Streetwise Professor

Bloomberg published a long article by an Icelandic hydrologist on AI trading bots. In some respects it is a contribution to the AI doom literature. It worries that many developers using the same AI platform (Claude Code being explicitly mentioned) and the same training data will cause their bots to enter into highly correlated positions that are subject to destabilizing unwinds in the event of a market shock. (Hedge fund basis trade unwinds are an example of such an unwind.)

At a superficial level this makes sense, but the analysis fails to think through the equilibrium effect of AI trading bots. Indeed, the low entry cost that Darri Eythorsson correctly identifies as the distinguishing feature of AI trading applications mitigates the effects he frets about.

In essence, AI bots can be viewed as privately informed traders who extract predictive signals from masses of highly dispersed data. Moreover, the low entry cost means that there can be–and will be, if there are not already–large numbers of such informed traders. These will be competing intensely.

Market microstructure theory predicts the effect of intense competition between many informed traders. Specifically, the model of Holden and Subrahmanyam (J. of Fin. 1992) predicts that these informed traders “compete aggressively and cause most of their common private information to be revealed very rapidly.” I italicize “common private information” because that is exactly what Eythorsson posits that AI trading bots will produce (because they are developed using the same tool–Claude Code–and the same data). Thus, the trading bot scenario fits the HS model almost precisely. Moreover, HS state that in a continuous trading environment (which characterizes virtually all equity and derivative exchanges) “market depth becomes infinite and all private information is revealed immediately” with a large number of entities trading on the same information.

This is in contrast to the situation (as in the canonical Kyle model) where there is one (or a small number) of informed traders, in which case information is incorporated only gradually in prices and market depth is finite.

The increase in depth is arguably a very salutary effect, which should be considered when weighing the benefits and costs of a trading bot army–including the costs of position correlation.

There are other implications. Prices that rapidly and fully reflect private information limits the incentive of the bots to accumulate large positions. Moreover, the competition between a large number of bots means that although their positions may be correlated, they will not be concentrated. A small number of concentrated positions (“whales”) pose, in my opinion, a greater systemic risk than a large number of correlated small ones.

The intense competition also drives the economic profit of bots towards zero. This is a self-limiting feature that constrains the aggregate scale of bot operator positions.

It should also be noted that truly smart bots will make trades based on information about other bots. As an example of this “reflexivity,” bots will attempt to predict the positions held by other bots, and will have considerable data to allow them to do so. This information is relevant to assessing the risk of cascading liquidations of correlated positions, which would reduce the amount of piling on by bots that (as they should) take both risk and expected return into account.

Of course, big hedge funds and quant firms hate this development. It essentially commodifies their expertise and human capital. This should make you treat any scare stories about trading bots with a healthy dose of skepticism, and indeed cynicism.

The main legitimate concern about AI trading bots is one that is common to all privately informed trading. Specifically, what social value does it produce? Is investment in private information for trading purposes primarily rent seeking that generates private profit (at someone else’s expense) but not commensurate welfare gains?

Privately informed trading extracts wealth from the uninformed, who trade for portfolio adjustment/risk management reasons (or for speculative thrills). This is purely a transfer, and one that requires investment in real resources to acquire and utilize the private information. In the case of AI bots, these real resources are the cost of developing and operating the bots. This is costly rent seeking, pure and simple.

Whence does the social benefit come? It is an unintended consequence of the rent seeking: more informative price signals that lead to better allocations of resources (e.g., better capital allocation or production decisions).

Financial economists have tended to trumpet the beneficial effects of more informative prices and “price discovery” without quantifying them, and discussed the rent seeking aspects of informed trading sotto voce, if they discuss it at all. Thus, a true cost-benefit analysis has not been undertaken.

In some respects this is understandable, because calculating the benefit of more informative prices is effectively impossible. (Maybe AI can someday make this calculation!) As is the benefit of potential speed-ups of the revelation of private information by a few minutes or seconds. But color me skeptical that it does.

So what it comes down to is a comparison of the real resource costs of privately informed trading by AI bots vs. the current set of privately informed traders, hedge funds, quant traders, investment banks, and the like. Here, the very cheapness (and hence ease of entry) of AI-based trading tools strongly suggests that rent seeking costs will decline relative to those in the current system.

