Craig Pirrong's Blog, page 7

Border Wars

Although there’s more to be said about the continuing secondary explosions from the Trump administration’s carpet bombing of the Europeans, today I’ll turn attention (as promised) to the home front. Specifically, the legal battles that Trump’s flurry of Executive Orders and the operations of DOGE have triggered.

Across the nation, aggrieved parties have engaged in a forum shopping spree to file cases in Federal courts demanding temporary restraining orders (TROs) and/or preliminary injunctions to stymie the administration’s actions. Not all of these are created equal, and it’s worth categorizing them and analyzing category by category.

At the outset, let me say that one thing that deserves greater attention is whether the plaintiffs in these actions have standing. At least one request for a TRO has been rejected on standing grounds. Given that standing was the basis for the rejection of many of the 2020 election lawsuits filed by Trump or other parties, it’s quite clear that courts routinely use standing as a way of quashing suits they don’t like while avoiding ruling on the substance of the claims. I wouldn’t be surprised if courts (up to and including the Supreme Court) might punt on many of these cases by throwing them out on standing grounds.

Now, going to the substance of the various types of cases being filed. One good classification algorithm is based on the fact that virtually all of these legal actions relate to a challenge of presidential authority under Article II of the Constitution.

The Constitution establishes a separation of powers. A major role of the courts is ruling on boundary disputes that are inherent in such a separation. One boundary is between the legislative and the executive. Another boundary is between a branch of the federal government (executive or legislative) and the people: such a boundary exists because of the Bill of Rights. Another boundary, and the most problematic, is between the courts and either the executive or the legislative.

Cases that challenge the administration’s cutting spending relate to the executive-legislative boundary. Where the boundary is relatively clear is when Congress has mandated specific expenditures. The executive’s ability to withhold or cut those is shaky at best. Although even here the fact that Congress apparently felt it necessary to pass the Congressional Budget and Impoundment Act of 1974 to constrain the president’s power to impound funds suggests that even when it faced a crippled and very unpopular Nixon administration Congress was not confident that the restriction on the president’s impoundment power was not rooted in the Constitution. The constitutionality of the restrictions on impoundment may become the overriding issue, and this would have to be resolved at the Supreme Court–or by Congress changing the impoundment laws, which is not outside the realm of possibility.

Things get far more ambiguous when Congress allocates moneys to a particular department or agency, yet doesn’t provide specific orders on how the money is to be spent. It appears that’s where Trump/DOGE are focusing, and it’s by no means clear how that will play out in the courts, and in the Supreme Court in particular, where this dispute, like all the others, will end up one way or another.

There’s also the very important issue of where DOGE’s algorithms have identified apparently fraudulent expenditures which it refuses to make or even tries to claw back. The president has the duty to see the laws are faithfully executed, and fraudulent expenditures of moneys allocated by Congress would represent a violation of those laws, meaning that the president has an obligation to stop them.

Here is where what constitutes “fraud” will come into play. This will be an issue of fact as well as an issue of law, and the facts will differ in every instance.

As for “DOGE is not elected!!!” well, DOGE is part of the executive branch, and every part of the executive has accountants, auditors, and investigators whose supposed job is to prevent and deter fraud. DOGE is basically performing that function . . . and in so doing is demonstrating that those who are supposed to be doing this are doing a crap job at it. It is watching the watchmen, and the watchmen don’t like it one bit–nor do those the watchmen have failed to detect.

Another legislative-executive boundary war involves the ability of the president to terminate executive branch personnel. Relationships with these personnel are governed in large part by civil service laws dating back to the Pendleton Act of 1883. Meaning that courts will have to decide whether executive branch actions violate these laws.

A more ambiguous type of case involves things like the deals that the on-its-way-out-the-door Biden administration negotiated with government employee unions on things like work from home. As executive actions those would at least be plausibly within the new president’s power to undo.

The executive-people boundary is implicated mainly in Trump EOs relating to things like eliminating DEI, banning transgenders from the military, and eliminating biological males from participating in female sports. These will also be fact-intensive matters, specifically whether a particular EO violates any right.

As noted earlier, the most problematic boundary is between the executive and judicial. Many of the suits have challenged the executive’s authority to do things that seem to be quite clearly and unambiguously under the purview of the executive. Most notable of these are attempts to restrict executive branch personnel from accessing executive branch information resources. The most astounding of these is the TRO that barred the Secretary of the Treasury from . . . accessing Treasury Department databases.

These suits seem to me to be facially absurd. How is the executive supposed to see that the laws are faithfully executed if he or his designated agents are not able to access information about the operations (most notably the distribution of moneys) of executive departments and agencies?

It is abundantly clear why these actions have been filed–and it’s not because of a punctilious regard for Constitutional powers. It is because information is power. The (unelected!) bureaucracy wields massive power precisely because at least heretofore it has had control over information. Giving the actual chief executive access to that information is a mortal threat to the power of bureaucrats/the administrative state/the Deep State.

This, of course, is precisely why under Trump’s direction DOGE’s first actions have focused on accessing and mapping that information. It realizes that control of information is the center of gravity in the war on the bureaucracy. Hence unhindered access to data and information is DOGE’s/Trump’s schwerpunkt.

And here is where the court-executive boundary comes into play. These actions are self-evidently in the sphere of the executive, and necessary for him to achieve his duty of ensuring the execution of the laws. By intervening in this domain the courts–or more accurately, specific Federal judges–are transgressing the limits of their authority.

It is a basic principle of Anglo-Saxon law that no person should be a judge in their own case. But that’s effectively what certain federal judges are doing here–judging what falls in their sphere. This is an inherent conflict under the separation of powers: who judges the judges? Yes, you can say that higher court judges will judge these district judges, but at the end of the day you still are in a situation where the highest court of judges is determining how far its powers, and those of its inferiors, extend.

So if there is a Constitutional Crisis now, it is one that is an omnipresent possibility under the separation of powers.

How can these conflicts be resolved? One is for the executive to exercise the FU option, and refuse to comply. Andrew Jackson’s response to a Supreme Court decision (“Mr. Marshall has made his decision. Now let him enforce it.”) is one way. Similar is Lincoln’s in ex parte Merryman, where Supreme Court Chief Justice Taney issued a writ of habeus corpus that Lincoln refused to obey: Taney ruled that only Congress could suspend habeus corpus. Taney admitted that he was powerless to enforce it, and Lincoln ignored the court. (Ex parte Milligan raised similar issues, namely the ability of the administration to try people with military tribunals while civilian courts were operating, but the Supreme Court decision came down when the issue was effectively mute, meaning that there was no need for the administration to defy the court).

