Streetwise Professor

Turkish President Recep Tayyip Erdoğan seems hell-bent on making enemies. Indeed, other than Qatar, it’s hard to point to any nation that is allied with Turkey. Turkey doesn’t even seem to have frenemies, only real enemies.

The FT had a long piece detailing how Erdoğan is using force and threats of force to prevent other nations, notably Cyprus, from drilling for gas in the eastern Mediterranean. He has also entered into a deal for what passes for a government in Libya to develop its offshore gas, and to build pipelines that deny that Crete is part of Greece. (Hey, it was Ottoman once, right?)

Speaking of Libya, Erdo has intervened in the conflict there. Turkey has supplied advisors, drones (including armed UAVs), anti-air defenses, and electronic warfare systems to support the “government.” Further, Turkey haas shipped in thousands of Syrian jihadi-types to provide the ground forces to fight against the force led by warlord Khalifa Haftar, who is trying to overthrow the UN-recognized government.

This has led to a confrontation between French and Turkish ships off the Libyan coast. Turkey has demanded an apology, and Macron trumpeted a call with Trump during which Libya was discussed–a clear indication to Turkey that the US was leaning towards France and against Turkey.

To make things even more complicated, Egypt supports Haftar and is threatening to intervene with its ground forces to combat the Turkish-supported troops. Turkey has made stern warnings to Egypt to stay on its side of the border.

To make things even more complicated, Russia is Haftar’s biggest backer. Russian mercenaries operate there. So in Libya Erdoğan is risking conflict with Russia, France (and hence the rest of the EU–yeah, I know), and Egypt.

The correlation of forces here is definitely not in Turkey’s favor, especially if Egypt intervenes on the ground. Egypt shares a border with Libya, and as the Desert Campaigns of 1940-41 showed, an armored force can race across Libya and achieve operational dominance. Egypt’s logistics would also be relatively simple, and it would be operating well within range of its air forces. Turkey, on the other hand, has no direct land route to Libya, and would have to reinforce and supply by sea. If shit gets real, it is highly doubtful that such a supply line would be sustainable. It would certainly be highly vulnerable to attack from air and sea.

Turkey has some submarines, some frigates (including some old US Perry Class ships) and corvettes, and some small landing craft. Egypt’s forces are comparable, with the big difference being the French-built (originally for Russia) Mistral assault ship, for which Turkey has no counterpart.

So Turkey would be in a very weak position if it indeed attempted to challenge an Egyptian incursion.

Libya is not the only country where Turkey and Russia are at loggerheads. They are also on opposite sides in Syria, and Russian-supported forces have killed well over 100 Turks. There is an uneasy coexistence between Russian and Turkey in Syria, nothing more.

But there’s more! The conflict between Armenia and Azerbaijan (which has been going on since 1988 or thereabouts) is heating up again. Armenia is close to Russia, but Erdo is rallying behind Azerbaijan.

It’s not surprising, then, that Russian helicopters flew along the Turkish border soon after the initial Armenian-Azeri clash in mid-June, and Turkey’s condemnation of Armenia for that fighting.

Erdoğan also has a very strained, and strange, relationship with the US generally, and Donald Trump in particular. Given Trump’s mercurial nature, Erdoğan would be a fool to expect Trump to pull his irons out of the fire in a Turkish dust up with Russia. Or France. Or Greece. Or Egypt.

The Turkish economy is also in a parlous state, meaning that the country is extremely vulnerable to economic pressure. The lira has depreciated badly in recent years, is near all time lows against the dollar, and could easily tip–or be tipped-off a cliff. Turks of a certain age remember the extreme privations that followed US sanctions imposed in the aftermath of the Turkish invasion of Cyprus in 1974. Younger generations don’t have that experience, and have (at least in the big cities) attained a degree of affluence that could be gone in a trice. It is an open question whether they would, in a fit of nationalist pride, forgive Erdoğan for that.

Erdoğan also outraged much of the Christian world with his conversion (on extremely dubious legal grounds) of the venerated Aya Sophia/Hagia Sofia from a museum (established by Ataturk) back to a mosque.

Erdoğan’s political situation is shaky–which may be why he is engaged in so much adventurism. He lost the big cities–Istanbul and Ankara notably–to the opposition CHP. He still has very strong support in the Anatolian heartland, especially among devout Muslims there (and in the cities as well). But the country is divided and Erdoğan has a lot of domestic enemies, and is making more by the day.

