The invaluable Christopher Balding has been tracking closely the massive financial support the Chinese government has been injecting into the banking system, the shadow banking system, local governments, and the stock market. In a blog post earlier this week, he estimated that this support totaled at least $692 billion, rising to $933 billion if the Reserve Ratio cut is counted as a subsidy to the banking system.

These funds went to the local government bond program I wrote about in June, an  investment in pension funds, PBOC 6 month loans to banks, and PBOC loans to the Chinese Securities Financing Corporation, which in turn will lend these funds to buy stock on margin.

But it’s hard to keep up! Christopher kindly shared with me his most recent calculation, which shows that the Chinese government keeps pumping in the money, most notably an additional $200 billion in loans to intermediaries who will use these funds for margin lending, and a rumored (but not yet confirmed) $160 billion in additional support for provincial municipal bonds. This brings the total to $1.3 trillion.

In RMB, that totals over 8 trillion (with a “t”, boys and girls). To Sinofy Evertt Dirksen: A trillion here and a trillion there, and pretty soon you are talking real money.

Another metric: $1.3 trillion is approximately three TARPs. Maybe we should start using that as a new unit of measurement, as in, “Chinese authorities intervened in the market and banking system today, providing an additional .5 TARPs in state funding.”

Yet another metric: $1.3 trillion is almost exactly $1000 per Chinese citizen. TARP was about $1500 per American. But China’s per capita GDP is (depending on whether you use exchange rates or PPP) about 1/5th or 1/7th of US GDP per capita. Thus, a low middle income country is spending roughly 3 to 5 times more per person as a percentage of per capita income than the high income US did. (Given that Chinese GDP is likely overstated-another issue that Christopher has analyzed in detail-the true multiples are even higher.)

Such massive spending-arguably the most gargantuan stimulus package ever-is not the sign of a confident leadership. It is a clear sign of panic.

Remember the extreme panic in DC and Wall Street in the post-Lehman period that culminated with TARP? Even in that hysterical environment, people questioned the need for and advisability of TARP. But in the end panic won out. That is the only reason TARP passed: people were scared stiff at what would happen if it didn’t.

Now think of how panicked the Chinese must be to implement measures that dwarf TARP. That’s what economists call revealed preference. Or, in this instance, revealed panic.

This gives the lie to official statistics, which showed a (patently unbelievable even absent this massive stimulus) .1 percentage point decline in the growth rate. Also giving the lie to the official statistics is the collapse in China-driven commodity prices, notably iron ore and coal, and oil as well. The slowdown in commodity economies further discredits the official Chinese data.

The Chinese stock market is getting most of the attention. This is the drunk-looking-under-the-streetlamp-for-his-keys phenomenon. The stock market is visible, and people can relate to it: this is why the government is using massive carrots (notably the support for margin lending) and even bigger sticks to try to arrest the decline. This would suppress the most visible manifestation of crisis. But the real dangers are lurking out of sight, in the leveraged sector (most notably the rats’ nest of non-bank lenders, but the banks are concealing a lot too), SOEs, and a real economy whose performance is masked by dodgy official statistics.

I’ve long referred to China as the Michael Jackson Economy, kept going by intense dosages of economic/financial drugs, cosmetic surgeries, and stimulants. The Chinese authorities are now administering the biggest dosages ever. This is an indication that the patient is doing quite badly. Further, although such actions may delay the inevitable, they make the end all the more horrific.

This is, alas, likely to be a long running saga, hence the title: if we are lucky, the chronicles will end no later than 16 months from now. We can only hope.

Today Hillary gave a Big Speech on the economy. She channeled her inner Elizabeth Warren, and blasted Wall Street, big banks, hedge funds, short-termism and other easy targets.

You knew it was Kabuki, not conviction, from the very first: Hillary was introduced for her bankster bashing speech by leading bankster Lloyd Blankstein of Goldman Sachs. If Blankfein was truly threatened by Hillary, he wouldn’t have been embracing her, literally.

