Streetwise Professor

May 5, 2018

Coup by Pretext

Filed under: Politics — The Professor @ 6:04 pm

The Fourth Branch of Government (the professional bureaucracy, especially its law enforcement and intelligence branches) seems incapable of doing anything in a forthright manner, acting instead like a cast of sidling crabs.  This perhaps reflects the fact that it has arrogated to itself this status, it being found nowhere in the Constitution, thus making it necessary to act by indirection.

The battle between the bureaucracy and the president, ostensibly over the “Russia investigation” is an ongoing (and going and going and going) illustration of this phenomenon.  Virtually every action undertaken by various bureaucrats that has advanced the investigation has been justified by a pretext that has nothing whatsoever to do with the real motives:

  • A supposed violation of the hoary–and never enforced–Logan Act was a pretext for Sally Yates to order the unmasking of  Michael Flynn. (Hey Sally–no doubt if you were still in office you’d be siccing the dogs on John Kerry, right? Right?)
  • The same supposed violation was a pretext for Yates to order the FBI to conduct an ambush interview of Flynn.
  • The inconsistency between Flynn’s statement to the FBI and the NSA intercept of his conversation with the Russian ambassador was a pretext to prosecute him, in the hope of getting him to roll on Trump, and at the very least, give Mueller a scalp to justify his investigation.
  • The dossier, with its farcical claim that Igor Sechin had offered Trump via Carter Page either (a) a 20 percent stake in Rosneft, or (b) a brokerage fee on the 20 percent stake (which is hard to say, given the idiotic wording of the dossier) was used as a pretext to get a FISA warrant on Page. (By the way, as @soncharm points out to me on Twitter, how could Qatar buy a stake in Rosneft if it had been promised to Carter Page? Great question! :-P)
  • The FISA warrant on Page was a pretext to conduct surveillance on the Trump campaign.
  • The Comey briefing of Trump on the dossier was a pretext to leak it to the media.
  • Comey’s memos to himself, and the leak thereof, were a pretext intended to lead to the appointment of a special counsel.
  • As US District Court Judge T.S. Ellis scathingly noted in a hearing yesterday, Mueller’s prosecution of Paul Manafort for crimes bearing absolutely zero connection with the ostensible purpose of the Mueller inquiry is a pretext to pressure him into rolling on Trump.
  • Mueller’s apparently focus on obstruction of justice is a pretext to continue an inquiry that has apparently failed to find any evidence of the turpitude he was charged to investigate.
  • Stormy Daniels was used as a pretext to conduct a raid on Trump’s lawyer.
  • Rob Rosenstein’s and the FBI’s repeated claims of national security to justify refusal to produce documents or the heavy-handed redaction of the documents that they grudgingly do produce are merely pretexts to cover up their dubious behavior. (By the way, I am more convinced by the day that Rosenstein is the Iago in this entire affair.  On Thursday, I asked how given his involvement in many aspects of case–such as his involvement in the Page warrant–Rosenstein did not recuse himself.  Judge Ellis asked the same thing on Friday.  The guy is conflicted out the wazoo.  Recusal is required at a bear minimum.)

Indeed, the entire Russia collusion investigation is merely a pretext for the Fourth Branch’s rebellion against the elected president.

The repeated reliance on subterfuge and pretext is prima facie evidence of dishonorable motives and conduct by public “servants” who believe themselves to be rightfully masters, accountable to no one.  The pervasiveness of this conduct demonstrates that the importance of this issue transcends Trump.  It calls into question whether the federal government is in fact accountable, and subject to Constitutional checks and balances.  Indeed, it is worse than that: it largely answers that question, and the answer is disturbing indeed.

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May 2, 2018

When You Play With Fire, Eventually You Get Burned–Even if You are Glencore

Filed under: Commodities,Economics,Politics,Regulation,Russia — The Professor @ 6:10 pm

Even by the standards of the commodity business (and the commodity trading business in particular) Glencore is known for its appetite for political and legal risk, and its willingness to deal with sketchy counterparties.  It does so because by taking on these risks, it gets deals at good prices.  But the bigger the appetite, the greater the indigestion when things go wrong.

In the past several weeks, Glencore has hit the going wrong trifecta.

It has a longstanding relationship–including marketing deals and equity investment–with Rusal, entered when the Russian company’s reputation was particularly dubious in the aftermath of the aluminum wars, and its owners were involved serial litigation.

We know what happened to Rusal–it is in dire straits because of US sanctions.  Yes, the Treasury has indicated that it will take Rusal’s case on appeal, but there is no guarantee that it will grant a stay of execution when the appeal process is completed.

Glencore also partnered with very dubious Israeli businessman Daniel Gertler in the Democratic Republic of the Congo (DRC).  Gertler was sanctioned by the US government in December for a history of corrupt dealings in that country.  Glencore bought out Gertler in 2017.  After the sanctions were imposed, Glencore stopped paying Gertler royalties, but now Gertler is suing for $3 billion in royalties that he claims Glencore owes him.

