Streetwise Professor

The indictment in the Russian espionage* case is available online, and having had a chance to read the portion related to HFT, it’s now clear to me what the Russians were up to. Contrary to certain idiots desperate for attention who are breathlessly claiming that this was part of a plot to bring down Wall Street and the American financial system, this was all about Russian paranoia about the vulnerability of their own financial system to the devilishly clever HFT.

Here’s the relevant part of the indictment:

ETFs on Russian stocks, including Market Vectors Russian Index ($RSX) are traded in the US, and HFT firms are major participants in ETF trading. What Badenov-sorry, I mean Buryakov-and his co-conspirators are worried about is that “trading robots”-why not trading drones?-could be used to trade Russian ETFs in a way that destabilized the Russian market. They are also curious about who trades ETFs on Russian stocks. Further, they want to gauge the NYSE’s interest in limiting these robots, presumably to learn whether the robots actually posed a threat to Russia.

In other words, this is Russian paranoia talking. More defensive than offensive. Still rather amusing.

Note that the Vnesheconombank employee, Buryakov, is the “expert” here, and the SVR agent operating under diplomatic cover, Igor Sporyshev, is the go between with the “news organization.”

As I noted yesterday, Russian cyber and hacking capabilities are formidable, and they don’t need a couple of disgruntled guys to garner secrets about the vulnerability of Wall Street. Instead, Bulyakov was just channeling fears about the vulnerability of the Russian financial markets.

That was in May, 2013. Just think of how paranoid they are today.

* Tellingly, these guys weren’t charged with committing espionage. Bulyakov was charged with failing to register as a foreign agent. Enough to put him in jail, and an excuse to fire this shot at Putin, but a charge that is likely easier to prove and which doesn’t require the government reveal too much about sources and methods.

Attorney General Holder today announced espionage charges against three Russians, one of whom was arrested today in New York. Two were Russian diplomatic officials, and the third-the one arrested-was an employ of a Russian bank, reported to be Vneshekonombank. The FBI had the men under surveillance since 2012.

So just what were these agents after? Information about potential future sanctions targets for one thing. But they were also after information on high frequency trading of exchange traded funds, or in acronymspeak, HFT of ETFs:

According to the complaint, Sporyshev told Buryakov to tell an unnamed Russian state-owned news organization to ask about how the New York Stock Exchange used exchange-traded funds and potential limits on the use of high-frequency automated trading systems.

Why, pray tell, would this be of such great interest to the Russians? Economic sabotage? Or a money making opportunity?

And why the need for such cloak-and-dagger? There are Russians working in pretty much every HFT shop on and off Wall Street: remember Sergey Aleynikov in Flash Boys? Can’t they find one susceptible to blackmail, bribery, or appeals to patriotism?

Further, what really could be learned by having an “unnamed Russian state-owned news organization” (can you say “RT”? I knew you could) ask someone (presumably the NYSE itself) about “limits on the use of” HFT that couldn’t be obtained by reading public disclosures?

The best of all: it’s not as if the Russians couldn’t find out-and haven’t found out-pretty much anything about NYSE (or NASDAQ or any other exchange) operations without leaving home. They have been fingered for hacking many financial firms, including NASDAQ. (CME has also been hacked, although Russians have not been specifically implicated.) That would be a much more informative, and much less risky, way of divining HFT secrets.

And it’s not as if Russians in Russia aren’t aware of the details of HFT. The Moscow Exchange is actively trying to attract HFT firms (h/t @libertylynx), and has introduced capabilities such as co-location in order to do so. (But perhaps the Moscow Exchange rep is speaking in code. No doubt Fort Meade and Langley have their best men working on this.) Just Google “HFT Moscow Exchange” and you’ll find numerous links describing HFT activities there.

And if they want to learn about ETFs, why not just buy some books? Or do a little surfing? And there are Russian stock ETFs. (Note my clever insertion of the Market Vectors Russia ETF tag.)

You know that HFT and ETFs are hardly Russian espionage priorities. US intelligence and intelligence capabilities, defense technology, and even other types of economic espionage are of far greater interest. The triviality of the targets of this cell, compared to other things of much greater sensitivity, just reveals how pervasive Russian intelligence operations in the US likely are. So why go after this rather hapless group? And why now?