And of course, for all of Hillary’s leftist red meat, she has long been quite intimate with Wall Street. She has long milked The Street for campaign contributions and other boodle like it was a prize holstein. Most notably, Hillary was a very solicitous junior senator from NY, and in exchange for very generous financial support, she did Wall Street’s bidding. No Warren-esque rhetoric then, in those halcyon pre-Crisis years.

Further, Hillary has personal experience with hedge funds. Her son-in-law (about whom she presumably corresponded on her secret server in now-deleted emails) runs a hedge fund. More tellingly, Hillary held a million dollar investment in a hedge fund which just so happened to short medical stocks while she was on the campaign trail blasting the pharmaceutical industry and promising thoroughgoing health care reform. In other words, Hillary was an investor in hedge funds before she was against them.

Hillary declaimed today against Too Big to Fail. I guess I will have to give her a pass on this: her experience  is with small, crooked, insolvent ditchwater S&Ls in Dogpatch, not big banks in Gotham.

And insofar as short-termism is concerned, who can forget the Miracle of the Cattle Futures, in which Hillary turned some short-term profits totaling around $100 grand, based (in her telling) on her discerning reading of the WSJ? Which has always had crappy commodities coverage.

Hillary, in other words, is wildly implausible as an anti-Wall Street crusader. It is transparently the case that this is something that polls well, especially among Democratic primary voters, so she will play that part.

Hillary’s complementary theme is that she will fight for middle America. Yet more kabuki. You know Hillary detests her middle class upbringing in Park Ridge, IL, and has spent her entire life distancing herself from it. The years in Arkansas were like purgatory. Whenever Hillary subjects herself to the actual presence of middle class Americans, it is plainly evident that she would much rather be undergoing a root canal, but for the fact that a root canal won’t advance her vaulting political ambitions. The trials she endures!

Insofar as policy is concerned, Hillary served up a dog’s breakfast of tedious progressive proposals. The most amusing of these was a swipe at Uber and Airbnb, further evidence that alleged progressives are actually the enemies of disruptive technologies that undermine (politically-connected) incumbents: they are the party of stasis, not progress. (The losers from Uber are not working stiff cabbies, who make their reservation wage, but the owners of government-rationed taxi medallions.) She also paid obeisance to the sacred cow of “infrastructure,” advocating the creation of an infrastructure bank (which would direct resources to the politically connected rather than the economically productive). She also had a flashback to the 60s-70s infatuation with corporate profit sharing, which she said her administration would “encourage.” If profit sharing is indeed mutually beneficial, Hillary’s encouragement is hardly needed. If it isn’t, such encouragement would be detrimental.

All in all, a paint-by-progressive-numbers performance intended to shore up her left flank. It was classic Hillary-banal, and as authentic as Velveeta.

And just think, we have at least a year to put up with the tripe. Just pray its not 5 plus-or 9 plus-years.

Trying to staunch the bleeding in the stock market, China is unleashing the full power of a police state. A Securities Execution Commission, if you will:

China’s police ministry is teaming up with the securities regulator to probe short selling, as the government works to stem a stock plunge that has erased $3.9 trillion in market value.

The Ministry of Public Security said it will help the China Securities Regulatory Commission investigate evidence of “malicious” short selling of stocks and indexes, according to a statement on its website Thursday. Vice Public Security Minister Meng Qingfeng visited the regulator’s offices in Beijing on Thursday, the official Xinhua News Agency said earlier on its microblog.

The move comes after the securities regulator pledged to “strictly” punish market manipulation and China’s state-run media blamed short selling, rumor-mongering and foreign meddling for fueling the stock slide. The ruling Communist Party has announced an unprecedented series of measures to boost shares, including banningmajor shareholders, executives and directors from selling stakes.

Whenever a police ministry “teams up” with securities regulators, watch out. You can bet-and it wouldn’t be speculation!-that some poor schmoes are going to do hard time for manipulative short selling. And China being China, it is not beyond the realm of possibility that some really unlucky bastards will wind up in front of a firing squad or inside a mobile execution van.