Also in the DRC, Glencore is in a dispute with the government’s mining company, which claims that a Glencore subsidiary operating in the country is undercapitalized.  This is really a battle over rents: in essence, the government claims that foreign miners (including Glencore) overburden operating subsidiaries with debt in order to reduce dividend payments to the government (which is part owner).  The government has moved to dissolve the Glencore subsidiary.

I don’t know enough to comment on the substance of the various legal disputes in Africa.  But I can say that the risks of such disputes are material, and that they can be very costly.

In some respects, the Glencore political/legal risk strategy is like a short vol trade.  It can be a money printing machine when things go well, but when it goes bad, it goes really bad.

In a way Glencore is lucky.  It can withstand these hits now, having clawed its way back from its near death experience in the fall of 2015.  If these hits had occurred back then, well . . .

In sum, when you play with fire, eventually you are going to get burned.  Even if you are Glencore.

PS. The tumult in the Congo could disrupt cobalt supplies.  This would put pressure on one of my fave targets–Tesla–which is already in a parlous state.  Elon gave a crazed performance at today’s Tesla earnings call.  To me it came off as the meltdown of a narcissist who is facing failure and cannot handle being questioned.

I’ve been biding my time on some additional Tesla posts.  The time may be near!

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May 1, 2018

Rusal: Premature Celebration

Filed under: Commodities,Derivatives,Economics,Politics,Regulation,Russia — The Professor @ 9:31 am

Rusal shares rose sharply and aluminum prices fell sharply on the news that the US Treasury had eased sanctions on the company.  The concrete change was an extension in the time granted for those dealing with Deripaska-linked entities to wind down those dealings.  But the market was more encouraged by the Treasury’s statement that the extension was being granted in order to permit it to evaluate Rusal’s petition to be removed from the SDN list.  It is inclusion on that list that sent the company into a downward spiral.

Methinks that the celebration is premature.  Treasury made clear that a stay of execution for Rusal was contingent upon it cutting ties with Deripaska.  Well, just how is that supposed to happen? This is especially the case if any transaction that removes Deripaska from the company not benefit him financially.  Well, then why would he sell?  He would have no incentive to make certain something–the total loss of his investment in Rusal–that is only a possibility now.

Of course, Putin has ways of making this happen, the most pleasant of which would be nationalization without compensation to Deripaska, perhaps followed by a sale to … somebody (more on this below). (Less pleasant ways would involve, say, Chita, or a fall from a great height.)

But if the US were to say that this was sufficient to bring Rusal in from the cold, the entire sanctions regime would be exposed as an incoherent farce.  For the ultimate target of the sanctions is not Deripaska per se, but the government of Russia, for an explicit foreign policy purpose–a “response to the actions and polices of the Government of the Russian Federation, including the purported annexation of the Crimea region of Ukraine.”

Deripaska didn’t personally annex Crimea or support insurrection in the Donbas.  The Russian government did.  The idea behind sanctions was to put pressure on those the Russian government (allegedly) cares about in order to change Putin’s policies.  They are an indirect assault on Putin/the Russian government, but an assault on them nonetheless.

So removing Rusal from the SDN list because it had been seized by the Russian government would make no sense based on the purported purpose of the sanctions.  Indeed, under the logic of the sanctions, the current discomfiture of the Russian government, facing as it does the potential unemployment of tens of thousands of workers, should be a feature not a bug. The sanctions were levied under an act whose title refers to “America’s adversaries,” which would be the Russian state, and were intended to punish said adversaries.

Mission accomplished!  Which is precisely why the Russian government is completely rational to view the Treasury announcement “cautiously,” and to view the US signals as “contradictory.”  The Russians would be fools to believe that nationalization and kicking Deripaska to the curb would free Rusal from the mortal threat that sanctions pose.

Perhaps Treasury has viewed the market carnage, and is trying to find a face-saving way out.  But it cannot do so without losing all credibility, and appearing rash, and quite frankly stupid, for failing to understand the ramifications of imposing SDN on Deripaska.  Also, doing so would feed the political fire that Trump is soft on Russia.

Further, who would be willing to take the risk buying Rusal from Deripaska either directly, or indirectly after nationalization?  They would only do so if they had iron clad guarantees from the US government that no further sanctions would be forthcoming.  But the US government is unlikely to give such guarantees, and I doubt that they would be all that reliable in any event.  Analogous to sovereign debt, just what could anyone do if the US were to say: “Sorry.  We changed our mind.”?

Indeed, the Treasury’s signaling of a change of heart indicates just how capricious it can be.  Any potential buyer would only buy at a substantial discount, given this massive uncertainty.  A discount so big that Deripaska or the Russian government would be unlikely to accept.

And who would the buyers be anyways?  Glencore already has a stake in Rusal, and a long history of dealings.  But it is probably particularly reluctant to get crosswise with the US, especially given its vulnerabilities arising from, say, its various African dealings.

The Chinese?  Well, since China is already on the verge of a trade war in the US, and a trade war involving aluminum in particular, they would have to be especially chary about buying out Deripaska.  Such a deal would present the US with a twofer–an ability to shaft both Russia and China.  And perhaps a three-fer: providing support to the US aluminum industry in the bargain (although of course harming aluminum consuming industries, but that hasn’t deterred Trump so far.)

