Streetwise Professor

I used to be a great admirer of General James Mattis. I have written many glowing posts over the year. I thought he was the best choice in Trump’s original cabinet. I even said kind things about him upon his resignation as SecDef, even though I disagreed with the reason for his departure: a disagreement with Trump’s Syria policy.

That admiration and respect has now evaporated. Or perhaps it is more accurate to say that they have gone up in flames, consumed in the infernos raging across US cities. Today Mattis released a tendentious and inflammatory letter bashing Trump. The gravamen of his criticism is that Trump is using the military to trample the rights of Americans. In particular, Mattis blasts Trump’s “bizarre photo op” at St. Paul’s church, which allegedly was possible only after tear gassing of peaceful protestors between the church and the White House. Mattis does not say that specifically, but it can be inferred as there is no other possible violations of civil rights involved in that episode.

That claim is based on a lie. It is now known there was no tear gas. There was no use of flash grenades. Those in the area were not uniformly peaceful: some were lobbing dangerous objects.

It is despicable that Mattis would base his allegation on a lie. Particularly given that the facts were known at the time he released the statement.

But then again, given that he was on the board of Theranos, perhaps the general can be a credulous fool who believes what he wants to believe. He is therefore responsible for the lie.

As for the photo op. A national treasure had been the target of arsonists. The White House had been besieged. Numerous building in the nation’s capital had been looted and burned. Great monuments–such as the Lincoln Memorial–had been defaced. American cities are in flames. Looters are rampaging from sea to shining sea.

Presidents always–always–make public appearances to such scenes: when they don’t, they are savaged in the press (e.g., Bush’s belated visit to New Orleans). In Trump’s case, it is important to demonstrate that the nation will not surrender to vandals and thugs, and that precious national symbols will be defended and preserved.

Mattis accuses Trump of overreacting to the situation. But Mattis’ words appear delusional to anyone who has been sentient over the past days. (Joe Biden is therefore excused):

We must not be distracted by a small number of lawbreakers. The protests are defined by tens of thousands of people of conscience who are insisting that we live up to our values—our values as people and our values as a nation.

A “small number of lawbreakers”? To speak in language that Mattis understands–and uses: are you fucking kidding me?

Boy, that “small number” is pretty efficient, given that they’ve wrecked not only swaths of DC, but Manhattan, Chicago, Philadelphia, Minneapolis, and many other cities. This minimization of the scale of the destruction and lawlessness, and confabulation of peaceful protestors with a rampaging mob, is appalling.

Mattis says that keeping order is the job of governors and mayors. Agreed! But when governors and mayors utterly fail in that job–yeah, I’m looking at you Bill diBolshevik, but not just you–what is the president supposed to do? Say, “oh well, not my job!”?

Mattis’ lies and delusions don’t end there. He barfs up the standard Democratic/leftist propaganda:

Donald Trump is the first president in my lifetime who does not try to unite the American people—does not even pretend to try. Instead he tries to divide us. We are witnessing the consequences of three years of this deliberate effort. We are witnessing the consequences of three years without mature leadership.

Yeah, I guess I missed the part where everyone in the US was holding hands and singing Kumbaya prior to 8 November, 2016. Maybe I’m Rumplestiltskin or something, and fell asleep prior to Hillary’s un-coronation.

And as for Trump being the “first president in my lifetime who does not try to unite the American people.” Again: are you fucking kidding me, general? Obama was extraordinarily divisive–and deliberately so. Remember “bitter clingers”? His invocation of The Untouchables?: “If they bring knives, we will use guns.” It was in all the papers. The man was an Alinsky acolyte–and Bill Ayers acolyte–for crissakes. He was all about division. Indeed, his divisiveness made Trump possible.

So maybe it was Mattis who was Rumplestiltskin from 2009-2016. Even though he was serving in the military at that time–until defenestrated by Mr. Uniter.

I also note that Mattis was alive when LBJ and Nixon were president. Nah, they weren’t divisive at all.

As for our sacred Constitutional rights, perhaps General Mattis has not been paying attention to the cascade of revelations about Obama’s trampling of the rights of people like, oh, I don’t know, Mattis’ former confrere, General Michael Flynn.

Further, what is Mattis doing other than promoting division? He is feeding it. Throwing gasoline on an already raging fire.

All in all, an utterly despicable performance by a man whom I once considered honorable, and whom I honored. Today he made a tendentious political statement built on a foundation of lies. Not a single lie. Multiple lies.

As a substantive matter, if Mattis has reservations about invoking the Insurrection Act, I do as well. But conditions of insurrection indisputably exist around the country. If governors and mayors fail to deal with insurrection, what is to be done? Instead of saying what you won’t do, General, why don’t you tell us what you would do. Rather than engaging in throwing red meat to the Blue State mob, why don’t you make a principled case for alternative measures. And preferably do so in private.

Oh, but I guess that would require an honest acknowledgement of the reality of the situation, which we’ve already seen you are incapable or unwilling of doing.

Mattis’ letter is filled with mawkish language about his sacred duty as a soldier. Well, General, political backshooting is hardly the duty of any American service member, and especially not of a Marine.

You’d think that in the face of a feared pandemic that was thought to put the lives of millions at risk, the prospect of a cheap, proven, and widely available treatment would be a godsend. In a sane world, you’d be right. In our twisted, increasingly dystopian one, you are dead wrong.

Hydroxychloroquine is a decades-old anti-malarial drug that has exhibited antiviral properties. It is off-patent, and cheap. It has been used billions of times.

Some anecdotal evidence suggested that hydroxychloroquine could reduce mortality in Covid-19 patients, especially if used in a timely fashion and in conjunction with zinc and/or antibiotics. Some also suggested it might have prophylactic uses.

Great, right? WRONG! The drug has been the subject of unrelenting attack for months now.

Why? The cause is overdetermined.

Probably the biggest reason is that Trump said positive things about it. And if Trump supports something, it must not just be opposed: IT MUST BE DESTROYED.

