Streetwise Professor

December 11, 2019

The FBI Channels Retro Steve Martin Bits

Filed under: Politics — cpirrong @ 3:24 pm

Back in the day, Steve Martin had a bit called “You can be a millionaire and not pay taxes.” The punchline was: “I forgot.” Make a million dollars, don’t pay taxes, and when the IRS calls you on it, say “I forgot.” When accused of armed robbery, say “I forgot armed robbery was a crime.”

Apparently the FBI was channeling 45-year old Steve Martin bits when IG Horowitz questioned them on their numerous omissions of exculpatory evidence and inclusion of false information in their FISA warrant applications:

“We identified at least 17 significant errors or omissions in the Carter Page FISA applications, and many additional errors in the Woods Procedures. While we did not find documentary or testimonial evidence of intentional misconduct on the part of the case agents … we also did not receive satisfactory explanations for the errors or problems we identified. In most instances, the agents and supervisors told us that they either did not know or recall why the information was not shared with the OI (Office of Investigations), that the failure to do so may have been an oversight, that they did not recognize at the time the relevance of the information to the FISA application, or that they did not believe the missing information to be significant. On this last point, we believe that case agents may have improperly substituted their own judgments in place of the judgment of the OI, or in place of the court, to weigh the probative value of the information.”

Altogether now:

IG to FBI official: Why didn’t you include this information?

FBI official: I FORGOT!

IG: You expect us to believe that you forgot all about a surveillance request on an American citizen that allowed you to view the communications of a presidential candidate’s campaign.

FBI official: Yes.

IG: How could you be so unprofessional and unethical?

FBI official:

Ladies and gentlemen, our best and brightest. Patriots all. How dare you question them!

Addendum: Recall (since you, unlike the denizens of the Alzheimers ward which is apparently the FBI) that Douchnozzle in Chief James Comey said “I can’t recall,” “I can’t remember,” or “I don’t know” 245 times by House Investigators about the various matters–including the Page FISA case–which he oversaw.

And you thought Joe Biden was losing it!

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December 10, 2019

In a Government Bureaucracy, People Are Promoted to the Level of Their Iniquity

Filed under: History,Politics — cpirrong @ 10:45 am

In 1969, Laurence Peter introduced the “Peter Principle” to the world: in any hierarchy, people rise to the level of their incompetence. This principle certainly applies–in spades–to government bureaucracies, but as two stories that came out yesterday demonstrate, there is another, far more malign principle at work. Call it the Pirrong Principle: in a government bureaucracy, people are promoted to the level of their iniquity.

The first demonstration is, of course, the DOJ IG report on the Page FISA warrants. Although the hierarchy of the FBI and DOJ that was responsible–particularly the execrable (words fail) psychopath (and I mean that literally) James Comey–has seized upon a clip from the report to claim vindication, the report as a whole is a damning indictment of the gross iniquity of those who infested the FBI and DOJ hierarchy.

The fig leaf that IG Horowitz gave to Comey, McCabe, et al was his statement that he found “no testimonial or documentary evidence of political bias.” But at the same time, he could find no defensible explanation for the serial abuse of the FISA process, abuse that was used to surveil–i.e., spy on–the Trump campaign.

Thus, the circumstantial evidence for bias is overwhelming. For what else could explain the repeated and deliberate lying by commission and omission by Comey et al to obtain the warrants on Page and thereby obtain access into the communications of the Trump campaign?

I would also like to know what possible defense there could be for lying to a court. Isn’t this a violation of multiple statutes? This is far worse than some procedural violations, as Horowitz suggests. This is serial, intentional misconduct to deceive a court in order to obtain a writ to trample the rights of an innocent man, Carter Page, not to mention to intervene in the political process. This last was an act of “interference in an election” that makes anything the Russians did pale into utter insignificance.

