and during the restructuring process the firms would continue to operate (although at a lower scale), some of their business would move to the survivors (it’s an ill wind that blows no one any good), and commodities would continue to move. Gross margins would widen in the industry, but this would not make a huge difference either upstream or downstream.

I should also note that the Lehman episode is likely not an example of a domino effect in the sense that losses on exposures to Lehman put other banks into insolvency which harmed their creditors, etc. Instead, it was more likely an informational cascade in which its failure sent a negative signal about (a) the value of assets held widely by other banks, and (b) what central banks could or would do to support a failing financial institution. I don’t think those forces are at work in commodities at prsent.

The European Federation of Energy Traders has called upon European state bodies like European Investment Bank or the ECB to provide additional liquidity to the market. There is a case to be made here. Even though funding disruptions, or even the failure of commodity trading firms, are unlikely to create true systemic risks, they may impede the flow of commodities. Acting under the Bagehot principle, loans against good collateral at a penalty rate, is reasonable here.

The reason for concern about the commodity shock is not that it will destabilize commodity trading firms, and that this will spill over to the broader financial system. Instead, it is that the price shock–particularly in energy–will result in a large, worldwide recession that could have financial stability implications. Relatedly, the food price shocks in particular will likely result in massive civil disturbances in low income countries. A reprise of the Arab Spring is a serious possibility.

If you worry about the systemic effects of a commodity price shock, those are the things you should worry about. Not whether say Gunvor goes bust.

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March 11, 2022

Direct Clearing at FTX: A Corner Solution, and Likely a Dead End With Destabilizing Potential

In a weird counterpoint to the LME nickel story, another big clearing-related story that is causing a lot of consternation in derivatives circles is FTX exchange’s proposal to move to a direct clearing model that would dispense with FCMs as intermediaries. Instead of having an FCM interposed between a customer and the clearinghouse, the customer interfaces directly with the FTX Derivatives Clearing Organization (DCO).

What is crucial here is how this is supposed to work: FTX will utilize near real time mark-to-market and variation margin payments. Moreover, the exchange will automate the liquidation of undermargined positions, again basically in real time.

The mechanics are described here.

FTX describes this as being the next big thing in the derivatives markets, and a way of addressing systemic risks. Basically the pitch is simple: “real time margining allows us to operate a pure no credit/loser pays system.”

FTX touts this as a feature, but as the nickel experience demonstrates (and other previous episodes demonstrate) it is not. Margining generally can be destabilizing, especially during stressed market conditions, and the model FTX is advancing exacerbates the destabilizing potential of margining.

The mechanical means of addressing margin shortfalls on a real time frequency increases the tight coupling on the exchange, and is tailor made to create destabilizing positive feedback loops: prices move a lot leading to margin shortfalls in real time that trigger real time trades that accentuate the price movement. It is like seeding the market with huge numbers of stop orders, which are inherently destabilizing. Further, they can create incentives to manipulate. Anyone who can get some idea of where the stops are can “gun the stops” and trigger big price moves.

This instability potential can be exacerbated by the ability of traders to hold collateral in the form of the “underlying” (i.e., crypto, at present). Well, the collateral value can fluctuate, and that can contribute to margin shortfalls which again trigger stops.

Market participants can mitigate getting stopped out by substantially over-margining, i.e., holding a lot of excess margin in their FTX account. But this is a cash inefficient way of trading.

It’s not clear to me whether FTX will pay interest on collateral. It seems not. Hmmm. Implementing a model that incentivizes holding a lot of extra cash at FTX and not paying interest. Cynic that I am, that seems to be a great way to bet on higher interest rates! Maybe that’s FTX’s real game here.

I would also note that the “no leverage” story here reflects a decidedly non-systemic view (something that I pointed out years ago in my critiques of clearing mandates). Yes, real time margining plus holding of substantial excess margin reduces to a small level the amount of leverage extended by the CCP/DCO. But that is different than reducing the amount of margin in the system as a whole. People who have borrowing capacity and optimal total leverage targets can fund their deposits at FTX with leverage from other sources. They can offset the leverage they normally obtain from FCMs by taking more leverage from other sources.