These standoffs inevitably become political issues. In the Lincoln-Taney standoff, the suspension of habeus corpus was widely popular in the US, and a little more than a year after Merryman Congress passed a law authorizing its suspension. But even here, Lincoln felt compelled to make the case to the nation:

The whole of the laws which were required to be faithfully executed were being resisted and failing of execution in nearly one-third of the States. Must they be allowed to finally fail of execution, even had it been perfectly clear that by the use of the means necessary to their execution some single law, made in such extreme tenderness of the citizen’s liberty that practically it relieves more of the guilty than of the innocent, should to a very limited extent be violated? To state the question more directly, Are all the laws but one to go unexecuted, and the Government itself go to pieces lest that one be violated?

I suspect that outside the usual suspects on the left and in the media (redundant, I know) letting slip the DOGEs of war on the bureaucracy’s information monopoly will be widely popular, especially given the bad look arising from disclosures like those involving USAID have had. Thus, I think it highly likely that the administration would prevail in the political controversy that defiance would unleash.

Some on the right, notably commentator Kurt Schlicter, recommend that that administration comply and just let the issue work through the courts. They argue that Trump’s case is so strong, and the high court’s neuralgia at overstepping its bounds in a fraught political issue is so great, that he will eventually prevail without having to bring things to a confrontation. This would have the added benefit of creating useful precedents.

This is probably wise. After all, the administration still has the FU option, and can defer choosing to exercise it until it becomes necessary. This would avoid paying the strike price of a political frenzy that would inevitably result.

Trump’s odds of prevailing depend on the bucket a particular case falls in. He has the best odds in the last type of case where the courts are asserting authority over matters that seem clearly outside their domain and within that of the executive. The cases that fall into the other categories are less clear-cut, and Trump will no doubt lose many though will prevail in more than a few.

For Those Who Didn’t (And Still Don’t) Get The Memo

Since the Russian invasion of Ukraine 3 years ago (and even going back to 2014) one refrain has been that the Budapest Memorandum obligates the US (and the UK) to defend Ukraine against invasion. Trump’s announcement of negotiations with Putin, and the dispensing of home truths about Ukraine’s prospects for joining Nato, have led to a spike in invocations of the Budapest Memorandum. (I could refer to it as the “BM” which would be appropriate, as will be seen, but I’ll desist).

Brief summary: the Budapest Memorandum does no such thing. Full stop.

Clue #1: It is a “memorandum.” Not a treaty. It was not ratified by the US Senate.

But let’s look into the actual language. Anyone who reads at a 5th grade level, and who has actually read it, will immediately grasp its (lack of) content. (Many of those shrieking about the Memorandum evidently fail one or both of those criteria).

Here ’tis.

The US, UK, and Russia promise not to nuke or invade Ukraine. Well, since only Russia was a threat to do so, this is creating a mirage of symmetry in a totally asymmetric reality. Neither the US or the UK gave up anything. Nor did Russia–see below.

And for those who are slow: a promise not to invade is not a promise to defend. Negative obligation vs. positive obligation. Not a trivial difference.

Moving on. To the best part. (Circled for your convenience).

What’s the enforcement mechanism? If Ukraine is invaded or nuked there is a commitment to take it up with the UN Security Council. Where Russia had/has a veto.

Meaning that the Memorandum cannot be enforced against the only party that was likely to, had the incentive to, and in the event did, violate it.

For those who are visual learners, here’s a picture of the Memorandum’s enforceability:

I think the big problem here is that people have somehow gotten the idea that Budapest was about protecting Ukraine. In fact, it had absolutely nothing to do with protecting Ukraine.

At the time of signing in 1994, the big fear in the US (and the rest of the West) was loose nukes in the ex-USSR. And Ukraine was a particular source of concern because of its preternatural (even by Sovok standards) corruption. Concern about loose nukes also drove the Nunn-Lugar Soviet Threat Reduction Act of 1991, which had four objectives:

Consolidate and secure WMD in a limited number of secure sites;Inventory and account for these weapons;Provide safe handling and safe disposition of these weapons as called for by arms control agreements; andOffer assistance in finding gainful employment for thousands of former Soviet scientists with expert knowledge of WMD or their delivery systems.

Budapest was adopted pursuant to all these objectives, especially 1-3.

Note that Nunn-Lugar was the “Soviet Threat Reduction Act,” and Ukraine was ex-Soviet. Budapest was a mechanism to get nukes out of an ex-Sov country, consolidate them, inventory them, and dispose of them. Protecting Ukraine’s sovereign integrity had nothing to do with it. Indeed, it was a mechanism to override Ukrainian sovereignty, by cajoling them into surrendering nukes.

All of the grandiose language about protecting Ukraine from invasion or nuclear attack was just a fig leaf. Pure Kabuki theater. Meaningless diplomatic jabber: and that’s all that any contract without a credible enforcement mechanism is.

Another clue is the identity of the American and British interlocutors–Slick Willy Clinton and Fast Tony Blair. They were great at making high sounding promises that vanish at the touch.

But at least you have the consolation of knowing that Bill is really, really, broken up about it:

Right, https://t.co/3eDCDaUVEw
but this is was Clinton was saying in retrospect: pic.twitter.com/XAqe2dWn9x

— oida (@oida) February 15, 2025

That’s what Bill was saying. This is what he was actually thinking:

So the Budapest Memorandum is sound and fury, signifying nothing. A scrap of paper that achieved its true purpose–securing nukes–under the guise of giving solemn guarantees to Ukraine. Guarantees that are–and were–transparently fraudulent because they could not be implemented against the only party that could or would violate the supposed commitments.

So if anyone tells you “But but but the Budapest Memorandum,” now you know. It does not mean what they think it means.

It means nothing at all.

Reality –What a Concept. (Which the Europeans Don’t Grasp).

The Trump administration is causing an intercontinental meltdown. Politicians in Europe, Canada, and the US are wetting the bed over its latest moves. I’ll cover the domestic meltdown in a future post. Today I’ll focus on the furriners.

Trump himself started the hysteria by announcing from DC that he and Putin had agreed to begin negotiations to end the war in Ukraine. His deputies, Vice President Vance and SecDef Hegseth, then delivered some home truths right in blunt terms right to their faces.

Hegseth said Ukrainian membership in Nato was not in the cards, and further, that Ukraine could not expect return of all territories lost since 2014. To which the Europeans took extreme umbrage. Premature concessions to Putin! Ukraine must go into Nato!

These are only concessions to reality, something to which the Europeans have a very doubtful attachment. Trump, and/or Hegseth and/or Vance and/or Rubio are apparently going to have to go all Colonel Jessup on them: You Can’t Handle the Truth! Because they obviously can’t.

It’s also beyond bizarre that the Europeans should want Ukraine in Nato, especially given their extreme neuralgia at spending money on defense. Ukraine in Nato would (a) provide no additional defense to Nato beyond what it is providing outside it now, and (b) because of Article 5 would increase Europe’s risk of going to war with Russia, a prospect that it apparently holds in dread.

