Streetwise Professor

The CME Group has announced plans to open a European exchange, following its earlier announcement of its launch of a European clearinghouse.

Just another unintended consequence of Frankendodd.  Another bucket emptied by the Sorcerer’s Apprentice’s regulatory broomsticks.

Why do I say that, pray tell?  Because that’s what CME Group is saying, quite clearly:

The Chicago-based exchange said that as policymakers overhaul the global market infrastructure, it was becoming increasingly important for market infrastructure providers to offer a choice of regulatory regimes. Derek Sammann, managing director of CME Group’s global interest rate and FX business, told Financial News immediately after the announcement: “Clients should not have to choose to trade with us in the US regulatory environment, or not to trade with us at all. That is not a real choice.

He added: “The more we have invested in our global infrastructure, the more we have realised that there are customer acquisition opportunities by creating regional access to our services.”

. . . .

Phupinder Gill, chief executive of CME Group, in June told an international derivatives conference IDX in London that the exchange group’s non-US clients had raised concerns that they would become ensnared by the Dodd-Frank rules if they traded with the US-regulated company – a phenomenon commonly known as extraterritoriality.

He said: “The question that many of our clients ask is if they are going to get ‘Dodd-Franked’.”

No, no, no, Gill!  It’s “going to get Frankendodded.”  Get with the program!  We need to feed the meme!

The reporting has been rather unclear on what the CME Group’s plans are going forward.  The new UK-based exchange will offer FX futures contracts.  The CME press release, and the reporting, do not say explicitly, but it looks like these would be new products, distinct from the CME’s FX contracts traded on Globex.  This means that liquidity and clearing would be fragmented, so that regulatory cost savings for European customers would be offset to some degree by higher trading and clearing costs.  Great!  And regulators note: the market will become more complex and difficult to oversee, with divided jurisdiction and the consequent need for regulators to coordinate in the event of market stress.  There will be arbitrageurs-including, no doubt, those HFT demons-buying and selling between the two markets, leading to more message traffic, more complexity, and more potential for breakdowns and technological glitches.  That is, the adverse technological consequences of fragmentation that have accompanied fragmentation in equity markets may rear their ugly heads in futures as well, with the added twist of fragmentation across international jurisdictions.

Given the difficulties associated with building liquidity, it is uncertain how the CME’s UK initiative will fare: it may be the case that Europeans decide that the liquidity and clearing costs savings exceed the regulatory burdens.  But it is relatively inexpensive for CME to put its toe in the water in the way it has.  It is a cheap way to buy an option on regulatory uncertainty.  If Frankendodd turns out to be the real monster that I think it will be, European customers will be willing to incur higher liquidity and clearing costs in order to avoid the monster’s grasp.  CME Group will add more contracts that mirror its US offerings.  The market will become more fragmented, and more complex.

Exactly what Frankendodd and Gigi and Timmy! intended, surely.

I have crossed pixels with Felix on occasion, most notably over the issue of “empty creditors,” in which I took the Coasean position.  But today, I largely agree with his take on the Knight Capital implosion:

We’re seeing the same thing with the fiasco at Knight Capital, where a highly-sophisticated high-frequency stock-trading shop lost an enormous amount of money in a very small amount of time, and small investors lost absolutely nothing. On the grounds that we can’t present this as news without somehow determining that it’s bad for the little guy, it took no time at all for grandees to weigh in explaining why this really was bad for the little guy after all, and/or demonstrates the need for strong new regulation, in order to protect, um, someone, or something. It’s never really spelled out.

Knight lost $440 million.  That really stinks for its shareholders, but its loss is a windfall for those on the other side of its Hal moment.   Every dollar lost by Knight is a dollar gained by someone who entered an away from the market limit order that Knight triggered, or arbitrageuers that took advantage of the price anomalies.  You might argue that the temporary distortions in prices for dozens of stocks is a source of welfare loss, but I defy you to identify a real decision (e.g., the amount of investment by an affected firm, or its capital structure) that was affected by the very short lived fluctuations.

