Streetwise Professor

January 5, 2024

The Fall of Claudine Gay: Turning Questions of Fact Into Matters of Motive

Filed under: Politics — cpirrong @ 1:00 pm

Claudine Gay has resigned as president of Harvard. Claudine, we hardly knew ye!

Well, we did, actually, and all too well. And for those who are slow on the uptake her NYT cri de coeure proves who she is without a doubt: a dishonest dealer from the race card and victimhood card decks. Which only puts paid as to why she got the job in the first place despite a thin gruel CV.

Gay admits to “mistakes” and “errors” which she claims she addressed by “promptly [requesting] corrections from the journals in which the flagged articles were published.”

Oh, really? Was she previously unaware of her copying, and only requested corrections when found out?: such ignorance would only raise a huge host of other issues. And more substantively. She only requested corrections on the articles initially identified: subsequently many further instances have been flagged. Why didn’t she proactively (a) reveal these instances when the earlier ones were identified, and (b) request corrections on those as well.

No. Claudine Gay attempted a “modified, limited hangout.” Worked out about as well for her as it did for Nixon.

Subsequently other serious allegations have surfaced, notably regarding various data abuses in her published research. When queried about these some time back, she refused to supply her data to those questioning her–a clear ref flag. And you wonder about why there is a replication crisis?

I strongly suspect that Harvard realized that there was fire producing this smoke, and that such infractions couldn’t be semantically obfuscated with argle bargle like using “some material duplicated other scholars’ language, without proper attribution” rather than the direct and accurate single word “plagiarism.” So . . . adios! Claudine.

As many have noted, this won’t actually change anything. Gay’s rise to the pinnacle of academia is but a symptom of the deeper rot in these institutions, and her departure will not affect that rot one iota. Indeed, DEI is a hill academia will die on: Gay was merely a casualty in the battle.

The frenzied response not just in academia but among media sycophants reveals a complete lack of remorse, or even serious retrospection. Operating on the theory that the best defense is a good offense, myriad academics (especially at “elite” schools) and journalistic lackeys have directed their furious fire at those (like Christopher Rufo) who had the temerity to open Gay’s closet and rattle the skeletons it contains.

This is an example of the classic leftist/Marxist tactic of turning every question of fact into an issue of motive.

In reality, the truth of a statement or claim is independent of who makes it. But we know that the postmodern, progressive, crit theory types who infest academia don’t believe in truth. To them, it’s all about power.

And that is the core of the rot. The defense of Gay shows that that rot survives her defenestration.

The competition is stiff, but the AP wins the grand prize in the ad hominem attack-defense contest. In reacting to Rufo’s celebratory tweet, the AP retched up–I mean wrote:

On X, formerly Twitter, he wrote “SCALPED,” as if Gay was a trophy of violence, invoking a gruesome practice taken up by white colonists who sought to eradicate Native Americans.

In its never-ending campaign to racialize everything, and specifically to blame whitey for every ill in the world, the left digs, hits the bottom, and keeps digging.

They could have made their point by putting a period after “as if Gay was a trophy of violence.” As tendentious as that would have been, the AP felt obliged to inject yet another–and despicable–gratuitous racial attack.

And it reveals yet again the utter dishonesty and contempt for truth that infests almost all leftist rhetorical.

The statement’s dishonesty is revealed by its slipperiness. “Taken up by white colonists.” Taken up from whom? Native Americans (“Indians”) perhaps? Well, of course.

But the AP then insinuates that the practice was taken up as a part of a campaign of genocide. Whether or not such a deliberate campaign of eradication existed at all, and among “white colonists” generally, linking it to scalping suggests that it was an integral component of that campaign. As if that matters fuck all in the issue of Claudine Gay. It is just another wave of the racialist bloody shirt as an attempt to demonize her critics as inveterate racists and white supremacists whose criticisms are therefore beyond the pale.

After getting ratioed out the wazoo, the AP stealthily added that scalping “was used by some tribes against their enemies.” 1. Who knew? 2. Were those enemies “white colonists”? Would that make it OK?

Of course scalping was overwhelmingly a “gruesome” (hey–the AP agrees) practice engaged in first and foremost by Native Americans of virtually all tribes against all their enemies of all races.

Now, it was not exclusively an Indian practice. Some whites (and blacks) employed it as well. Crow Killer Johnson (lionized in a very different time in a movie starring Robert Redford) was notorious for taking and keeping the scalps of Crows and Blackfeet. Though that might have been the least objectionable of his desecrations: he was also known as Liver Eater Johnson, and not because he found elk and bison livers to be a delicacy.

Confederate guerrillas in Missouri, such as “Bloody Bill” Anderson and George Todd also took scalps of their Yankee enemies, both white and black.

But these were the exceptions. The rule was that scalping (and other forms of trophy taking and desecration of the dead) was a nigh universal practice among American tribes.

I have something of a personal interest in this. My GGGGGF Abel Sherman (I might be off by a G there) was infamously killed and scalped by a Delaware Indian named Silveheels in 1794 (supposedly the last white “colonist” killed by Indians in Washington County, OH). His tombstone reads “Here lyes the body of Abel Sherman who fell by the hand of the savage on the 15th of August 1794, and in the 50th year of his age.”

The hand of the savage! Where are the smelling salts?

Abel’s 18th century tombstone is preserved in the Cmapus Martius Museum in Marietta, Ohio. (At least, I think he hasn’t been canceled yet):

The details of his death and scalping, and the identity of the perp, are very well documented. His scalped body was found in the woods near what is now called Dead Man’s Creek. His long hunting shirt contained mayapples that he was apparently collecting when ambushed. His musket was found concealed in a hollow log.

As for the perp, some months later Silverheels wandered into a logging camp, and sitting around the fire after a few tugs from the jug, related his exploits during the late war. Among them, coming across an old white man picking mayapples, whom he slew and scalped, and then deposited the man’s musket in a hollow log.

Unbeknownst to Silverheels, one of the loggers in his audience was Abel Sherman’s son, who of course knew all these details. Silverheels was found shot dead shortly afterwards. Connect those dots.

There is a way to implicate white colonists here though. Silverheels bragged that the British in Detroit–who paid for scalps of American settlers–paid double the normal price for Abel’s because the old man had a double crown: Silverheels cut the scalp in half, each half with a crown, and sold the pieces to the British. So I guess the AP is right. Scalping was a gruesome practice taken up by white colonists–at least by proxy!

The point of this long digression–and it does have a point!–is to illustrate the fundamental dishonesty of the left, and in particular their utter disregard for the truth, and their willingness to distort realities in order to construct racist narratives that they use to club those who dare to challenge their racialist–and racist–policies. At a time when such inflammatory tactics need to be toned down, and indeed eliminated, the left turns them up to 11.

And that’s why Claudine Gray’s fate is all but irrelevant to the fate of American academia, or political discourse in America. She is merely an illustration of the rejection of merit and truth in favor of “critical” racialist narratives and politics, and the reaction to her demise demonstrates beyond cavil how viciously her ilk will fight to defend them.

Print Friendly, PDF & Email

January 1, 2024

Happy New Year!