As an extreme case, if creation and use of AI bots is free (which it isn’t, but consideration of this case is informative), we would get more informative prices at zero cost. Indeed, there would be significant cost savings due to the elimination of costly hedge funds, quant firms, etc. Indeed, this would represent a real world refutation of the Grossman-Stiglitz proposition that fully informative prices (“strong form market efficiency”) is impossible. Yes, there are costs, but if costs are low we can approach fully informative prices.

The main lesson is that if AI is a cheaper way of acquiring and trading on private information than the incumbent system, their displacement of incumbents would represent a welfare gain (though not a Pareto improvement!). This gain would come in two forms: lower rent seeking costs and more informative prices.

But that’s where the debate about the benefits and costs of AI trading should focus. The welfare effects of privately informed trading are ambiguous, at best, and such trading has a strong rent seeking component. If AI trading bots reduce rent seeking costs, their development is salutary. If not, it isn’t.

The very feature that Eythorsson highlights–the ease with which anybody can create a trading bot–suggests that AI will reduce rent seeking costs, and microstructure theory suggests it will improve price efficiency. Lower costs and higher benefits than the incumbent system represent a decided improvement.

Combine that with the likelihood that, as argued earlier, the equilibrium effects of competition among AI bots is likely to have little effect on systemic risk (and potentially may reduce systemic risk by reducing position concentration), well, don’t worry: be happy. Unless you are an incumbent privately informed trader that is. In which case, the trading bot reaper is coming for you.

The BBC recently ran a story hyperventilating over “the insider trading suspicions looming over Trump’s presidency.” This is just one piece of a genre: there have been numerous other stories during the period of the war pointing out that there have been oil trading volume spikes shortly before Trump Truth Social posts regarding war-related news.

The BBC has examined trade volume data on several financial markets and matched them to some of the president’s most significant market-moving statements.

It found a consistent pattern of spikes just hours, or sometimes minutes, before a social media post or media interview was made public.

The BBC then stated: “Some analysts say it bears the hallmarks of illegal insider trading, whereby bets are made by people based on information that is not available to the general public.”

Either the BBC is mischaracterizing what “some analysts” told it, or these analysts are full of it.

Even in securities markets in the United States, under Rule 10b-5, trading on “information not available to the public” is not illegal. Instead, the information must have been obtained illegally, or trading on it represents a breach of a duty.

With respect to commodity futures markets, “insider trading” was not even a thing prior to the passage of Frankendodd in 2010. That piece of legislation incorporated a new anti-manipulation rule that essentially copied 10b-5. Since insider trading is illegal under 10b-5, the insider trading is plausibly illegal in commodity futures markets as well.

The CFTC implemented the authority established by Dodd-Frank in its Rule 180.1. The rule elicited considerable commentary, on the issue of insider trading generally. This was framed as a discussion of “material non-public information” (“MNPI”):

The Commission recognizes that unlike securities markets, derivatives markets have long operated in a way that allows for market participants to trade on the basis of lawfully obtained material nonpublic information. This final Rule does not prohibit trading on the basis of material nonpublic information except as provided in the following paragraph or otherwise prohibited by law.

And the following paragraph?

Depending on the facts and circumstances, a person who engages in deceptive or manipulative conduct in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity, for example by trading on the basis of material nonpublic information in breach of a pre-existing duty (established by another law or rule, or agreement, understanding, or some other source), or by trading on the basis of material nonpublic information that was obtained through fraud or deception, may be in violation of final Rule 180.1. [Emphasis added.]

That is, trading on MNPI is a necessary, but not sufficient condition to violate Rule 180.1. The information must have been obtained by fraud, or theft, in order to rise to the level of a violation. And the norm in these markets is that trading on MNPI is NOT insider trading.

What is the likelihood that these conditions are met in any of the events set out in the BBC article? Small. Very small. For Trump or anyone connected to him? Even smaller.

Consider the March 9 event, where Trump was interviewed by phone by CBS, and the network released the content of that at 1829. Trading volume spiked about 47 minutes earlier. We don’t know the time of the interview, but presumably there it was considerably before the story ran. Meaning that there were people in CBS News who knew about it. Presumably several. Meaning that it could have escaped into the wild and sparked the trading volume noted by the BBC.

Meaning that if anyone violated 180.1, it was likely someone tipped of by CBS. Was this obtained by fraud? Was there a duty by anyone at CBS not to disclose this information?

The BBC also calls out a blip in trading activity (smaller than on March 9) on March 23 about an hour prior to Trump backing off his threat to attack Iranian power plants and bridges. This spike was smaller than the one on March 9.