But that doesn’t explain all the opposition. Being off-patent and cheap, its’ not in the interest of the pharmaceutical industry to promote or even defend it. In fact, it is against the interest of those developing new anti-Covid drugs. Moreover, it is definitely an anathema to the vaccine evangelists (or the vaccine cult, if you prefer), most notably the malign and creepy Bill Gates. The elites have no vested interest in this everyman’s drug, and some have an extremeoy strong interest against it.

Hence the war on hydroxychloroquine.

The anti-hydroxychloroquine forces thought they had scored a decisive victory with a publication in the (don’t ask me why, given some of its past escapades) esteemed medical journal The Lancet which purported to show that not only was the drug inefficacious in treading Covid-19, it was positively dangerous, leading to substantially increased risk of fatal heart conditions.

So hydroxychloroquine quickly became the New Thalidomide. Almost immediately upon the article’s publication, other clinical trials of the drug were stopped. France banned its use in the country.

But the article quickly received scrutiny, and its findings proved unsupported at best, and perhaps utterly fraudulent. The results were certainly not reproducible. The data were assembled by a small firm nobody had ever heard of, which allegedly trawled electronic health records to compile a huge sample. But the results give indications that the data were made up out of the whole cloth:

Other researchers were befuddled by the data themselves. Though 66% of the patients were reportedly treated in North America, the reported doses tended to be higher than the guidelines set by the U.S. Food and Drug Administration, White notes. The authors claim to have included 4402 patients in Africa, 561 of whom died, but it seems unlikely that African hospitals would have detailed electronic health records for so many patients, White says.

The study also reported more deaths in Australian hospitals than the country’s official COVID-19 death statistics, The Guardian reported. On 29 May, The Lancet issued a correction updating a supplemental table and saying that a hospital assigned to the study’s “Australasia” group should have been assigned to Asia. “There have been no changes to the findings of the paper,” the correction notice said.

Similar problems have been identified in other articles on Covid-19 using data produced by the same firm.

There were also serious methodological problems. (See the linked Science article for details.)

The Lancet, for its part, said it had “concerns.” Really? What was your first clue?

The haste with which this article was published, and the greater haste with which our supposed betters acted upon it, is grotesque. It gives all the appearance of rushing out results that advance a certain agenda or agendas, and since they do, being too good to check.

We are constantly lectured and hectored about Science! Don’t question The Science! If you dispute The Science!, you are knuckle-dragging flat earther fundamentalist!

In fact, the first virtue of true science is skepticism: question everything. And it is precisely events like this Lancet study which suggest that the thing we should be most skeptical about is professional science, particularly as related to subjects where strong political or economic interests are involved.

That is indeed a tragedy.

Shit’s getting real out there, and it’s hitting close to home. Not so much in Houston, which has been relatively quiescent. (My tennis partner/rapper friend says Houston is chill compared to other Texas cities. A comparison to Dallas suggests that’s true.). No, in Chicago, where my younger daughter witnessed the looting of a jewelry store located directly beneath her apartment in the wee hours of Sunday morning, and who today went to go grocery shopping only to find several of her usual stores either burned out or ransacked. And they weren’t in Englewood or Austin.

And of course, there are scenes of destructive orgies in other major cities, including notably at the very gates of the White House in DC.

I have a modest proposal to address the situation: shoot all white rioters on sight.

I make this proposal in the spirit of bringing America together. For after all, who can possible object? (Except for a few pigment impaired ruffians–but they won’t be in any position to object!)

Think about it. The left apparently believes that the riots are the work of their bêtes noires (heh), white supremacists. (Cf. statements of the governor of Minnesota, the mayor of Minneapolis, or the mayor of Seattle, who blamed the recent riots on “white men.”) Certainly the left will rejoice at the summary dispatching of their arch enemies.

The non-left believes that the pasty-faced (and largely sunken-chested and pipe cleaner-armed) rioters are far left Antifa radicals who deserve a good whacking.

Speaking for myself, I hold no truck with either. So let God sort ’em out.

There is also a Solomonic angle to this. It is a way of getting at the truth. Just as Solomon’s threat to split the baby was meant to reveal the truth about who the actual mother was among the contenders, we will know from who screams loudest at this proposal just who the perps are. So I would take Seattle mayor Karen–sorry, Jenny–Durkan far more seriously if she were to endorse this modest proposal.

Further, implementing this proposal is a form of redress for centuries of state violence directed against black people. Evening the score.

So bring America together!

Putting my attempt at Swift (or Juvenal) aside, I am completely serious about focusing law enforcement efforts on white rioters: to me the most striking racial aspect of what I have seen in numerous videos is just how many white punks, mainly dressed in black and wearing backpacks and masks (but not for Covid-19 reasons) are at the center of the violence. As for these being white supremacists. Please. I know Bubbas. These ain’t Bubbas. They are Antifa, right out of central casting.

These have all the trademarks of Antifa or Antifa wannabes. They should definitely be the target of law enforcement, both at the point of action and behind the scenes. Their financers. Their support groups. Their lawyers. They are the schwerpunkt of these riots, and should be attacked and taken down. Hard. By all means necessary. And not just because of this time. But to reduce the probability of a next time.

There is obviously planning and support here. Consider the Miracle of the Bricks, whereby pallets of bricks have magically appeared on streets, handy for rioters and looters to use. No business leaves bricks in the street. Even construction companies don’t leave bricks in the street–they aren’t stupid. No, the bricks were acquired and distributed to strategic locations for the express purpose of providing ammunition for thugs.

It should not be that hard to track down the sources of at least some of these caches. Street surveillance cameras. Old fashion police work identifying who bought lots of bricks recently. Drones–or are they all being deployed to catch people violating stay at home orders?

One would hope that the FBI and other federal and local law enforcement agencies have devoted at least as much attention to these groups as to the KKK or other knuckle-dragging (and almost completely marginalized) white supremacist groups. Perhaps they can pry themselves away from chasing Russian hobgoblins and chase the anarchist left instead.

