Streetwise Professor

Felix Salmon posed several questions for David Kocieniewski about his scurrilous article about Scott Irwin and me.  And-shockingly!-David Koscieniewski refused to answer a single one.  Not. A. Single. One. So if you don’t win that Pulitzer, Dave (and we know that’s what you want, isn’t it?), there’s always the Royal Order of the Weasel ready to be claimed.  You should be a runaway. Emphasis on the Runaway!

Instead of actually answering direct questions posed to him, our dear David doubled down on insinuation, innuendo, and ad hominem.  That’s our boy: go with what you got, eh?

I will respond more fully later, through multiple channels, but a few comments are in order now.

1. Kocieniewski insinuates that I have violated the American Economic Association disclosure guidelines.  Fail, Dave. Pure fail.  The AEA guidelines require disclosure of any support (financial, in the form of data, etc.) on submissions to peer reviewed publications.  I have not submitted any work to a peer reviewed publication that has been supported by any party with an interest in the speculation debate.  I told you this during our interview.  So what is it?  Is David ignorant, stupid, or dishonest?  I can’t answer that.  Those are all observationally equivalent.
2. I responded to all FOIA requests, forwarded to me via the University of Houston’s general counsel’s office, in a timely fashion.  Any suggestion to the contrary is false.
3. My work for “one of the largest commodity exchanges” had nothing to do with speculation, and occurred after my positions on speculation were public.  Years afterwards.  Years.  As in plural.
4. My work for “one of the largest commodity trading houses, Trafigura” occurred years after my positions on speculation were public.  Again, years plural.  I had no contractual relationship with Trafigura until September, 2013.  Um, I testified before Congress on speculation-testimony which gives dear David the faints-in July 2008.  You know, five freaking years before. And that’s not even the best part! Trafigura is not a speculator.  It is a hedger.  It routinely sells massive quantities of futures to hedge its massive quantities of oil transactions.  But-correct me if I’m wrong (but I’m not)-Kocieniewski’s article focuses on how speculators drive prices up by buying futures.  Hedgers. Speculators. Buy. Sell.  Up. Down. Whatever, eh? It’s all the same to our Dave. So again: David Kocieniewski: ignoramus, idiot, or liar? I say again: Observationally equivalent.
5. Kocieniewski explicity refers to  the fact that “this debate [over speculation] began more than five years ago.”  Excuse me, but I wrote my first blog post on this in August, 2006.  I know you are math challenged, David (I read your piece on Goldman’s warehouse operations), but using the fingers on your left and right hands, you should be able to cipher that that works out to about 7 years (and about four months, but hey, let’s round down!).  So I weighed in on this before “the debate began.”  Just call me prescient.  But here’s the point: how did my (non-existent) consulting work on speculation years later affect my opinions?  Do you have issues with the concept that the cause must precede the effect?

More later.  I’m just getting warmed up (spits into palms, old school style).

Thanks again, Felix.  The cat caught the weasel.

David Kocieniewski of the NYT is answering questions this week about his deep thoughts on “issues ranging from the role of Goldman Sachs in the global aluminum market to academics who have reaped financial benefits while defending some of the largest players in the commodities business.”  (Bonus opportunity! Gretchen Morgenson is teaming with DK to answer!)

Have at it, folks. I am sure you have inquiring minds that want to know the answer to some questions about Kocieniewski’s journalism.

Update: Please leave a comment to this post if you ask a question and it is not answered.  Also let me know what your (unanswered) question was.

To get back to the substance of the speculation debate, let me reprise something I’ve discussed for years to illustrate the vapidity of many of the arguments about speculation.  I’ve been making this point for more than 6 years: it was a focus of a presentation I made at a conference in Champuloc, Italy in January 2008.

It relates to the use of position data to attempt to identify the price impact of speculation.  You know the drill.  Speculators are huge net long, so they must be driving up prices, right?  We’ve seen that argument repeated over and over and over again.

But here’s the thing.  For every long, there’s a short.  So how do you know the net long speculators are driving prices up?  Why aren’t the net short hedgers driving down prices?

Here’s the example I keep coming back to that illustrates the stupidity of using net speculative positions to claim that prices are too high or too low.

Back in the 1990s and early 00s, gold prices were low.  Very low.  $300 and below.  Back then, the hue and cry was that prices were artificially low because . . . wait for it . . . producers were massively short because of hedging programs.

