»  Radio Derb — Transcript

        Friday, November 18th, 2022

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[Music clip: Haydn's Derbyshire March No. 2, organ version]

01 — Intro.     And Radio Derb is on the air! Greetings, listeners, from your cryptically genial host John Derbyshire with a view of the passing charivari.

With the recent midterm elections, the news this past few days has been dominated by retail politics. I shall cover some of that later in the show; but as longtime listeners know, it's not my primary zone of interest. I'm more enthused by deep cultural issues and broad geopolitical trends.

People of my tendency owe a debt of gratitude this week to financial whizz-kid Sam Bankman-Fried for giving us an excuse to talk about something other than retail politics.

Thank you, Sir. I'm not quite ready to declare you a public benefactor; but you have — although unintentionally, to be sure — shed light on the murky zone where politics meets high finance, and lifted up stones to show us some of the slimy crawling things that dwell in that zone.

Sure, you are one of those things yourself: a liar, a crook, and a political poseur. You've done harm to a lot of people's personal finances. On balance, though, you have surely done much less harm to the nation at large than, say, Nancy Pelosi, or, say, Mark Zuckerberg. So, a qualified "thank you."

Before proceeding, I should say that Bankman-Fried's world — the world of exotic financial instruments — is not one in which I have much expertise. I have therefore called in an old friend who is an expert to give me, and you, supporting explanations. You'll meet him shortly.

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02 — The murky waters of high finance.     So what about this whizz-kid Sam Bankman-Fried — "SBF" to his friends, when he used to have friends — and his cryptocurrency exchange FTX?

In case you missed it, the exchange filed for bankruptcy last week. It's not clear how much of investors' money turned into dust, but FTX was valued at $32 billion earlier this year, so we're in that ballpark. That's investors' money, mind. If every single living soul in the U.S.A. — man, woman, and child — was an investor, a $32 billion loss would be a hundred dollars per head. Lotta money.

Before he founded FTX in 2019, SBF and a friend had founded a trading firm — technically a market-making hedge fund — named Alameda Research. Alameda has also gone bust.

Just keep clear the distinction in your mind between the two. FTX was an exchange like Coinbase, buying and selling cryptocurrencies for you and me; Alameda was a hedge fund, applying complicated trading strategies to all kinds of financial instruments to build portfolios for wealthy and presumably sophisticated investors and institutions.

Apparently funds were flowing more freely than they should have been between FTX and Alameda, the crypto exchange and the trading firm. There's talk of investigations, extraditions, and of course lawsuits. There's a political angle, too: SBF was a big donor — a big donor — to woke causes and progressive politicians.

Yes, I worked on Wall Street for fifteen years, so I can understand the ins and outs of the FTX collapse, right? Wrong.

  1. The firm I worked for most of those years was an old-style conservative bond brokerage that didn't deal in anything more exotic than options, swaps, and repos. When someone like SBF showed up, our managers politely listened to his sales pitch then politely showed him the door.

  2. I was a back office cube jockey, not a trader. When I phoned through to the trading floor the commonest thing I heard was: "Can't talk, I'm trading. [Click.]"

  3. I quit that job 21 years ago, and finance has gotten considerably more exotic since then. Cryptocurrency in 2001 was a theoretical talking point for financial geeks to amuse themselves with over after-dinner drinks. Today, as we've seen, it's a billion-dollar business.

Fortunately I have a friend, Tom Costello, who lives and breathes this stuff. In fact he's written a book about it, title The Front Office, which you can find on Amazon. Tom's currently a principal at Bedrock Digital Assets, a crypto hedge fund.

Tom's offered me an explanation, so I'm going to hand you off to him. Before doing so, permit me some introductory remarks.

First let me say that when we use material like this from friends or correspondents, we keep the source strictly anonymous unless we have explicit permission to give names. Tom has given me that permission; I wouldn't name him or his firm otherwise.

Second, a great many very sophisticated people in the financial world still, after twenty years, refuse to take crypto seriously. My own investment adviser was one such. When I told him I'd acquired some crypto he gave me a lecture about what a scam it all was: "No store of value … tulip mania …" and so on. Today, nine years on, Warren Buffet is giving precisely the same lecture when news reporters ask him about FTX.

Eh, maybe. As inflation keeps teaching us, though, there is a scam aspect to all monetary systems. Here in November 2022 we are precisely 99 years away from one of the most striking illustrations of that fact: the great post-WW1 hyperinflation in Germany. In November 1923 the Deutschmark was trading at 4.2 trillion to the dollar.

This wasn't some Third World rat-hole; this was early-20th-century Germany, home to the greatest concentration of mathematical talent that ever existed.

