Streetwise Professor

June 28, 2018

A Tarnished GEM: A Casualty of Regulation, Spread Explosions, or Both?

Filed under: Clearing,Commodities,Derivatives,Economics,Energy,Exchanges,Regulation — The Professor @ 6:28 pm

Geneva Energy Markets LLC, a large independent oil market maker, has been shuttered.  Bloomberg and the FT have stories on GEM’s demise.  The Bloomberg piece primarily communicates the firm’s official explanation: the imposition of the Basel III leverage ratio on GEM’s clearer raised the FCM’s capital requirement, and it responded by forcing GEM to reduce its positions sharply.  The FT story contains the same explanation, but adds this: “Geneva Energy Markets, which traded between 50m and 100m barrels a day of oil, has sold its trading book after taking ‘significant losses’ in oil futures and options, a person close to the company said.”

These stories are of course not mutually exclusive, and the timing of the announcement that the firm is shutting down months after it had already been ordered to reduce positions suggests a way of reconciling them. Specifically, the firm had suffered loss that made it impossible to support even its shrunken positions.

The timing is consistent with this.  GEM is primarily a spread trader, and oil spreads have gone crazy lately.  In particular, spread position short nearby WTI has been killed in recent days due to the closure of Canadian oil sands production and the relentless exports of US oil.  The fall in supply and continued strong demand have led to a rapid fall in oil stocks, especially at Cushing.  This has been accompanied (as theory says it should be!) by a spike in the WTI backwardation, and a rise in the WTI-Brent differential (and other quality spreads with a WTI leg).  If GEM was short the calendar spread, or had a position in quality spreads that went pear-shaped with the explosion in WTI, it could have taken a big hit.  Or at least a big enough hit to make it unviable to continue to operate at a profitable scale.

Here’s a cautionary tale.  Stop me if you’ve heard it before:

“The notional value of our book was in excess of $50 billion,” Vonderheide said. “However, the actual risk of the book was always relatively low, with at value-at-risk at around $2 million at any given time.”

If I had a dollar for every time that I’ve heard/read “No worries! Our VaR is really low!” only to have the firm fold (or survive a big loss) I would be livin’ large.  VaR works.  Until it doesn’t.  At best, it tells you the minimum loss you can suffer with a certain probability: it doesn’t tell you how much worse than that it can get.  This is why VaR is being replaced or supplemented with other measures that give a better measure of downside risk (e.g., expected shortfall).

I would agree, however, with GEM managing partner Mark Vonderheide (whom I know slightly):

“The new regulation is seriously damaging the liquidity in the energy market,” Vonderheide said. “If the regulation was intending to create a safer and more efficient market, it has done completely the opposite.”

It makes it costlier to make markets, which erodes market liquidity, thereby making it costlier for firms to hedge, and more difficult to enter and exit positions.  Liquidity reductions resulting from this type of regulation tend to be most acute during periods of high volatility–which can exacerbate the volatility, perversely.  Moreover, like much of Frankendodd and its foreign fellow monsters, it tends to hit small to medium sized firms worse than bigger ones, and thereby contributes to greater concentration in the markets–exactly the opposite of the stated purpose.

As Reagan said: “The most terrifying words in the English language are: I’m from the government and I’m here to help.” Just ask GEM about that.

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June 18, 2018

Putin’s Very Useful Idiots

Filed under: Politics,Russia — The Professor @ 2:28 pm

This article is of interest primarily because it represents an inversion of, a retreat from, and a repudiation of, the collusion narrative:

[Former CIA Moscow station Chief Dan Hoffman] points to the infamous 2016 Trump Tower meeting, which he says was a deliberately discoverable Russian operation.

“I think what Vladimir Putin was thinking is the best way to soil our Democratic processes, link the Trump campaign in some conspiratorial way, because it’s Russia, back to the Kremlin.”

Two years on from that meeting, President Donald Trump and his team are still being investigated over allegations of Russian collusion.

. . . .

Mr Hoffman says the Trump Tower meeting has the Russian President’s fingerprints all over it.

“It wasn’t meant to be a clandestine operation, that’s the last place he would ever do that. There’s too much security, too much press, too many people there,” he said.

“What I think Vladimir Putin was doing, was deliberately leaving a trail of breadcrumbs from Trump Tower to the Kremlin.

“I see the full spectrum of Russian intelligence operations and frankly, if the media can find something that Russia did, like the meeting at Trump Tower, then it was meant to be found.”

. . . .

Mr Hoffman believes Mr Putin’s intention was to spark a media frenzy.

“[It was] kind of like a poison pill. Eventually the media will expose them,” he said. [Emphasis added.]

In other words, the politicians and journalists (and special prosecutors?) who have freaked out about the Trump Tower meeting are the ones who fell for Putin’s machinations. It is the politicians and journalists (and special prosecutors?) who have been Putin’s instrument in destabilizing American democracy.  It is they who have been Putin’s pawns, not Trump.  In their unreasoning hatred of Trump, they fell right into a trap that Putin laid.