Viewed in context, it’s pretty clear. We rolled up what is likely the least important and sensitive operation the FBI is monitoring at this time and had the Attorney General announce it as a bit of Kabuki theater to communicate our displeasure with the Russians. We have had this group under surveillance since 2012, and could have netted them anytime. That time was now because of the escalating tensions with Russia. It is a signal that we can do things that would hurt the Russians much worse.

Will Putin listen? Doubtful. So what will we do next? That will be interesting to see.

Once upon a time, high frequency trading-HFT-was viewed to be a juggernaut, a money-making machine that would have Wall Street and LaSalle Street in its thrall. These dire predictions were based on the remarkable growth in HFT in 2009 and 2010 in particular, but the narrative outlived the heady growth.

In fact, HFT has followed the trajectory of any technological innovation in a highly competitive environment. At its inception, it was a dramatically innovative way of performing longstanding functions undertaken by intermediaries in financial markets: market making and arbitrage. It did so much more efficiently than incumbents did, and so rapidly it displaced the old-style intermediaries. During this transitional period, the first-movers earned supernormal profits because of cost and speed advantages over the old school intermediaries. HFT market share expanded dramatically, and the profits attracted expansion in the capital and capacity of the first-movers, and the entry of new firms. And as day follows night, this entry of new HFT capacity and the intensification of competition dissipated these profits. This is basic economics in action.

According to the Tabb Group, HFT profits declined from $7 billion in 2009 to only $1.3 billion today. Moreover, HFT market share in both has declined from its peak of 61 percent in equities in 2009 (to 48.4 percent today) and 64 percent in futures in 2011 (to 60 percent today). The profit decline and topping out of market share are both symptomatic of sector settling down into a steady state of normal competitive profits and growth commensurate with the increase in the size of the overall market in the aftermath of a technological shock. Fittingly, this convergence in the HFT sector has been notable for its rapidity, with the transition from birth to adulthood occurring within a mere handful of years.

A little perspective is in order too. Equity market volume in the US is on the order of $100 billion per day. HFT profits now represent on the order of 1/250th of one percent of equity turnover. Since HFT profits include profits from derivatives, their share of turnover of everything they trade overall is smaller still, meaning that although they trade a lot, their margins are razor thin. This is another sign of a highly competitive market.

We are now witnessing further evidence of the maturation of HFT. There is a pronounced trend to consolidation, with HFT pioneer Allston Trading exiting the market, and DRW purchasing Chopper Trading. Such consolidation is a normal phase in the evolution of a sector that has experienced a technological shock. Expect to see more departures and acquisitions as the industry (again predictably) turns its focus to cost containment as competition means that the days of easy money are fading in the rearview mirror.

It’s interesting in this context to think about Schumpeter’s argument in Capitalism, Socialism, and Democracy.  One motivation for the book was to examine whether there was, as Marx and earlier classical economists predicted, a tendency for profit to diminish to zero (where costs of capital are included in determining economic profit).  That may be true in a totally static setting, but as Schumpeter noted the development of new, disruptive technologies overturns these results.  The process of creative destruction can result in the introduction of a sequence of new technologies or products that displace the old, earn large profits for a while, but are then either displaced by new disruptive technologies, or see profits vanish due to classical/neoclassical competitive forces.

Whether it is by the entry of a new destructively creative technology, or the inexorable forces of entry and expansion in a technologically static setting, one expects profits earned by firms in one wave of creative destruction to decline.  That’s what we’re seeing in HFT.  It was definitely a disruptive technology that reaped substantial profits at the time of its introduction, but those profits are eroding.

That shouldn’t be a surprise.  But it no doubt is to many of those who have made apocalyptic predictions about the machines taking over the earth.  Or the markets, anyways.

Or, as Herb Stein famously said as a caution against extrapolating from current trends, “If something cannot go on forever, it will stop.” Those making dire predictions about HFT were largely extrapolating from the events of 2008-2010, and ignored the natural economic forces that constrain growth and dissipate profits. HFT is now a normal, competitive business earning normal, competitive profits.  And hopefully this reality will eventually sink in, and the hysteria surrounding HFT will fade away just as its profits did.

Russia’s economic position remains parlous. The ruble has continued to weaken, and although the price of oil rallied somewhat late last week, it still remains far below levels necessary to permit growth. The World Bank is predicting a 2.9 percent decline in GDP in 2015. 9.2 percent is more likely.