And isn’t it always the way? Stock price declines are always blamed on short sellers. Always. And with stocks, manipulation accusations are thrown about on the way down, but never on the way up.

If the Chinese authorities want to find a market manipulator, they need to look no further than the nearest mirror.  Which is precisely why they are so intent on finding someone else to blame.

Surprise, surprise, surprise. The vaunted Russia-Turkey gas pipeline deal is not really a deal. The reason-brace yourself against the shock-is that the two sides can’t come to an agreement over price:

Russia’s plan to build a new $15 billion pipeline to Turkey is at risk of delay because of a fight over gas prices, according to people with knowledge of the matter.

State-run OAO Gazprom and its Turkish counterpart Botas had a six-month period to agree on prices for gas supplies between the two countries, which expired on Monday. The Ankara-based company now has the right to take the matter to international arbitration, three of the people said, asking not to be named because the information is private.

The dispute over prices means there’s no immediate prospect of signing a binding pact for the new pipeline, the second between Russia and Turkey. An agreement could now be delayed until at least October, two more people said, also asking not to be identified.

I was about as surprised about this as I was to see the sun rising in the east this morning.

Remember: Gazprom consummates maybe one percent of the “deals” that it announces. And the deals founder on price. Almost every time.

By the way, this totally demolishes the alleged pipeline deal between Russia and Greece, because the Grecian pipeline was intended to carry gas that Russia had shipped to Turkey on to Europe.

Not that the $2-odd billion pipeline deal would have been more than spit in the ocean of Greece’s debt problem: the Greek government would only realize a fraction of the $2+ billion, many years from now. And as things look now, never.

In other Gazprom news, apparently the company is stiffing Turkmenistan:

Turkmenistan, irked by falling natural gas exports to Russia, hit out at Moscow’s gas export monopoly Gazprom on Wednesday, saying the energy giant had not paid for gas purchased from the Central Asian country so far this year.

“Since the beginning of 2015, OAO Gazprom has not paid for its debts to state concern Turkmengas for the shipped volumes of Turkmen natural gas,” Turkmenistan’s Oil and Gas Ministry said in a statement on its official website (www.oilgas.gov.tm).

Could be worse. Gazprom could have blown up the pipeline.

This suggests that Gazprom is having some major cash flow problems.

And who says there is no good news?

The Greeks voted a resounding No! in today’s referendum, thereby rejecting a deal that had been taken off the table.

Figuring out the Syrzia plan is something of a puzzle. It reminds me of the old South Park Underwear Gnomes bit, hence the  title of this post. One can see the desired objective (a more prosperous future liberated from a crushing debt burden) and one can see the initial move (referendum), but the middle steps are a complete mystery.

At first blush-and second, and third-it appears that what the Greek government is doing is crazy and self-destructive. This suggests two alternatives:

1. The Greek government is crazy and self-destructive.
2. The Greek government is pretending to be crazy and self-destructive for tactical reasons.

I say crazy because the Greeks are claiming that they are willing to accept economic Armageddon instead of making far less costly concessions to the Europeans. But if there is even a small probability that people are of this type (i.e., they much prefer to die on their feet than live on their knees), pretending to be this way and getting a reputation for being this way can be an effective way of extracting concessions from an adversary. It is often rational to defer to craziness.

This gambit works best if a repeat player is matched against a series of one-shot players: the repeat player benefits from creating a reputation, the one-shot players don’t. That’s not the case here, though. The solvent Euros (e.g., the Germans and Dutch) also have an incentive to build a reputation for being tough in negotiations, because they are repeat players. They reason that if they concede to the Greeks, the Southern Euros (Spain, Portugal, Italy in particular) will try to extract concessions as well. So they have an incentive to play tough with the Greeks even though if this was a one-off situation it would make sense to make more concessions.

Which all means that I have no idea how this will play out.

