Streetwise Professor

November 26, 2021

Boris’ Big Short

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — cpirrong @ 8:09 pm

Due to the immovable object of price caps and the irresistible force of spiking natural gas and power costs, about 20 retail energy suppliers in the UK have gone toes up. Most of these have been addressed using what is called the Supplier of Last Resort (SoLR) mechanism, whereby customers of the failed firm are transferred to another supplier. (SoL sounds about right!) This mechanism effectively socializes losses:

Energy suppliers that rescue customers via the supplier of last resort can recoup their costs through an industry levy that is funded by bills.

Although the foregoing suggests that all UK energy consumers share in the costs, energy market regulator Ofgem suggests that the customers of failed firms may bear some of the costs:

Could bills go up?

When we appoint a new supplier using the Supplier of Last Resort process, we try to get the best possible deal for customers.

Suppliers we appoint will likely put you on a special ‘deemed’ contract when they take on your supply. This means a contract you haven’t chosen. A deemed contract could cost more than your old tariff, so your bills could go up. However, they are covered by the energy price cap Ofgem sets, which ensures you get a fair price if you are put on one. 

When contacted by the new supplier, it’s best to ask to be put on their cheapest tariff or shop around if you want to. You won’t be charged exit fees. This is a challenging time in the market and we know that there may not be many tariffs available when shopping around right now.

Deemed contracts can cost more because the supplier takes on more risk. For example, they might have to buy extra wholesale energy at short notice for new customers. So they charge more to cover these costs.

Up to last week, all the failures had been dealt with using this mechanism. But the failure of Bulb (Dim Bulb?) was evidently too big for Ofgem to deal with using the SoL mechanism. Instead, it resorted to a “Special Administration Regime” which basically nationalizes Bulb. This regime permits the government to “make grants and loans to the company in administration and may also give guarantees for any sum borrowed while it is in administration.”

That is, SAR is essentially a bailout/nationalization of losses and risk.

Ofgem notes:

The energy price cap, which sets a maximum price for customers on standard default tariffs, will remain in place to protect millions of people from the sudden increases in global gas prices. 

(Aside: It is impossible to protect millions of people from the sudden increase in global gas prices. It is only possible to determine–based on political mechanisms–which millions pay and how much. So this statement is typical government bullshit.)

Thus, given the price cap and the fact that Bulb is now owned by the UK government, Boris now has a big short position in natural gas. So how is he going to manage it?

I have heard that the government approached Vitol, which told them to fuck off. So . . . what next?

The company still has to procure energy at market prices and sell them at fixed prices. Since the government is now the residual claimant, it has a short exposure and can take this exposure on the balance sheet, as it were, and essentially run a naked short.

Or it can try to hedge by buying gas forward. But this is not a trivial problem. This is not a position of fixed size that faces only price risk that could be hedged using fixed quantities of swaps/forwards/futures. There is volumetric risk as well: cold weather increases both the price of gas and the amount of gas that must be supplied. A sophisticated hedge would involve both forward fixed price purchases and weather derivatives. Or through the purchase of a sophisticated structured product that has payoffs that depend on both volumetric and price variables.

I’m guessing that the government is not into sophistication, or frankly, capable of it. As a result, it is likely to be at a severe disadvantage in negotiating a price on a structured product or weather derivatives or long dated forwards.

It is also likely sweating out the hedger’s hindsight dilemma. If it doesn’t hedge and prices spike it will catch hell because of the large losses passed on to taxpayers. But if it hedges and prices don’t spike or in fact decline, it will catch hell too: you idiots overpaid!!!! Both of these judgments are based on hindsight, but even though hedging decisions should be evaluated ex ante on the basis of how they effect risk, inevitably they are evaluated ex post based on how they pan out.

Consider California in the aftermath of its 2000-2001 electricity crisis. It entered into long term contracts at what retrospectively was the height of the crisis, and thus paid higher prices than it would have had it procured on a short term basis. Of course, California attempted to recover by suing the contract sellers, claiming it was a nefarious manipulative scheme. Alas, it succeeded to some degree.

The best solution would be to do what clearinghouses do when a big member collapses–auction off the positions. This is what NYMEX did when the hedge fund Amaranth collapsed due to natural gas futures and swap losses in 2006: JP Morgan and Citadel assumed the positions in exchange for consideration. Similarly, when Lehman collapsed in 2008, the CME auctioned off its futures portfolio.

Even in these situations, however, there is always controversy about whether the price is right. Assertions that the buyers of Lehman’s futures positions received a windfall (i.e., bought on the cheap) led to litigation (filed by the Lehman bankruptcy trustee) and considerable controversy. (Here’s my take on the issue.)

Note that the factors mentioned above mean that the pricing in any putative auction of Bulb obligations is likely to be more discounted, and thus subject to more controversy, than the Lehman positions. As in the Lehman case, the positions will be auctioned in a stressed market. Moreover, as noted above, the exposures are far more complex and difficult to manage than Lehman’s rather vanilla (though large) futures positions. That complexity will bring a discount. Furthermore, apropos California circa 2001, the bidders realize that they are subject to government attempts to clawback any gains that result ex post due to favorable fundamentals (e.g., an unexpectedly warm winter). That is, the bidders may fear that the government will actually acquire a long option position, and hence they will be short an option: if prices spike, the auction “winner” will bear the brunt, but if they don’t the government will claim that it was exploited and over payed.

That is, unless the government can credibly commit to adhering scrupulously to the results of the auction, the auction may well fail to attract any bidders.

NB: credible commitment is not one of most modern governments’ strong suits. (This is likely one of the reasons Vitol told the government to bugger off. It realized that it was assuming a totally skewed position–heads they lose, tails they don’t win.).

According to the FT article linked above (amazingly factual and informative for a current day FT article, BTW) the government rejected two offers to assume the Bulb portfolio. I surmise that the bids were discounted heavily to reflect the factors mentioned above and Ofgem accordingly rejected them.