In sum, Erdoğan has picked a fight with pretty much everyone with a stake in the eastern Mediterranean. Why he’s doing so is not completely clear. In part, it’s delusions of grandeur: he envisions himself as the emerging dominant power in that region. But he can be so only at the sufferance of the US and Russia in particular. He is appealing to a highly chauvinistic populace–Turks are arguably the most chauvinistic nation in the world–in order to bolster his political situation.

But strategically his actions appear to be incredibly foolhardy and shortsighted. It is hard to see the upside, especially in Syria and Libya. The downsides are huge. He must be counting that the big boys in the neighborhood are willing to put up with his bumptiousness. But if he’s wrong, Turkey will be in a world of hurt.

He needs to be most careful about the Russians. After Turkey shot down a Russian jet over Syria, the furious Russian reaction forced Erdoğan to back down. Now he is risking confrontation with them not only in Syria, but in Libya and Armenia/Azerbaijan. With Putin too perhaps needing a wag the dog moment again (given the uninspiring results of his constitutional referendum, growing discontent as illustrated by open protests in the east, and chronic economic difficulties), Erdoğan could be made to order.

Fools rush in where angels fear to tread. Erdoğan is rushing in where angels avoid, and doing so very likely because he is a fool.

“As a dog returns to his vomit, so a fool repeats his folly” — Proverbs 26:11 

This Proverb applies to the American news media and the US “Intelligence” Community, with a variation. The variation being the media returns to the “Intelligence” Community’s vomit, rather than its own per se.

For about four years the news media lapped up whatever lies the “I”C barfed up about “Russian collusion.” And it was all lies. 100 percent.

Honest people can be fooled. Yet, once they are fooled, they distrust who fooled them. Dishonest people lap up lies over and over again. Because they want to.

The latest iteration of this is the recent hysteria over the allegations that the Russians (namely, its military intelligence service, the GRU) paid bounties to the Taliban to kill Americans, that Trump had been briefed about it, and did nothing. These allegations were “credited” to “anonymous intelligence sources.”

The dogs at the New York Times ran to the vomit like they hadn’t eaten in months. Which may be true, since the demise of the impeachment fiasco, and the dominance of the Covid-19 story. But rather than treating another “I”C leak with skepticism, if not disdain, they wolfed it down. Because they wanted to.

In the event–I’m sure you will find this shocking–the “intelligence” was of dubious provenance, and because of that Trump had not been briefed about it. So the story was 100 percent unadulterated puke.

A word to the wise. If you claim to put any credence in any story based on “anonymous sources in the intelligence community,” you are either a fool (because you actually believe it despite the repeated evidence of their untrustworthiness) or a knave (because you know it is likely untrue but choose to treat it as gospel regardless because it is politically useful).

Arguendo, suppose the story is true. What is Trump supposed to do about it? Nuke Russia? Add more sanctions? What’s left to be sanctioned, pray tell?

Those who are flogging this story, and those like it, want a new Cold War with Russia. But apparently they expect only one side to fight it: the Russians, evidently, should be pacifists in this Cold War II. But if the Russians are pacifists, why fight a war against them?

So let’s get real. If there is a Cold War II, then one can expect both sides to utilize the tactics of Cold War I. During which, you might remember, the Soviets supplied massive military supplies to, inter alia, North Vietnam and North Korea which were used to kill Americans.

And during which the United States “Intelligence” Community supplied weapons to Afghan Islamist foes of the USSR that were used to kill thousands of Soviet soldiers.

Memories run long, and payback is a bitch.

Meaning that if you fight Cold War II with the Russians, as day follows night, Russians will try to kill Americans–while attempting not to leave fingerprints. That’s the way Cold Wars are fought.

So be very careful what you ask for: and if you ask for a New Cold War, expect the consequences. And if those consequences include the deaths of American soldiers, you need to accept that the responsibility is largely yours.

It is particularly perverse to blame Trump for the deaths of Americans in Afghanistan. He has been laboring to extract the US from that cesspool, precisely because he believes that it is pointless for American troops to die there, for . . . well, for nothing.

And the establishment–notably the “Intelligence” Community and the Pentagon–have fought him tooth and nail. Apparently forgetting the adage “never reinforce failure,” they have reinforced it for going on 20 years now. And they will not admit failure, and have fought Trump more viciously in his attempts to withdraw than they have fought the Taliban in the Hindu Kush.