But the decision that Trump announced was surely not made up at the instant he started tapping his post into his phone. And many people would have known about that. And DC leaks like a sieve.

You don’t leak information you are going to trade on. And the very volume of the trading that attracted the attention of the BBC and other news outlets makes it highly unlikely that any of those in the administration who were privy to this development were the traders responsible for the volume spike.

Eyeballing the BBC graph there were around 5000 lots traded during the spike. In round numbers, about $570 million worth of oil. The March 9 spike was even bigger, around 8000 contracts (~$800 million). So either a lot of people/firms had the news and were trading, or a couple of big institutions were doing so, or both. Nobody in the government would have the ability to trade in that size, and if they did, they would be total idiots to do so.

That is, the facts are most consistent with leaks leading to trades by someone outside the administration. And the leaks are not necessarily from within the administration: in the March 9 case, the information plausibly came from CBS.

Yes, it was non-public information (in the sense it had not been publicly disclosed), but as noted above that is not sufficient to establish an insider trading violation. And it certainly does not establish that Trump, or anyone in the administration, profited from this information.

Yes, there could be a violation here. One could argue that a leak from within the administration was a breach of a duty. But what if the information had not been classified? Would its revelation be a breach? Would anyone who acted on it have obtained it by fraud, or in violation of a duty?

It has long been known that securities prices often move well prior to public announcements, such as takeover announcements. Information is hard to keep contained, especially when related to things that involve many people. Such information leakage results in insider trading prosecutions only in extraordinary circumstances.

In other words, what has the BBC and others reporting breathlessly in the walls-are-closing-in genre is pretty much the norm in financial markets. Information tends to flow prior to public disclosures, and seldom constitutes a crime (or civil violation) when it does. If anything, the story just illustrates how pervasive leak culture is in DC. But as beneficiaries of that culture, don’t expect the BBC or any other media organization to call it out.

Since the Russian invasion of Ukraine 3 years ago (and even going back to 2014) one refrain has been that the Budapest Memorandum obligates the US (and the UK) to defend Ukraine against invasion. Trump’s announcement of negotiations with Putin, and the dispensing of home truths about Ukraine’s prospects for joining Nato, have led to a spike in invocations of the Budapest Memorandum. (I could refer to it as the “BM” which would be appropriate, as will be seen, but I’ll desist).

Brief summary: the Budapest Memorandum does no such thing. Full stop.

Clue #1: It is a “memorandum.” Not a treaty. It was not ratified by the US Senate.

But let’s look into the actual language. Anyone who reads at a 5th grade level, and who has actually read it, will immediately grasp its (lack of) content. (Many of those shrieking about the Memorandum evidently fail one or both of those criteria).

Here ’tis.

The US, UK, and Russia promise not to nuke or invade Ukraine. Well, since only Russia was a threat to do so, this is creating a mirage of symmetry in a totally asymmetric reality. Neither the US or the UK gave up anything. Nor did Russia–see below.

And for those who are slow: a promise not to invade is not a promise to defend. Negative obligation vs. positive obligation. Not a trivial difference.

Moving on. To the best part. (Circled for your convenience).

What’s the enforcement mechanism? If Ukraine is invaded or nuked there is a commitment to take it up with the UN Security Council. Where Russia had/has a veto.

Meaning that the Memorandum cannot be enforced against the only party that was likely to, had the incentive to, and in the event did, violate it.

For those who are visual learners, here’s a picture of the Memorandum’s enforceability:

I think the big problem here is that people have somehow gotten the idea that Budapest was about protecting Ukraine. In fact, it had absolutely nothing to do with protecting Ukraine.

At the time of signing in 1994, the big fear in the US (and the rest of the West) was loose nukes in the ex-USSR. And Ukraine was a particular source of concern because of its preternatural (even by Sovok standards) corruption. Concern about loose nukes also drove the Nunn-Lugar Soviet Threat Reduction Act of 1991, which had four objectives:

1. Consolidate and secure WMD in a limited number of secure sites;
2. Inventory and account for these weapons;
3. Provide safe handling and safe disposition of these weapons as called for by arms control agreements; and
4. Offer assistance in finding gainful employment for thousands of former Soviet scientists with expert knowledge of WMD or their delivery systems.

Budapest was adopted pursuant to all these objectives, especially 1-3.