This was my first reaction to the Trump Tower meeting “bombshell” back in 2017.  It’s not that complicated to figure this out–there would have been no reason for the meeting if Trump had been colluding with Putin all along.  It is the allegations of collusion that have advanced Putin’s interest, not collusion itself–and setting up a meeting like that in June, 2016 was an obvious way of stoking those allegations.  But to see someone from the CIA endorse this rather obvious logic is quite interesting.  It signals that the collusion story is effectively dead, and never should have drawn a breath in the first place.

Von Mises (not Lenin) wrote that communists called western liberals who were “confused and misguided sympathizers” for the USSR “useful idiots.”  (This phrase is typically attributed to Lenin.) Today’s western media and establishment politicians are fully deserving of the epithet.  But they do the 1920s and 1930s-era unwitting dupes for Lenin and Stalin one better: rather than being sympathizers (confused or otherwise) they advance the objectives of someone they claim to despise in every way, and in so doing they damage the very thing they claim they are protecting. Given this, “useful idiot” seems rather generous, doesn’t it?

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Never Interrupt Your Enemy When He Is Making a Mistake–Immigration Edition

Filed under: Politics — The Professor @ 1:56 pm

In his biography of Joseph Chamberlain, British politician Enoch Powell (who would eventually illustrate his aphorism) said: “All political lives, unless they are cut off in midstream at a happy juncture, end in failure, because that is the nature of politics and of all human affairs”.  The next political life to end in failure may be that of Angela Merkel, who is facing a revolt from her CDU’s long time coalition partner the CSU.  CSU leader and Interior Minister Horst Seehofer, an adamant foe of Merkel’s immigration policy, had proposed a policy which included denying entry into Germany of individuals who had already registered for asylum in other countries–as they are obliged to do under EU law.  Merkel threatened to veto Seehofer’s initiative, and he said he would proceed regardless, forcing Merkel to fold, or to sack him, which would no doubt bring down her government.  Merkel begged for time to negotiate with Greece and Italy and other “front line” states.  Seehofer gave her two weeks.   Since the other countries don’t seem to be in much of a negotiating mood, there is a very good chance that in 14 days matters will come to a head and Merkel could well be forced to exit.

Insofar as negotiating is concerned, I am in Italy now, and if you are following the news you will know that new the Italian government is taking a hard line on immigration.  It has already turned away one ship of refugees, and has told NGOs that it will turn away two more already at sea.  The Italians are fed up with immigration, and German diktats on the subject (and on other matters too), and certainly cannot be seen to knuckle under to Merkel in their first weeks in office.

For her part, Merkel is doing her best to prove Churchill right about Germans being either at your throat, or at your feet:

The German chancellor turned to neighbors, including Austria, Greece, Italy and Bulgaria, for help as a fierce dispute over immigration threatens to topple her three-party coalition.

Immigration may be the proximate cause of Merkel’s demise, but ultimately it is a matter of hubris that comes with long tenure in office.  Such hubris is one of the main causes of the near inevitable failure that Powell wrote about.  It leads to riding roughshod over even–and perhaps especially–political allies who dare question, and those trampled underfoot nurse their grievances and look for their opportunity to exact revenge.  Hubris also tends to make politicians so convinced of their own rectitude and brilliance that they become deaf and blind to the legitimate criticisms of others.  These things have brought down far more consequential and admirable figures than Merkel: Margaret Thatcher comes to mind.

Ironically, it was a stand on immigration–the exact opposite of Merkel’s, in fact–that brought Powell’s career to an end (with his incendiary “Rivers of Blood” speech).  In Europe and the US, it is now the most divisive issue on the political agenda, pitting the establishment elites against the hoi polloi.  In his inimitable fashion, Trump took the opportunity presented by Merkel’s distress to put the boot in, tweeting “The people of Germany are turning against their leadership as migration is rocking the already tenuous Berlin coalition. Crime in Germany is way up. Big mistake made all over Europe in allowing millions of people in who have so strongly and violently changed their culture!”

Translation: So, you want to f*** with me at the G-7 Angela? You ran for another term as chancellor to thwart me? Let’s see how that works out for you, shall we?  Who’s going to outlast whom? Want to bet on it?

There is an old Latin expression (attributed to Caesar by Plutarch): “De gustibus non est disputandum.” Tastes (or preferences) are not disputable, and everyone has the right to their own.  In democratic polities, this would imply that the hoi polloi has the right to its preferences on matters like immigration, and those should be respected–especially if those advocating such views prevail at the polls.  But today’s establishment will have none of that.  The preferences of large numbers of Americans and Europeans (and arguably a comfortable majority thereof) are subjected to intense dispute, hostility, scorn, and abuse by the establishment.

This is amply illustrated by today’s freak out by the better thans regarding the separation of children of from adults (who may or may not be their parents) caught entering the country illegally.  Put aside the fact that this is not a new policy dreamed up by Trump in a tweetstorm–the Obama administration did it as well (not as if that would make it right, if it isn’t, but to illustrate the hypocrisy of those shrieking about the issue today).  Put aside the fact that holding children with adults makes them much more vulnerable to abuse.  Put aside the fact that families who apply for asylum at an authorized port of entry are not separated–only those who request asylum as a fallback strategy after being caught trying to enter the country illegally.  Let’s just consider the politics.