In sum, FTX is arguing that its mechanism of direct clearing and real time margining creates a far more effective “no credit” clearing system than the existing FCM-intermediated structure. That’s likely true. But as I’ve banged on about for years, that’s not necessarily a good thing. The features that FTX touts as advantages have very serious downsides–especially in stressed market conditions where they tend to accelerate price moves rather than dampen them.

Insofar as this being a threat to the existing intermediated system, which many in the industry appear to fear, I am skeptical. In particular, the cash inefficiency of this mechanism will make it unattractive to many market participants. Not to be Panglossian, but the existing intermediated system evolved as it did for good economic reasons. It trades off credit risk and liquidity risk. It does so in a somewhat discriminating way because it takes into account the creditworthiness of market participants (something that FTX brags is unnecessary in its system). FTX is something of a corner solution that the market has not adopted despite the opportunity to do so. As a result, I don’t think that corner solution will have widespread appeal going forward.

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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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February 28, 2022

Reality is a Mother

Filed under: Climate Change,Commodities,Economics,Energy,Politics,Russia,Ukraine — cpirrong @ 11:09 am

The Russian invasion of Ukraine has not shocked and awed the Ukrainian military, but it has shocked and awed Germany, fo’ sho’.

In a period of hours over the weekend (and remember, German stores close promptly at 6 and are not open on Sunday), Germany announced that it will:

(a) Increase defense spending to 2 pct of GDP.

(b) Build two new LNG import facilities.

(c) Consider delaying decommissioning its nukes.

(d) Consider all options for energy, including gas, nuclear, and coal: there are no longer any “taboos” on energy sources.

What will Greta say?:

The Germans are saying, in effect: Go away girl. The shit just got real.

I note that (a) and (b) topped the list of Donald Trump’s harangues against Germany, which caused the ruling class to shriek in anger: how dare he insult our dear allies? Actions speak far louder than an apology.

Alas, this reality therapy has not penetrated the thick skulls of the Biden administration. When asked about reversing Biden administration anti-fossil fuel policies, spokesmoron Jen Psaki instead continued to ride the renewables hobby horse. She thereby reinforced the message of the Most Clueless Man in the World, John Kerry, whose big concern about Ukraine is that it might distract Vladimir Putin from focusing on climate change.

Yes, reality is a mother. Enough of a mother to snap even the dreamy Germans out of their green and pacifistic reveries. But not enough of one to do the same in the Biden administration.

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February 9, 2022

Spin the Bottleneck: The Location of the LNG Bottleneck Is Now Blindingly Obvious

Filed under: Climate Change,Commodities,Economics,Energy,LNG,Politics,Regulation — cpirrong @ 10:36 am

When playing Spin the Bottleneck with my students I say to look at what lies between the price of a transformed and untransformed commodity to identify the bottleneck. In my earlier post on the gaping spread between European (and Asian) LNG prices and the price of US gas (which is on the margin for both destinations) I noted two possible constraints: shipping and liquefaction capacity.

Well, it ain’t shipping.

There is a surfeit of LNG shipping capacity. So much that LNG shipping is effectively free between the US and Europe (down from $273K/day in December). Yet the spread remains very wide. So the binding constraint is definitely liquefaction capacity, in the US in particular. Those who have the rights to that capacity–notably firms that entered into contracts with the likes of Cheniere or Freeport that buy gas at the US price and pay a contractually fixed liquefaction/tolling fee–are coining it. They capture the bulk of the existing spread between TTF or UK Balancing Point prices and Henry Hub. (The LNG companies are benefitting only to the extent that they reserved some of their capacity for their own trading, which is rather de minimis).

So in the short run liquefaction capacity is quite valuable. The question is what will its value be over the longer term? Will current events convince enough financiers to provide capital for a large expansion of US capacity? Given the long gestation period of these projects it is a hard issue for banks and equity to analyze.

One thing to note. Another thing I discuss extensively in my classes is the importance of government/regulatory bottlenecks. Such bottlenecks may be a constraint on expansion of US LNG capacity. Many of the projects under development do not have the requisite federal permits. The Biden administration is unlikely to grant more. Thus, like taxicab medallions in NYC, existing permits likely have a substantial scarcity value–thanks to a government-created bottleneck.