I shouldn’t say anarchist, really. Anarchism has a semblance of intellectual coherence. These thugs are nihilists, pure and simple: read Dostoevsky’s The Devils/Demons/Possessed to get a better understanding of them. All of the actions we have seen them commit are completely nihilistic, and these individuals have been encouraging nihilistic behavior by others. Not that these others lack agency or are not responsible for their own wantonness, but the white agitators in their midst are definitely accelerants pouring onto burning embers. The nihilists are cynically manipulating the discontented and the criminal in order to advance their agenda of destruction. (There are many in the black community, including those who could be described as radical, who understand this.)

And just who are the fascists that the soi disant antifascists are fighting? In their fevered minds, the United States is fascist. Every business is fascist, right down to the last convenience store. Every government at every level is fascist. You are a fascist if you aren’t Antifa.

This isn’t like Spartacists fighting the SA on the streets of Weimar Germany. They are going after you, and every civil and commercial institution in the country.

Many on the left tolerate them–hell, encourage them–apparently on the principle of the enemy of my enemy, or out of some deluded belief that Antifa storming the White House allegedly inhabited by an orange Nazi is the modern equivalent of the Big Red One storming the Nazis at Omaha Beach.

They should take heed Churchill’s remark about crocodiles. He who sows the wind reaps the whirlwind.

As for the spark of these events, the horrific death of (Houston native) George Floyd (a Houston legend rapper back in the day, in fact) created the conditions that Antifa can exploit. Large crowds of understandably angry people. Police forces that are reluctant to create more racial incidents. An inability or unwillingness of many people to distinguish between legitimate protest and nihilistic political violence.

These factors are underlying conditions to the violence, perhaps necessary conditions, but not sufficient conditions for it. Absent the malign acts those of who want violence and destruction for their own political reasons, legitimate protest would not have exploded into this bacchanal of violence. The nihilists are opportunists, and are exploiting this opportunity.

So get whitey. Especially if s/he is dressed in black.

One last remark. Events like Floyd’s death, and the reaction to it, leave the impression that unlawful police violence is purely a white cop-on-black victim phenomenon. This is not true. There are many tragic stories of non-blacks being killed under questionable circumstances by police officers (white and black)–e.g., Daniel Shaver, Dillon Taylor, Dylan Noble, Isiah-Murietta Golding, to name a few.

Making this issue a black-white narrative (literally and figuratively) impedes rather than promotes addressing it. The problems are systemic in nature–training, the personalities of people attracted to police work, stress, and in particular the cumulative psychological impact of stress, the ambiguous and largely deferential legal treatment of cop shooters (or kneelers or chokers). Making it all about race prevents dealing with these real causes.

One factor that I bet dimes-to-donuts played a factor in Minneapolis is police unions. The policeman who kneeled on Floyd’s neck, Derek Chauvin, had been involved in numerous complaints, and multiple shootings. That he was still on the force with such a record is almost certainly due to the ability of his union to shield him from termination.

To reduce the frequency of such events as those that triggered this nightmare, police have to be meaningfully accountable. Yes, I know that they will be the subject of numerous false accusations; that some of the actions that have tragic outcomes (as with Michael Brown in Ferguson, MO) represent legitimate use of force; that some actions are the result of mistakes or negligence or panic rather than depravity. But a rebalancing of legal and institutional protections seems to be in order to improve accountability and take the bad actors off the streets, or to deter them from engaging in bad acts.

The June 2020 WTI contract expired with a whimper rather than a bang yesterday, thereby not repeating the cluster of the May contract expiry. In contrast to the back-to-back 40 standard deviation moves in April, June prices exhibited little volatility Monday or Tuesday. Moreover, calendar spreads were in a modest contango–in contrast to the galactangos experienced in April, and prices never got within miles of negative territory.

Stronger fundamentals certainly played a role in this uneventful expiry. Glimmers of rebounding demand, and sharp supply reductions, both in the US and internationally, caused a substantial rally in flat prices and tightening of spreads in the first weeks of May. This alleviated fears about exhaustion of storage capacity. Indeed, the last EIA storage number for Cushing showed a draw, and today’s API number suggests an even bigger draw this week. (Though I must say I am skeptical about the forecast power of API numbers.). Also, the number of crude carriers chartered for storage has dropped. (H/T my daughter’s market commentary from yesterday). So the dire fundamental conditions that set the stage for that storm of negativity were not nearly so dire this week.

But remember that fundamentals only set the stage. As I pointed out in my posts in the immediate aftermath of the April chaos, technical factors related to the liquidation of the May contract, arguably manipulative in nature, the ultimate cause of the huge price drop on the penultimate trading day, and the almost equally large rebound on the expiry day.

The CFTC read the riot act in a letter to exchanges, clearinghouses, and FCMs last week. No doubt the CME, despite it’s Frank Drebin-like “move on, nothing to see here” response to the May expiry monitored the June expiration closely, and put a lot of pressure on those with open short positions to bid the market aggressively (e.g., bid at reasonable differentials to Brent futures and cash market prices). A combination of that pressure, plus the self-protective measures of market participants who didn’t want to get caught in another catastrophe, clearly led to earlier liquidations: open interest going into the last couple of days was well below the level at a comparable date in the May.

So fundamentals, plus everyone being on their best behavior, prevented a recurrence of the May fiasco.

It should be noted that as bad as April 20 was (and April 21, too), the carnage was not contained to those days, and the May contract alone. The negative price shock, and its potentially disastrous consequences for “fully collateralized” long-only funds, like the USO, led to a substantial early rolls of long positions in the June during the last days of April. Given the already thin liquidity in the market, these rolls caused big movements in calendar spreads–movements that have been completely reversed. On 27 April, the MN0 spread was -$14.45: it went off the board at a 54 cent backwardation. Yes, fundamentals were a major driver of that tightening, but the early roll in the US (and some other funds) triggered by the May expiration clearly exacerbated the contango. Collateral damage, as it were.