Furthermore, this is primarily a game about redistribution rather than creating wealth. This maximizes the potential for conflict, and increases the incentives for rent seeking and rent dissipation. The exact outcome is difficult to predict, but the basic contours of this outcome are pretty predictable: everybody ends up poorer and miserable.

It is hard to have sympathy for either side. The Greeks have a corrupt and bloated state, and its people have a socialist, welfare/entitlement state mindset, and they borrowed lavishly to achieve a lifestyle that their productivity could not support. The Europeans gladly lent more to a corrupt and bloated state, and a people with a socialist-tinged, welfare/entitlement state mindset than they could afford to repay. They jointly made their bed, and now they have to lie in it. So be it.

The least likely outcome is that Greece makes fundamental changes and conjures up a growth miracle, like postwar Japan or Germany, or Taiwan or Korea. The socialist/statist/welfarist impulses are too deeply rooted, and its interlocutors-the Euros-are also too statist to compel or persuade the Greeks to change their ways.

A couple of years ago I said that Europe had a choice between amputation and gangrene in dealing with Greece. They chose not to amputate. They now have to live with the consequences.

Apologies for the light posting. Some travel (to Sweden, Denmark and London), work, and a need to decompress for a bit account for the absence.

I have kept a watch on things, though, and some Putinsanity has caught my eye.

For instance, VVP has accused cursed furriners of luring, Pied Piper-like, talented Russian youth away from the glorious Motherland:

A network of [foreign] organizations has ‘rummaged’ through the schools in the Russian Federation for many years under the guise of supporting talented young people. In reality, they simply hoover everything up like a vacuum

Note to Vlad: the reason that “talented young people” want to leave in droves is less that “foreign organizations” attract them, but that the state and society that you have constructed repel them.

Note the rampant insecurity here. I think that Putin knows that Russia has little to offer. But he can’t admit that, so he rages agains the West.

Item two: Surprise, surprise, surprise. The Russia-Turkey gas pipeline project is stalled because of a failure to communicate on price. Don’t say I didn’t tell you so:

Russia’s plan to build a new $15 billion pipeline to Turkey is at risk of delay because of a fight over gas prices, according to people with knowledge of the matter.

State-run OAO Gazprom and its Turkish counterpart Botas had a six-month period to agree on prices for gas supplies between the two countries, which expired on Monday. The Ankara-based company now has the right to take the matter to international arbitration, three of the people said, asking not to be named because the information is private.

The dispute over prices means there’s no immediate prospect of signing a binding pact for the new pipeline, the second between Russia and Turkey. An agreement could now be delayed until at least October, two more people said, also asking not to be identified.

The Russians think that you are stupid enough to believe that this is due to Erdogan’s defeat in the recent parliamentary elections, but that’s just a face saving cover story. Truth be told, the Russians are masters of vapor agreements. By my rough estimate, two of the last 100 announced gas deals have come to completion. And I’m being generous.

Anyone who believes anything Russia/Gazprom say about any pipeline project, deal, contract, etc., please contact me! Have I got a deal for you!

(As an aside, Erdogan and Putin are doppelgängers in a competition for the coveted titled of Most Insane Wannabe Autocrat Obsessed With Restoring Lost Imperial Greatness. May the best nut win!)

Next comedic moment: the Russia-Greece pipeline vapor deal, which is effectively contingent on a (non-existent) Russia-Turkey pipeline vapor deal. (BTW: Why is everybody freaking out about Russia courting Greece? Let Putin have them! Just what he needs. Another economic basket case, to join Abkhazia, Transnistria, South Ossetia, Donetsk, Luhansk. May the Orthodox nations enjoy every happiness! They deserve one another!)

Item three: Russia blasts the new US defense doctrine, which (realistically) identifies Russia as a threat to the sovereignty of its neighbors due to its willingness to use force as “confrontational.”

This is a perfect illustration of Pirrong’s Principle of Putinist Psychological Projection. Whatever the Russians say about the US is a pitch-perfect description of what the Russians are doing. They are the masters of projection.