Note that Nunn-Lugar was the “Soviet Threat Reduction Act,” and Ukraine was ex-Soviet. Budapest was a mechanism to get nukes out of an ex-Sov country, consolidate them, inventory them, and dispose of them. Protecting Ukraine’s sovereign integrity had nothing to do with it. Indeed, it was a mechanism to override Ukrainian sovereignty, by cajoling them into surrendering nukes.

All of the grandiose language about protecting Ukraine from invasion or nuclear attack was just a fig leaf. Pure Kabuki theater. Meaningless diplomatic jabber: and that’s all that any contract without a credible enforcement mechanism is.

Another clue is the identity of the American and British interlocutors–Slick Willy Clinton and Fast Tony Blair. They were great at making high sounding promises that vanish at the touch.

But at least you have the consolation of knowing that Bill is really, really, broken up about it:

Right, https://t.co/3eDCDaUVEw
but this is was Clinton was saying in retrospect: pic.twitter.com/XAqe2dWn9x

— oida (@oida) February 15, 2025

So the Budapest Memorandum is sound and fury, signifying nothing. A scrap of paper that achieved its true purpose–securing nukes–under the guise of giving solemn guarantees to Ukraine. Guarantees that are–and were–transparently fraudulent because they could not be implemented against the only party that could or would violate the supposed commitments.

So if anyone tells you “But but but the Budapest Memorandum,” now you know. It does not mean what they think it means.

It means nothing at all.

My web hosting service of the 18+ years of this blog’s existence is canceling me. The story is that “certain websites, including yours, will no longer be supported by our technical team due to outdated technology.” (Emphasis in original.). Well, maybe. But these days one never knows.

Regardless, the site will be migrating to a new hosting service. We will see how that goes.

As a precaution, I will start a Substack and cross post there. Depending on how that goes, I might migrate completely to Substack.

I’ll keep you all apprised.

Regardless of where this endeavor (which has lived far longer than I ever could have imagined) ends up, I very much appreciate those who have followed and read SWP over the many years of its existence, and I hope you continue to do so.

Cheers,

Craig Pirrong AKA The Streetwise Professor.

For they have sown the wind, and they shall reap the whirlwind: it hath no stalk: the bud shall yield no meal: if so be it yield, the strangers shall swallow it up.

Hosea, 8:7

Those words came to mind in the immediate aftermath of the Trump verdict in New York. For it is clear that baleful and long-lived consequences will flow from a trial and conviction that transgressed legal boundaries and common decency: while following it, I was wondering if Judge Merchan was striving to set the record for reversible errors and violations of a defendant’s rights.

Yes, an ill wind has been sown. Who shall reap the whirlwind?

The Biblical quotation suggests that the sowers are the reapers. It is indeed possible that the Democrats generally and the Biden administration specifically will reap in November what they sowed in May (and in fact for many, months before that, and it many places beyond New York): the decision has sparked outrage, and not just among Trump’s existing supporters, or Republicans. But it remains to be seen whether this outrage will outweigh the burden of running for president as a “convicted felon.”

Alas, I believe the entire country will reap what the regime and its apparatchiks have sown, and for many years to come. The by-any-means-necessary use of lawfare has violated all pre-existing norms, and has set a precedent that will cast a shadow over American politics forevermore. There is no going back.

America is now channeling Peruvian dictator R. Benavides: “For my friends, everything; for my enemies, the law!” 

I was always astonished that during the Trump impeachment circuses that the Democrats smugly believed that this could not be used against them. They are similarly smug in their belief that they are immune from the type of lawfare they have waged since Trump left office.

Yes, their entrenchment in the deep, middle, and shallow states (to use the insightful desription of Jeffrey Tucker) does provide some immunity. But once a weapon has been unsheathed by one side, it is inevitable that the other will take it up as well.

2020s Lawfare will be to American politics what poison gas was to combat in WWI.

Lawfare–and especially the weaponization of criminal law–makes politics existential. All restraints are lifted in existential conflicts. We can only go downhill from here.

One of the things that really irked me about the Caesar bio show that I wrote about last week was the lionization of Cato. In fact, Cato was as responsible, and indeed arguably chiefly responsible, for the fall of the Republic which he claimed he was defending against tyranny precisely because he and his faction waged lawfare against their political enemy Caesar, and thereby made politics existential.

Caesar crossed the Rubicon with an army because Cato had ensured that his freedom and perhaps his life were in grave legal jeopardy if he crossed without one. Cato made politics existential for Caesar: Caesar understood that he could continue to exist only by waging civil war. Cato sowed the wind. He, but more importantly all of Rome, reaped the whirlwind.