Filed under: Uncategorized — cpirrong @ 3:07 pm

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

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

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

The view from the front door:

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

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

Print Friendly, PDF & Email

Agency Problems, or, The Progs Lose Control Of Their Bodily Functions in Fear of How the SCOTUS May Rule

Filed under: Commodities,Derivatives,Economics,Politics,Regulation — cpirrong @ 2:43 pm

In the coming year the Supreme Court will rule in two cases that could result in the imposition of substantial constraints on the administrative state. Since federal administrative agencies are progressive pets, the prospect has the left freaking out. And I do mean freaking out.

The first case is Securities and Exchange Commission v. Jarkesy. Here Jarkesy is challenging the legitimacy of the SEC (and by implication other agencies) relying on internal administrative law judges (“ALJs”) to decide enforcement actions brought by the agency. Jarkesy argues that such cases should be tried in Article III courts (i.e., in federal court).

The Constitutional basis for his argument is compelling. Agencies flout the separation of powers: they combine legislative, executive, and judicial functions. In the case of enforcement actions like that against Jarkesy, the SEC brings the charges against the defendant/respondent, prosecutes the case, and if the agency uses an ALJ, tries the case and renders the judgment and assesses the penalty. The case is brought under regulations adopted by the agency in a quasi-legislative role (supposedly under powers delegated by Congress–an issue that is relevant in the other case I will discuss).

Jarkesy argues that being subordinate to, and accountable to, the agency, ALJs are not independent are subjecting him to their judgment violates his Constitutional rights, and in particular his right to due process.

As an empirical matter, Jarkesy has a compelling case. I recall that in an antitrust case, Justice Potter Stewart opined that the “only consistency” in such cases is “that the government always wins.” (That was in the 60s.). And that was before Article III courts. That is even more true in cases before ALJs in agencies like the SEC and FERC. (When is the last time a FERC ALJ decided against the agency in a big matter?)

Jarkesy therefore wants the trier of fact to be an ostensibly independent Article III federal court. He doesn’t want to have his fate decided by an ALJ who is effectively beholden to the commissioners who run the agency who are bringing the charges and prosecuting them.

Reasonable, no? But not to the progs. They are losing their sh!t over the prospect. Case in point, this article in the Atlantic–which is always a reliable barometer of prog opinion.

According to author Noah Rosenblum, this would represent The End of the World as We Know It.

It would “destroy the government”!!!!!!!! (He says this like it’s a bad thing!–JK).

Rosenblum’s argument veers between the hysterical and the dishonest.

This part in particular cracks me up:

Jarkesy’s second claim—that the internal adjudicator who first heard his case held too much independence—is especially galling. These adjudicators should be independent; the alternative would be to put their regulatory powers at the political whim of whichever administration might be in charge. 

The relevant question is “independent from whom?” The very essence of Jarkesy’s argument is exactly that ALJs are creatures of “whichever administration may be in charge.” “The political whim of whichever administration might be in charge” is precisely the problem, not the “alternative.”

Article III courts are about as independent of the current administration (whether it be the presidential administration, or the commissioners of an agency) as is possible–and that’s by the Founders’ design. ALJs are definitely not.

Rosenblum loses control over his bowels at the thought that allowing those accused by federal agencies be judged by, you know, federal judges will gut the ability of agencies like the SEC to prosecute financial crimes:

The SEC was created as an independent agency in 1934, after the financial crash of 1929, to thwart the sort of market manipulation that preceded the Great Depression; Congress has granted it additional powers over the years to continue protecting financial markets. Responding to catastrophes and guarding against market manipulation is exactly the kind of work that Congress should empower the executive branch to do. Requiring Congress to legislate in response to every new fraud some crook might dream up would not be a good use of its time. And there’s no reason to think that delegating authority to police markets runs afoul of the Constitution.

Requiring those who “police markets” to prove their cases beyond the relevant burden of proof (preponderance of the evidence in a civil case) to a truly independent trier of fact does not permit manipulators and fraudsters to run rampant, any more than requiring your local police and prosecutor to prove charges before a judge allows murderers and rapists to run rampant.

Given the stakes in federal securities cases, which can easily run into the tens or hundreds of millions, if not more, requiring prosecuting agencies to clear such a hurdle is eminently reasonable.

What is Rosenblum so afraid of? These people would be prosecuted before Article III courts under the same laws and regulations that they are currently prosecuted before ALJs. A decision adverse to the SEC in Jarkesy would not eliminate the Securities Act, or the Exchange Act, or the SEC regulations adopted pursuant thereto. It would just require the SEC to prove cases brought under those acts and regulations in an Article III court rather than on the agency’s home court.

Rosenblum’s ultimate argument is that Jarkesy is a scumbag:

George R. Jarkesy Jr., a right-wing activist and conservative-radio talk-show host.

Heaven forfend that such a MAGA man should have rights! Oh! The humanity!

The kind of ad hominem chickenshit to which the left routinely resorts to today, and uses to stamp “QED!!!!” on its argument. By doing so, Rosenblum betrays the substantive weakness of his arguments.

I note that many seminal Supreme Court cases involving fundamental Constitutional rights have involved scumbags. And the Supreme Court ruled–rightly–that scumbags have rights too.

It is interesting to note that the CFTC now brings most of its manipulation cases–you know, “exactly the kind of work that Congress should empower to the executive branch to do”–in Article III courts. Now, as it happens, there is a tangled and unrepresentative story behind this, namely that the CFTC ALJs proved to be particularly dysfunctional and inveterately opposed to the agency’s enforcement staff. (I have intimate knowledge and experience regarding this history.). But the why is no matter. The reality is that an agency can bring manipulation cases (and fraud cases, for that matter) in federal court. Requiring the SEC (and other agencies) to do so will not “destroy the government” or allow wrongdoers to run rampant.

Indeed, the CFTC’s experience in federal court–most notably, its loss in the DRW/Wilson case–demonstrates the virtue of forcing agencies to play in the big leagues. It reduces the probability of Type II errors, i.e., false convictions.

I also note that there are rights of private action for certain federal securities, antitrust, and commodities law violations. Here private plaintiffs can bring cases in federal court against alleged malfeasors. I believe that such private rights of action are more reliable deterrents of bad conduct than agency actions, for a variety of reasons. (Again, this observation is based on considerable experience and observation.)

The other case that has the progs’ undies in a bunch is FDA v. Alliance for Hippocratic Medicine. This case threatens to demolish so-called “Chevron deference,” a reference to the case Chevron v. Natural Resources Defense Council in which Justice Scalia (!) on behalf of the court opined that courts should defer to agency judgements in cases in which Congress did not unambiguously delegate authority. That is, when there are “gaps” in a statute pertaining to a regulatory agency, Article III courts should defer to agency decisions regarding on how to fill those gaps.

Alan Blinder (among others) fears the abrogation of Chevron deference. Blinder is less hysterical than Rosenblum in his criticism (a low bar to clear!) but substantively he is no more persuasive.

The gravamen of Blinder’s argument is that agencies are experts, and we should defer to their expertise: we are not worthy to challenge them, nor are federal judges!

This has been the mantra of progressives since, well, the Progressive Era. Blinder is channeling his inner Woodrow Wilson. (Scary thought, that.)

