March 28, 2013

March 28, 2013

There Are Three Investment Opportunities That Investors Can Benefit From Today
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New Swap Rules Aim to Control Derivatives Risks

The huge, opaque, and risky over-the-counter (OTC) derivatives market that sparked the financial collapse in 2008 has not gone away – it has grown in the years since.  It’s also been in the forefront of many regulators’ minds.

New rules rolling out in Europe and the U.S. will begin to move parts of the OTC derivatives market onto exchanges.  However, of course there are parties with vested interests resisting the change, regulators and industry analysts alike believe that exchange trading will have substantial benefits — providing market participants and regulators with more information and greater transparency, and reducing the systemic risk posed by the potential catastrophic failures of counter-parties to OTC trades.  Think of Lehman Brothers and AIG.

Since 2008, the OTC Derivatives Market Has Grown, Not Shrunk

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Source: Financial Times

Derivatives (financial instruments whose value depends on, or is “derived” from, some underlying asset) are invaluable tools for businesses operating in a global environment who must hedge risks associated with market movements and volatility in interest rates and foreign exchange rates, for example.  Although certain types of derivatives are as old as risk itself, and have been around for centuries, financial derivatives have become more and more important over the past several decades as globalization has taken hold.  As the global economy has moved into a post-BrettonWoods environment, volatility has begun to pose even more severe risks to the profitability of businesses competing in global markets and using global supply chains.  The growth in derivatives is a natural response to these risks…

What are the problems with derivatives and how devastating they can be.

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Wash Trades Draw Scrutiny of Stock and Commodity Regulators — Fast
(High Frequency) Traders at work?

Officials at the Commodity Futures Trading Commission (CTFC) and at the Financial Industries Regulatory Authority (FINRA) are independently investigating the potential broad use of “wash trades” by high-frequency trading firms in commodities and stocks, according to an article published last week in the Wall Street Journal, and according to public comments by commissioner Bart Chilton of the CTFC.

A wash trade is one in which the same entity acts as buyer and seller in a transaction.  Such trades are illegal in the U.S., because they can be used to game markets by creating phantom liquidity and goading other market participants into behaviors detrimental to themselves, but beneficial to the fraudulent traders.  The risk of these and other similar system-gaming activities has been in the forefront of proposed regulation of high-frequency trading.

CFTC and FINRA Say, “No Washing”

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American Workers’ Retirement: Squeezed Between Economics and Demographics

Long-term financial and demographic trends are catching up with American workers.  The Employment Benefit Research Institute (EBRI) surveyed American workers, and reports that 57% have less than $25,000 in total household savings and investments.  That’s up from 49% in 2008.

We’ve commented in this letter before on the trend of rising retirement insecurity among Americans.

The EBRI cites several possible explanations of their new data:

Retirement savings may be taking a back seat to more immediate financial concerns: Just 2 percent of workers and 4 percent of retirees identify saving or planning for retirement as the most pressing financial issue facing most Americans today.  Both workers and retirees are most likely to identify job uncertainty (30 percent of workers and 27 percent of retirees) and making ends meet (12 percent each).

In other words, the pressure of continued high unemployment is causing workers to delay building their savings.

Cost of living and day-to-day expenses head the list of reasons why workers do not contribute (or contribute more) to their employer’s plan, with 41 percent of eligible workers citing this factor… Worker confidence in the affordability of various aspects of retirement continues to decline.  In particular, increases are seen in the percentage of workers not at all confident about their ability to pay for basic expenses (16 percent, up from 12 percent in 2011), medical expenses (29 percent, up from 24 percent in 2012), and long-term care expenses (39 percent, up from 34 percent in 2012).

We highlight every two weeks the way in which stealth inflation, obscured by changes in CPI calculations, are eroding purchasing power.  Clearly this is also having an effect on the way in which workers are looking forward to retirement…

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Guild Basic Needs IndexTM

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Stay tuned to these letters, and visit periodically to track the cost of basic, essential needs in America.

In this week’s Premium Global Market Commentary available to Gold Subscribers, we discuss:

  • China Pursues the Internationalization
    of Its Currency

    A recent article in China Business News notes that since the financial crisis broke in 2008, China has greatly expanded the roster of nations with whom it has entered into currency swap agreements.  The strategic significance of these arrangements is China’s progressive long term plan to internationalize the Yuan — by making agreements first with close neighbors, then with certain developing countries, and finally with countries in the developed world.  New Zealand and Australia have signed agreements, and discussions are in progress with the Bank of England… 

  • Guild’s Premium Global Market Summary


  • We Make One New Equity Recommendation

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