Streetwise Professor

Europe and the US have diverged in significant ways on post-crisis financial regulation. This has had myriad consequences, including fragmentation of liquidity (especially in the swaps market), which in turn leads to less competition as it is harder for US banks to compete for the business of European clients and vice versa; greater cost; and greater complexity.

One area where there was some prospect of a unified global framework was capital rules for banks, where it was hoped that the US would adopt Basel III. But evidently the Fed is resisting that, and will move forward with its own stress test-based framework, rather than the Basel III framework which permits banks to utilize their own models to evaluate risk and hence capital.

Not that Basel III is perfect, by any means, but this approach creates the problems mentioned above, plus some more in the bargain. One is mentioned in the article: a one-model-fits all approach creates a monoculture problem that is vulnerable to catastrophic failure. I wrote about this problem quite a bit in 2009.

There is another problem as well. Although the stress test has some merits as a way of periodically evaluating capital adequacy, it  is not immediately clear how banks can evaluate the capital implications of particular transactions on a day-to-day basis in this system. If you can’t do that, you can’t price deals right or make capital allocation decisions. This is especially true if the details of the Fed model are kept secret, as will almost certainly be the case.

If you have a Basel III compliant capital model you can calculate the impact on capital due to an incremental change in a portfolio, and can hence price deals rationally and structure portfolios to achieve capital efficiency. This will be harder to do in a black-box stress test model. Not impossible but not easy either.

Re-reading Pipes’s account of the Russian Revolution. I’m at the part where he is discussing Brest-Litovsk, and the relations between Germany and the Bolshevik regime.  The more things change, the more they stay the same. Large German firms succeeded in pressuring the government then, as they do now, to turn a blind eye to the true nature of the regime in Russia, all in order to facilitate German business with that regime.

Soviet ambassador to Imperial Germany Ioffe had three missions, one of which was to cultivate German business by holding out “dazzling prospects of profits in Soviet Russia.” Despite the fact that Ioffe was also fomenting unrest among German workers, German businesses fell for the transparent lie that this was the work of the “private” Communist Party, rather than the Soviet government. According to Pipes:

Hard-headed businessmen fell for this ploy in part because they wanted to believe it and in part because they could not conceive that anyone in his right mind could take Bolshevik slogans seriously. The Krupps, the Thyssens and the Stinneses, all future supporters of Hitler, pressured their government to maintain good relations with the new rulers of Russia in order to secure German hegemony over the country. The coalition of diplomats, industrialists, and bankers managed to neutralize the military.

Later Pipes discusses post-War relations between the German government and the USSR. Again, very much a see-no-evil, go along to get along, cynical and amoral approach.

Fast forward to the present. The entire German elite is now bending over backwards in order to appease Putin. Merkel makes some scolding noises now and again, but (a) never takes action, and (b) completely undercuts those messages with conciliatory remarks about needing to extend an “open hand” with Putin. Even normally sensible figures like Schaeubel counsel cooperation at all costs. The German business community is pulling out all the stops to make sure that Germany derails any attempt to impose costs on Putin.

But as Pipes shows, such attitudes have a long pedigree. The Germans like to claim that they are different. In very crucial ways, and in very unattractive ways, they are not.

I have been going through an extremely high variance travel experience, hence the light posting. And no, the crazy in the title does not refer to me and what United Airlines has done to me over the last 3 days.

Instead, I am referring to Putin, who has been on a major roll at the St. Petersburg International Economic Forum.

Where to begin? One statement is loonier than the next.

A lot of it is whining about how Russia doesn’t get any respect.

Note to Vova: respect has to be earned. Cleptocratic autocracies that annex the territory of other countries and foment rebellion in other countries often come up short in the respect department. Just sayin’.

Putin justified the annexation of Crimea by saying that if he hadn’t, Ukraine could have joined NATO and Sevastapol would have become a NATO base.