So I’m guessing the government will wear the risk. Perhaps it will try to manage it–and do it badly. Or more likely it will just let it ride. Maybe it will bet on Covid, thinking that the new variant or the new variant after that or the new variant after that will cause governments (stupidly) to lockdown again and crater economic activity and hence gas demand.

I note that Bulb might not be the end of the story. As noted above, the price caps remain in force, meaning that other suppliers may fail in the future–including those that have already gone through the SoL process. The government would be the ones SoL then. That is, the government not only has the Bulb liability–it has a big contingent liability that could dwarf Bulb.

Ofgem has already hinted at this:

In a letter to Kwarteng justifying the decision to pursue a special administration for Bulb, published on Wednesday, Ofgem’s chief executive Jonathan Brearley said the supplier of last resort mechanism was already “under considerable” strain from managing the failure of 20-plus other energy companies in recent months.

So Boris’s already big short could get bigger.

And perversely, it could influence government policy on COVID. Doing something (like lockdowns) that would crush energy demand would benefit its short energy position (existing and contingent). Talk about moral hazard.

Good luck with that Boris! Or should I say, good luck with that, Limeys?

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November 21, 2021

The Rittenhouse Rorschach Test

Filed under: Politics — cpirrong @ 5:45 pm

The Kyle Rittenhouse trial has ended as it should, with his acquittal on all charges. Any fair viewer of the evidence would reach the same conclusion as the jury, namely, that Rittenhouse shot, and shot and killed, in self-defense.

That is an encouraging outcome, but it must be said that the case did not begin as it should have: it never should have begun at all. The prosecutors were in possession of all this evidence, and indeed (outrageously) in possession of other exculpatory evidence that they concealed from the defense. Absent the hyper-political atmosphere that prevailed after the August 2020 riots in Kenosha during which Rittenhouse shot three people, a fair-minded prosecutor would not have brought charges at all.

That’s the way I see it. It is obvious, however, that many do not see it that way. Like some modern Dreyfus case, Rittenhouse’s has proved a political Rorschach Test: for every person like me that sees it my way, there is another (perhaps more than one, alas) that sees it completely differently. Instead of an unjust prosecution resulting in a just verdict, these people see this as a righteous prosecution resulting in a travesty of justice. Indeed, a travesty of justice that demonstrates that white supremacy indeed reigns supreme in America, and that white supremacist vigilantes can kill with impunity.

Watch any establishment media coverage, and you will see the Supremacist Narrative on display virtually 24/7. I could provide literally hundreds of examples, but this is sadly representative:

Needless to say, I find this utterly delusional–and mendacious. Virtually the entire narrative was built on lies–and things proven to be lies at the trial. Or more pointedly–things that were demonstrable lies before the trial, but which the establishment media repeated ad nauseum–and continues to repeat, verdict notwithstanding. The basic case for Rittenhouse’s alleged white supremacism–a slander repeated by Biden while a candidate in 2020–appears to be that he was white, and shot people at a (mostly peaceful?) “protest” of a police shooting of a black man. He shot three honkeys–kind of weird for a white supremacist, no? Never once has the establishment media presented direct evidence of white supremacist beliefs: no emails, texts, TikToks, tweets, Facebook posts, etc., etc., etc. They have made the weakest circumstantial argument ever to accuse Rittenhouse of being another Dylann Roof. Yet they believe (or at least assert) that their beyond flimsy circumstantial case is God’s truth.

The slander reached its heights when Rittenhouse took the stand (quite courageously, and against the near universal judgment of legal pundits) and broke down in tears. Oh, but those were “white tears” dontcha know according to scumbags like LeBron James and Joy Reid. A manipulative dog whistle that rallied all the defenders of the white race to the defense of one of their legion.

Apparently an 18 year old Olivier has been born. And one canny enough to know how to call forth the white phalanx to save him from the consequences of his actions.

It is disgusting and incredibly divisive that this trial was turned into racial issue. Indeed, it is disgusting precisely because it is so divisive–and because the racial narrative has absolutely nothing to do with the facts.

Many commentators have said that Rittenhouse should not have been there in the first place. From a legal perspective, that matters not a whit. Given that he was there, did he act in self-defense? is the only legal issue, and the one that the jury settled in the affirmative.

My take is that Rittenhouse was extremely naive, and was in Kenosha for reasons that he considered noble and idealistic. Funny, isn’t it, that leftist teens (or somewhat older young people) who act out of self-identified noble reasons with bad consequences are lionized (e.g., Rachel Corrie), but a conservative kid is demonized? Simply because his idea of a noble cause is an anathema to the left.

There’s also the question of whether the people he shot, or shot at (namely, the “jump kick man”), should have been there. Let’s put aside the quite real possibility that Rosenbaum, Huber, Grosskreutz, and Jump Kick Man should have all been in jail or a mental institution, rather than on the streets of Kenosha. Let’s just ask whether since they were at liberty they should have been there wreaking havoc? They were not engaged in anything remotely resembling peaceful protest. They found a place where they could wrap their antisocial pathologies in a gauze of social righteousness–something that the establishment media was fully complicit in.

The left believes its violence is speech, and your speech is violence. But that’s depraved: those who died by violent means were engaged in violence that was not Constitutionally protected speech, regardless of what you think about the Blake shooting. Their psychopathic and sociopathic behavior was encouraged by and validated by the establishment media, making them accessories. In contrast, Kyle Rittenhouse was behaving far more responsibly prior to the confrontation with the child rapist Rosenbaum than Rosenbaum was.

In other words, no riot, no Rittenhouse. So if you want to push back the causal chain to before Rosenbaum started to chase Rittenhouse, push it back to the riots, not to the time that Kyle Rittenhouse perhaps quixotically decided to protect Kenosha from the rioters.

Which brings us to who should have been there, but were not. The civil authorities were completely AWOL: they should have been there but they utterly failed in their duties. In particular, the mayor of Kenosha and the governor of Wisconsin consciously declined to take the measures necessary and sufficient to maintain civil order in Kenosha. They decided–like the “leaders” of many cities in the United States in the summer of 2020 (e.g., Portland, Chicago, Minneapolis, Seattle, and on and on and on)–to capitulate to mob rule. Because social justice. Or something.