Progressives on both sides of the Atlantic seem to think that heaping abuse–including routinely accusing those who implement or support the policy of being Nazis (with ex-NSA director Michael Hayden being among those disgracing themselves with such accusations)–will somehow advance their political cause.  Their stupidity and utter imperviousness to evidence and experience  is really quite astounding.  It is exactly this sort of behavior that got them Brexit, and Trump, and the AfD in Germany, and a populist victory in Italy, and populist governments in eastern Europe.  Yet they seemingly think that insulting people even more viciously and even more loudly will work THIS time.

In fact, it is playing right into their enemies’ hands–Trump’s in particular.  Want to galvanize a Trump turnout in the midterms?  Shriek about immigration and how anyone who wants to impose restrictions on it is a Nazi.

So be my guest–go right ahead.  Knock yourself out with the Nazi thing. I certainly won’t object.  Because as Napoleon said: never interrupt your enemy when he is making a mistake.


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June 6, 2018

Putting Germany First

Filed under: History,Politics,Russia — The Professor @ 1:24 pm

Angela Merkel is set to challenge Donald Trump’s America First agenda at the G-7, presumably to the strains of Deutschland über alles.

This is just another illustration of Germany’s utter lack of self-awareness, because criticizing America First is rather jarring coming from Merkel and her country’s political elite, which espouses Germany First in all but the slogan.  But actions speak louder than words.

Consider the record of the last few weeks.  The German elite threw an absolute tantrum at the prospect of an anti-EU government in Italy, and strongly backed the Italian president when he rejected such a government.  The German budget minister, Guenther Oettinger said “The markets will teach the Italians to vote for the right thing.”

This was yet further evidence of German tone-deafness, because the backlash against his remark, and the real possibility that the Italian reaction would be to have another vote that would strengthen the populists even more, unleashed another market meltdown. This forced the EU, led by Jean-Claude Juncker, to go into damage control mode and force Oettinger to apologize and to get German politicians to put a cork in it generally, lest they do even more damage.

Oettinger, in other words, had committed a gaffe.  That is, he said exactly what he really believed–and you know that the German establishment believes exactly the same.

Another case in point.  Completely oblivious to the optics of Germany and Russia cooperating to benefit at the expense of the Poles (e.g., the three partitions, Molotov-Ribbentrop), Merkel and Germany are unwilling to give the time of day to the Poles’ objections to the Nord Stream II pipeline. Germany has also been extremely critical of Poland’s democratically elected government, and is leading the charge in the EU to cut aid to Poland (and Hungary) for “violating the rule of law.” Like the Italians, the Poles apparently just got it wrong when they voted and are in need to Teutonic guidance.

Altogether now: “Deutschland, Deutschland über alles, Über alles in der Welt . . . ”

I’ve already mentioned in a previous post the obliviousness of Germany’s anger at Trump for interfering with its ability to do business with a state that has vowed-repeatedly-to exterminate Israel.  Yes, Angela did criticize Khamenei’s characterization of Israel as a “cancerous tumor” that Iran would eliminate, but again, actions speak louder than words.  Germany’s preferred policy–a continuation of the JCPOA, with a bonanza of European (and especially German) investment in and trade with Iran-would do far more to assist Iran in realizing its objective than Merkel’s words will impede it.

Merkel is apparently of the belief that she’s not advancing German interests.  Oh, no! She’s the defender of the “liberal international order”:

Chancellor Angela Merkel of Germany told Mr. Obama that she felt more obliged to run for another term because of Mr. Trump’s election to defend the liberal international order. When they parted for the final time, Ms. Merkel had a single tear in her eye. “She’s all alone,” Mr. Obama noted.

What self-sacrifice!

Tell me: just exactly where does Iran fit into the “liberal international order”? Russia? China? All of these are avowedly opposed to that order, and say so at every opportunity.  All are clearly revisionist powers. But in her hatred for Trump (and likely for the US generally), Merkel is more than willing to reach out to them.  Subjectively, Angela is all about the “liberal international order.” Objectively, quite the opposite.

You may dislike Trump’s America First/MAGA agenda and rhetoric.  But it does have one thing all over Merkel’s: honesty.

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June 2, 2018

A Day at Antietam

Filed under: Civil War — The Professor @ 6:39 pm

Ever since I was 9, and my grandparents took me on an epic road trip to Shiloh, Vicksburg, Chickamauga, Chattanooga, Richmond, Petersburg, the Seven Days, Fredericksburg, Spottsylvania, Wilderness, Chancellorsville, Antietam, and Gettysburg, visiting Civil War battlefields has been an important pastime for me.  I’ve been to every major field multiple times, and the site of pretty much every action worthy of the name battle at least once (with the exceptions of Jenkins’ Ferry, Olustee, and Poison Spring).