And that’s where we are now.

The bitter irony is that a common criticism of Trump is that he transgresses American democratic norms. Most of this is in the fevered imagination of his enemies: most of his norm violations have come merely from running his big mouth. That pales in comparisons to the violations of political and legal norms that have become commonplace in the lawfare waged not just against him, but against many in his orbit, and many outside it who have had the temerity to challenge the regime.

Words can’t hurt you: legal sticks and stones certainly can. And if one side picks them up, the other side will inevitably do so.

It is also sickly ironic that a bogus charge of “election interference” (bogus because no actual legal violation of Federal election law was properly charged, and New York has no jurisdiction over this law regardless) is being used to engage in the most flagrant attempt in American history to manipulate a national election.

This betrays a deep insecurity among Biden and the Democrats. A confident president and party would not feel it necessary to stoop to such devices.

Exactly where we go from here is unknown. But it is clear that we are entering an era of existential politics. Such a politics inevitably descends into conflict, chaos, and violence. And frequently to civil war. And when future generations look back, they will know exactly who to blame, and to when the Time of Troubles began.

Happy New Year to all my loyal readers–and even to you traitors who read!

A few days from now will mark the 18th anniversary of this blog. That may make me seem old, but of course I started it as a small child.

Apologies for the sparse posting lately. Have been absorbed in work, and in a sojourn at my new medieval house. Well, new to me anyways: a medieval house can’t be new, can it?

The view from the front door:

Whence I will retreat during the zombie apocalypse. Or the 2024 election, which may be more or less the same thing.

I wish everybody a joyous and peaceful 2024. That didn’t work out so well in 2023, but let’s be optimistic.

In the last couple of weeks the site’s spam filter has taken a holiday. It puts everything into moderation, including comments from long time commenters and obvious spam: formerly the former were automatically approved (for the most part) and the latter were automatically consigned to spam.

And it’s not just you. It holds my comments for moderation.

I apologize to those of you kind enough to comment whose contributions were hung up until I got around to wading through everything to approve them. I hope to get this resolved ASAP, but the hosting service is also on holiday 😛

And “getting around to it” is not an excuse. My grandfather had some round wooden blanks made with the words “to it” printed on them. He gave one to me, and said: “now you can NEVER say you didn’t get a round to it.” He also gave these out to his employees 😛

So reverting to my Navy plebe year: “no excuse, sir.” (One of the four permitted answers to a question.). I’ll work on getting it fixed ASAP. And in the meantime, please continue to comment if you are so inclined. They are always appreciated.

My best wishes to all for a Merry Christmas (belatedly) and Happy New Year (early, so on average I’m good!)

Pardon the interruption. As several loyal readers informed me yesterday morning, the site was inaccessible due to a “bandwidth limit exceeded” error. Apparently, SWP was subject to a DDS attack that commenced shortly after I posted a crypto-skeptical piece. Go figure. I guess I got some crypto weirdos bent out of shape. Or maybe it was the deep state 🤣 whom I also fingered.

You can tell a lot about a person from his/her enemies.

Regardless, in a way “bandwidth limit exceeded” is accurate in other ways. I am hip deep in testifying at a trial and have other deadlines looming, so my bandwidth is definitely challenged. I’ll post ASAP. Subjects of interest including a disturbing move to transform the United States Marine Corps into the United States Woke Corps, and the utter insanity of the Rittenhouse prosecution.

Stay tuned and be well.

The unprecedented spike in European (e.g., TTF, UK Balancing Point) and Asian (mainly JKM) gas prices has apparently subjected major trading houses (e.g., Mercuria, Gunvor, Trafigura, Vitol, Glencore) to massive margin calls that have put strains on their liquidity resources. This happens every time there is an epic rally, as traders are usually short paper: Cargill, for example, ran into this problem when ag prices spiked in the first decade of this century.

I wrote about this in one of my Trafigura whitepapers:

This mismatch between timing of cash flows on a hedge instrument and the underlying physical can create extraordinary cash flow strains that can put a trader into financial distress.

The question is whether this is all that is going on in the natural gas markets now, or whether there is something more. There has been some hyperventilating about the potential collapse of trading firms, notably Gunvor and Mercuria. Is there anything to this?

Well, the answer is: not as described in that article.