So just be a little cautious when talking about stores of value and tulip manias. Shortly after the FTX news broke I was in conversation with two gentlemen both with decades of experience in high finance. I asked them for investment advice. Gent A said I should buy oil; Gent B said, quote, "gold coins and ammo."

Third, Tom's account of the FTX fiasco is heavy with high-finance jargon. Those who understand will understand, and possibly benefit. Those who don't will at least get a feel for what a deep and muddy pond SBF was splashing around in.

This is not your dad's high finance. It's certainly not your granddad's. The securities business has come a long way from the days when it was mostly trading stocks on margin through a broker with an office in Manhattan, a house in Westchester County, and a degree from Wharton.

High finance today is way more global and way, way more mathematical. Forget about Wharton; your broker today more likely graduated MIT, as SBF and the CEO of Alameda both did.

When I acquired my math degree in 1966 we were told that a math degree was good for just two career paths: schoolteacher or actuary. "Nobody ever got rich on mathematics," says a character in a novel I wrote, and that was still the common opinion in 1970 when my character spoke the words.

Then, through the last quarter of the 20th century, things changed completely. Financial pioneers with math degrees — people like Jim Simons — rode the IT revolution to stupendous wealth.

The downside to all that for us opinionators is that when players in that world generate big headlines, as SBF has been doing this past few days, it's awfully hard to explain their work. Even with a good background in math, I don't understand more than half of what these guys do.

Indeed, Caroline Ellison, the CEO of Alameda, has a better math degree than mine; yet according to Tom Costello, as we shall see, she didn't understand what she was doing.

So I'll hand you off to Tom. I've edited his explanation down some, but it's still rather long, so I'll give it its own segment.

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03 — The view from the front office.     Here's Tom Costello's account. Long quote:

Five years ago SBF and a friend founded a market-making hedge fund named Alameda Research, headquartered in Hong Kong and specializing in cryptocurrencies. Then, three and a half years ago, SBF founded FTX, a crypto exchange headquartered in the Bahamas. So now he has a hedge fund and a crypto exchange.

Shortly after founding FTX SBF decided to issue his very own cryptocurrency, called FTT, designed to be pegged to the dollar and to facilitate trading in a non-dollar format on the FTX exchange. The exchange issued billions of FTTs and they began trading on multiple exchanges.

FTX used these FTTs to fund Alameda, the hedge fund. Unfortunately Alameda was run by totally inexperienced traders. The CEO had a total of 19 months in institutional finance and no real training in the field. And since market-making is inherently a short volatility position, much mayhem eventually ensued.

Alameda, funded with FTTs (basically credit), was trading FTT on Binance [that's a major other crypto exchange based in the Cayman Islands] and on FTX. SBF was hopping about trying to be a megalomaniacal hero in the crypto world.

Over time, however, Alameda had been doubling down on any losing trades and covering by expanding their credit. That eventually put them in a highly leveraged position with massive mean reverting trades on FTT.

The CEO of Binance, a Chinese-Canadian fellow known as CZ, found out about it somehow. Since CZ knew that meant Alameda were short vol, he squeezed them and put a notice out on Twitter explaining that Binance were dumping their FTT position.

If 90 percent of the crypto industry wasn't offshore, that would be illegal; but since the U.S. Tax law requires all crypto exchanges to notify the IRS about any trading where there is a U.S.-beneficial holder involved, and most of the crypto industry has a deep libertarian streak, they have told the IRS and U.S. regulators to go [pleasure] themselves, and have simply excluded U.S. citizens and their firms from access.

So CZ, the Binance boss, would be breaking U.S. law if he cared at all about U.S. law. But it's a big world, and he's in the Cayman Islands. So he talked up his book on Twitter, and the mob overseas joined in, squeezing Alameda.

Alameda quickly accumulated 20 billion or so in losses. Since most of that money was borrowed from the FTX exchange as, quote-unquote, "margin" lending where FTTs had been posted as collateral, the more they tried to roll up their position to cover their losses, the more downward pressure they put on the FTT's price, and the more stress they put on the exchange and its ability to meet its demands for liquidity by clients.

FTX had been acting like a bank with fractional reserves. But they weren't a bank, and they had no regulations or cap requirements, no lenders of last resort like the Fed is for U.S. banks.

That they thought they could pull it off is the fault of SBF and his hubris. That Alameda failed on a short gamma trade is the fault of the adolescent and utterly unqualified CEO Caroline Ellison. She had a total of 19 months at quant trading firm Jane Street, which makes her unqualified as a senior analyst, let alone as CEO of a quant hedge fund. Jane Street doesn't train its staffers, so although Ellison is an MIT graduate and good at math, she had no idea what she was doing.

