Streetwise Professor

I’m baaaccckk. Posting pause due to travel (which I’ll write about in my next post) and a pressing expert report deadline.

The biggest news event of interest to me during the hiatus was the agreement for Gunvor to buy the non-Russian assets of the just sanctioned Lukoil, and the early term abortion thereof, with Treasury Secretary Scott Bessent administering the abortifacient. Sort of a reverse of the Anchor Man meme:

It was surprising, not to say shocking, to read of the announcement of the Gunvor-Lukoil deal. It raised many questions.

For one thing, this was a minnow trying to swallow a whale. With a book value of around $6.5 billion, Gunvor was trying to acquire assets worth between 3 and 4 times as much.

Which meant that Gunvor would have needed to raise substantial financing. When the deal was announced, no mention was made of this.

And seriously, what non-Russian bank would want to touch this? Or was it thought that some Middle Eastern SWF be willing to step up? Even that is a stretch. Nobody wants to attract the attention of a sanctions-happy US.

Strategically it would have created a beast somewhat unique in the energy trading world. Lukoil, with significant upstream and downstream assets as well as a largish trading operation, is more analogous to Shell, BP, Total, and the like than it is to a trading firm. Yes, trading firms (e.g., Vitol, Trafigura) have become asset heavier, but the contemplated acquisition would have turned Gunvor into a privately owned, very asset heavy company very different from its peers. There would have been a serious mismatch between ownership structure, capital structure, and asset structure.

There’s also a serious question about the ability of Gunvor to manage such an enlarged, and much more complicated, organization. Torbjörn Törnqvist has not demonstrated that expertise, and in any event, he is 72 and a management transition is on the horizon. He is trying to groom his son for the role, but he obviously has even less experience.

Given all the very serious questions about the deal, one is led to wonder why it was even attempted. The most benign interpretation is that it matched a desperate seller to an opportunistic buyer wanting to do something unprecedented.

A less benign, and probably more accurate, interpretation is that Törnqvist was acting as the Kremlin’s cat’s paw. That is, Putin wanted to retain control over the assets, and therefore wanted them to go into friendly hands that he could control, at least to some degree.

Gunvor’s Russian roots are well known. The sanctions against Gennady Timchenko, former co-owner of Gunvor, in 2014 created an existential crisis which Törnqvist successfully navigated. (Though the details of how he did so remain obscure). With the exception of the Ust Luga port asset Gunvor had shed its Russian assets. The company claims complete independence.

But there is a history of deep connections. And Törnqvist’s second (current) wife is Russian, and continues to operate an environmental NGO in Russia. Further, given the opacity of the commodity trading world generally, and the Russian commodity trading world specifically, it is always reasonable to suspect that subsurface connections still remain, and that Russia has leverage over Gunvor and Törnqvist.

The US Treasury Department certainly thinks so, and said so bluntly when it torpedoed the deal.

President Trump has been clear that the war must end immediately. As long as Putin continues the senseless killings, the Kremlin’s puppet, Gunvor, will never get a license to operate and profit.

— Treasury Department (@USTreasury) November 6, 2025

“Kremlin’s puppet.” Brutal. And “Never” seems pretty final.

I laughed when I read that. No bureaucratic doublespeak. Just a right cross to the jaw. (Which Bessent is apparently quite capable of throwing. As Elon).

Of course, the US has far more information about Gunvor and its doings than a mere blogger. You can bet its communications are surveilled, and it is likely that the US has human assets working in the company, and in Lukoil too. Meaning that allegations of puppetry are likely grounded in hard intelligence.

So, whither Lukoil? Well, it will be more like wither, Lukoil.

The trading operation has to be totally shtuped. Trading lives on credit and they won’t get it. And any buyer will feel Uncle Sanctions looking over their shoulder.

Bulgaria is planning to nationalize the Lukoil refinery there. Romania is likely to do something the same with the refinery in its country.

The biggest asset is Lukoil’s big stake in an Iraqi oil field. Likely the other partners will continue operations, and the US will probably acquiesce, not wanting to see a hit to world oil supplies. Revenues can be escrowed, and conceivably Iraq could nationalize it.

Moldova is trying to obtain the Lukoil storage assets located there.

Lukoil stations in Finland, the US, and elsewhere are already having problems getting supplied with fuel. Those could be pieces that other entities, including trading firms or NOCs (note that Kuwait Petroleum operates Q8 gas stations) could snap up.

Meaning that the likely outcome is that rather than being bought in one piece, as Gunvor had proposed, pieces of Lukoil will be seized, sold, or shut down.

One issue I haven’t seen addressed is that of Lukoil International’s creditors, and how that will be handled. A subject for another day.

For now, suffice it to say that the Gunvor Gambit–and arguably the Putin Gambit–was shot down in flames by the United States, and there appear to be no survivors.

The severity of the US action, and the in-your-face explanation thereof, have a clear geopolitical subtext. Trump has had it with Putin. He offered Putin all sorts of off ramps, face saving deals, and the like. But an alternately smirking and snarling Putin refused to budge an inch on Ukraine.

So Trump tightened the sanctions screw, not just on Lukoil but on Russian oil sales generally, and these are having an effect. And he wasn’t about to give Putin a workaround on Lukoil via a transaction with a potentially friendly or even controlled buyer.

The cancellation of a mooted meeting in Budapest between Putin and Trump further demonstrates that Putin has exhausted Trump’s patience. (This cancellation sparked a rejuvenation of Kremlinology. The meeting was cancelled after a phone call between Russian Foreign Minister Lavrov and US SecState Marco Rubio. Lavrov was missing from some subsequent Kremlin meetings, leading to speculation that the failure of the call has led to his being disgraced, and to suggestions he stay away from windows).

But maybe Vova doesn’t care. He appears more than willing to spend another million lives to seize shreds of blasted territory in Ukraine rather than make any concessions whatsoever. Sad. And sick.

A week ago Friday (10/10/25) there was a crypto crash. Not huge, but not small. Bitcoin:

Ether was also hit.

The proximate cause was the most recent Trump tariff spasm. But that was just the spark. The initial down move triggered classical self-reinforcing crash dynamics. And the crypto market structure is arguably uniquely vulnerable to such events.

As I’ve written for years and years, (a) tightly coupled systems are vulnerable to catastrophic collapse, and (b) a wide variety of factors produce tight coupling in these markets. The most important of these factors is marking to market and variation margin.

And this dynamic is particular fraught in crypto. Positions are marked to market at a very high frequency. Moreover, the resulting margin calls occur at the same frequency. That frequency is so high that margin breaches result in liquidations of positions (“auto liquidations”) because there is no time to replenish collateral. These liquidations exacerbate price movements, creating a positive feedback mechanism–and positive feedback is almost always a bad thing in financial markets.

But it gets better! Risky positions are sometimes collateralized with . . . risky collateral! Specifically so-called “stablecoins.” I say “so-called” because stability is aspirational rather than real, especially for a new variety of “stablecoins” implicated in the 10/10 event, like USDe.

Whereas traditional stablecoins like Tether are supposedly backed by high quality, low-risk dollar assets (and the recent “Genius Act” will reduce any uncertainty about that), USDe is “backed” by both dollar assets and–wait for it–crypto. So what is the lithium that keeps USDe “stable”? Hedging using perpetual futures.