The final score: Knight -$440 million.  Others who bought and sold the affected stocks: +$440 million.  Third parties (not counting those who get the vapors when the markets don’t work as neatly and tidily as they think they should): $0.  Net result: $0.

Not quite, though, because of the pour encourager les autres aspect of Knight’s travails: to me this episode is an example of Darwinian selection in action.  Those who don’t adequately check their code are driven from the market (or almost are-Knight was rescued from bankruptcy on very harsh terms by a group of brokers and dealers).  Indeed, the outcome here is likely to be more efficient than a purely Darwinian one: here others can learn from Knight’s tale (“there but the grace of a geek go I: I’d better be extra vigilant”) whereas that learning mechanism doesn’t operate under pure natural selection.

Although I sometimes agree with Felix Salmon, the same cannot be said of me and John Kemp, another Reuters writer.  The correlation between our views pushes -1.

That’s true today, with respect to Kemp’s analysis (if that’s the right word) of ICE’s decision to relabel swaps as futures.  Kemp presents this as a smashing victory for Frankendodd.  Now it may seem churlish of me to criticize, given that Kemp did give my blog post extended play in his piece: I am aware of Brendan Behan’s dictum that there is no such thing as bad publicity, except where your obit is concerned.  But duty calls.

Kemp spends inordinate space in a disquisition on the Talmudic distinctions under the Commodity Exchange Act between contracts for future delivery and commodity forward contracts.  All of which is completely irrelevant because the ICE contracts transubstantiated from swaps to futures are definitely not commodity forward contracts exempt from CEA exchange trading requirements.  Kemp quotes my statement that nothing of economic substance changes as a result of the relabeling-and doesn’t disagree.  But he cavils:

Pirrong has been critical of Dodd-Frank and much of the CFTC’s rule-making. In this instance, he appears to argue that the sole outcome will be another round of regulatory arbitrage. (“A swap by any other name” Aug 2)

Arguably, however, ICE’s decision to re-label its cleared swaps as futures suggests regulators have won this round of the battle, ensuring that all contracts with an economically equivalent purpose will be treated in the same way, rather than subject to an artificial distinction.

Note the attempt to cast doubt on my analysis by pointing out my (unapologetic) criticism of Frankendodd, and Igor’s (i.e., the CFTC’s) implementation thereof. (“Distrust the skeptic!”)

Sorry, but I’m finding it hard to see the great regulatory victory here.  Nothing of economic substance has changed: Kemp does not dispute this, and in fact agrees with it (though he doesn’t go far enough, because the transactions are equivalent in form and substance as well as purpose).  The “artificial distinction” he criticizes is in fact a creation of the regulation: it is the direct result of Frankendodd’s establishment of a separate regime for swaps.  By revealed preference, the regulatory regime that ICE has chosen to operate under is less burdensome that the swap regime created by Frankendodd.  Since the economic substance of the transactions at issue hasn’t changed, this implies that either the swap regime is inefficiently costly (at least for some transactions), or the futures regime is inefficiently lax but a mere relabeling permits ICE and others to take advantage of that laxity.

I guess you have to take your victories where you find them, but that’s pushing it.

I have long been a China bear, even before the financial crisis.  (Bearishness here means that I believe China has many structural weaknesses that make it highly unlikely it will achieve the  prodigies that China bulls predict.)  A major reason for this bearishness has been the Chinese financial system.  For years, bad loans have been buried. More recently, the combination of financial repression and the need to get bad loans off bank balance sheets have encouraged the development of a shadow banking system that makes the West’s look positively staid and stable by comparison.

This is illustrated quite graphically in an excellent special report on Reuters.  Do read the whole thing, but here are my takeaways.  First, as just noted, financial repression which depresses returns on bank accounts encourages savers to look for higher return-and higher risk-alternatives.  Second, shadow banking mechanisms such as “Wealth Management Products” are being used to fund very dodgy assets and get them off bank balance sheets.  Third, these shadow banking products involve maturity, credit, and liquidity transformation.  In many cases, the degree of transformation is extreme, with very short term liabilities (as little as a few weeks) used to fund long maturity, non-performing, extremely illiquid assets  Fourth, the degree of disclosure about these products is appalling.