First of all, Ukraine was and is decades away from any possibility of being in NATO. Any belief that Ukraine’s ascension to NATO was or is imminent is the raving of a paranoid mind. Not to mention that never during Maidan or post-February 22 had breaking the Russian lease to Sevastapol been mooted.

Second, raising NATO as a bogeyman is also the raving of a paranoid mind. Other than the US, and maybe France and UK on good days, NATO couldn’t fight its way out of a piss soaked paper bag (as Patton used to phrase it). It is militarily shambolic, spending well under 2 pct of GDP on defense, and most of that is on waste and militarized welfare rather than weapons. But Schaeuble says no, no, no, NATO nations should raise defense spending in response to Ukraine or any of Vlad’s other adventures.

To illustrate how toothless NATO is, consider the fact that when the Russians sent the carrier Kustnetsov through the Channel (rather than around Ireland, per usual), the Dutch navy did not have a single ship to dispatch to follow it, and also has no maritime patrol aircraft to shadow any vessel sailing of its shores.

All this stuff about big, bad NATO is so much hot air. Militarily, NATO is the US, and as anyone following things knows, in the era of Obama and sequestration, US military capability is extremely stretched. And the prospects for Sevastapol becoming some sort of NATO outpost are somewhere between zero and as if.

Another of Vlad’s wacko statements was that the only reason the US wants to impose sanctions on Russia is to achieve competitive advantages over the EU. Or something:

“By insisting on sanctions against Russia, I suspect that our American friends, and they are shrewd guys, may wish to gain certain competitive advantages in their trade and economic relations with Europe,” Putin said at the St. Petersburg Economic Forum on Friday.

Exactly how that works is beyond me.  The US is going to replace Russia as a supplier of gas to Europe and accelerate that process through sanctions? Really?

This is part of Putin’s plan-which has been all to successful-to sow discord between Europe and the US.

In the same conversation, Putin said this about Ukraine:

“A civil war is starting in Ukraine, but what do we have to do with that?” the Russian president asked.

Try “everything” for an answer.

Relatedly, Putin had the chutzpah to demand of Ukraine: “Where’s our money?” [for natural gas]. To which Ukraine should reply: “Where’s our Crimea?”

But as stiff as the competition was, this had to be Putin’s most outlandish uttering:

“Russia is not the type of country that gives up fighters for human rights,” Putin said during the plenary session of the St. Petersburg International Economic Forum.

Actually, I sort of agree with that. When the fighters for human rights happen to be Russians, the country doesn’t give them up: it imprisons them, beats them, or kills them. Because Russia is not the beacon for human rights, as Putin outrageously suggests: but because it is the enemy of human rights.

Face it. The world is dealing with someone who either is believes the most insane things, or is willing to say the most insane things even when he knows they are crazy. Either way, this man is a menace. Not someone before whom it is necessary to cringe, or to extend a hand. Indeed, what Merkel says is as crazy, or crazier, than anything Putin has been saying. And that is saying something.

I told you to ignore the hype (all of which originated from the Russian side) about an impending Russia-China gas deal. Despite being 98 percent done! Down to one digit! Putin left China with no deal to sell gas to China.

Again: don’t believe it until you see it.

There was the same old-same old blah, blah, blah to rationalize the failure:

According to Xinhua, the Chinese state news agency, after meeting Mr. Xi in Shanghai, Mr. Putin said, “I’m glad to be informed that the two sides have made significant progress in the price negotiation of the east route of the natural gas project.”

A joint statement said that Russian natural gas supplies would start flowing “as soon as possible,” a phrase used after many previous negotiations between Gazprom and the China National Petroleum Corporation, and an indication that the two sides could not close the gap on price in time for the two leaders to announce the deal at their meeting.

The linked NYT article quotes several people who are surprised at the outcome. I really need their contact information. I have some bridges to sell. These people are apparently afflicted with this time it’s different syndrome. But it never is.Yes, there are some differences now, but it’s really not that different.

The most telling thing (which I alluded to in yesterday’s post) is that all of the hype emanated from the Russian side. The Chinese were noticeably silent. Since it takes two to make a contract, this asymmetry was a major tip-off.