No. Seriously. Yeah, because hedges are always perfect, right? Here’s the only perfect hedge I’m aware of:

So in reality the “stablecoin” has basis risk, the basis being the difference between the price of the crypto collateral and the perp futures.

Arbitrage is supposed to keep the basis small with little volatility. However, if you look at data, e.g., the spread between BTC and BTC perp futures on Coinbase, you will see that there are frequent and large basis movements, often as big as 1 percent.

Moreover, USDe is traded on multiple exchanges, and the prices can diverge. Again, arbitrage is supposed to keep those divergences small and of short duration, but the market moves faster than arbitrage: given the frequent revaluing of positions and collateral, even a very brief price divergence can trigger a self-reinforcing spiral before arbitrage can close the gap.

On 10/10, Coinbase used the price of USDe on its platform to market collateral to market. But that exchange is not the primary USDe platform, and is therefore relatively illiquid. So forced liquidations of positions on Coinbase due to the price move and marking to market led to liquidations of USDe collateral which pushed downward pressure on the Coinbase USDe price which led to more positions being undercollateralized which led to those positions being liquidated. And this all happened faster than the speed of arb. Rinse, wash, repeat.

Can you say wrong-way risk? I knew you could.

The industry cope is to say “well ackshually if Coinbase had used the USDe price on more liquid exchanges as its USDe ‘oracle’ this wouldn’t have happened.”

Maybe. But irrelevant. What happened on 10/10 was a “normal accident.” Normal accidents result from a sequence of events in a tightly coupled. complex system. Accidents are “normal” in such systems because there are many, many, many possible sequences that can trigger accidents. Meaning that even if this particular sequence is eliminated by referencing prices from the most liquid exchange, many, many, many other such sequences will remain.

The underlying “cause” of such events is the very nature of the system itself. The reason crypto is particularly susceptible is the tight coupling due to frequent marking to market and high leverage. Those factors remain.

The crypto system is acutely vulnerable due to another structural factor–the fragmentation of trading. As I’ve frequently written, crypto market structure is puzzling. The centripetal force of liquidity typically results in the concentration of trading on a single platform. Crypto, in contrast, is traded on multiple exchanges, with several have a fairly large market share.

This fragmentation increases the number of connections and therefore the number of possible paths by which a destabilizing shock can spread. And referencing prices from other exchanges to value positions or collateral on a given exchange creates more such interconnections.

In brief, a shock–a price shock, or an operational shock–on one exchange can impact other exchanges. These shocks can trigger the destabilizing auto liquidations.

“Too big to fail” is not the right description of the crypto market. Instead, “too interconnected and tightly coupled and complex to succeed” is more accurate.

It must also be noted that the factors that make the crypto market systemically fragile make it unduly susceptible to manipulation which can in turn trigger systemic crises.

One of the oldest strategies in the book is “gunning the stops.” The play being that if you force prices to hit stops order triggers, that will induce trades that move prices further in the same direction.

In crypto, the game is “gunning the liquidations.” The idea is the same. Trade like a whale to push the price in a particular direction. If the move is big enough, that will trigger liquidations that move the price further in that direction. And since some collateral is risky, there is another way to manipulate–bash the collateral.

Given the high leverage and high frequency marking to market, the necessary push isn’t that big–maybe a dolphin can do it. And as shown on 10/10, and as discussed above, once the price moves begin they can trigger a crash.

It is also disturbing that crypto exchanges can profit from liquidations. Conceivably this could provide an incentive for the exchanges to manipulate themselves. But even if that’s not the case, the fact that they can profit from destabilizing manipulations, and instability generally, means that they have a weaker incentive, and perhaps a positive disincentive, to prevent/deter manipulations or big price moves.

In sum, crypto market structure is crapto. It has all of the inherent vulnerabilities of markets, but on meth. Supposed “innovations”–like near continuous marking to market and unstablecoin collateral–exacerbate these vulnerabilities. As does the fragmentation.

All meaning that it is inevitable that you will see this movie again.

In my recent post on Don Wilson and GPU trading, I expressed skepticism at the prospects for such trading based primarily on market structure issues. Specifically, a commodity futures market can thrive if the underlying product has a highly intermediated value chain, but that vertical integration or long-term contractual relationships between producers and ultimate buyers is inimical to their success. Further, I surmised that transactions costs considerations would lead to long-term contracts and/or vertical integration dominating the GPU sector.

And indeed, that outcome is becoming clearer by the day. OpenAI (it of ChatGPT) has agreed to a massive chip purchase from AMD and has also bought a 10 percent stake in the chipmaker. OpenAI has also entered into a five-year deal with Oracle to buy “computing power.”

There is also increasing verticality in power supply arrangements. (Apparently the new industry buzzword is “circularity” but we are really talking about vertical relationships here, so I’ll stick with traditional IO speak). Example: AI firms building gas-fired plants in Texas. Musk’s xAI building a gigawatt scale plant in Mississippi to power a data center outside Memphis.

Microsoft has entered a 20 year deal with Constellation Energy to restart–believe it or not–a unit at Three Mile Island. And on and on.

It’s somewhat amusing to me. Years ago Paul Joskow wrote a seminal article about coal mine mouth power plants in which he showed that this co-location led to long term contracts or vertical integration. We are now seeing data center mouth power plants.

The economics are basically the same. It makes sense to locate something that consumes as much (or more) power than a generator can produce to economize on transmission costs and enhance reliability. However, this creates bilateral monopoly driven transactions costs issues that lead to vertical integration and long term contracting.

Going back to GPUs, there is no reason for colocation, but economies of scale on both sides of the market–huge consumers operating data centers, and a small number of GPU producers–create similar bilateral monopoly opportunism risks, which in turn are leading to the implementation of traditional responses to these risks–tight vertical connections between producers and consumers.

This market structure is inimical to the development of a thriving derivatives market. So I wouldn’t be surprised to see the launching of GPU futures contracts, but I fully expect them to sink faster than a Nork destroyer after launch. But unlike the Nork ship, GPU futures would not be refloated.

China is currently undergoing an “overcapacity crisis.” Due to investment booms that far outstripped demand, firms in several major industries are engaged in price wars, what at one time was referred to as “cutthroat competition.”

Presumably because of the negative connotations of phrases like cutthroat competition, the Chinese have coined a neologism–“involution”–to describe their predicament.

Involution ?? or ? doesn't have to be a hard word, but I keep seeing it misused in China commentary, e.g. this article, which I also have mixed feedback on.

Simply: Involution is the state of intense competition AND the symptoms of that competition.?https://t.co/8D4rEDylZq

— David Fishman (@pretentiouswhat) September 20, 2025

The resort to euphemisms is always a tell of a deep problem. And in fine CCP fashion, it has launched a “campaign” against it:

In prosaic terms, then, this campaign is about limiting overcapacity and ensuring China doesn’t fall into the fatal tendency toward deflation that took over Japan three decades ago. It’s also a way to combat the collective action problems that bedevil all economies.

Dressing it as a campaign follows the Communist Party’s long history of presenting major shifts in policy as popular drives against particular internal enemies. It’s a successor to Mao’s anti-rightist and anti-intellectual movements, or the anti-corruption purge that Xi used to exert control over the state apparatus after he came to power in 2012.