So short of the US going full Emily Litella (and thus demolishing its credibility), it’s hard to see a viable path to freeing Rusal from SDN sanctions.  Meaning: Put away the party hats.  The celebration is premature.

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April 17, 2018

Where’s Hercules When You Need Him? McCabe’s “Defender” Unwittingly Reveals How DC Puts the Augean Stables in the Shade

Filed under: Politics — The Professor @ 6:37 pm

Writing on the relentlessly anti-Trump, pro-swamp Lawfare site, Steptoe & Johnson attorney (and made swamp thang) Stewart Baker attempts to explain and rationalize Andrew McCabe and the “lack of candor” (swamp-speak for “lying”) that resulted in his termination.  What he really accomplishes, however, is to demonstrate just how depraved DC is.

Baker’s essay is a target-rich environment, but I will focus on just a couple of things.

There’s this gem:

But the Trump administration’s ferocious response to leaks, including FBI leaks, led to an internal investigation.

That is, Andy would have gotten away with leaking if it hadn’t been for that blasted Trump! It’s Trump’s fault! He doesn’t understand the rules!

Apparently, leaking is droite du bureaucrate, and the upstart Trump was violating privileges and immunities of longstanding by attacking this conduct.

But the best (or worst, depending on how you look at it) is this:

So, what should we think of Andrew McCabe? He’s certainly no hero. But he’s no sacrificial goat, either. Assuming he did what the IG says he did, the recommendation that he be fired is completely understandable. Still, the things McCabe did are not uncommon in government, even—perhaps especially—among talented and effective officials. His bad luck, and his failing, is that the issue kept coming back month after month, and his efforts to give misleading but not quite false answers grew ever more strained. It’s hard not to feel some sympathy. If the times had been different, he might have ended his service as a respected bureaucrat like many others—with a reputation for being talented and a bit slippery.

“Everybody does it!” is the best that Baker can muster in McCabe’s defense.  It is probably true that everybody does it.  But what the DC denizen cannot see is that is precisely the problem.  It may indeed be the case that McCabe is something of a Sad Sack who behaved completely in accordance with the rules of the DC game, but fell afoul of developments that he could never have imagined.  But for that interloper the leaky liar would have retired with honor, and after additional years of leaking and lying and railroading political enemies and doing God knows what else.  Bad luck!

I’d call it karma.  Too bad it’s limited to him, so far.

But the fact that McCabe’s behavior was “normal” is (a) exactly why US politics–and the administrative state–is a sewer, and (b) why Trump was elected in a fit of Jacksonian revulsion at corruption.

Baker is right: if Andy McCabe is fired, everyone in DC deserves to be fired. If we could only be so lucky.

Baker’s piece also lays out the chronology and background of McCabe’s agonies, which further demonstrates how perverse the Potomac Swamp is.

Baker relates that McCabe was leaking as part of a bureaucratic war against Sally Yates at DOJ, and one of McCabe’s lackeys (the now notorious Lisa Page) exulted at throwing one of Yates’ lackeys under the bus.  Now remember that Yates has rushed to McCabe’s defense.  Further, McCabe leaks undercut Comey, and he lied to Comey’s face.  Yet Comey has also leapt to McCabe’s defense and savaged Trump’s firing of him.  Another defender of both Comey and McCabe is the execrable (there has to be a better epithet–execrable seems so tame!) John Brennan.  Yet if Lee Smith’s reporting is to be credited, Brennan basically strong-armed Comey into launching the counterintelligence operation against Trump.

In other words, when in power, and behind the scenes, these paragons of public virtue waged vicious bureaucratic battles against one another.  But they deliver slobbering encomiums to one another and their virtue when it advances their war against a common enemy: Trump.

So thank you, Stewart Baker, for inadvertently laying bare precisely why DC makes the Augean Stables pale in comparison, and why it needs to be cleansed, post haste.  Unfortunately, Trump is probably not quite the Hercules we need.  And alas, DC is so overflowing in filth that even Hercules hisself would be hard pressed to perform that labor.


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April 10, 2018

What SDN Hath Wrought: How Trump Rocked Not Just Rusal, But Most of Russia

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 8:42 pm

I clearly underestimated the impact that the sanctions imposed on Deripaska, Rusal, and others would have.  The initial reaction Monday by many was to puke everything Russian.  Everything.  The ruble. The overall Russian stock market.  Russian debt.  Every major Russian company.  They all crashed. The carnage was widespread and indiscriminate and extended far beyond those directly targeted.

Rusal was the biggest loser, and extended its losses today.  Overall, its stock price is down almost 55 percent.  Ivan Glasenberg resigned from the board, and just now two Russian non-executive directors also resigned.  The company is clearly toxic/radioactive.  I don’t see it surviving without massive state support, and perhaps nationalization.   But even then . . . who outside of Russia and China will buy its aluminum?  (Note China is already suffering an overcapacity problem in the metal, which US trade restrictions would only make worse.)

I thought I might have misjudged seriously that Potanin would gain at Deripaska’s expense: on Monday Norilsk Nickel was down almost 20 percent, and Potanin was the biggest absolute loser.  Norilsk has since bounced back, and recovered much of its loss: it is now down about 7.5 percent from Friday.  But the “shootout” auction will still be between two gunmen who have been grievously wounded by fire from an unexpected direction.