Or does it? On the one hand, it wrings its collective hands and wails how Russia is an existential military threat. On the other, it has stubbornly refused to make a serious effort-or any effort at all-to strengthen its own defenses. So actions don’t match words. Why should we take them seriously?

And here’s where something else Hegseth said has the Europeans’ panties in a wad. Defending Europe is up to. . . Europe. The US has to focus on a pacing threat from China.

OMG! That’s undermining Nato!

No. Again, more reality.

As for Nato, it was formed when Europe was on its back and did face an existential threat that was also a threat to US interests. That was almost 70 years ago. Europe is off its back. The USSR is gone, and Putin’s Russia is a pale simulacrum of that. China was not a major threat to US interests then. It is now.

In other words, the threats Nato faces are far diminished, the Europeans are far better positioned to deal with, and the US has business elsewhere So deal with it.

But no! Uncle Sucker has to do it!

And the Euros are stamping their little feet and shooting off their fat mouths.

In the fat mouth (and other body parts) category is German Defense Minister (an oxymoron if I’ve ever heard one) Boris Pistorius says that the remarks of Vance (more on him below) and Hegseth are “unacceptable.”

JUST IN: German Defense Minister Boris Pistorius starts whining about JD Vance's speech, says it was "not acceptable."

Looks like Vance's speech was a success.

The whining came after Vance ripped European nations for criminalizing free speech and acting like tyrants.

"If I… pic.twitter.com/zM9DBo7V3M

— Collin Rugg (@CollinRugg) February 14, 2025

Yes, we get that reality isn’t acceptable for you. But there it is. Lump it or like it, as you will.

Former German Defense Minister [sic] and current EU President Ursula von der Leyen said “Ukraine needs peace through strength. Europe wants peace through strength.”

"Ukraine needs peace through strength. Europe wants peace through strength"

European Commission President Ursula von der Leyen says "real deterrents" are needed to combat "the authoritarians of this world." Live updates: https://t.co/09MjMRGl8U pic.twitter.com/ZroKpotoM7

— Bloomberg (@business) February 14, 2025

This being the woman, mind you, under whose “leadership” the German military trained with painted broomsticks and had an abysmal operational readiness rate in aircraft in particular.

Then there’s little Manny, who like other Europeans is demanding a seat at the table:

Macron to the FT : Trump brought “ element of strategic disruption”. It’s for Zelenskyy “alone” to discuss “territorial and sovereignty issues”. And “up to the international community, with a specific role for the Europeans, to discuss security guarantees
https://t.co/5O46RaDf7z

— roula khalaf (@khalafroula) February 14, 2025

Hop along like a good little froggy now. The reality (there’s that word again!) is that to get a seat at the big boys table you need to buy in. The buy-in at this table is hard power. Of which Europe has none. By choice.

Europe is willing to fight to the last Ukrainian and the last American dollar. That doesn’t get you into the game no matter how much you harrumph and whine.

You see, America is being selfish!

Former French Prime Minister Dominique de Villepin tells @flacqua the Trump administration has no willingness to defend the interests of Ukraine, and is only guided by the interests of the US https://t.co/bX1GK76cQT pic.twitter.com/dNLFQE4naZ

— Bloomberg (@business) February 14, 2025

Yes. And?

How dare the US be guided by the interests of the US? The nerve of those people, right?

Well, you can hop along right after Manny, Dominique. You look after Europe’s interests, the US will look after ours.

Vance’s broadside, delivered at the security conference in Munich that followed hard on another mass atrocity by an immigrant (from Afghanistan), dropped truthbombs on subjects beyond Ukraine, and as a result sparked more hyperventilating (e.g., the Pistorius remarks above). Vance lambasted Europe for its virulently anti-free speech policies and attitudes, its cultural malaise, and its suicidal immigration policies. All right on target, and precisely for that reason a trigger for hysterical shrieks.

To which Vance no doubt says: “I don’t really care, Margaret.”

Face it. Europe is a dysfunctional mess. It is a continent of Lilliputians who want to tie down Gulliver and get him to do their bidding. The analogy is exact. Per Wikipedia:

The Lilliputians reveal themselves to be a people who put great emphasis on trivial matters. For example, which end of an egg a person cracks becomes the basis of a deep political rift within that nation. They are a people who revel in displays of authority and performances of power. Gulliver assists the Lilliputians to subdue their neighbours the Blefuscudians by stealing their fleet. However, he refuses to reduce the island nation of Blefuscu to a province of Lilliput, displeasing the King and the royal court.

Europe to a “t.” Well, Europe, Trump-Gulliver doesn’t give a damn if he displeases you. You are going to have to face Blefuscu on your own, and deal with your own internal (and self-inflicted) dysfunctions.

Like Robin Williams pointed out years ago: Reality . . . What a concept. And one the Europeans haven’t yet grasped, and show no signs of doing so any time soon.

Trump’s Operation Bagration–Bagging ‘Rats

Trump’s version of Operation Bagration has started bagging rats. Or, more exactly, sacking bureaucrats.

First to feel the blow are the staff at USAID. Musk’s DOGE landed there with two big feet and released a stream of information regarding the agency’s profligate, inappropriate, and frankly un-American spending. One that attracted a lot of attention is the amount of money USAID showered on media organizations, including–get this–the BBC, which admitted receiving 8 percent of its funding from USAID. Yes, USAID NOT UKAID. Apparently license fees coercively extracted from Brits are not enough to fund the Beeb, so it had to suckle at the American teat. Sorry, old chum, but weaning time is nigh.

Another beneficiary was Politico, AKA Tiger Beat for the political class. In a huff, Politico (in a “note to our readers“) said “this is not funding. It is a transaction.”

So is prostitution. (The analogy is exact).

Hard on the heels of these disclosures, newly installed Secretary of State Marco Rubio (a) defenestrated the head of USAID, (b) installed himself as head, and (c) (and this is the best part) fired 9000 USAID staffers, leaving a rump of 600, which is probably more than enough to do what USAID is supposed to do, whereas the 9000 were engaged in what it shouldn’t do.

I am sure the choice of USAID was no coincidence, comrades. First, it almost certainly represents the most egregious examples of spending abuse, and especially of the type that drive people mental (e.g., condoms for Gaza). Second, this is an indirect attack (a la Liddell-Hart or JFC Fuller) on the NGO-Think Tank-Deep State nexus, which is the center of gravity for the anti-Trump axis. What DOGE has revealed is that USAID is a massive money laundering operation with layers of cutouts that directs money to subversion efforts abroad and at home (e.g., through facilitation of illegal immigration). Its ostensible purpose of feeding starving waifs and fighting contagious diseases in benighted regions is merely a cover for its real purpose.

Next on the agenda? Apparently the Department of Education. And academia generally, as this Musk post signals:

Can you believe that universities with tens of billions in endowments were siphoning off 60% of research award money for “overhead”?