The IG report also demonstrates that the Steele Dossier was a tissue of fantasies, fabrications, and gossip that even Steele’s unnamed “sub-sources” called bullshit on when questioned by the IG. It also demonstrates that this tissue of fantasies, fabrications, and gossip was the centerpiece of the Page FISA warrant applications. This completely vindicates Devin Nunes, who said the same in 2018, thereby unleashing a cascade of calumny that continues to the present. It also gilds the lily by showing that Adam Schiff is a lying sack of crap. Which we already knew, and receive demonstration of daily.

But here’s the thing. We already knew all of this. Here’s what I wrote in September, 2018:

Failing to detail Page’s full involvement with the prosecution and conviction of the Russian agents was therefore another crucial omission from the FISA warrant application.  Given this information, Page’s plausibility as a Russian agent would have been zero.
Second, Sperry doesn’t remind us that after failing in its first try to get a FISA warrant on Page, a dossier report miraculously appears which contains the account of a meeting in which Sechin supposedly offered Trump, via Page, a stake in Rosneft.  Presented with the new “information” of Page’s deep ties with the Russians, et voila!, the court issues the warrant.
This makes it highly likely–certain, in my view–that Steele was a short order cook serving up made-to-order material intended to advance the anti-Trump campaign.  His–and the FBI’s/DOJ’s.
The FBI’s cynicism here is off the charts, and appalling.  Carter Page helps them out in an investigation of Russian spies.  But Peter Strzok and his fellow badged gangsters saw that Page was now useful in their attempt to sabotage Trump, so they viciously twisted his previous cooperation with them into evidence of connivance with Russian intelligence by leaving out the crucial details of his cooperation, the Russian views of him, and the likely Russian knowledge of him.
Moral of the story? Support your local sheriff, perhaps, but the FBI–you’d be a complete fool to do so, because they will F*** you sideways when it is in their interest to do so.  Page is the poster boy for “no good deed goes unpunished.”
Carter Page should have a massive civil rights case against the US government, and the individuals who lied and conspired to deprive him of his 4th Amendment right against unlawful search and seizure–Strzok, McCabe, Comey, Yates, and others.

Nota bene the date–almost 2 months before the 2018 midterm elections. We knew the gravamen of the FBI’s conduct at that time (and earlier) but the slow-walk in the DOJ allowed the lies to flourish without official contradiction until well after the election. The same happened with regards to the Mueller Report: Mueller and his malign minions knew early in their investigation in 2017 that every word of the Russian collusion story was false, including “and” and “the.”

The ongoing impeachment fiasco is the direct result of the 2018 elections. How would those have been different had the Mueller and Horowitz revelations been made prior to them? How is the unconscionable dilatoriness of the iniquitous bureaucracy not grotesque election interference?

The second demonstration of the Pirrong Principle is the revelation (in the WaPo) of documents indicating that those responsible for running the war in Afghanistan (which, like Napoleon’s misadventure in Spain, has been a bleeding ulcer for years) have been lying about its progress and prospect for going on two decades.

Pace MacArthur, lying is a substitute for victory. At least in the minds of iniquitous bureaucrats.

Like Vietnam, Afghanistan illustrates that long, indecisive guerrilla conflicts corrode and corrupt even the most reputable American government institution–the military. The reason that revelation of this corrosion and corruption have taken so much longer to be revealed in Afghanistan is due to the smaller body count, the initial success in defeating the Taliban and Al Qaeda in 2001-2002, and the isolation of the battlespace which sharply limited independent observation and disclosure of the true state of affairs.

It is sickly ironic that the same elements who are responsible for years of stalemate and lies to cover it up have fought Trump tooth and nail in his (typically spasmodic and unfocused) attempts to wind down American participation. This is of a piece with the Ukraine fiasco, where the “interagency” that reigned over a chronically failed policy have waged their own war against Trump. Ditto Syria.

If the bureaucracy was only as good at waging guerrilla wars in the back of buggery as it is in the halls of DC, American would never lose a war.

Yes, I think the Pirrong Principle is as valid, or more so than the Peter Principle. We see demonstrations of it daily.