There are two major problems with this. The first–and arguably less important–is that their “expertise” is vastly exaggerated. I mean vastly. Again based on extensive personal experience, I conclude that this is definitely the case when it comes to complicated markets (e.g., electricity, commodity derivatives). And yes, I realize that these complexities challenge federal judges, but the relevant question is who is better to resolve these issues: on that, I come down firmly on the side of the judges.

The second is what economists call “agency problems”–which in the present context can be called Agency problems. That is, the progressive view endorsed by Blinder (and Woodrow Wilson et al) is that agency decision makers are acting in the public interest.

This view has been laughable since the 1960s when Stigler posited “capture theory,” and then others like Sam Peltzman and Gary Becker looked at how the regulatory sausage is really made. The Public Choice literature has also utterly discredited the public interest view.

In a nutshell: regulatory agencies have their own agendas and own incentives that are not aligned with the public interest, for myriad reasons.

As valuable and insightful as they are, even the Peltzman-Becker-type analyses are inadequate. They are best suited to model the regulatory laws legislatures pass. They posit a decision maker looking to maximize political support (“votes”). That makes some sense when modeling legislatures that are somewhat accountable to an electorate. But the problem raised by Chevron deference is that regulatory agencies are incredibly insulated from such electoral feedback. If you view Congress as an agent of the public, agencies are agents of agents of the public. As a result, their incentives are extremely attenuated, and they have considerable scope to implement their own agendas regardless of whether they comport with the public interest or not.

John Cochrane laments that a new theory of regulation is required, because the Stigler-Peltzman-Becker theories, and public interest theory, are inadequate. I agree that these theories are inadequate, but do not believe that there is a vacuum. Certain strands of public choice that treat bureaucracies as independent agents in their own right have much to teach here. I recommend the works of Gordon Tullock and James Q. Wilson in this regard. (Tullock was an amazing scholar whose work deserves close attention–even his work from nearly 60 years ago.)

Here’s my Cliffs Notes theory of regulation: a large unaccountable bureaucracy combined with Hayek’s “why the worst get on top.” Ideologues with agendas are attracted to agencies with power over their agendas. Ensconced in power, they are largely immune from external check. So ensconced, they wreak havoc, the public be damned.

People, I give you–the EPA.

That’s why deferring to these agencies is disastrous. Their “expertise”–really their specialization in subjects of particular interest to the ideologues who infest them–is positively dangerous when given free rein.

I hope that the Supreme Court decides in Jarkesy’s favor, and also hacks away at Chevron deference. That said, I realize that the Supreme Court usually splits the baby, and that ringing decisions that drastically curtail the scope of agencies’ powers are unlikely. Meaning that the war against the agencies–or more accurately, the war of the agencies against us–will continue.

Print Friendly, PDF & Email

December 7, 2023

Universities, Bastions of Free Expression. As If.

Filed under: Politics — cpirrong @ 1:21 pm

Former University of California Chancellor Clark Kerr once famously said that “I find that the three major administrative problems on a campus are sex for the students, athletics for the alumni and parking for the faculty.”

University presidents’ and chancellors’ jobs are much simpler now. No such multitasking! The job is now pander to leftists, pander to leftists, and pander to leftists.

This is not a heavy lift, moreover, because virtually all university presidents and chancellors are leftists, chosen by leftists for their reliable leftism.

Only when they leave the hermetically sealed environment of the “modern” campus (“modern” in quotes because now most universities are now a perverse mixture of the pre-modern and post-modern) do the presidents really face any real challenges. As when the presidents of Harvard, MIT, and Penn went this Tuesday (5 December 2023) to Capitol Hill to testify on antisemitism on campus. They put on a Herculean display of dissembling, evasion, and outright dishonesty.

I mean, what fools do they take us for? They all defended their letting virulent antisemitism run riot on their campuses by avowing their commitment to free expression.

I shit you not.

Who you gonna believe? Them or your lyin’ eyes and ears? To say that American universities are now viciously hostile to free expression and to intellectual diversity is to understate things. Vastly. They are Cancel Culture HQ. Censorship runs riot, and of course since they have censored with extreme prejudice in exemplary situations pour encourager les autres, self-censorship is the rule for those who might dare deviate from the program, lest their universities take the measures necessary to get their minds right.

The presidents (dishonestly) said they intervene only when expression crosses the line into conduct. This drew an incredulous response from Rep. Elise Stefanik (R-NY): “Does that [antisemitic, genocide advocating] speech not cross that barrier? Does that speech not call for the genocide of Jews and the elimination of Israel?”

Penn’s Elizabeth Magill replied: “It is a context-dependent decision, congresswoman.”

So just in what context is calling for genocide on this side of the line, Lizzie? Rep. Stefanik thinks the same:

“That’s your testimony today?” Stefanik responded. “Calling for the genocide of Jews is depending upon the context? That is not bullying and harassment? This is the easiest question to answer ‘Yes,’ Ms. Magill.”

I predict that when pressed further, Dr. Magill and her like will abandon the Context Line and take shelter in the Nuance Line.

I have a very high tolerance for speech I consider offensive, and that most people consider offensive. The biggest problem with universities is that their tolerance goes only one way–left.

Perhaps I overstated things when I said university presidents have only one job. They also have the task of shaking loose large bank from donors and government. The only possibility for an even slight course correction is that the backlash to the rank antisemitism on university campuses will reduce the flow of donor funds. (Alas, it will probably encourage additional flows from the current administration.) But even there the hopes are slim. Universities will bob and weave and make insincere apologies and commitments to change. The intensity of the tumult on campuses will abate when Israel completes its campaign in Gaza. When it does, the donors will probably return, by and large.

Universities were the first conquest in the left’s Long March Through the Institutions. Its victory there would do Tamerlane proud, for the destruction it wreaked. To be honest, I believe they are beyond saving.

Print Friendly, PDF & Email

December 5, 2023

Luddism in the Oil Futures Markets

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges — cpirrong @ 1:06 pm

The old, old game of Pin the Tail on the Speculator has been updated. According to Bloomberg, the speculators who now “disrupt” the oil markets are not human: they are bots. Specifically, bots operated by Commodity Trading Advisors (CTAs).

This argument consists of two parts. The first being that the crude oil futures markets have been disrupted. The second being that the CTAs are the cats behind the disruption. Both plinths are defective.

Insofar as disruption is concerned, Bloomberg claims “Trading oil has perhaps never been more of a roller coaster ride than it is today.” Further:

Just in the past two months, prices threatened to reach $100 per barrel, only to whipsaw into the $70s. On one day in October, they swung as much as 6%. And so far in 2023, futures have lurched by more than $2 a day 161 times, a massive jump from previous years.


Never more of a roller coaster ride? Well, let’s do something crazy. Like look at historical data.

The conventional measure of the wildness of the ride is volatility. The annualized daily volatility of crude oil during the alleged Rule of the Bots (the last two years) is 41.62 percent. The historical volatility (2010-2020) is 41.2 percent. (This omits 4/20/20 and 4/21/20, the day of the negative oil price and the following day.) Excluding the COVID months of 2020 produces a somewhat lower vol of 36 percent, not that much smaller than in the last two years. Further, extended excursions of realized volatility to above 40 percent are not unusual in the historical record. So to say that oil prices have been more volatile recently than has historically the case is categorically false.