What a ripoff! https://t.co/RRTIMKTVYN

— Elon Musk (@elonmusk) February 8, 2025

Man, can I relate. More than 30 years ago I secured a grant–$100K, a huge amount at the time. (NB: Private grantor, not the government). The University of Michigan sucked up every dime. Every single dime. I saw nothing. Lesson learned. I said fuck that. Never again. I’m not going to be a chump for university bureaucracy. But the US taxpayers have been for years.

These “indirect cost” allocations have subsidized the grotesque administrative bloat that I have witnessed during my years in academia. As recently as last week I have seen what this metastasizing academic administrative state does: make it more difficult to do beneficial things, not easier.

So chop away!

Other agencies are feeling the knife. EPA staffers are supposedly upset that 1000 are to be let go.

I’m upset too! Why only 1000?

DC is in an uproar. All of the legacy news outlets are running stories about the terror stalking the corridors of administrative power.

It’s kind of funny actually. They act as if it’s a bad thing, and that we beyond the Beltway feel their pain. LOL.

“We at OPM are just as frustrated, confused, and traumatized as the rest of America.”

Sorry to break it to you, but the rest of America isn't traumatized. Giddy is more like it. https://t.co/4HprQdmerH

— streetwiseprof (@streetwiseprof) February 8, 2025

Among the shrieks are “NOBODY ELECTED ELON MUSK!” and “THIS IS UNCONSTITUTIONAL.”

Well, nobody elected any of these bureaucrats. Musk and his DOGE minions are the designated agents of the man who was elected as chief executive.

Which gets to the nub of the issue of constitutionality. The real constitutional issue is how is it remotely possible that employees of the executive branch are independent of the chief executive, who by the Constitution exclusively wields executive authority. The whole idea of a bureaucracy independent of the chief executive is at best a constitutional deformity, and really a constitutional monstrosity.

One issue is the president’s authority to direct spending, or more precisely, to stop spending on, say, queer studies in the 3rd World. Here the Government Party is hoist on its own petard. Trump is going after expenditures not explicitly authorized by Congress. In essence, shirking its responsibility, Congress has shoveled money at agencies like USAID and said “knock yourselves out! Go to town! Have a spree!”, which the agencies obliged like a drunken sailor who found a wad of $100s lying on the sidewalk.

Yes, Congress appropriated money for the agencies. And yes, there will be a court challenge to Trump’s actions. But he has a strong case: you gave money to these agencies with no strings attached, that is, with discretion on how it is to be spent. Fine. I will exercise my discretion by not spending it. And certainly not on funding NGOs (whom nobody elected, BTW).

This is a fight he wants. It is a fight we should want. And it is a fight he can win, both in the courts and politically.

Another reason that Trump started with USAID is no doubt the fact that it is the creation of an executive order by JFK. So it is different than the Department of Education, or the Department of Energy, and the like. He’s saying, in effect, what the executive giveth, the executive can taketh away.

There is no doubt panic in the streets of London and Birmingham.

And there is definitely panic in the streets of DC. (I’ve read that housing prices have fallen by about 1/7th). Which, like napalm in the morning, I love . . . because it smells like victory.

Wunderwaffe: The Next Generation

Friend of SWP James T sent along an article titled “Hypersonic Overhype” and thought I might be interested and that the subject is worth a post. Both thoughts are correct!

I’ve long cast a skeptical eye at hypersonic missiles. These have been hyped repeatedly over the last 10-15 years as wunderwaffe that will transform warfare, and in particular will dramatically shift the correlation of forces against the US (and in particular the US Navy) in favor of China and Russia, who claim to have deployed operationally effective hypersonic missiles. In contrast, US development efforts have been plagued by problems and delays.

My skepticism rests on two propositions: (1) wonder weapons are almost never as transformative as advertised, in part because even if they work (which they often don’t–see 2) countermeasures are typically developed relatively rapidly, and (2) wonder weapons often don’t work, or don’t work as advertised.

The linked article highlights the extreme technological challenges of producing hypersonic weapons. These challenges are myriad. And as this article demonstrates, these are exactly the challenges that have dogged US efforts.

Which leads to two possibilities about supposed Russian and Chinese advances and deployments: (1) either the US really sucks at this, or (2) the Russian and Chinese systems , though allegedly deployed, have the same issues but unlike the US those nations decided to rush unreliable systems into service.

Of course (1) is possible, but I consider it much less likely than (2). (Remember the US had manned hypersonics, e.g, the X-15 in the 60s!) This is particularly true with regards to Russia. FFS, Russia has serious–and I mean serious–problems with getting decades-old ballistic missile technology to work. Hell, simply to avoid catastrophic explosions on launch or soon thereafter. This casts serious, serious doubt on their ability to get a far trickier technology to function. Perhaps the Chinese are better, though their defense efforts generally involve widespread theft or copying of US technology, so if our technology sucks, why wouldn’t their’s?

One more comment about hypersonics in the nautical domain in particular. Yes, hypersonics are fast, but that relates only to the last leg of the OODA loop–what happens after “A” (act). Hypersonics are at best complementary to technologies and assets that relate to the other legs, specifically observe and orient. The oceans be big. Ships move, and can move unpredictably. Successful deployment of hypersonics against a carrier task force require the intelligence, surveillance, reconnaissance (“ISR”) and communications assets necessary for observation and orientation, and for deciding on a course of action.

(The Battle of Midway is a classic example of this. The US had superior ISR that allowed it to target the Japanese fleet–and even that almost failed due to a course change that the US fliers only detected by accident. Conversely, a breakdown in Japanese reconnaissance, namely the delayed launch of some search planes and a radio failure on one of them, led them to detect the presence of the American fleet only belatedly).

China is certainly working on those capabilities. That’s reallly what a lot of its space program is about. But just as there will be countermeasures for the terminal element of a hypersonic strike, there will be (and are) countermeasures to the ISR elements.

For all these reasons, I remain skeptical that hypersonics will be as transformative as claimed. As a result, it’s also an open question whether hypersonic development is a wise use of US defense funds, especially inasmuch–as the Hypersonic Overhype article discusses–there are other more mature and reliable technologies that can serve the same operational purpose.

In some respects, the raving about hypersonics and the US’s laggard status reminds me of earlier hysterias like “the bomber gap” and “the missile gap.” We allegedly face a “hypersonic gap” now, but I suspect that this will prove as chimerical as those earlier gaps.

Which brings me to the public choice aspects of this issue. Defense contractors and the officers and civilians in programs like hypersonics have a vested interest in hyping both adversary capabilities and American infirmities. This is what gets the money to flow. So be very skeptical about those who are talking their book, and cast a jaundiced eye on hypersonic hype.

