Craig Pirrong's Blog, page 62

The Most Annoying and Pathetic Geopolitical Entity Ever? I Think So!

There may be a more annoying geopolitical entity in history than the EU, but I’ll be damned if I can think of one.

In recent weeks, a group of northern EU states centered on the Netherlands have formed the “Hanseatic group” to represent their positions, regarding the Italy situation in particular.  This has outraged the French and the Germans.  In response to the blonde upstarts, French economy minister Bruno le Maire lashed out:

Speaking at a dinner with his Dutch counterpart Wopke Hoekstra in Paris on Thursday, Bruno Le Maire said he was “not comfortable” dealing with the Hanseatic group — eight to 10 countries that have agreed common positions calling for more national responsibility and stronger rules in the eurozone.

“Let’s imagine that France tries to create a club of the southern countries with Portugal, Italy, Spain — what would be the reaction of the other member states? Do you think that it would be a positive one? Do you think it would improve the situation of Europe?” Mr Le Maire told the Financial Times.

“I am not comfortable with the idea of creating new circles, new clubs, new leagues within Europe. If you want to create new divisions between the north and the south, or the west and east, you will never have France on your side,” said Mr Le Maire, who has spearheaded French ambitions to reform the eurozone in a partnership with Germany.

Some Franco-German initiatives, such as a blueprint for a eurozone budget, have met resistance from countries led by the Netherlands. The group has also advocated tougher enforcement of budgetary rules and moves towards debt restructuring in the eurozone to be agreed by EU governments next month.  (Emphasis added.)

Did you catch that?  Franco-German ambitions to reform the eurozone–OK!  Lilliputian resistance–BAD!!!!

When the hypocrisy was pointed out, Bruno a dit non! non! non! C’est totalement différent!

When asked whether the Franco-German alliance was not a “club”, Mr Le Maire said: “That is totally different. This is not a club. This is what is at the core of the European ambition: peace between France and Germany. This is at the core of the European Union.”

So, is M. Le Maire suggesting that absent the EU, jackbooted Germans would soon be marching in the shade along the tree-lined French roads?  If he is, that’s quite the insult to Germany, non?  But if he is, he is utterly delusional: to quote Patton, the post-post-modern Germans couldn’t fight their way out of a piss-soaked paper bag, and what’s more, have no desire even to try.  They’ve found alternative means to achieve dominance over the continent, and the French are now their (junior) allies in that endeavor.  A key part of that strategy is divide-and-conquer, and “clubs” like the Hanseatic one threaten that gambit.

Germano-French ambitions extend beyond Europe.  They want to leverage their dominance in the EU to a position of world influence.  Fortunately, here their efforts have proven again and again to be laughable.

A particularly juicy example is the hilarious efforts of the EU to set up a special purpose vehicle to facilitate trade with Iran in defiance of US sanctions, pour epater le bête orange.  They have made grandiose announcements.  Only one problem: European companies don’t want to touch this with a ten foot pole.  Make that two problems: no European government wants to touch it either:

So up to now the commission has been unable to find a home for the SPV. Not even a post restante address. No EU country has offered to host it. The sad SPV has been wandering between railway stations and airports, without a nationality, a bank account or even a real name. If I passed it on the street, I would put a euro in its hat.

Har!

And as I’ve pointed out since the day of the announcement, it is an utterly pointless exercise because it addresses every issue except the one that matters: secondary sanctions.  Once the US seized upon this mechanism, any attempt to circumvent sanctions by avoiding the dollar became utterly pointless: do a barter deal, or a Euro deal, or a Venezuelan crypto bolivar deal with a sanctioned Iranian company, and the Treasury will still hammer you.  So, if you want to do all your biz in cryptobolivars–knock yourself out! But if you want to do any business with the USD at all, think twice about dealing with a sanctioned entity by an SPV or any other way.  And pretty much every European company has decided that one thought is sufficient.

M. Le Maire seems to be getting a glimmer of a clue that the EU is a geopolitical lightweight:

“I’m not sure the Hanseatic League would be in a position to face the competition with China and the US”, he said. “If we are creating closed clubs, alliances within the EU then we run the risk of losing time and weakening our common project.”

Bruno. Dude: the EU is not in a position to face competition with China and the US.  This is proven daily.

So under German-French “leadership” the EU is likely to lurch along like it has been for years.  Compensating for their inability to achieve their vaulting global ambitions by beating up on the EU’s smaller members.  Annoying.  But in the end, risible and pathetic.

This Is What Happens When You Slip Picking Up Nickels In Front of a Steamroller

There are times when going viral is good.  There are times it ain’t.  This is one of those ain’t times.  Being the hedgie equivalent of Jimmy Swaggert, delivering a tearful apology, is not a good look.