If you had to ask me to choose just one to go to, I would pick Antietam/Sharpsburg, where I visited today (for the 11th time, give or take).  Why? Several reasons.

It’s relatively compact.  I walked the entire field in about 5 hours.  And I mean the entire field.  From Cornfield Avenue to the North Woods (Poffenberger Farm) down the old Hagerstown Pike to the West Woods, into the West Woods all the way to the line of Sedgwick’s furthest advance, over to Dunker/Dunkard Church, up the Smoketown Road back to the Corn Field.  Then over to Mumma’s Lane up to the Sunken Road, into the field where Richardson’s division charged, and then over to the end of the road where Barlow and the rest of Caldwell’s brigade broke the line.  The only drive was from there to the other side of the Boonsboro Pike, where I walked most of the road down to the 40 Acre Cornfield (where Gregg turned the Union left after Hill’s epic march from Harpers Ferry), into the cornfield, and then down to Burnsides’ Bridge. All in all ~11 miles.

It is sobering to think that one can walk in half a day an area that saw the greatest slaughter that has occurred on any single day in American history.  The concentration of carnage was awful–and only seeing how small the battle area is can make that plain.  The contrast between the tranquility and quiet of the field today (where often I heard only the chirps of birds, and was accompanied only by gophers, rabbits, and deer) and the chaos and noise that prevailed 156 years ago is also somewhat eerie.

The Battlefield Park also encompasses virtually the entire area in which fighting took place, and the landscape is relatively unchanged–it is one of the best preserved and most complete fields, and most vistas are free of modern visual pollution.  One can therefore get a more comprehensive and undistracted perspective of the battlefield than is possible anywhere else.  Further, it is much less crowded, and much less touristy than Gettysburg. Sharpsburg the town is charming, and again, much less touristy than the Pennsylvania burg an hour’s drive north.  Not a ghost tour sign in sight.  Thank God.

Unlike Chickamauga and Shiloh, which are densely wooded, much of the ground at Antietam is open and rolling, giving pleasing perspectives and panoramas.  Further, one gets a great sense of the role that terrain played in the battle.  For instance, one can walk over the crest where the Irish Brigade advanced immediately in front of the Sunken Road and see how close the Confederate line was, and understand how devastating the shock would have been as the Union line took fire once it became visible from the road, a mere few yards away.  One can visualize how short the distance between the lines was (there, and a little to the north where French’s division charged), and remark at how intense the fire must have been to make it impossible to charge successfully over so few yards.  (The only comparable place I can think of is The Nek at Gallipoli–and there the Turks had Maxim guns to mow down the Australian Light Horse as they tried to cross the 30 yards between the trenches.)

The vistas and ability to appreciate the terrain is perhaps best on the southern part of the field, where the IX Corps advanced after crossing the Antietam.  I had given that area short shrift in previous trips, but made up for it this time.  Here the country is almost completely open, with several prominent ridge lines that allow one to observe and imagine the scope of the struggle.

Here’s a panorama view taken from just north of the 12th Ohio monument, overlooking the 40 Acre Corn Field where Gregg’s brigade smashed the IX Corps left, and turned the tide of the battle.  (Although it should be noted that Gregg’s brigade gets too much credit–Archer, Branch (who was killed) and Toombs also played pivotal roles in stopping the final Union advance.)  If anyone’s interested, I can post the rest of the album of photos I took today.

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May 28, 2018

Thank God for the Revolution, But Don’t Take It For Granted

Filed under: Politics — The Professor @ 8:10 pm

Two things from Europe are worth some discussion.

In Italy, the president, Sergio Mattarella, rejected a proposed government advanced by a coalition of populist parties from both left and right.  In the words of the FT, Mattarella “faced down” the populists–who just happened to have won the elections, and who trounced the “mainstream” EU-philic parties.  In so doing, the president was following hallowed EU tradition: the proles will vote until they get it right!

Ostensibly the reason for the rejection was the inclusion of a hardcore opponent of the Euro as the Finance Minister.  No doubt that was a convenient pretext.

The EU proclaims that it is democratic, and EU politicians routinely blast Trump and Orban and others for being authoritarian.  The EU is in fact demonstrably anti-democratic, and objectively far more authoritarian than those it excoriates as such.  Mattarella’s actions are clearly authoritarian and anti-democratic.

No doubt the EU sees Italy’s incipient rebellion against it, and the Euro, as a mortal threat.  They should.  But the reaction–thwarting the results of an election, rather than mounting a persuasive campaign that appeals to voters and addresses their concerns–reflects a weird combination of arrogance and defensiveness.  This is the reaction of frightened people who understand at some level that theirs is a deeply flawed project, and that they have no idea on how to address these flaws.  S0 rather than addressing the sources of discontent, or even attempting to understand them in a serious way, they attempt to suppress its expression–even (especially?) when that expression occurs at the ballot box.  Incapable of facing them down in an election, the EU oligarchy must resort to facing them down through undemocratic means.