But other than alliteration and the allusion to the also alliterative Peter Principle, it’s not correct that I make the principle epynomous. It should really be named the Hayek Principle, in deference to Hayek’s chapter in Road to Serfdom titled: “Why the Worst Get On Top.”

We see his principle in action daily. But on few days do we see it demonstrated more forcefully than we did yesterday.

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December 9, 2019

The Four Horsemen of the Repo Apocalypse

Filed under: Derivatives,Economics,Financial crisis,Regulation — cpirrong @ 9:42 pm

The BIS included a box on the September USD repo spike in a chapter to its Quarterly Review titled “Easing Trade Tensions Support Risky Assets.” The piece lays out many damning dots, but does not connect them. Let me give it a try.

In a nutshell, the BIS report says that as a result of the wind down of the extraordinary post-crisis monetary policy measures there has been a dramatic change in the funding structure in US markets. In particular, the “big four [US] banks” (which the BIS delicately–or is it cravenly?–doesn’t name) have flipped from being suppliers of repo collateral (and hence cash borrowers) to being suppliers of cash (and hence collateral borrowers). Further, other US banks are not viable competitors to the big four, nor are other potential cash suppliers such as money market funds because they have hit counterparty credit limits which have constrained their lending capacity. According to the BIS, these events has made The Big Four Banks Who Shall Not Be Named the “marginal lenders” in the repo market. And mark well: prices are set at the margin.

Further, “leveraged players (eg hedge funds) were increasing their demand for Treasury repos to fund arbitrage trades between cash bonds and derivatives.”

So here are the dots. Recent structural changes have given the Big Four Banks Who Shall Not Be Named a dominant position in the repo market. Their main potential competitors as suppliers of funds are constrained by size or regulation. There has been a large increase in demand for repo funding.

Not even being willing to name the banks (as if their identities are unknown), the BIS does not even draw the blindingly obvious implication of its analysis–that the Four Repo Horsemen have market power. A lot of market power. Are we supposed to believe that (out of the goodness of their hearts, perhaps) they did not exercise it? I didn’t just fall off the turnip truck.

Even the euphemism Big Four is deceptive, for in reality this group is dominated by one bank–Morgan. And of course Morgan has been loudest in its protestations that it really wanted to lend more, but just couldn’t, dammit, because of those cursed liquidity regulations.

The BIS attempts to run cover, and provide some rather lame excuses for the failure to lend more despite the high rates:

Besides these shifts in market structure and balance sheet composition, other factors may help to explain why banks did not lend into the repo market, despite attractive profit opportunities. A reduction in money market activity is a natural by-product of central bank balance sheet expansion. If it persists for a prolonged period, it may result in hysteresis effects that hamper market functioning. For instance, the internal processes and knowledge that banks need to ensure prompt and smooth market operations may start to decay. This could take the form of staff inexperience and fewer market-makers, slowing internal processes. Moreover, for regulatory requirements – the liquidity coverage ratio – reserves and Treasuries are high-quality liquid assets (HQLA) of equivalent standing. But in practice, especially when managing internal intraday liquidity needs, banks prefer to keep reserves for their superior availability.

Hysterisis? Decaying internal processes and knowledge? Staff inexperience? Complete and utter argle bargle. We’re talking overnight secured lending here, not rocket science structured finance. It’s about as vanilla a banking transaction one could imagine. And LCR provides convenient cover.

The BIS lays out a compelling case that four major institutions have market power in repo. September events in particular are consistent with the exercise of market power, and the alternative explanations are beyond lame. Yet none dare speak its name, or even raise it as a possibility. Not the BIS. Not the Fed. Not the Treasury. Despite the systemic risks this poses.

The Financial Crisis supposedly changed everything. It apparently changed nothing.

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December 4, 2019

The Democrats Enlist Elitist Leftist Eggheads to Make Their Case For Impeachment. Yeah, That’ll Play in Flyover Country. So Do Continue!

Filed under: Politics — cpirrong @ 6:43 pm

I haven’t written about the ongoing impeachment farce because, well, it’s so farcical. But events in the last few days deserve some comment.