In other words, Trump has been trying to save American lives, and the Pentagon and the “Intelligence” Community have been willing to expend them. To what purpose, they cannot explain.

In that respect, the “Russian bounty” story is even more twisted than the run of the mill Russian collusion story. For it represents the most malign elements of the Deep State and their vomit mongers in the media and the Democratic Party crying crocodile tears over dead Americans in Afghanistan, and blaming the man who is trying to prevent more Americans from dying there, all to perpetuate their insane war that will kill Americans as long as it lasts.

It is hard for normal people to imagine a more damning commentary on the American establishment than that. But that likely reflects the limits of my imagination. I am sure that these malign, evil creatures that dwell in the bowels of Langley and the Pentagon will conjure up even more sick actions in the future.

The very informative RBN Energy blog notes “Look What You Made Me Do – Permian Crude Producers Waste No Time In Ramping Up Production“:

Crude oil supply news comes in from all angles these days, bombarding the market daily with fresh information on producers’ efforts to ramp their volumes back up now that the global economic recovery is cautiously under way. Crude demand is rising, storage hasn’t burst at the seams yet, and prices have come a long, long way in just a few weeks. Permian exploration and production companies, having avoided a fleeting, longshot chance that the state of Texas might regulate West Texas oil production, are responding to higher crude oil prices as free-market participants should. The taps are quickly being turned back on, unleashing pent-up crude and associated gas volumes that, you could say, were under a sort of quarantine of their own for a while. Today, we provide an update on the status of curtailments in the Permian Basin.

The story mentions “the taps.” US shale regions, Permian in particular, are as close to something that can be turned on and off like a tap as anything in the history of the oil business.

You will recall that Igor Sechin’s brain flash in responding to the Covid-caused demand crash was to spurn Saudi importuning to extend output cuts, which spurred the steamed Saudis to increase output, thereby turning a hard fall in prices into a bona fide crash. A crash that hurt Russian producers generally, and Rosneft specifically, extremely hard.

The reasoning for Sechin’s strategy was that US shale producers had been the main beneficiary of previous output cuts, and he wanted to drive them out of business. Predatory pricing, in other words.

But as the RBN post indicates, this strategy, like most predatory pricing strategies, doesn’t work if the target can rope-a-dope and recover when you attempt to raise prices. That’s exactly what’s happening.

Yes, some companies have gone bankrupt–but bankruptcy is different than destruction. (Igor might not know this. Seriously.) And yes, the industry is facing more stringent financing conditions–but if prices rise these will ease too, and drilling activity will resume.

In other words, Sechin failed to realize that not only is predatory pricing almost always a futile strategy, it is particularly futile when unconventional US oil production is concerned. The Saudis found this out in 2014-2015, but Igor either wasn’t paying attention, or didn’t learn the lesson.

Predation doesn’t pay. This is hardly a new insight, or one not demonstrated by repeated experiences–including experience involving Igor’s intended prey.

Sechin’s predatory endeavors work when they involve exploiting the Russian legal system. In the marketplace, not so much. But we all knew that Igor is basically a thug, and not all that bright.

A little more than a month ago, when the China virus was first wreaking havoc in the oil market, Vladimir Putin and Igor Sechin demurred when the Saudis requested an extension of OPEC+ oil cuts. Furious, the Saudis retaliated by promising to ramp up oil production by more than 1mbpd, and prices truly cratered.

No problem!, said Vladimir and Igor. This is part of our master plan to destroy US shale! (Never mind such “logic” is right out of Economics for Mouth Breathers.) Furthermore, Russia has ample financial reserves, and its government can ride out a long stretch of low prices. (The Russian people? Ha! Demonstrating the state-centric nature of Russian policymakers.) The ruble crashed. No worries! In fact this is GREAT for Russian oil producers, because their costs are in rubles and the weakening of the currency cushions the impact of a lower dollar oil price on revenues. (The Russian populace? Again Vova and Igor DGAS.)

But despite the bold talk (which in some ways reminded me of the old story about G. Gordon Liddy holding his palm over an open flame to prove how he could take pain without cracking), the magnitude of the collapse, and the possibility that it would endure, obviously caused considerable consternation in the Kremlin.

