Tuesday Night Links

• There is one problem for China, however when it comes to manufacturing sodium batteries. It controls much of the sources for lithium worldwide, but has little access to the soda ash that is the source for the sodium needed to manufacture batteries. The United States accounts for over 90% of the world’s readily mined reserves for soda ash. According to the New York Times, beneath the southwestern Wyoming desert there is a vast deposit of soda ash that was formed 50 million years ago. For centuries, it has been mined to meet the needs of America’s glass manufacturing industry. [Clean Technica]
  
• One can fly​ to Japan from anywhere, but from Japan one can only fly to the Third World, and it hardly matters whether one lands in Kinshasa, London, New York or Zurich: they are all places where one must be constantly watchful and distrustful, where one cannot leave a suitcase unattended even for ten minutes, where women strolling home through town at 3 a.m. are deemed imprudent, where the universal business model is not to underpromise and overdeliver but if anything the other way round, where city streets are clogged at rush hour because municipal authorities mysteriously fail to provide ubiquitous, fast and comfortable public transport, where shops need watchful staff or cameras against thieving customers, and where one cannot even get beer and liquor from vending machines that require no protection from vandalism. Japan was the world’s only really different country when I first visited forty years ago, and it remains so now, despite many misguided attempts to internationalise its ways to join the rest of the world. [LRB]
  