First, the “Intelligence” Committee’s impeachment report. It reminds me of what one would expect a constipated man who binged on Ex Lax to produce. To summarize–and I think quite fairly–its central claims are that (a) it is an impeachable offense for the President to have policy differences with the bureaucracy that is Constitutionally subordinate to him, and (b) it is also impeachable for a politician to practice politics, if he is sufficiently loathed by the other political party.

Second, today’s hearings in the Judiciary Committee, which is more aptly named the Prejudicial Committee, because clearly the fix is in.

The “witnesses” in today’s proceeding were three hard left law professors (but I repeat myself) and one exception who proves the rule–Jonathan Turley, who though hardly conservative, isn’t a hard-core leftist. And of course he wasn’t asked any questions.

Several of the witnesses were literally prejudiced, having found grounds to impeach Trump within days of his taking office, for such things as tweets.

One witness, Stanford’s Pamela Karlan, especially debased herself by including Trump’s 13 year old son Barron into her diatribe. Karlan also said:

“Ukraine is on the front lines. They are fighting the Russians over there, so we don’t have to fight the Russians over here.”

That just cracks me up. Trump has so deranged the left that he has turned them into McCarthyite warmongers who see Russkies under every bed and think that Red Dawn is our future if we don’t defend the Donbas.

But as offensive as this display was, my cynical side says–More! Lots more! Please!

It is a testament to the cluelessness of the Democratic leadership in the House, and the governing class (the “elite”) generally, that they actually think that these people are going to play in Peoria, or anywhere outside of, say the Upper West Side, the Beltway, LA, and the Bay Area.

For one thing, most Americans don’t have a lot of respect for academics. Indeed, a lot of Americans despise academics. And as an academic, who has been in academia for 30+ years, I can say they have substantial justification for those beliefs.

It goes ten-fold for legal academics, who combine Americans’ disdain for academics with their loathing of lawyers. Or a three-fer, actually, because many Americans’ disgust with hard-core leftist partisans gets added to the mix.

Apparently the House Democrats believe that Americans will defer to the pronouncements of obviously partisan and prejudiced legal academics. This is quite frankly insane, and illustrates how out of touch those in the ruling class are. The Pamela Karlans of the world loom large in the salons of DC and NY and the Bay Area, but most Americans think they couldn’t screw in a lightbulb, and who would blame their failure on capitalist, patriarchal, racist, homophobic oppression. And they wouldn’t be far off in that judgment.

So, echoing Napoleon (or somebody!), far be it from me to interrupt an enemy when he is in the middle of making a mistake. And in trotting out leftist eggheads to make their impeachment case, the Democrats are definitely making a huge mistake.

So please . . . don’t let me interrupt you!

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November 30, 2019

The Invasion of the Control Freaks

Filed under: China,Climate Change,Economics,Politics,Regulation — cpirrong @ 11:47 am

It’s impossible to turn around these days without being beset by control freaks.

Exhibit 1. Michael Bloomberg, who is running for president. Bloomberg is infamous for his desire to control everything, from what you eat to what you drive to how you defend yourself. Bloomberg thinks taxing “sugary drinks” (among other things) is a great thing, despite the regressivity of this tax, because it’s good for the poor:

And if you buy a gun do defend yourself, you’re pretty stupid–so he will take them away:

Pretty sure his security detail is heavily armed. But that’s the credo of his ilk: for me, but not for thee.

Bloomberg also sucks up to the world’s leading control freaks, the Chinese Communist Party. When (amazingly) confronted about this by (amazingly) a PBS interviewer, Mikey totally flacked for them:

And behold the stunning dishonesty here–the lengths to which he goes to avoid criticizing the CCP. Bloomberg wants to control the entire energy system in order to reduce the emissions of global greenhouse gases (GHG). The Chinese are building coal plants at a frenzied pace, yet when confronted on this, Bloomberg treats the Chinese coal plants as merely an issue of local particulate pollution in places like Beijing.