James Cordier ran a hedge fund that blowed up real good.   The fund’s strategy was to sell options, collect the premium, and keep fingers crossed that the markets would not move bigly.  Well, OptionSellers.com sold NG and crude options in front of major price moves, and poof! Customer money went up the spout.

Cordier refers to these price moves as “rogue waves.”  Well, as I said in my widowmaker post from last week, the natural gas market was primed for a violent move: low inventories going into the heating season made the market vulnerable to a cold snap, which duly materialized, and sent the market hurtling upwards.   The low pressure system was clearly visible on the map, and the risk of big waves was clear: a rogue wave out of the blue this wasn’t.

As for crude, the geopolitical, demand, and output (particularly Permian) risks have also been crystalizing all autumn.  Again, this was not a rogue wave.

I’m guessing that Cordier was short natural gas puts, and short crude oil calls, or straddles/strangles on these commodities.  Oopsie.

Selling options as an investment strategy is like picking up nickels in front of a steamroller.  You can make some money if you don’t slip.  If you slip, you get crushed.  Cordier slipped.

Selling options as a strategy can be appealing.  It’s not unusual to pick up quite a few nickels, and think: “Hey.  This is easy money!” Then you get complacent.  Then you get crushed.

Selling options is effectively selling insurance against large price moves.  You are rewarded with a risk premium, but that isn’t free money.  It is the reward for suffering large losses periodically.

It’s not just neophytes that get taken in.  In the months before Black Monday, floor traders on CBOE and CME thought shorting out-of-the-money, short-dated options on the S&Ps was like an annuity.  Collect the premium, watch them expire out-of-the-money, and do it again.   Then the Crash of ’87 happened, and all of the modest gains that had accumulated disappeared in a day.

Ask Mr. Cordier–and his “family”–about that.

 

The Looming War on Thanksgiving

Attacking Columbus day? Confederate monuments? Old news!  The new hotness is attacking Thanksgiving.  Yes, the criticism can best be characterized as a swell today, but after long experience of observing the dynamics of these things, I expect that it will become a tidal wave next year, or the year after.

The grounds of the attack: it is a racist celebration.  Here is one particularly angry example of the criticism, but it differs from other things I’ve read and heard more in atmospherics than substance:

Nobody but Americans celebrates Thanksgiving. It is reserved by history and the intent of “the founders” as the supremely white American holiday, the most ghoulish event on the national calendar. No Halloween of the imagination can rival the exterminationist reality that was the genesis, and remains the legacy, of the American Thanksgiving. It is the most loathsome, humanity-insulting day of the year – a pure glorification of racist barbarity.

We at [Black Commentator] are thankful that the day grows nearer when the almost four centuries-old abomination will be deprived of its reason for being: white supremacy. Then we may all eat and drink in peace and gratitude for the blessings of humanity’s deliverance from the rule of evil men.

Thanksgiving is much more than a lie – if it were that simple, an historical correction of the record of events in 1600s Massachusetts would suffice to purge the “flaw” in the national mythology. But Thanksgiving is not just a twisted fable, and the mythology it nurtures is itself inherently evil. The real-life events – subsequently revised – were perfectly understood at the time as the first, definitive triumphs of the genocidal European project in New England. The near-erasure of Native Americans in Massachusetts and, soon thereafter, from most of the remainder of the northern English colonial seaboard was the true mission of the Pilgrim enterprise – Act One of the American Dream.  African Slavery commenced contemporaneously – an overlapping and ultimately inseparable Act Two. The last Act in the American drama must be the “root and branch” eradication of all vestiges of Act One and Two – America’s seminal crimes and formative projects. Thanksgiving as presently celebrated – that is, as a national political event – is an affront to civilization.

In a nutshell: Thanksgiving is a uniquely American holiday.  America is uniquely evil.  Therefore, in the coming Year Zero, Thanksgiving must be expunged, “root and branch.”

I will agree that Thanksgiving is a uniquely American holiday.   Everything after–appalling tripe.

First, to say that “[t]he near-erasure of Native Americans in Massachusetts and, soon thereafter, from most of the remainder of the northern English colonial seaboard was the true mission of the Pilgrim enterprise” is a lie and a libel.  Few things of that era are as well documented as the genesis of the voyage of the Mayflower, and the intent of those who sailed on it across storm tossed seas to an exceedingly uncertain shore.  The Puritans were people of intense religious feeling, suffering from intense religious persecution in their native England.  Decamping first to Leiden in the Dutch Republic, they decided to establish a New Jerusalem in a land outside of the control of the secular and religious authorities who persecuted them.

This was an inwardly-directed, insular, and arguably cultish group that was obsessed with inner salvation and communal adherence to strict religious principles.  It was the antithesis of a band of imperial adventurers and would-be conquerors: such a label might apply to the settlers of Jamestown, but not Plymouth.  There was not a Cortez among them.  They wanted to be left alone to pursue their vision of religious perfection.  Further, their settlement was founded based on a rather democratic and egalitarian document, the Mayflower Compact.