This leads to my last observation: what will Putin do in Ukraine? He can’t go back: that would be a humiliating climbdown which he is psychologically incapable of, and which could actually threaten his power. Maintaining the status quo is the lowest risk, but offers the least potential for gain, and creates the real potential for a creeping collapse as the economic drain of sanctions and militarization saps the economy. Going forward and attacking Ukraine presents serious risks. Ukraine might be able to deny him a quick victory and impose serious losses. Even if he prevails operationally, the costs of occupation will be steep. These include the direct costs, which will be especially high if Ukrainians resort to historical precedent and wage a grueling guerrilla war (remember the Greens?). They also include the indirect costs of almost certainly escalated sanctions.

He’s in a fine mess, and I don’t know how he will react. Time is running out for a summer offensive, but time is not on his side generally. My fear is that he will follow Eisenhower’s dictum: “If a problem cannot be solved, enlarge it.” The question is: where? The Baltic-Finland, Sweden, Denmark, as well as the Baltic States-is a real possibility. Putinsanity is hard to predict, but nothing is beyond the realm of possibility.

Last week the Treasury Department announced that in a redesign of the $10 bill, Alexander Hamilton would be replaced, joined, or supplemented by a Historical American Woman to be Named Later. Considering that Jackson, Grant, McKinley, and Cleveland also grace US Federal Reserve Notes, the decision to replace Hamilton of all people is lamentable in the extreme. Even overlooking his, to put mildly, controversial career, as a hater of paper money, assassin (and proud of it!) of the predecessor to the Fed, and an economic imbecile, Jackson in particular is a dubious choice to grace a greenback.

Hamilton, in contrast, merits sole possession of a widely circulated bill because it is hard to identify any figure, of any sex, president or no, who made a greater contribution to American history, and to its economic success. Off the top of my head:

• A successful and brave staff and line officer during the Revolution. After long service on Washington’s staff (which led some to conclude, wrongly, that he was Washington’s brain), he took command of the Continental light infantry at Yorktown, and led the successful assault on Redoubt Number 10 which, along with the fall of adjoining Redoubt Number 9 to the French, sealed the fate of the besieged town.
• The moving force (along with Madison) of the Annapolis Convention, which played a role in the convocation of the Constitutional Convention the next year.
• Played a major role in the Convention.
• Along with Madison, as the author of the Federalist Papers, provided the intellectual case for the passage of the Constitution. Worked assiduously to secure ratification of the Constitution.
• First, and most important, Secretary of the Treasury. He righted the nation’s fraught fiscal situation, and made the nation creditworthy. He crafted a comprehensive fiscal and financial framework, including taxation, debt, and a national bank. (Even as the descendent of some Whiskey Rebels who objected to the whiskey taxes that were part of Hamilton’s system, I even understand his role as commander of the US forces sent to disperse the Rebels.) His Reports on Manufactures and Public Credit were incredibly economically sophisticated, and eminently practical. (I remember Robert Lucas in Econ 331 or 332 expressing his awe at Hamilton’s Reports.) It is not an exaggeration to say that the United States could not possibly have developed the way it did and as rapidly it did without his farsighted fiscal and economic stewardship
• Founder of the Bank of New York, which exists to this day.
• A man of liberal (in the Adam Smith/David Hume sense of the word) views, i.e., a lover of liberty. For all races. He was one of the few Founders who was not only a frank opponent of slavery and advocate of emancipation, but who also viewed those of African heritage equal as humans to whites.
• A man who rose from extremely poor beginnings to become a colossus. Proof that birth is not fate, and that America has long been a land of opportunity for the able, ambitious, and hard working. (At Cal-Berkeley those sentences would be considered a “microaggression.” 1. I don’t do microaggressions. I move straight onto macroaggressions. Or maybe I pool and tranche my microaggressions to create MBS: Microaggression Backed Securities. 2. Cal-Berkeley can sod off.)

In sum: Military hero. Political giant. Political scientist. Economist. Practical manager. Entrepreneur. I defy you to find anyone with as diversified a portfolio as Alexander Hamilton. He truly was Alexander the Great.