So what is Putin/Russia going to do? The options are limited. Given the weak economic conditions, and the lack of access of the banking and corporate sectors to international funding, there appears to be only one option. As a lawyer friend sagely put it, the government will essentially have to move massive amounts of liabilities from big banks and large state enterprises onto the government balance sheet. Formally, it will be done through the banks. The banks will extend credit to the corporate sector (including most notably big state firms) and the government will capitalize or guarantee/backstop the banks.

This is certainly the view of Sberbank’s Chairman, German Gref (one of the last liberals-as Russians go-in the power structure):

The head of Russia’s largest bank, German Gref, offered a bleak picture of the fate awaiting the country’s banking sector in 2015 during the set piece Gaidar economic forum in Moscow this week.

“It’s obvious that the banking crisis will be massive,” the Sberbank chief told reporters.

“The state will capitalize the banks and increase its stake in them, and the banks will buy industrial enterprises and become financial-industrial groups,” Gref said Wednesday. “All our economy will be state-run.”

The result will be a simulacrum of the Soviet economy.

Two things are worth noting. The first is that this gives the lie to those who are sanguine about the prospects of a sovereign default in Russia. These optimists downplay the impending downgrades by the rating agencies, and the  fact that Russian CDS are trading well into the junk range by pointing out that Russia’s government debt is relatively small compared to GDP. But one always needs to pay attention to the contingent liabilities, and in the current circumstances these contingent liabilities include a large fraction of the liabilities of the banking and corporate sectors. That’s why Russian 5 year CDS are trading at implied default probabilities of around 10 percent despite modest levels of government indebtedness.

The second notable fact is that once things move onto the government balance sheet, it’s hard to move them off. Companies get quite comfortable with government support and the avoidance of capital market discipline: soft budget constraints-or no budget constraints at all-have their attractions. It’s easier for managers in the elite to influence the members of the elite in government than it is to persuade investors, especially foreign ones. The managers can muster 1000 excuses: think of all the justifications Sechin pushed to stave off privatization of a large stake in Rosneft. Even more excuses will be forthcoming in the midst or even the aftermath of a crisis. What’s more, appeals to patriotism-chauvinism and paranoia, really-will be quite effective. And perhaps most importantly, Putin and his clique will relish exercising even greater control over big firms than they do now. For reasons of power and personal profit.

This means that the prospects for any real structural change in Russia will be even more doubtful than they ever were, and they were never very good, especially in the mature stages of Putinism. Thus, the consequences of the immediate crisis will be severe, but the consequences of the likely response to the crisis will be enduring and quite negative. An even more statist economy even more thoroughly dominated by Putin and his cronies is doomed to stagnation.

We have already seen that to some degree in the aftermath of the last crisis: Russia’s post-2009 growth has been a fraction of its pre-crisis growth. I expect that post-2015, long run growth will ratchet down yet again, as the dead hand of the state and the dying hand of Putin weigh heavily upon the economy.

The geopolitical consequences of this are hard to discern, because there are conflicting forces at work. An economically moribund Russia will have less capacity for adventurism. But a resentful Russia that will blame the crisis and its dreary aftermath on its enemies abroad, and a Putin who will be looking to stoke these resentments for domestic political gain, will be more likely to provoke conflict.

Some years ago Andrei Shleifer said that Russia was becoming a normal,  middle income country. I always thought that was doubtful, especially once Putinism really took hold. I think it is utterly fantastical now. A combination of economic and political factors accentuated by a crisis brought on by sanctions and especially low oil prices will defer indefinitely Russia’s convergence to western-style normalcy.

As is its wont when desperate, Russia is throwing around threats. And Gazprom and its CEO Alexei Miller are the usual heavies in this role, like mouth-breathers that mafiosi send around to talk to you about how you have such a nice family and it would be a shame if something happened to it.

Yesterday, Miller told Europe it better support Gazprom’s initiative to circumvent Ukraine by shipping gas through Turkey by building a connector between Turkey and Greece, or else:

“Our European partners have been informed of this and now their task is to create the necessary gas transport infrastructure from the Greek and Turkish border,” said Miller, according to a Gazprom statement. [Can the Russians please give this “partners” thing a rest? With partners like them, who needs Ebola?]