And it’s surely a coincidence, right, that the overcapacity is most acute in industries which the government has targeted to be world leaders, which include solar energy (40-50 percent capacity utilization, 90 percent of companies losing money, measured in the billions) and EVs? But it also extends to more prosaic sectors, like steel and coal, and even hogs. Then of course there are the glittering infrastructure and transportation projects that are dazzling, but generate far less value than their cost. And don’t even start on residential construction.

There are no coincidences, comrade.

What has occurred in China represents the largest misallocation of capital in human history. And like much of China generally, the external appearance is but a veneer that conceals a fundamentally flawed construction.

This misallocation is the direct result of the huge degree of central control and “planning” in the economy. No, it is not Patriotic Nail Factory Number 10 will produce 5 billion nails in 2025 style planning, but planning implemented through a vast array of explicit and subsidies, tax breaks, and inducements offered by local governments jumping to the central government’s “guidance” on growth targets.

What the CCP has done, in essence, is play the Sorcerer’s Apprentice, and unleashed economic forces it cannot control.

Xi and his minions are desperately trying to stem the flood by . . . exercising more central control. Specifically, by the “anti-involution” campaign, which is basically government mandated and monitored cartellization of the over-capitalized sectors.

Of course many, particularly in the West, fret that the CCP policies to stifle competition will fail because they are not stimulative. No, really.

It’s a similar situation today, except Chinese policymakers are rolling out only half the solution. While Beijing’s recent push to curb overcapacity is helping rein in the glut in steel and solar sectors, the “anti-involution” campaign is missing a stimulus spark and could hurt the economy instead of bringing inflation back.

Uhm, you think that just maybe that “stimulus spark” is the cause of the problem, not the cure? You can’t follow the logical implications of this–which was in the immediately preceding paragraph?

When President Xi Jinping faced a deflation spiral a decade ago, he not only cracked down on China’s oversupply problem but also unleashed an almost $900 billion housing investment boom.

Not to mention the Keynesian idiocy implicit in this analysis, that “bringing inflation back” is the same as bringing back economic growth. The Phillips Curve, with Chinese characteristics.

What are other alternatives for the CCP? More central direction, of course:

Options available to Xi’s government include overhauling the incentive structure for local officials so they will chase faster consumption instead of investment and production, according to Robin Xing of Morgan Stanley, as well as reforms to transfer more income to households.

They just need to pull different levers, that’s all. Throttle back the investment, juice the consumption. By command!

That always works out well. After all, these guys did so great before why wouldn’t they do great now?

I can’t even. The stupid here–within China, and the Westerners who presume to analyze the Chinese economy–is beyond measuring.

They all would be better off heeding Hayek:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account

But of course they won’t.

In sum, China is dizzy with success! It called forth massive investment, and its call was answered. Answered far too well, in fact.

The dizzying success is leading to a pullback, a tactical withdrawal like Stalin’s in 1930. But the fundamental communist mindset of direction from the top has not changed. Meaning that they won’t repeat the same mistakes. They will make new ones instead.

SEC Chairman Paul Atkins has clearly set out to be the anti-Gary Gensler. If that’s not an endorsement, I don’t know what is!

Case in point–his move to abandon to the mercies of the courts Gensler’s cretinous, pointless, and incredibly burdensome climate reporting rule. (I use that Sierra Club link to provide some levity. I love the smell of hysterical panic in the morning).

Atkins is also largely reversing GiGi’s anti-crypto agenda. (Well, he is a “crypto peddler” after all, at least according to the Sierra Club!) I am not a crypto evangelist by any means, but broadly support letting consenting adults trade what they want to trade. The regulatory framework for such trading should focus on legitimate investor protection, anti-fraud, and anti-manipulation measures as set out in the SEC’s authorizing statutes. That’s what Atkins’ SEC is striving to do, in contrast to Gensler’s mission to strangle crypto at every opportunity.

In crypto, but more generally, Atkins is also moving sharply away from Gensler’s regulation by enforcement approach, which is another welcome change.

And hot off the presses, Atkins has taken aim at the bloated and (IMO) pointless Consolidated Audit Trail. (Seriously–I found the above announcement while Googling “Atkins CAT” while writing this post. It came out hours before I put pixels to screen). Proposed in the aftermath of the 2010 Flash Crash, it always struck me as a hugely expensive solution to a non-existent problem. Yes, the CAT could assist in forensic evaluations of market events like the Flash Crash and market manipulation, but having worked on such evaluations in markets lacking the CAT, and reading the analyses of others, I conclude it is possible to carry out these analyses without CAT. Put differently, the marginal benefit of the CAT is minuscule relative to the cost.

One issue that has received less attention outside the equity trading community is market structure, and particularly RegNMS. The 20th anniversary of that regulation was the occasion for an SEC conference to reevaluate that regulation. (At the time of the passage of RegNMS, I wrote an article saying that it marked the 30 Years War over market structure that began with the 1975 Securities Act, and wryly suggested that there would actually be a 100 Years War over market structure. We are now at the halfway mark!)

Along with several participants, Atkins criticized a key provision of RegNMS–the so-called “trade through rule” that prevents the execution of a trade on one exchange when a better price is displayed on another. Atkins favors elimination of the rule.

This rule is the keystone of RegNMS, and its removal would reshape the equity exchange environment as thoroughly as the regulation did 20 years ago. Indeed, its elimination would signal that the entire experiment was ill-conceived.

As I wrote in my Regulation Magazine piece, the trade through rule was the “centerpiece” of RegNMS. Its very purpose was to cause a fundamental restructuring of equity trading in the US. And it did.

As I phrased it, the purpose of the rule was to “socialize order flow.” That is, eliminate–or at least sharply circumscribe–the control that an exchange had over the order flow directed to it. The objective of this was to make the exchange landscape more competitive, and specifically to reduce the market power of the NYSE and NASDAQ. At the time of RegNMS’s passage, the NYSE executed 80 percent of the volume of shares listed on it.

Evaluated against its stated objective, RegNMS was a . . .

The equity trading landscape looks nothing like it did in 2005 or before. More than half of trades are executed off exchange. The remainder is divided among 12 exchanges, with the largest having a 10 percent market share:

But to Atkins and the critics of the trade through rule, this represents not great success, but great failure. To the critics, this fragmentation is deleterious.

That is, one man’s competition is another man’s fragmentation.

The post-RegNMS environment has clearly seen dramatic improvements in liquidity and declines in trading costs. This is plausibly, though not definitively, materially the result of increased competition. Moreover, the exchanges have adopted different order types, pricing rules (e.g., taker-maker/inverted v. maker-taker), and trading infrastructures. This means that heterogeneous market participants can choose among heterogeneous platforms, thereby achieving a better match than a one-size-fits-all system would.

The main disadvantage of fragmentation–and a major source of discontent–is that brokers and traders must connect to a variety of platforms, and crucially, must buy data from each. As I wrote some years ago, this creates strong complementarity among the data streams that exchanges provide, which as Cournot demonstrated two centuries ago creates considerable market power which inflates prices. Data is expensive, and economics implies it is too expensive.