As an aside on this issue: the silence of the Davos Douches (control freaks all) who sucked up to Xi on this issue, and so many others involving China, is deafening.

Exhibit 2. Elizabeth Warren, reprising her “you didn’t earn that” bullshit:

What pretzel logic. Because you might have benefited from some public goods, you are obligated to let Lizzie decide what she will take from you in order to pay for all the non-public goods that she wants.

I have a better idea: I’ll gladly pay taxes for public goods that earn a return in excess of the cost of capital, and Lizzie can STFU.

Exhibit 3. Angela Merkel. Zere vill be NO free speech for you!:

Nice hand gestures there. Wonder where she picked those up?

Such a good little Ostie, ain’t she?

Exhibit 4: “Scientists”:

The irony of this is that those so wise in the ways of science

are obviously lecturing the developed world, which in their wisdom they apparently haven’t recognized is depopulating. Population growth is overwhelmingly concentrated in very low income Africa, the Middle East, Asia, and the Subcontinent, whose peoples (a) will never hear what these scientists are demanding, and (b) would ignore it in any event.

So what are these scientists proposing? What coercive powers will they deploy against brown people in order to achieve their vision?

No doubt Bloomberg has the answer: if they don’t submit voluntarily, kill them. You know, for their own good.

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November 29, 2019

More Flagrant Chinese IP Theft

Filed under: China,History,Politics — cpirrong @ 6:43 pm

Communist China is notorious for IP theft. It’s gotten so bad, that maybe even the KGB should sue them.

Back in the day, the standard Soviet response to American criticism of the USSR’s human rights record was to say something along the lines of “well in the US you lynch negroes.” Supposedly this originated with Russian Minister of the Interior Vyacheslav von Plehve who “The Russian peasants were driven to frenzy. Excited by race and religious hatred, and under the influence of alcohol, they were worse than the people of the Southern States of America when they lynch negroes.” Variants on this were standard fare over the years up to 1991.

Today the CCP is freaking out over Western, and particularly American, criticism of treatment of Uighurs and its handling of Hong Kong. So, how to respond? By stealing a page from gospodin Pelhve’s playbook (or maybe from Matthew 7:5).

Lijian Zhao, “Deputy Director General, Information Department, Ministry of Foreign Affairs, China. Try my best to tell the story of China & spread the voice of China” (according to his Twitter bio) replied thus to Trump’s signing of the (entirely symbolic) act criticizing the CCP’s handling of Hong Kong

It goes on. Check out his T/L, which provides numerous variations on the theme. All totally unoriginal, and a rather lame imitation of the Soviet original.

But maybe Mr. Zhao has a future. I hear there are openings on the Democratic Party platform drafting committee. He’d fit right in.

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Escaping the Thrall of a Barbarous Relic in LNG Contracting

Filed under: Commodities,Economics,Energy,LNG — cpirrong @ 4:56 pm

For 5+ years I have been calling oil-linked LNG contracts a “barbarous relic” (echoing Keynes and the gold standard). This opinion was widely castigated when I first voiced it, but I had a strong basis for it: oil and LNG prices are driven by totally different fundamentals, and as a result oil prices are almost always disconnected with gas market fundamentals.

My presentations include a graphic and some statistics to make the point: correlations between oil and gas prices (measured by the Japan-Korea Marker, or JKM) are about zero, and so are the correlations between gold and gas prices. So it makes about as much sense to index LNG contracts to gold as it does to index them to oil.

Platts has released a report making the same point:

Asian utilities buying liquefied natural gas under rigid long-term contracts linked to oil prices risk paying an average of $20bn more each year up to 2022 than if they bought the superchilled fuel directly in the market.

S&P Global Platts, which sets the benchmark LNG price for the region, said there was a “huge disconnect” between the of cost oil-linked contracts and prices in the so-called “spot market” for LNG.

Nice of you to catch up, Platts. This “huge disconnect”–the exact phrase I’ve used in public presentations for years–has been evident in the data . . . for years. Indeed, since the beginning of the JKM index.