In brief, there are all the ingredients of a run present there.  Indeed, if the Reuters characterization is correct (and I have heard the same or worse from those who have major skin in the game), this system is far more fragile than the web of ABCP, SPVs, liquidity puts, subprime MBS and CDOs and CDO squareds that collapsed in the US in 2007-2008.

Woefully uninformed investors have no ability to discriminate between good and bad trust companies, wealth management products, etc.  Bad news about a few, or a big one, quite likely would lead to a spike in suspicion about all of them: given the highly dubious quality of the underlying assets (resulting to a considerable degree to the malinvestment caused by the government’s stimulus efforts in 2008-2009), such bad news is quite likely to arrive.  This would spark a run on the entire shadow banking sector (because investors cannot discriminate given the near complete opacity), which given the extreme maturity mismatches and the illiquidity of the underlying assets would lead to a collapse in short order.  Some of this would blow back onto banks, threatening their solvency.  But even if banks walk away from related trust companies, etc., investors in the shadow banking products would be ruined.  This could have social ramifications that no doubt petrify the ruling Communist Party.  Even absent social disturbances caused by infuriated investors seeing their wealth evaporate, and the associated potential for a government crackdown, the decline in wealth would lead to a sharp reduction in consumption, slowing Chinese economic growth; putting a drag on the world economy (especially commodity producing countries); and exacerbating the already unprecedented imbalance between investment and consumption.

The heavy hand of the Chinese government has contributed mightily to this state of affairs.  Distortions of prices (notably interest rates) and misallocations of capital through a banking system that favors state owned enterprises and forces entrepreneurs who generate the real growth to rely on shadowy sources of capital, currency management, the focus on export and investment oriented growth, all exacerbated by the response to the 2008-2009 crisis have led to the development of a warped financial system that is extremely fragile.  More fragile, almost certainly, than the one that imploded in the US and Europe 4-5 years ago.

When will a collapse come?  The coordination game, multiple equilibrium nature of these things makes that very hard to predict.  A small change can lead to a jump to a run equilibrium.  The risk is there, just as a huge pile of dead underbrush in a forest poses the risk of a conflagration at any instant.  When the spark or the carelessly discarded cigarette or the lightning strike will set it off is impossible to predict.  But one must be very lucky indeed to avoid a big fire when the conditions are so favorable.

ICE has created something of a kerfuffle by its announcement that it will convert its cleared energy swaps contracts to futures.  Despite a lot of breathless reporting, there is less here than meets the eye.

ICE has merely relabeled its cleared energy swaps as futures in order to avoid burdening its customers with the costs that Frankendodd imposes on swaps.  Futures and swaps are subject to different regulatory regimes.  Firms with sufficiently large swap positions are considered swap dealers under Frankendodd, and must meet a variety of requirements that those not blessed with this designation can avoid: holders of equivalent futures positions need not meet the same requirements.  Swaps trades also involve additional reporting obligations not imposed on futures trades.

So what ICE will do effective in January is change the name of its contracts, thereby reducing the regulatory burden on its customers, without changing their economic substance one iota.  Note that these are cleared swaps, so the change doesn’t create a new clearing obligation on those trading them.  The central counterparty for the futures will be the same as for the swaps: ICE Clear Europe. The contracts will have identical settlement terms.  They will have identical cash flows.  They will trade on the exact same ICE platform.  The economic substance of every aspect of the old “swap” transaction and the new “futures” transaction remains the same, from execution to clearing to settlement.  Nothing changes but the name.

And the regulatory burden.

Which points out the potential for absurd outcomes under Frankendodd.  The CFTC has labored mightily to craft definitions of a swap and swap dealers and major swap market participants.  Where one falls under these definitions matters a lot.  Firms will endeavor to take measures that minimize the regulatory burden they face. ICE is basically picking the low hanging fruit, and taking note of Congress’s morbid obsession with “OTC swaps” and idealization of futures by magically transforming the former into the latter, and thereby making life easier-and cheaper-for its clients.