What is the takeaway from all this? Well, I think the major takeaway is not to overgeneralize from what happened on 20-21 April. The underlying fundamentals were truly exceptional (unprecedented, really)–and hopefully the likelihood of a repeat of those is vanishingly small. Moreover, the CME should be on alert for any future liquidation-related game playing, and market players will no doubt be more cautious in their approach to expiration. It would definitely be overlearning from the episode to draw expansive conclusions about the overall viability of the WTI contract, or its basic delivery mechanism.

That mechanism is supported by abundant physical supplies and connections to diverse production and consumption regions. Indeed, this was a situation where the problem was extremely abundant supply–which is an extreme rarity in physical commodity futures markets. Other contracts (Brent in particular) have chronic problems with inadequate and declining supply. As for WTI being “landlocked,” er, there are pipelines connecting Cushing to the Gulf, and WTI from Cushing has been exported around the world in recent years. With the marginal barrel going for export, seaborne crude prices drive WTI. With a better-monitored and managed liquidation process, especially in extraordinary circumstances, the WTI delivery mechanism is pretty good. And I say that as someone who has studied delivery mechanisms for around 30 years, and has designed or consulted on the design of these contracts.

The past few weeks have brought pleasant surprises from people whom I usually disagree with and/or dislike.

For one, Michael Moore, the executive producer of Planet of the Humans. Moore does not appear on camera: that falls to Jeff Gibbs and (producer) Ozzie Zehner. The main virtue of the film is its evisceration of “green energy,” including wind and solar. It notes repeatedly that the unreliability of these sources of power makes them dependent on fossil fuel generation, and in some cases results in the consumption of more fossil fuels than would be the case if the renewables did not exist at all. Further, it points out-vividly-the dirty processes involved with creating wind and solar, most notably mining. The issues of disposing of derelict wind and solar facilities are touched on too, though that could have been beefed up some.

If you know about wind and solar, these things are hardly news to you. But for environmentalists to acknowledge that reality, and criticize green icons for perpetrating frauds in promoting these wildly inefficient forms of energy, is news.

The most important part of the film is its brutal look at biomass. It makes two points. First, that although green power advocates usually talk about wind and solar, much of the actual “renewable” energy is produced by biomass, e.g., burning woodchips. In other words, it exposes the bait-and-switch huckersterism behind a lot of green energy promotion. You thought you were getting windmills? Sucker: you’re getting plants that burn down forests. You fucked up! You trusted us!

Second, that biomass is hardly renewable (hence the quote marks above), and results in huge environmental damage. Yes, trees can regrow, but not as fast as biomass plants burn them. Moreover, the destruction of forests is truly devastating to wildlife and to irreplaceable habitats, and to the ostensible purpose of renewables–reduction of CO2.

The film also points out the massive corporate involvement in green energy, and this represents its weakest point. Corporations, like bank robbers, go where the money is. But that begs the question: Why is there money in horribly inefficient renewables? Answer: Because of government subsidies.

Alas, the movie only touches briefly on this reality. Perhaps that is a bridge too far for socialists like Moore. But he (and Gibbs and Zehner) really want to stop what they rightly view as the environmental and economic folly of renewables, they have to turn off the money tap. That requires attacking the government-corporate-environmentalist iron triangle on all three sides, not just two.

I am not a believer in the underlying premise of the movie, viz., that there are too many people consuming too much stuff, and if we don’t reduce people and how much they consume, the planet will collapse. That’s a dubious neo-Malthusian mindset. But put that aside. It’s a great thing that even hard core environmentalists call bull on the monstrosity that is green/renewable energy, and point out the hypocrisy and fundamental dishonesty of those who hype it.

My second candidate is long-time target Elon Musk. He has come out as a vocal opponent to lockdowns, and a vocal advocate for liberty.

Now I know that Elon is talking his book. Especially with competitors starting up their plants in the Midwest, the lockdown in California that has idled Musk’s Fremont manufacturing facility is costing Tesla money. But whatever. The point is that he is forcefully pointing out the huge economic costs of lockdowns, and their immense detrimental impact on personal liberty earns him some newfound respect, strange or otherwise.

Lastly, Angela Merkel. She has taken a much more balanced approach to Covid-19 than most other national leaders. Perhaps most importantly, she has clearly been trying to navigate the tradeoff between health, economic well-being, and liberty. Rather than moving the goalposts when previous criteria for evaluating lockdowns had been met, when it became clear that the epidemic was not as severe in Germany as had been feared, and that the economic consequences were huge, and that children were neither potential sufferers or spreaders, she pivoted to reopening quickly and pretty rationally.

The same cannot be said in other major countries, including the UK and France as notable examples. She comes off well in comparison to Trump, although the comparison is not completely fair. Trump only has the bully pulpit to work with, for one thing: actual power is wielded by governors. But Trump’s use of the bully pulpit has been poor. Moreover, he has deferred far too much to execrable “experts,” most notably the slippery Dr. Fauci, who has been on the opposite sides of every policy decision (Masks? Yes! Masks? No! Crisis? Yes! Crisis? No!), is utterly incapable of and in fact disdainful of balancing health vs. economics and liberty, and who brings to the table a record of failure that Neil Ferguson could envy, for its duration if nothing else. The Peter Principle personified: he is clearly at the level of his incompetence, and due to the perversity of government, has remained at that level for decades.

Merkel’s performance is particulary outstanding when compared to those who wield the real power in the current crisis, American governors, especially those like Whittmer, Pritzker, Evers, Walz, Brown, Wolf, Cuomo, Murphy, Northam, and Newsom. These people are goalpost movers par excellence, and quite clearly find the unfettered exercise of power to be orgasmic.

It is embarrassing in the extreme to see the Germans–the Germans–be far more solicitous of freedom and choice than elected American officials, who seem to treat freedom–including the freedom to earn a livelihood–as an outrageous intrusion on their power and amour-propre.