Well, if producers were massively short that means that speculators were massively long.  So if speculators drive prices, why weren’t gold prices stratospherically high in the late-90s early-00s?  After all, supposedly in 2008, and the last couple of years, the massive long speculative positions were inflating prices.  Why didn’t the massive long speculative gold positions a decade ago inflate gold prices?  Flipping things: If short commercial positions were depressing gold prices a decade ago, why didn’t they depress oil prices in 2007-2008, and over the last couple of years?

Hence the danger of superficially examining net positions and claiming that one side of the market is inflating (or depressing) prices: an equally legitimate argument is that the other side of the argument is depressing (or inflating) prices.

But the point is that neither argument is legitimate: both are equally illegitimate.  Derivatives positions net out to zero.  Derivatives are in zero net supply.  Looking at one side of the market, and ignoring the other, makes no sense.

Basic finance theory says that if anything, net positions should predict risk premia, and price trends.  In a simple Keynes-Kaldor model, if speculators are net long, prices should drift up.  Or not: if the price of the commodity in question is uncorrelated with the pricing kernel and markets are well-integrated, prices won’t drift at all even if speculators have a net position.

But the basic point is that in standard finance speculation and hedging affect risk premia, not price levels.  The relationship between positions and risk premia depends the integration between the commodity market of interest and the broader financial markets, and the covariation between the commodity price and the pricing kernel.  If the “financialization” of commodities means anything, it means that commodity markets have become more closely integrated with the broader financial markets, and that this has impacted risk premia.  The evidence of Hamilton and Wu (and UH PhD student Bingxin Li) points exactly in this direction: risk premia in oil plunged to near zero in the mid-2000s, when index trading increased dramatically.  Any impact on the level of prices overall is due to indirect effects of risk premia: risk premia affect the costs of hedging which affect output and storage and consumption, which affect prices.  But whatever those knock-on effects are, whether prices rise or fall, they are likely efficiency enhancing: they reflect the consequences of a more efficient allocation of risk.  (By the way, I explained this to Chilton years ago.  Talk about pearls before swine.)  (I say “likely” because of the usual caveats about the difficulty of making welfare comparisons in incomplete markets.)

So word to the wise.  If you want to make a persuasive argument about the impact of speculation (or hedging) on the level of spot prices (rather than on the difference between spot and futures prices), don’t say anything about net derivatives positions.  Because the market as a whole has no net position.

Comparing the gold and oil cases has reminded me of this Escher drawing.  Who is drawing whom?  Which hand is the long?  Which hand is the short?

It’s New Years Eve, and perhaps a little game is in order to get ready for the turn of the calendar in about 3 hours.  Let’s play connect the dots.

• In July, David Kocieniewski writes a big-totally incoherent, but big-article in the New York Times on the aluminum warehouse controversy involving Goldman Sachs, JP Morgan and others. The article focuses on Goldman’s Metro Warehouse in Detroit.
• On 1 August, 2013, the law firm Lovell, Stewart, Halebian and Jacobson LLC files suit against Goldman Sachs for violating Sections 1 and 2 of the Sherman Antitrust Act in its operation of the Metro Warehouse in Detroit.
• The Lovell, Stewart complaint cites the Kocieniewski article.  Numerous news articles state that Lovell, Stewart is the firm that filed the complaint.
• Lovell, Stewart is one of the leading plaintiffs’ law firms in the country.  It is indisputably the leader in manipulation class action lawsuits filed under the Commodity Exchange Act.  LSHJLLP has been the lead counsel or co-lead counsel in virtually every major manipulation lawsuit in the US, and has won hundreds of millions of dollars in settlements in such cases.  Its web page lists numerous past and current commodity manipulation cases, as well as other cases filed against financial institutions.
• I have worked as an expert in numerous cases for Lovell, Stewart (and its predecessor law firms) going back to 1994.  Many of these are manipulation cases.
• David Kocieniewski knew, before writing his hatchet job, that I had worked for Lovell, Stewart.
• Kocieniewski did not ask me about my work for Lovell, Stewart.  He did ask me about my work for trading firms and banks.  I did mention, on my own initiative, that I had been adverse to such firms in some of my work.
• Kocieniewski mentioned my work for trading firms and banks, but did not mention my work for Lovell, Stewart.

So there are the dots.  Help me connect them.

Seriously.  I would like you to tell me in the comments what you see when you connect those 8 dots: what inferences do you draw?  I know what I see, but I’d like to crowd-source this.  Maybe you all see something different.  Thanks in advance for your help, and have fun playing!

And to all my readers: have a Happy and Healthy New Year.  Your interest and continued support is what makes this a rewarding endeavor.  Cheers!