One wonders what the Russians hoped to gain by exaggerating the imminence and certainty of a deal.

Did they think that they would embarrass the Chinese into giving in? Why would they think that? That the Chinese would lose face if their guests left empty handed? As if the Chinese care. This is a commercial transaction, and the Chinese realize the Russians need the deal more than they do.  If anything, by trading them like obsequious hosts cringingly sensitive to world opinion, such a strategy would be more likely to tick off the Chinese and make them less likely to deal. If anything, the Chinese want to cultivate a reputation for being hard bargainers and actually expect to benefit from walking away.

Didn’t the Russians think that another failure would make them less likely to believed next time? Apparently not. But as the whole Ukraine episode demonstrates, they say outlandish things that are sure to be disproved with no apparent shame.

Actually, the most plausible explanation is that the Russians were pumping and dumping Gazprom stock. The price moved up as the market became convinced that a deal was impending, and then fell about 3 percent when the sure thing turned out to be not so sure . If Gazprom management and regime figures sold into the rally, they could have covered quite profitably on the selloff.

I say that only half in jest. Because otherwise I am at a loss to explain why the Russians would repeatedly over-hype the prospect for a China deal.

But I am also at a loss to understand how the stock would have rallied on the Russian pumping of the likelihood of a deal. This requires a lot of suckers to believe it.  After 10 years of this farce, you’d think people would wise up and heavily discount Russian assurances.  I guess there are a lot of suckers who want to believe. Charlie Brown lives.

Next time around don’t be a sucker. Sell rumors that Russians are peddling, and maybe-maybe-buy facts of an actual deal.

Putin travels to China this week, and the big item on the agenda is the supposed signing of a long-awaited gas deal.

I’ve seen this show many times before, going back to 2004. Much fanfare ahead of the meeting! A deal is signed! But the price is TBD. Meaning there is no real deal. And then the charade occurs again a couple of years later.

So I’ll believe it when I see it.

The Russians, per usual, are doing all the talking about the impending deal. Apparently understanding that those who have seen the earlier episodes will be skeptical about any deal that doesn’t nail down pricing, they are at pains to claim that the pricing is all but set. Deputy Energy Minister Anatoly Yanovsky said the deal is “98 percent completed.” What does that mean anyways? By word count? Meaningless, if the missing 2 percent relates to price. Gazprom’s Alexi Miller says the deal is “one digit” away from completion. Well, which digit kinda matters. Is it in the hundreds column? The tens? The ones? (Or does the single digit refer to an upraised middle finger?)

If a deal does get done, pay close attention to the price. The Chinese have the bargaining power here. As they always have. But now it is greater because this is now part of Russia’s game with Europe and Ukraine. It very much wants to put pressure on the Europeans. So Putin/Gazprom might be willing to take a lower price to further that strategy.

Just as important, look at the formula. The reports I’ve seen are saying that the Russians will sell at a fixed price, in the range of $350-$380/MCM. If the deal is truly at a fixed price, this would be a major concession, as Gazprom is an ardent defender of oil-linked pricing. If it gives up the oil-link, that would be a major concession, and would put oil-linked deals in Europe under greater pressure than is already the case.

This figure is based on leaks from Gazprom, which is kind of appropriate given the massive leakage that occurs from its pipes. Perhaps the leaker is converting an oil-based formula number to a flat price. Moreover, regardless of how arrived at, is this a number for deliveries over the entire 30 year life of the contract, or just for the near term deliveries? I can’t imagine locking into a price over 30 years. There has to be some kind of indexing, but to what? That matters a lot. Moreover, I would not be surprised if  the Chinese agree to near-term prices that are comparable to European prices in order to give Russia a propaganda victory to use in its battle with the Euros, but get more than compensated at the back end through some convoluted pricing formula that is not publicly disclosed.