The other case is that of Tommy Robinson in the UK.  Robinson is a notorious critic of Muslim immigration into the UK.  He has been routinely accused of “racism” (though last time I checked, Islam was not a race): given the promiscuity with which that term is thrown about, I always treat it with skepticism.  It is the default way in establishment circles to discredit those who challenge orthodoxy, a low form of ad hominem intended to silence and ostracize.  Being an actual racist may be a sufficient condition for being called a racist, but it is not a necessary one.  So the fact that someone is called a racist tells me exactly nothing.

Robinson is in the news–well, sort of, as will soon become clear–for having been arrested and incarcerated (after a “trial” lasting minutes), for livecasting from the outside of a courthouse where a group of child rapists, who happen to be Muslim, are on trial.

The charge against Robinson was that he violated the terms of his suspended sentence.  Said sentence was not for any conduct remotely related to his activism, or racism, but for providing misleading information on a mortgage application. (Arguably the original charge was pretextual, but leave that aside for the moment.)  But the judge leapt at the opportunity to clap Robinson behind bars for daring to call attention to one of the most sordid and colossal failures of the British establishment.*

But that’s not the most outrageous thing here.  The judge also imposed a gag order forbidding any reporting on Robinson’s arrest and incarceration in the British press.  Several outlets that had posted articles online immediately took them down.

This is revealing on so many levels.  Again, it betrays a deep fear–bordering on panic–in the establishment of the wrath that hoi polloi may visit on them.  (Tim Newman argues this persuasively.) The judge obviously fears that Robinson may become a cause célèbre, meaning that the judge believes that large numbers of Britons are “racists” just like Tommy Robinson who might rally around him and challenge the elite.

Again, not the act of a confident elite–the act of a very shaken one.  (Brexit likely being a major contributor to this self-doubt.)

Further, it illustrates the degree of intimidation and fear among the hoi polloi that the elite fears.   Tommy Robinson is hardly a polished fellow.  He is arguably a dodgy one.  His name is itself revealing.  It is not his given name, but a pseudonym taken from a prominent football hooligan in his hometown of Luton.

But as the judge clearly fears, Robinson evidently represents the views of a large portion of the British populace.  Yet though many agree, few speak out, and it is left to a marginal and truculent figure to launch a kamikaze attack on the system.  This illustrates the relentless and ruthless application of social pressure by the establishment–the politicians, the media, and the police, who repeatedly tell people that their social media posts are being monitored for “hate speech”–and the consequent intimidation of pretty much everybody but the likes of Tommy Robinson and a few like hi.

That is, silence and preference falsification are the rational responses of those who are deeply uneasy about the social changes that the UK has undergone.  These responses are decidedly characteristic of repressive societies, not free ones.

The UK at present differs from China’s “Social Credit” system in degree, but not in kind. Social control enforced by the threat of ostracism and even imprisonment is a pervasive reality.

To which I say: thank God for the Revolution, and the Bill of Rights.  There is no right to free speech in the UK as guaranteed by the First Amendment–and people are quite aware of that, and trim their expression accordingly.

I also repeat something that I have said often: the UK is the US’s Ghost of Christmas Future. Many of the same forces and fissions that are manifest in the Robinson affair are operating in the US.  Again, the US has a better institutional bulwark against that, but given the disproportionate influence of the established elite in the institutions of government, the courts, media, and higher education, that is hardly secure.

There is also a more militant (Jacksonian) strain in the US, and it operates from a rather broad geographic base, which given the Constitution has political power (hence the left’s hostility to the Electoral College and the Senate).  This geographical divide also gives many people a sense of solidarity and strength which makes them more willing to speak out: many Texans (e.g.) are willing to be more outspoken because the disapproval or ostracism of coastal elites has little adverse effect on them, and may indeed even bring approval from those in their lives who matter to them.

But progressivism is relentless, and American progressives want the US to be more like the UK, and the EU, with them in charge and the rest of us playing the part of obedient plebs.

So thank God for the Revolution, but don’t take it for granted.

*It is a revealing commentary on the Animal Farm some-animals-are-more-equal-than-others reality of modern Britain that in this day of the #MeToo movement, where the British press–and the FT in particular–goes on and on about gender pay equity and the lack of women in corporate board rooms, that anyone who dares speak out about the systematic rape of young women throughout Britain is running grave personal and legal risks.  So is mistreatment of women–including rape–a big deal, or isn’t it? Apparently it depends on who does the mistreating, and what women are the victims.

Another observation of some note is that Robinson’s recording of the exterior of a British courthouse is considered a crime in a country where every public space is constantly under video surveillance.  That speaks to the issue of repressiveness in Britain.