If there is blood on anyone’s hands, it is on theirs, first and foremost, if you follow the chain of causation to its logical origin.

I know the foregoing makes the left apoplectic. And perhaps that’s the one solace of this whole sorry, depressing affair. The trial has proved to be the most reliable IFF (identify friend or foe) system I have ever seen. You know whether someone is your friend or foe based on the response to the trial and the verdict: and yes, that goes both left to right and right to left. No bogeys here. Only bandits and friendlies, and you know which is which with certainty. That’s quite useful information to have.

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Sisyphus Does Energy Policy

Filed under: Commodities,Economics,Energy,Politics,Regulation — cpirrong @ 4:39 pm

For well over twenty years in my various energy pricing and policy classes I have pointed out that every energy price spike leads to accusations of manipulation and gouging and a call for an FTC investigation . . . which is always announced with great fanfare but never finds anything–something that is announced sotto voce, if announced at all.

And lo and behold, right on cue, due to the rise in energy prices in recent months Biden (or more likely, Howdy Joe’s ventriloquists) has asked the FTC to investigate rising gasoline prices:

President Biden called on the Federal Trade Commission to investigate whether oil-and-gas companies are participating in illegal conduct aimed at keeping gasoline prices high, in the latest effort by the White House to respond to public concerns about costs for everything from fuel to groceries.

Sisyphus would understand the drill. “Time to roll the price gouging rock up the hill again.”

And for the most idiotic, demented hot take, let’s turn to Lizzie Warren, speaking on Joy Reid’s show (talk about a singularity of stupid*):

Recall, this is about a change in prices. So if the change in prices is due to gouging by oil companies, it would have to be due a change in gouging behavior. (I think even Joy and Lizzie should be able to follow this, it’s so basic: but maybe I’m too generous.)

But let’s follow that thread. It would imply that until recently, oil companies were not exploiting the opportunity to “double their profits” by price gouging.

So what happened? Did one day a few months ago the CEO’s of Chevron and ExxonMobil et al have a V8 moment, and slap themselves on the forehead and say “Wow! I could have doubled my profits by jacking up prices!”

So if they could screw consumers at a whim by jacking up prices why did they let oil prices go to single digits in 2020? Why does the urge to gouge seem to wax and wane?

This is so incandescently stupid. But I guess I should consider the sources, and remember that this sort of incandescent stupidity spikes every time oil prices do.

If the FTC exhibits the integrity it has in the past, this investigation will end the way all the others have, with a whisper not a bang, stating that fundamentals are the driver. But there is no guarantee that the current FTC will indeed exhibit such integrity, given how degraded government institutions have become (not that they were ever paragons, but everything is relative). Political imperatives and narratives, not realities, rule the day.

* Lizzie was dean of Harvard Law School, and a professor of law there. Joy Reid went to Harvard. God save us from Harvard.

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November 7, 2021

You Can’t Spell “Cryptocurrency” Without “Crypt”

Filed under: Cryptocurrency,Exchanges,Politics,Regulation — cpirrong @ 7:25 pm

The libertarian/anarchist roots of cryptocurrency, especially Bitcoin, are well known. The supposed allure is that crypto would allow individuals to transact without requiring on state issued fiat currencies (which are subject to various government controls and monitoring) or state-sanctioned financial institutions. Crypto is in theory anonymous, decentralized, and peer-to-peer, outside of the purview or control of the state. A way to Go Galt, virtually.

In the early days of crypto, which of course are not that long ago, I expressed extreme skepticism about that vision. It could be realized only if crypto remained unimportant and utilized by few: if it were ever to become close to realizing the vision on a broad scale, it would be a threat to governments and they would intervene to control it, neuter it, co-opt it, or destroy it.

There’s an irony here. If you believe the ideological argument for crypto–that it is justified as a means of escaping a tyrannical government-sanctioned and controlled financial system–you also have to understand that governments would not permit crypto to survive as the true believers desire it to.

And we are at that point. Crypto has flourished in the last several years. Not surprisingly, governments are moving to crack down on it.

China–again not surprisingly–was the first to attack crypto in a systematic way, implementing a blanket ban on crypto transactions. But other governments are not far behind, including the US.

Indeed, perhaps you didn’t know this, but the marvelous “infrastructure” bill just passed by the House includes a provision mandating reporting of crypto transactions. The language is unsurprisingly murky, but the intent is quite clear: to bring crypto into the view of the federal government’s Panopticon, especially its tax Panopticon.

In both China and the US the regulatory/legal attack is focused on intermediaries (e.g., exchanges, brokers) that facilitate transactions. In theory, true peer-to-peer transactions (e.g., transactions between anonymous wallets) can be used to circumvent this, but the very fact that intermediation has proved so integral to the operation of the crypto market (which is in itself a refutation of the anarchist vision, as I pointed out in a post about Ethereum creator Vitalik Buterin) demonstrates that the regulations will seriously compromise the ability of crypto to achieve that vision. Moreover, this is just a first step, but one which strongly indicates intent: if non-intermediated transactions flourish, governments will devise means to bring them to heel too.

There’s also something else to keep an eye on: central bank digital currency. It is no coincidence, comrades, that the first country to crack down on non-government crypto–China–is also in the lead in implementing–mandating, actually–a government digital currency.

Private crypto is a competitor to government digital money. Governments don’t like competition. So they do their best to destroy it. Furthermore, the Chinese government truly desires to create an actual Panopticon that permits monitoring, rewarding, and punishing all aspects of individual behavior. Government digital currency greatly advances that objective, and private digital currency impedes it. So to advance the former China destroys the latter.

Governments world wide have cognitive dissonance when it comes to cash. On the one hand, it provides a source of revenue–seigniorage. On the other hand, it provides a way to circumvent the tax system as a way of generating revenue–and of monitoring and controlling behavior. Government digital currency allows states to resolve that dilemma. They can have their revenue cake and eat your privacy too.