A Normal Accident, Alas

Complex systems are inherently vulnerable to “normal accidents” (also called “system accidents”). A complex system is one with a large number of components that interact. Moreover, these parts are “tightly coupled,” meaning inter alia that delays in performance of any element can cause the failure of the entire system, and that the order of the performance of these components is invariant. That is, the functioning of each part is necessary to the operation of the whole and the parts must operate in a specific sequence. That is, tightly coupled, complex systems have the potential to be like the one-hoss shay: they work fine until they don’t, and when they don’t the entire system breaks down. (Oliver Wendell Holmes Sr., the author of the poem, could be viewed as the true expositor of the theory of normal accidents).

Aviation is a complex system. In fact, it is a complex system of complex systems, in a fractal sort of way. At the micro level, planes themselves are complex, as are the people who fly them (individually and as members of crews) and control (coordinate) them. Zooming out a bit, a particular airport is a complex system. Reagan National (DCA), where the recent horrible crash occurred, is an example of that, and it is in fact a particularly complex complex system. It has a lot of planes landing and taking off, and these operations (and the preceding operations on the ground) must occur in a precise sequence. It also has another element complexity that is arguably unique to DCA–a massive volume of helicopter traffic operating in close proximity to the runways. The airport is also an artifact of the past, with short runways, and planes must often make sharp turns after takeoffs and during approaches. These conditions tighten the couplings and reduce system slack. For these reasons, DCA has always been my least favorite airport. Every takeoff and landing can be an adventure.

What happened at DCA earlier this week is highly likely to have been a normal accident in this particular complex system. Specifically, a series of actions and events, individually trivial, were deadly when interacting in this complex system.

Initial indications are that the Army Blackhawk helicopter that collided mid-air with the American Airlines CRJ-701ER was operating 100 feet above the allowed altitude (200 feet) at the time of the collision. Indeed, it gained that additional altitude shortly before the collision (after having flown at the correct altitude for some distance). Why? Perhaps the black boxes will provide some insight. Maybe not. Distraction, a gust of wind, a simple mistake. Could be myriad things–or several things interacting in a complex way.

Another element of the complex system is air traffic control. Immediately prior to the crash, Reagan ATC radioed the helo, asking if it saw the CRJ. The recordings I’ve heard don’t indicate a response: I’ve seen it conjectured that the helo was operating on a different frequency, but I have no idea. Regardless, the communication was extraordinarily ambiguous. Pilots can’t necessarily identify an aircraft type, especially at night. Moreover, there were multiple aircraft around, so which one was ATC referring to? How could the helo crew know? How could the controller know that the crew knew? Adding some directional information, like “at your 10 o’clock high descending left to right” would have focused attention on the plane on a collision course and made corrective action far more likely.

It was on a collision course because of a previous ATC instruction for the plane to shift from landing on Runway 1 to Runway 33.

The controller communicating with the plane and helo may have been bandwidth constrained. (Lack of “slack” in a complex system is a major contributor to its risk of failure). There should be two controllers on duty, one specifically handling helo traffic. But his supervisor had let him leave early, and the sole controller had to perform double duty. How familiar was he with controlling helos? Even if he was, was his ability to do so reduced by the greater workload put on him? That is, was the seemingly innocuous decision to let one person go home fatal because it eliminated vital slack in the system?

The role of the supervisor demonstrates another aspect of complex systems. They are often embedded in organizational and institutional structures (or perhaps better thought of as vice versa) and organizational and institutional factors can cause normal accidents. This is why a “safety culture” embedded in an organization is often essential. Bad organizations are conducive to system failure. (ValueJet, one of the canonical examples of a normal accident, was notorious for its lax safety culture. The erosion of Boeing’s culture is likely to prove another widely-taught case study).

Changing any one of these things probably would have meant no accident. That is, each element was a necessary condition for the accident. Individually they were low probability events, perhaps, but the probability of a sequence of low probability events is not zero. Very small, perhaps, but not zero.

The rarity of air crashes in the US demonstrates that the complex aviation system is very robust. This crash demonstrates that it is nonetheless at risk of an accident. That’s why they are called “normal accidents.” They are the normal (and indeed inevitable) part of the operation of a complex system.

So what is to be done? Well, one of the lessons of the study of complex systems and normal accidents is that it is impossible to reduce the risk of system failure to zero. Moreover, measures intended to improve safety (especially in the aftermath of one kind of failure) can actually make things worse, or at least, create the potential for different kinds of normal accidents. Adding some sort of safety mechanism makes the system more complex–especially if its proper utilization depends on the correct actions of other parts (notably, the operators of the system). (The 737 Max crashes are arguably on example of that). So a new piece may shut off one causal chain, but open another. Whether this is beneficial on net is impossible to say, precisely because the behavior of complex systems is inherently stochastic with a massive number of possible causal pathways relating actions of parts of the system to the operation of the whole.

Every normal accident tends to be unique. This one will no doubt be found to be as well.

Horrible accidents like this one inevitably lead people to ask: “who is to blame?” In normal accidents, its not too much of an exaggeration to say “everyone and no one.” In legal terms, this could be considered a case of “contributory negligence.” The negligence of multiple parties combined to cause the accident. But in complex systems everybody can do exactly what they are supposed to–that is, every human actor is non-negligent–and a normal accident occurs nonetheless.

Viewed broadly, this is all about complex chains of causation, so many chains that not all of them can be even identified, let alone understood or their probabilities calculated. Searching for someone to blame usually involves trying to find a sufficient condition for failure. But in most normal accidents, no single action is sufficient to cause it. Instead, a confluence of necessary conditions is “the” cause: not an individual cause, but multiple causes, the absence of any of which would mean no accident. For example, no altitude deviation by the helo. Even the helo having operated at a slightly higher or lower speed, or taking off slightly earlier or later, so it was at a different point in space at the time of the crash. The CRJ landing on Runway 1 instead of Runway 33. One could go on almost ad infinitum.

These kinds of issues come up all the time for me. For example, in my research: what caused the Great Financial Crisis? Will mandatory clearing eliminate the possibility of future Great Financial Crises? Why did oil prices spike and then crash in 2008? In my litigation work: determining what caused a particular price movement, and in particular, were the deliberate actions of one agent necessary for that price movement to occur.

Or in my avocation, history. My favorite example is “What Caused WWI?” Mountains of scholarship identify various necessary conditions: if the Germans hadn’t done this; if the Austrians hadn’t done that; if the Russians (or Serbians or British or French) had done something different, WWI wouldn’t have happened! So who caused it? Well, this would be an example where “everyone” is probably closest to the truth. Everyone played a vital role.

The world geopolitical system is inherently complex. The pre-1914 alliance system created tight coupling. Military logistics–notably the complexities of mobilization and the coordination of troop movements by rail–also created tight coupling. Historians have identified these as causes of the war. Yes, but only in the sense that they were parts of the system that operated as conditions necessary to turn “some damned thing in the Balkans” into a world war.

People want simple answers. They are impossible in complex systems.

Well, maybe not: “shit happens in complex systems” is both simple and accurate. Murphy’s Law is also informative.