The incentive to label or structure transactions to achieve the same economic outcome at lower regulatory cost will be quite strong in the Frankendodd era.  This will initiate a regulatory dialectic in which regulators will attempt to adjust regulations in order to limit such attempts to escape regulatory burdens by relabeling or restructuring; the regulated will adjust to the adjustments; the regulators will adjust some more; and on and on.*

The lawyers will rejoice.

Much of the reporting on the ICE move has been pretty far off base, such as this from the WSJ:

Derivatives exchange IntercontinentalExchange said it plans to overhaul trading in trillions of dollars of energy contracts starting in January, becoming the first exchange to take such a step ahead of new financial regulations.

ICE is pushing trading of certain energy contracts onto its exchange, a move that would likely diminish the more-opaque world of over-the-counter derivatives trading. The plan will likely appease lawmakers who have decried the lack of transparency in such portions of the financial markets.

Derivatives exchange IntercontinentalExchange said it plans to overhaul trading in trillions of dollars of energy contracts starting in January, becoming the first exchange to take such a step ahead of new financial regulations.

ICE is pushing trading of certain energy contracts onto its exchange, a move that would likely diminish the more-opaque world of over-the-counter derivatives trading. The plan will likely appease lawmakers who have decried the lack of transparency in such portions of the financial markets.

. . . .

Many energy producers and users generally have preferred swaps contracts because each contract can be written up individually and to a company’s own specifications. That has enabled them to be more targeted in their hedging. Futures contracts, by contrast, are generally standard contracts covering the price of a specific energy grade to be delivered at a certain time.

Pretty much none of that is true.  All of it suggests a change in the way these instruments are designed, traded, and cleared, none of which is in fact changing. The contracts are already standardized, traded on an electronic platform, and cleared.  This is not a movement of bespoke, uncleared, bilateral contracts onto an exchange.

Look.  It’s long been known that the economic substance of swaps and futures are effectively identical, especially when the former are cleared.  Changing the label-hell, call them bananas-doesn’t change the economics.  If the CFTC had even less burdensome regulations for bananas, ICE would launch ICE Bananas.

Which illustrates that Frankendodd is quite often and in many ways truly bananas.

* Relabeling of derivatives contracts was employed in the 19th century to avoid legal restrictions.  When Illinois banned options trading, traders bought and sold the same things, but started calling them privileges.

The Intercontinental Exchange (not to be confused with the Intercontinental Railroad!) has announced the end of cotton, coffee, sugar, cocoa and OJ options floor trading.  The futures floor was closed some time ago.

The decision was spurred by the movement of options trading to ICE’s computerized trading system.  This is significant, and is likely the beginning of the end of floor trading.  Options have been the last major bastion of open outcry.  Many options trades involve more complicated multi-leg strategies (including spreads of various sorts) that are more difficult to computerize than simple outright futures trades, or simple futures strategies like calendar spreads, but which can be done efficiently on the floor: locals on the floors quote many of the common spreads.   If options can be done on the screens, there’s nothing really left for the floor to do.

Thus, we are witnessing the culmination of a process that began about 20 years ago.  I first did some research on electronic trading in the early-1990s, and remember the disdain with which the futures and options communities looked on computerized markets.  In 1995, I wrote a study comparing the electronic DTB and the open outcry LIFFE market which found that the former was as liquid, or more liquid than the latter: this study was met with much derision by LIFFE, and by most people in Chicago.  The derision of electronic trading died down substantially in 1998, when volume in the Bund futures market tipped completely to DTB’s successor (Eurex), and LIFFE suffered a near death experience.

The floor held out in the US for sometime longer, but by the early-2000s the writing was on the wall here as well.  By the mid-2000s options trading was keeping the floors going.  But that’s no longer true of ICE, and it is likely a matter of time before it is no longer true on CME/CBT or NYMEX.

I owe thanks to Tim Worstall (never to be confused with Timmy!) for his Forbes blog post on, and compliments of, my Blame it on Ben? piece from Saturday.

I also owe Tim props, for he recognized the dangers that low interest rates pose to the traditional broker model back when MF Global went bust.