There is an arrogance that comes from these kids in the venture capital world. They believe they're smart enough to come up with the "magic formula" for quant trading that will win 100 percent of the time. They don't realize that's impossible, so they pursue the usual tactics that will give them a higher hit rate by shorting gamma — the short vol trade. They pick up pennies in front of the steam roller without any awareness of what a "fat tailed" distribution really means in trading.

They think intelligence is more important than knowledge in trading, and they all operate on "belief," rationalizing their way through the world, and barely ever delving into reason. I wrote a whole book designed to help kids like this avoid this kind of failure. Obviously they didn't read it.

So what happens going forward? There will be some rolling bankruptcies through the space — all kids who deserve to go out of business. They'll all shake out by the end of the year as mark to market accounting forces them to fess up to their losses. I'm hearing projections for the low for Bitcoin at about the 10,000 range, but that's just speculation. The market will decline a bit more certainly, but no one really knows how much.

At the moment, the Fed is staged to pause rate increases by June of next year, and that will mean more inflation. More inflation will begin to boost crypto again, and by this time next year I expect things will be improved.

As for my firm: On Monday we noticed that FTX was paying 500 percent for borrowed dollars. Intuiting that this couldn't be good, we migrated all our assets off the platform later that day. By the time the news was making headlines, all in we made 24 percent off the turmoil and we're staged for more success. I'm optimistic.

End quote.

Many thanks for that, Tom. Let's go shoot some more birds when you're free.

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04 — Election integrity.     The topic here is election integrity. My general approach to the issue is guided by Nico Colchester's famous distinction between "soggy" and "crunchy" procedures, institutions, attitudes, and government programs. Sample quote from Colchester:

Crunchy systems are those in which small changes have big effects leaving those affected by them in no doubt whether they are up or down, rich or broke, winning or losing, dead or alive … Sogginess is comfortable uncertainty … The richer a society becomes, the soggier its systems get. Light-switches no longer turn on or off: they dim.

End quote.

By Colchester's criterion, our voting and ballot-counting procedures are far gone in sogginess.

Permit me to introduce a different old friend, whom I shall keep anonymous. I'll call him Jud, which has no letters in common with his actual name. Jud is a respectable gent of high integrity whom I've known for years, a retired physicist.

Well, I was on the phone with Jud the other day. He told me a story about his grandson. The lad was born and raised in Maryland. When he came of age he registered as a voter in that state.

Currently, however, this young man is a fulltime student at one of the campuses of the University of California. He is not a registered voter in that state.

California none the less sent him mail-in ballots — eight of them.

For a nation whose politicians l—o—v—e to orate about "democracy," the sogginess of our voting systems is really quite amazing. Why isn't there a general uproar about it?

I'll hazard a guess: There isn't a general uproar because the sogginess allows our ruling class to nudge election results this way or that; while the media, who would have to amplify the uproar, won't do so because 95 percent of them are bought and paid for by the ruling class.

Running a crunchy system of voting and ballot-counting isn't difficult. The state of Florida seems to have managed it; they had their final midterm results out a few hours after the polling places closed.

Entire nations manage it. Writing on this topic in Chronicles magazine two years ago I raised the case of Australia. Quote from myself:

Australia, although a constitutional monarchy, has a federal structure not unlike our own. Elections there are supervised by the Australian Electoral Commission (AEC), a federal body. All registered candidates can nominate "scrutineers" to be present throughout the polling and counting at every voting place. Voting is compulsory, with fines for defaulters. Absentee voting is strictly limited; and the limits have not been much affected by the COVID-19 pandemic.

End quote.

Yes, yes: I know that our Constitution says that the "Times, Places and Manner of holding Elections" are for the individual states to decide. The Constitution can be amended, though; and even without that, why aren't the citizens of states like Arizona marching on their state legislatures with pitchforks and flaming torches to demand crunchiness?

And with Australia in mind, I don't see any Constitutional obstacle to states legislating compulsory voting. What's wrong with it? It's hard to see how those tiresome people whining about "voter suppression" could go on whining under a system of compulsory voting …

Although personally I think that just fining people who fail to vote is still kind of soggy. What would be wrong with short jail sentences? That would be crunchy!

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05 — Tech (and DEI!) layoffs.     In last week's podcast I spoke about the big layoffs of tech workers at Elon Musk's Twitter and Mark Zuckerberg's Meta, and about the howling and weeping over the fact that so many of those laid off were guest workers on H-1B visas. According to the visa rules, if these foreign guest workers don't find another employer within sixty days, they have to go home.