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May 27, 2018

Alice in Swampland: Paging Lewis Caroll

Filed under: Politics,Russia — The Professor @ 6:02 pm

It is alternately amusing and nauseating to watch the shocked! Shocked! reactions to Trump’s accusation that the FBI (and likely the CIA and perhaps other tentacles of the octopus) spied on his campaign (i.e., on him).  Perhaps only Lewis Caroll could do justice to the verbal contortions:

 “I don’t know what you mean by ‘glory,’ ” Alice said.
Humpty Dumpty smiled contemptuously. “Of course you don’t—till I tell you. I meant ‘there’s a nice knock-down argument for you!’ ”
“But ‘glory’ doesn’t mean ‘a nice knock-down argument’,” Alice objected.
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Only to the Masters of the Word in the swamp could a counterintelligence operation, complete with a codename, NOT be considered “spying.” Further, it is clear that Trump was the target of this counterintelligence (i.e., spying) operation, rather than the beneficiary of its protection (as some of the swamp things would have us believe). If US intelligence believed that the Russians were running an operation against Trump, rather in league with him, they would have informed him.  They didn’t. Hence, they believed he was the enemy.  Not that complicated.

The most satisfying thing about all this is is that whenever anyone engages in such semantic pettifoggery, and obsesses over definitions rather than substance, it is an admission of defensiveness, the inability to win an argument on the merits, and indeed, guilt.

Basic facts are usually robust to variations in the words used to describe them–which is precisely why Trump can be persuasive to many people (most of whom do not live by words) despite his verbal imprecision.  If a particular claim can only be made by playing Humpty Dumpty, and making a simple three letter word like “spy” mean exactly what you want it to mean, that’s a pretty strong indication that your claim is wrong, and moreover, you are making it in extremely bad faith.

The crucial issue here is how this will play with the public.  My inclination–and perhaps this is wishful thinking–is that most Americans are like Alice, looking askance at swamp-dwelling Humpty-Dumptys.

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May 24, 2018

Gazprom and Its Connected Contractors: The Credit Mobilier Scheme, With Russian Variations

Filed under: Commodities,Economics,Energy,History,Russia — The Professor @ 6:05 pm

A couple of SWP friends were kind enough to send me a copy of the swan song of one Alex Fak, an erstwhile senior analyst at Sberbank.  Alex lost his job because he committed a mortal sin: telling the truth, in this instance about the monstrosity that I have savaged for years–Gazprom.

Alex said that the oft-heard question “why does Gazprom do such stupid things?” is off base because it presumes that the company is run in the interest of shareholders: if it were, its unmatched record of value destruction would indeed be stupid.  However, Mr. Fax opined that the company’s actions over the decades are definitely not stupid if you evaluate them from the perspective of its contractors, who make massive amounts of money building obscenely negative NPV projects.

Why does this persist, in the Putin era, which allegedly cracked down on oligarchic thievery? Well, one reason is that the biggest contractors happen to be owned by–wait for it–the two biggest friends of Vova: Gennady Timchenko (a hockey buddy) and Arkady Rotenberg (a judo buddy).*  Putin did not eliminate oligarchs, so much as replace them with his cronies.  Calling out such connected men by name is no doubt why Mr. Fax is an ex-Sberbank analyst.  And saying this kind of thing puts him at risk of being an ex-person.

The Gazprom MO described by Mr. Fak  represents a continuation of, and a mega-sizing of, the bizness model of the 1990s, when the “red directors” of state-owned firms tunneled out huge amounts of funds by having their firms buy supplies and services at seriously inflated prices from firms owned by their relatives.

Indeed, in the pre-Cambrian days of this blog–2006(!)–I hypothesized that Gazprom and its contractors were in effect a Russian version of Credit Mobilier, the construction firm that the Union Pacific hired to build the railroad.

The WaPo article also mentions that Gazprom’s pipeline construction costs are two to three times industry norms. To me this suggests a Credit Mobilier-Union Pacific type situation, where inflated prices for materials and equipment flow into the pockets of companies owned by Gazprom managers. Just thinkin’.

Thomas C. Durant was the president of the Union Pacific–and the major shareholder in Credit Mobilier.  The UP paid Credit Mobilier around $94 million, and Credit Mobilier incurred only about $50 million in costs to build the UP.   The Gazprom arrangement is somewhat different given that neither Timchenko nor Rotenberg are executives at the Russian gas giant, but the basic idea is very similar. (I also noted early on that Transneft, the oil pipeline monopoly, operates on the same model.)  Gazprom and its contractors operate on the Credit Mobilier model, with Russian variations.

Once upon a time Gazprom CEO Alexei Miller boasted that he would make Gazprom the world’s first trillion dollar company.  Today it’s market cap is south of $55 billion.  Hey! anybody can be off by two orders of magnitude, right?

This is not surprising, because maximizing value to shareholders is not, nor has it ever been, the objective of Gazprom.  The objective is, and always has been, to divert resources to the politically connected via wasteful capital expenditures (that happen to be the revenues of the likes of Timchenko and Rotenberg).  Alex Fak understood this, and paid the price for shouting that the emperor had no clothes.

Both Gazprom and Rosneft are world leaders in destroying value, rather than creating it.  But this is a feature, not a bug, given the natural state political economy of Russia, which prioritizes rent creation and redistribution to the elite. And this is precisely why Russia’s pretensions to great power status rest on economic quicksand.  That should be blindingly obvious, and I am sure that Putin understands this at some level.  But revealed preference suggests that he values enriching his friends more than implementing the economic changes that would make his nation economically and militarily competitive.