Many other Russian companies that were pounded yesterday have also bounced back.  Severstal is actually trading above the pre-sanctions-news price.  Rosneft and Novatek have also recovered most of their losses.

Sberbank remains down–down more than 16 percent.  The bank disingenuously stated that the selloff was overdone because its exposure to sanctioned companies represented only 2.5 percent of its assets.  Well, since it is leveraged about 12-to-1, that represents 30 percent of its shareholder equity, which would justify a pretty big selloff.

The ruble remains down.  Indeed, it extended its loss today, and actually experienced a greater percentage decline today (almost 5 percent) than it did Monday (around 3 percent).  Perhaps this reflects the central bank’s statement that it would not intervene in support.  But it does indicate that this is perceived as a Russia-wide shock, and not one limited to a few billionaires and their companies.

The broader selloff, somewhat overdone as it was (as reflected by today’s recovery in many names) suggests a widespread estimation that other shoes will drop, and that billionaires that escaped the first round are still at risk for the Oleg treatment.

This raises the question of how the targets were chosen. Leonid Bershidsky argues that Deripaska and Rusal were targeted because taking Rusal’s aluminum off the market (as is happening, with the LME saying it will not warrant Rusal metal not already in warehouses) would be a much more effective way of supporting the US aluminum industry than selective tariffs.  This does have a certain logic, but if that is the logic, it would speak very poorly of the the US government, for it would imply the masking of a protectionist measure behind an allegedly principled reaction to Russian turpitude. It also doesn’t explain the other targets.

Nor does it explain the non-targets.  Novatek and Timchenko are much more tightly connected to Putin than Deripaska and Rusal. And Novatek LNG competes with US LNG, so there would be a protectionist rationale for hitting it.  Yet Novatek was not subject to SDN treatment, and as noted earlier its stock price has largely rebounded.  Perhaps a journalist friend in Moscow is right that Total’s big investment in it and its Yamal project has given it some immunity.

Similarly, Rosneft and Sechin are much more in the inner sanctum than Deripaska/Rusal.  Yet it too has escaped SDN.  Perhaps the risk of creating an oil shock is too great.

The “perhapses” indicate, however, that the rhyme and reason of the administration’s actions is not obvious.  And perhaps (there’s that word again) that’s what really has the market–and many rich Russians–spooked.  Given the capriciousness of the list, everyone is at risk.

Russia’s official reaction was of course negative, but one voice has been missing: Putin’s.  It’s not quite akin to Stalin, 22 June-3 July, 1941 (when he remained out of sight after the shock of Barbarossa), but it does suggest uncertainty as to how to respond.  Not a B’rer Rabbit reaction, at least not yet.

This uncertainty is no doubt fed by the realization of the vulnerability of the Russian economy to US policy.  I’ve written before that the US could crush Russia like an overripe grape by, for instance, cutting it off from SWIFT or the dollar system altogether.  This shows that it can wreak havoc with far more limited measures.

It’s also interesting that Xi made rather conciliatory remarks yesterday.  A coincidence? Perhaps (again). But Friday’s sanction action shows that Trump can act unpredictably and punishingly.  That likely concentrates minds in Beijing as well as in Moscow.

Whatever the logic of Friday’s thunderbolt, it should put paid to the Trump-is-Putin’s-pawn and Putin-has-something-on-Trump theories.  Indeed, a desire to terminate with prejudice those narratives is as good an explanation for the administration’s action as anything.  Not that reality will interfere with the conspiratorial ravings of those in the Democratic Party and the media and the neocon NeverTrumpers.  They are just too invested and obsessed, and nothing short of a preemptive nuclear strike on Moscow is likely to change that–and even then . . . . And with Trump threatening to attack Syria despite Russian warnings against it, maybe we’ll soon put that theory to the test as well.

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April 8, 2018

Caught in the Crossfire: Oleg Deripaska and Ivan Glasenberg

Filed under: Commodities,Politics,Russia — The Professor @ 7:15 pm

On Friday, the US Treasury Department sanctioned several Russian billionaires, commonly but misleadingly referred to as oligarchs. Topping the list was Rusal’s/EN+’s Oleg Deripaska.  Also included were Suleiman Kerimov , Alexey Miller of Gazprom, and Viktor Vekselberg of Renova (which holds a substantial stake in Rusal).

Presumably the intent behind choosing these specific targets, and the sanctions law which led to their selection, is to somehow punish Putin, and to cause him to change his behavior.  The sanctions will probably fail in achieving these objectives, and could actually be a net benefit for Putin.

When it comes to Russian billionaires, there are distinct classes.

There are Putin’s favored billionaires–his buddies like Timchenko and the Rotenbergs (who share St. Petersburg roots with Putin).  To a large extent these figures are billionaires because of Putin–they are beneficiaries of his largesse.  As further evidence of their privileged position, he compensated them through favoritism to offset their losses when they were targeted for sanctions early on.

There are the billionaires Putin hates (or hated).  These are the 90s oligarchs proper, men like Khodorkovsky, Berezovsky, and Gusinsky, who are in exile or dead.