What would happen if the trade through rule is abolished? I predict that by effectively re-privatizing order flow it would lead to a massive consolidation of trading venues, and a return to a market structure resembling that of 2004 and before. Less fragmentation, but less competition. Those are essentially two sides of the same coin.

The busy Mr. Atkins has also weighed in on the issue of the frequency of corporate reporting, favoring (fast-tracking, actually) the elimination of the quarterly reporting requirement. Since Trump proposed the same, of course this has led to shrieks and wails–which have been markedly absent when Warren Buffet mooted the idea.

Here’s another issue where I support letting the market decide, as is typically the case when there are trade-offs. Reporting frequency has costs and benefits. A company that provides too little information largely internalizes the cost, in the form of a lower stock price. That is to say, its shareholders internalize the cost. Yes, agency problems mean that managers who make disclosure decisions may act against the interest of shareholders and disclose too little or too infrequently, but that is a problem that is inherent in the corporate form (and the consequent “separation of ownership and control”) that manifests itself in many ways that are not the subject of government mandates and intricate regulations. It’s hard to see why corporate disclosure should be different. Yes, punish false disclosures, but don’t dictate how often companies must avoid lying.

One concern in recent years has been the large number of companies deciding to go private or remain private (rather than IPO’ing). There are myriad reasons companies make these choices, but one of them is the cost of being subject to the reporting obligations imposed on public companies. Easing those obligations somewhat would nudge more companies toward going/remaining public, meaning that the amount of information available to investors and the opportunities available to them might increase if the Trump/Atkins proposal goes into effect.

Overall, Atkins is a welcome relief. Though anyone probably would have been, after Gensler’s Reign of Error (and Terror). I’m ambivalent about his hostility to the trade through rule, but on non-market structure matters he is moving in the right–and pro-market–direction.

Today’s Bloomberg Odd Lots has an interesting conversation with Don Wilson, founder of DRW whom Odd Lots calls the “King of Chicago Trading.”

Overall the ~40 minute conversation was very interesting. One of the most interesting parts related to the possibility of GPU futures trading. Wilson thinks it could become the world’s biggest market, and is putting his money where his mouth is. This includes the creation of GPU price indices.

I’m pretty skeptical on the prospects for this market. I note at the outset that it is very difficult to predict which futures contracts will succeed, and which will not. Most don’t.

In a nutshell, the necessary conditions for a successful futures contract are pretty well established. The underlying market must be large. The price of the underlying must be volatile. The underlying can be heterogeneous, but not too heterogeneous, otherwise basis risk is too big with any single contract, and no single contract can generate enough volume to be viable.

GPU would certainly tick the market size box. Perhaps the volatility box. The heterogeneity box–not so sure, although trading a contract that prices based on a service flow (e.g., flops) rather than chips themselves would probably tick that box as well.

Although the necessary conditions for a successful contract are pretty well established, sufficient conditions are not. One can launch a futures contract on something volatile with a large underlying and price volatility and watch it flop. That happens quite frequently.

What’s missing from most analyses, in my view, are more qualitative things. The most notable of these is market structure. In particular long marketing chains, with a lot of intermediation. Also, relatively low concentration on either the producer or the consumer side.

In commodities, for example, trading firms generate a lot of the hedging activity. They intermediate the flow of the physical, and typically their exposures turn over relatively rapidly, meaning that they are putting on and taking off positions frequently. This generates trading volume and liquidity.

The fragmentation of the value chain and fundamental volatility militate against long term contracts for most commodities. Moreover, the lack of concentration mitigates market power which is often associated with price rigidity (as Dennis Carlton showed many moons ago).

My understanding of the GPU market is that the marketing chains are short, not intermediated, and highly concentrated. For example, there are a small number of very large cloud storage providers. AI is likely to be highly concentrated on the buy side. The GPU production side is obviously very concentrated, being dominated by NVIDIA.

Moreover, transactions cost considerations are likely to lead to a good deal of vertical integration. AI firms are going to buy their own chips. Vertical integration also militates against the development of a liquid futures market.

Given the concentration on both sides of the market, I anticipate that to the extent buyers and sellers want to achieve some price stability, it will be via bilateral contracts between the producers and the big users.

Joe Weisenthal asked the question that came to my mind–what about DRAM futures, which were highly touted at the height of the dotcom boom, and crashed along with NASDAQ in 2000?

I have some personal history here. One of the (many) nascent DRAM futures markets (Buckaroo.com, if you are wondering) flew me out to Mountain View to give my opinion on the prospects for the market. Ironically, I was there the day NASDAQ crashed. (Hmmm, I also had some connection with the ’87 Crash–maybe it’s me!)

My assessment was negative. Not long after, the late CEO of Micron, Steve Appleton had me come out to Boise to give my view. Buckaroo had been importuning him, and when they told him they had talked to me, he invited me to tell him what I had told them. After hearing my take, he told Buckaroo “hard pass.”

My prediction, vindicated by experience, was based on market structure considerations. My skepticism about GPU futures is similarly grounded.

For his part, Wilson dismissed DRAM as a precedent. In his view, the fact that DRAM prices trend down strongly meant that there was no underlying volatility to hedge or trade around.

I don’t find that compelling. Yes, everybody knew that prices for a particular chip type tended to trend down (due mainly to learning-by-doing). But as long as there is variation around that trend, there is a price risk that sellers and/or buyers might want to hedge.

DRAM might not be the only cautionary tale. I’m so old I remember Enron touting bandwidth as the future world’s biggest commodity. Yeah. No.

Another issue is information flow. A high rate of information flow causes high rates of price changes which drive both hedging and speculation. Weather derivatives tick a lot of the necessary condition boxes, but information flow is very lumpy. Consider a weather derivative on July 2026 cooling degree days in Houston. From now until, oh late-June–maybe–there will be relatively little information that flows. So there’s nothing really to trade on until then. Meaning that volumes–and liquidity–will be moribund.

Which is why exchange-traded weather derivatives have never done any real volume.

My intuition is that the information flow about future DRAM value will be pretty modest.

So maybe GPUs will be unlike DRAM and bandwidth and weather, maybe it won’t. I will watch with interest.

Another interesting part of the Odd Lots conversation related to the CME’s move to the cloud. Wilson made the great point that the way the cloud works is not compatible with housing the matching engine there. Especially in a high speed world, it is nigh on impossible to implement time priority on the cloud.

Wilson, Alloway, and Weisenthal also discussed tokenization. Here I agree that this could become a thing, and a big one. It may finally be the moment for DLT/blockchain technology to have a big impact.

It was widely hyped for years as transformative, for everything–including financial markets and commodity markets. I had a 2022 JACF paper expressing skepticism about the potential of DLT/blockchain. I still am skeptical about a lot of the proposed uses (e.g., tokenizing shares of fine art or real estate, or in physical commodity trading). However, tokenizing standard securities, derivatives, or collateral offers some advantages. Like I wrote in the 2022 piece, the interesting thing to watch will be whether the blockchains will be permissioned or public.

Some tokenized ETFs and MFAs trade on permissioned chains, but some are on Ether. In 2022 my intuition was that most trading applications would be via permissioned blockchains, but now I’m not so sure. I’ll revisit that issue as time allows me to get more up to speed on what is going on.