I have always admired Thomas Sowell greatly.  I read his Knowledge and Decisions during my first year of graduate school, and it had a profound effect on my thinking and way of looking at the world.  I also read most of his work on discrimination, and found his book on Marxism to be a classic in intellectual history: a truly fair and penetrating appraisal of Marx, and Marxists (the two things aren’t the same, which is one of the points of the book).  Conflict of Visions is a classic: there is no better book for understanding the intellectual roots behind the political divisions in the West.  Yes, Sowell has strong views, but he is like John Stuart Mill in his ability to characterize his opponent’s views fairly and objectively.

Sowell has also been the subject of some the the ugliest personal attacks directed against any scholar over the last 40 years.  For the progressive left, to be black and on the right is to be an anathema who must be destroyed.  Yet he has handled the vicious attacks on him with equanimity and humor, and has never been cowed.

It is therefore beyond humbling to have Dr. Sowell come to my defense, and take on the New York Times “hit piece.”

All I can say is that I am honored beyond words.  Thank you, Dr. Sowell.

The NYT hatchet job has elicited quite a bit of discussion on the web, and on Twitter.  Several major bloggers have saddled up and ridden to the defense of Scott Irwin and I.  Pride of place goes to Felix Salmon, who wrote a long and thoughtful post at Reuters. This is particularly gratifying, because Felix and I have had our differences in the past (e.g., over the empty creditor problem) but I have always found him to be extraordinarily fair and open minded.  Felix wrote his piece before I posted mine, meaning that his was based on publicly available information (including his past interactions with me) which confers a considerable degree of objectivity: most importantly, it shows that information that the NYT ignored or distorted was there in plain sight.  Felix is like a judge entering a summary judgment motion against the NYT, with prejudice, making it unnecessary for the defense even to present its case.  I think it’s correct to say Felix’s verdict is pretty brutal, but eminently fair.

Other members of the cavalry include Jeff Carter’s Points and Figures blog (who was the first to arrive on the scene), Peter Klein at Organizations and Markets, Sonic Charm (or is it Crimsonic?) at Rhymes With Cars and Girls (who always cracks me up, whatever he’s calling himself these days), and John Hinderaker at Powerline. Peter and John point out the double standard under which academics who work with private business are often accused of being corrupt, whereas the motives of those who accept money from the government are almost never questioned.   Peter focuses on the Fed, John on climate research.  The common conclusion of all is that the NYT piece was a deeply biased smear written in bad faith with ulterior motives.  Crimsonic calls for a retraction.  Interesting idea.

Felix’s post and mine also unleashed a torrent of tweets.

Thanks to all.  I’m sure this isn’t over yet.  So keep your horses watered and your powder dry.

In a whirlwind sequence of events, Putin announced that Mikhail Khodorkovsky would be pardoned; he was pardoned; he left his Russian prison camp; and finally, he boarded a plane for Germany, where he landed a few hours ago.

This is obviously a welcome development, but one that raises many questions.

It is yet another embodiment of the Churchillian cliche. For the “whys” of the release itself, and its timing, are mysterious, etc.

There is a clear official narrative.  Khodorkovsky requested pardon based on humanitarian considerations (in November) and it was granted on humanitarian grounds a little more than a month later.

But what lay behind Khodorkovsky’s decision to request a pardon?: he had said in the past he would never do so. His lawyers were unaware that he had made any such request, and were completely nonplussed by Putin’s almost off-hand announcement of the pardon.

Had he finally been broken?  Did the prospect of yet another sham trial and inevitable conviction convince him that he had to concede to Putin, and allow his torturer to appear magnanimous and achieve a political benefit? Or did Putin approach Khodorkovsky and offer the pardon, backed by a threat of horrible future consequences if he did not?  If so, why?  What benefit does Putin expect to gain?

Most of the conjecture behind Putin’s motives in granting the pardon focus on the upcoming Sochi games.  Yes, I know Sochi is a big deal to Putin, and perhaps (as rumor has it) part of the deal is that Merkel will attend the games: but her presence will make all the more conspicuous the absence of Obama, Hollande, and numerous other first-tier national leaders. In some respects, if it appears that Putin had to make such a big concession in order to get one world figure to attend the Olympics, it will make him look weak, almost pitiful.