One clarification.  I didn’t mean to suggest that low interest rates caused MF Global, or Peregrine, or the Whale, in the sense that low rates were a sufficient condition for these things to occur.  Low interest rates aren’t necessary either: some firms take risk or commit fraud when interest rates are high, obviously.

But risk taking (such as MF Global’s gambling for resurrection) and fraud (such as Peregrine’s) are more likely when firms are on, or over, the financial brink.  Low interest rates put these firms on the brink, and made the courses of action that Corzine and Wasserman chose more attractive and compelling than they would have been had they been making money the old fashioned way.  Put differently. low interest rates increase the odds of such conduct.

With that clarification made, just let me say thanks Tim, and keep up the good work.

During all the whinging about WTI, and the claims that it was inferior to Brent as a benchmark, I pointed out that although the former was subject to short term issues that could be fixed by investment in infrastructure, the latter was plagued by far more intractable problems that would compromise its viability over the medium-to-long term.  Indeed, WTI’s problems reflected an unexpected supply surge that actually bodes well for its long term viability, whereas Brent’s inexorable production decline would be virtually impossible to fix.

That reality is now becoming more widely recognized, pace Javier Blas’s piece in the FT:

The drop in production is putting the Brent benchmark in danger. Platts, the pricing agency that acts as the de facto regulator of the Brent physical market, is looking for solutions. It will need to work closely with ICE Europe, the exchange home of Brent futures and options, and the UK’s Financial Services Authority, which has an interest in the Brent derivatives market running smoothly.

The usefulness of West Texas Intermediate, the US crude oil, as a global benchmark has suffered over the past two years due to the so-called ‘Cushing syndrome’ – a glut at the Oklahoma town that serves as the delivery point of the contract. This glut is due to surging production and limited pipeline offtake capacity, and pushed WTI prices below what global fundamentals suggested.

Brent is now suffering from the opposite problem. The ‘North Sea syndrome’ – falling regional output combined with unlimited seaborne offtake capacity. The problem could push Brent prices above what global fundamentals suggest.

It is a lot easier to build pipelines than develop vast offshore oilfields. (Well, it is if administrations I won’t bother to mention let pipeline development proceed.)  This means that WTI’s “problems” can be fixed-and indeed, that its problem (a surge in supply in regions tributary to the delivery point) is a feature not a bug.  Brent’s.  Not so much.  Meaning that before very long CME/NYMEX is likely to be laughing, and Platts and ICE will be sobbing.

This provides a truly fascinating insight as to how Russia works:

Sucres et Denrees SA, a French sugar trader with processing in Russia, may offer a stake in Russian assets to Kirsan Ilyumzhinov, a former regional governor, to help protect operations, its head of the local business said.

“This can be the case if Mr. Ilyumzhinov helps to save our assets from the corporate raiders,” Etienne Pelletier, also a member of the company’s executive committee, said today by phone. Ilyumzhinov, governor of Kalmykia until 2010 and World Chess Federation president, has “necessary contacts,” he said.

“Necessary contacts.”  Those two words speak volumes.

Ilyumzhinov is a real piece of work, by the way.  (And his WCF involvement provides yet more evidence, as if any is needed, of the deeply dysfunctional and corrupt nature of virtually every international sports organization, e.g., the IOC, FIFA, Formula 1.)

This part is particularly illuminating:

The trader has been in legal disputes over ownership of Russian assets since 2008 after contracts to buy equipment for plants were challenged by local counterparts. Sucden has three sugar plants in Russia that processed 2.5 million metric tons of beet into 316,000 tons of sugar last year, company data show.

This illustrates the challenges that commodity trading firms face generally, as many must deal in jurisdictions in which the state is predatory and/or the the state does not protect property rights and/or the line between the state and predatory elites is somewhere between blurry and non-existent.  Russia presents all of these problems.