This has interesting implications for financing of US LNG projects. Financiers of a given project face less risk of a glut of capacity coming online in a few years, and this should make them more willing to finance already permitted projects. But, of course, they are taking on political risk by doing so: might a new administration change course post-2024? Or might political pressure induce a change in course by the current administration? There are already a lot of political risks in investing in anything fossil-fuel related (attributable to climate hysteria). This is a US LNG-specific risk.

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January 16, 2022

Dispatches From Dystopia

Filed under: CoronaCrisis,Economics,Politics — cpirrong @ 7:17 pm

The shade of James Buchanan rests easy now, secure in the knowledge that he is no longer the worst president in US history.

Although the eclipse of Buck’s dubious claim to fame has been evident for some months, his successor to the sobriquet sealed the deal with a truly loathsome (even by his standards) speech on “voting rights” in Georgia last week. Unsurprisingly demonstrating no shame, or self-knowledge, the one-time buddy of full-on segregationists (e.g., Eastland, Talmadge, Byrd) and man who bragged that (a) Delaware had sided with the South in the Civil War, and (b) that George Wallace praised him, claimed that anyone who opposed the federalization of US elections was in a confederacy with Bull Connor, selfsame George Wallace and . . . Jefferson Davis.

Buchanan was a disaster because he fiddled while the country spun into disunion and civil war. But although he failed to stop it, he didn’t actively stoke division and hatred. Which is what exactly Biden did in his speech.

A sharp contrast to Biden’s previous claims (e.g., in his inaugural address) that he would be a unifier.

As if that was ever credible.

Biden’s speech was so repulsive that even his pom-pom squad (e.g., Peggy Noonan, Chuck Todd, DICK Durbin, Al Sharpton, CNN, MSNBC, etc.) recoiled in horror. Not even they would drink this KoolAid.

But to anyone who is shocked: seriously? Where have you been during Biden’s entire public life? He has ALWAYS been a mean, nasty, dishonest, repulsive schmuck. Did I mention dishonest? His hair plugs are the most honest thing about him. Anyone who fell for the avuncular Joe shtick was an idiot or self-deluded.

In sum, it was only a matter of time before Brandon elbowed Buchanan to the side, and assumed the mantle of worst president in American history. Worst in personality (which is saying something, given the likes of LBJ), the most intellectually limited (by a mile, even before his senescence), and the most inept.

An illustration of Mencken’s adage: “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.”


Well, we’re getting it good and hard now, ain’t we?

And as for democracy, and in particular, “our democracy”, Biden’s mantra is that state control of elections is tantamount to Jim Crow. Well, state control of elections has been a staple of “our democracy” (sic–the US is a republic) since the first federal election in 1788. But now it’s not, apparently. Indeed, its an anathema to it.

So spare me any blather about “our democracy” (sic). What we are witnessing is not reverence for, and an effort to protect, our political traditions: it is a concerted attempt to overthrow them.

Switching gears somewhat in my tour-de-dystopia–to COVID. (Not a complete shift, because Biden’s idiocy appears here too).

Here there is too much ground to cover–the entire globe, in fact. So much malignity to choose from. But much of it focuses on vaccine mandates.

Even this is a target rich environment. Macron saying that those refusing vaccination were not citizens and that he would piss on them. Quebec fining the unvaccinated and Canada barring unvaccinated truckers from entering the country (thereby exacerbating an already acute supply chain situation). Germany. Austria. (Germans gonna German!) Biden’s attempts to foist them on the US via OSHA or HHS (the former foiled the latter alas not).

But Australia presents the most egregious example. Australia has been in an intense competition with Canada and New Zealand for the Commonwealth Fascist Cup, but had eased into a comfortable lead with its concentration camps and truncheoning protesters (including old ladies). It has decided to cement its lead with its actions in a very high profile case.

Unvaccinated tennis great Novak Djokovic was just deported, thereby preventing him from playing in the Australian Open (with the very good chance of setting the record for Grand Slam victories). Was he deported because he violated visa requirements? No, even the Australian government recognized that he had a recognized and legitimate exemption–a previous COVID infection which made him less of a threat to the health of Australians than his vaccinated competitors. No. They deported him because he may “foster anti-vaccination sentiment.”

That is, he might galvanize opposition to government propaganda. Or, put differently, he would potentially undermine Mass Formation Psychosis.

Can’t have that!