As a small band clinging to a precarious foothold, they posed little threat to Native Americans and intended to pose no such threat.   The initial relations with local tribes were mainly friendly.  Interestingly, competing tribes sought to cultivate their support in inter-tribal struggles.

As it turned out, their initial communitarian (bordering on communist) ideals turned out to be utterly impractical, with common property and communal labor leading to near obliteration by starvation.  The first Thanksgiving was a celebration of survival.  A genuine gesture from a sincerely religious people.

Being quicker learners than modern-day socialists, they jettisoned their Bible-inspired economic model, embraced private property and private labor, and within a few years of landing were becoming increasingly prosperous. During this period, relations with the native peoples were largely peaceful.

Continued religious persecution in England led other dissenters to leave their homeland for the New World.   Eventually the population growth, and the somewhat different ethos of these latter day Puritans, led to conflict with native tribes.  This culminated in the mid-1630s with the outbreak of the Pequot War.  But even that conflict is impossible to represent honestly as a conflict between grasping Europeans and persecuted natives.  Instead, it grew out of inter-tribal conflict, and in particular the aggressive imperialism–there’s really not a better word for it–of the Pequots.  In this war, the Puritan settlers were basically another tribe, but one with greater military capacity.

The Pequot War culminated in the Mystic Massacre.  Notably the Puritan attackers of the Pequot’s Mistick Fort were joined by Indian allies (the Mohegans and Narragansetts).  The attack against the fortification was almost a disaster, and in their desperation to escape the attackers set fires that spread, eventually consuming most of the fort and killing most of the Pequots trapped in it.

Like all history, this history is complicated.  Attempting to jam it into simplistic narratives intended to advance present-day political agendas necessarily does great violence to the truth, and leads to bitterness and conflict rather than understanding.

To make the Puritans emblematic of every American transgression does violence to the truth.  In particular, to tar them with the stick of slavery is particularly wrong.*  Moreover, to celebrate their laudable accomplishments, and their humble appreciation of God’s sparing them, does not excuse them or their followers from their failures and sin.

The modern holiday also attempts to appeal to the better angels of our nature (to quote Lincoln).  Consider Washington’s Thanksgiving proclamation:

Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor, and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness. Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be. That we may then all unite in rendering unto him our sincere and humble thanks, for his kind care and protection of the People of this Country previous to their becoming a Nation, for the signal and manifold mercies, and the favorable interpositions of his providence, which we experienced in the course and conclusion of the late war, for the great degree of tranquility, union, and plenty, which we have since enjoyed, for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted, for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us. And also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions, to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually, to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed, to protect and guide all Sovereigns and Nations (especially such as have shown kindness unto us) and to bless them with good government, peace, and concord. To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and Us, and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best. Given under my hand at the City of New York the third day of October in the year of our Lord 1789.

It is clearly aspirational, and even acknowledges “national . . . transgressions,” for which it asks forgiveness in Christian fashion.  It also appeals for strength to be better as a people.

Or consider Lincoln’s, proclaimed during the depths of a Civil War:

The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequalled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consciousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.

It also acknowledge’s America’s “sins,” and “our national perverseness and disobedience,” and calls for “humble penitence” therefore: read in context, coming as it did the same year as the Emancipation Proclamation, it is evident that Lincoln is referring to slavery.

In other words, from the outset in Plymouth or subsequent declarations in 1789 or 1863, Thanksgiving was anything but a chauvinistic celebration of a haughty people.  To the contrary.  It was an appreciation for the bounties that Americans had reaped, bound with a recognition of human (and national) failures to realize ideals, and a commitment to do better.  It is more gratitude and humility, than chauvinism and haughtiness.

This is why Thanksgiving is my favorite holiday, and why I for one will push back at the swelling progressive attacks on it.

*One of my direct ancestors, Samuel Fuller, was a Mayflower passenger and a survivor of that first horrible year.  His parents, Edward and his wife (whose name does not appear in the records), were not so lucky, and died soon after they stepped off the boat.  Samuel was taken in by his uncle, also named Samuel Fuller, and survived to the ripe old age of 75, dying in 1683.

It is possible that Samuel Fuller was the only slaveholder among the Mayflower Puritans.  His will bequeaths an Indian named Joel to his son.  There are no other similar records of slaves, Indian or otherwise, held by these Puritans.  Slavery in Massachusetts Bay colony probably dates from the time of the Pequot War, but was relatively marginal there through the mid-18th century.  There were fewer black slaves than free blacks in Massachusetts in this period.   And of course, the descendants of the Puritans formed the core of the American abolitionist movement.