Then there are those billionaires he tolerates, because they steer clear of politics and pony up to pay for Putin pet projects (e.g., the Sochi Olympics).  Deripaska, Vekselberg, and Kerimov are in this category.

Deripaska in particular is hardly a Putin favorite, and at times Oleg has tested Putin’s tolerance–as evidenced by the pen throwing incident at Pikalevo in 2009, where Putin chastised Deripaska publicly, likening him to a cockroach who ran at Putin’s approach.

Punishing this group is unlikely to cause Putin any loss of sleep. And indeed, he may reap some benefits.  The sanctions make these men and their firms more dependent on him and Russian state support–and he can extract a price for this support.  Furthermore, it pays into his narrative of Russia being unfairly targeted by a hostile West (and the US in particular).  Indeed, the peripheral political role of those sanctioned allows Putin to make the colorable claim that the US harbors an animus against Russia and Russians generally: he will therefore be able to claim that this is just another example of American Russophobia.

Perhaps most importantly, Putin has been attempting rather pathetically to get wealthy Russians to repatriate their fortunes: truth be told, the US government is making a more persuasive case for that than anything Putin has done or even could do.  Putin is therefore somewhat in the position of B’rer Rabbit, and the US in the position of B’rer Fox.

All of these factors strongly suggest that the US action is at best symbolic, and perhaps counterproductive.  They certainly are insufficient to induce Putin to ratchet down his confrontation with the US, and may indeed play into his justification for such a confrontation.

Putting motivations and incentives aside, the sanctions will not have much impact–if any–on Russian capabilities to implement Putin’s confrontational strategy.

So again, a flamboyantly symbolic act, with little practical benefit accruing to the US.

This is not to say that the individual targets will not suffer–they will.  It’s just that Putin won’t feel their pain, or will use it to advance his own purposes.

Deripaska’s case is particularly striking.  The sanctions were clearly a surprise: Rusal stock fell 20 percent on the news, which would not have happened had it been anticipated.  [Update: as of Monday morning Central Time, Rusal is down 50 percent, and the company has asked customers to stop payment while it tries to right the business.] Moreover, Rusal/EN+/Deripaska were subjected to the most harsh form of sanctions–Special Designated Nationals (SDN) sanctions.  These are more punishing than those imposed on Rosneft, for instance.  Under SDN, any US person (including corporations) is forbidden to transact with the sanctioned individual or entity.  Moreover, secondary sanctions can be imposed on non-US entities that deal with an SDN target.  US firms can be precluded from dealing with foreign firms subject to secondary sanctions.  This makes it far more risky for non-US firms to cushion the blow against (say) Rusal: such firms may have to make the choice between transacting with US firms (especially banks and other financial institutions) and transacting with Rusal.  Many will likely say: “Lots of luck, Oleg! Been nice doin’ business with ya!”

Topping the list of firms facing this grim choice is Glencore, which has a marketing deal with Rusal through 2018.  This deal was expected to be renewed, except on a smaller scale for 2019 forward.  (On a smaller scale because Rusal has been moving away from selling primary aluminum which Glencore markets to selling value added wire rods, billets, and slabs directly to industrial customers.)  Glencore also owns 8.75 percent of Rusal, which it had announced it will convert into EN+ shares.

Of course one of Glencore’s strategies has always been to go where other companies daren’t.  Its appetite for political risk is clearly much larger than its peers in mining, and even its Swiss commodity trading peers.  But tempting fate with Uncle Sam on sanctions is a different matter, and thus I would consider a renewal of the marketing deal to be unlikely, and Glencore may also be looking to unload its Rusal/EN+ shares, although to whom and at what price are rather difficult questions to answer.  Probably to Russian entities (or a buyback financed by Russian state banks), and perhaps the Chinese, and for a song.

Glencore shares fell modestly on Friday, so the blow is not perceived as being too heavy.  But the company is likely the biggest loser other than Oleg himself.

The grievous blow directed at Deripaska also raises an issue that has not attracted much attention in the US or Europe–the fate of Norilsk Nickel.  Nornickel has been subject of a long running battle for control between Deripaska and Vladamir Potanin.  Roman Abramovich had indicated his intent to sell a block of shares that he had purchased as part of a peace deal between Deripaska and Potanin, and this raised the possibility of a “shootout” auction for the block between the two.

Well, methinks Oleg is plumb out of bullets right now, and so Potanin will prevail.  Which means that even a Russian billionaire can benefit from US sanctions on Russian billionaires.

(Curiously, although Potanin was on the “Forbes List of Potential Sanction Targets” announced earlier this year–as was Deripaska–he was not hammered the way Oleg was.  I have no idea why.)

All in all, there are loser and winners from Friday’s sanctions.  The losers are clearly Deripaska and to a lesser degree a non-Russian (despite the first name!), Ivan Glasenberg. One like winner is a Russian billionaire, and other winners are likely Chinese.

One person who is clearly not a loser, and may even be a winner, is the ostensible target–Vladimir Putin.

So other than throwing a few Russians to the US hounds baying for Russian blood, it’s really hard to see the point of this exercise.  It doesn’t advance American interests in any meaningful way.  Anyone looking for any change in Russian behavior–in Putin’s behavior–in the coming months will almost certainly be disappointed.  This is more another act in the ongoing American political melodrama than a serious policy move.