“They have a couple of years at most to do this. It’s a very, very tight deadline. In order to meet the deadline, the work on building new trunk gas pipelines in European Union countries must start immediately today,” Miller warned.

Or else what, Alexei?:

“Otherwise, these volumes of gas could end up in other markets.”

Hahahahahaha.

Like where? And don’t tell me China. Heard that one. Over and over and over again.

Look, if you make threats, you need to make them credible. Miller is basically saying that if gas can’t move to Europe via Turkey, Gazprom won’t ship it via Ukraine. If it comes to that, and if Europe is the most valuable destination for Russian gas, Gazprom will sell it there, and ship it via Ukrainian pipes. It can’t afford not to.

This is  a bluff that even the Euroweenies will have no problem calling. This is particularly true if market conditions are like at present, where LNG prices have cratered in Asia, and gas imports are now viable. When the big Australian and US projects come on line later this year, there is a real possibility of an LNG glut which would undercut Russian leverage, not just in Europe, but in China too. (And you know that the Chinese will squeeze Putin’s kiwis like a hungry python.)

What’s more, the whole Turkish route looks like a stitch up job done at the last moment when Bulgaria toed the European line and rejected South Stream. There are so many problems.

First, even ignoring the Turkey-Greece link (and yeah, they always play so well together), it is by no means clear that Turkey has the domestic infrastructure to get the gas from the Black Sea shore to the Aegean. From an Oxford Institute for Energy Studies report (h/t Number One Daughter):

The BOTS [the Turkish national gas company] transport system’s throughput capacity is not sufficiently developed to accept and ship all the contracted gas volume from the eastern suppliers due to the limited installed capacity of the existing compressor stations. BOTAS is able to take some 90% of the gas from the Trans-Balkan Gas Pipeline (the Western Line) and the Blue Stream pipeline from Russia, but has struggled to cope with volumes contracted from Azerbaijan and Iran. Therefore, the company has had to pay billions of dollars for ‘untaken’ gas.

That’s given current flows: it will obviously take a substantial investment in Turkey to handle large additional flows via the new pipeline.

Second, just who is going to pay for this? It ain’t like Gazprom is rollin’ in the dough. To the contrary, like all Russian corporations, Gazprom is in desperate straits. It’s not sanctioned now, but that could change with one wrong move in Ukraine. Moreover, its hard currency revenue picture is dire. Gazprom shipments to Europe were down more than 9 percent last year, no gas is yet flowing to China, and the best part is still to come: Gazprom prices-at its own insistence!-are tied to lagged oil prices. So it is looking at a potential revenue decline from European sales in the 60 percent ballpark.

Schadenfreude doesn’t even come close to describing my feelings at contemplating Gazprom getting what it asked for-nay, insisted on: an oil price link. It made this link a matter of principle, and marshaled one inane argument after another to justify it.

How’s that working out for y’all? Be careful what you ask for!

Third, there’s the little matter of price. Isn’t there always? Immediately after the ballyhooed announcement of the Turkish project, it became known that the Russians and Turks were far apart on price. Look at the history of Vapor Pipe (analogous to vaporware) deals announced with China going back to 2006: they didn’t materialize because of an inability to come to agreement on price. (Even the deal signed when Putin was under the gun has not fully resolved price issues.) This “deal” has every prospect of having the same issues, especially since the Turks realize Russia’s weak bargaining hand here.

Hell, the Russians and Turks can’t even agree on the gas price for this year. They are going to magically lock in a long term price/pricing formula? As if.

So this Turkey route looks like . . . a turkey. Miller is blowing gas. Yet again. I’d be astounded if 1 percent of what that guy says in public turns out to be true.

One last thing. There was a report in the Daily Mail yesterday claiming that shipments of Russian gas via Ukraine to 6 southern European countries had been cut off. This was duly repeated breathlessly by the usual Kremlin echo chambers like Zero Hedge and Infowars. But I have yet to see confirmation in any other source, and I pinged an industry contact who can’t find confirmation either.

It sounds like this is another way of delivering a threat, directed at the most vulnerable parts of the EU, including a country (Greece) that is in political turmoil and which could cause no end of headaches to the Euros-and the Euro. This happens at a time when the wets in Europe are making noises about easing off on sanctions. So I’m getting the impression that this is a story planted in the Daily Mail with the same purpose that Don Corleone places a horse’s head in someone’s bed.