 

Yes, But He’s *OUR* Bastard: Trump’s Transactional Realpolitik in Action

So Franklin Roosevelt* allegedly responded to Sumner Welles’ statement that Nicaraguan dictator Anastacio Samoza was a bastard.  Despite Samoza’s odiousness, Roosevelt put up with him because it advanced American interests.

Trump might as well have said the same about Mohammed bin Salman and Saudi Arabia yesterday.  Despite the hue-and-cry over the Khashoggi murder, Trump made it clear that he has decided that US interests are best served by sticking with our bastards in Riyadh, rather than engaging in moralistic virtue signaling.

As I wrote before, there are no good guys in the Middle East generally, and KSA in particular.  Since there are no George Washingtons waiting in the wings to replace MbS, I can say with metaphysical certainty that any replacement would be as bad, or worse, insofar as brutality is concerned.  More to the point, it is almost as certain that any replacement would be less supportive of US interests that MbS.  This is particularly true now, given the leverage that the murder has given Trump.

So our choice is: (a) a thug who has largely acted commensurately with American interests, and who has mitigated KSA’s longstanding hostility to Israel, or (b) a thug who may be far more hostile to American interests.

This is not a hard choice to people who exist in reality.  Which largely excludes most of the political and media class.

Further, will those who beat their chests in indignation please specify what would happen the day after the US destabilizes the Saudi regime?  After all, the US record in intervening in Middle East regimes is so great, right?  It always works out swell, no?

And as horrible as the Khashoggi murder was, let’s see things for what they are.  Contrary to his latter-day pose as a crusader for reform, he was in effect a middling character in Game of Thrones who was on the losing side in an internal regime struggle.  You can guarantee had his side prevailed, someone on the other side would have met a grisly death too.  The main remarkable thing about Khashoggi’s death is we know about it.  Pretty sure that there are a lot we don’t know about, and wouldn’t know about, regardless of which of the zillion princes wound up on top.

A friend remarked that maybe there are some princes in KSA who would not act as brutally as MbS were they in charge.   To which I replied: probably so, but immaterial.  Any such softer figure would not prevail in the internecine struggle for power.

Trump’s remarks and the underlying policy choice reflected his transactional approach.  MbS is someone he can deal with.  He has negotiating leverage.  He has used it.  Hence the boasts about lower oil prices, which has spurred people who never gave a crap about the US oil industry before to clutch their pearls about the impact of this on US oil companies, because, well, they have to find a way to criticize Trump.

The most remarkable thing about Trump is that in contrast to Roosevelt, who justified siding with Samoza in private, Trump said he was standing by our Saudi bastard in public.  This demonstrates another way in which he differs from conventional politicians.  Yes, he lies and bullshits repeatedly, but he also tells blunt truths that most politicians would conceal, or wrap in vaporous clouds of hypocrisy.  That’s kind of refreshing, actually.

*This remark is also attributed to Truman.

File Under “Duh”

The IEA points out the obvious:

Driving electric cars and scrapping your natural gas-fired boiler won’t make a dent in global carbon emissions, and may even increase pollution levels.

Higher electrification may lead to oil demand peaking by 2030, but any reduction in emissions from the likes of electric vehicles will be offset by the increased use of power plants to charge them, according to the International Energy Agency’s annual World Energy Outlook, which plots different scenarios of future energy use.

Substitution electrical motors for internal combustion engines involves a substitution of one fossil fuel for another?  Who knew?  WHY WASN’T I TOLD????

Further, especially when it comes to countries outside the EU, Canada, and the US, this will result in a substitution towards coal, electrification will involve a substitution of higher-CO2 intensive fuel (coal) for lower CO2-intensive fuel.

But, but, but . . . renewables! Right?

Of course, Bloomberg feels obliged to quote a green fantasist:

“Electrification is a necessary part of deep decarbonization because it is relatively easy to decarbonize the power sector,” said Lauri Myllyvirta, a senior analyst at Greenpeace’s air pollution unit. “But electrification only helps if the power sector moves rapidly towards zero emissions.”

Zero emissions power sector.  “Relatively easy to decarbonize.”  Apparently, Greenpeace does not require drug tests.  Or perhaps, they do, but if you test negative you’re fired.

What is the cost of zero emissions power sector? (Anything is “easy” if cost is no object.)  Even far smaller renewable penetration (Denmark, Germany, California) results in substantially higher electricity costs.  Costs which fall extremely regressively, especially if implemented no a global basis, but upper middle class types who populate Greenpeace and Green Parties etc. couldn’t be bothered thinking about that.

Furthermore, there is no proof that renewables scale, and indeed,  basic considerations and basic economics strongly suggest they will not and cannot.  Renewables are diffuse and intermittent, and as a result maintaining reliability is costly, and this cost increases at an increasing rate the larger the share of renewables in the generation mix.