It is quite possible that it will be very difficult for outsiders to know exactly what terms the parties have agreed to, and to back out a price, or a price structure over the life of the contract. Recall the Rosneft/Transneft-Chinese oil deal that was signed in 2009. The Chinese made an upfront payment to pay for a pipeline, and presumably received a discount on the price. But the pricing terms were not transparent and who got the better of the deal was hard to figure. I wouldn’t be surprised to see the same thing happen here.

Also remember that Russian-Chinese deals are not ended with “and they lived happily ever after.” The Rosneft/Transneft-China ESPO deal has been marked by chronic pricing disputes between the parties. Don’t be surprised if that happens here too. The Chinese are also notorious for re-opening pricing terms after deals are signed. And their performance on contracts generally leaves something to be desired. They are notorious for defaulting on fixed price contracts when spot prices fall below the contract price: for this reason, most iron ore and coal sales to China are on spot terms only. Iran recently canceled a $2.5 billion deal with China to develop an oil field because the Iranians claim the Chinese are not living up to the terms of the deal (though this isn’t related to pricing per se). (H/T Neil C. Levine.) In other words, any deal is just setting the stage for ex post opportunism, by either party or both.

So even if Putin walks away from Beijing beaming a beatific botoxed grin, don’t draw too many conclusions. When two of the least transparent regimes in the world enter into a contract you cannot expect disclosure of the real terms, and the public announcements relating the deal will be intended primarily for propaganda purposes rather than to enlighten the world. When the inscrutable deal with the riddle/mystery/enigma folks, you can’t ever know what is really going on.

Further thoughts (added 5/19/14 at 1730 CDT). If and when a deal is announced, look to see whether there is a take-or-pay clause. The Russians usually insist on these, and they can be a source of major friction between the contracting parties if the price terms in the contract get out of alignment with spot market conditions, as is almost inevitable in a contract that extends over 30 years. I would be surprised if the agreement has take or pay terms and the Chinese also fund the construction of a pipeline upfront. Take-or-pay is usually a mechanism for protecting the party making the investment in the specific asset (like a pipeline or gas field): if the Chinese are funding the project, Gazprom doesn’t need take-or-pay to protect it. If anything, the Chinese would need protection against Gazprom’s opportunism.  If the Chinese indeed provide a substantial sum up front, as has been rumored (with sums of around $20 billion) the pricing terms of the contract become even more important: discounts later on in the life of the contract are necessary to pay the Chinese the principal and interest on the funding. There is no way that Gazprom will get European prices for sales to China if China also finances the investment. If Gazprom boasts that it indeed received European prices for sales to China, and the Chinese fronted the investment, you know there is something being hidden. (This happened with the Rosneft/Transneft deal.)  With respect to pricing, I can’t see any way that the deal would be at a fixed price for 30 years. There must be some sort of indexing. Again, if the boasting is about some price level that is anywhere near what the Russians get currently from Europe, be very suspicious. This is likely part of some sort of Three Card Monte game, with Russia tantalizingly flashing, then palming, the Black Queen to gull the suckers. If the deal is really for thirty years, there must be some sort of indexing mechanism, with a set of discounts, and the details here would be very devilish. Lastly (for now, anyways), I’ll be interested to see if the deal includes some sort of hostage exchange to protect each party against the predations of the other.

In the continuous process of Bayesian updating, my estimation of Noah Smith’s sensibility went up when I read his post on high frequency trading: he too recognized the ambiguous effects of informed trading. But my estimation plunged today when I read this. The piece comparing economists new and old is silly, superficial, and truth be told, embarrassingly ignorant.

Smith’s basic thesis is that economists of the 60s and 70s were “policy scientists”, theoretical rather than empirical, and ideological rather than practical, with that ideology being pro-market and anti-government: conservative, in a word. In contrast, modern economists are engineers focused on predicting human behavior rather than trying to influence policy, relentlessly empirical rather than theoretical, and due to their more practical grounding, less ideological, more skeptical of markets, and more supportive of government intervention.

All of which is tripe, of course.