Update. Do I feel like an idiot. Apparently ZH linked to a Daily Mail story from 6 years ago and made it sound like it was from yesterday. When you click through the link, the current date appears at the top of the story. That’s beyond bizarre even for ZH. Shame on me. [The story is that someone emailed asking if I’d seen that ZH story. I hadn’t, but clicked through the link. Like I say, shame on me.]

I was glancing over some posts from the 2008-2009 crisis period, and was struck at the similarities between what happened in Russia then and what is happening now. The imploding ruble. Capital flight. Discussions of whether capital controls were necessary to stem the rout. The heavily stressed banking system. The government’s desperate attempts to support the the banking system and big firms. The attempts of Rosneft and Gazprom to use the crisis as an excuse to feed at the government trough. Putin’s crazed and frequently paranoid ramblings, and a broader national paranoia.

Russia scraped by last time, in part because oil prices rebounded starting in mid-2009, and because the world economy (notably China) also fought its way out of the crisis. The stimulus-driven Chinese rebound was especially important, because it supported commodity prices, which was vital for a commodity producer like Russia.

Will it scrape by this time? Well, there is a lot of ruin in a country, as Adam Smith informed us, so it’s always risky to predict a collapse. And Russia has rebounded from even worse situations (think 1998).

That said, things aren’t nearly so favorable for Russia this time around. First, there is the self-inflicted wound: the invasion of Ukraine and the sanctions that followed. This is harming the banking and extractive sectors in particular. The fundamentals are bad enough for these sectors: sanctions exacerbate the problems. Second, Russia can’t look to a return to rapid Chinese demand growth to save it this time. China’s slowdown (which is have broad based effects, including on Tesla which has seen Chinese sales on which it was counting decline substantially) is at the root of the current commodity downturn, and since it is likely that this growth slowdown will persist Russia can’t look for succor from that quarter. Third, as bad as Russia’s institutional environment and governance were in 2009, they are even worse now. The ossification of Putinism (and Putin himself!) and his deep fear of overthrow are leading to regress, rather than progress in the development of the rule of law, secure property rights, and civil society, and the reduction of corruption, cronyism and rent seeking. The horrible institutions and governance will be a drag on growth. Fourth, the fiscal situation is weaker. Reserves are relatively smaller now, and Putin’s electoral promises to raise social payments and his commitment to increase dramatically armaments expenditures represent a significant departure from the fiscal probity of the Kudrin years.

Russia emerged tenuously from the last crisis, and never regained the pre-crisis rate of growth. Its post-2009 growth performance was lackluster, given the fundamental environment and Russia’s stage of development. In my view, the conditions for a recovery are even less favorable this time. Some-and arguably the lion’s share-of the reasons for that are self-inflicted, or more accurately, inflicted by one Vladimir Vladimirovich Putin, whom the Russian populace has chosen to inflict on itself. Consequently, though Russia will hit bottom and rebound, I think it is likely that this rebound will be even weaker than the last one. The national equivalent of a dead cat bounce.

Not that the current situation is not without its moments of levity. Today, for instance, oligarch Mikhail Prokhorov announced he is putting the Brooklyn Nets up for sale. Prokhorov’s wealth has been running in reverse for the past several years, and in the current circumstances, the Nets are arguably his most salable asset. His Russian holdings, not so much.

In a way this is sad, because although Prokhorov is a jerk like most NBA owners, he is also somewhat amusing. In contrast, other owners are just jerks.

But back to the main show. When looking at Russia today, Yogi Berra comes to mind. It’s deja vu all over again. Only worse.

When it comes to the Saudi predatory pricing meme, I feel like Buffy the Vampire Slayer. No matter how many times I drive a stake through its heart, in the next episode it reappears in a different guise.

Here’s yet another example. 

I stipulate that the current low price environment is imposing substantial financial losses on shale producers. I further stipulate that they are currently slashing capex, which will lead to production growth declines at the least, and perhaps production declines  (depending on the race between reduced number of new wells and the increase in well productivity), while prices remain low. I stipulate further still that these effects would be reduced, if the Saudis had cut output to support prices.