• Classical liberalism was a creature of a specific time and place: the 17th and 18th centuries within the Hajnal lines. The last vestiges of classical liberalism were blown up in World War I. Modern "classical liberalism" is full of unprincipled exceptions: numerous, byzantine trade sanctions; no freedom of association; sound money has been replaced by central bank fiat; the government engineers numerous bailouts to prevent the rich from becoming poor; the government reserves the right to shut down the economy without a vote; hate speech is not free speech; your protest is violent insurrection, mine is "mostly peaceful"; certain races matter; etc. All these unprincipled exceptions have the full support of the modern, self-styled "classical liberals." It probably takes an IQ of 100 - 105 to grasp the abstract concepts of classical liberalism that justify citizen self-governance. The US mean is sliding down to 95 and will inevitably end up around 90. Classical liberalism is as dead as the Mandate of Heaven. [Anti-Gnostic]
• A number of recent studies show an important role of framing, teaser rates, and advertising content in shaping consumer financial decisions. In the context of [structured notes], the product would appear more attractive if an investor overweights the product coupon rate in her decision, and underweights the size or probability of the possible loss. Consistent with such framing effects, I find the coupon rate is saliently displayed in product prospectuses, often even in the name of the product. Information about the payment at maturity when investors may lose some or all of their principal is less salient. The information is typically displayed only after the coupon rate and does not come with any indication of the size or the probability of losses, because these variables need to be estimated using option pricing techniques. More interestingly, the possible loss of principal at maturity is often not emphasized as a loss but instead reframed as the physical delivery of the underlying. [Engineering Lemons]
• We propose a new measure of retail investor sentiment for individual stocks that is constructed from issuance volumes of retail structured equity products (SEPs) that provide synthetic long exposure to the SEPs’ reference stocks. Stocks for which SEP issuance volumes are high during a month experience large negative abnormal returns during the next month. The negative abnormal returns persist robustly across a wide range of benchmarks, including standard and contemporary factor models. Weighted by proceeds, 81% of SEPs reference stocks have market capitalizations falling in the top decile of CRSP stocks, and 89% of SEPs are based on top quintile stocks. Thus, SEPs issuance volumes predict negative abnormal returns on widely followed, liquid, large capitalization stocks that are generally easy-to-borrow and sell short. Our interpretation of this predictability is that SEPs issuance volumes proxy for retail investor sentiment, defined as beliefs about future stock prices that are not justified by rational evaluation of available information. We hypothesize that high issuance volumes are correlated with high retail investor sentiment and overvaluation, which is subsequently corrected. [Retail Derivatives and Sentiment]
• Several published papers have valued large samples of structured products and found average issue date values between 92 and 98 cents per dollar. Henderson and Pearson (2010) argued that the complexity of structured products allows brokerage firms to sell investors mispriced market exposure and thus book an issue date profit. Bernard and Boyle (2011) drew similar conclusions for locally-capped structured products and estimated the average initial pricing of these products at approximately 6.5%. This issue date mispricing can be interpreted as the present value of the extent to which the structured products expected future returns fall short of the returns required to compensate investors for the interest rate, credit and underlying market risks. [Ex-Post Structured Product Returns: Index Methodology and Analysis]
• Investor demand for complicated and overpriced products is counterintuitive. Campbell (2006) and Carlin (2009) observe similar inefficiencies in other financial decisions made by consumers. Henderson and Pearson (2008) also find puzzling investor behavior in the structured products market and note “it is difficult to rationalize investor demand for structured equity products within any plausible normative model of the behavior of rational investors.” The existence of overpriced complex financial products is consistent with Carlin’s (2009) model. In Carlin’s model, firms strategically increase the complexity of financial products to preserve market power and bound the financial literacy of consumers. Moreover, sellers are able to charge a higher markup on the more complex products. In most cases, the retail investor does not have the expertise to understand the complexities of these contracts and obtains advice from an agent who is remunerated by sales commissions. If the producer’s surplus is shared with the sales agent, then there are incentives for the agent to push the more complex products and for the industry to favor a regulatory regime that makes it easier to avoid disclosure and complicate the product. [Locally-Capped Investment Products and the Retail Investor]
• Parvini, however, goes farther and concludes that popular action that seeks radical change, whether the (fantastic and excellent) Electoral Justice Protest, the Yellow Vests in France, the Canadian truckers, or other such bottom-up movements emerging from those denied power and harshly oppressed, will necessarily fail. This is, as I noted, his “populist delusion.” I think he is too hasty in this conclusion, because it is easy to demonstrate that under the correct circumstances, the populace can destroy a regime without being led by a counter-elite, or even without the existence of a counter-elite. The people of the tyrannized countries of Eastern and Central Europe (tyrannized less, for the most part, than we are today) did it in 1989 (and not because they wanted blue jeans and rock music, but for much deeper principles, and all this is well discussed in Stephen Kotkin’s Uncivil Society). Sri Lankans did it recently (although I claim no special insight into the politics of that country, or how successful mass action ultimately was), and the unhinged reaction of the extremely punchable Justin Trudeau and his filthy henchmen clearly suggested they feared a similar result from the trucker protests. It only takes a little historical reflection to see that the often-held belief, which is also Parvini’s, that a counter-elite must originate and control such an uprising by the common people for it to be successful is false, the exception rather than the rule, and that this false belief is usually held mostly by eggheads and monomaniacs who incorrectly think that they would be part of such an elite, which could be nothing without them. Yes, it is sometimes true that a counter-elite first organizes, and only then replaces an existing elite; Vladimir Lenin is the best Western historical example. But if you change a few minor variables in 1917, the Russian ruling class is still overthrown, yet not replaced by the Bolsheviks, which suggests it is mere happenstance that Lenin spent decades preparing for the role that history ultimately granted to him. [Charles Haywood]
• Becoming aware that every single major institution is rigorously ruled and determined by the elite has come as quite a shock to me at an embarrassingly old age. How did it happen? Leftist hegemony is ubiquitous. It has always been thus, and will always be so. Politically, you are either a friend of the regime or an enemy, as Carl Schmitt noted. “They” can be in charge, in which case you will be suppressed and reviled. Or, “we” can be in charge, in which they will be suppressed and reviled. There is no “liberty” other than when a society is disintegrating. There is no freedom of speech. There is sanctioned speech and unsanctioned speech. One’s speech can seem free if it happens to conform, or at least stays within the bounds of the Overton window. When it does not, you will not know what hit you. It is the existential situation of any monopolist, whether in business or politics, to see himself as threatened on every side. He has everything to lose and nothing to gain. Speaking once to a leftist professor (what other kind are there?) he expressed his dismay that there were a couple of think tanks right of center and a few non-liberal colleges. These exceptions that prove the rule he perceived as all hell about to be let loose and proof of just how far the Left had to go before they really had monopolistic control. According to Parvini, my mistake was in thinking that it has ever been otherwise. There cannot be two centers of power in a moderately well-functioning society. The separation of powers is an illusion. They converge. Anything otherwise would be a denial of rule by the elite. [Richard Cocks]