The first indication was when the Russians claimed that the Saudis had taken their action to harm US oil producers, a complete flip for Russia’s bragging that that’s why they were taking the hard line.

In the past few weeks, Trump cajoled the parties to the bargaining table, and yesterday–after overcoming a Mexican holdout–the parties agreed to a deal. And what a deal it is, involving Russia agreeing to cut production by 2.5mbpd–almost 23 percent–an amount 4 times what they refused to accept a little more than a month ago. (I also note that it flies in the face of repeated Russian statements over years saying that it was operationally impossible for them to cut more than trivial amounts.)

The Russians had insisted on formal commitments from the US to cut. Trump–who brokered this deal–said that US production would fall due to price declines. (True dat–I’ll try to provide some estimates tomorrow.). The Russians said that wasn’t good enough (apparently demonstrating an ignorance of the limited ability of the US government to force output reductions)–they wanted mandated cuts. But in the end, the deal was done, absent any formal US commitments.

In other words, Putin and Sechin cried uncle. Hell, they tapped out like an MMA fighter in a chokehold. This makes a mockery of their bold front of a month ago. I think it reveals that they were truly shocked by the Saudi reaction, and were desperate to find a way out, but they didn’t want to show it. They needed some sort of fig leaf, and Trump gave them one.

Now this is being spun as some sort of Putin master plan to curry favor with Trump to gain negotiating leverage on other issues.

All together now: Suuuurrrre it is, Vova. Suuurrrre. Trump don’t owe you–you owe him.

I oppose the deal, despite the fillip it will provide to the US oil industry. Artificially boosting oil prices will harm already devastated consumer economies (including the US). Further, this will potentially rejuvenate OPEC post-crisis. Again that would be good for the US oil industry, but not for the US.

I also wonder whether Putin (and the Saudis) will come back later with proposals to get the US government to take measures to reduce output in a coordinated fashion. Just how that would be done is rather mysterious. The only plausible measure that I could think of would be some sort of tax (either on production, or on exports). But this would require Congressional action–it’s not something Trump or any president could negotiate unilaterally–and I don’t see that happening.

But that’s for the future. In the present, Putin and Sechin reaped what they sowed. They thought they could force the Saudis into bearing the brunt of supporting oil prices, while they could continue to produce at capacity. The Saudis responded like it was 1986, and the resultant collapse in prices brought the brilliant schemes of the KGB masterminds crashing down. In the end, they had to capitulate. No matter how hard they try to spin it, it’s obvious that they did.

So forget all of that stuff about what workaround Putin was going to employ to remain de facto president for life: he has found a workaround to make himself de jure president for life.

It’s comical in a way. Start a process to amend the constitution of the Russian Federation. Get a respected Soviet-era fossil in the Duma, astronaut Valentina Tereshkova, to introduce an Orwellian Memory Hole amendment. Specifically, that anyone is eligible for two consecutive future presidential terms, thereby consigning Putin’s previous/current consecutive terms to the Memory Hole.

Then get Vova to address the Duma, and say (in effect): oh shucks, guys, I’ll accept if you insist. But only if the Constitutional Court agrees! Which is sort of like the organ grinder saying he’ll accept tips only if the monkey dances.

And, of course, yesterday the monkey danced.

The entire process has been completely banal, and lacking of the frisson that would accompany weighty constitutional changes in other countries.

This all transpired with a (predictable?) lack of response from the Russian populace. Likely because they know responding is worthless. If you know the game is rigged, what’s the point of protesting?

This raises only the question of why Putin went through such machinations in January. My conjecture is that those were mainly trial balloons. He clearly signaled that he was looking for a way to remain in power indefinitely. These signals were met with a collective shrug, except from a completely irrelevant opposition. Seeing this, Putin figured (IMO) that there was no political need for subterfuge: take the direct route and retain presidential power. Which also had the benefit of eliminating ambiguity about the distribution of power going forward.

So Russia shrugs, and Putin moves on: unlike an adage that Putin favors, he did not even hear any dogs barking. A further illustration of the maxim that nations get the leaders they deserve.

Insofar as the US is concerned, this is probably the best outcome. A succession struggle in a hostile nuclear power is not a happy prospect. And it’s not a bad thing when a self-proclaimed rival is in the hands of an aging man (in a country where men do not age well) whose mental powers will diminish and who will become more risk averse/conservative with age.