Will this represent the new normal? Will SWP props for Moore, Merkel, and Musk become routine in the post- (hopefully) Covid era? I doubt it, but for today, I’m happy to give credit where credit is due.

In the film Pulp Fiction, moronic hoodlums Jules (Samuel L. Jackson) and Vincent (John Travolta) pick up a guy who had stolen a briefcase from the back of their boss Marcellus Wallace’s car. While driving him away, Vincent accidentally shoots him, leaving the back of the car splattered with blood and brains. In a panic, they drive to friend Jimmy Dimmick’s (Quentin Tarantino’s) house. Dimmick tells them his wife will be home in an hour and they can’t stay. In a panic they call Wallace, who calls in Winston Wolf. Wolf says: “It’s an hour away. I’ll be there in 10 minutes.” In 9 minutes and 37 seconds, Wolf’s car squeals to a halt in front of Jimmy’s house. Wolf rings the doorbell, and when Jimmy answers, Wolf says: “I’m Winston Wolf. I solve problems.” Within 40 minutes, Wolf solves Jules’ and Vincent’s problem. The car is cleaned up with the body is in the trunk, ready to be driven to the wrecking yard to be crushed.

The Imperial team that relied on Microsoft/Github to fix its code should have called Winston Wolf instead, because MS/Github left behind some rather messy evidence. “Sue Denim,” who wrote the code analysis I linked to yesterday, has a follow up describing what Not Winston Wolf left behind:

My favorite one is “a fix for a critical error in the random number generator.” In 2020? WTF? I remember reading in 1987 in the book Numerical Recipes by  William H. Press, Saul A. Teukolsky, William T. Vetterling and Brian P. Flannery a statement to the effect that libraries could be filled with papers based on faulty random number generation. (I’d give you the exact quote, but the first edition that I used is in my office which I cannot access right now. Why is that, I wonder?). And they were using a defective RNG 33 years later? Really?

“Algorithmic errors” is another eye popper. The algorithms weren’t doing what they were supposed to?

Read the rest. And maybe you’ll conclude that this was a mess that even Winston Wolf could have cleaned up in 40 days, let alone 40 minutes.

By far the most important model in the world has been the Imperial College epidemiological model. Largely on the basis of the predictions of this model, nations have been locked down. The UK had been planning to follow a strategy very similar to Sweden’s until the Imperial model stampeded the media, and then the government, into a panic. Imperial predictions regarding the US also contributed to the panicdemic in the US.

These predictions have proved to be farcically wrong, with deaths tolls exaggerated by one and perhaps two orders of magnitude.

Models only become science when tested against data/experiment. By that standard, the Imperial College model failed spectacularly.

Whoops! What’s a few trillions of dollars, right?

I was suspicious of this model from the first. Not only because of its doomsday predictions and the failures of previous models produced by Imperial and the leader of its team, Neil Ferguson. But because of my general skepticism about big models (as @soncharm used to say, “all large calculations are wrong”), and most importantly, because Imperial failed to disclose its code. That is a HUGE red flag. Why were they hiding?

And how right that was. A version of the code has been released, and it is a hot mess. It has more bugs than east Africa does right now.

This is one code review. Biggest take away: due to bugs in the code, the model results are not reproducible. The code itself introduces random variation in the model. That means that runs with the same inputs generate different outputs.

Are you fucking kidding me?

Reproducibility is the essence of science. A model whose predictions can not be reproduced, let alone empirical results based on that model, is so much crap. It is the antithesis of science.

After tweeting about the code review article linked above, I received feedback from other individuals with domain expertise who had reviewed the code. They concur, and if anything, the article understates the problems.

Here’s one article by an interlocutor:

The Covid-19 function variations aren’t stochastic. They’re a bug caused by poor management of threads in the code. This causes a random variation, so multiple runs give different results. The response from the team at Imperial is that they run it multiple times and take an average. But this is wrong. Because the results should be identical each time. Including the buggy results as well as the correct ones means that the results are an average of the correct and the buggy ones. And so wouldn’t match the expected results if you did the same calculation by hand.

As an aside, we can’t even do the calculations by hand, because there is no specification for the function, so whether the code is even doing what it is supposed to do is impossible to tell. We should be able to take the specification and write our own tests and check the results. Without that, the code is worthless.

I repeat: “the code is worthless.”

Another correspondent confirmed the evaluations of the bugginess of the code, and added an important detail about the underlying model itself:

I spent 3 days reviewing his code last week. It’s an ugly mess of thousands of lines of C (not C++). There are hundreds of input parameters (not counting the fact it models population density to 1km x 1km cells) and 4 different infection mechanisms. It made me feel quite ill.

Hundreds of input parameters–another huge red flag. I replied:

How do you estimate 100s of parameters? Sounds like a climate model . . . .

The response:

Yes. It shares the exact same philosophy as a GCM – model everything, but badly.

I recalled a saying of von Neumann: “With four parameters I can fit an elephant, with five I can make him wiggle his trunk.” Any highly parameterized model is IMMEDIATELY suspect. With so many parameters–hundreds!–overfitting is a massive problem. Moreover, you are highly unlikely to have the data to estimate these parameters, so some are inevitably set a priori. This high dimensionality means that you have no clue whatsoever what is driving your results.

This relates to another comment:

No discussion of comparative statics.

So again, you have no idea what is driving the results, and how changes in the inputs or parameters will change predictions. So how do you use such a model to devise policies, which is inherently an exercise in comparative statics? So as not to leave you in suspense: YOU CAN’T.

This is particularly damning:

And also the time resolution. The infection model time steps are 6 hours. I think these models are designed more for CYA. It’s bottom-up micro-modelling which is easier to explain and justify to politicos than a more physically realistic macro level model with fewer parameters.

To summarize: these models are absolute crap. Bad code. Bad methodology. Farcical results.

Other than that, how was the play, Mrs. Lincoln?

But it gets better!