China is open and unapologetic about its social credit system and its view that government digital currency will allow it to extend and deepen the operation of that system. Other governments are not so blatant, but there have been discussions in the US and Europe and elsewhere about not just the adoption of central bank digital currency, but how that system could be used to compel desired behavior.

A retired Swiss banker friend once held up a 100 CHF note to me and said: “when I hold this, I feel free.” Well, that’s a feature to him, but a bug to governments. When you “hold” government digital currency, you will not be free. Its use can be monitored. It can be wiped out at the speed of light if you use it in a way that offends governments–or if you do other things that offend governments. Think that social credit can’t come to the US? If so, you are a trusting fool. Especially since government digital currency incredibly leverages the power of a social credit system.

In other words, government digital currency is a major step to the implementation of a dystopian Panopticon. Destroying, or at least severely hobbling, non-government digital currency is a crucial first step to the successful introduction of government digital currency. So this provision buried in the “infrastructure” bill, along with other strong signals from the Treasury, OCC, SEC, CFTC, and Congress of an intent to throttle private crypto should be viewed with alarm, and not just if you are a believer in the crypto dream.

There’s another thought that comes to mind, more speculative, but one that cannot be dismissed out of hand. Namely, that what we are seeing is a huge bait-and-switch. Bitcoin’s origins are incredibly murky. Its creation myth is an anarchist one–which makes it very appealing to those who value freedom and independence, and bridle at government coercion and control. What better way to identify and ensnare such people–who are an anathema to control-obsessed governments–than creating cryptocurrency with an anarchist creation story?

And even if governments did not create the bait, they are certainly not above exploiting an emergent phenomenon (if that’s what crypto really is) to advance their anti-liberty agenda. Crypto has gained a cachet in large part because of its anti-authoritarian aura. Once attracted to crypto by this aura, people are much more vulnerable to being seduced into the use of government crypto, with the loss of freedom that implies.

The poem The Spider and the Fly comes to mind.

But although these speculations would have important implications if proven true, in many ways they are beside the point. The point is that governments are turning the screws on anarcho-crypto and moving to create fiat-crypto. These actions are complementary, and bring closer the day in which fiat-crypto will supplant the fiat currency you can hold in your hand. And when that day comes, freedom will be on its death bed, if not dead already.

Remember, you can’t spell “cryptocurrency” without “crypt.”

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October 30, 2021

Janet Yellen: From Elf to Clown

Filed under: Economics,Politics — cpirrong @ 6:57 pm

Once upon a time Janet Yellen was a respected and respectable economist. That time is long past. She is now the lead singer for a Say Anything cover band. It’s sad to witness.

Janet is currently saying anything–and everything–to justify the monstrosity that is the Biden “reconciliation package,” AKA Build Back Better. Perhaps I should call it the Incredible Shrinking Reconciliation Package, because apparently it has shriveled from $3.5 trillion to a mere $1.75 trillion. But even at half the size, it is a monstrosity.

One indefensible thing that Yellen defended that has subsequently been modified, and may disappear, is the requirement that banks report to the IRS the gross annual flows on bank accounts when those flows exceed $600/annum. Yellen said oh no no no no–this is NOT aimed at the little guy. It’s to prevent billionaires from cheating on their taxes:

This is so patently ludicrous it requires little comment. Indeed, it is an insult to everyone’s intelligence because it so so outrageously and transparently false: everyone with a few functioning synapses understands reporting on the account of everybody with a bank account (and surely, a $600 filter would catch virtually every account holder) will do F-all to prevent billionaires from cheating on their taxes.

Yellen’s latest outrage is her claim that no no no no a massive increase in government spending will NOT add to the mounting inflationary pressures. Indeed, it will reduce these pressures. Yes, you read this right: she said that the reconciliation bill will reduce inflation, despite its size.

Why? Well, according to Yellen, it will shift out the aggregate supply curve. Why? The one specific thing that she said is that the child care subsidy in the bill will free up women to work. Well, even granting that–what about the rest of the huge bill?

Casey Mulligan has taken one for the team, and tortured himself by reading the entire bill. (God bless you, Casey.) He finds it chock full of disincentives to work. Here’s one of this posts that focuses on that, but I recommend that you scroll through all of Casey’s recent posts to get the full effect.

In a nutshell, as in most welfare and subsidy programs, there are huge implicit marginal tax rates embedded in “Build Back Better.” Your benefits go away, or are reduced substantially, if you earn too much. That is a disincentive to work.

These various features shift back the supply curve, thereby exacerbating the inflationary effects of an increase in spending.

And as Mulligan notes, even the vaunted child care provisions are an economic nightmare, with many disincentives to work, and burdens on those who do work in childcare. This is a classic example of the government simultaneously stepping on the gas (subsidizing child care) and slamming the brakes (imposing mandates that dramatically increase the cost of child care). Among the costs are wage floors for child care workers and requirements that said workers obtain particular college degrees. Yeah, those are really great ways to juice productivity, right Janet?

There’s also how the bill is to be paid for, mainly with explicit or implicit taxes on capital. Those will–duh–discourage investment and capital accumulation, further reducing productivity growth. Another adverse shift in the supply curve.

But Yellen claims that the “investments” in Build Back Better will enhance productivity. Say Anything, indeed.

Yellen even defended the utterly insane idea to tax unrealized capital gains, something the desperate Dems seized on to replace the capital and wealth taxes that Krysten Sinema rejected. There aren’t enough hours in my day to explain all the ways in which this idea is insane, unworkable, inefficient, and a threat to freedom.

I’ll just say one thing: if you believe that this tax, if implemented, would be limited to billionaires in perpetuity, you have not been paying attention to the history of federal taxation since the passage of the 16th Amendment in 1913.

In sum, Yellen has not just defended, but advocated every bad idea in BBB. Shamelessly.

In 2009, Yellen was one of the Obama administration’s main justifiers of the stimulus bill. She did so on strictly Keynesian multiplier grounds. I disagreed with her on that, but that was a serious intellectual disagreement: I’m an anti-Keynesian, and she argued on traditional Keynesian grounds. At least there was a serious intellectual foundation for her view, although no doubt she was carrying administration water in advancing it.