Platts spins this as utilities paying too much. It wouldn’t be any better if they paid too little. The point is that divergences between contract prices and product values cause misallocations of resources, including transactions costs associated with trying to circumvent contracts with prices that are misaligned with fundamentals.

There are still some who are in the thrall to the barbarous relic:

Jera, the world’s biggest buyer of LNG, said that oil-linked contracts still often made sense. The spot market was still small and vulnerable to volatile spikes as seen in early 2014, it said, while long-term contracts offered “stable procurement for buyers”, as well as providing a guarantee of demand needed by developers to launch new LNG projects.

This is a jumble of sloppy thinking.

Volatile spikes? If the spikes are driven by gas market supply and demand conditions, tying contract prices to gas prices rather than oil is a feature not a bug. You want prices that reflect fundamentals, and if fundamentals are jiggy, so be it. And, er, last time I checked, the oil market was subject to “volatile spikes” despite its greater size. And this is a bug, not a feature, when it comes to LNG because these oil price spikes are almost always unrelated to gas supply and demand conditions.

That is, it is better to tie LNG contract prices to markets with jumps that reflect gas fundamentals, than it is to tie prices to markets with jumps that don’t.

There can be a role for long term contracts, though the transactions cost (“opportunism”) related reasons for such contracts become less important as the short-term market becomes more liquid. Furthermore, even to the extent that long term contracts facilitate investment, it is a non sequitur to conclude that these long term contracts should be indexed to oil, rather than a gas price (be it JKM, or Henry Hub, or TTF, or whatever). The contracts will perform better–transactions costs will be lower–the lower the likelihood that pricing terms become misaligned with fundamentals. Gas indexing results in lower probability of misalignment than oil indexing.

For years, the mantras in the LNG market have been “security of supply” and “security of demand”, and that long term contracts are the only way to secure it:

David Thomas, an independent adviser with experience at Vitol and BP, said that Japanese utilities “value security of supply and there’s a strong relationship between buyers and sellers” but that was changing as the LNG market became more liquid and Japan’s gas and power markets liberalize.

The oil and refined product markets rely on markets for security of supply and demand. A big refinery or a major oil development are as, or more, capital intensive than an LNG product. But these things get created without long term contracts because liquid markets allow transactions at prices that reflect supply-demand fundamentals.

Long term contracts play a role when spot markets aren’t “thick” enough: under these conditions, opportunism (“holdup”) is a problem, and long term contracts can mitigate that problem. The evolution of spot markets in LNG will progressively mitigate the potential for holdup problems. And as I’ve noted, this is a virtuous cycle: as spot markets become more liquid, the need for long term contracts will decline, which will contribute to greater spot market liquidity, which will vitiate further the need for long term contracts.

As the producer of the JKM index, Platts is obviously talking its book here. But that’s not to say that it’s wrong. It isn’t. And economic reality will inevitably push contracting practices in the LNG market away from the barbarous past. Or perhaps I have the tense wrong there: is pushing would be a better way of putting it.

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November 28, 2019

America is Exceptional, and Its Foreign Policy Failures Stem From Americans’ Failure to Acknowledge That Fact

Filed under: Civil War,History,Military,Politics — cpirrong @ 1:47 pm

When reading Allen Guelzo’s review of Elizabeth Varon’s narrative history of the Civil War, Armies of Deliverance, this jumped out at me:

What will redeem even this quibbling is the significance of the basic trope around which Varon builds her narrative. It is Varon’s fundamental belief that Northerners entered into—and stayed in—the Civil War out of the conviction that they were rescuing the deluded Southern white masses from the tyranny of Southern slaveholders. Northerners saw the Confederacy as a vast kidnapping by these elites, who had turned the slaveholding states into a closed economic system approximating what Karl Marx called “feudal socialism.”
By overthrowing this slaveholder coup d’etat, and by destroying the yoke of slavery for both white and black, the way would be opened to redeem the South, through opening its doors to “free labor”—to open markets, competitive wage contracts and, in a word, capitalism. “What a commercial world this State of Virginia should be,” marveled a Union army surgeon in 1862. With the overthrow of the slave oligarchs, insisted Henry Ward Beecher, “Schools will multiply. Books and papers will spread. Churches will bless every hamlet.”
Confidence that Northern victory would bring this deliverance in its train motivated the constant refrain in Northern writing that the war was aimed only at the oligarchs, and that poor whites and freed slaves would flock eagerly to the banner of Unionism. Hence the joyful predictions that, sooner or later, a latent Southern Unionism would rise from its repressed well; hence, also, Lincoln’s attempt to negotiate a generous amnesty and Reconstruction policy. Varon acknowledges that other historians have recognized the attraction of “the deluded-masses theory,” but virtually all of them limit its influence to the early months of the war, before the stiffening of Southern resistance led Northerners to embrace instead a “hard war” of conquest and subjugation. Varon sees no such evaporation. To the contrary, she demonstrates the “deliverance” idea’s persistence, marshalling evidence from Edward Everett’s 1863 Gettysburg oration (the “other” Gettysburg address) to soldier diaries to newspaper pronouncements—all the way to Lincoln’s last cabinet meeting on April 14, 1865.
The painful irony of this conviction was that Southerners—and not just the oligarchs—simply did not share it. They repudiated the accusation of oligarchy and instead stressed Southern white solidarity, a solidarity fired by the sufferings they endured during the war. The end of the conflict left Southern whites militarily defeated, but even more defiant in their loss—and more contemptuous of Yankee missionary efforts to convert them to free labor—than they had been in 1861. And from this refusal springs the bitter fruit of Reconstruction.

During the nadir of the American experience in Iraq, I often drew parallels with Reconstruction. One major parallel was that utter military defeat was a necessary, but by no means sufficient, condition to bring a vanquished region to heel. Conquering a populace is much harder than defeating armies.

The other major parallel is related to Varon’s interpretation of Northern thinking about the implications of victory. Per Varon, Northerners believed they were liberating oppressed masses from a small ruling class, and that the subjugation of that class would make the oppressed Southerners, black and white alike, into stereotypical Yankees who would adopt Yankee institutions and ways. In 2003, Americans (especially the neoconservatives) believed that the US was liberating oppressed Iraqis from a small (Sunni) ruling class, and that once liberated, (mainly Shia) Iraqis would adopt American (Western) values and institutions, and we could ride off into the sunset, like the Lone Ranger.

The happy visions of 1865 Northerners and 2003 Americans soon crashed into the reality that white Southerners and Iraqis didn’t want to become Yankees. The underlying reality here is that culture goes deep, culture is extremely particularist, and most of the world doesn’t share universalist American (Yankee) pretensions. Indeed, Civil War and Reconstruction demonstrate that at one time many Americans didn’t share such universalist pretensions.

If you look at many of the myriad debacles of what passes for American statecraft (e.g., the Wilsonian failure post-1918, Vietnam), they can be traced to a similar source: the American failure to understand the immense power of civilizational and cultural identity, and the concomitant belief that if given the chance–if “liberated”–everyone everywhere would become Americans.

Ironically, these beliefs have proved utterly resistant to repeated and decisive empirical refutation. Indeed, the near hysterical (well, maybe not so near) reaction to Trump in particular, and various strains of “nationalism” generally, among the establishment/government class demonstrates that they are still in thrall to such beliefs.

The ongoing impeachment farce is the most pathetic manifestation of this. Trump’s instinctual distrust of a corrupt and dysfunctional Ukraine clashes with the most deeply held convictions of The Interagency, AKA, the establishment Blob, which still pursues the chimeras that enticed Civil War-era Yankees and Iraq War-era policy elites. This time it will work! Trust us on this! Pay no attention to the sad litany of failures! We can make Sovoks into Yankees!