Needing a break from the social sickness displayed so prominently in recent days, I will distract myself with a post on economic policy, specifically, Federal Reserve independence and Lisa Cook.

I get the point about Fed independence. But the sacralization of it in recent days by commentators of virtually all stripes ignores the flip side of independence: accountability.

A Fed that is totally independent of political influence, or influence by other interests, is also totally unaccountable. And unaccounability has its own costs. Indeed these costs can be large.

The Fed is not immune to error. Indeed, the history of the Fed is riddled with colossal errors. I am an intellectual grandson of Milton Friedman (my PhD advisor being a Friedman student), so that fact is burned into my brain.

Indeed, even some of what are widely considered the Fed’s shining moments–e.g., Bernanke’s interventions during the GFC–were necessitated by its previous errors. Should you get credit for putting out the fire you threw gasoline on earlier?

What are the feasible mechanisms for identifying and correcting such errors, and more importantly, for preventing them? That is a hard problem, but complete freedom from accountability ain’t one of them.

The Fed likes to portray itself as a wizard-like entity. Well it is. The problem is, the wizard it most resembles is Oz.

That is, lack of accountability is the flip side of independence. Imperfect people and institutions that are not accountable are prone to make major mistakes, and to persist in making them even when outsiders identify them.

In other words, like all things human, there are trade-offs. Those clutching pearls at Trump’s Fed-bashing abdicate from grappling with those trade-offs.

The potential for Fed F-ups is amplified by another matter of current controversy swirling about Trump, also related to administrative agency independence. Specifically, the wretched record of the Bureau of Labor Statistics in its unemployment/employment statistics.

The huge revisions of the reports originally made in 2024 and early-2025 testify to the potentially wildly misleading nature of these statistics. Of course, Trump being Trump, he ascribes dark political motives to the overstatements of job creation under Biden. But regardless of the motive, the performance is appalling.

Meaning the BLS has to be held accountable. Those bewailing the firing of the agency head are objectively supporting the principle that it should not be so held.

This is of course relevant to the discussion of the Fed, because the Fed touts that its policies are “data driven.”

Garbage in, garbage out, anyone?

Should the Fed be held blameless for failing to identify and call out systemic failings in the production of the data on which it relies? Mightn’t it be better to spend billions on creating independent data sources, rather than, say, building Jerome Powell’s Taj Mahal?

I should also note that Fed independence will not survive a fiscal crisis in the United States. Listening to Treasury Secretary Scott Bessent, rather than Trump, I get the sense that it is fiscal and budgetary issues that lie at the heart of the administration’s hostility to Powell.

Meaning that the Original Sin here is American fiscal incontinence. Arguing about Fed independence focuses on a symptom, rather than the real problem.

As for the issue that has driven the latest “Oh My God Trump is Threatening the Fed!!!” panic–the firing of Fed Governor Lisa Cook–it is also really about competence and accountability.

Lisa Cook is utterly incompetent and unqualified for the position she holds. Full Stop. She is not a macroeconomist–not that that alone should be disqualifying, but it is relevant. She has credentials as an economist–but that is neither necessary or sufficient to demonstrate competence or qualification, especially for a job as vital as Fed governor.

Let me be blunt: she is an embarrassment to the economics profession. She plagiarized. Her CV is laughable. Her most widely cited paper–and the one she is most proud of, regarding the alleged causal role of lynching in stifling innovations by blacks–is so bad that I doubt I am capable of doing justice to its awfulness. She got hired at, and tenured at, Michigan State University. Yeah, and we know how that happened.

In a nutshell. If a la William F. Buckley you open the directory of the American Economic Association to a random entry, the person on whom your finger lands would be more qualified to be a Fed governor than Lisa Cook. Indeed, that would be true of you performed this exercise N times, with large N.

I will also point out that she is a nasty piece of work. Poor, poor pilloried Lisa was front and center in the efforts to cancel (persecute, really) an actually talented economist, Harold Uhlig, over his wrongthink in the George Floyd frenzy.

Which makes it particular disgusting that “450 prominent economists” have rallied around her.

450 prominent economists rally around an embarrassment to the economics profession. She is a plagiarist. Her CV is worse than a joke. Her most cited publication is a farce. The travesty here is not that she has been fired. It is that she was appointed in the first place. https://t.co/A3GSJF75M5

— streetwiseprof (@streetwiseprof) September 2, 2025

Probably an outbreak of Malcom Gladwell-ism by cowardly academics.

Think you are being unfairly attacked, Lisa? Well, karma is a bitch.

The real travesty here is that Lisa Cook was appointed to her august position by a mentally incompetent, race card dealing president, and the Senate confirmed her.

And so we have an indisputably incompetent person on the Fed. Fed independence is so sacred that error cannot be addressed? (Would that there were a way of making the Senate and “Biden” accountable).

As for the pretext for her removal, incompetence should be sufficient “for cause.” Given that’s probably too difficult and too precedential to get courts to buy, credible allegations of mortgage fraud will do.

And that is another testament to her incompetence, and the Senate’s failure of due diligence. She, through arrogance or stupidity or just plain dishonesty, gave Trump the means to remove her.

In addition to the screeching about “independence,” there are also wails about lack of due process.

FFS. you don’t get a trial by jury with a presumption of innocence for everything. The amount of process due depends on the context.

If you are an at-will employee, your due process is basically bupkus. If you can be fired “for cause,” the due process is typically a senior decision maker evaluating your conduct and determining whether sufficient cause exists.

If you are a financial regulator, yes, credible allegations of violating financial laws is pretty much a drop-dead cause. Caesar’s wife, etc.

Note that she has never denied that she lied on multiple mortgage applications. So she’s not even denying the cause. Just saying that it is not sufficient.

Well, what would be then?

Siding with her renders the entire concept of for cause termination null and void. Which would further immunize the Fed from accountability.

In sum, the whole Fed independence battle has been framed in typically Manichean terms, with Trump, as always, cast in the role of Demiurge.

That’s BS. It’s not good v. evil. It’s about difficult trade-offs. If you don’t take that seriously, I won’t take you seriously.

Elon Musk has apparently jumped back into his various businesses with both feet since his butthurt departure from his temporary government post. And in so doing, he is resurrecting his standard playbook. Virtually every play therein, in fact.

For example:

Just left the @Tesla design studio.

Most epic demo ever by end of year.

Ever.

— Elon Musk (@elonmusk) July 14, 2025

5 months???? I DON’T THINK I CAN WAIT THAT LONG!!!! I’m dying here!

The hype. About the future. That’s the Elon MO.

Which brings to mind some of Elon’s past totally awesome demos. Like the Solar Roof . . . that was not a functioning product at the demo, and has never been seen in the wild since–but which he used to con hundreds of millions of dollars out of the State of New York. Or the Hyperloop.

Since this latest is from the “design studio” I’m also expecting some Potemkin Village presentation of a concept, the realization of which will always be mañana.

He has to do this for the same reasons he did these things before 2018 or so: Tesla is really struggling, with sales dropping sharply around the world and the prospect of cash flow challenges are raising its ugly head. Part of the sales drop is sector-wide, as the popularity of EVs is plunging, but part of it is Tesla specific, due to Musk’s political forays alienating his traditional customer base, and the fact that all Tesla models are getting a little old in the tooth. (Another reason to hype the “epic demo”). Furthermore, the looming disappearance of the $7,500 EV tax credit, which Tesla has benefited from for years, will shift back the demand curve by that amount: Trump credibly said that this was the real reason for Musk’s meltdown. That’s a big demand drop on top of the drop attributable to consumer EV disenchantment.