To alter a saying which Putin is fond of  quoting: the hounds will bay but the caravan–Putin’s caravan–will move on.

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April 3, 2018

Hogg Wild: The Intellectual Bankruptcy and Political Impotence of Moral Authority

Filed under: Guns,Politics — The Professor @ 6:27 pm

Not to mince words (since when do I ever do that?) but the gun control movement’s latest poster boy, David Hogg, is a repulsive, narcissistic punk who is using his dead fellow students’ corpses as a platform for demagoguery.

Now, if I had more of a public profile, CNN, Bloomberg, etc., would be dispatching a swarm of flying monkeys to get me, and my little dog too, for uttering such heresy.

I find Hogg so loathsome because he assumes a mantle of utter moral righteousness (and self-righteousness), and because he slanders anyone who disagrees with him as an accessory to mass murder.  And, of course, CNN, Bloomberg, etc., and the bulk of the political left in the US wholeheartedly agree with his calumnies (because they sincerely believe them), and find him useful because they believe that he will advance their cause.

Said media and leftists (but I repeat myself) claim that Hogg is beyond criticism because he has moral authority, due to his (somewhat ambiguous) proximity to the Parkland massacre.  And because he is a teenager, which apparently gives him some sort of additional authority, even though self-superiority rivals acne as the most repulsive teenage affliction.  Hence the frenzy directed at anyone who criticizes him.

Word to the wise: whenever anyone asserts moral authority to advance a cause, it is because they know that they cannot persuade on the basis of logic, reason, or evidence.  Like other appeals to authority, it is logically fallacious.  Indeed, appeals to expert authority are actually less disreputable than appeals to moral authority, because at least the former can be justified somewhat on Bayesian grounds.  Appeals to moral authority are also a form of ad hominem argument–that is, the audience is supposed to judge the truth of an assertion on the basis of the identity of the individual making a claim, rather than the logic or evidence supporting it.

I could colorably claim equal moral authority to Hogg.  In September, 2016, minutes after I left for the university, my neighbor opened fire indiscriminately with a semiautomatic 45 ACP Thompson carbine, wounding ten, before he was smoked in a shootout with police.  I was probably in as much danger as Hogg was, but that matters diddly squat in evaluating any argument I might make regarding guns and gun control, which is as much as Hogg’s proximity should matter.

Thus, I judge the frenzy with which the left pushes Hogg and some of the other Parkland students (all the while suppressing the voices of those with equal standing but who disagree with them) as an admission of their utter failure to make a reasoned argument in support of their agenda.  Conceding the inability to prevail on the merits, they appeal to emotion and resort to intimidation.

I mentioned before that anti-gun advocates believe that Hogg and his supporters believe that they have found the magic bullet (sorry, I couldn’t resist) to achieve their desire to disarm Americans.  In the past, they have failed repeatedly, and are becoming desperate.  So this time, they actually believe that by being more insulting, more slanderous, more supercilious, more condescending, and more morally superior they will dragoon their opposition into submission.

Yet further proof that doing the same thing over and over and expecting different results is a form of insanity.

Note there is not even an attempt to persuade.  There is merely an assertion of authority, combined with attempts to intimidate anyone who defies it.

They just don’t get it, and probably never will.  They don’t realize that their behavior just hardens and intensifies the opposition that they face, without attracting a single convert. We’ve seen this over and over and over again in the past two years. They utterly fail to understand that the phenomena that they despise, whether it be the election of Trump or the refusal of large numbers of Americans to budge an inch on gun control is a reaction to them. The more they fail to achieve their political objectives, the more they insist on reprising their act, only louder and more obnoxiously.  Which only engenders and even stronger reaction against them.

Unless and until the left and the media stop treating their opponents as objects of hatred and scorn, and as moral monsters, they will fail.  Since they are so utterly convinced of their own rectitude, and in their heart of hearts actually view their opponents as beneath contempt, however, they will not stop.  When David Hogg becomes old news, they will find someone else.  And that will fail too.  But then they will find someone else.  And the political hamster wheel in the US–not just on gun control–will continue spinning pointlessly.


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March 27, 2018

CEFC: Everything Must Go! Does that Include Rosneft?

Filed under: China,Energy,Politics,Russia — The Professor @ 4:11 pm

The bizarre saga of CEFC just keeps getting more bizarre.  Today Bloomberg reports that the company is selling off all its real estate.  All of it: Everything must go!

CEFC China Energy Co., the sprawling conglomerate that’s come under increasing government scrutiny, plans to sell its entire global property portfolio with a book value of more than 20 billion yuan ($3.2 billion), according to people with knowledge of the matter.

Almost 100 properties are up for sale, including its headquarters in an upscale Shanghai neighborhood, four floors of the Hong Kong Convention & Exhibition Centre and a condominium at the Trump World Tower in Manhattan, as well as hotels, residential apartments and industrial facilities, said the people, asking not to be identified because the deliberations haven’t been publicly disclosed. The properties, mostly located in big Chinese cities, include a smattering of developments overseas, the people said.