Yet it does not follow that the Saudis are not cutting output because they are attempting to drive out shale producers. Because they can’t do so for long. The capital that is leaving the industry now can come back in when demand rebounds. This will limit the price upside, thereby depriving the Saudis of any payoff to recoup the losses they are incurring now.

Instead, the Saudis, just like everybody else in the industry, are coping with the consequences of a decline in demand the best way they can. Given Saudi market share, the elasticity of demand for oil, and crucially, the elasticity of supply of shale oil (which is relatively high, due to the relative flexibility of the technology and the availability of a large amount of prospects), the demand for Saudi oil is relatively elastic. This makes output cuts money losing: the cuts don’t increase price enough to offset the lower number of barrels sold. So keep producing, and pray for a demand turnaround.

Tune in soon for the next installment of Buffy the Saudi Conspiracy Theory Slayer. Alas, I think it will be a long running series, and there’s not a lot of variation in the plot lines, because the economics don’t really change.

A few weeks ago I ridiculed one of the arguments raised against Keystone XL: Namely, that oil transported on the pipeline will be exported. I pointed out that this is idiocy. The very purpose of the pipeline is to transport it to the very complex refineries at the Gulf of Mexico. These refineries are clearly able to outbid anyone for oil sands crude transported on Keystone XL, and they will. Moreover, export through the Gulf to Asia, is far more costly than export to Asia via Canada’s west coast.

The main targets of my ridicule in that post were various Internet and Twitter economic geniuses. Hardly an august group. But their voices have been heard! For now the Democrats in Congress are making this argument the centerpiece of their opposition to pro-Keystone legislation:

As Republicans revive the Keystone debate in Congress, opponents are trying to shift the focus to where the Canadian pipeline’s oil will end up once it reaches Texas: China or U.S. gas tanks?

Massachusetts Democrat Edward Markey stood on the floor of the Senate this week next to a giant sign reading “Keystone Export Pipeline” as he argued against a bill to approve the project.

Ed Markey. I should have known.

You can just see TransCanada CEO Russ Girling’s frustration at having to deal with such economic inanity:

Russ Girling, head of pipeline builder TransCanada Corp. (TRP) issued a lengthy statement saying it doesn’t make any sense to export the oil once it reaches the U.S. coast of the Gulf of Mexico, home to the world’s biggest concentration of refineries.

But TransCanada has concluded that this argument, inane as it is, is politically effective:

Girling said the company’s internal polling shows the export issue raises the most concern for Americans. In an interview last month with Bloomberg News, Girling acknowledged that critics found a “nerve that resonates” in that argument.

So much for the influence of economic reasoning on political debate.

I mentioned the Twidiots earlier. There’s something interesting here, and clearly illustrates a pattern. Specifically, that there are no coincidences, comrade. Especially in social media. Or to put it differently, there are too many coincidences for them to be coincidences.

The Twitter storm of the Keystone export meme coincided closely in time with Obama making the same point, and led into the Democratic leadership making this argument the center of their anti-Keystone campaign. In combination with other such “coincidences” strongly suggests manipulation of social media to support political strategies, and in particular administration political strategies. The Twitter storm that broke out in support of the (equally inane) administration free community college initiative over the last few days is another example.

Meaning that pushing back on Twitter stupidity may not be a waste of time. For such stupidity is often merely the handmaiden of some asinine political agenda.

Commodities are down broadly: Oil gets the headlines, but most major commodities-especially industrial commodities-are down, with iron ore leading the pack. The main driver is Chinese demand: perhaps it’s more accurate to say that the main brake is slackening Chinese demand. Forecasting the course of future Chinese demand is challenging, because there is a huge political component to it.

China has long followed a commodity-intensive, investment-focused (including construction and infrastructure), credit-fueled economic model. It has long been recognized that this model is unsustainable because it is fraught with imbalances. There have been signs that China has recognized this, and in particular the new Xi government is attempting to to navigate this transition, signaling a desire to transform to a consumption-based model with growth rates in the 6-7 percent range rather than 10 percent (though analysts like Michael Pettis say that growth rates in the 3-4 percent range are more realistic.)