Now, however, she is just spouting absolute garbage that has no foundation in any solid economic theory, and which is indeed contrary to good economics, but which happens to be propaganda for administration policy. She is as bad, or worse, than Jen Psaki. A flack and a hack.

I met Janet Yellen once, when I gave a presentation on clearing to the Board of Governors of the Fed when she was Vice Chair. She sat right next to me. She was very nice to me. She is quite small, and at this meeting she was dressed in a green velvet outfit with red trim. I couldn’t help thinking that she looked like an extra from Elf.

But alas, Janet Yellen is no longer an elf. She has become a clown, honking a horn to promote the clown show that is Biden administration economic policy.

As someone might say: Sad!

Coda. The subject of childcare reminded me of some work done by the late, great Sherwin Rosen on child care subsidies in Sweden. He drolly asked: ” If Swedish women take care of each other’s parents in exchange for taking care of each other’s children, how much additional real output comes of it?” More substantively, he said:

The most important finding is that the welfare state encourages excessive production of household goods and discourages production of material goods. Too many people provide paid household (family) services for other
people in the subsidized state sector and not enough are employed in the production of material goods.

Doesn’t sound like a shift out in the supply curve to me–especially for goods and non-household services.

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October 19, 2021


Filed under: CoronaCrisis,Economics,Politics — cpirrong @ 12:21 pm

The United States is currently in the midst of a colossal game of chicken. The administration, state and local governments, and their CEO pilot fish at major corporations and hospitals are insisting on vaccinating all employees. Large numbers of nurses, pilots, flight attendants, ground crew, police, firemen, and other working stiffs are resisting. Notably, many in the military are resisting–including most notably special operators.

Who will blink? If neither side blinks, the crack up will be epic. There will be a severe loss of public protection services, and crime will spike. Ironically, given that the supposed justification for all of the various anti-COVID measures has been to protect the health care system, the loss of nurses will lead to a substantial overload on these systems: some hospitals are already cutting down on care, including emergency care. The already strained transportation will crack. Perhaps most ominously, the United States military will be seriously degraded, as the personnel loss is likely to be concentrated among the most highly trained, and disproportionately impact combat units.

Southwest Airlines was red pilled by what transpired over the Columbus Day weekend, and has relented on mandates. Alas, it is the exception, not the rule. (Delta is another exception. American and United are adamantly not.) Virtually all other mandate maniacs have their foot pushed to the floor.

It is beyond doubting that those resisting mandates are in the right, and those insisting are them are in the wrong.

I repeat: beyond doubt.

Even the administration’s politicized scientists at the CDC have acknowledged that vaccines do nothing–nothing–to prevent transmission. There is therefore no externality that can rationalize coercion. (And as I’ve noted before, even if such an externality existed, it does not necessarily support mandates: it is a necessary but not sufficient condition for them.)

Further, the efficacy of the vaccines is becoming more dubious by the day. The clinical trial results represent an extreme upper bound on efficacy, and real world experience is proving them far less robust than promised.

Moreover, although there is much controversy about this issue, the vaccines may have severe negative externalities: that is, they may supercharge the mutation process and lead to the the accelerated evolution of more virulent strains resistant to the existing vaccines. (Cynics will say that from the perspective of the vaccine makers, this is a feature, not a bug.) Here the science is not settled, but that in itself is reason not to proceed full speed with mandates.

Therefore, like virtually all government policy (and not just in the US), coercive vaccination is all pain, no gain.

Yet governments and their CEO collaborators proceed apace, undeterred by reality.

The administration blames everything–everything–currently ailing the country on the unvaccinated. They are the epitome of evil and the scapegoats for everything currently ailing America (the economy especially).

Example: Supply chain problems? THE UNVACCINATED!!! BLAME THEM!!!

And vaccinating everyone will fix everything, according to the “authorities.”

This is pure, 100 percent, unadulturated horseshit. Patent medicine barkers in the 19th century would be embarrassed at the abject dishonesty here.

So why are we here? Why are we in a situation in which government at all levels–with a mendacious administration in the lead–persisting hell bent on such a destructive and apparently irrational course?

Because from their perspective it is not irrational. Yes, it is irrational from a perspective of public health, economic health, and personal liberty. It is not irrational if your true objective is oppression for oppression’s sake. Then it makes perfect sense.

All of the non-pharmaceutical and pharmaceutical interventions make perfect sense if the objective is to compel submission to government authority. All of the unremitting attacks on therapeutic mitigation of COVID make sense if the objective is compulsion.

It’s about control, not health. Then the question arises what is the purpose of exerting such control?, but that’s the subject of future posts.

And governments are so obsessed with control that they appear dead set on steamrolling anyone who resists or objects, even though by doing so they will wreak great havoc on lives, and on the economy (which, of course, also impacts lives).

Many of those resisting mandates appear to be quite strong in their convictions. (When a football coach chooses to forego a $3 million payday rather than submit, he is definitely putting money where his mouth is. So are all the others who are jeopardizing careers and pensions with their refusal.) Governments and companies appear similarly committed. Given that neither appears to be likely to swerve or jump, the outcome is therefore likely to be ugly indeed.

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October 8, 2021

That Putin, He’s a Gas*: Or, Gazputin Returns!

Filed under: Commodities,Energy,Politics,Russia — cpirrong @ 5:59 pm

Churchill called Russia “a riddle, wrapped in a mystery, inside an enigma.” Those following the natural gas market, particularly in Europe, during the Great Spike of 2021 have no doubt agreed wholeheartedly. What is Russia’s (specifically Gazprom’s) game? Why haven’t they increased sales/output to profit from the spike? Because they can’t due to output constraints? Or because China is outbidding Europe for supplies? Or because they need to build domestic stocks?

Or because they are deliberately withholding output for some strategic purpose, a la 2006?

Yesterday Putin unravelled the riddle/mystery/enigma quite a bit: it’s the latter.