Smith’s exemplar of the 60s-70s economist is Milton Friedman. Smith’s views of Friedman are apparently based on YouTube videos: he refers to those, but not to one piece of Friedman’s professional work. If he had paid the slightest attention to that work, he would have realized that his characterization is completely at odds with reality.

Friedman was all about using economics to explain human behavior and the consequences of the interactions between individuals in market settings. He was, first and foremost, a scientist.

Yes, Friedman did theory. But as his famous (and controversial) essay “The Methodology of Positive Economics” demonstrates, he viewed empirical evidence as the ultimate arbiter: theories were only as good as the empirical validity of their predictions. The objective of theory is to explain practical things. What’s more, Friedman practiced what he preached. He did empirical work. Lots of it. His PhD thesis, on the income from professional practice, was empirical. His most important and influential work, A Monetary History of the United States, 888 pages (!) of empirical work, done back when empirical work was a true labor.

Moreover, Friedman’s theoretical efforts spawned massive amounts of empirical research, precisely as he desired. The most notable example of this is his work on the theory of the consumption function, which was motivated by the empirical failures of the Keynesian consumption theory.

Nor was Friedman alone. The great Gary Becker just passed away. Becker was all about using economic theory to explain an incredible range of human behavior. He made practical predictions that are as amazing and empirically valid as those of auction theory and random utility discrete choice which Smith cites with approval as representative of modern economics.

In fact, the 1960s and 1970s were a period during which neoclassical economics was developed and applied extensively to produce tremendous insights on a broad range of human behavior, including family and fertility, crime, and myriad other subjects.  It was first and foremost about explaining human behavior. To the extent these explanations had policy implications, some economists were not shy about pointing them out. But that was a side-effect of the main thrust of their inquiries.

And believe it or not, these basic microeconomic tools are still amazingly powerful today.

Indeed, part of the reason that these theories were powerful is that they showed the flaws in numerous policies. Anti-trust and regulation immediately come to mind.

In other words, many economists of this earlier generation-and most notably Friedman-were all about understanding and solving real-world problems. This is not something that came to economics in the last decade or two. Noah Smith grossly mischaracterizes, and arguably slanders, the giants on whose shoulders he stands.

Such is the danger of doing the history of economic thought based on YouTube videos.

Smith notes that a larger fraction of published research today is empirical. Friedman would not be surprised. As Smith notes, the  price of empirical research relative to theoretical research  has gone down due to computation costs and the availability of data sets, and any good price theorist would predict that this will lead to substitution towards empirical work.

There is a corollary to this. The value of the marginal regression will fall to its marginal cost. As that cost has gone to zero, so has the value of the marginal piece of empirical research.

Insofar as the politics and ideology of economics is concerned, to say that economics was  a “conservative science” in the middle of the 20th century is beyond delusional. In what alternate universe?

In the 60s and 70s in particular, economists were broadly in favor of government intervention: this had been true since the 1930s. This was the golden age of Market Failure Economics. In macro, Keynesian fine tuning reigned supreme. To say otherwise is completely ahistorical.

Friedman and other avowedly pro-market economists were the exception, rather than the rule.

There was a shift among economists towards more pro-market, anti-government attitudes in the late-70s and early-80s due to the marked empirical failure of Keynesian economics in macro, the theoretical and empirical work on the actual causes and effects of regulation, and Coase’s logical evisceration of the Pigouvian market failure paradigm. To the extent that the pendulum has swung back it is due to the financial crisis, just as the shift to pro-intervention among economists in the 30s and 40s reflected the impact of the Great Depression.

Smith remarks that the  most well known current public economist, Krugman, is liberal, whereas the most well-known public economist of the 60s and 70s was Friedman, a conservative. But here again Smith is making a fundamental error. Yes, Friedman was a public figure in the earlier era, but there were many more economists on the left that played the role of public intellectual: Paul Samuelson is the most notable of these. Friedman was again the exception. What is remarkable is that these other economists have faded from view, whereas Friedman lives on, as the YouTube vids that Smith mentions attest. Who will remember Krugman 40 years from now? I am betting that Friedman will be better known in 40 years than Krugman will be. For myriad reasons, professional and personal.