Related news items have been coming thick and fast this week. Here was the King 5 TV station in Seattle on Monday, headline: "Workers on H-1B visas face challenges after recent tech layoffs." Quotes from the story, with inner quote from a local tech-business leader:

Meta, Facebook's parent company, let go of 11,000 workers last week. Twitter let go of roughly half its team, which included 208 workers in the Seattle area. Seattle-based Redfin sent out a memo last week that it intends to lay off 862 employees.

[Inner quote.] "It's terrifying and it is happening a lot across the industry right now," [end inner quote] Feinzaig said …

It's too early to know how many of those let go are foreign workers. Immigration attorney Tahmina Watson wouldn't be surprised if the number is more than ten percent.

End quote.

It turns out there's some sogginess in the immigration rules, though. That immigration attorney recommends that laid-off H-1B workers try for other visas: the TN NAFTA permit for Mexicans and Canadians, or the E-2 visa for foreigners who invest in a U.S. business, or can persuade someone who has done so to employ them. She also says workers might choose to start a company and employ themselves.

Further quote from her: "In every adversity there is opportunity," end quote. An opportunity, she means, for laid-off techie guest workers to game the immigration system — with a little help, of course, from immigration attorneys like herself.

Also this week we got news of big layoffs at Amazon — ten thousand employees to go. A lot of these, although we don't know how many, are techies supporting the Alexa voice-assistant software and Amazon's cloud gaming service Luna.

With proper respect to the laid-off techies, I note that there is some good news in there too. The Reuters report on Wednesday told us that Amazon has offered voluntary buyouts to some of its human-resources staff.

Dare we hope that means pink slips for some of the Diversity, Inclusion, and Equity parasites big companies have been loading up with since the Great Awokening of nine years ago?

I think we dare. Fortune magazine ran a report, also on Wednesday, under the heart-warming headline "Tech layoffs are disproportionately hitting HR and DEI teams. That could spell trouble for companies." Quote:

Tech layoffs are decimating human resources and corporate diversity teams.

End quote.

I'm struggling to hold back my tears.

The sympathy emanating from these stories is, however misplaced, at least being directed to foreigners here legally. Meanwhile, also on Wednesday, Senate Majority Leader Chuck Schumer was working the other side of the field. Here he was addressing a gathering of illegal aliens outside the Capitol building.

[Clip:  Now more than ever we're short of workers, uh … We have a population that is not reproducing on its own with the same level that it used to. The only way we're going to have a great future in America is if we welcome and embrace immigrants — the Dreamers and all of them, 'cause our ultimate goal is to help the Dreamers but get a path to citizenship for all eleven million or however many undocumented there are here. (Cheers, applause.)]

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06 — Miscellany.     And now, our closing miscellany of brief items.

Imprimis:  The United Nations announced that as of Tuesday there were eight billion people on Earth.

Our own Census Bureau's population clock begs to differ. We're still 66 million and some short, according to the clock. Whatever. I doubt anyone really knows even to the nearest ten million. You mean to tell me there are precise head counts for places like Congo, Indonesia, Kazakhstan, and Bolivia? I don't bolivia.

In related news, India's population is hovering on the edge of overtaking China's. This is a much bigger thing in India than in China. Here at Radio Derb three years ago I passed the following comment.

[Pips.]
India's a populous and important nation, and we don't pay as much attention to it as we should. Radio Derb will try to do better. In the meantime, on the demographic issue, here's a little social experiment you can carry out for yourself. It was recommended to me by a Chinese friend, and I've field-tested it a couple of times with a positive result both times.

Any time you find yourself in the company of a well-educated young person from India, casually slip the following question into your conversation.

"I have seen, somewhere or other, an estimate for the year when India's population will surpass China's. I can't remember what that year was, though. Do you by chance happen to know it?"

That's the question you ask. The answer comes back faster than a speeding bullet, and loaded with pride: 2024! They all know it, and they're all pleased about it.

Try it for yourself next time you're in company with an Indian.
[Pips.]

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Item:  The British government's Treasury Department is grappling with that nation's appalling financial condition: out-of-control inflation and, at the same time, government spending far outstripping government revenues. What to do?

Fortunately Treasury has a plan. In a memo that appeared last week on the Department's intranet service for civil servants they declared a, quote, "black staff representational target of six percent at all grades," end quote.

In other words Treasury is aiming to have six percent black employees at some point in the near future. They don't seem to have given an actual date.

Only 3.3 percent of people in England and Wales identify as black, so the Treasury target is nearly twice that.