Where this leaves the deal to buy the 14.1 percent stake in Rosneft from Glencore and the QIA is anybody’s guess.  But it probably doesn’t leave it in a good place.

Rosneft’s guess is probably as good as yours or mine.  They made inquiries, and learned nothing:

Rosneft representatives have since traveled to China but failed to get any update from CEFC on the stake acquisition deal, according to the sources.

“The other party (CEFC) has just vanished,” one source said.

“Just vanished” is not a phrase you normally hear uttered when referring to the purchaser of $9.1 billion in equity!  And definitely not one you want to hear!

(The Reuters piece is horribly and confusingly written, by the way.)

CEFC had apparently already paid out some money on the deal, but it has not closed.  Glencore optimistically asserted that the deal would close in the first half of 2018–which is already half over.  Given all of this uncertainty about CEFC, this looks incredibly unrealistic, but Glencore has not provided any more guidance. Go figure!

The price  CEFC agreed to was never disclosed in full, but was allegedly enough to allow Glencore (and the Russian banks backing it) and Intessa Saopaolo to emerge whole.   Glencore did let on that the price was at a 16 percent premium to the 30 day volume weighted average of the Rosneft price, presumably meaning the 30 day period (business days? Calendar days?) prior on 8 September, 2017.  In August-early September, 2017, Rosneft traded in the $5-$5.25 range, which puts the price in the $5.80-$6.00 ballpark.  That comports with a $9 billion total price for 14.16 percent of Rosneft’s 10,598,177,817 shares, which works out to about $6/share.  The price yesterday was $5.41, so it is clear that CEFC’s position is well under water.   This readily explains why the two Chinese government entities that have taken stakes in CEFC are allegedly reluctant to takeover the company altogether and proceed with the deal: it has already incurred a 10 percent loss.

To make things even more dicey, in January VTB announced it was “ready to” loan CEFC the money to finance the deal.  Presumably some of this money flowed, and is the source of the funds that have already been paid out.

So CEFC is selling off all its property.  Will it try to unload the Rosneft stake too? Or will the deal just collapse, leaving the original parties holding the bag? The deal was touted as a great example of Sino-Russian cooperation.  Will this compel the parties to save face by proceeding, or substituting some other Chinese firm?  Presumably this will require a price adjustment.  Who will eat that?

From day one almost 17 months ago the most bountiful product of the Rosneft privatization was questions.  And they just keep on coming.


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March 24, 2018

Tim Cook Goes to Beijing and Carries Xi Jinping’s Water

Filed under: China,Economics,Politics — The Professor @ 8:48 pm

Trump fired his 2d trade salvo last week.  Unlike the the previous one on steel and aluminum, which first appeared to be aimed at everyone and then due to various exceptions and exemptions is hard to know who will actually take the hit, this blast is clearly aimed squarely  at China.  Moreover, the rationale for the salvoes is quite different.  The allegation relating to the metals was that other countries were unfairly favoring domestic producers and exporting to the US at unfairly cheap prices, the China-directed blast is a response to systematic Chinese theft of intellectual property, an issue of longstanding that the US has repeatedly bitched about, but not taken action against.

These issues are quite different, and as Doug Irwin notes, whereas economists are largely opposed to tariffs like those levied on steel and aluminum, they have a much more open mind on taking on China on IP issues.

They are indeed quite different.  A simple analogy comes to mind.  When someone sells you a car below cost, they are doing you a favor.  When someone steals your car, and then sells it back to you, they are harming you–and adding insult to injury.  Steel and aluminum fall in the first category, IP theft in the second.

This should be a debate about tactics: how can Chinese theft be deterred and diminished?  I don’t know the answer to this question, but given the systematic failure to make progress on this issue for years, I wouldn’t rule out Trump’s tariff-based approach out of hand.  Maybe he is talking a language the Chinese understand.

What I can state with absolute certainty is that this is not a battle between principled free trader nations and retrograde protectionists, with China in the former role and Trump in the latter.  Anyone who treats it as such is not to be taken seriously, and indeed deserves brickbats.

Let’s be clear.  Virtually every government around the world criticizing Trump’s protectionism is hypocritical to the n-th degree.  Even with Trump’s recent actions, the US is less protectionist that the Europeans and the Japanese, and let’s not even start with the Chinese, whom Adam Smith would have recognized for what they are: aggressive mercantilists.

Two wrongs don’t make a right, but I’ll be damned if I listen to lectures from the Europeans, Japanese, or particularly the Chinese about the American threat to the world trade system.  Look in the mirror, jackholes.

It is particularly infuriating to see Tim Cook of Apple mouth pieties about embracing free trade–while speaking in Beijing, no less:

“Countries that embrace openness, that embrace trade, that embrace diversity are the countries that do exceptionally,” Mr. Cook said during a panel discussion at an economic forum here Saturday, when asked what message he would like to bring home to Mr. Trump. “And the countries that don’t, don’t,” he added, without mentioning the president by name.

OK, Timmy–do you have the balls to give that sickeningly sanctimonious homily to Xi Jinping?  The US is infinitely more open than China.  And if you think that the Chinese are all into diversity, Timmy, you are even a bigger idiot than I thought.