So Elon has to keep the balloon afloat. In the past he’s done that with hype–which, admittedly found an accepting audience. He’s doing it again. Whether it will work again remains to be seen given that whereas fundamentals–notably massive subsidization and consumer optimism about EVs–worked in his favor before, they will not do so again.

His TL is full of hype about Grok. A week after Grok went Nazitard (and Erdotard). Never go Nazitard.

He’s also hyping his mission to Mars. You know, to save humanity.

Starship will take humanity to Mars
pic.twitter.com/VEVWmjwb2w

— Elon Musk (@elonmusk) July 13, 2025

I am not competent to judge, but some who are claim that the huge rocket that will go there–the one that keeps blowing up–can never be a reliable launch vehicle because of fundamental physical constraints. I’ll keep an open mind on this, but be cautious about projecting SpaceX’s previous remarkable achievements onto the SuperHeavy.

Another MO is taking money from one of his ventures to fund another, that is using his winners as piggy banks to support his cash sucks. The most notorious example of this was Tesla’s purchase of Solar City.

And here we go again: “SpaceX to invest $2 billion in Musk’s xAI startup.” And again: “Tesla to hold shareholder vote on whether to invest in xAI.”

Recall that X was folded into xAI. It is clear now that the X acquisition was not about free speech (although it did have that effect, at least compared to the old Twitter, and at least for a while), it was about getting massive input to train Grok. Never forget: if it’s free, you are the product.

And Musk is using X and AI not just as a source for LLM training: he is using it to hype his other ventures. And not primarily through his own TL. As a friend wrote to me: “And don’t forget using X to amplify his company with AI accounts (there are estimated to be 100s of millions of AI accounts) and silencing critics.” And it is definitely clear that the X algos are definitely not to create a true all-to-all experience, let a thousand flowers bloom free speech experience. Instead, they heavily favor and promote specific accounts and throttling most others, leaving most of us shouting into the X void.

Musk also just announced Grok for Government:

Announcing Grok for Government – a suite of products that make our frontier models available to United States Government customers

We are especially excited about two new partnerships for our US Government partners

1) a new contract from the US Department of Defense
2) our…

— xAI (@xai) July 14, 2025

What would the “cause” be (click on “Show more”)? Just think of all the grist for the Grok mill that this will provide. And think of all the commercially valuable information that will be gleaned. Hell, maybe xAI will start a hedge fund that will outperform Nancy Pelosi!

And, of course, he no longer has to play well with others (like Scott Bessent!): “Elon Musk is Back to Work and Burning Through Executives.”

Every one of the many headlines about Musk from the last few days is like something burped up out of the Memory Hole. Although the ostensible subject matter is different, the MO is the same.

And the essence of that MO is overpromising and underdelivering. I kick myself for letting my hopes stifle my experience when it came to DOGE. It won’t happen again.

The victory of Zohran Madmani–excuse me, Mamdani–in New York City’s Democratic primary has unleashed a torrent of commentary. In particular, it has sparked euphoria on the left, who see it as the harbinger of a successful “resistance” to Trump and the dawning of an overthrow of American capitalism.

Much of this is overwrought, and wishcasting rather than forecasting. Matt Taibbi called it socialism’s “American Normandy”: It is more likely socialism’s Anzio, an initial success that will wind up being a strategic and tactical dead end.

Most importantly, New York City generally, and its Democratic Party electorate in particular, are hardly representative of the country at large. Indeed, outside the media bubble and other urban socialist outposts this Mamdani is largely viewed as the winner of a Best of Freak contest. He and his ilk are political pustules concentrated in small enclaves of major cities–many of which are dying, in large part because of them. The perverse rank choice–excuse me, ranked choice–voting system also exaggerates his appeal. Furthermore, his main opponent was Me Too poster boy and grannie killer Andrew Cuomo, who is about as popular as chlamydia.

Mamdani’s win, and the exaggeration of its importance in the media, is attributable to a particular social class that dominates certain precincts in big cities and most of the media. You know the type. Identitarians. Wokies. Highly credentialed “elites” who are inveterately anti-American, anti-Western, anti-freedom (except for the freedom of perversion), and anti-capitalist.

These attitudes are largely a consequence of “elite overproduction,” combined with the technology that now produces the “elite.” The basic idea is that the production of “educated,” credentialed individuals in excess of the career opportunities that provide the financial remuneration and status that these people believe is their due because of their innate superiority creates a class of resentful people who conclude that the system is inherently unjust and should be overthrown.

The concept of elite overproduction was recently popularized by Peter Turchin, but Joseph Schumpeter had it figured out way before–decades in fact. In his seminal Capitalism, Socialism, and Democracy, Schumpeter posed the question: “Can capitalism survive?” He answered in the negative, but not for the classic Marxist reason that the internal contradictions of capitalism produced an immiserated proletarian class that would overthrow it. Instead, the internal contradiction was that capitalism produced a class of decidedly non-proletarians who were hostile to it and who would undermine it from within.

Schumpeter struggled with finding the right label for this class, finally settling on “intellectuals.” He also struggled with identifying its defining characteristics, but it’s a you-know-it-when-you-see-it kind of thing. And when you see Mamdani fan<insert gender identity here>s, you know they are the type Schumpeter had in mind.

In particular, look at Chapters XIII (especially section II) and XIV of CSD. They read like a crystal ball for the Era of Woke generally and Mamdani specifically. There is too much to quote so I’ll just pull out a few.

But in the case of capitalist society there is a further fact to be noted: unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest.

“The very logic of its civilization” means that because of its incredible fecundity, capitalism can support a large number of individuals who can pursue intellectual pursuits rather than toil for subsistence through the production of goods or services.

That is a necessary, but not sufficient condition for this group–which Schumpeter believed can be characterized as a social class–to be inherently oppositional to capitalism and the bourgeoisie. In addition, the internal logic of capitalism incorporates open inquiry and criticism (parts of “creative destruction”) and a belief in freedom (especially freedom of expression), and therefore finds it difficult to fend off its intellectual critics:

From this follows both the unwillingness and the inability of the capitalist order to control its intellectual sector effectively. The unwillingness in question is unwillingness to use methods consistently that are uncongenial to the mentality shaped by the capitalist process; the inability is the inability to do so within the frame of institutions shaped the capitalist process and without submitting to non-bourgeois rule. Thus, on the one hand, freedom of public discussion involving freedom to nibble at the foundations of capitalist society is inevitable in the long run. On the other hand, the intellectual group cannot help nibbling, because it lives on criticism and its whole position depends on criticism that stings; and criticism of persons and of current events will, in a situation in which nothing is sacrosanct, fatally issue in criticism of classes and institutions.