The code that was reviewed in the first-linked article . . . had been cleaned up! It’s not the actual code used to make the original predictions. Instead, people from Microsoft spent a month trying to fix it–and it was still as buggy as Kenya. (I note in passing that Bill Gates is a major encourager of panic and lockdown, so the participation of a Microsoft team here is quite telling.)

The code was originally in C, and then upgraded to C++. Well, it could be worse. It could have been Cobol or Fortran–though one of those reviewing the code suggested: “Much of the code consists of formulas for which no purpose is given. John Carmack (a legendary video-game programmer) surmised that some of the code might have been automatically translated from FORTRAN some years ago.”

All in all, this appears to be the epitome of bad modeling and coding practice. Code that grew like weeds over years. Code lacking adequate documentation and version control. Code based on overcomplicated and essentially untestable models.

But it gets even better! The leader of the Imperial team, the aforementioned Ferguson, was caught with his pants down–literally–canoodling with his (married) girlfriend in violation of the lockdown rules for which HE was largely responsible. This story gave versimilitude to my tweet of several days before that story broke:

"People he'd allowed to see his code." "Hey babe, want to swing around my place and see my code?" https://t.co/ZFWuNg7Upt

— streetwiseprof (@streetwiseprof) April 25, 2020

It would be funny, if the cost–in lives and livelihoods irreparably damaged, and in lives lost–weren’t so huge.

And on such completely defective foundations policy castles have been built. Policies that have turned the world upside down.

Of course I blame Ferguson and Imperial. But the UK government also deserves severe criticism. How could they spend vast sums on a model, and base policies on a model, that was fundamentally and irretrievably flawed? How could they permit Imperial to make its Wizard of Oz pronouncements without requiring a release of the code that would allow knowledgeable people to look behind the curtain? They should have had experienced coders and software engineers and modelers go over this with a fine-tooth comb. But they didn’t. They accepted the authority of the Pants-less Wizard.

And how could American policymakers base any decision–even in the slightest–on the basis of a pig in a poke? (And saying that it is as ugly as a pig is a grave insult to pigs.)

If this doesn’t make you angry, you are incapable of anger. Or you are an idiot. There is no third choice.

I think it’s fair to say that I was one of the early lockdown (AKA Karentine) skeptics. In one post (19 March) I asked rhetorically whether we were destroying society to save it. Evidence accumulates daily that the lockdowns were indeed wildly costly compared to the benefits, and in the case of the healthcare industry in the US in particular, it is only slightly rhetorically excessive to say that yes, we destroyed it to save it.

Recall that the primary justification for lockdowns was to prevent the healthcare system from being overwhelmed. With a few very localized (and highly publicized) exceptions, it never was, nor was it in any danger of being so. (And for those who claim this was the result of the lockdowns, there is mounting empirical evidence both within the US and internationally that variations in lockdown policy in terms of stringency and timing have trivial impacts on the trajectories of the epidemic.)

But to “save” the healthcare system, the non-coronavirus-targeted system was almost completely shut down. One major effect of this has been financial: hospital systems and individual physicians and nurses have been financially devastated. I can’t put my hands on the citation right now, but I read that something like 40 percent of the large decline in US GDP in March was due to reduced output in the healthcare sector.*

And there will be severe health consequences as well. “Elective” procedures are not unnecessary ones: avoiding or even delaying treatment of many conditions increases the risk of death, and the number of deaths. Such avoidance or delays can also lead to serious declines in quality of life.

These effects are part of the “unseen” that I mentioned in my earlier post. People will die because of the lockdowns, but there are no Lockdown Death Trackers. And those responsible for the lockdowns, or for cheerleading for them (which includes most major media outlets), have absolutely no incentive to create them. Because you can’t handle the truth, apparently.

It is sickly ironic (deliberate word choice) that many of the most strident defenders of lockdowns were, in normal times, almost equally strident in their insistence that the lack of adequate government provided or funded health care caused people to receive too little care, thereby leading to increased mortality and greater incidence of debilitating ailments. And no, don’t bother trying to reconcile these positions: it’s impossible.

I also note that the persistence of the lockdowns, especially in places like California, Michigan, Illinois, Wisconsin, and Minnesota gives the lie to the “flattening the curve to save the healthcare system” justification for them. In California in particular, but also in the other states (outside of perhaps Detroit, which has its own pathologies decades in the making), there has been a yawning gap between ICU capacity and utilization. Yet despite these what should be welcome data, and increasingly restive citizenries in these states, their governors refuse even to countenance relaxation. So it wasn’t really about the healthcare system, was it? Or if it was, it’s now about something else.

And what is that something else? Power.

Gavin Newsom’s tirade against those who dared to go to beaches is a particularly odious example. He basically treats the 40 million people of his state as would a control-freak father incensed at the audacity of his children in defying his authority. This is not a statewide lockdown. This is a statewide grounding–and if you break the rules again, sonnie, the grounding will be extended! Indefinitely! Not because it has any public benefit. But because you dared to challenge Governor Cartman’s–excuse me, Governor Newsom’s–authoritah.

And, of course, Google and Facebook in particular are willing–nay, eager–accessories to these mass deprivations of rights. They have become censors in chief, extirpating (sorry, “deplatforming” and “removing” are too weak) content that crosses the authoritahs’ official line.

The logic behind the lockdowns was always dubious, and they were NEVER based on reliable data. (And don’t get me started on the models.). But whatever logic there was, it is non-existent now. They have become self-perpetuating. Or rather, they are being perpetuated in order to perpetuate the powers seized by governors and local officials.

And if it destroys the healthcare system (not to mention the livelihoods of tens of millions of Americans)? Well, as a man who is apparently the role model for many governors once supposedly said, you can’t make an omelet without breaking some eggs.

*Here are the data. (See p. 9.) GDP fell $234b in the first quarter. Since GDP was rising rapidly–about 3.5 percent annualized–in Q4, and the lockdowns didn’t kick in until March, virtually all of this likely occurred in the last half of March. A pretty staggering decline in a few weeks.