With respect to the big daily moves, the Bloomberg analysis is fatally flawed because it looks at dollar price moves: big dollar price moves are more likely when prices are high than they are low, and by historical standards oil prices have been high in the last several years. It is appropriate instead to focus on percentage price changes (which is how vols are calculated, btw).

Rather than count the number of times an arbitrary threshold (like $2/bbl) is breached, it is more rigorous to look at a statistical measure of the frequency of extreme events: the “kurtosis.” Kurtosis bigger than zero means a distribution has fat tails relative to a Gaussian (“normal”) distribution, i.e., extreme moves up or down are more likely than under a normal distribution. The bigger the kurtosis, the more likely extreme moves are, i.e., the fatter the tails of the distribution.

Looking at the kurtosis of daily percentage changes rubbishes the Bloomberg analysis. The kurtosis in the last two years is 4.15, whereas from 2010-2020 it was 27.9! That is, the frequency of extreme daily price moves in years of alleged CTA disruption is far, far smaller than was the case prior to their alleged emergence as the dominant force in the. markets.

Interestingly, the kurtosis of dollar price changes is not that different between eras: 6.9 post-2020 vs. 7.2 2010-2020. So even extreme dollar price moves are less frequent in the alleged CAT era than previously. The difference is smaller, which demonstrates the need to take into account the level of prices in an analysis of “extremes.”

So the predicate for the article–that oil prices have been unusually volatile and unusually susceptible to extreme moves in the past couple of years–is not supported by the data.

As for the alleged causal factors, the dominance of CTAs is not evident in the data. CTAs are included in the “Managed Money” category of the CFTC’s Commitment of Traders Report. Here is a graph of the net position of Managed Money going back to 2006:

There was a peak in 2017-2018–a drilling boom in the US, to which I will return shortly–followed by a decline–a drilling drought–followed by a rebound to levels comparable to the 2017-2018 levels. Indeed, managed money net positions have actually been relatively low in the past year (with the exception of a recent spike) as compared to the post-2015 period as a whole. Certainly no Alice to the moon spike in CTA presence apparent here.

Bloomberg claims that the CTAs have become dominant in large part due to a sharp decline in producer hedging:

That coincided with the collapse of another source of futures and options trading: oil-production hedging. During the heyday of shale expansion about a decade ago, drillers would lock in futures prices to help fund their growth. But in the aftermath of the pandemic-induced price crash, a chastened US oil industry increasingly focused on returning cash to investors and eschewed hedging, which can often limit a company’s exposure to the upside in a rising market. By the first quarter of this year, the volume of oil that US producers were hedging by using derivatives contracts had fallen by more than two-thirds compared with before the pandemic, according to BloombergNEF data.

It should be noted that this claim that CTAs have achieved greater dominance due to an ebbing of hedging is implausible on its face. Futures are in zero net supply. If producers have reduced their net positions, necessarily non-hedgers–including CTAs–must have reduced their net positions.

Hedging has indeed declined. In the oil market, much (if not most) producer hedging is via the swaps market rather than direct producer participation in the futures market. Banks buy swaps from producers, and then hedge their exposure by selling futures. Here is a chart of net Producer and Merchant Plus Swap Dealer exposure from the CFTC COT data:

Note that there was a big increase in hedging activity (by this measure) in 2017-2018 that was reversed, followed by a partial resurgence, but in the last couple of years hedging activity has indeed ebbed, and reverted to its 2016 levels.

But note that this pattern of hedging mirrors closely Managed Money net positions. As is necessarily the case. If there is less hedging, speculators necessarily hold smaller positions. Meaning that this statement is nonsensical:

The recent wave of dealmaking by US oil producers threatens to further accelerate the decline in hedging. And it’s highly likely that CTAs will continue to fill the vacuum left by those traditional market players.

It’s not as if CTAs–or speculators generally–are “fill[ing] a vacuum.” If hedgers reduce positions, speculators do too.

The Bloomberg writers may dimly glimpse the truth, though they don’t realize it.

How did CTAs come to become so dominant? Like many current phenomena, the answer starts in the depths of the pandemic.

As shutdowns engulfed the world in 2020, fuel consumption collapsed by more than a quarter. All hell broke loose in the crude market. The benchmark US oil price briefly dropped to minus $40 a barrel and investors were in wholly new territory. Some funds that took longer-term views based on supply-and-demand fundamentals quickly pulled out.

Such bear markets proved to be “extinction events” for traditional funds, which made way “for algo supremacy,” the bulk of which are CTAs, said Daniel Ghali, senior commodity strategist at TD Securities. Russia’s invasion of Ukraine gave the CTAs another foothold. Spiking volatility in the futures market drove many remaining traditional investors to the exits, and open interest in the main oil contracts tumbled to a six-year low.

So if CTAs have indeed become more prevalent, it is because they have supplanted other speculators who exited the market. Futures are risk transfer markets. If some of those who previously took on the risk from hedgers have exited the market, either hedgers must hedge less or other speculators must step in. It seems that both things have been happening.

That’s not some ominous development–it’s markets at work. And CTAs shouldn’t be damned–they should be praised for stepping into the breach.

And another paragraph in the Bloomberg article suggests at what is actually happening here:

The unpredictability of this year’s market swings haven’t been kind to human traders, many of whom are making less money on oil than they did last year when they raked in record gains, according to market participants.

What is likely driving this story is whinging by the traditional specs, who have been outcompeted by the bots. “No fair! They are making money and I’m not! They must be cheating.”

Reminds me of my epigram from my manipulation book, where riffing on Ambrose Bierce’s Devil’s Dictionary I wrote something to the effect that a market is manipulated when it moves against me.

Again, this is markets at work. The fact that bots are doing well relatively to trad specs means that they are better at predicting market movements, or have lower costs of bearing risk, or both.

It does not mean that they are making the markets move.

So this Terminator Tackles the Oil Market narrative is really nothing more than Luddism. A new technology outcompetes the old. The incumbents complain. End of story.

Print Friendly, PDF & Email

November 30, 2023

Ridley Scott Screws the Pooch

Filed under: History — cpirrong @ 3:24 pm

I saw Ridey-Scott’s Napoleon on Thanksgiving. I am not thankful.

The film has been savaged by numerous reviewers, so perhaps it is gratuitous for me to put the boot in, but I figure I have to get my money’s worth somehow.

I went in ready to grant liberal artistic license and overlook some historical inaccuracies. For instance, yeah Napoleon didn’t shoot cannon at the Pyramids of Giza, but whatever.

But the movie definitely violated the terms of its license in ways that are grossly misleading. For example, Napoleon was a spectator of the Battle of Waterloo–when he wasn’t taking a nap, that is–and fled after watching “la Garde recule” and the Prussians crushing his right flank. He definitely did NOT lead a cavalry charge–especially given that he might well have been suffering from hemorrhoids at this climactic moment of his military career. Depicting him doing so gives an extremely distorted picture of Napoleon the man and the historical figure. (Napoleon’s departures from his armies in Egypt, Russia, Germany–after Leipzig–and Waterloo were the subject of criticism, but the film only mentions the criticism regarding Egypt.)

This is not a minor rewriting of history.