But, but, but . . . . batteries!

Batteries have been the subject of intense research for decades, and costs are falling, but again there are serious doubts that they can scale sufficiently to make zero emissions power even remotely attainable.  Indeed, batteries perhaps can handle diurnal variations in renewable power production, but handling the massive seasonal fluctuations in power demand is another matter altogether.

Further, from a lifecycle perspective, it is by no means clear that electric vehicles reduce CO2 emissions.  What’s more, the monomaniacal focus on CO2 ignores the other environmental and economic consequences of renewables generation, including profligate use of land, blended birds, the pollution created by extraction of minerals used in batteries and motors, and the pollution caused by the disposal thereof.

These issues always bring to mind James Scott’s Seeing Like a State, which shows that “high modernist” projects envisioned by alleged elites invariably result in catastrophe because they inevitably impose simplistic, low-dimension measures on complex, high-dimension systems.  Unintended consequences usually strike with a vengeance, and even the intended consequences fail to materialize.

The massive re-engineering of society required to de-carbonize is in many ways the zenith of high modernism, and is destined to produce a nadir of consequences, even compared to some of the other disasters that Scott examines.

The IEA’s caution should be heeded.  But it will not be.  Those Who Know Better will plunge ahead, until it becomes clear that they in fact know very little about what they imagine to design.  Alas, they will not bear the costs of their conceit.  The Lesser Thans will, and the lesser you are, the greater the costs will be.

 

Read Financial Journalism For the Facts, Not the Analysis

One of the annoying things about journalism is its predilection to jam every story into an au courant narrative.  Case in point, this Bloomberg story attributing a fall in bulk shipping rates (as measured by the Baltic Freight Index) to the trade war.  Leading the story is the fact that iron ore and coal charter rates have fallen about 40 percent since August. The connection between these segments in particular to the trade war is hard to fathom, and the article really doesn’t try to make the case, beyond quoting a shipping industry flack.

An earlier version of the story included a few paragraphs (deleted in the version now online) about grain shipping, stating that grain charter rates had also fallen, since the decline in shipments from the US to China had depressed the rates for smaller ships.  It was not clear from the unclear writing whether the smaller ships referred to just means that smaller vessels are used to carry grain than ore or coal, or whether it means that among grain carriers, the smaller ones have been hit hardest.  If the former, it’s by no means clear that the trade war should reduce shipping rates for most grain carriers.  Indeed, by disrupting logistics through reducing shipments out of the US, Chinese restrictions on US oilseed imports has forced longer, less efficient voyages, which effectively reduces shipping supply and is bullish for rates.  If the latter, yes, it is possible that the demand for smaller ships that normally operate from the USWC to China has fallen, but this can hardly explain a fall in the Baltic Index, which is based on Capesize, Panamax, and Supramax voyages, not (as of March, 2018) of Handymax let alone Handy-sized vessels.  (Perhaps this is why the paragraphs disappeared.)

Bulk shipping rates are used as an indicator of world economic activity: Lutz Kilian pioneered the use of freight rates as a proxy for world economic conditions.  Thus, it’s more likely that the decline in the BFI is a harbinger of slowing global growth–and growth in China in particular.  There are other indications that this is happening.

Yes, the trade war may be impacting the Chinese economy, but it is more likely that it is just the icing on the cake, with the main ingredients of any Chinese decline (which is indicated by weakening asset prices and lower official GDP numbers, though those always must be taken with mines of salt) being structural and financial imbalances.

If you are going to look to freight markets for evidence of the impact of the trade war, it would be better to look at container rates, which have actually been increasing robustly while bulk rates have declined.

While I’m on the subject of pet peeves relating to journalism, another Bloomberg story comes to mind.  This one is about oil hedging:

The plunge in oil prices may finally make oil producers’ hedging contracts into a financial winner for 2018.

After more than a year of surging prices made the contracts a drag on profits, the slide in West Texas Intermediate crude to around $55 a barrel this month means some of the hedges are edging toward profitability, said Anastacia Dialynas, a Bloomberg NEF analyst.

Uhm, that’s not the point.  Just as this article misses the point:

There’s a downside to oil prices being up that could cost the industry more than $7 billion.

When crude markets slumped, explorers used hedging contracts to lock in payments for future barrels to ride out prices that fell as low as $27 a barrel in 2016. Now, as global tensions and OPEC supply cuts drive prices toward $70 in New York, those financial insurance policies have become a drag on profits, limiting some companies from cashing in on the rally.

Even the title of this week’s article is idiotic: “Hedging Bets.”  What would those be, exactly?  “Hedging bet” (as distinguished from “hedging your bets”) is pretty much an oxymoron.  If hedge is any kind of bet, it is a bet on the basis–but that’s not what these articles are talking about.  They focus on flat prices.