Furthermore, and crucially, there is a mismatch between the attributes (I hesitate to say “skills” or “abilities”) of the members of this class and their expectations regarding income and status:

Third, it may create unemployability of a particularly disconcerting type. The man [an anachronism!–see below] who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work. His failure to do so may be due either to lack of natural ability—perfectly compatible with passing academic tests—or to inadequate teaching; and both cases will, absolutely and relatively, occur more frequently as ever larger numbers are drafted into higher education and as the required amount of teaching increases irrespective of how many teachers and scholars nature chooses to turn out. The results of neglecting this and of acting on the theory that schools, colleges and universities are just a matter of money, are too obvious to insist upon. Cases in which among a dozen applicants for a job, all formally qualified, there is not one who can fill it satisfactorily, are known to everyone who has anything to do with appointments—to everyone, that is, who is himself qualified to judge.

I say anachronism because today women are far more likely to fit this description than men.

He continues:

All those who are unemployed or unsatisfactorily employed or unemployable drift into the vocations in which standards are least definite or in which aptitudes and acquirements of a different order count. They swell the host of intellectuals in the strict sense of the term whose numbers hence increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment. And it often rationalizes itself into that social criticism which as we have seen before is in any case the intellectual spectator’s typical attitude toward men, classes and institutions especially in a rationalist and utilitarian civilization. Well, here we have numbers; a well-defined group situation of proletarian hue; and a group interest shaping a group attitude that will much more realistically account for hostility to the capitalist order than could the theory—itself a rationalization in the psychological sense—according to which the intellectual’s righteous indignation about the wrongs of capitalism simply represents the logical inference from outrageous facts and which is no better than the theory of lovers that their feelings represent nothing but the logical inference from the virtues of the beloved.1 Moreover our theory als accounts for the fact that this hostility increases, instead of diminishing, with every achievement of capitalist evolution.

I could quote further, but that gets at the gist of it. Elite overproduction, avant la lettre. (It is rather discreditable that Peter Turchin’s book on elite overproduction, End Times, does not mention or cite Schumpeter. The Austrian was obviously decades ahead of him).

Relatively recent developments in the “elite” production technology have only exacerbated these tendencies. An especially important one is the superabundance of student loans. This has had three perverse effects. The first is simply that it subsidizes the production of the credentialed. The second is that it has caused an increase in the output of those with “unemployability of a particularly disconcerting type.” Namely, all those with expensive but useless degrees, “studies” degrees most especially. (Note that Mamdani has a degree in African Studies. No wonder he has never held a job. Never). Third, those who cannot get employment with compensation or status that they believe their credentials entitle them too are saddled with a crushing debt burden that reminds them daily of the fundamental injustice of society.

Student loans are not the only issue regarding “elite” production technology. Another is its self-reinforcing, reflexive nature. Academia has become infested with oppositional intellectuals who through their control of their institutions indoctrinate students with their resentful ideologies. Resentful intellectuals produce more resentful intellectuals who cannot achieve income and status commensurate with their inflated self-worth. It is the academic version of The Sorcerer’s Apprentice:

Another factor is the feminization of higher education. (Apropos my comment regarding the anachronism in Schumpeter’s analysis). Women tend to be disproportionately represented in the “intellectuals” produced in studies, humanities, and soft social sciences programs that contribute most heavily to the discontented intellectual class. Moreover, women are more likely to be hostile to the competitive, not to say Darwinian, features of capitalism.

It is amusing that Richard Swedberg’s introduction to the version of Schumpeter I have at hand dismisses Schumpeter’s negative answer to “can capitalism survive?”

In short, in areas where Schumpeter perceived a threat to capitalism, there is no apparent threat at all or, alternatively, a very minor one. To illustrate this, let us look at two of the alleged causes for the demise of capitalism: the role of intellectuals in capitalist society and the relationship of property owners to their property. According to Schumpeter, as capitalism develops it gives rise to an increasing number of intellectuals who are basically resentful and hostile to capitalism. The argument, however, does not accord well with our observations; rather, most intellectuals appear fairly well integrated into the various institutions in which they work, and the vocal intelligentsia changes its political opinions at regular intervals, usually oscillating between pro-capitalism and indifference to economic questions, and only rarely lapsing into anti-capitalism. In any case, it is simply not correct to state that Western intellectuals in general have been hostile to capitalism and that they are likely to be hostile also in the future.

Dude. How wrong can you be? This judgment was a dubious characterization of conditions when written (in 1976). It is utterly delusional now.

Consider “most intellectuals appear fairly well integrated into the various institutions in which they work.” Uhm, yes, they are, but not in the way Swedberg meant. As a result of the march through the “various institutions”–especially academia, journalism, and government–they have reshaped those institutions into anti-capitalist bastions. It is pro-capitalists like me that are not well-integrated, to the extent we are tolerated or even exist. (Don’t bother to look in English departments, etc.). Or “the vocal intelligentsia changes its political opinions at regular intervals, usually oscillating between pro-capitalism and indifference to economic questions, and only rarely lapsing into anti-capitalism.” I agree that the vocal intelligentsia changes its positions at regular intervals, from left to more left to even more left. And rather than oscillating between “pro-capitalism and indifference to economic questions,” anti-capitalism has been trending strongly. Yes, there is sometimes “indifference to economic questions” in the sense that modern leftist intellectuals are not obsessively focused on them like 20th century classical Marxists were, but their ostensibly non-economic critiques about race, gender, sexual orientation, etc., identify inequities on these dimensions as the inevitable consequences of capitalism.

That’s the essence of the Gramscian, Frankfurt School turn from traditional Marxism. The proletariat did not behave as Marx predicted, so the critique of capitalism, and the strategy to overturn it, pivoted to race, gender, sexual orientation, and most lately to transgenderism.

Schumpeter did not predict the exact manifestation of the intelligentsia’s non-classical-Marxist attack on capitalism, but he predicted the hostility and coherently explained why it would–and alas has–happen.

Capitalism, Socialism, and Democracy is much richer and more expansive than an exposition on elite overproduction, its causes, and its consequences. But that section was especially prescient, and resonates 82 years after it was written. No more so than when witnessing New York City’s recent election.

“Haven’t seen you around recently. So what’s up?”, says you. “Same old, same old: Just the Trump gamma trade”, says I. (After the 2016 election I wrote that a Trump presidency meant you should be long gamma. That’s even more true after 2024).

So the tariff two step has continued. Trump caved! Xi caved!

Whatever. If you believe (as I said literally on day 1, AKA Liberation Day) that the initial tariff salvoes were a negotiating tactic, the outcome was expected. Make maximalist demands, negotiate down from there.

NB. The negotiations continue. This ain’t over.

I only remark that if Trump had announced the current (interim) levels on 2 April, the frenzy would have no doubt been about the same as it was with the 125 percent charge for China, etc. But now these levels (30 to 50+ percent, depending on how you calculate) are greeted with a huge sigh of relief and a complete reversal of the market selloff that greeted the initial announcement. In other words, if you panicked, you were played.

Another fairly recent development has been the prescription drug EO. The initial (over-) reaction has been that Trump is ordering price controls. Well, not exactly. (The irony here is that the right has been critical, and the left hypocritically silent, because Trump).