Smith’s biggest blind spot-and the above shows that there are many-relates to government, and specifically government failure. He mentions how information economics has identified additional sources of market failure. But he utterly neglects to mention how some economists-including many from that earlier generation-have identified how private arrangements can mitigate these problems, and completely overlooks the fact that government may not be able to ameliorate these failures, and may create failures of its own. (And by saying “may” I am being overgenerous.)

Again, an awareness of the insights of some of those “policy scientists” whom Smith denigrates would disabuse him of this error. Coase in particular comes to mind. He emphasized that any analysis of policy could not end with the identification of a market failure: that was at best a beginning. Any analysis has to make comparisons between real world alternatives, rather than conjuring a magical government solution. I would further note that Coase was relentlessly empirical. “The Theory of Social Cost” grew out of an analysis of how the Federal Trade Commission actually worked.

Smith characterizes modern economists as more practical and less ideological than those of an earlier generation. And lo!, they are also liberal and favorably disposed to government intervention.

Smith is probably right about the political leanings of modern economists, and the basis for those views. So much the worse for modern economics.

But he can only make favorable comparisons between the current generation and Milton Friedman and others of an earlier generation by completely distorting the professional work of Friedman and his contemporaries. Smith probably does this out of ignorance, but that is no excuse. Smith doesn’t know what he doesn’t know, and this leads him to denigrate unfairly the legacy of the earlier generation and exaggerate the virtues of his own.

A US Treasury Department official has confirmed what I had conjectured:  the administration is pursuing a fear, uncertainty, and doubt sanctions strategy:

“One of the purposes of sanctions is to create uncertainty and to create the expectation in the marketplace that worse could be coming,” said David S. Cohen, the Treasury Department under secretary who oversees sanctions. “That uncertainty has led the market to punish the Russian economy.”

It must be noted that Putin is also pursuing a FUD strategy, but with armor and combat aircraft. The continued presence of large Russian formations hard on the border with Ukraine, which pose a constant threat of invasion, is definitely sowing FUD in Ukraine (and in some western capitals). Today Putin cranked up the implied threats by staging large numbers of combat and support aircraft to Crimea.

Putin clearly hopes that the mere threat of invasion will so intimidate the Ukrainian government that it will either capitulate, or collapse, thereby leaving Putin free to pick up the pieces. In either outcome, Putin would achieve his objectives without a shot being fired by his main force units.

Cohen’s statement identifies the crucial assumption underlying these FUD strategies: they are intended to “create the expectation . . . that worse would be coming.” But can those expectations be sustained?

What happens if the threats are never carried through? In the case of financial sanctions, what conclusions will Putin draw if his continued aggressive actions do not actually cause Obama or the west generally to do something worse?

Especially for someone like Putin, who is predisposed to consider the west generally and Obama in particular to be weak and soft, he will conclude that the threats are a bluff. The deterrent effect of the threats will disappear.

Ukrainian officials could make similar judgments about Putin if he doesn’t invade. They could conclude that he is deterred by the direct and indirect costs of invasion.

Strategies that rely on manipulating expectations through threats are fraught with dangers. The potential for miscalculation and misinterpretation is high. Not carrying through raises doubts about the credibility of the threats, which could lead the target of the threat to become complacent and act in a way the threatener cannot accept. This risk is particularly great for Putin, given his overweening self-confidence and his disdain for the US, the west, and Obama. The risk is compounded by Obama’s history of drawing then erasing red lines.

In other words, FUD wars seem to be a cheap way of waging conflict, and they can be. But expectations are tricky things, and the infinite regress of expectations about expectations, and expectations about expectations about expectations can lead to complexity and miscalculation. Which means that FUD wars can very easily lead to real wars. Which means that you should fear the uncertainty, and doubt that FUD is a prudent strategy.

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

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

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

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

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

Not.

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

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

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

Great work if you can get it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fat chance.

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

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

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

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

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

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

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

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

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

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