Not to trivialize funding risk–I will come to that in a minute–but the biggest risk a hedger faces is basis risk: the price of the hedging instrument moves a lot relative to the price of the underlying being hedged. This basis risk depends on the relationship between the hedging instrument and the underlying.

The article linked above presents a situation where a trader (e.g., Gunvor) has purchased LNG on a netback basis, which essentially means that it pays the LNG supplier the difference between the price of gas at a destination market (e.g., TTF or JKM) and the price at the origin (e.g., Henry Hub). (There is also a shipping charge deducted.) But this means that the trader is short TTF (or JKM–to keep it simple, I’ll stick with TTF): its purchase price goes up as TTF goes up so a high TTF price is harmful, and harm resulting from a high price is the definition of a short position.

That can cause an increased need for cash to pay the supplier, but that’s different than a margin call on derivatives as represented in the article. And the article incorrectly identifies a purchase at a price linked to TTF as a long position in TTF: it is clearly a short position because a higher TTF translates into a higher cost.

How would the trader hedge this risk? One way is by selling LNG at TTF-linked prices: the higher the TTF, the higher the sales price, and assuming the sales linkage is the same as the linkage in the netback deal, the TTF risk is hedged tightly. (I never say “hedged perfectly”: the only perfect hedge is in a Japanese garden.)

Whether there is a funding liquidity risk here depends on the timing of the cash flows under the netback deal and the sales contract. It could be that the trader has to finance the purchase because revenue from the sale will be received later than the contractual payment to the supplier.

Another way is just to sell spot at into Europe. Here there could be a risk because the price obtained in the sale may not exactly match the TTF price in the netback contract.

There could also be a timing mismatch here that gives rise to funding risk.

The important thing to note is that neither of these strategies involves selling futures or swaps as a hedge. Indeed, selling forward would be an insane way to “hedge” a netback purchase. It would actually be what some wryly refer to as a “Texas hedge”: doubling down on a price bet, not entering into offsetting positions. Under the netback the purchase price goes up when TTF goes up. A rise in TTF also would cause losses on the short futures/swap. That is, both ends of this “hedge” would lose, meaning that it is actually a supersized short position in TTF.

Indeed, the netback seller (e.g., the LNG producer) would be the one to short futures as a hedge because the contract makes it long TTF. Selling TTF forward would lock in a sales price.

So the claim that netback purchases are going to kill Gunvor or Mercuria or whoever because margin calls makes no sense if these traders actually hedging: as netback-based buyers they wouldn’t be selling as hedges futures that would be subject to big margin calls in these markets.

Where hedging traders would be subject to margin calls is if they had fixed price purchases of LNG, not floating price purchases like netbacks. Then they would have sold futures/swaps as a hedge, and have received margin calls as prices spiked.

The main risk to the fixed price purchaser/futures hedger is the basis risk between the futures price and the sales price of the LNG. TTF futures prices will typically not track perfectly spot prices, giving rise to some basis risk, which could be acute in volatile market conditions.

Another reason to be skeptical about the claimed connection between margin calls and netbacks–netback pricing is not the current pricing model in LNG: it is largely aspirational.

In the US, Cameron operates under a tolling model, where the buyer pays a fee to Cameron and acquires its own gas. (A buyer could hedge these purchases by buying US natural gas forward, e.g., buying HH futures or swaps.) Cheniere operates under a pass through model. It buys the gas it liquifies. and charges the buyer Henry Hub plus a fixed fee. (A buyer could hedge these purchases and convert them to fixed price by buying HH futures/swaps.). Most non-US LNG has been sold under Brent-linked contracts (which could be swapped into fixed price by buying Brent forwards or swaps).

Gunvor has entered into a large netback-based contract with Tellurian (as have Total, Shell, and Vitol). But Tellurian’s Driftwood project has not even made FID, let alone is it actually selling gas. Tellurian touts netback pricing as an innovation. It’s certainly not the standard way of doing business in LNG now. (Full disclosure: Streetwise Daughter works for Tellurian.)

So pray tell from whom is Gunvor or Mercuria or whomever buying on a netback basis from now, especially in massive quantities? It is possible that there are unreported short term deals that have been done on a netback basis. But it’s not the current way that LNG producers sell gas. The article asserts that 80 percent of Gunvor purchases are on a netback basis. What is the support for that claim? It is certainly not the case that 80 percent–or anything close to that–of LNG overall is bought on a netback basks. What is the basis for asserting that Gunvor is such an outlier?