The fact that the Treasury is even countenancing removing Hamilton is proof of the historical idiocy of supposedly educated Americans. The excuse that the $10 bill was next in line for a redesign doesn’t cut it. That sounds like typical bureaucratic cowardice, hiding behind procedure and routine to avoid defending a position that is indefensible on the merits.

So by all means put a woman on a bill. Just not the $10. And use this as an opportunity to teach Americans who know far too little about their past about one of the most remarkable figures in American history.

As a blogger, I am long the option to point out when I call one right. Of course, I am short the option for you all to point out when I call one wrong, but I can’t help it if that option is usually so far out of the money (or if you don’t exercise it when it is in) 😉

I will exercise my option today, after reading this article by Greg Meyer in the FT:

West Texas Intermediate crude, once derided as a broken oil benchmark, is enjoying a comeback.

Volumes of futures tracking the yardstick have averaged 1m contracts a day this year through May, up more than 45 per cent from the same period of 2014, exchange data show. WTI has also sped ahead of volumes in rival Brent crude, less than two years after Brent unseated WTI as the most heavily traded oil futures market.

. . . .

WTI has also regained a more stable connection with global oil prices after suffering glaring discounts because of transport constraints at its delivery point of Cushing, Oklahoma. The gap led some to question WTI as a useful gauge of oil prices.

“I guess the death of the WTI contract was greatly exaggerated,” said Andy Lipow of consultancy Lipow Oil Associates.

But in the past two years, new pipeline capacity of more than 1m barrels a day has relinked Cushing to the US Gulf of Mexico coast, narrowing the discount between Brent and WTI to less than $4 a barrel.

Mark Vonderheide, managing partner of Geneva Energy Markets, a New York trading firm, said: “With WTI once again well connected to the global market, there is renewed interest from hedgers outside the US to trade it. When the spread between WTI and Brent was more than $20 and moving fast, WTI was much more difficult to trade.”

Things have played out exactly as I forecast in August, 2011:

One of the leading crude oil futures contracts–CME Group’s WTI–has been the subject of a drumbeat of criticism for months due to the divergence of WTI prices in Cushing from prices at the Gulf, and from the price of the other main oil benchmark–Brent.  But whereas WTI’s problem is one of logistics that is in the process of being addressed, Brent’s issues are more fundamental ones related to adequate supply, and less amenable to correction.

Indeed, WTI’s “problem” is actually the kind an exchange would like to have.  The divergence between WTI prices in the Midcontinent and waterborne crude prices reflects a surge of production in Canada and North Dakota.  Pipelines are currently lacking to ship this crude to the Gulf of Mexico, and Midcon refineries are running close to full capacity, meaning that the additional supply is backing up in Cushing and depressing prices.

But the yawning gap between the Cushing price at prices at the Gulf is sending a signal that more transportation capacity is needed, and the market is responding with alacrity.  If only the regulators were similarly speedy.

. . . .

Which means that those who are crowing about Brent today, and heaping scorn on WTI, will be begging for WTI’s problems in a few years.  For by then, WTI’s issues will be fixed, and it will be sitting astride a robust flow of oil tightly interconnected with the nexus of world oil trading.  But the Brent contract will be an inverted paper pyramid, resting on a thinner and thinner point of crude production.  There will be gains from trade–large ones–from redesigning the contract, but the difficulties of negotiating an agreement among numerous big players will prove nigh on to impossible to surmount.  Moreover, there will be no single regulator in a single jurisdiction that can bang heads together (for yes, that is needed sometimes) and cajole the parties toward agreement.

So Brent boosters, enjoy your laugh while it lasts.  It won’t last long, and remember, he who laughs last laughs best.

This really wasn’t that hard a call to make. The price signals were obvious, and its always safe to bet on market participants responding to price signals. That’s exactly what happened. The only surprising thing is that so few publicly employed this logic to predict that the disconnection between WTI and ocean borne crude prices would be self-correcting.