Expenditures on health care fell $110b, almost exactly the 40 percent I mentioned in the original post. This contrasts to a $27b increase over Q4.

Matt Levine wrote a typically amusing piece highlighting the role of Trade at Settle (TAS) contracts in the 4/20/20 oil futures debacle:

But actually a lot of oil changed hands at those negative prices. Not because a bunch of investors came to the market all at once looking to sell, and no one would buy from them at negative prices, but for a more technical reason. Some oil traders use “trade-at-settlement” contracts: Instead of buying (or selling) oil futures at the market price at the time of your trade, you agree in advance to buy (or sell) them at whatever the official 2:30 p.m. settlement price is that day. 1  This is a good trade, for you, if your job is to obtain the day’s settlement price: For instance, if you run an index fund or exchange-traded fund that is benchmarked to that price, using TAS futures guarantees you the benchmark price. If you invest in oil futures and your boss fires you if you miss the benchmark, you might use TAS futures, that sort of thing. If you are a savvy oil trader attuned to minute-by-minute changes in supply and demand and trying to capture as much value as possible from your skills, you’ll probably just trade the futures at their current prices, selling if the price is too high and buying if it’s too low. But a lot of oil traders are doing something else, something a bit more passive, and for them the ability to guarantee the settlement price is useful.

He goes on to ponder whether the TAS mechanism could be manipulated, and whether manipulation could have contributed to the settlement fire that Red Adair couldn’t have put out:

The basic pattern—agree in advance to buy (sell) stuff at the official settlement price at some fixed future time, and then sell (buy) a bunch of that stuff in the minutes leading up to the official settlement time with the effect of pushing down (up) the price at which you are buying (selling)—is incredibly common, and the gradation from “sensibly pre-hedging the exposure you will get at settlement” to “sloppily pre-hedging the exposure you will get at settlement” to “manipulating the market to push down the price you will get at settlement” is blurry. If you type in a chat room “lol I’m gonna pound out 500 contracts to push down the settlement price and make fortune on my TAS trades, I am really ripping those muppets’ faces off, hope I don’t go to prison bro, hashtag fraud hashtag crime hashtag manipulation,” you will get in trouble. But if you don’t type that, and you quietly sell the 500 contracts and the price goes down, then as far as anyone knows that was just pre-hedging.

So could somebody have popped CLK20 with a TASer last Monday?

Funny you should ask. I wrote a paper on TAS manipulation a while ago. My interest was sparked by the CFTC’s action against Dutch trading firm Optiver, which the agency accused of doing exactly the kind of thing Levine writes about in crude, gasoline, and heating oil futures back in March, 2008. You can read the complaint–and listen to some actual “ripping those muppets’ faces off” trader braggadocio.

How does manipulation work here? First, to make manipulation profitable, there has to be an asymmetric price response to purchases and sales. If the manipulator’s purchases impact prices the same as sales, just buying and selling a lot can’t move prices in a profitable direction. Indeed, the manipulator would have to pay transactions costs (crossing the spread, brokerage, etc.) and this would cause the trading to be unprofitable.

The model in the paper derives conditions under which purchases and sales of TAS have a smaller impact on prices than do trades in the underlying futures. The basic idea is that if information is short-lived, or if there is intense competition among informed traders, new information will be incorporated into prices very quickly. Under those circumstances, informed traders will not want to trade TAS: their information will already be incorporated into the price by the time settlement occurs. Thus, TAS is a mechanism that allows traders to signal that they are uninformed: many “muppets” choose to trade TAS, and the informed don’t. Thus, the price impact of TAS trades is smaller than the price impact of regular outright trades: trades move prices because of the possibility that they are motivated by private information, so trades that are unlikely to be privately informed move prices less than trades that are more likely to be so.

This creates the asymmetry that makes manipulation possible: the manipulator buys, say, the TAS and then sells in quantity immediately before and during the settlement period and profits as Levine describes.

This type of manipulation is particularly pernicious because manipulative trades have persistent price impacts because they cannot be distinguished from informed trades (or liquidity trades, for that matter). Note that in Optiver, prices did not reverse after the firm’s trades,

This strategy is likely to be particularly profitable when markets are relatively illiquid, as in an illiquid market outright trades have bigger price impacts. Liquidity (measured by the bid-ask spread, quantity at the top of the book, price impact coefficients, etc.) has plummeted for everything since the CovidCrisis began, and the decline in CL liquidity has been particularly pronounced. Moreover, contracts close to expiration are less liquid anyways. Add to this the extreme physical constraints (which mean that small shocks to fundamentals have big price impacts) and the raging uncertainty about the logistical situation at Cushing, and it is likely that small volumes at the settle could have big impacts on prices.

To this I would add that an unexpected shortfall in buy orders (due to shorts exercising market power) at the settle could have price impacts, and exacerbate the price impacts of sell orders by exacerbating order imbalances.

Thus, the potential for a big asymmetry in price impact was pronounced on that fatal Monday.

In sum, it is not implausible that the market did indeed get TASed. Or at the very least, a TASer jolt contributed to the collapse. (Sort of like in this video!)

A final remark on the economic benefits and costs of TAS trading. TAS is a form of “cream skimming”–i.e., the skimming off of uninformed order flow. This tends to make the order flow in the regular continuous market more toxic, which reduces liquidity in that market. For this reason, other cream skimming mechanisms used primarily in equity markets (payment for order flow, dark pools, block trades) are frequently criticized. (This is why some regulators, particular in Europe, have attempted to curb such activity and force more trading into “lit” venues.)

I showed in my Market Macrostructure paper that things aren’t so simple. If the regular market isn’t perfectly competitive, the increased competition from a cream skimming mechanism can improve welfare. Moreover, there are distributive effects here: the uninformed traders who can utilize the TAS mechanism (e.g., those who are hedging exposures tied to the settlement price) benefit, while uninformed traders who can’t lose. Informed traders can lose too. Moreover–and this is a point that is almost always overlooked–some informed trading is essentially rent seeking (e.g., trading on information that will be released shortly anyways, and accelerating its incorporation into prices has little effects on resource allocation decisions). Reducing rent seeking informed trading is a good thing.