A banal Russia in the hands of a president who retains his powers as a result of an utterly banal process is not a good thing for Russians. But it is not a bad thing for the rest of the world.

What a helluva few weeks it’s been, eh boys and girls? By way of post mortem (hopefully?) rather than prediction, here’s my take.

Under “normal” circumstances, two factors drive asset valuations: expectations of cash flows, and the rate at which investors discount those cash flows. COVID-19–Wuhan Virus, to call it by its proper name–has has profound influence on both.

WV has caused a major aggregate supply shock, and an aggregate demand shock, and these amplify one another. The aggregate supply shock stems from shutdown of productive capacity due to social distancing. And people who aren’t working aren’t earning and aren’t spending, hence the aggregate demand shock.

These developments obviously reduce the income streams from assets (e.g., corporate profits). That’s a negative for stocks.

As an aside, these factors defy traditional policy prescriptions. Monetary and fiscal policy are focused on addressing aggregate demand deficiencies, i.e., trying to move demand-deficient economies (where demand deficiencies arise from price rigidity and nominal shocks) back to the production possibilities frontier. Supply shocks shrink the PPF. Pushing the PPF back to its normal state in current circumstances is a function of public health policy, and even that is likely to be problematic given the huge uncertainties (that I discuss below) and the dubious competence of government authorities (which I discussed last week).

The pandemic nature of WV also makes it the systematic shock par excellence. It hits everyone and every asset class, and cannot be diversified away. A big increase in systematic risk results in a big increase in risk premia, meaning that the already depressed expected cash flows on risky assets get discounted at a higher rate, leading to lower valuations.

A lot higher rate, evidently. Why? Most likely because of the extreme uncertainty about the virus. Data on how infectious it is, how many people have been infected, the fatality rate, how it will be affected by warmer weather, etc., are extremely unreliable. In other words, we know almost nothing about the salient considerations.

This is in part due to lack of testing, and to inherent defects in the testing: those who get tested are disproportionately likely to be symptomatic, exposed, or hypochondriacal, leading to extreme sample selection biases. The tests are apparently unreliable, with high rates of false positives and false negatives. The RNA tests cannot detect past infections. It is in part due to the novelty of the virus. Is it like influenza, and will hence burn out when temperatures warm? Or not?

Another major source of uncertainty is due to the fact that the initial outbreak in China was covered up by the evil CCP regime. (Which now, in an Orwellian twistedness that only totalitarian regimes can muster, is boasting that it will save the world. And which is blaming the United States for its own abject failures. Which is why I insist on calling it the Wuhan Virus–so go ahead, call me a racist. IDGAF.) Thus, data from Ground Zero is lacking, or wildly unreliable. (Ground One–Iran–is equally duplicitous, and equally malign.)

This huge uncertainty regarding a major systematic factor leads to even greater discount rates–and hence to lower stock prices.

And then there is the truly disturbing factor. These textbook causal channels (lower expected cash flows, higher discount rates) have in turn caused changes in asset prices that force portfolio adjustments that move us into the realm of positive feedback mechanisms (which usually have negative effects!) and non-linearities. This represents a shift from “normal” times to decidedly abnormal ones.

When some investors engage in leveraged trading strategies, big price moves can force them to unwind/liquidate these strategies because they can no longer fund their large losses. These unwinds move asset prices yet more (as those who placed a lower valuation on these assets must absorb them from the levered, high-value owners who are forced to sell them). Which can force further unwinds, in perhaps completely unrelated assets.

Not knowing the extent or nature of these trading strategies, or the degree of leverage, it is virtually impossible to understand how these effects may cascade through the markets.

The most evident indicators of these stresses are in the funding markets. And we are seeing such stresses. The FRA-OIS spread (known in a previous incarnation–e.g., 2008–as the LIBOR-OIS spread) has blown out. Dollar swap rates are blowing out. The most vanilla of spreads–the basis net of carry between Treasury futures and the cheapest-to-deliver Treasury–have blown out. Further, the Fed has pumped in huge amounts liquidity into the system, and these alarming spread movements have not reversed. (One shudders to think they would have been worse absent such intervention.)

One thing to keep an eye on is derivatives clearing. As I warned repeatedly during the drive to mandate clearing, the true test of this mechanism is during periods of market disruption when large price moves trigger large margin calls.