The battle scenes were painful to watch because of their comic book unrealism. My groaning began at the very outset. Napoleon’s attack on the British at Toulon was nothing like the actual thing. He didn’t assault a masonry fortress (which I think was depicted by the Vauban fort at Collioure, one of my favorite places): he assaulted earthen fortifications. His leadership there was valiant, widely admired, and oft remarked upon: in Ridley-Scott’s version he was just part of the crowd.

And speaking of earthworks, the French at Austerlitz and the British at Waterloo didn’t have them, let alone trenches festooned with fraise.

Yeah, I get that it is hard to depict on the screen the surprise that Napoleon pulled at Austerlitz by abandoning then assaulting the Pratzen Heights, but to convey surprise by having French cannoneers hide under white tarps pulled over their (non-existent in reality) trenches is just silly. Better to describe Napoleon’s tactical coup through dialog.

I could go on dissecting the battle scenes, but will leave it at that.

These failings are minor compared to fundamental problems in plot and character development.

Most notably, the real Napoleon was amazingly charismatic, and that never comes through in the film. Not only is Joaquin Phoenix too old by far to play anyone but the dying Napoleon, his Bonaparte comes off as something of a loser closer to the shlub living with mom in The Joker than a world striding colossus. Who would follow this guy to the concessions stand, let alone into the frozen wastes of Russia? Maybe a more accurate depiction of Toulon, or a scene of Napoleon at the Bridge of Lodi, would have helped convey why Napoleon could move armies and nations.

For understandable reasons–not least that it is easier to portray inter-personal dramas than sweeping historical events like epic battles–a good deal of the plot revolves around Napoleon and Josephine. We know that Napoleon was smitten by her, and often acted like an idiot about her especially in his absence, but Napoleon Dynamite seems like a manly chick magnet in comparison to Phoenix’s Napoleon Bonaparte the lover. And the depiction of Josephine also makes one wonder what Napoleon–and the many other men in her life–and I do mean many!–saw in her.

As another illustration of Ridley-Scott’s fundamental distortions of history that goes well beyond justifiable artistic license, in the film’s telling Napoleon leaves Elba because he reads in the newspaper that Josephine was canoodling with Tsar Alexander. FFS. (His departure from Egypt was also supposedly in response to being informed of Josephine’s infidelity.)

Napoleon thought much more above the neck than below the waist. This film would have you believe otherwise.

Casting was uniformly odd. The character playing Robespierre, for example, would have been better suited as Danton :P. (That said, the scene in which Robespierre was accosted and shot himself–unsuccessfully–was one of the better ones in the movie. Another was the assault of the Council of Five Hundred on Napoleon’s person during the Brumaire coup.)

Another minor but repeated and therefore annoying irritation was the atmospherics. The weather in most scenes was depicted as cold, cloudy, and/or rainy: scenes in sunny places (like Egypt or at Tilsit) take place largely in tents. You would think that France was Ridley-Scott’s native Yorkshire. He has said that the dreary, ever-raining atmospherics of Blade Runner were inspired by memories of his Yorkshire childhood. So I guess in Napoleon he gave us have Blade Runner meets Bonaparte.

But maybe that’s the point. Maybe Ridley-Scott is trying to say that Napoleon’s world was dystopian. There are certainly many–and have been since he exploded on the world stage–who believe that Napoleon led the world to perdition, and that is a valid stance for Ridley-Scott to take. But it begs the questions of what drove him to it, and why people followed him to the dystopia to which he led them. Ridley-Scott and Joaquin Phoenix provide no answers.

All of these liberties–to characterize them kindly–could be excused if they were taken in the cause of conveying fundamental truths. But they do the exact opposite. They give us an inverted Napoleon.

Successful biopics, like say Lincoln or Patton, succeed in this despite departures from the literal truth. Yes, Ridley-Scott made a daring choice of attempting to cover virtually the entire sweep of one of the most eventful lives in recorded history, and one that spanned more than two decades, unlike Lincoln which focused on a few months or Patton which covered barely three years. But that choice means that he had to be all the more precise and creative in his choice of how to convey accurately Napoleon’s personality and conduct. By choosing dramatic devices that uniformly deceive and distort, Ridley-Scott fails his audience, and fails the history he claims he wants to portray.

Print Friendly, PDF & Email

November 28, 2023

Tales of Two Wars

Filed under: History,Military,Politics,Russia,Ukraine — cpirrong @ 2:12 pm

The war in Ukraine grinds on with no appreciable movement on either side–except in the body counts.

The conflict is often compared to World War I, but this is in some respects unfair to World War I. Territorial gains on both sides are measured in meters–when there is any progress at all. Even catastrophic assaults like the Second and Third Battles of Artois in 1915 saw the French advance a few miles.

The most extreme current example is the sustained Russian assault on Avdiivka. Day after day for more than a month the Russians have mounted attacks on the three fronts of the Ukrainian salient enclosing the town. And day after day their attacks are repelled with massive losses. Many times the assaulting troops do not even make it to the contact line, being smashed by Ukrainian artillery and drones as they move to contact.

At most the Russians take a field or two here, a tree line there.

The Ukrainian experience to the south, around Verbotene, is much the same. The Ukrainians made some decent (albeit slow) progress there during the summer, creating a modest bulge in the Russian positions, and here and there breaching Russian minefields and fortifications. But for months the two sides have fought to a standstill, exchanging fields and tree lines here and there.

Moreover, in each location the attackers at first attempted armored assaults, only to suffer massive tank losses from mines, artillery, and drones. Consequently, each now mounts small infantry assaults. In Avdiivka, the Russian AFVs drop off their mounted infantry a couple of kilometers from the front. The soldiers slog forward and then throw themselves into frontal assaults.

You can find lots of video of the results on Telegram. It is not pleasant viewing.

And if these infantry assaults succeed breaching enemy lines? Nothing will change. Just as in WWI, infantry cannot exploit a penetration by infantry. The “successful” attackers are worn out and often combat ineffective due to heavy losses. Even if they were capable of moving forward, or reserves could be rushed into the breach (something neither side has proved able to do) the defenders can withdraw and regroup faster than the attackers can advance. Meaning that a “breakthrough” just moves the stalemate a kilometer or two. Absent the ability to exploit with armor–and crucially, without the logistics to support armored exploitation–decisive advances are impossible.

The stasis of the battlefield is in large part due to the inability of either side to achieve air superiority. In Ukraine, air superiority does not refer to manned fixed wing aircraft or helicopters, but drones. Both sides are able to operate drones for both reconnaissance and attack with relative impunity. This is a major reason (mines being another) for the impotence of armored forces.

The only front holding out the prospect for maneuver is in the south, on the left bank of the Dnieper/Dnipro River near Kherson. Unlike on the remainder of the front, here Russia did not create deep lines of entrenchments, and its forces are spread relatively thin. But an advance here would require Ukraine to send large amounts of supplies over a wide river, and it is doubtful that it is capable of doing this. (Its logistic capabilities to support a deep drive are suspect generally, even without the necessity of bridging a wide river, and defending the bridges.)

The Ukrainian government and its Western supporters claim that if it only had more weapons, it could drive out the Russians. Given the trivial incremental effect of the offensive weapons already supplied, this is to be seriously doubted.