As I have written before, Putin has always had a visceral, Pavlovian reaction to the mere mention of Khodorkovsky’s name.  He hated the man.  Moreover, Putin and Russia had been the subject of years of criticism for imprisoning him.  But Putin was evidently willing to live with that criticism and the associated political and economic costs for 10 years.  Is the benefit of a somewhat reduced negativity of coverage of Sochi (and there will be many other things that can and will be criticized) enough to overcome the personal hatred and the other benefits that Putin (by revealed preference) clearly obtained by keeping him behind bars?  The Sochi effect seems so transitory, I find it hard to believe that is the main driver.  Again: this pardon will have only a modest impact on the tenor of the coverage of Sochi, and the coverage of Russia during Sochi.  And much of that coverage will be: “Yes, he freed Khodorkovsky, but why was he imprisoned in the first place? Yes he freed Khodorkovsky, but look at how little has really changed in Russia.”

My sense is that for some reason, Putin no longer considers Khodorkovsky the threat he once was.  Perhaps Khodorkovsky’s physical or mental condition.  Or perhaps some deal between the two men.  This would make the cost of releasing him low, and the benefit of the release is likely bigger now than it would have been earlier, or after the Olympics are over.  So Sochi may explain the timing of the pardon, but not the pardon itself.  There are other hidden facts and conditions and understandings that have overcome Putin’s previous implacable determination to keep Khodorkovsky in jail.  Those facts, conditions, and understandings neutralized Khodorkovsky as a threat.

The Russian stock market jumped on the news, but not remarkably so.  A one percent move, an order of magnitude smaller than the price decline that occurred when Khodorkovsky was arrested.  And in my opinion, that one percent move is overdone.  For this announcement reinforces, rather than negates, the singular fact that makes Russia toxic for investors, and for foreign investors in particular: that Russia is a country of the rule of a man not laws.  The sudden and almost cavalier and improvised approach to the pardon makes it clear that Putin can make major decisions on a whim.  Yes, the Tsar can giveth.  But this just reminds that the Tsar can taketh away too.  It is the highly personalized, arbitrary, and a-institutional nature of the Russian system of law and governance that makes it a dangerous place to invest and do business.  The pardon decision only emphasizes that nature.

So Godspeed to Mikhail Khodorkovsky on his release from a decade of torment.  But be cautious about drawing larger conclusions from his pardon.  We don’t know the real story as to why it occurred.  Moreover, it is an illustration of the defects of Putinism rather than a sign that Putinism is actually changing for the better. Life for Khodorkovsky has changed dramatically in the last few hours: life in Russia, hardly at all.

Ukraine has shocked many Europeans and dismayed many Ukrainians, by announcing that it will suspend preparations to enter into an Association Agreement with the EU.  Russia was violently opposed to such an agreement that would have moved Ukraine away from Russia and towards Europe.  Hence, this is viewed as another “diplomatic” triumph for Putin.

It’s not really that shocking, or that much of a triumph.  If you think of the correlation of forces (to use the Soviet military term), it decidedly favored the Russians. There is geographic proximity.  There is the fact that the Ukrainian economy is a basket case, and extremely vulnerable to Russian pressure-pressure which Putin had been exerting for months, and would only have intensified had Ukraine gone along with the Europeans.  There is the fact that the Ukrainian political and economic elite has a lot to lose if Europe insists on reforms that open up the economy and increased transparency.  There is the fact that Old Europe was decidedly lukewarm about the prospect of drawing closer to a corrupt, dysfunctional, and bankrupt country that could become another money sink.  Europe also insisted on the freeing of Ukrainian President Yakunovich’s arch rival and predecessor, Yulia Tymoshenko, which could be extremely perilous for Yakunovich.  Countries on the front line with Russia-notably the Poles and Baltic States, but also the Swedes, who are seeing repeated Russian aerial intrusions and other indications of Russian aggressiveness-were pushing this, but they aren’t the main forces in the EU. In contrast to tepid European interest, Ukraine is a near obsession with Putin.

And then there is money and corruption.  Days before the Ukrainians hit the brakes, Yakunovich traveled to Russia.  There were conflicting reports about whether he even met with Putin, and if he did, where, and what was discussed in the meetings (if they occurred).  Also, in the midst of one of the repeated standoffs between Gazprom and the Ukrainians over gas, it was announced that Gazprom would sell gas at a large discount to Ukrainian oligarch Firtash.  Firtash had been the intermediary in shady gas deals between Russia and Ukraine in the past, but had been cut out by Tymoshenko. Now he’s back, and will deliver gas to Ukraine.  Since Firtash is an ally of Yakunovich, the opposition immediately charged that this was a corrupt bargain that will put money into Yakunovich’s pocket, and bankroll his reelection campaign.  Putin, in other words, could make deals that the Europeans could not hope to match.