Heretofore the clearing system seems to have operated without disruption. I note, however, that the strains in the funding markets likely reflect in part the need for liquidity to make margin calls. Big margin calls that must be met in near real-time contribute to stresses in the funding markets. Clearinghouses themselves may survive, but at the cost of imposing huge costs elsewhere in the financial system. (In my earlier writing on the systemic impacts of clearing mandates, I referred to this as the Levee Effect.)

The totally unnecessary side-show in the oil markets, where Putin and Mohammed bin Salman are waging an insane grudge match, is only contributing to these margin call-related strains. (Noticing a theme here? Authoritarian governments obsessed with control and “stability” have a preternatural disposition to creating chaos.)

Perhaps the only saving grace now, as opposed to 2008, is that the shock did not arise originally from the credit and liquidity supply sector, i.e., banks and shadow banks. But the credit/liquidity supply sector is clearly under strain, and if parts of it break under that strain yet another round of extremely disruptive knock-on effects will occur. Fortunately, this is one area where central banks can palliate, if not eliminate, the strains. (I say can, because being run by humans, there is no guarantee they will.)

Viruses operate according to their own imperatives, and the imperatives of one virus can differ dramatically from those of others. Pandemic shocks are inherently systematic risks, and the nature of the current risk is only dimly understood because we do not understand the imperatives of this particular virus. Indeed, it might be fair to put it in the category of Knightian Uncertainty, rather than risk. The shock is big enough to trigger non-linear feedbacks, which are themselves virtually impossible to predict.

In other words. We’ve been on a helluva ride. We’re in for a helluva right. Strap it tight, folks.

The collapse in oil prices is completely understandable. The co-movement in equity and bond yields is harder to fathom.

As I noted in a previous post, the initial sell-off in oil was driven by corona-related demand declines. One thing interesting at the time was that equities did not respond similarly, which suggested that the prevailing view was that the situation would be contained in China. The last few weeks, equities and bond yields caught up, presumably due to the spread of the virus outside of China (especially in Italy).

The main oil-related news was a big supply shock–the prospect for higher Saudi and Russian output. But this should be positive for the economy overall, and thus for equities. There does not seem to be any new virus-related news that would lead to predictions of a sharp reduction in incomes and output. So, by itself, the oil supply shock should not cause a large sell-off in equities and big buying of bonds. But that is what we are seeing.

One can imagine other channels, e.g., losses on oil positions causing liquidation of equity positions. But the oil markets likely aren’t large enough to trigger such a reaction, and this channel would require those who are long equities to be long oil too–and in a big way in both.

Focusing on the oil supply shock in particular, I wonder if Putin and the Russians expected the furious Saudi reaction. The ruble is down 5+ percent today. Amusingly, Russian cat’s paw Zerohedge is claiming that Putin is all copacetic with this, saying that Russia can survive $25/bbl oil prices for a decade.

This is putting a brave face on things. And those with long memories will recall similar statements during the 2008-2009 collapse–statements that proved laughably false.

It is also interesting to note that Russian expressions of confidence relate to the state budget. Maybe the fiscal frugality has indeed positioned the government to live lean. The populace, not so much. But that’s very revealing about the mindset of the Russian ruling class: it is all about the state, utterly state-centric, and largely dismissive of the citizenry. And it has been so, as long as there has been a Russia.

As a coda to the post on the bloodbath in oil. I remember how many Smart People claimed that Putin’s alliance with MbS’s Saudi Arabia was an act of strategic genius! Genius I say! The move of a 4 dimensional chess grandmaster. A move that went a long way to achieving Russian dominance in the Middle East, at the expense of the US.

Er, no. Like almost all of Putin’s moves, it was an act of short term opportunism, and one that was built on a foundation of sand (appropriate, given the locale). MbS was being equally opportunistic, and his and Putin’s short-term interests aligned. But cartels–and this was little more than a cartel with a little geopolitical gloss–are inherently unstable, and the interests of the colluders are inherently in conflict. Inevitably such condominiums collapse.

Inevitably.

And so has this one. It was merely a matter of time, and what the proximate cause of the collapse would be.

There was no enduring alignment of interests that would provide the basis for a strategic realignment. There was a momentary alignment of interests between oil ticks. A market shock (extremely unexpected, no doubt) smashed the delicate structure to pieces.

The furious Saudi reaction to the Russian move demonstrates how fleeting Putin’s gains were. MbS is well and truly pissed, and looking to take revenge.