All that said, the fact that something is normal doesn’t make it good. In fact, the normal is horrible. The victims and their families have my deepest condolences and should not view this as a rationalization of their tragic loss.

Observations on Immigration

The immigration issue is the subject of the most intense coverage right now, just as it was arguably the most important issue in the campaign. The issue has numerous facets. Here are a few observations on several of them.

Birthright citizenship. Trump eliminated it by Executive Order (“EO”). He did so on day one no doubt knowing that the issue will be litigated to the Supreme Court and he wants it decided ASAP.

This immediately elicited shrieks of “it’s unconsitutional!!!!!” Not so fast.

These statements are based on an 1898 Supreme Court decision, which established birthright citizenship on a given set of facts. Moreover, the decision was based on an application of common law, rather than the Constitution. The justices at the time basically used common law to fill a purported gap in the Constitution, specifically the 14th Amendment. This reliance on the common law was challenged (in a dissent) at the time, and the dispute over this continues.

The issue then, and the one on which any future decision will turn, is the language of the clause in the 14th Amendment italicized here: “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.” By ordinary principles of statutory and Constitutional interpretation, the clause must mean something. Moreover, it clearly qualifies the previous clause: if the amendment was intended to establish unqualified birthright citizenship, the clause would not be necessary, and indeed would be superfluous.

So what does it mean? It has to mean something more than “born in the US because the US has jurisdiction over the US,” which is what the ardent defenders of birthright citizenship claim.

An interpretation that squares with the debates over the Amendment, and the previous statute that it was intended to protect from challenge or repeal, is that it means “subject to the jurisdiction of no foreign power.” That is, subject to the sole jurisdiction of the US. An immigrant that comes here is potentially subject to the jurisdiction of his/her home country. By this reading, the children of parents subject to such jurisdiction would not automatically be citizens.

My GGGF’s citizenship paper says something like “I, Georg Pirrong, having foresworn my allegiance to the King of Germany” (quoting from memory). Which implies that previous to his naturalization he was presumed to have such an allegiance, and was therefore potentially subject to German jurisdiction.

It should also be noted that the Amendment was established when all immigration was legal, so the status of the children of illegal immigrants was not explicitly considered by Congress when the Amendment was enacted. Furthermore, this issue was clearly not what the 14th was about: it was obviously about putting the citizenship of black Americans on a firm Constitutional footing. The facts in the 1898 case also do not match up with the issue of birthright citizenship for the children of illegal aliens: the plaintiff in that case was born in the US prior to the restriction on Chinese immigration, and was denied admission to the US when returning from China after the anti-Chinese immigration law had been passed. So, he was not born to illegal immigrants.

The mismatch of facts between 1868 and 1898 and 2025 means this is not an open and shut issue. It will come down, of course, to squishes like Barrett and Roberts, and it is likely that they will go against the EO.

Who Will Pick Our Vegetables???? And build our houses? And buthcher our meat? This is a standard trope from the left and Democrats, wryly answered by the Babylon Bee:

Democrats Once Again Concerned About Who Will Pick Their Crops https://t.co/gkWTemIree pic.twitter.com/PbksCkaIUo

— The Babylon Bee (@TheBabylonBee) January 27, 2025

To which it must be added that it is an utterly ridiculous argument. There are (on the upside) 3 million farm workers in the US, half of whom are illegal. That figure comes from an advocacy organization. Government data is weirdly out of date: as of 2000 there were about 1.13 million hired farmworkers in the US. (That is from a 2025 USDA document–I haven’t found one with later data–please send if you can find it). Survey data published by the USDA suggest about only 500,000 are employed in crops. Interestingly, that data shows that the average age of hired farmworkers has risen steadily–meaning that recent immigrants (who tend to be very young) are not going into farm work.

There are about 6 million (non-supervisory) construction employees in the US: estimates are that 20-30 percent of these are illegal.

So we are talking at most 3 million illegals in these two sectors, many (if not most) of whom were here before 2021. (Employment in meat packing is less than 100K total, representing perhaps a mere 50K illegals). Yet approximately 10 million flooded in under Biden, not to mention the flow in earlier years, plus the offspring of those who came in during, say, the Obama years. So it’s obviously not the case that the new illegals are vital to sustaining the ag and construction sectors.

The whole issue is absurd on its face. Just what crops are the immigrants in the Roosevelt Hotel in NY picking? The residents of Little Village in Chicago? In any sanctuary city? I could go on.

Enforcing the border with the military. Another freakout is over Trump’s deployment of the military to the border, allegedly in violation of the Posse Comitatus Act. There is a parallel freakout over declaring the cartels terrorist organizations. I don’t think the freakers out see the connection between these two issues.

The cartels are inextricably linked with human smuggling/trafficking. Waves of immigrants also contain numerous narcotics mules. If cartels are terrorists, using the military to combat their activities-including human and drug trafficking-is not purely a law enforcement activity, or even primarily a law enforcement activity. It is something clearly under the purview of the military.

But this country was built by immigrants!!!!! Over the weekend, media midwit Margaret Brennan challenged J.D. Vance on immigration. In her (limited) mind, her killer point was going to be: how can you oppose immigration, because this country was built by immigrants?!?!?

This is another idiotic trope that we hear over and over, along with its frequent fellow traveler, the Emma Lazarus poem about give us your poor yadda yadda. I find it particularly ironic that progressives trot out this line.

For one thing, those who solemnly declare native land acknowledgements think such “settler colonialism” is evil and a historical stain on America-so why do they want to elevate it to a principle that must never be challenged or changed? Aren’t immigrants invading tribal lands?

For another, why are they hardcore conservatives–in the strict sense of the word, meaning “devoted to conserving the past”-on this issue, and not on others? Relatedly, why are those who insist on a “living Constitution” that must change with the times because it was written at a time with markedly different circumstances arguing that immigration laws should not be “living” too? Why do they insist on having the dead hand of the past rule the living?

Because it’s a rhetorical trick that they think will appeal to ordinary Americans who descended from immigrants, that’s why. It’s an emotional ploy.

The circumstances of the United States in the mass immigration era were markedly different than is the case now. Moreover, the immigrants were very different than those coming here now, particularly in terms of cultural similarity to the native population. Crucially, the earlier immigrants arrived when assimilation was strongly encouraged–and often embraced–by the immigrants, whereas now that is considered a racist idea: the cultural differences also make assimilation far more difficult, and many of the new immigrants are militantly opposed to assimilation.

And even more crucially, that immigration occurred in the pre-welfare era. The incompatibility of welfare and open immigration has long been emphasized by libertarians who are pre-disposed to favor immigration, such as Milton Friedman and Richard Epstein. An immigration system that works without welfare is a disaster with welfare. So choose, progressives: unbridled immigration, or welfare.