The real constraint on Ukraine now is manpower, not equipment. It started at a severe manpower disadvantage, exacerbated by the emigration of many military aged men, evasion of conscription, and lukewarm volunteering. In contrast, Russia has proved able to replace its ravaged ranks by hook and crook, even without resorting to a formal nationwide mobilization. Even at an inflated exchange ratio, this meat swap is a contest that Ukraine cannot win.

That said, there is no real prospect for peace because Zelensky and many others in Ukraine are still wedded to the idea of driving Russia out of Ukraine altogether, and Putin is perfectly willing to pay the exchange rate for as long as it takes to out wait Ukraine.

Israel stupidly hit pause in the other war, in Gaza, apparently bowing to U.S. pressure. The pressure was stupid, and bowing to it was too. Israel was making steady progress at extirpating Hamas and digging up–literally–its military infrastructure.

The deal it made with Hamas takes off the pressure on the terrorist organization. Moreover, the terms of the deal, in which Israel releases more prisoners than Hamas does hostages only encourages future hostage taking. This is utterly insane.

The fecklessness of Biden and his administration exceeds even what I had expected–which is saying something. The only American hostage released so far is . . . wait for it . . . a relative of one of the connoisseurs of Hunter’s art. I mean you cannot make this shit up. And it demonstrates that the administration calculates that it will pay no political price.

The proper response to the taking of American hostages should have been reboot of “Perdicaris alive or Raisuli dead.” The Hamas “leadership” livin’ large in Qatar (apparently on large stacks totaling billions) should have been told: all our hostages alive, or you dead.

But noooooo. Indeed, that’s not even the worst example of his cravenness. Yesterday, he abjectly apologized to five (unnamed) Muslim heavyweights for questioning whether Gazan “authorities'” (AKA Hamas stooges’) casualty figures are accurate.

Joe is disappointed in himself. Aren’t we all. Aren’t we all.

He “promises to do better.” Even though the bar is very low indeed, I’m taking the under on that one. It’s always the sure bet with Biden.

War is always grim. These wars are even grimmer than most. They will be long running attractions, with no constructive results.

Print Friendly, PDF & Email

Javier Milei: Argentinian Hercules?

Filed under: Economics,Politics — cpirrong @ 1:26 pm

On Sunday 19 November 2023 the flamboyant–outré, actually–Javier Milei won the presidential election in woeful, tragic Argentina. “Won” does not really fully capture the result–he trounced his opponent, winning almost 56 percent of the vote.

Milei is repeatedly compared to Donald Trump, but there is really no comparison. He is truly unique among prominent world political figures. So unique that mainstream sources don’t know how to pigeonhole him–though God knows they strive mightily to do so.

Since he is not a leftist, he is of course repeatedly called “far right.” But any epithet that is used to describe both the open borders, anti-collectivist Milei and the nationalist, anti-immigration Alliance for Germany (AfD) is obviously meaningless–except as a signal from the left that someone is beyond the leftist pale.

He is also referred to as a populist, but that also widely misses the mark. Milei is a self-described anarcho-capitalist, whereas most populists now and historically (such as the Populist Party in the United States in the 1890s) are openly hostile to capitalism and markets: modern populists hurl the “neoliberal” insult at those with pro-market views far milder than Milei’s.

Even Milei’s dogs’ names advertise his beliefs and intellectual heroes. They are Murray (for Rothbard), Milton (for Friedman of course), and Robert and Lucas (a twofer for the late Robert Lucas–one of my professors at Chicago). What, no Friedrich? Milei should have cloned another one! (These pets are all clones.)

When I wrote Milei is not a leftist, let’s say that rather understates the matter. Milei loathes leftists and leftism, and repeatedly refers to them on television and in public appearances in scatalogical terms, and calls them “leftards.” He despises collectivism, and asserts bluntly that leftists are out to destroy you. His mission is to destroy them first.

As someone so vehemently hostile to the left and well outside conventional political categories, Milei’s victory has triggered a mass moral panic, especially in the media. The New York Times’ coverage was (unintentionally) hilarious: “Some voters were turned off by his past outbursts and extreme comments over years of work as a television pundit and personality.” Well, obviously a lot more weren’t, but I guess one has to take solace where one can, eh, NYT?

Milei’s agenda is indeed a radical one, especially for a statist basket case like Argentina. To combat the country’s massive (140 percent annualized) inflation, Milei says he will dollarize the economy and eliminate (“burn down”) the central bank. He also wants to reduce radically the role of the state in Argentina’s economy. He says he wants to “chainsaw” the government–and emphasizes the point by campaigning with an actual chainsaw.

His election on this program sparked a rally in Argentine financial markets, with government debt rising modestly and stock prices rallying smartly.

But will Milei be able to deliver? Some early commentary has doubted his ability to govern based on the fact that his party’s representation in the legislature is well below a majority.

Yes, that may be an issue, but not the major obstacle to Milei’s ability to transform Argentina into what it was at the dawn of the 20th century–an advanced, rapidly growing economy and a relatively free society.

The real obstacle is one that is faced by anti-statists everywhere–the bureaucracy. (I do not say “civil service” because that phrase is at best aspirational and more realistically a patent falsehood. Akin to the Holy Roman Empire that was neither holy nor Roman, the “civil service” is neither civil nor a service.)

Argentina’s bloated state is its own clientele with its own interests–mainly self-preservation and an expansion of its powers. Moreover, it has created a whole host of patronage clients in business and labor. Milei’s agenda is an anathema to this nexus of public and private interests. They will go to the mattresses and make war to the knife to subvert Milei and his agenda.

Even a president with an electoral mandate–like Milei–faces formidable obstacles to implementing his agenda. The most important obstacle is what economists call an “agency problem” (which in the U.S. could be referred to as an “Agency problem”). The bureaucrats are agents of the chief executive, but it can be nigh on to impossible to get these agents to implement the executive’s directives if they don’t want to. Their incentives are not aligned with the executive, and are often antithetical. As a result, they resist and often act at cross purposes with the executive.

The modern chief executive’s power to force his bureaucratic agents to toe the line is severely circumscribed. At best, the executive can make appointments at the upper levels of the bureaucracy (such as the heads of ministries or departments), but the career bureaucrats who can make or break the executive’s policy are beyond his reach, and not subject to any punishment if they subvert the executive’s agenda.

This problem is not unique to Argentina. Indeed, it is the main defect in the governance of virtually every country in the world. Cf. Suella Braverman in the UK, who was recently defenestrated as Home Minister for daring to offend the sensitivities of the British civil servants. (I again emphasize this phrase’s oxymoronic nature.)

But the travails of the likes of Braverman (or Trump) are likely to pale in comparison to Milei’s in confronting the gargantuan Argentinian state and bureaucracy. Even if he avoids Trump’s fault of repeatedly appointing those hostile to his agenda to the positions in the bureaucracy he can hire and fire, Milei will still face the immense task of bringing those myriad bureaucrats outside his direct reach to heel.

There are indications that Milei understands this problem, and has devised a solution. Rather than attempting to control particular bureaucracies, he states that he wants to eliminate government departments (like the Ministry of Education) altogether. This is likely the only way to succeed, but whether he can cut the bureaucratic Gordian Knot a la Alexander brings us back to the question of his doubtful legislative backing.