The only question that remains is: who will drink whose milkshake?

Apropos my earlier post on Erdoğan’s strategic brilliance, after Turkey’s army inflicted some serious damage on Assad’s armed forces, the Russians evidently made it clear that he would not be allowed to have his way in Idlib. So Erdoğan scuttled to Moscow, and emerged with a ceasefire agreement (not that he wanted one) which basically brought his campaign to a screeching halt.

The optics tell all. The fact that Erdo had to go to Moscow for one thing. But it was worse than that. Putin really rubbed the would-be sultan’s nose in it.

The same week a delegation from Zimbabwe–yes, Zimbabwe–visited Putin in the Kremlin. The entire delegation was seated. There was no statuary in sight.

When the Turkish delegation visited, all except Erdoğan were forced to stand. In front of a statue of Catherine the Great, no less, which had been moved into the room specifically for the Turkish delegation.

Catherine, of course, waged war against the Ottomans during her entire reign, and seized vast territories from them. Catherine epitomizes Russian domination of Turkey. As Russians well know–as do Turks.

After leaving the Turks to shuffle cravenly before Catherine’s bronze gaze for a few moments, Putin beckoned them to approach with a dismissive wave of his fingers, like he was calling his dogs. He was trying to humiliate. He succeeded.

Erdoğan has been flailing desperately for US and European support to counter Russia. Trump acknowledged that Turkey and Syria were fighting, but said he didn’t care.

In so many words: You’re on your own, Erdo! You made your bed with Putin, hope you stocked up on the KY.

The refugee gambit has only infuriated the Europeans. Not as if they would be willing to risk confronting Russia anyways.

Yes. Quite the genius Erdo is. Quite the genius.

Oil is crashing, with WTI trading at a 33 handle, down 20+ percent since Friday.

The first leg down in oil prices was caused by the coronavirus demand shock in China. This most recent free-fall is a response to Russia’s refusal to agree with OPEC to extend the existing OPEC+ cuts, and deepen them in response to the demand decline; and the Saudis’ reaction to the Russians, specifically, to put the output pedal to the metal.

The Saudi reaction to the Russians is a classic cartel defector punishment strategy. The Russian demurral is more difficult to understand. One story circulating is that Putin wants to punish US shale. If so, he’s a fool. And worse, a fool who fails to learn from the foolishness of others, e.g., the Saudis whose predatory pricing strategy in 2014-2016 failed miserably.

Yes, cratering the price of oil will inflict pain on US shale producers. They will suffer financial losses, and will curtail drilling and output. But US pain does not equate to Russian gain. Russia will incur substantial losses from prices in the 30s–and more pain if prices go into the 20s, as is possible. But Russia will not recoup this pain with future gains. If and when they (and OPEC) decide they’ve had enough, and curtail output to raise prices, US output will respond accordingly.

US rocks can outwait Putin. Yes, reduced activity will damage the shale supply chain, and it will take some time to recover, but as the Saudis found out in 2016, the flexibility of the US oil sector allowed it to rebound extremely rapidly when prices rose. The resource remained. The human capital remained. When OPEC+ went into effect, US oil output soon exceeded the pre-2014 price crash levels, which sharply limited the upside for the Saudis and Russians.

I am currently putting finishing touches on a paper which, among other things, demonstrates the futility of the Saudi strategy in 2014–and the Russian strategy (if that’s what it is) today. I document learning-by-doing economies in the US shale sector. If these economies are big enough, lost output today due to predatory Saudi or Russian behavior translates into lower US productivity in the future. That means that Saudi/Russian price cutting today raises their rivals’ costs in the future, which could lead to higher future Saudi/Russian profits then.

But the empirical estimates show that the US productivity losses due to foregone learning are very small, and hardly allow the predators to recoup the huge costs they incur from their predatory strategies. Putting the Saudis and Russians together, $10/bbl price cuts today cost them on the order of $230 million/day: $20/bbl cuts cost them around $460 million/day. There is no way that the higher future cost of US oil production due to lost learning opportunities will allow the predators to recoup these losses in the future by raising the ceiling that US shale puts on world oil prices.

Predatory pricing strategies are almost always futile. They are definitely futile with regards to the US shale sector. If Putin is indeed pursuing a predatory path, he is cutting off his own nose to spite his face.

So go ahead, Vova. Knock yourself out.