Speaking of not enjoying the laugh, the exchange where Brent is traded-ICE-issued a rather churlish statement:

Atlanta-based ICE blamed the shift on “increased volatility in WTI crude oil prices relative to Brent crude oil prices, which drove more trading by non-commercial firms in WTI, as well as increased financial incentive schemes offered by competitors”.

The first part of this statement is rather incomprehensible. Re-linking WTI improved the contract’s effectiveness as a hedge for crude outside the Mid-continent (PADD 2), which allowed hedgers to take advantage of the WTI liquidity pool, which in turn attracted more speculative interest.

Right now the only potential source of disconnect is the export ban. That is, markets corrected the infrastructure bottleneck, but politics has failed to correct the regulatory bottleneck. When that will happen, I am not so foolish to predict.

Not that further proof is needed, but still.

You may recall that NYT “reporter” (and by “reporter,” I mean “hack”) David Kocieniewski slimed me on the front page of the NYT on 31 December, 2013. In a nutshell, Kocieniewski accused me of being in the pocket of oil traders, and that this had led me to skew my research and policy positions. Specifically, he insinuated that I opposed position limits and defended speculation in energy markets because I had been suborned by oil traders who profited from high prices, like those that occurred in 2008 (before the crash). Kocieniewski’s main piece of “evidence” was that I had written a white paper sponsored by Trafigura. According to Kocieniewski, as an oil trader, Trafigura benefited from high prices.

At the time I pointed out that this demonstrates Kocieniewski’s appalling ignorance, as Trafigura is not a speculator, and is typically short futures (and other derivatives) to hedge its inventories of oil (and other commodities). Companies like Trafigura have no real interest in the direction of oil prices directly. They make money on margins and volumes. The relationship between these variables and the level of flat prices depends on what makes flat prices high or low.  I further said that if anything, commodity traders are likely to prefer a low price environment because (1) low prices reduce working capital needs, which can be punishing when prices are high, and (2) low price environments often create trading opportunities, in particular storage/contango plays that can be very profitable for those with access to storage assets.

Well, imagine my surprise (not!) when I saw this headline and article:

Crude slide bolsters Trafigura’s profits and trading margins

Trafigura has posted record half-year profits and a doubling of trading margins, illustrating how one of the world’s largest commodity trading houses has been a big beneficiary of the collapse in oil prices.

Profits at the group rose almost 40 per cent in the six months to 31 March, reaching $654m, while margins hit 3.1 per cent, as the Switzerland-based company used its global network of traders and storage facilities to buy cheap crude and take advantage of dislocations in the oil market.

. . . .
It was not the only company to benefit. Other trading groups including Vitol, the largest independent oil trader, and Gunvor have posted strong results for this period. Even Shell, BP and Total managed better-than-expected first quarter results thanks to the performance of muscular trading operations.

Wow. In Kocieniewskiworld, “Crude slide bolsters Trafigura’s profits” would be a metaphysical impossibility. Here on earth, that’s an eminently predictable event. Which I predicted. Not that that makes me a genius, just more knowledgeable about commodity markets than David Kocieniewski (which is a very low bar).

Not that there was ever anything to it in the first place, but this pretty much blows to hell the entire premise of Dim Dave’s story. Proof yet again that if you read the NYT for economics stories, you’ll wind up dumber after reading than before.

* As well as an unethical slug who blatantly violated the NYT’s ethics guidelines. Not that his editor gave a damn, making him as much of an unethical slug as Kocieniewski.

About 19 months ago I wrote about RINsanity, i.e., the United States’ nutty ethanol (and other biofuel) program. RINsanity has long outlived the phenomenon (Lin-sanity) that inspired the neologism. A couple of weeks ago, the EPA announced the ethanol and biodiesel quotas . . . for 2014. Who said time travel is impossible? That Einstein. What an idiot!  (The EPA also announced quotas for 2015 and 2016.)

