Shadow Banking Reforms and Financial Stability
Europeans Mull Reforms in Collateral Services — Derivatives Revisited
According to European Commission documents obtained by Bloomberg, European authorities are mulling restrictions in the way dealer banks are allowed to handle the collateral they receive from their clients. In the U.S., these dealer banks include the familiar list of names you know well: Bank of America-Merrill Lynch, Citibank, Goldman Sachs, JP Morgan Chase, and Morgan Stanley; European dealer banks include Barclays, Credit Suisse, Deutsche Bank, HSBC, Société Générale, Nomura, and UBS.
How Does This Affect You and Your Portfolio?
This recent development serves as a good opportunity to explain again why Guild Investment Management, Inc. suggests clients hold their securities accounts in a private bank that will not borrow your securities or lend them to others (i.e., they act purely as a custodian). This is especially important if your investment assets on deposit exceed $500,000 in value. We recommend that clients not hold assets in excess of SIPC limits in the brokerage division of a bank without being very careful about their account opening agreements and the manner in which the assets are held…
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How Are Your Investment Assets Used by Others?
The instability created by shadow-bank collateral services, and the collapse of liquidity in this system, was one of the key contributors to the financial crisis of 2007–2009 and of the Great Recession that followed. Depending on your account agreement, as stated above, brokers may be permitted to use stocks that you leave in your brokerage account to be hypothecated and borrowed by the broker or brokerage division of your bank. Your account agreement may also allow banks or brokers to rehypothecate your stocks and re-lend money or borrow using your stocks as collateral. This is another method of derivatives creation by brokerage houses…
Shadow Banking: Not Your Grandfather’s Money Creation… Rather Money Creation via Derivatives
The term “shadow banking” was first used by then PIMCO director Paul McCulley at the Fed’s annual Jackson Hole symposium in 2007. Since then, it’s been taken up by analysts and defined in various ways. The Financial Stability Board (FSB), a G-20 group of financial analysts and officials, has defined shadow banking as “credit intermediation involving entities and activities outside the regular banking system.” It includes entities such as hedge funds and money market funds, and performs functions analogous to those performed by the traditional banking system — such as leverage and credit, maturity, and risk transformation…
Rehypothecation: A Word You Should Know
“As collateral is scarce, a key shadow banking function is to re-use collateral to support a large volume of transactions” (IMF economist Stijn Claessens)
If that sentence didn’t give you pause, you should read it again…
Desperately Seeking Collateral
Ironically, with increasing perceptions of counterparty risks, the demand for collateral has increased, and will increase further; and the need for collateral will be met with rehypothecation — because there isn’t enough capital of sufficient quality to go around.
With over 40 years of investment experience, Guild Investment Management’s goal has been to help their investment management clients reach their investment objectives while protecting their clients’ assets. To request a consultation and to learn more about Guild’s investment management services, please email firstname.lastname@example.org or please give us a call at (310) 826-8600.
Wall Street Writes Its Own Regs — What Else is New?
The New York Times reported last week that much of the financial legislation that finds its way through the halls of Congress is written by Wall Street lobbyists—not shaped, not influenced, but often written word for word.
Lobbyists are increasingly making allies on both sides of the aisle. So much of Dodd-Frank was left for later elaboration and completion that lobbyists have been very keen to make sure that this process plays out to their advantage. The Times’ analysis of campaign finance records shows that lawmakers who supported the bills that had Wall Street’s imprimatur received, on average, twice the contributions from financial institutions as those who opposed them…
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U.S. Chemical Industry: Growth and Jobs from Shale Gas Boom
A new report from the American Chemical Council quantifies some of the potential economic benefits to the chemical industry from America’s powerful advantage in natural gas pricing.
The exploitation of shale gas reserves has given the U.S. a significant price advantage over the rest of the developed world. Although natural gas prices are up in the U.S. in 2013, they’re still substantially lower than the prices paid in Europe and Asia.
Although this is a boon for the energy component of manufacturing costs in general, it is also a boon for the chemical industry — with natural gas as the feedstock for countless chemical products, plastics, and other synthetics. Driven by shale production, American chemical production has already outstripped Western Europe…
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Government Inflation Data May Show Prices Are Lower; the Prices of Basic Essential Needs are Not
In countries around the globe, the April 2013 official inflation data tended to show falling inflation rates. In the U.S., the official data showed consumer prices as measured by the Consumer Price Index (CPI) actually declined 0.1 percent during the month. However, when we measure the prices of certain food, clothing, shelter, and energy components in our Guild Basic Needs IndexTM, we see that the prices of items that people have to consume every day actually rose about 0.8 percent. Over the last 12 months our GBNI is up about 9.4 percent while the CPI is up a mere 1.1 percent.
We have often discussed how the federal government — which makes hundreds of billions in payments that are based on its own calculations of inflation — would like those calculations to show a lower number. That being said, there are different agencies within the government that calculate inflation. The popular CPI is calculated by the Bureau of Labor Statistics (BLS). The government’s Bureau of Economic Analysis (BEA) also calculates inflation rates. In 1996, the BEA adopted a chain weighted price index. Chain weighting refers to the process of continuously updating the index to reflect spending patterns and substitution. Often this substitution lowers the weight of higher priced items and replaces them with lower priced replacements. In 2002, the BLS also adopted chain weighting in it CPI, but the methodology is different.
In general, analysts agree that chain weighting lowers the cost of living calculation; some say it reduces the inflation rate by about 0.25 percent per year. The various measures have usually been tracking in a similar pattern, but recently, the government’s various inflation calculations are starting to diverge. The BEA’s chain weighted Personal Consumer Expenditure (PCE) — which is closely tracked by Ben Bernanke and the Federal Reserve — has dropped considerably in recent months while the CPI data has been more stable. Nonetheless, both measures are well below the Fed’s 2 percent inflation target.
Since the Federal Reserve, which is actually trying to create rising inflation, is watching the lower of the two indices, it looks like the talk of tapering the bank’s asset purchases or an end to QE are premature. We expect more QE in the future. We also expect rising prices in the cost of basic essential needs in the future… actually, we don’t have to wait for that. It is here now.
Guild Basic Needs IndexTM
Track your basic needs at www.gbni.info
Our GBNI showed a continued trend towards higher prices for basic, essential needs in April.
In this week’s Premium Global Market Commentary available to Gold Subscribers, we feature:
- The Final Frontier in Offshore Drilling: Subsea Rigs
Faced with increasingly challenging offshore drilling environments — whether in the Arctic, the deep water of the Gulf of Mexico, or in Brazil’s pre-salt formations that lie under 2 kilometers of water and 5 more kilometers of sediment and salt deposits — explorers are looking at the final frontier: production not from a surface platform, but from remotely-operated facilities bolted directly onto the ocean floor…
- Newly Implemented Executive Summary
- Guild’s Premium Global Market SummaryIs it time to take the money off the table? Find out what we think about the markets today and the industries we think are attractive.
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