*The sums tunneled from Gazprom to Timchenko make me laugh when I think about the oft-repeated allegation that oil trader Gunvor (half-owned by Timchenko) was a source of massive personal wealth for Putin (via Timchenko).  There was much more money to be made much closer to home, and completely outside the scrutiny of bankers and regulators.

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May 23, 2018

Ayatollah Khamenei Performs at Open Mike Night

Filed under: Politics — The Professor @ 7:59 pm

Some comic relief from an unexpected quarter today. Namely, Ayatollah Khamenei–such a card! He accused Germany, France, and the UK of “disloyalty” for not confronting the US for walking on the non-treaty, and spelled out an ultimatum which, if the Europeans do not comply, will trigger a resumption of Iran’s nuclear activities:

He further blasted the Europeans for keeping mum about the US frequent violations of the 2015 nuclear deal in the last two years, and said “the EU is required to make up for this silence”.

Ayatollah Khamenei reminded that the US has violated UN Security Council Resolution 2231 that accompanies the nuclear deal, and said hence “Europe should issue a resolution against the US violation” of the agreement.

He said “the EU should also undertake to avoid a discussion of Iran’s missile and regional power”.

The Iranian Leader reminded that the nuclear talks were aimed at the removal of the sanctions, “many of which were not lifted, while they have been recently threatening to revive the sanctions desipte the emphasis of the UN Security Council resolution” to the otherwise.

The Leader further underlined that the EU should also pledge “to take action against any kind of sanction against the Islamic Republic and stand against the US sanctions on the basis of a clear-cut position”.

“Europe is also needed to ensure Iran’s full crude sales,” he said, and explained, “In case the Americans manage to strike a blow at our oil sales, (we) should be able to sell whatever volume of oil that we want. The Europeans should compensate (for the loss in crude sales) in a guaranteed manner and buy Iran’s crude.”

Ayatollah Khamenei also underscored that the EU banks should also ensure trade with Iran, and said, “We don’t want a fight with these three countries, but (we) don’t trust them either because of their past record.”

I have it on good authority, from sources who cannot be identified, that in a secret protocol Khamenei demanded that the Europeans supply him with daily shipments of M&Ms, with all of the brown ones removed.

The Leader (what a giveaway that is) also seems somewhat hazy on what JCPOA is: The Islamic Republic cannot deal with a government that easily violates an international treaty, withdraws its signature and in a theatrical show brags about its withdrawal on television.” Um, not a treaty! Obama denied it was a treaty.  He refused to submit it to the Senate for ratification as a treaty, as the Constitution requires.  Hence, whatever Khamenei says or thinks, it is not a treaty that legally binds the US, and hence, it was a simple matter for Trump to walk away, leaving the Ayatollah and the Europutians sputtering in rage.  A perfect illustration of “hoist on his own petard,” as it were (both Khamenei and Obama).

European companies have already made clear that they are not going to get crosswise with the United States.  The Iranian threat to resume processing of nuclear fuel is utterly abstract, and irrelevant to them: the threat of multi-billion dollar fines and the potentially devastating effects of secondary sanctions (cf. Oleg Derispaska) are very concrete and real.  The Germans, French, and British may wish that Iran won’t spin up its centrifuges again, but it would be absurd to impose penalties on their own companies for deferring to the US, especially since it would be trivially easy for the US to beat any penalty that the Europeans impose, and whereas Europe would be harming its own companies by imposing penalties (and incurring greater penalties from the US), it would cost the US nothing to impose them. Solving for the equilibrium in this game is pretty easy–maybe someone should explain it to Khamenei.

And just what “actions” and “stands” can the Europeans take?  Angela can stomp her feet and hold her breath until she’s blue in the face in anger at Trump, and it won’t matter a damn.  When it comes down to actual action, the Europeans are so impotent that all the Viagra in the world wouldn’t help.  It is clear who has escalation dominance here, and all Khamenei’s demands will not change that.

So Khamenei can demand and threaten, and at the end of the day it will avail him nothing, except maybe the Europeans will send  him those M&Ms.  As for the substance of his demands, he’s just pissing in the wind.


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May 21, 2018

DOJ “Independence” Is Not a Thing: It Is an Extra-Constitutional Arrogation of Power

Filed under: Politics — The Professor @ 6:45 pm

On Sunday Trump announced (via Twitter, naturally) that he intended to order the Justice Department to investigate allegations of spying on his campaign: today, he followed through, and the DOJ has complied.

Immediately after Trump’s tweet, craniums began to explode all over DC and the media.  So many that it may be necessary to change the lyrics of the National Anthem to “heads bursting in air.”

Most of the exploding pates belonged to ex-DOJ officials and functionaries, many of whom do not come to this issue with clean hands (to understate things).  For example, ex-Assistant Attorney General Sally Yates shrieked (but I repeat myself):

“I think what we’re seeing here is the president has taken his all-out assault of the rule of law to a new level and this time he is ordering up an investigation of the investigators who are examining his own campaign. You know, that’s really shocking,” Yates said on MSNBC’s “Morning Joe.”