At the outset, let me say that (as I will explain in more detail below) I am ambivalent about overall policy framework. But the reason I say there has been an overreaction is that all it is right now is just a framework. The only real action item is a direction that HHS formulate a set of rules that will require pharmaceutical companies to allow consumers to purchase directly from them at “most favored nation” (“MFN”) prices. We know how long the rule process takes. We also know that the devil will be in the details of the rule, and those details will be determined in a highly politicized environment where the regulated have a huge say, so it is impossible to draw conclusions about what effects it will actually have, or when it will have them.

Trump’s basic attack–that comparisons between US and foreign prices for the same drugs prove that Americans are being ripped off–is an old one, and ironically was a talking point of Hillary in 1992-1993. The policy piece I wrote in 1993 (“Political Rhetoric and Stock Price Volatility”) addressed this very issue. (Ironically, it was that piece that put my on Hillary’s Hit List, the figurative one at least; it didn’t cost me my life, but did jeopardize my career).

Defenders of this pricing structure claim that it is purely economic conduct by pharma, specifically, price discrimination. More elastic demanders pay a lower price than inelastic American ones.

Yes, this might be why some drugs are dirt cheap in Africa, say, but it is hardly the entire story. Drug companies have to offer big price cuts to high income countries (European countries, Canada, etc.) whose demand is likely about as inelastic as the US’s, so that their national health services will buy them. One interpretation is that these countries are free riding off the innovation paid for by US consumers who pay full fare.

Which raises another issue. Presumably Trump believes that the MFN rule he has outlined will result in drug makers dropping US prices to match foreign ones. But no doubt some of the movement will go in the other direction–the companies will raise prices in other markets, and in some cases will decide to forego some smaller markets altogether rather than have their prices drive those in the really big market. Meaning that the ultimate effect on US price levels is hard to determine.

One part of the EO actually addresses this issue. It directs the U.S. Trade Representative and the Secretary of Commerce to ensure that foreign governments are not taking actions to undercut US prices. (The order incorrectly states that such undercutting raises US prices). That is, this is really a trade issue, and in particular a non-tariff barrier/IP expropriation issue that is more properly addressed in the context of trade negotiations.

The EO–as is the case with most policy proposals directed at drug prices–ignores the real drivers: patent protection, R&D costs, and third-party payments. If you think drug prices are too high, that is, the prices are in excess of what is required to induce the efficient level of innovation, then go after these issues. Examine whether drug patent protection should be attenuated (not extended as it was in recent years). Whether regulatory burdens unnecessarily inflate R&D costs. Cross-country price comparisons tell you nothing about these issues.

Insofar as third-party payment is concerned, the EO does address that issue to some degree. Specifically, the direct purchase option (subject to MFN provisions) is intended to “cut out the middleman,” namely, the Pharmaceutical Benefit Mangers (Caremark Rx, LLC (CVS), Express Scripts, Inc. (ESI), and OptumRx, Inc. (OptumRx) being the Big 3). These are accused of (a) charging high markups on drugs, and (b) excluding many drugs from their formularies.

The first issue is again related to relative prices, not price levels. That is, it is really about who captures the monopoly rent that ultimately derives from patent protection. The main concern is double marginalization–the inefficiency that results from back-to-back monopolists. Double monopolization can lead to prices that are higher than monopoly prices. Another concern could be that the PBMs exercise monopsony power, thereby reducing the returns to R&D and suppressing innovation. (This makes PBMs analogous to foreign governments).

I am always skeptical of “cut out the middleman” arguments because they ignore Chesterton’s Fence: why do the middlemen exist in the first place? If they bring cost but no benefit, how can they survive?

I don’t know the answer in this case. But (a) I am sufficiently skeptical based on long experience so as to not fully credit the seductive cut-out-the-middleman argument (which is almost always wrong, unless the middleman is a government creation), and (b) relatedly, would not be surprised if PBMs are ultimately the creation of the baroque (and broken) regulatory structure in the US. If my suspicion (b) is correct, going after middlemen attacks the symptom, not the cause, and the underlying problem will persist.

All that said, just as the case with foreign-benchmarked MFN pricing, it is naive to think that the direct purchase mandate will lead drug companies to reduce direct-to-consumer prices to the level they charge PBMs. The rules would totally change the negotiating dynamic between them. And again–and this is crucial–this is mainly about how monopoly rents will be distributed/split, not the amount of the rent (and thus not the final price to the consumer), which is driven by the underlying market power inherent in patent protected medicines.

In sum, I think this EO’s significance has been vastly overstated, because (a) it is essentially a “mission order” that sets out a broad objective, and the effects of which will be driven by the tortuous politicized rulemaking process required to carry it out, and (b) does not touch the underlying drivers of pharma prices.

Another major issue of the past few weeks is the (in Trump’s words) “Big Beautiful [budget] Bill” working its way through the House.

First off, let me say that it is almost certainly the case that nothing Big in government is really beautiful. Hell, who even knows what’s in it, precisely because it is so big? It be like “Yeah the chick in the burkha is really beautiful! And she’s actually a chick! Take my word for it!”

Its main attribute is that it will–if the legislative legerdemain works–mitigate the logrolling and secret last minute deals that corrupt the standard budgeting process. Mitigate, not fix.

The “beautiful” bill has some real warts. Hell, cancers, maybe. A sample.

• An elevated state and local tax (SALT) exemption. Elevated so high as to be virtually non-binding. A sop to high income, high tax states which seriously undermines their incentives to control spending and taxation. If California, New York, Illinois, etc., want to raise taxes and spend more, let them fuck their own citizens, not the rest of us. Maybe that will force their citizens to get their minds right, and set their governments straight.

• Serious backsliding on the rollback of Biden’s grotesque, and grotesquely named, “Inflation Reduction Act.” It should be terminated in its entirety, with extreme prejudice. But this bill–which mind you cannot bind future Congresses–delays implementation of subsidy cuts and mandates until four years from now, at the earliest.

Gee, why four years, I wonder?

The renewables subsidies and mandates make energy excessively costly in return for no meaningful environmental benefits. They are also unaffordable given America’s parlous fiscal situation.

Notably, Rumpublicans are among those pushing to save these monstrosities.

• Virtually noting meaningful on entitlement reform. Even extremely modest changes to Medicaid have elicited shrieks and wails, and not just from Democrats.

The US fiscal situation is far and away the greatest danger our to economic prosperity and national security. But nobody–least of all Trump–is taking it seriously. Like Scarlett O’Hara, they will think about that tomorrow.

Except, apropos CCR, that day never comes.

So we seem destined–doomed–to go bankrupt like Hemingway’s Mike Campbell, “Gradually and then suddenly.”

DOGE and Musk held out the (false) promise of preventing this fate by attacking “waste and inefficiency.” Even if such massive inefficiencies exist, DOGE didn’t go through them like a buzzsaw: instead, DOGE has been buzzsawed and Elon has slunk away, achieving a dime on the promised dollar at the very most.

And at the outset, I expressed skepticism–though not enough–that the supposedly “easy” route of restoring fiscal sanity through attacking waste would actually work. The brutal fact is that without addressing entitlements we are on the highway to fiscal hell.

The most depressing takeaway is that the supposedly transformative and revolutionary Trump presidency is at most tinkering with an unsustainable status quo, and even that elicits frenzied, and indeed unhinged, opposition. The nation is as unserious about addressing its existential fiscal problems as was France in the 1780s, and just as politically poisonous.

And we know how that worked out.