This is how the natural state works.  Which makes the following borderline insane:

Investors should buy European stocks with sales in Russia as the oil-producing nation’s economic growth will outperform the debt-stricken euro region’s, according to Citigroup Inc. (C)

“The point is that Russia has growth while Europe is facing stagnation,” Kingsmill Bond, chief strategist at Citigroup in Moscow, said in a phone interview today. “A lot of the growth that European companies will generate will be from their Russian operations.”

First, Russian growth is highly dependent on what happens in Europe.  Remember, Russia is a high beta economy, and due to the natural resource dependence an economic crisis in Europe or China will hit Russia even harder.  So the idea that investing in Russia is some sort of hedge against economic troubles elsewhere is particularly daft.  Second, Russian operations pose their own special risks to foreign companies.  Such as having to get a krysha from corrupt governors who believe they were abducted by aliens.

Barclays’ has copped to an attempted manipulation of LIBOR.  It has agreed to pay about $450 million to the UK’s FSA, the CFTC, and the USDOJ.  The CFTC filing states that Barclays had two motives for its actions.  First, when Barclays’ reports to LIBOR were high relative to other banks’ (which Barclays people referred to as having their head above the parapet) and thereby raising questions about the bank’s financial condition, it allegedly reduced reported rates in order to allay such fears.  Second, the bank’s traders allegedly influenced rate submissions, and conspired with traders at other banks to change their submissions, in order to advantage derivatives positions.

As I noted in 2008, when the story first broke, the second possibility created substantial legal liability for banks like Barclays that submitted the false reports.  Under the anti-manipulation law in effect in the US at the time, it was necessary to have specific intent to create an artificial price of something like the LIBOR-based Eurodollar futures contract.  The emails divulged today suggest such a specific intent.

Perhaps crucially, the Order only finds that Barclay’s attempted to manipulate, not that it had in fact succeeded.  This will be an important issue going forward.  To prove manipulation, and crucially, to collect damages, it will be necessary to show that Barclay and other submitters of LIBOR quotes indeed distorted the index, that is, they caused an artificial price in a futures contract based on LIBOR or some other interest rate like Euribor.

Proving this will be a very data intensive exercise.  Moreover, there are two distinct issues-the impact of manipulation on the final settlement price of the futures contract (which is based on LIBOR), and the impact of manipulation on futures prices prior to expiration.  The second issue will prove more challenging than the first because the connection is more direct in the final settlement price.  Even that will pose some issues, however, because of the necessity of identifying the “but for”, i.e., what interest rate should banks like Barclays have reported.   This will necessarily require looking at actual interbank transactions, raising the question of how many such transactions there will be during periods of time of money market stress starting in 2007.

These issues are not impossible.  Similar, and arguably even more challenging issues, were confronted in a class action lawsuit against those who misreported  natural gas prices to publishers like Platts.  (Full disclosure: I consulted with plaintiffs in that matter, and wrote a declaration in support of certain aspects of the plan of allocation of settlement monies.)

The whole fiasco does point out, yet again, the overriding importance of basing cash-settled indices on actual transactions, wherever possible.

This is becoming an important issue in oil markets as well, as “Price Reporting Agencies” like Platts and Argus are under great scrutiny.  But oftentimes the problem is not amenable to easy solution.  You can’t have a reliable transaction-based index that is not susceptible to manipulation if (a) there are few transactions, and/or (b) market participants have the option to report transactions.  Pharonic pronouncements from regulators that PRAs make bricks without straw are futile.

None of these issues are new.  I (and my colleagues at UH) dealt with them in 2003 in our efforts to create an “energy data hub” in the aftermath of the price reporting scandal post-Enron.  Voluntary reporting is extremely problematic.  Compulsory reporting (along the lines of one of the few salutary features of Frankendodd) is necessary (but not sufficient for some markets) to produce reliable price indices.  Arranging this on an international market like oil seems virtually impossible to implement, let alone enforce.

This is the longer explanation behind my rather cryptic quote from this WSJ article from last week.

Going back to LIEBOR, the Barclays $450mm coughed up is the first fine, but it won’t be the last one.   In the energy markets, the CFTC collected about $250 million: fines will be many multiples of that in LIBOR and Euribor and TIBOR and whatever.  And believe it or not, the really big money will likely be in civil litigation, and the battles will be much more intense there as well, IMO.