Indeed, Milei needs to be more than a mere Alexander. He must be a Hercules to clean the Augean Stable of the Argentinian state. I don’t hold out much hope–Hercules is a mythical figure, remember. But it is at least refreshing that someone has been elected to play Hercules, and one who is eager to take on this labor. Would that this starts a trend worldwide.

Nota bene: This post also appears at the Brownstone Institute, under the title “Milei’s Task Ahead: Defeating the Administrators.” Give it a click. Brownstone is a good organization that deserves your support. The website has a lot of interesting articles and is worth regular visits.

Print Friendly, PDF & Email

November 19, 2023

A Dozen More Observations on Israel-Hamas

Filed under: History,Military,Politics — cpirrong @ 5:42 pm

About 3 weeks have passed since my previous post making 18 observations on Israel v. Hamas. Events in those 3 weeks prompt some additional observations.

  1. Israel appears to be filtering out the near universal screeching, preaching, and second guessing regarding its methodical campaign in Gaza, where assault by fire has been succeeded by a ground assault. It recognizes that a cease fire or “pause” would rescue Hamas from destruction, and likely in the long run result in more Gazan (and Israeli) deaths than will result from a campaign that extirpates the terrorist organization that rules Gaza. That is, it has determined not to play Sisyphus again.
  2. It is likely that Israel recognizes that the screeching, preaching, and second guessing is almost totally ineffectual posturing by pusillanimous western politicians and Hamas fellow travelers, and that the costs of bending to this criticism far exceed any benefits that would result from doing so. Doing so would spare Israel’s enemies, and not make it any friends. So the dogs are barking loudly, but the Israeli caravan is moving along inexorably.
  3. Indeed, those who could pose the greatest threat to Israel–namely Arab states, especially the Gulf states–are making only perfunctory criticisms at most–when they are not outright criticizing Hamas strongly as the UAE did today. It is telling that Saudi Arabia does not permit pro-Palestinian (i.e., pro-Hamas) protests while the streets of Paris, London, and Washington are awash with them. One can only imagine what the Saudis, etc., are telling Israel in private.
  4. Meaning that the pro-Palestinian ferment is a far bigger threat to western governments than to Israel. Which helps explain the bleating of those like Macron.
  5. The Biden administration is like a deer in the headlights. Its initial unambiguous pro-Israel stance unleashed a firestorm on the Democratic Party’s left that jeopardizes Biden’s already extremely shaky political situation. This firestorm has led to–well,what better way to put it?–insurrectionary actions (at least as those have been defined for the last 35 months). These include a boisterous protest inside the Our Lady of Our Democracy, AKA the Capitol, an attempt to storm the White House, and an attack on a reception at Democratic Party headquarters in DC. This is a no-win situation for Biden and the Democrats. Breaks me all up.
  6. There is opposition to the administration’s largely pro-Israel stance from within the State Department. I’m shocked! Shocked! Well, not really. The State Department has been anti-Israel since 1948. Truman recognized Israel only over the determined resistance of the “striped pants boys” in the State Department. La plus ca change.
  7. Reactions in the West generally, and the U.S. in particular are quite clarifying. In particular, the Left’s embrace of Hamas–largely dishonestly camouflaged as concern for oppressed Palestinians–is quintessential the-enemy-of-my-enemy “logic” that demonstrates the profound anti-western animus of the left. The Palestinian cause has been a major element in the anti-Western alliance since the 1960s. The USSR was a major supporter of Palestinian “resistance,” and now Islamist Iran–a rabid revisionist anti-Western nation–is the major supporter of violent Palestinian forces. Political Islam is also profoundly anti-Western. The Western left is also rabidly anti-West–and terms like “colonialism” are barely concealed anti-western code. A common enemy unites Western leftists and Islamist terrorists, and explains the enthusiasm of the former for the latter. They don’t love the Palestinians. They both hate you.
  8. The most bizarre manifestation of this nutty nexus is “Queers for Palestine” and the like. If the self-described queers actually went to Gaza, the only question among the Palestinians would be whether to hang them from cranes, throw them off rooftops, or crush them under large rocks. But since the self-described queers have no intention of setting a single painted toenail in Gaza, they can embrace Hamas from the safety of leftist enclaves like Cambridge and Amherst as a means of undermining traditional Western societies, ethics, and morality.
  9. The events since 7 October 2023 have demonstrated beyond any doubt the utter depravity of western–especially American–universities. Certainly the humanities and most of the social sciences, and clearly the administrations (administrators being a dominant force in the modern university), but also a non-trivial portion of the STEM faculties. And the more “elite” the university, the more profound the depravity. There really was not much doubt about the state of universities prior to 7 October, but whatever doubt that remained has been pulverized. I know how we got here, but I don’t see any way back. The institutional dominance of anti-western forces in the quintessential product of Western Enlightenment is too entrenched to be overthrown.
  10. These events have also made plain the depravity of public education in the United States. The vacuity of Zoomers, and their embrace of pathological pro-Palestinian propaganda like Osama bin Laden’s post-911 letter, show that the left’s march through the institution of public education has triumphed. And again, I don’t see any way back, especially given the vice grip of the teachers’ unions. Until that is broken, public education will become even more broken.
  11. Hezbollah doesn’t appear to be in any hurry to commit suicide by throwing in with Hamas. Its histrionics and support of groups that pull Uncle Sam’s beard in Syria and Iraq aside, the same is true of Iran. Which makes it all the more inexplicable that the Biden administration continues to shower billions on it. All that will do is convince the mullahs that they can go further without triggering a response that hits them where it hurts.
  12. Insofar as the Israeli campaign itself is considered, it is proceeding relentlessly and methodically. It has surrounded northern Gaza, then proceed to cut that half almost in half (from east to west). The Israeli inkblot will continue to expand until Hamas is eliminated in all of northern Gaza. There are very few reports of pitched battles, suggesting that Hamas realizes it is overmatched and that Israel’s overwhelming force and obviously long-standing operational plan make all but scattered resistance futile. The urban warfare nightmare widely predicted for Israel has not materialized. Casualties have been light, as compared to expectations and previous experiences in urban battle (e.g., Fallujah). Total Israeli casualties so far amount to the toll of a few hours of Russian assaults on Avdiivka, Ukraine. But that is a subject for another day.
Print Friendly, PDF & Email

November 15, 2023

Gary Gensler: From Igor to Frankenstein

Filed under: Clearing,Derivatives,Economics,Exchanges,Politics,Regulation — cpirrong @ 4:53 pm

Gary Gensler has been a menace to the market system for as long as he has been in government. Those of you who have followed this blog for a long time know that I relentlessly criticized him during his tenure as CFTC chairman. He apparently took notice, because he banned me from the CFTC building. I also consider it extremely likely that he was the moving force behind the 2013 NYT supposed hit piece on me–for which I should probably thank him, because on net that has turned out to be a major positive.

Gary Gensler. (Though this is how I like to think of him.)

At CFTC, Gensler was merely an Igor implementing the Frankendodd creation of his congressional masters. As head of the SEC, however, Gensler has become a full-fledged Dr. Frankenstein, stitching together regulatory monsters that threaten to stalk the landscape leaving economic devastation in their path.

I have already written several times about the SEC’s misguided Treasury clearing mandate. But that is only one of Gensler’s Monsters. There are many others.