Specifically, Putin said Russia would be more than happy to send Europe more gas. But, only via Nordstream 2, not via currently operating pipelines, through Ukraine in particular. Too expensive to send via Ukraine, you see.

Nordstream 2 was just completed, at the insistence primarily of chief Putin-Versteher, Angela Merkel (whose energy policies have been boneheaded from start to finish), and against the determined efforts of Trump and Congressional Republicans. Biden caved recently on the issue and, waived Trump-imposed sanctions, thereby allowing the completion of the pipeline.

But there are still major disagreements between the European Union and Gazprom regarding the pipeline so gas is not flowing yet. Specifically, the EU has ruled–and EU courts have agreed–that Gazprom must “unbundle.” That is, there must be a separation between control of pipeline capacity and ownership of the gas. Meaning that Gazprom must auction off its capacity on NS2:

The Nord Stream 2 gas pipeline is not exempt from European Union rules that require the owners of pipelines to be different from the suppliers of the gas that flows in them to ensure fair competition, a German court ruled on Wednesday.

The Duesseldorf Higher Regional Court rejected a challenge brought last year by the operators of the Gazprom-backed (GAZP.MM) project to carry gas from Russia to Germany under the Baltic Sea. They had argued the rules were discriminatory.


“Russia’s Gazprom will be forced to auction pipeline capacity, which could delay deliveries further,” said Refinitiv gas analyst Xun Peng.

EU rules require the companies that produce, transport and distribute gas within the bloc to be separate, or “unbundled”. They aim to ensure fair competition in the market and to prevent companies from possibly obstructing competitors’ access to infrastructure.

This means that the company transporting the gas must auction its capacity to third parties.

Gazputin no likey!

And now he has a desperate gas short, winter-dreading Europe by the balls.

Did you really think he would pass on an opportunity to squeeze?

So he’s squeezing. Hard. The threat is clear: if you want more gas, cave to me on unbundling.

“Nice little continent you have here. Shame if something happened to it. Like, you know, freeze.”

In other words, Putin is not the Riddler, or a mystery, or an enigma after all. He is just playing to type. Where type includes adding sanctimonious snark to sugarcoat his threat.

Putin hasn’t changed a bit. The circumstances have changed, and Putin, in his oft-proven opportunistic fashion, is playing the scorpion in Aesop’s fable the Frog and the Scorpion. “I couldn’t help it. It’s in my nature.” Gazputin is back, baby.

For precisely this reason the Europeans–and Merkel in particular–have no one to blame but themselves. They are the ones who put the scorpion on their backs. One would think this sting would be a lesson. But given how many times they’ve been stung in the past, and continued in their course, that will almost certainly not happen. So I for one am shedding no tears.

*The title is an homage to Chicago Bears great Gale Sayers, and his commercials for Cheker Gas stations, in which the closing line was always: “That Cheker, it’s a gas.”

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October 2, 2021

Today’s 70s Acid Flashback: Energy Crisis Edition

Filed under: Commodities,Derivatives,Economics,Energy,History,Politics,Regulation — cpirrong @ 1:15 pm

Back oh-so-long ago, during the California electricity crisis and its aftermath, I would say that California wanted to deregulate its power market in the worst way, and succeeded. (Wanting to keep up my ESG score, I recycled this line to describe Gibbering Joe’s Afghanistan exit.)

The main design failure of California’s restructuring (a more accurate description than deregulation) of its power market was that it capped retail prices for the two largest utilities in the state (SoCal Edison and PG&E) while requiring them to acquire power at market-determined wholesale spot prices. (San Diego Gas and Electric had met criteria to allow it to enter into long term forward purchase contracts and as I recall was not subject to the same retail price cap.). Thus, SCE and PG&E were massively short wholesale (spot) power. When those prices spiked, due mainly to fundamental factors, the utilities hemorrhaged cash and hurtled towards bankruptcy. Their financial distress led to further dislocations in the California market (and the western US power markets generally).

The world is currently undergoing what is being called an “energy crisis,” focused on power markets, and their inputs, mainly natural gas and coal. There are two parts to this “crisis,” one fundamentally driven, the other driven by ill-conceived regulatory and political factors redolent of California circa 1999-2001.

The most pronounced indicator of the fundamental-driven stress is the price of liquified natural gas (LNG), which has reached dizzying heights.

That price spike is in early “shoulder” months, boys and girls. Lord knows what the peak demand months have in store.

And that’s the nub of the problem: storage.

Historically, natural gas has been a “spikey” commodity. The shale boom mitigated spikeness in US natural gas prices, but periodic price spikes are an inherent feature of storable commodities. The truly motivated can read about it in my book, but the CliffsNotes version is this. It is optimal for inventories to run out periodically: if inventories were never exhausted, some of the commodity would never be consumed, which makes no sense. So “stockouts” will occur periodically. When they do, it is impossible to accommodate demand increases or supply declines by drawing down on inventory. Instead, prices bear the entire burden of adjusting to a demand shock (for example). Thus, periodically stocks will be tight, and when they are, a demand increase causes prices to rise dramatically (because inventories can’t cushion the blow).

The cover illustration in my book, based on a purely theoretical model of a storable commodity market, illustrates the point. Note the periodic spikes.

That is, price spikes are inherent in storable commodities.

The magnitude of the price spikes is amplified by the nature of natural gas production and consumption. Both demand and supply are extremely inelastic. The inelasticity effects optimal storage decisions, but when natty inventory constraints bind, inelasticity means that price impacts of shocks are extreme.

This is why going short natural gas (or shorting the calendar spread especially in the winter) is referred to as a “widow maker” trade.

There are lots of widows out there today. In essence, a hard winter of 2020/2021 depleted stocks. The 2020 COVID demand collapse and subsequent price crash (JKM traded at $2.20/mmBTU in May 2020) cratered drilling, constraining current supply (as wells drilled then would have been producing now) making it difficult to build stocks. Warm summer weather in 2021 drained stocks and impeded stock build. Outages in Norwegian production, and a wind drought in the UK (which required greater utilization of gas generation) stoked demand. Stocks are now at historically low levels, setting the stage for even bigger spikes this winter.