Along these lines, and related to the earlier discussion of immigrant labor. There are still acute labor shortages in, say, the Central Valley of California, despite large inflows of immigrants to that region (and California generally). Why?: because of the benefits showered on immigrants by the Federal government, and by the state of California. (The rising age over farm workers mentioned above is indirect evidence of this).

Margaret Brennan thought she had cornered Vance with this (tired) question. Vance was having none of it, and trenchantly answered that what we did 240 years ago is no reason to have the world’s dumbest immigration laws today. (If I would quibble with Vance, it is that various European countries, notably Germany, have pretty stupid laws too–it’s a close call as to which is dumber).

It never ceases to amaze that midwits like Brennan think they can play gotcha with Vance after he has run rings around them time and time and time again.

The immigration debate will continue to rage. But I predict the battle lines will not change, and that all of the above will be focus of contention for the next four years. At least.

The NYT and Bloomberg: Special Pleaders for Cartels and Mexico

The New York Times and Bloomberg are freaking out at one of Trump’s opening salvos–his designation of Mexican cartels as terrorists. The gravamen of their arguments is that the cartels are so embedded in “legitimate” Mexican businesses that US businesses that deal with such companies could be subject to sanctions. And fearing that, Americans won’t do business with Mexicans:

Even more complicated, these criminal networks have extended their operations far beyond drug trafficking and human smuggling. They are now embedded in a wide swath of the legal economy, from avocado farming to the country’s billion-dollar tourism industry, making it hard to be absolutely sure that American companies are isolated from cartel activities.

Although though I doubt Bloomberg and the NYT would wise up even if beaten mercilessly with the clue bat, let me try to explain.

In brief: Uhm, what they whine about is exactly the point. The sprawling nature of the cartels is precisely why they pose such a serious threat.

The whole purpose of Trump’s action is to isolate American businesses from cartel-related activities. This serves several purposes.

First, and perhaps most important, to hold Mexico’s feet to the fire to get them to take more forceful action against the cartels. Even the Bloomberg oped acknowledges that Mexico’s actions against the cartels have been halting at best. Mexico obviously needs an incentive to get its mind right. We’ve tried the easy way for years, to little effect. So the hard way it is.

Second, to hurt the cartels financially to limit their capacity and incentive to harm the United States.

I should also note that the Executive Order designating the cartels as terrorist organizations will not just impact American businesses’ dealings with Mexican companies: it will impact American businesses’ dealings with American companies, and American companies directly. The cartels’ penetration of businesses is not limited to Mexico by any means: their tentacles spread wide in the United States.

And not just businesses. Law enforcement throughout the United States is also compromised.

The drug cartels have penetrated American commerce and law enforcement even more than the Mafia in its golden age. Do the NYT and Bloomberg regret the government’s war on the Mafia (waged with particular ferocity in the 1960s and 1970s) because of how it affected the GDP print?

Thus, contrary to the NYT and Bloomberg articles, this action does not discriminate unfairly against Mexico. It will likely have effects similar to RICO did at its introduction.

Even evaluated on narrowly economic terms, do the NYT and Bloomberg really believe that massive criminal organizations that supply massive quantities of fentanyl and other drugs resulting in tens of thousands of deaths and addictions per year are somehow additive to GDP? That the vicious violence that they commit is a price worth paying because of the economic benefits of cartel activity? Is human trafficking just a broken egg necessary to make a delicious economic omelet? Or maybe the NYT and Bloomberg believe it’s a positive benefit?

But OMG taking action against the cartels could reduce remittances to Mexico!

If money transfer companies like Western Union also stop transactions to Mexico over worries about properly vetting Mexican clients, it could affect the remittances the country relies on. That would be devastating for the Mexican economy, which received $63.3 billion in remittances in 2023, nearly 5 percent of the country’s gross domestic product.

Well, deporting millions of illegals will too! And again, this would serve to incentivize Mexico to get serious about getting the problem under control.

Both articles fret about the effects of direct military action by say Delta or the SEALs against the cartels in Mexico. I consider this problematic as well, but not for the reasons that media savants. They are fussed about a “massive violation of [Mexican] sovereignty.” Uhm–the cartels operating largely with impunity in Mexico are a massive violation of American sovereignty. Qualms about offending Mexico’s sensibilities about its sovereignty should not prevent us from defending ours.

I consider it beyond ironic that publications that are big boosters of aggressive sanctions against Russia and Russian businesses suddenly clutch their pearls about imposing sanctions on cartels (and hence indirectly-or maybe not so indirectly-the Mexican government). The logic of both is the same: both are methods short of war intended to compel countries operating against the interests of the United States to curb their depredations.

The NYT’s and Bloomberg’s special pleading on behalf of Mexico and its cartels raises questions. Like: Are they under cartel influence?

I say that only half in jest.

A Political Prometheus Unbound

Yesterday was Trump’s inauguration. It was also likely his apotheosis–the apex of Trumpness, the culmination of years of struggle. It’s hard to believe it could get any more glorious for him than this.

Watching him speak and then sign one executive order after another made me think “Prometheus unbound.” Trump was certainly a political Prometheus, defying the gods of the establishment, and condemned to years of torment for his impertinence and lese majeste (or lese deus). But through the exercise of will perhaps (but only perhaps) matched only by one man in American history (Andrew Jackson) he broke his shackles and triumphed, to relish a Conan-like best-of-life moment: “To crush your enemies, see them driven before you, and to hear the lamentations of their women.” (Yes, I’m looking at you, Liz Warren!)

The progressive left is staggering about (to quote Lincoln’s description of General William Rosecrans) “like a duck struck on the head,” not knowing quite what hit them. They have no one to blame but themselves. They failed to grasp that Trump is the living embodiment of Nietzsche’s aphorism: “What does not kill me makes me stronger.” If they had just let him alone four years and a day ago, he would have probably raged against the coming darkness, but soon faded from view. But they hated and feared him so much that they embarked on an all out campaign to destroy him personally and financially. But he fought back and they failed. All the while he absorbed all of their negative energy and turned it back upon them.

Further, whereas the Trump of 2017 was surprised, shocked, giddy, and naive, making him totally unprepared for the deep state’s and establishment’s unrelenting attacks, the Trump of 2021 is fully aware of what lurks in the recesses of DC and has launched a preemptive attack, the political equivalent of Operation Bagration, an all out attack on all fronts.

The opening barrage of executive orders hit every position the left has established in recent years. Immigration. Gender. Energy. “Climate change.” The public health apparatus (specifically by leaving WHO). Perhaps most provocatively, pardoning the J6 defendants en masse. His inauguration address hit all these positions and a few more to boot.

This broad front strategy is canny. By attacking everywhere at once Trump forces the left/Democrats either to dissipate their efforts by trying to defend everywhere at once, or to concentrate on a few sectors thereby leaving Trump to rampage through the undefended areas. And the stunned ducks haven’t been able to decide which. Army Group Left has been smashed.