The point of these contracts is to reduce exposure to flat prices, and to reduce the sensitivity of revenue to price fluctuations.  The hedger gives up the upside during high price environments to pay for a cushion on the downside in low price environments.  Thus, if anything, these articles shows hedges are performing as expected.  They are in the money in low price environments, and out in high price ones, thereby offsetting the vicissitudes of revenues from oil production.

The problem with journalism regarding hedging (and these articles are just the latest installments in a large line of clueless pieces) is that it doesn’t view things holistically.  It views the derivatives in isolation, which is exactly the wrong thing to do.

Journalists are not the only ones to commit this error.  Some financial analysts hammer companies that show big accounting losses on hedge positions.  “The company would have made $XXX more if it hadn’t hedged.  Dumb management!” Er, this requires the ability to predict prices, and if you can do this, you wouldn’t be hedging–and if it’s so easy, you shouldn’t be a financial analyst, but a fabulously wealthy trader living large on a yacht that would make a Russian oligarch jealous.

Derivatives losses deserve scrutiny when they are not (approximately) offset by gains elsewhere.  This can occur if the positions are actually speculative, or when there is a big move in the basis.  In the latter case, the relevant question is whether the hedge was poorly designed, and involved more basis risk than necessary, or whether the story should be filed under “stuff happens.”

Which brings me to a recommendation regarding consumption of most financial journalism.  Look at it as a source of factual information that you can analyze using solid economics, NOT as a source of insightful analysis.  Because too many financial journalists wouldn’t know solid economics if it was dropped on them from a great height.

Return of the Widowmaker–The Theory of Storage in Action

I’m old enough to remember when natural gas futures–and the March-April spread in particular–were known as the widowmakers.  The volatility in the flat price and especially the spread could crush you in an instant if you were caught on the wrong side of one of the big movements.

Then shale happened, and the increase in supply, and in particular the increase in the elasticity of supply, dampened flat price volatility.  The buildup in production and relatively temperate weather encouraged the buildup in inventories, which helped tame the HJ spread.  But the storage build in 2018 was well below historical averages–a 15 year low.  Add in a dash of cold weather, and the widowmaker is back, baby.

To put some numbers to it, today the March flat price was up 76 cents/mmbtu, and the HJ spread spiked 71.1 cents.  The spread settled yesterday at  $.883 and settled today at $1.594.  So for you bull spreaders–life is good.  Bear spreaders–not so much.

The March-April spread is volatile for structural reasons, notably the seasonality of demand combined with relatively inflexible output in the short run.  As I tell my students, the role of storage is to move stuff from when it’s abundant to when it’s scarce–but you can only move one direction, from the present to the future.  You can’t move from the future to the present.  Given the seasonal demand for gas it is scarce in the winter, abundant in the spring, meaning that carrying inventory from winter to spring would be moving supply from when it’s scarce to when it’s abundant.  You don’t want to do that, so the best you can do is limit what you carry over, so you don’t carry it from when it’s scarce to when it’s abundant.

Backwardation is the price signal that gives the incentive to do that: a March price above the April price tells you that you are locking in a loss by carrying inventory from March to April.   Given the seasonality in demand, the HJ spread should therefore be backwardated in most years, and indeed that’s the case.

But this has implications for the volatility in the spread, and its susceptibility to big jumps like experienced today.  Inventory is what connects prices today with prices in the future.  With it being optimal to carry little or no inventory (a “stockout”)  from winter to spring, the last winter month contract price (March) has little to connect it with the first spring contract price (April).  Thus, a transient demand shock–and weather shocks are transient (which is why the world hasn’t burned up or frozen)–during the heating season affects that season’s prices but due to the lack of an inventory connection little of that shock is communicated to spring prices.

And that’s exactly what we saw today.  Virtually all the spread action was driven by the March price move–a 76 cent move–while the April price barely budged, moving up less than a nickel.

That’s the theory of storage in action.  Spreads price constraints.  For example, Canadian crude prices are in the dumper now relative to Cushing because of the constraint on getting crude out of the frozen North.  The March-April natty spread prices the Einstein Constraint, i.e., the impossibility of time travel.  We can’t bring gas from spring 2019 to winter 2019.  Given the seasonality of demand, the best we can do is to NOT bring gas from winter 2019 to spring 2019.  Winter prices must adjust to ration the supply available before the spring (existing inventory and production through March).  The supply is relatively fixed (inventory is definitely fixed, and production is pretty much fixed over that time frame) so an increase in demand due to unexpected cold winter weather can’t be accommodated by an increase in supply, but by an increase in price.  The Einstein Constraint plus relatively inflexible production plus seasonal demand combine to make the inter-seasonal spread an SOB.

There will be a test.  Math will be involved.