Putin, in other words, had all the cards.  Only overweening European self-regard about the obvious superiority of their system could have deluded them into believing that the odds were on their side.

Putin, of course, couldn’t resist chewing the scenery, joining Lavrov in accusing the Europeans of blackmailing Ukraine.   Of course Putin was the one really doing the blackmailing-and the bribing.  He had the sticks.  He had the carrots.  He used them both, and thereby cajoled the Ukrainian ass to turn its back on the EU.

Sovok players.  Sovok tactics.  Sovok results.  Is this really surprising?

The latest earth-shattering Snowden revelation emanating from the Russian Front aka Der Spiegel is that NSA and GCHC have spied on OPEC.

A couple of responses.

1. Duh. Or in the words of a Navy chief who left an indelible impression on me during Youngster Cruise: “That’s a real no sh*tter, son.”

2. Good!

Please. OPEC is of major economic and geopolitical importance. Of course it is a prime target for intelligence collection-and a legitimate one.  It is also an organization representing governments, many of whom are hostile to the US (Venezuela, anyone? Iran?), or of quite doubtful friendliness.  Many of its members-and I could probably say, all of its members-are hopelessly corrupt, and/or connected with terrorist organizations.

What would be scandalous is not that we’re watching OPEC with every means at our disposal, but that we were turning a blind eye.  I will sleep better tonight knowing that the NSA has not been delinquent in its duty to collect information on an economically important cartel that is really a congeries of corrupt anti-American nations.

And to the Berlin gang, I ask: do you seriously think that German intelligence isn’t vacuuming up every piece of information about OPEC that it can? (That question was purely rhetorical: I still haven’t caught a ride on the cabbage truck, let alone fallen off head first.)

Here’s an even better question: don’t you think that the Russians are aggressively spying on OPEC?  Hell, they are directing a major effort at the Finns-the Finns-for crying out loud.  Don’t you think that Russia, which lives and dies by the price of oil, has a major economic and geopolitical interest in OPEC decisions, and hence is straining every nerve to collect every piece of information it can about it?  If you answer “no”, then either (a) you are a pathological liar, (b) you are a Russian tool, or (c) not only did you fall off the cabbage truck head first, it backed over your melon several times.  (I’m placing heavy money on “b”.)

One of the “revelations” in the Der Spiegel story is that the NSA had collected information that confirmed that OPEC and Saudi Arabia had released misleading estimates of oil production.  Can you imagine the wailing and rending of garments at Der Spiegel had it uncovered accounting fraud at Siemens, let alone Exxon?

OPEC is a malign organization, and many of its members would have to undergo thorough reforms to graduate to becoming merely malign.  Not only should we be collecting all the information on it we can, we should be using that information to undermine it at every turn.

No doubt the Berlin gang and its echo chamber around the world will use this story to claim that the NSA is engaged in “commercial espionage.”  Um, engaging in espionage on commercial enterprises is different than engaging in commercial espionage.

Commercial espionage, properly understood, is the covert collection of information from foreign firms that is then utilized to benefit commercial entities in the country engaged in the spying.  The Chinese, Russians, and yes, the French, are notorious for this.  Their intelligence agencies steal intellectual property, business plans, etc., and provide it to domestic firms who use it to improve their products, win contracts, etc.

Nothing in the stories that Der Spiegel or Greenwald have produced based on Snowden leaks demonstrate that information collected from commercial or quasi commercial organizations (OPEC, Petrobras) has been provided to American companies, to advance their commercial interests.  Indeed, the absence of specific disclosures of this nature is revealing in its own way: you know that if Snowden had evidence that this occurred, Greenwald and Der Spiegel would be shouting it from the rooftops.

The whole Snowden narrative has gone well beyond stale and tiresome. The only people who are outraged are those who want to be outraged.  Those who are looking for a reason to be outraged. Those willing to suspend disbelief in order to feed their desire to play the outraged victim. Serious people who know the way the world works react with disdain.  Sadly, such people seem to be in short supply, while there is a surfeit of wannabe victims, especially in Germany.

Update: I was especially amused at the “revelation” that OPEC tried to pin the rise of oil prices on “speculators”.  I made a presentation on the impact of speculation on energy prices at a conference at Champouloc in January, 2008 (before the big runup in prices in the spring and summer) at which I quoted several statements by OPEC officials blaming speculators for high oil prices.  As I recall, I sang a chorus of of Chuck Berry’s “It Wasn’t Me!” to make the point.  You didn’t need the NSA to uncover this great insight.  You just needed to read the energy press.