In a nutshell, despite protestations to the contrary, the EPA largely conceded to the reality of the E10 “blend wall” (the fact that the vast bulk of auto engines are incapable of burning fuel with more than 10 percent ethanol), and announced quotas that were (a) smaller than the market expected, and (b) smaller than the statutory amounts that Congress specified in its farseeing omniscience 10 years ago. At the same time, the EPA decreed larger quotas for biodiesel.

As a result, the market did the splits. The price of ethanol RIN credits that count towards the ethanol quota plunged, while the price of biodiesel RIN credits that count towards the biodiesel quota rose. Scott Irwin and Darrell Good have all the gory details here. (Those are the guys to follow on this issue, folks. I’m just kibitzing.)

As a result, pretty much everyone is upset. The nauseating biofuel lobby is screaming bloody murder because the ethanol quota is too small, and is threatening to go to court. Those holding ethanol credits are fuming due to the forty plus percent price decline.

This all points out the dysfunctional nature of environmental markets in which the supply is set by some opaque politicized bureaucratic process unhinged from economic reality. (The European CO2 credit market is another classic example.) The Congressional mandate set quotas (supplies) years in advance based on forecasts of future fuel demand that turned out to be wildly incorrect. So the EPA played Mr. Fixit, and through some unknown process, divined what Congress meant to do-really!-and announced some surprising numbers that caused prices to plummet.

The EPA’s reaction? It is shocked! Shocked! to find gambling going on at Rick’s (ethanol served here!):

The EPA didn’t intend for the program to create a speculative market, and an agency spokesperson declined to comment on RIN price movement.

“RINs are used to demonstrate compliance under the Renewable Fuel Standard program,” the EPA said. The agency manages an electronic system that tracks the RINs, but not their prices on the open market.

Earth to EPA! Earth to EPA! (And hey-aren’t you supposed to be earth’s stewards? So what are you doing orbiting Pluto?): if you create a scarce resource (ethanol credits) a market-and yes, one with speculation!-will appear. This is inevitable as the sun rising in the east. Another unintended but metaphysically certain event.

Indeed, the kind of speculation that these markets foster is particularly bizarre, because of the necessity of speculating on the feedback between the market and the EPA’s decisions on the amount of the scarce resource it creates. A big part of the RIN prices is market participants’ expectations about what the EPA will decide. If the EPA’s decision takes the market price into account, in some unknown (and almost certainly unarticulated) way, the reasoning chain becomes mind-numbingly complex very quickly. Mr. Market guesses what the EPA will do. That affects prices. The EPA takes the price, and guesses what this says about what the market knows about fundamentals . . . and what the market thinks about what the EPA is going to do. It adjusts its decision accordingly. Market participants have to make judgments about the feedback between the price and the EPA’s decision, which can affect the EPA’s decision, and on and on, ad infinitum. (This is analogous to Keynes’s beauty contest metaphor, and Soros’s theory of market “reflexivity.” Sign of the apocalypse alert: I gave Keynes and Soros a favorable mention in a single blog post.)

That’s no way to run a market, but the alternatives are  likely worse. One alternative would be to set quotas for years far into the future, and then not adjust them based on the evolution of other fundamentals that cannot be foreseen when the quotas are set.

It’s pretty clear that events like have just rocked the biofuel world are an inherent part of the system. Somewhat arbitrary, inherently difficult to predict (in part because they are politicized), and “reflexive” decisions are a major determinant of supply. These decisions are made at discrete times. It is extremely likely that there will be disconnections between the quantity the market thinks the EPA will select and what the EPA actually chooses. Given the inelasticity of demand for energy products, these supply surprises lead to big price impacts.

All of which goes to show that a better use of ethanol is imbibing it to cope with the craziness of a faux market.

Of course it’s not just that the market is crazy: it’s crazy that there is a market. Ethanol is an economic and environmental and humanitarian monstrosity. Yes, ethanol would play a role without subsidies or mandates. But a much smaller role. Forcing and inducing its use is costly, not environmentally beneficial, and raises the price of food, which hits the poorest the hardest. So this crazy market shouldn’t exist in the first place. I think I need another drink.