All in all, the role of the TASer is yet another piece of the 4/20/20 WTI WTF puzzle. The forensic analysis of this entire episode will be fascinating.

Just another day at the Globex, folks. May WTI up a mere $49.88 on its last trading day at the time I write this paragraph, a while before the close. (Sorry, can’t calculate a percentage change . . . because the base number is negative!) That’s just sick. But at least it’s positive! ($12.25. No, $9.96. No . . .) (This reminds me of a story from Black Monday. My firm did a little index arb. We called the floor to get a price quote on the 19th. Our floor guy said “On this part of the pit it’s X. Over there it’s X+50. Over there it’s X-20. I have no fucking idea what the fucking price is.”)

But June has been crushed–down $7.35 (about 35 percent). Now the May-June spread is a mere $.83 contango. That makes as little sense as yesterday’s settling galactic contango (galactango!) of $57.06. (Note that June-July is trading at at $7.71 and July-August at $2.65.

I’m guessing that dynamic circuit breakers are impeding price movements, meaning that the prices we see are not necessarily market clearing prices at that instant.

A few follow-ons to yesterday’s post.

First, the modeling of the dynamics of a contract as it approaches expiration when the delivery supply/demand curve is inelastic, and some traders might have positions large enough to exploit those conditions to exercise market power, is extremely complicated. The only examples I am aware of are Cooper and Donaldson in the JFQA almost 30 years ago, and my paper in the Journal of Alternative Investments almost a decade ago.

Futures markets are (shockingly!) forward looking. Expectations and beliefs matter. There are coordination problems. If I believe everyone else on my side of the market is going to liquidate prior to expiration, I realize that the party on the other side of the contract will have no market power at expiration. So I should defer liquidating–which if everyone reasons the same way could lead to everyone getting caught in a long or sort manipulation at expiration. Or, if I believe everyone is going to stick it out to the end, I should get out earlier (which if everybody else does the same results in a stampede for the exits.)

In these situations, anything can happen, and the process of coordinating expectations and actions is likely to be chaotic. Cooper-Donaldson and Pirrong lay out some plausible stories (based on particular specifications of beliefs and the trading mechanism), but they are not the only stories. They mainly serve to highlight how game theoretic considerations can lead to very complex outcomes in situations with market power and inelasticity.

One thing that is sure is that these game theoretic considerations don’t matter much if the elasticities of delivery supply and demand are large. Then no individual can distort prices very much by delivering too much or taking delivery of too much. Then the coordination and expectations problems aren’t so relevant. However, when delivery supply or demand curves are very steep–as is the case in Cushing now due to the storage constraint–they become extremely relevant.

Perhaps one analogy is getting out of a theater. When there are many exits, there won’t be queues to get out and little chance of tragedy even if someone yells “fire.” If there is only one exit, however, hurried attempts of everyone to leave at once can lead to catastrophe. Moreover, perverse crowd dynamics occur in such situations. That’s where we were yesterday.

About 90 percent of open interest liquidated yesterday. That is why today is returning to some semblance of normality–the exit isn’t so crowded (because so many got trampled yesterday). But that begs the question of why the panicked rush yesterday? That’s where the game theoretic “anything could happen” answer is about the best we can do.

About that storage constraint. My post yesterday focused on someone with a large short futures position raising the specter of excessive deliveries by not liquidating that position, thereby triggering a cascade of descending offers until the short graciously accepted at a highly profitable price.

But there is another market power play possible here. A firm controlling storage could crash prices (and spreads) by withholding that capacity from the market. The most recent data from the EIA indicates about 55 mm bbl of oil storage at Cushing. That’s about 80 percent of nameplate capacity (also per EIA.). Due to operational constraints (e.g., need working space to move barrels in and out; can’t mix different grades in the same tank) that’s probably effectively full. Therefore, someone with ownership of a modest amount of space could withhold it drive up the spread. If that party had on a bull spread position . . .

Third, we are into Round Up the Usual Suspects mode:

And first in line is the US Oil ETF. There has been a lot of idiotic commentary about this. They were forced to take delivery! (Er, delivery notices aren’t possible before trading ends.) They were forced to dump huge numbers of contracts yesterday! (Er, they publish a regular roll schedule, and were out of the May a week before yesterday’s holocaust. They also report positions daily, and as of yesterday were 100 pct in the June.)

Not to say that USO can be implicated in hinky things going on in the June right now, but as for May–that dog don’t hunt.

Fourth–WTF, June WTI? Well, my best explanation is that the carnage in the May served to concentrate minds regarding June. No doubt risk managers, or risk systems, forced some longs out as the measured and perceived risk for June shot up yesterday. Others just decided that discretion was the better part of valor. The extremely unsettled positions no doubt impaired liquidity (i.e., just as some wanted to get out, others were constrained by risk limits formal or informal from getting in), leading to big price movements in response to these flows. If that’s a correct diagnosis, we should see something of a bounceback, but perhaps not too much given the perception (and reality) of an extremely asymmetric risk profile, with going into expiry short being a lot more dangerous than going into it long. (This is why expectations about future conditions at delivery can impact prices well before delivery.)

Fifth, on a personal note, in an illustration of the adage that the apple doesn’t fall far from the tree (and also of Merton’s Law of Multiples) my elder daughter Renee completely independently of me used “WTI WTF” in her daily market commentary yesterday. I’m so proud! She also raised the possibility of negative prices some time ago. Good call!

And I finish this just in time to bring you the final results. CLK goes off the board settling at $10.01, up a mere $47.64. CLM settles at $11.57, down -$8.86. The closing KM20 spread, $1.56.

Someday we’ll look back on this and . . . . Well, we’ll look back on it, anyways.