Note well that governments’ insistence on vaccination has been almost perfectly negatively correlated with evidence regarding vaccine efficacy and perfectly positively correlated with evidence regarding its risks, especially for the non-aged.

To learn more about evidence of the always weak and now declining efficacy of the vaccines, read Substacks by el gato malo, Steve Kirsch, or Alex Berenson. The evidence is too strong to ignore–but governments are doubling down on ignoring it.

Hell, don’t believe them? How ’bout Bill Gates?: “The vaccines we have prevent severe disease and death very well but they are missing two key things. First they still allow infections (‘breakthrough’) and the duration appears to be limited. We need vaccines that prevent re-infection and have many years of duration.” So they don’t work long and they don’t stop the spread. Other than that, they’re great!

Don’t believe Bill? How about the Pfizer CEO, Albert Bourla?:

“The two doses, they’re not enough for omicron,” Bourla said. “The third dose of the current vaccine is providing quite good protection against deaths, and decent protection against hospitalizations.”

And believe me, these are the mildest characterizations of mRNA “vaccine” efficacy.

And as for the health risks, the anecdotal evidence (e.g., athletes collapsing or withdrawing from competition due to heart issues) is pretty startling.

Well, you might say, it’s only anecdotal evidence. But I guarantee that for any other medication, this anecdotal evidence would catalyze public outrage and spur aggressive government investigations, and indeed, pre-emptive pauses on further vaccination pending a thorough inquiry.

But here we see the exact opposite from governments. They do not even deign to acknowledge the issue, but double down on their demonization of the unvaccinated, their dismissal of doubts, and their demand for obedience.

Why? For the worst of reasons.

First, governments are loath to admit their myriad errors regarding the panicdemic, most notably their errors in wildly exaggerating the miracles that mRNA technology would shower upon a beleaguered world. Two shots didn’t work??? Then THREE! Three don’t work? FOUR! (The Dutch are planning six!)

Insanity: doing the same thing over, and expecting different results.

And this does not even get into the possibilities mooted by some even before mRNA treatments were widely employed that they could have unintended consequences, such as stimulating mutation or damaging immune systems.

Second, and even more disturbingly, as with most of the COVID policies we have endured the last two years, it’s not really about public health. It’s about public control. The Djokovic situation demonstrates that clearly: he was a threat not because he jeopardized public health (which the government acknowledged he did not), but because he jeopardized the government’s control over an ovine public. The sheep might get ideas!

(Never forget that 40 percent of Australians descend from prison guards conditioned to exact obedience. I shudder to think at the proportion among those in government. And many of the rest descend from prisoners conditioned to obey.)

Take any government policy adopted over the last two years that seems completely insane from a public health perspective. Then evaluate it from the perspective of whether it advances government control–or elite control (e.g., the Bill Gateses of the world).

You’ll find that the public health insanity is the epitome of government control rationality. Every. Damned. Time.

The Djokovic deportation is unique only because it is a disarmingly honest recognition of that fact.

There are stirrings of discontent around the world. But stirrings are not enough. The time for full-blown civil disobedience has arrived. No disobedience now, dystopia forever.

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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 22, 2021

Levitating the Lira–For How Long? Or, Erdo Promises the Impossible (Trinity)

Filed under: Economics,Turkey — cpirrong @ 7:01 pm

The Turkish lira is now about 12, a big recovery from its nadir on Monday. I expressed skepticism that Erdoğan’s announced policy of guaranteeing some Turkish bank deposits against an adverse move in the TRY was the cause. As we’ll see in a moment there is something to that. But even if the policy announcement caused all or some of the rebound, my skepticism about the viability of this mechanism remains.

As to the logic behind the policy. In essence, there was a run on the lira, and one way of running was to sell lira on deposit, and buy dollars. A typical bank run is to sell deposits for currency. One reason bank runs are far less frequent today in places like the US is deposit insurance, which is basically a mechanism to ensure that a dollar on deposit will always be worth a dollar of currency. That short-circuits the run dynamics, in which fear that a dollar of deposits will be worth less than a dollar of currency, which induces people to race to convert deposits into currency, which can cause banks to fail . . . leading to deposits being worth less than the equivalent amount of currency.