Bugger Off, M. Macron, and Take Your Buddies With You

Trump’s blunt statement that he was a nationalist has set off paroxysms of rage from the usual quarters.  This culminated with French president Macron intoning (under a monument to French national pride and military conquest–but we’ll see that’s just a sliver of the hypocrisy) that “patriotism is the exact opposite of nationalism.”

Upon reading this, my initial reaction was: bugger off, froggie.  Here’s my more considered reaction, though I have to confess it pretty much arrives at the same conclusion, only with bigger words

A Job That Americans Are All Too Eager to Do

That job?  Voter fraud.

In three states where major elections are within the margin of fraud, ballot boxes are miraculously appearing in solid Democratic counties after Republicans appeared victorious.

This is a time-honored tactic.  It’s how “Landslide Lyndon” Johnson obtained his nickname.  After it appeared that LBJ had lost a Senate primary to Coke Stevenson, several ballot boxes containing 20,000 votes miraculously appeared, giving Johnson victory by an 87 vote margin.

So spare me chin pulling–and hysteria–about foreign interference in American elections.  American interference in American elections is a far greater threat to democracy.  And it’s a job Americans have been doing–and doing all too well–since the beginning of the Republic.

Reading about the shenanigans in Florida, Arizona, and Georgia spurred me to Google “Landslide Lyndon” to refresh my memory about his 1948 “victory.” The first several hits were from MSM (NYT, WaPo) reviews of Robert Caro’s biography of Johnson that documented the fraud.  Given how Johnson had been savaged by the left during Vietnam, it was astounding to see the lengths to which mainline liberal/leftist publications went to defend Johnson and criticize Caro.  It was like T-cells attacking a foreign body.  Yes, LBJ was a bastard–but he’s our (Democratic) bastard!

This is particularly revealing given the incredible research that Caro had done.  But he attacked one of the tribe, so he must be destroyed.

I remember vividly reading this Caro volume.  I finished about half of it, and had to put it down.  Johnson was such a loathsome human being–to put it charitably–it was nauseating to read the details.   I cannot think of one redeeming quality in the man.  Not a single one.

I was already pretty cynical about American politics by that time.  Caro’s Means of Ascent turned me into a die-hard cynic.   It was a perfect illustration of Hayek’s principle: the worst always get on top.

What is going on in the aftermath of the 2018 midterms is putting an exclamation point to that cynicism.  (Not that there were no reinforcing events in the intervening years–far from it.)   And we should not be surprised.   As government has grown in scope and power, the stakes of winning elections have grown commensurately.  If fraud paid in 1948 (or 1960), it pays far more now.

Indeed, I suspect that the obsession with idiotic Facebook posts or tweets allegedly posted by Russians is driven by the fact it is a very convenient distraction from far more real–and far more enduring–threats to the integrity of American elections.  Homegrown threats. But if you read the MSM, Russian meddling is a real and important threat, but even entertaining the possibility that American elections are rife with domestic fraud is to advance a conspiracy theory.  This is another illustration of their incomparable ability to invert reality.

 

Election 2018: Stalemate, Which is Effectively a Victory for the Defense (Which Would Be Trump)

Sunday marks the centennial of the end of World War I.  A word that is often used to describe that war–stalemate–also describes the results of Tuesday’s mid-term election.

After an intense rhetorical barrage lasting weeks, the Big Push ended with the contending lines virtually unchanged.  Yes, the Democrats captured the House, narrowly: but the Allies penetrated a few miles here and there at the Somme, without changing the strategic balance one whit.

Stalemate works to the advantage of the defender, which is what the Trump administration and the Republicans were on Tuesday.   So in a sense they won, by depriving their foes of a clear victory.

The Democratic control of the House will have little effect.  The new majority will not be able to achieve any legislative victories.  Hell, the Republicans couldn’t do squat, even when they controlled both houses and the White House, with a few exceptions (e.g., tax legislation).

Trump will continue to focus on foreign policy, the use of executive authority on domestic matters, and domination of the terms of political debate.  The Democrats will respond exactly like the Republicans did when Obama was president: much fussing and fretting, ranting and raving, to little effect.  The dogs will bark, but the Trump caravan will move on.

The major potential problem relates to defense, where the Democrats may impede the necessary recapitalization of the military.

The Democrats have vowed to mount a major offensive of investigations.  But tell me: since Watergate, when have Congressional investigations have any real impact?  When in the majority, the Republicans mounted investigation after investigation against Clinton and Obama, to virtually no effect.  Indeed, the Republicans frequently beclowned themselves with their investigations: expect the Democrats to do the same.   And expect Trump to fight hard and fight dirty in response, and to troll them mercilessly, thereby increasing the odds they will beclown themselves.