Yates, of course, is directly implicated in the anti-Trump campaign, notably for setting up Michael Flynn (and likely many other things as well, including unmasking of US citizens).

The highest ranking exploding head is ex-Attorney General Eric Holder, who tweeted:

Trump demand for DOJ investigation is dangerous/democracy threatening. DOJ response is disappointing.There is no basis/no predicate for an inquiry. It’s time to stand for time honored DOJ independence. That separation from White House is a critical part of our system.

Let us pause for amusement at the thought of a man who proudly proclaimed that his proud duty as AG was to serve as Obama’s “wingman” intoning about “separation from the White House.”  Let us guffaw at Holder’s claim of “no basis/no predicate” for an investigation, after recalling the findings of the House and Senate Intelligence Committees, not to mention numerous NYT and WaPo articles, many based on leaks clearly emanating from Justice.  Certainly there is much more “basis/predicate” here than hearsay from a partisan about the drunken ramblings of a peripheral campaign figure, or a completely unverified dossier that is risible on its face.

But now let us turn to the main issue: the assertion of “time honored DOJ independence.”

In fact, “DOJ independence” is not a thing.  Indeed, the assertion thereof is an extra-Constitutional arrogation of authority.  Trump’s actions in ordering an investigation are not a threat to the Constitutional order–instead, it is threatened by the actions of members of the executive branch who usurp power based on their inflated and utterly mistaken belief that somehow the DOJ is not subordinate to the President.

This is not that hard.  Trump’s unconditional authority to demand an investigation is explicit in black-and-white in Article II, Section 2 of the Constitution:

[the President] may require the Opinion, in writing, of the principal Officer in each of the executive Departments, upon any Subject relating to the Duties of their respective Offices. [Emphasis added.]

Require written reports on any subject relating to the duties of an executive department.  There is no dispute that DOJ is an “executive department.”  If Eric and Sally need any guidance on this score, please refer them to An Act to Establish the Department of Justice (passed on 22 June, 1870) which reads, in part, “That there shall be, and is hereby, established an executive department of the government of the United States to be called the Department of Justice, of which the Attorney General [a position that predated the establishment of the DOJ] shall be the head.”

Thus, DOJ is clearly subordinate to the Chief Executive, and said Chief Executive has the unconditional authority to order reports (which necessarily involve the performance of some sort of investigation) on any subject related to the DOJ’s “duties” (which include criminal and counterintelligence investigations).  There is no “except for investigations of his campaign” exception.  In fact, there is no exception at all.

Further, the DOJ is clearly subordinate to the President, whose primary duty is to “take care that the laws be faithfully executed.”

Against this no doubt the likes of Holder and Yates and the other lesser lights who have also weighed in (heavy on the outrage) will respond: but it is necessary to ensure that the President does not violate his duty to execute the laws by interfering in investigations, particularly those that threaten him or his personal or political interests.

Two remarks are apposite in reply.  First, yes, this is a danger, but the Constitution has a remedy.  Presidents are subject to impeachment by Congress if they engage in such conduct–which would violate their duty under the Take Care Clause. Impeachment is the check on executive conduct–not the judgment of the executive’s subordinates.  One co-equal branch checks another: it is incoherent for the subordinate parts of one branch to check the acts of the head of that branch.  It is an inherent part of the system for the head to check the acts of the subordinates.  Indeed, it is his duty.

Second, it is particularly outrageous to raise this argument in this context, because if a President’s motives are suspect in a case involving his own interests, the motives of DOJ (including FBI) employees present and past are deeply suspect in the cases of spying on the Trump campaign, and the Clinton email investigation.  Indeed, all of the stonewalling of requests by Congress, and the extensive redactions, usually based on claims of “national security”, have been exposed as efforts of the DOJ to conceal its misdeeds and to protect senior department officials past and present.  Any presumption of independence and clean hands is risible here.  DOJ personnel past and present are up to their necks in this, and it is imperative to hold them accountable.

Thus, the rantings of Yates about threats to the rule of law, and Holder’s assertion of DOJ independence, are inversions of the truth.  Trump is not threatening the Constitutional order: he is upholding it by demanding accountability by those delegated by him pursuant to his Constitutional power in order to perform his Constitutional duties.

The hysterical reaction to Trump’s action is quite revealing.  Some people are afraid.  Very afraid.

Good.  Damn good.

My main reservation is the approach that emerged from today’s meeting between Trump, Sessions, and Rosenstein: delegating to the DOJ Inspector General the responsibility of investigating and reporting on the campaign spying issue–in addition to all of the other investigations on his plate.  This means that we will learn something in oh, 2020 or so.

Not acceptable.  This is an urgent matter that must be resolved quickly.

It would be preferable for Trump to exercise another of his unconditional powers–the power to declassify.  At the very least, he should order all relevant documents be made available to Congress, unredacted, and should order all DOJ personnel to make themselves for Congressional questioning.  I would consider going further: declassifying and releasing unredacted to the public the relevant documents, to let us decide.

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