What Turkey has announced–and note, it has not announced the details so this isn’t really a plan but a sketch of a plan–is equivalent to a form of deposit insurance. Except that here the government is promising the TRY value of deposits will be worth at least a fixed amount of USD or Euros. But the idea is the same. If people are convinced that their deposits will remain pegged to the dollar, they have less incentive to run.

There is a key word in the prior sentence: “convinced.” It might work if people believe it will work. It won’t work if people don’t. So how can they have confidence? This confidence is necessary, but not sufficient, for success.

The confidence depends on the reliability and solvency of the guarantor. It’s not quite clear who that is in this situation. Is it the banks? The government? The former would be ludicrous, so let’s go with the latter.

So how is the government going to fund the guarantee? It’s likely hoping that the mere fact that people believe it can and it will will mean that the government is never on the hook for anything.

But that’s not realistic. The value of the TRY will fluctuate for the same reasons that currencies always fluctuate. Macro shocks. Balance of payment issues. Capital flows. Whatever. The Turkish government is short a put on the currency (that’s essentially what the guarantee is–a put on the TRY). Sometimes these factors are going to push the TRY down, obligating the government to make good on its promise.

So how is it going to pay for that? And note that it will have to pay a good fraction of the time. Roughly 50 percent of the time if the floor is set at the current exchange rate.

Print lira? LOL. So the lira declines, and the government prints more lira to pay off on its short put. Which will depress the lira further. Requiring more printing, etc. etc. etc.

Short put=short gamma. Short gamma can create an unstable positive feedback mechanism, and positive feedback mechanisms in economics very often have extremely negative consequences. Lira declines feed further declines. And again–as with any currency, lira declines are always a major risk. This is especially true with a country like Turkey. And resorting to this mechanism would likely destroy the trust that it depends on.

OK. The printing option seems pretty dumb–though don’t put it past Erdo! So, to meet its obligation to top up lira-denominated accounts to compensate for a decline in the TRY, instead of printing lira Turkey could sell dollars and Euros for lira which it then gives to depositors. At least this would potentially create a beneficial (negative/stabilizing) feedback mechanism, with the $ and € sales tending to increase the value of the lira.

But where is Turkey going to get the dollars and euros? That’s what I meant the other day when I said don’t trust a madman whose mouth writes checks his wallet can’t cash.

This second mechanism can be viewed another way: as a commitment device. Specifically, a device committing Turkey to defend the lira. Effectively, a way of committing to a peg: it has to buy lira/sell $ or € when the lira declines. And if Erdo’s other promise–not to raise interest rates–is believed, committing to a peg and foregoing the option to raise interest rates to defend the currency.

And if this is the real plan, it faces all the risks that pegging inevitably entail. Pegs are always at risk to speculative attack. Turkey is particularly so, given its paucity of foreign exchange reserves and its bizarre government policies. No doubt George Soros’ interest has been piqued.

This is why I am skeptical. Skeptical as to the announcement of this sketch of a plan leading to a 33 percent rally–FX traders no doubt have figured out what I just laid out. Skeptical as to the feasibility and stability of this mechanism, even if it did levitate the lira.

And as I alluded to at the outset, it may well be the case that the plan didn’t raise the lira on Monday and keep it there–traditional government intervention has. The FT reports that the central bank has spent billions of dollars in recent days to stabilize the TRY. This suggests that the plan is basically just propaganda to (a) conceal what is really going on behind the scenes, a traditional defense of the currency, and (b) allow Erdo to take credit for the rally without admitting that more dollars are going out the door.

Regardless of the mechanism, defending the lira puts strains on Turkey’s public finances. The fact that Turkish credit spreads have widened even as the currency has strengthened suggests that Mr. Market has figured that out.

Turkey, like all countries, faces the “impossible trinity.” A country cannot have a fixed exchange rate, an open capital account, and an independent monetary policy. But Erdoğan is promising all three. Fixing interest rates at low levels as he promises, because he’s on a mission from Allah=independent monetary policy. He has promised to maintain free movement of capital. And now, he is implicitly promising to fix the exchange rate.

We know with metaphysical certainty that this is impossible–the “impossible trinity” phrase came about for a reason. So it’s going to end badly. The only question is which part of the trinity is Erdoğan going to jettison. Based on form, I predict the lira.

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