But of course Timmy doesn’t have the balls, because he knows that if he challenges the Chinese autocracy they will make Apple’s life miserable, whereas by dissing Trump he’ll get accolades in both Beijing and the “elite” circles in the US.  A profile in cowardice, not courage.

In fact, by criticizing the speck in the US eye while ignoring altogether the beam in Beijing’s, Cook is carrying Xi’s water like a good little flunky.  Objectively his criticism of Trump (and if you don’t think that who he was aiming at despite his not mentioning Trump’s name, your IQ is about the same as Stormy Daniels’ bra size) helps China in a confrontation with the US over an issue in which China is overwhelmingly in the wrong.

Again, the issue here is NOT about free trade.  It is about theft, and whether imposing penalties on the thief’s exports is the appropriate way to deter theft.  His phrasing implicitly supports the Chinese framing of Trump’s actions, which is as an attack against trade and openness, which is a grotesque distortion.

Given the extremely asymmetric threat that Apple faces from displeasing the president for life in China (who has virtually unlimited power)  vs. displeasing the president for at most 6+ more years in the US (who is hamstrung by myriad Constitutional and political constraints), it is understandable why Cook would sell out his own country by serving as its adversary’s mouthpiece.  But we should understand that’s exactly what he’s doing, and as a result ignore his homilies, and direct at him the scorn he so richly deserves.


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March 21, 2018

In Facebook’s Farmville, All Animals Are Equal, But Some Are More Equal Than Others

Filed under: Economics,Politics — The Professor @ 7:13 pm

The outrage du jour is that a firm that worked on the Trump Campaign, Cambridge Analytica, had sucked up, and then retained, Facebook data on 50 million users.  The sucking up apparently occurred with Facebook’s approval and knowledge, the retention not.

I am highly confident that this is being treated as Armageddon primarily because of CA’s work for Trump.  Why am I so confident?  Because the 2012 Obama campaign did as much, or worse (a) with Facebook’s knowledge and support, and (b) without attracting anything close to the same criticism.  Indeed, quite the opposite: the Obama campaign’s supposedly innovative use of Facebook data to shape its strategy was the subject of fawning, slobbering praise from virtually the entire media.  Privacy, shmivacy! It helped Obama, so it’s good!  And besides, it proved how much more hip and with it those cool Obama people were, as compared to those fuddy-duddy Republicans.

And as I say, the Obama effort was massive, and occurred with Facebook’s knowledge.

Just like Orwell wrote in Animal Farm: All animals are equal, but some are more equal than others.

As it turns out, the Cambridge Analytica effort was less decisive than previously reported, and was arguably irrelevant to the outcome of the campaign.  Perhaps the Obama campaign’s use of Facebook was similarly overhyped.  Not that we’ll ever know, given the media’s clear preference to give the Sainted One’s administration tongue baths, rather than critical coverage.

The rah-rahs that Facebook gave to the Democrats sucking up of its entire “social graph,” and  Sheryl Sandberg’s email exchange with John Podesta in which he said that he looked forward to “working with you” to elect Hillary, and she replied that she wanted Hillary to “win so badly” raise serious concerns about how in Facebook’s political Farmville, Democratic animals are much more equal than others.  This in turn makes it worthwhile to revisit an idea that I mooted many moons ago, and which has subsequently gained some traction: regulating Facebook, Google, Twitter, and other social media.  It relates directly to my proposal to regulate them as common carriers, subject to a non-discrimination requirement.

It is clear that these companies have a political agenda, and that that agenda is relentlessly left and pro-Democrat.  Well, so does the New York Times and the rest of the “elite” media, so why just regulate Facebook et al?

Two reasons.  The first is the one I gave in the earlier post.  That unlike traditional media, due to network effects these companies have market power.  They fit very well into the common carrier framework in that regard.

The recent events bring out another reason.  Whereas the NYT or CNN blatantly broadcast their bias, and it is there for all to see, the same is definitely not true of Facebook, Google, and Twitter.  They can readily engage in partisanship in very insidious ways that are virtually impossible to detect.  The algorithms that Facebook uses to push content, or now censor content; that Google uses to slant search results; and Twitter uses to censor, ban, and shadow block, are utterly opaque to outsiders.  Meaning that whereas if I feel particularly masochistic and decide to read the NYT or watch CNN, I can identify and correct for the bias, I cannot readily do so when interacting with the social media and search platforms.

The second point means that a common carrier-like non-discrimination requirement is not sufficient, given the opacity of the platforms: unlike, say, price discrimination by a railroad, political discrimination by Facebook is unlikely to be observable to those who are adversely affected.  To be effective, therefore, common carrier status would have to be accompanied by a more or less intrusive means of auditing these platforms and their algos.

As a classical liberal, I do not advance this proposal with glee, although as I noted in my earlier post the idea of common carrier regulation is rooted in classical liberal jurisprudence and thought.  But the deep politicization of powerful network industries, and their Animal Farm ethos, pose a serious threat to the political system.  Life is about trade-offs, and the perfect is the enemy of the good.  These platforms are subject to little economic competition, and pose a grave threat to political competition.  They need to be constrained, before they do even more damage.

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