The left will eventually gather itself, somewhat anyway. There will be legal counterattacks. Virtually the second Trump took the oath four lawsuits challenging DOGE were filed. His order to stop spending remaining moneys authorized by the Inflation Reduction Act [sic] will spur legal challenges over the constitutionality of impoundment. So there will not be surrender, let alone unconditional surrender, but the correlation of forces overwhelmingly favors Trump at this time.

Like Bagration, Operation Trump will eventually outrun its logistics and slow down, likely even bogging down for a time. But the momentum is his and the political battlefield favors his ultimate operational success.

Yesterday reminded me of a couple of previous political watersheds.

For one, this is Reagan’s “it’s morning again in America” on steroids. Trump is the embodiment of animal spirits, and MAGA is essentially a promise to free American animal spirits from the suffocating embrace of the nanny state–and the deep state. To harness a Jacksonian bumptiousness that has not been completely banished from the land, despite the establishment’s concerted effort.

The second harkens back to the early days of this blog, in which in what was one of my first political posts, I launched a rant (first of many!) against Obama’s election: it was apparently amusing enough to attract the attention of the WSJ’s John Fund Political Diary, which published an excerpt. Yesterday (and 11/5/24) represent the bell tolling for Obamaism. All political eras are eventually eclipsed. Obama’s just has been. Jackson’s was. Trump’s will be. But I sense that in the latter case, that eclipse will be some time in coming.

Coo Coo for Cocoa

Cocoa has been on a wild ride for the past year.

So wild that Bloomberg has a separate category for “The Cocoa Crisis.” Contributing to the recent hysteria is news that Hershey has requested “special permission to buy over 90,000 tons of cocoa.” Evidently the chocolate manufacturer has requested a position limit exemption from the CFTC. (Links to the “Cocoa Crisis” coverage are in the article).

Note that exemptions, specifically for hedging, are explicitly recognized in the relevant regulations, and are granted routinely, so this is not really exceptional. Not knowing the exemptions granted to Hershey in the past it is difficult to know whether the magnitude of the exemption is extraordinary.

The article is confusingly written. In commodities subject to limits, there are different kinds of limits. These include single month and all month limits outside the “spot month” and “spot month” limits. Spot month limits kick in sometime prior to expiration. In cocoa, it is my understanding that the spot month limit kicks in on First Notice Day, which for the next ICE Cocoa contract (“CC”), March 2025 (“CCH5”) is 24 February, 2025.

The article implies that the exemption requested is for the spot month:

The maker of Reese’s Peanut Butter Cups wants to take a position that will allow it to purchase more than 90,000 metric tons of cocoa on ICE Futures US, said the people, who asked not to be identified because the information is private. The request to the Commodity Futures Trading Commission equates to about 5,000 20-foot containers and is more than nine times the amount the exchange currently allows.

The spot month limit is 1,000 lots, so 9,000 contracts would be 9x the spot limit. The single month/all month limit is 4,900 contracts, so the requested exemption would be less than 2x the single/all month limit.

I am somewhat skeptical that the exemption request is related to the spot month given that spot exemption requests can occur closer to FND, and the magnitude is so large relative to ICE cocoa certified stocks (currently only 1,604 lots) that granting such an exemption would be problematic. Particularly problematic would be “purchas[ing] more than 90,000 metric tons of cocoa on ICE Futures US” if that means acquiring that much physical cocoa via the delivery process.

But Hershey did that in 2020, and exchange cocoa is supposedly at a discount to the cash market. The cash market discount begs the question: why? Are apples being compared to apples in terms of quality, location, etc.?

Acquiring 90,000 tons–or 25 percent of that amount– would require bringing in large amounts of cocoa to exchange warehouses. That in turn would require acquiring cocoa on the cash market (at a supposed premium), getting it to ICE warehouses, grading it, etc. So it’s hard to believe that cert cocoa is an economical source of supply for Hershey in the quantities mentioned in the Bloomberg article.

The price movement in 2020 sure as hell looks like a squeeze, but neither ICE nor the CFTC took action, so maybe Hershey figures it can do it again.

Unlike 2020, this time the spread didn’t take off:

The March-May 2025 spread did spike in mid-December, but only narrowed slightly after the publication of the Bloomberg article on 8 January. (Perhaps somewhat confusingly, an increase in the spread is referred to as “narrowing”. “Wider” means a bigger carry: “narrower” means less carry or more backwardation).

Here’s 2020 for comparison:

I certainly believe that big commercials can sometimes bamboozle ICE and the CFTC, especially when it comes to telling just so stories about how its economical to take delivery. So it’s not inconceivable that Hershey is trying to do that here, and that they will succeed.

The are other curious things in the article. For example: “A spokesperson for the Pennsylvania-based company said Hershey has a ‘rigorous’ procurement process and that it is ‘well covered’ on its cocoa needs for 2025.” If “well covered” means that Hershey has supply contracts sufficient to meet its anticipated physical needs, why would it need to take delivery? If “well covered” means that they supply contracts are fixed price, Hershey wouldn’t need to hedge using futures. So the company’s statement obfuscates rather than informs if it is intended to ease fears that the company could be hammered by a high and rising cocoa price in 2025.

As I noted before, the epic price rally has put cocoa in the news frequently. Another example is this Reuters article from last month. In brief, the high and volatile cocoa prices have driven speculators from the market, leading to thinner, less liquid markets.

A couple of comments.

First, the exit of hedgies has not caused prices to decline, which implies that they were not the ones that caused the high prices in the first place as has been frequently claimed (as is usually the case when prices move a lot–“round up the usual suspects”).

Second, the reduction in speculative capital makes the price more sensitive to bigfooting by commercials. Like Hershey. Just sayin’.

Third, this demonstrates clearly the effects of clearing and margining. Volatility and high flat prices increase margins and thereby the cash needed to maintain positions. Since cash liquidity can be costly, this raises the cost of providing both long term and short term market liquidity, which leads to the exit of speculative capital that has occurred in cocoa. This in turn increases volatility all things equal. That is, the margining mechanism creates a positive feedback loop that can be detrimental to market performance.

Not to say that the credit risk mitigation benefits of margining don’t outweigh these market liquidity costs. Just pointing out that mitigating credit risk is not cost free.

Given the decline of liquidity and the possibility that a large commercial may lean on the delivery process, the cocoa market is worth keeping an eye on.

As an aside, some years back there were squeezes in cocoa in March. I used to teach my commodity trading course in Geneva in March, and I joked to my students that I should buy CC calendar spreads before heading to Geneva. (I now teach there in April). This March might be particularly interesting.

And of course there was the big Armajaro corner in cocoa in July 2011.

All in all, cocoa can be a source of material for those interested in how er “technical factors” affect pricing. Including me. So I guess you could say I’m coo coo for cocoa:

(A flashback to my youth).