The gas market–due to LNG–is now international, meaning that shocks in any region impact prices around the world. Asia (especially China) and Europe are now playing tug of war for gas, and prices are spiking in both places.

Since gas and coal are substitutes, the price spike in gas is resulting in a price spike in coal:

Oil can also be used to generate power, although this has become relatively rare in recent years. However, the spikes in gas and coal are making fuel switching to oil more attractive, and additional gas/coal price spikes in the winter will likely result in more use of oil in electricity generation, which will put upward pressure on oil prices too.

This is all fundamentals driven, and exactly what occurs periodically in storable commodities. There’s nothing really that can be done about it, policy wise. But that won’t stop governments from trying.

You’ve no doubt read of energy “shortages” in recent days and weeks. Well, low supplies and high prices are not a “shortage” per se. A true shortage is a failure for a market to clear, resulting in queueing for the good. That is, a shortage occurs when the price is kept to low, leading to a gap between the quantity demanded and the quantity supplied.

Think gasoline lines in the US in the 1970s.

That’s where regulation comes in. Various regulations, adopted for political economy reasons, create shortages and the other dysfunctions currently observed in world energy markets.

Take China. The authorities have implemented power rationing. The reason commonly given is a “coal shortage.” Yes, coal prices are high in China (and the world), but that doesn’t create a true shortage. What has? Power prices are capped. The big increase in input costs (both coal and LNG) mean that Chinese generators can’t sell profitably, so they restrict output, leading to a true shortage.

What this means is that the shadow price of power–the price that market participants would be willing to pay for an additional megawatt–is (a) above the regulated price, and (b) above the market clearing price. Consumption would be higher in the absence of the price cap.

High coal prices do not reflect a “shortage”, properly defined. Yes, they represent constrained supplies, but that is not a shortage.

And do not forget that China’s coal supply constraints (and high prices) are in large part a result of their brilliant central planners. China imposed quotas on coal production some years back. The reason was–wait for it–coal prices were too low. Now the government is winking at the quotas in order to encourage production–because prices are too high.

India is another country where the Californiaesque capped power price/uncapped input price problem is rearing its ugly head.

France is going to cap gas and power retail prices, but make suppliers whole (though how it will do so remains unstated as of now). Compensating suppliers (effectively having the government pay the difference between marginal cost and the capped price) will prevent true shortages, but will have the perverse effect of exacerbating the spikes in gas and coal prices because at the capped price consumers will not internalize the true scarcity of fuel, and will overconsume.

The UK is experiencing another echo of California. Several of its retail gas suppliers have imploded because they are required to sell at a capped price and chose to cover their sales commitments by purchasing wholesale spot. The price cap made no sense: competition among retail suppliers would have kept prices in line. Adding the price cap just put the competitive retailers at risk of bankruptcy. (Admittedly, such can occur when retail prices are not capped if retailers offer fixed prices to consumers and don’t hedge, as occurred in Texas this last winter. But price caps make that outcome more likely.)

The UK is also suffering a true shortage of gasoline–excuse me, petrol–a la the US in the 1970s. A true shortage, because there are lines:

Scarcity of truck drivers to distribute fuel is at the root of the problem. But that can’t lead to a true shortage–lower supplies and higher prices yes, but not a shortage with people waiting in line. So what gives?

Apparently there was an information cascade about impending shortages, which led to a panicked run for gas stations. This evidently started with a leak (probably politically motivated) of cabinet deliberations.

A sudden demand increase of this magnitude can lead to true shortages–queueing–if prices do not rise to clear the market. This raises the question of why petrol sellers didn’t increase prices. I’m not aware of formal caps, but I surmise that fear of allegations of “gouging” led retailers to choose to allow customers to pay the high price implicitly (through the time cost of sitting in line) rather than raise price to reflect the sudden (and perhaps contrived) scarcity.

For storable commodities like natural gas, coal, and refined petroleum products, price spikes can last for some time. That’s what we are experiencing today: it’s just one of those spikes like on the cover of my book that happen in commodity markets. Given that we are going into a peak demand season with constrained supplies, the prospect for a continuing spike–and indeed, a higher spike–is very real indeed.

Governments can’t change this fundamental reality. Market prices are sending a signal about underlying conditions. Governments don’t like the message the prices are sending, and will try to do something about it. Alas, their knee-jerk response–to shoot the messenger by capping prices–will make things worse, not better. But because governments can’t help themselves, look for many 1970s energy market flashbacks in the coming months.

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September 28, 2021

I Have Returned

Filed under: China,Military,Politics — cpirrong @ 9:30 am

Howdy. Miss me?

My absence was due to a long deferred vacation (a week spent in Paris) and my annual teaching gig at the University of Geneva (which fortunately returned to in person instruction after a year online).

I was originally supposed to go to the Netherlands first, to give a talk at the Erasmus University Leadership in commodity trade & supply networks program (which I also teach in). However, due to the US being, er, “promoted” to being an Orange country (though no longer a Bad Orange Man country!), doing so would have required 10 days quarantine. So I did the talk online, and went to Paris instead.

Given the news accounts of anti-Pass Sanitaire demonstrations and a first hand description of the nightmarish application of that system in the provinces, I had my reservations about how that would go.

Fortunately, however, in Paris anyways the PS BS was rather lightly applied. I started to rate restaurants and other businesses on a GAF scale. Roughly half gave zero fucks. They didn’t even check. A few gave half a fuck, or maybe one fuck, and subjected my awesome CDC card to a cursory glance and did not bother to check whether the name on it matched my passport. One place, near Luxembourg Gardens, required me to show it to 3 different waiters, including apparently the head waiter.

Nor did I see any evidence that the authorities were monitoring compliance. The main evidence of police presence was convoys of cops in tactical gear on motorcycles or in paddy wagons (Pierre wagons?) racing around the boulevards on Saturday (protest day! yay!) sirens wailing.