Perhaps the most monstrous is the SEC’s proposed rule on climate-related disclosures. This would mandate that public companies disclose their carbon emissions–and those of their suppliers. This is at best vast speculative endeavor, and and worst an impossibility. It’s main concrete effect will be to provide a pretext for lawsuits against companies targeted by activists who will allege that the companies’ calculations were wrong, or were lies because alternative internal calculations came up with numbers that differed from those reported in their 10Ks.

The regulation would also require companies to make fulsome disclosures of their climate risks. Another speculative endeavor that cannot produce any meaningful or useful information. It requires each company to characterize the interaction between one complex system–climate–and another complex system–the economy–to predict the adverse consequences of this interaction for it, a small part of the economic system allegedly impacted by climate. Prognostications about climate are themselves wildly uncertain–indeed, arguably the biggest risk is model risk. Predicting how climate will impact economic outcomes at the company level under myriad possible climate scenarios is a mug’s game.

And indeed, it is even worse than that. For there is another element to the problem–government policy. This introduces an element of reflexivity that is particularly devilish. Government policy will respond to climate and economic outcomes as well as interest group pressure, and will affect economic outcomes (though whether these policies will actually affect climate outcomes is dubious). This is arguably by far the biggest risk that companies face.

Meaning that if the regulation comes into force, I recommend the following boilerplate disclosure for all companies: “We face the risk that some government agency will adopt a boneheaded policy that will dramatically raise our cost of doing business or eliminate the markets we service.”

This will also be a boon to lawyers. “Company X failed to disclose the risk associated with [insert climate scenario here] described in [poorly executed paper published in obscure journal].”

I could go on. But in Congressional testimony John Cochrane did a lot of the heavy lifting for me, so I direct you there.

And I ask: how will this information improve the allocation of capital? It is more likely that this will just add noise that impedes efficient capital allocation, rather than actionable information that improves it. The hive mind of investors is likely far more adept at evaluating the effects of the climate-economics-policy nexus than the managers of corporations.

I further note that this obligation’s burdens are greater for small companies than big ones. Meaning that it will likely lead to exit and consolidation, and greater concentration. Which other parts of this administration–notably Lina Khan’s FTC–think is a great evil. Ironic, that. Ironic, but not humorously so.

Moving right along, the trendy Gary has targeted the New Thing, Artificial Intelligence. In public statements Gensler has made the at least somewhat plausible argument that interactions between very similar AIs can produce destabilizing positive feedback mechanisms. But the SEC’s proposed AI regulation instead focuses on potential agency problems:

Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals. This raises possibilities that conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests. When offering advice or recommendations, firms are obligated to eliminate or otherwise address any conflicts of interest and not put their own interests ahead of their investors’ interests. I believe that, if adopted, these rules would help protect investors from conflicts of interest — and require that, regardless of the technology used, firms meet their obligations not to place their own interests ahead of investors’ interests.”

The SEC remedy for this litany of horrors?

But under the guise of minimizing conflicts of interest, the SEC now proposes requiring advisers and broker-dealers to write new internal procedures and to log all uses of technologies relating to predictive data analytics for agency review. If left unchallenged, the new rules would hamper the American financial industry’s world-beating innovation.

The definition of what must be disclosed is comprehensive:

“an analytical, technological, or computational function, algorithm, model, correlation matrix, or similar method or process that optimizes for, predicts, guides, forecasts, or directs investment-related behaviors or outcomes in an investor interaction.” 

This would basically encompass EVERY analytical function performed by covered entities, including e.g., quant traders’ algorithms, portfolio optimizers, and on and on and on. Basically any use of statistical methods is implicated (note the reference to “correlation matrix”).

Perhaps the “investor interaction” language will limit this to principle-agent applications (as bad as that would be), but it is so broad that it is highly likely that the SEC will interpret it to cover, say, an HFT firms algorithms to predict and analyze order flows. That involves “an investor interaction.”

This all brings to mind previous regulatory initiatives to require disclosure of all trading algorithms–something that was mercifully killed.

And what will the SEC do with this information? This would represent a massive amount of highly technical information that the SEC would not have the capacity or expertise to analyze proactively, and information that would metastasize inexorably. Hell, even storing the information would be a challenge.

Again, like the climate reg, this seems all pain no gain. This disclosure would entail massive cost. And for what? To find an agency violation needle in a massive informational haystack? Agency violations (such as trading ahead) that could not be detected using existing methods?

But that’s not all!

Gensler also looks askance at exchange volume discounts. Why? Because NO FAIR:

“Currently, the playing field upon which broker-dealers compete is unlevel,” said SEC Chair Gary Gensler. “Through volume-based transaction pricing, mid-sized and smaller broker-dealers effectively pay higher fees than larger brokers to trade on most exchanges. We have heard from a number of market participants that volume-based transaction pricing along with related market practices raise concerns about competition in the markets. I am pleased to support this proposal because it will elicit important public feedback on how the Commission can best promote competition amongst equity market participants.”

Volume discounts are obviously pervasive throughout the economy in the US and indeed the world. So why should these be somehow so nefarious in stock trading as to require their elimination?

Let’s apply some economics–which alas is an alien concept to Gensler. There are two basic reasons for volume discounts.

One is that it is cheaper to service bigger customers. In which case volume discounts are efficient, and banning them would be unambiguously bad.

Another is that it is a form of price discrimination. For example, big intermediaries may find it easier/cheaper to shift business between exchanges than smaller intermediaries, in which case their demand for the services of a particular exchange would be more elastic than the demand of the smaller firms. Exchanges would then rationally charge lower prices to the more elastic demanders.

The welfare effects of this type of price discrimination are ambiguous, making the case for banning it–even if it can be established that the volume discounts are demand-elasticity-driven discrimination vs. cost-based discrimination–ambiguous as well.

With respect to “concerns about competition,” well, elasticity-based discrimination requires that inter-exchange competition not be perfect in the textbook sense. But if that is what is driving the volume discounts, outlawing them treats a symptom of market power rather than market power itself, and how “imperfectly competing” exchanges will price when they can’t price discriminate is very much an open question–and exactly why the welfare effects of price discrimination are ambiguous.

Gensler seems to be channeling discredited Robinson-Patman like logic that protected the high cost against competition from the low cost. That is anti-competitive, not pro-competitive.

These are only some of the monsters the Frankensteinian Gensler is assembling in his DC laboratory. I could go on, but you get the idea.

There is hope, however. Whereas Gensler’s CFTC actions were largely rooted directly in very specific statutory directives, his work as Dr. Frankenstein is based on extremely expansive interpretations of the SEC’s statutory authority dating back to the 1930s. Such expansive interpretations–not just by the SEC, but many other agencies–are currently being challenged in the courts, including cases pending before the Supreme Court.

It is possible therefore, and indeed to be fervently hoped, that the Supreme Court will hand down decisions that demote Gensler back to Igor implementing very specific Congressional mandates, and end his career as regulatory Frankenstein.

And the benefits of such decisions would extend beyond reining in the SEC, for as bad as it is that agency is probably not the worst offender–the EPA probably is, but the competition for this dubious honor is intense. The administrative state–the American Mandarinate, as I like to think about it–needs to be culled. And with extreme prejudice, and as soon as possible.

Print Friendly, PDF & Email

« Previous PageNext Page »

Powered by WordPress