This would be shocking if not for the fact that the long march of white ethnomasochism these past decades has dulled our capacity for shock.

It's also of a piece with the stories I've heard from young Americans of my kids' generation, and with occasional items in the more based kind of news outlets, about how the lightness of your skin puts you at a disadvantage in job interviews. "They just want to hire blacks," people mutter.

I'd actually prefer it if the jobs listings were honest about it and included a line saying NO WHITES NEED APPLY. I suppose it would cause a fuss; but at least there'd be a net reduction in the quantity of hypocrisy in the world. And it would save white jobseekers wasting time attending interviews at companies that don't want them.

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Item:  Here's an organization clearly out front on the race issue: the Girl Guides of Canada. Tuesday this week they told us on Twitter that their junior program for 7- to 8-year-olds will no longer be called "Brownies." Tweet from them, Tweet:

We have heard from racialized girls that this name has caused them harm.

End tweet.

That's just one more disappointment from the Girl Guides for me. I grew up in England before 1971, when the nation's currency was changed from the dear old traditional pounds, shillings, and pence to something more cool, up-to-date, European, decimal, and easier for politicians to devalue.

Back in those pounds-shillings-and-pence days the lassies used to go door to door selling cookies their group had made. They'd ring the doorbell, you'd open the door, and there was this cute little preteen lady in her Girl Guide uniform chirping: "Please give a shilling to a girl who is willing."

I always did. Eh, innocent times …

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Item:  Our president has been on the road. Last Friday he attended the COP27 climate-change show in Egypt, presumably to boast of how, in fealty to the cult, he had destroyed American energy independence.

Saturday it was over to Cambodia for the gathering of ASEAN (the Association of Southeast Asian Nations). I'm somewhat at a loss to know what the point of that was, since the U.S.A. is not a member of ASEAN. I guess there's always the hope we might stir up a war down there so our military contractors can make some money.

What got most of my attention at ASEAN was news pictures of Joe Biden and Justin Trudeau showing up in what the media call Mao jackets but which any Chinese person will tell you are in fact Sun Yat-sen jackets, 中山装 (ZhōngShānzhuāng). Presumably Joe and Justin were rehearsing for their meetings with ChiCom dictator Xi Jinping at the G20 summit in Indonesia on Monday and Tuesday.

That was weird. Fortunately their people found out in advance that Xi himself would be wearing a regular Western-style suit and tie, so our North American leaders had time to figure out some other way to ingratiate themselves with the Boss.

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Item:  Remember Watership Down, Richard Adams' novel about a band of rabbits struggling to preserve themselves and their families against assaults on their territory? Published just fifty years ago this month, it was a surprise best-seller and span off a movie and at least one TV series.

I am sorry to record that my main Watership Down memory is of the joke going round when the movie came out: "You've read the book, you've seen the movie. Now eat the pie!"

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07 — Signoff.     That's all, ladies and gentlemen. Thank you for listening; and if you haven't yet got your Thanksgiving fruitcake in, there's still time!

If you ever attended a course on the history of music, or listened to Professor Greenberg's lectures from the Great Courses company, you know that the year 1750 was a major milestone. That was the year Johann Sebastian Bach died; and that same year is taken, as a matter of convenience, to mark the end of the Baroque period in Western music. The Baroque period (think Handel and Bach) was followed by the Classical period (think Haydn and Mozart).

When Bach died in that year 1750 he left behind a major work, The Art of the Fugue, that had never been performed and perhaps wasn't meant to be performed. Scholars are still arguing about that. They are also arguing about whether or not the manuscript music of The Art of the Fugue is complete. I'll leave you to look those arguments up for yourself if you feel inclined.

Along with those uncertainties, we don't know what instruments Bach had in mind for performing The Art of the Fugue. Most likely Bach intended it for keyboard instruments; either the harpsichord or the new-fangled piano. It's been played on other instruments, though. Back in August I signed off Radio Derb with a snippet from the work played by The Canadian Brass Quintet: trumpets, trombone, tuba, and french horn.

For signout music today I'm going to give you that same snippet — it's Fugue Number 5 — but this time played on two harpsichords.

These two instruments were both built in the later 20th century by American makers of musical instruments, Keith Hill and Philip Tyre. The players are likewise American: Gavin Black and George Hazelrigg. I've taken this clip from a CD titled The Art of the Fugue, which has its very own website where you can read all about it: www.theartofthefugue.com.

Thanks to the kind friend who alerted me to this lovely little musical curiosity.

There will be more from Radio Derb next week.

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[Music clip: Harpsichordists Gavin Black and George Hazelrigg, J. S. Bach's Contrapunctus 5.]