In a weird way, this is why I am an American exceptionalist, in the literal meaning of that term. I believe that the United States is largely an exception that proves the rule. America’s repeated attempts to make its very historically contingent institutions, culture, and development the universal rule are doomed to failure because they founder on the very historically contingent institutions, cultures, and developments of those it presumes to change.

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November 27, 2019

Back to the Future: Exchanges That Price Other Things Don’t Price Their Own Things Right

Filed under: Derivatives,Economics,Exchanges — cpirrong @ 7:54 pm

The first post I wrote almost 14 years ago was about an electronic trading system (in Japan) being overwhelmed by a avalanche of orders. The main conclusions I drew were: (a) since communications capacity is costly, it is uneconomic to build so much capacity as to make such outages impossible, and (b) pricing of capacity is the best way to ensure that it is utilized efficiently.

What is old is new again. A few weeks ago the CME was strained by a deluge of message traffic in the Eurodollar futures market. The surge was in part the result of something only dimly–if that–grasped 14 years ago: algorithmic trading. More specifically, algorithmic trading combined with the order matching and confirmation protocols of the CME and Eurodollar markets. Eurodollar futures utilize a pro rata secondary priority rule in the absence of a “TOP” order, i.e., an order that improves the best bid or offer. Moreover, the biggest order at the inside market gets informed of executions slightly before smaller orders. This advantage (on the order of 10-20 millionths of a second) provides a valuable edge.

This institutional setup provided incentives for two algorithmic traders to attempt to get a slight edge in quote size. Thus, each would send a message to increase its size when the other had the edge, which induced the prior leader to send a message to increase its size to regain the lead, which induced the other to send a message to send a message to regain the lead . . . which continued until the maximum quote size was reached. This race for priority in the book led to a surge in message traffic which put stress on the CME system.

Matt Levine wondered why the two algos didn’t just keep their orders at the maximum size. My surmise is risk: the larger size you show, the greater the risk. Furthermore, if someone else improved the price and became the TOP order, size didn’t confer an edge, so it makes sense to cut size.

The CME has responded by announcing fines of $10,000, with the threat of cutting off a violator’s trading connection altogether, for violations of a message traffic threshold. This is a rough form of pricing, so why call it a fine? Why not just call it a non-linear message pricing schedule?

I guarantee that a variant on this story will recur. Because capacity is costly, exchanges don’t price it, and rules adopted for other reasons (e.g., priority rules intended to promote quoting in size) provide an incentive to use this unpriced resource.

As I argued years ago, it’s odd that institutions–exchanges–that specialize in providing the platform to allow the pricing of scarce resources don’t find a better way to price their own scarce platform resources.

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November 23, 2019

The Judo Discount?

Filed under: Economics,Energy,Politics,Russia — cpirrong @ 7:06 pm

Gazprom has recently sold two blocks of treasury shares, amounting to 6.5 percent of its equity, at substantial discounts. The most recent sale, of a 3.6 percent stake, was at a whopping 11 percent discount.

The sale was to a single buyer. Had to be a pretty well-heeled dude to come up with the mere $3 billion purchase price. (Was it all cash? Or did some accommodating state bank fund a big chunk of the deal?)

The lucky single buyer’s name has not been disclosed, but rumor has it that it is Putin’s longtime friend and judo buddy, Arkady Rotenberg. He would definitely count as well-heeled.

As I’ve said for years, folks: judo is the path to riches. At least in Russia.

The behavior of Gazprom’s stock price has been rather strange. Yes, it dropped about 2.5 percent on the news of the discounted sale, but this drop mirrors almost exactly the rise in price on the day prior to the announcement.

While looking at the stock price, I noted that Gazprom’s market cap is now . . . . drum roll, please . . . . $85 billion. LOL. I remember they halcyon days of 2007 and 2008 when Gazprom management bragged it would be the first trillion dollar company.

Only off by two orders of magnitude. Could happen to anyone.

But it’s not surprising it happened in Russia, where the to-my-friends-everything-and-to-my-enemies-the-law essence of the Putinism has succeeded only in consigning the country to becoming an increasingly irrelevant blip on the world economy.

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