Some Democrats vow to impeach Trump.  Ask Newt Gingrich et al how that worked out for the Republicans in 1998.

Indeed, a Democratic House will provide Trump with a foil, a whipping boy, and a scapegoat.  The Democrats are so beside themselves with outrage over Trump that they will surely overstep themselves.  Further, in their frenzy they will rise to any bait, and you can believe Trump will chum the waters incessantly.  Trump will spend the next two years baiting and running against Nancy Pelosi, Maxine Waters, and the rest.  This will work to his advantage.

Tuesday actually brought more substantive victories to the Republicans than the Democrats.  They flipped a net two Senate seats.  Indeed, I would argue that they flipped a net of four.  The two ostensibly Republican seats in Tennessee and Arizona that were kept in the party had been held by anti-Trump prima donnas, Corker and Flake, who would didn’t even qualify as RINOs.  They have been replaced by more solid conservatives (at least they are now–there is always the risk they will go native).  So I see Tuesday as giving Trump/the Republicans (who are now part of the Trump empire, for better or worse) a four seat gain in the Senate.  Add to that the conservative replacement for McCain, and the Senate has an actual Republican majority, rather than a simulacrum thereof.

Of course, since the Democrats didn’t make headway in the Senate–the Senate must be abolished! Seriously: there is a steady stream of commentary to that effect.  Adding levity to the idiocy–or is it idiocy to the levity?–some lefties are actually claiming that the Republican Senate victories are illegitimate because–wait for it!–the Republicans gerrymandered the Senate elections.

Talk about people unclear on the concept!  But never underestimate the Dunning-Kruger effect, when it comes to politics, especially on the left.

What’s more, the Kavanaugh hearings (another example of Democrat overreach and their inability to help themselves) all but radicalized other Republican senators: have you heard Lindsey Graham lately? The Senate is a far more reliable Republican/administration bulwark as of today than it was on Monday.  This bodes well for confirmations.

The next confirmation battle is likely to be over whomever Trump nominates to be Attorney General, for literally hours after the election he unceremoniously ordered Jeff Sessions to resign.

The shrieks emanating from the Democrats and the bedraggled rump of anti-Trump Republicans indicates that this is a good thing.  You can guarantee that Trump will appoint someone who will be reliable, and likely combative, unlike the all-but-emasculated Sessions.

Robert Mueller is apparently also frightened, if this is to be believed.  Assuming that it is, I am compelled to ask: who the hell [I cleaned that up] does he think he is?  Here is a guy with no formal Constitutional standing, subordinated by law to the Attorney General, claiming to question of the authority of the president to name his own cabinet.  Perhaps he should re-acquaint himself (or acquaint himself) with Article II of the Constitution:

He shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur; and he shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

That is: the president can fire the likes of Sessions for reasons good, bad, or ugly.  And Bob Mueller’s permission is not required.

The hue and cry is oh my God, Mueller will be subject to a Trump-appointed AG.  Yes.  Exactly as the law is intended and exactly as it is written.  Trump was rightly furious at Sessions’ recusal, which left the “oversight” to arch insider Ron Rosenstein, who was infinitely more conflicted that Sessions, yet felt no compunction against overseeing an investigation of matters in which he was at least a witness, and arguably a principle player.

The swamp echoes with grave warnings of another Saturday Night Massacre.  Trump is not that stupid.  I think a more likely outcome is revelation of Mueller’s current hunting license (which Rosenstein has fought fiercely to keep under wraps), followed by a substantial limitation of Mueller’s investigation to the matters it was originally supposed to cover: collusion between the Trump campaign and the Russians.

Thus, the election’s end frees Trump to defend himself more vigorously against Mueller.  That’s also a victory.

In sum, the battle lines have changed little, but despite local successes by the Democrats, this battle has been a victory for the defender–Trump.

One last comment on the election, or more specifically, what it reveals about the media.  From early Wednesday morning, my Twitter feed was choked with breathless tweets from all the usual suspects (Bloomberg, the FT, Reuters, etc.), about the glorious victories of women, especially minority women.  As @shootersix (a real bad-ass, by the way) commented, the three hyped most prominently were “a 29 year-old moron, a woman who married her brother, and another waving a Palestinian flag.” Leftists winning in lefty Congressional districts.  BFD.

Meanwhile, as @shootersix noted, the first Korean-American woman elected to Congress received ZERO attention, let alone accolades for being elected while having a uterus–because she is a Republican.  As egregious as this slight, if not more so, is the fact that two Republican women who won much more consequential senatorial victories in competitive states–McSally in Arizona and Blackburn in Tennessee–were also invisible as far as the media was concerned.

In other words: to the MSM it’s not about women making political strides–it’s about leftist/socialist/terrorist-friendly women making political strides.  I’d say the mask has slipped, but it was never on in the first place, was it?