Sorry about the prolonged interruption.  Work demands-notably testimony in a couple of cases-intervened.  One of the cases, believe it or not, stems from the California electricity crisis of the summer of 2000.  The wheels of justice do grind slowly.  We’ll see how fine.  On Tuesday, I testified at a FERC hearing/trial relating to refunds demanded by electricity buyers in California.

The interruptions may recur going forward.  I appreciate your patience, and the inquiries of those who wondered about my absence.

A few quick comments on things that caught my eye in the past couple of weeks.

• My last post was on the administration’s sole commitment to transparency, i.e., it’s chattiness on sensitive intelligence matters, in an information operation designed to make Obama look like a synthesis of Rambo and Thomas Aquinas.  In the weeks following, this issue has caught fire to some degree, at least in DC (though popular opinion has been somewhat muted).  There have been numerous calls for official investigations. These are not purely partisan. Diane Feinstein and Carl Levin have also expressed dismay at the leaks.  And in the latest episode of the inversion of transparency, Obama has asserted executive privilege in the Fast & Furious matter.  His assertion is either facially baseless and contrary to established precedent-or implicates him in a coverup.
• Hillary botched the Russian helo to Syria story. By suggesting that Russia was sending new equipment to Syria, Hillary gave the Russians the opportunity to make outraged denials. On the subject generally, here’s a question that I think is important, but which hasn’t been asked.  Where is Syria getting the spare parts and support services for its Russian/Soviet weapons?  Especially at the increased operational tempo, Syria would need a steady supply of spares to keep its forces in the field.  And likely also some repair and support services.  Arab armies are notoriously-notoriously-bad at this.  (It’s something that has driven American trainers assigned to Arab armies, such as Egypt’s, absolutely crazy over the years.)  I wish someone would ask, investigate, etc.
• Obama met with Putin in Cabo.  Obama came out of the meeting looking like he would have preferred 32 root canals sans anesthesia.  He got nothing from Putin.  Well nothing substantive, that is.  But I am sure that Putin gave him plenty of disdain.  Obama later said that China and Russia were not on board regarding Syria.  No sh*t.  What was his first clue?
• Putin looks bad in the photos from Cabo BTW.  His face looks puffy and waxy.  I’m guessing steroids.
• It has been reported that Putin will attend the Olympics in London after all.  Not the opening ceremonies, as is traditional, but the judo competition.  You know, to see the next generation of Russian billionaires.
• Putin jetted from Cabo to St. Petersburg, for the Annual Economic Forum.  He was in fine form, and in some ways, a flashback to 2008.  That is not a compliment.  In 2008, Putin famously asserted that Russia was an island of stability in the world economic storm.  That was right before the country suffered the biggest decline of any major economy.  Putin also lashed out at the west generally and the US in particular for causing the world crisis.  He repeated both themes yesterday, in a somewhat schizophrenic performance.  First, he stated that Russia is a strong country capable of withstanding another global economic crisis. This despite the fact that Russia is even more dependent on energy/oil now than in 2008, and that the link between economic crisis and oil prices is as strong today as it was four years ago. In other words, Russia is more dependent on oil than ever but Putin believes it is perfectly positioned to withstand another crisis.  Or something.  And speaking of oil, Brent is trading with an $89 handle, down 4 percent on the day and over 20 percent over the last several weeks, and Urals with an $88 handle (a $1.60 discount to Brent). Recall that Russia’s budget balances at Urals=$117.  This may explain the vituperativeness of Putin’s attack on the US and the west.  The more nervous he gets about economic conditions, the more he directs his salvos westward.  This reflects, IMO, his rage at the fact that Russia is hostage to the west, via the commodities price channel.  It is an inevitable consequence of the marriage of comparative advantage and the natural statism of Putinism.  And it drives him nuts.
• Putin also channeled his inner Barney Frank and said that the west needed more effective regulation of derivatives markets. (Bad mental image, I know.)  The man is an expert on everything.

That’s all for now, folks.  Will post as circumstances permit.