One sign of that is the central government’s recent attempts to rein in local governments that borrowed heavily through “local government funding vehicles” (“LGFVs”) to support local infrastructure, housing construction, and industry. Clamping down on LGFVs would be one way of steering China’s economy away from the investment-intensive model:

China’s local government bond issuers face judgment day as authorities in the world’s second-largest economy decide which debt they will or won’t support.

Borrowing costs soared by a record amount last month before today’s deadline for classifying liabilities, on speculation some local government financing vehicles will lose government support after the finance ministry starts reviewing regional authorities’ debt reports. Yield premiums on one-year AA notes, the most common ranking for such issuers, jumped a record 98 basis points in December.

Premier Li Keqiang has stepped up curbs on local borrowings just as LGFVs prepare to repay 558.7 billion yuan ($89.8 billion) of bonds this year amid economic growth that’s set for the slowest pace in more than two decades. The yield on the 2018 notes of Xinjiang Shihezi Development Zone Economic Construction Co., a financing arm in a northwestern city with 620,000 people, climbed a record 63 basis points in December.

But there are mixed signals. Today China announced a $1 trillion stimulus:

China is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year as policy makers seek to shore up growth that’s in danger of slipping below 7 percent.

Premier Li Keqiang’s government approved the projects as part of a broader 400-venture, 10 trillion yuan plan to run from late 2014 through 2016, said people familiar with the matter who asked not to be identified as the decision wasn’t public.

. . . .

The projects will be funded by the central and local governments, state-owned firms, loans and the private sector, said the people. The investment will be in seven industries including oil and gas pipelines, health, clean energy, transportation and mining, according to the people. They said the NDRC is also studying projects in other industries in case the government needs to provide more support for growth.

The NDRC’s spokesman, Li Pumin, said last month China would encourage investment in those areas.

So which is it? A transition to a less-investment intensive model, implemented in large part by reducing the use of credit by local governments? Or continuing the old model, to the tune of $1 trillion over the next couple of years?

Commodity traders want to know. But given the opacity of the Chinese decision making process, it’s impossible to know. The signals are very, very mixed. No doubt there is a raging debate going on within the leadership now, and between the center and the periphery, and decisions are zigging and zagging along with that debate.

I see three alternatives, two of which are commodity bearish. First, there is a transition to a more consumption-based model: this would lead to a decline in commodity demand. Second, there is a crash or hard landing as the credit boom implodes due to the underperformance of past investments: definitely bearish for commodities. Third, the Chinese keep pumping the credit, thereby keeping commodity demand alive. The third alternative only delays the inevitable choice between Options One and Two.

In brief, for the foreseeable future, the most important factor in commodity markets will be what goes on in Chinese policymaking circles. And insofar as that goes, your guess is as good as mine.

Russia is leasing 12 SU-24 swing wing Fencer fighter-bomber aircraft to Argentina. Argentina is paying with . . . food, specifically beef and wheat. The 1970s-era SU-24 was, um, very similar to the US’s 1960s-era F-111, which the US retired in 1996. (Seriously: look at pictures of the Soviet SU-24 and the American F-111 and it’s hard to tell the difference.)

The UK is unsettled by the transaction, because the jets could threaten the Falklands. And of course Argentina is in such great shape that it can easily afford a few wars of choice. After all, the last one went so, so well.

But look at it this way. If Argentina prevails this time over an emaciated British military, it will conquer islands with 500,000 sheep. Just think of how many weapons the Argentines will be able to lease from Russia in exchange for all that lamb, hogged, mutton and wool. Chile, look out!

I have another suggested trade between the two countries. They should just exchange their currencies. That way, each can obtain more varied wallpaper.

So no, Russia is not isolated. It is a fully paid member of the Drowning Men’s Club, whose desperate members grab onto one another for dear life as they go under once, twice, and yet again. Look at its economic and political allies, such as they are. Argentina, Venezuela, Cuba, North Korea, Syria. Decrepit losers, every one. Hell, even Belarus is looking for ways to escape the embrace of a drowning Russia.

This deal is so revealing. Russia, once the world’s breadbasket, can’t feed itself. But what does it have to trade? Decrepit military equipment from another era, and a derivative design largely lifted from the evil Americans at that. When “Will Bomb For Food” is only a slightly exaggerated characterization of a country’s comparative advantage, it says everything you need to know about Russia’s economy 23 years after the end of the Soviet Union and 15 years after the advent of Putinism.