Meaning, color me very skeptical about this alleged impending implosion of commodity traders due to netback deals.

I think that a more plausible explanation of the huge margin calls is that the traders are short TTF/JKM futures/swaps against fixed price purchases, Brent-linked purchases, or Brent-linked purchases hedged into effective fixed price purchases.

And yes, as seen historically, and described in my white paper, this cashflow mismatch between what is hedged and the hedging instrument can cause major liquidity problems. And banks, for various reasons (e.g., exposure limits, asymmetric information), may not be willing to extend credit sufficient to meet these liquidity needs. This would lead firms to have to cut positions. This hurts, but it’s not Armageddon.

Margin calls are one big headache for traders. Another is credit risk. A trader that has sold LNG basis JKM or TTF has to worry that the counterparty will default at such elevated price levels, either because of financial distress (e.g., the counterparty must sell power or gas at fixed prices, hasn’t hedged its purchases, and goes bust) or “price majeure” (the counterparty just refuses to adhere to the contract. because of the high price): price majeure has long been a major issue in selling commodities to China. Perhaps the CCP’s desperation for energy and its order for utilities to obtain fuel at any price will reduce the PM risk, but it’s always dangerous to count on the CCP.

Another interesting aspect of the recent LNG spike is that unlike the one last winter, this one has not seen an explosion in LNG shipping rates. Thus, the yawning spread between TTF or JKM and Henry Hub (upwards of $50/mmBTU) cannot be explained by shipping rates.

So, to reprise one of my favorite games with my students: Find the Bottleneck!

Spreads price bottlenecks. The spread between TTF/JKM and Henry Hub cannot be explained by shipping cost, so shipping is not the bottleneck. So what must be the bottleneck?

To find the bottleneck, always look what is between the consumption and production location. What (other than shipping) is between importing markets (Europe, Asia) and the gas supply locations (e.g., Henry Hub)? Liquefaction capacity. So the huge spread (which exists even after deducting shipping costs) between JKM/TTF and Henry Hub means that the shadow price of liquefaction capacity is huge. That capacity is the bottleneck.

Qui bono? Well, Cameron and Cheniere have sold their capacity at a fixed price. By selling at oil linked prices, Qatar, etc., are not capturing the shadow price of capacity via that pricing mechanism. So the buyers profit–if they have not hedged their purchases/sales. If they have hedged, the counterparties to the hedge transactions (those that bought TTF or JKM swaps) are the winners.

That is–the speculators in TTF or JKM win by profiting on an explosion in the shadow price on liquefaction capacity.

Meaning . . . how long before this becomes understood, and therefore how long before “kill the speculators!” again becomes the cry heard throughout the land.

Last Tuesday Joe Biden delivered the worst speech I have heard from any president going back to the mid-1970s, including Jimmy Carter’s “malaise” speech (in which he did not actually use that word, by the way). It was horrible both in terms of the delivery and the content.

In terms of delivery, Ranty Joe appeared in lieu of his alter ego Sleepy Joe. He shouted out his remarks, shrilly and defensively.

Note to Joe: saying something louder and more shrilly does not bolster your case. To the contrary. It makes it clear that you have no case to make.

Biden clearly came off as an extreme narcissist enraged by criticism of his conduct in Afghanistan. He could not acknowledge that the criticism he has received over Afghanistan had the slightest justification–that would be too much for his fragile narcissistic ego to handle. So he responded with rage and bitterness. He bristled with defiance, not against American enemies (a la say Churchill in 1940), but against Americans he deems to be his enemies because they dare question his judgment.

Very revealing.

The speech only accentuated the shock of many at Biden’s recent behavior, most notably at the arrival of 13 dead Americans at Dover, and his meeting with the parents of the dead. At the ceremony he acted disrespectfully (checking his watch repeatedly) and–wait for it–narcissistically by going on and on AGAIN about his dead son Beau, who has nothing in common with combat Marines shredded by a suicide bomber in Afghanistan except for the fact he is dead. Biden’s narcissistic ego was also evidently incensed at the anger directed towards him by the bereaved parents, in one case rolling his eyes at a mother of a fallen Marine and angrily saying over his shoulder as a Parthian shot at her that he understood her loss in response to her claim to the contrary.

It’s not about you, Joe. The fact that you can’t believe anything isn’t about you speaks volumes.

