Banks and Commodity Trading
We’ve written before on the difference between good and bad regulation — good regulation which can reduce systemic risks through judicious oversight, and bad regulation which can smother productivity and growth and create opportunities for cronyism…
The reduction of regulation could be good, or could be bad — depending on what kind of regulations are being removed. As investors, we stay aware of regulatory developments in the sectors that currently interest us the most. This is one set of data points among many that shape our view of emerging trends.
Banks and Non-financial Businesses
For most of the past century, banking regulations kept a barrier between finance and commerce. That changed after the erosion and final repeal of Depression-era legislation in 1999. Since then, there have been even more regulatory changes which have weakened the historical restrictions on banks’ commodity trading activities. Fed regulations currently allow banks and other financial institutions to engage in commodity trading under several different authorizations made over the past decade. Some institutions that reorganized during the financial crisis (so that they could gain access to stabilizing liquidity from the Federal Reserve) were permitted specific “grandfathered” exceptions — including Morgan Stanley and Goldman Sachs.
For almost a year now, regulators — including both the Federal Reserve and the Commodities Futures Trading Commission (CFTC) — have been discussing banks and bank holding companies who trade in physical commodities, and wondering about the risks this may pose to consumers and to the stability of the wider economy.
Regulators Look for Stability Risks
Last year, the discussion was mainly about the potential for price manipulation. But now the questions have widened to include various ways in which banks’ trading in commodities could expose the financial system to unexpected and destabilizing risks.
The focus on stability makes sense given the experience of 2008. Regulators want to make sure that banks aren’t exposed to some “black swan” event that will embroil them in another systemic crisis. The Fed drew particular attention to the BP Deepwater Horizon oil spill as one example of catastrophic risk connected to commodities trading.
Do we think that banks will continue to trade commodities?
What does this mean for profits for big banks?
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Are Reforms In Europe Too Little Too Late?
Europe’s markets are more cheaply valued than the U.S. market, and below we explain why. For the future, the key questions are: Will they correct the problems they have? Can European politicians and administrators act rapidly and decisively?
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Emerging Trend: Positive Economic Data in Japan
Reforms may be gaining traction in Japan. Data from late 2013 show machinery orders, wages, and overtime hours worked are all up in Japan. These data points may show that Prime Minister Shinzo Abe’s bold programs are finally starting to overcome the ingrained fear and unwillingness of Japanese corporations to invest for growth.
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Who Will Be the New Military Flash-Point?
One effect of America’s shale energy renaissance may be a reorganizing of global military strategy by the U.S. government…
U.S. involvement in Iraq and Afghanistan is already winding down. In the long run, U.S. interest in the Middle East has really been driven by its need to maintain stability in the region — because of the critical role the region’s energy producers play in the U.S. and world economies.
Although the region will continue to be important, its significance for the U.S. will, we think, gradually decrease. Doubtless the U.S. will continue to feel the need to support regional allies. But the long-term trend will be shaped by U.S. energy independence, which is already on the horizon. And as important as the nations of the Middle East have been to the U.S., they don’t — apart from energy — have deep economic ties.
Who comes into prominence?
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We hope you have found our weekly global market commentary useful in keeping you informed about the global macro landscape and navigating the complexity of the financial markets.
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In 2014, we expect many events and developments that U.S. investors need to consider. Do you have a seasoned investment advisor able to position your portfolio for any opportunities or to employ a defensive strategy in case of a significant market correction?
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We discuss the four emerging trends that are all significant parts of understanding the investment picture for 2014 and for the remainder of the decade. Upgrade today to see them.
In Last Week’s Global Market Commentary, We Also Discuss:
- Is 2014 the Year For Commodities?
- Rebirth of the IPOs: Will 2014 Follow 2013 As the Year of IPOs?
- The “Internet of Things” for Consumers — Almost Here, or Still Too Soon?
- Wearables: Ready to Move Beyond Fitness?