More than a week prior to departure, I applied online for “Demande de conversion d’un certificat de vaccination étranger en passe sanitaire français (étrangers).” Didn’t hear anything until 2 days after my return, when the French government (a) acknowledged receipt of my “dossier”, and (b) in a separate email, told me that my dossier had been rejected . . . since I had departed France.

We’re in the best of hands, non?

What France did GAF about during my visit was the Australia-UK-US defense deal, which shtupped the French out of a $90 billion contract to build conventional submarines for Australia, and replaced it with a deal to provide nuclear subs and nuclear technology to Australia. The French were incandescent with rage, and it was the lead subject on most news programs for almost my entire trip. (Energy prices were #2 on the hit parade–I’ll post on that in due course.)

Given France’s history of defense unilateralism (de Gaulle, anyone?) the outrage is a bit hard to take. Moreover, as is often the case with such contracts, France’s performance on deadlines and costs was poor, angering the Australians. (Maybe their dilatory response to requests for a PS is representative of their general attitude to timely performance.) Further, from a capability and geopolitical perspective, nuclear boats are far more suitable to contribute to collective defense in the Asia-Pacific, and against China in particular–which is why China was also incandescent with rage. (A good sign! Though they freak out about everything so it’s not that meaningful an indicator.) (Although the extended timeline for delivery means that any real contribution will benefit any college-aged readers I have.)

That said, the way that the deal and announcement were handled was appalling. It was a public humiliation for France, and indeed, almost seems like a deliberate humiliation. Given the antagonism between Macron and BoJo that can’t be ruled out. This puts paid to Biden’s “rebuilding alliances” BS. Right now the French are pining for mean tweets. Sticks and stones may break my contracts, but tweets will never hurt me.

The Geneva portion of my trip was excellent. I always enjoy teaching in the master of commodity trading program at UNIGE, and the students this year were a particularly good group. Not surprisingly, the Swiss were a little more manic about COVID documentation than the French, but there were many restaurants there that achieved the precious Give Zero Fucks rating. The one exception being a place that had never heard of J&J or its vaccine, or that it was one dose, or that it was approved in Switzerland.

Getting tested to return was something of a hassle, with few appointments on offer. But Swiss physicians apparently collect a little swag on the side (paid in cash!) by giving tests, so I had a new experience–my first ever appointment with a gynecologist, who blessedly only looked up my nose.

Hopefully the pace of posting will pick up over the next few days. The rest of today is a loss, but there’s much to comment about so I’ll leave you waiting in breathless anticipation.

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September 12, 2021

Gabby Biden’s 911 Stream of Dementia

Filed under: Politics — cpirrong @ 5:47 pm

Apparently not wanting to risk Joe Biden breaking his own record for Worst Presidential Speech on as solemn an occasion as the 20th anniversary of 911, his handlers decided that he would not give formal live remarks in New York, the Pentagon, or Pennsylvania. Instead, they decided to unleash the allegedly avuncular Gabby Biden, who responded to some questions in Shanksville.

The question that started this verbal train wreck, this word succotash, was the most dangerous that Biden could have faced:

Q    Mr. President, what is going through your mind today, sir?

Dear God in heaven, anything but that.

Biden responded by saying exactly what was going through his mind. Which is to say, he unleashed a stream of dementia (I would never say consciousness) that veered between something that had at least some connection to 911 (though that (a) ended up being all about him, and (b) sounded like Fractured Fairy Tales as written by Hunter on crack), to his alleged attempts to unite the country, including a foray into his domestic agenda–“human infrastructure”–to a defense of his decision to withdraw from Afghanistan, to (amazingly) a defense of how we got out of Afghanistan (there was no other way to get out), to a slap at Trump (who apparently lives in his head, granted there is a lot of empty room).

The man said “anyway” SEVEN TIMES. This is a common verbal tick of someone (usually elderly) whose mind wanders, and subconsciously knows his/her mind has wandered. Like Grandpa Simpson:

“You see, back in those days, rich men would ride around in zeppelins, dropping coins on people. And one day, I seen J. D. Rockefeller flyin’ by– so I run out of the house with a big washtub, and—Anyway, about my washtub. I just used it that morning to wash my turkey, which in those days was known as a “walking bird”. We’d always have walking bird on Thanksgiving with all the trimmings: cranberries, Injun eyes, yams stuffed with gunpowder. Then we’d all watch football, which in those days was called “baseball.”

So, anyway, I’m going to do my thing.    

That last was Joe Biden, not Grandpa Simpson. And Judas Priest. “I’m going to do my thing.” That’s exactly what we’re petrified about. We’ve seen the thing. And we’re afraid. Very afraid.

Really. You have to read the whole thing to get the full effect.

Apparently Gabby’s puppeteers have never heard the aphorism: “Better to remain silent and be thought an idiot, rather than to speak and remove all doubt.”

If you had any doubt, you shouldn’t now. And if you do, I have no doubts about your mental state.

Not only was this Journey Into Joe’s Mind disturbingly revealing about his lack of a functioning mind, it was wildly inappropriate for an extremely somber occasion like yesterday’s remembrance of a shattering episode in American history. It had nothing to do with him, his political agenda, or his performance as president. But this makes it plain: narcissism will win out. Always.

Why do I call him Gabby? Reading his remarks reminded me of Blazing Saddles, and Gabby Johnson’s genuine frontier gibberish.

There were other awful moments from yesterday. Like Biden giving a shoutout to someone at Ground Zero–while Obama looked on in horror.

Insert “WTF Joe” word bubble over Obama’s head.

Or when Biden geriatrically shuffled over to someone pointed out to him by security, and the crowd heckled him–including saying “don’t sniff ’em”–a reference to Creepy Joe’s predilection for inappropriate gropes and sniffs of underaged girls (though not just girls)

This on a day where raucous college football crowds around the country (for the second consecutive weekend) erupted into “Fuck Joe Biden” chants:

This is not sustainable. The problem is that the alternatives are as bad or worse. Look at the line of succession. Kamala. Pelosi. Leahy.

We are truly putting Adam Smith to the test. Yes, there is much ruin in a country. But not infinite ruin.

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