Amazingly many are astounded that Biden is not an empathetic healer in these trying times, as they assured us he would be in contrast to the boor Trump. Just what planet these people inhabit is unknown to me. Joe Biden has always–always–been a narcissistic, arrogant, asshole. Believe me: I’ve witnessed this for about 35 years. Anyone who thought otherwise is delusional.

And as I always remind my children, mark well my faults–they will become more pronounced as I age, so prepare to deal with them. This is true for most everyone: one’s least appealing traits almost always become more accentuated with age. Joe Biden is living (supposedly) proof of this: he is becoming a more narcissistic, arrogant asshole by the day. Moreover, his panic at the realization that he is in over his head is causing him to double down on obnoxiousness and rage.

That is, the problems with his obvious mental and physical decline are not that he’s “lost a step.” It’s that they have made his more repulsive traits (which are legion) more pronounced. He’s added a step to his arrogant repulsiveness.

One more point about affect. The extreme variance between Sleepy Joe (literally at times, as with his nap while meeting with the Israeli Prime Minister) and Ranty Joe is striking. This could again be symptomatic of senescence. But it also strikes me that it could be chemically induced, or exaggerated. Do they juice up Joe before they let him give a speech of such importance? It’s not the first time he’s appeared cranked during a speech in decided contrast to his dazed and confused mumbling during other public appearances.

Insofar as “substance” is concerned, the speech was an incoherent farrago. Getting out of Afghanistan was the right thing to do. But that’s not the point–the issue is how it was done, which Biden ignored. Biden wanted to get out of Afghanistan in the worst way–and he succeeded.

Bizarrely, moreover, Biden portrayed the exit as a great success. I am reminded of Pyrrhus of Epirus: “One more such victory and Pyrrhus is undone.” One more such success like Afghanistan and America is undone.

Moreover, even though Trump also said that getting out was the proper course, he didn’t give Trump props. Instead, per Biden, Trump caused the fiasco we have witnessed by tying his hands with a May 1 exit deadline. Except Trump obviously didn’t, because Biden moved the exit to 9/11 (swift move, dude), and then back to 8/31. This was not a date written in stone. And if Trump is so horrible–as Biden repeatedly has said–why would he feel bound to follow his plans? He hasn’t on anything else.

This is gaslighting on an epic scale. Every sentient being (I understand Biden may fail to qualify) recognizes this for the catastrophe it is. But Biden insists it is a great, great triumph. Who you gonna believe? Joe or your lyin’ eyes? Joe insists that you believe Joe.

Spare me more such successes. I can’t handle them.

We are learning more about the events that led up to the fiasco. Most notably, the Afghan president, Ghani, begged Biden for continued air support. Biden promised it–if Ghani could provide a plan, as if Ghani (rather than the US military on which his government and army were utterly reliant) was independently capable of conceiving such a thing. No air support was forthcoming. The inevitable happened.

Moreover, Gaslighter Joe instructed Ghani to gaslight the world, and claim that his army was succeeding when it clearly was not. Perception, not reality, was Biden’s preeminent concern.

This is dereliction of duty of the most egregious sort. A transparently political calculation to buy time and to distance himself from the impending catastrophe. In the end he did not, but the whole sequence of events reveals that Biden had only two objectives: to get out, and not to be blamed for an ultimate Taliban triumph.

Well, you’re batting 500, Joe.

Moreover, although Biden claims that the decision to abandon Bagram was made by the military, and that he merely acceded to it, it is clear that they made this decision due to a constraint that he imposed. Namely, a limit on the number of military personnel in Afghanistan to 650 or so. It was impossible to hold Bagram, the embassy, and the Kabul airport with such a paltry force. So Bagram went, and we were reliant on an utterly indefensible exit point.

This is on Biden, and his crew of idiots–namely the execrable NSC chair Jake Sullivan and Secretary of State Stinkin’ Blinken–and no one else.

In a parliamentary system, Biden and his crew (including latest milk carton “have you seen me?” person Kamala Harris) would have been removed through a vote of no confidence, and a snap election. But under the US system, which provides stability and continuity often lacking in parliamentary ones, we are cursed with them for at least another 40 months. (Life is all about trade-offs.)

If the catastrophes continue–and they well might, both geopolitical and economic–the prospect of continued misrule by a senile narcissist and idiot and assorted other throne sniffing dim bulbs will be unsustainable. In that event, there will be a constitutional crisis. How that will be resolved is unknown, but almost certain to be ugly, divisive, and destructive.

These are the fruits of 2020.