When something doesn't make sense, it isn't sensible.
President Obama proudly announced he would 'fight' the banking institutions who were using our money to buy up investments in commodities making record profits at the same time.
The natural reaction to this was that banks' share prices took a tumble. Interestingly Mr Obama announced this on the 21st Jan '10. What is perhaps worrying is how commodity prices have reacted.
Commodities are the very things we use every day; Oil, gas, soya beans, pigs, wheat, oats and so on. It is normal for commodities to perform well as we move out of recession, but most of these commodities have performed well, long before we have come out of recession. Hmmm puzzling!
In January '09 all we could hear was Armageddon. Yet in January '09 crude oil jumped from $49 to a massive $83 on the 7th of January 2010? (1) No explanation given.
Remember we have been in a global recession. Peculiarly, just prior to Mr Obama announcing his intentions that he would curb the activities of these banks, crude oil fell to $77.56 (-6.5% - just as it was announced we are coming out of recession when clearly global demand for oil would become much greater - very weird indeed). Amazingly, its low of $72.84 was only found on 1st Feb '10. Most commodities followed a similar pattern - almost as if they knew it would happen.
There were quite a few falls and rises over last year (5 sharp rises and 6 sharp falls ) with oil regularly hopping around by 15-18% in both rises and falls. That simply isn't logical. Clearly at the heart of all this confusion is proprietary trading - trading by these banks and other institutions in assets they should be no-where near. Indeed these banks are solely responsible for driving our costs of living through the roof.
However the threat is greater than we think. Investors, keen on making money from this bubble are piling their cash into a range of assets that could be exposed to bizarre risks.
And here is the next threat - ETF (exchange traded fund). This is generally sold as a cheap and quick access to a basket of shares or commodities. It is a successor of a tracker or an evolutionary 'development'.
There is great potential for a substantial loss for investors exposed to commodities. These are the customers exposed to certain Latin American funds, Emerging market funds, BRIC funds (Brazil, Russia, India , China), ETF's and ECT's (exchange traded commodities). But every single investor in the UK, whether they have a personal pension, endowment, ISA or investment bond is likely to be exposed to this.
Many ETF's are opaque. For tax, regulatory and cost reasons many are resident in one country, the management residing in another and the commodities or securities they are investing in are in the third. One fund was found that had a manager, trustee, custodian and listing in the Indian sub continent, the Gulf, Africa and Europe where the 'verifiers are junior people from small firms with a limited track record'. (2) Global ETF assets soared past £625bn at the end of last year. Some of the above ETF's are highly complicated and the risk is not easily understandable to an investment adviser let alone a consumer.
Few will have been stress tested for what may happen. For example, because of poor, if not nonexistent regulation, some funds have begun to use highly complicated derivatives to get investors excited.
Every fund should also have sufficient collateral to repay customers. Some are using stocks and bonds which fluctuate daily as their 'collateral'. The investment firms response to that is that they have it clearly documented in their material how their fund is structured.
This will not mean a jot to most due to the stress testing referred to above; i.e. commodities and their associated stocks collapse, so investors try and encash their investments, but unfortunately the collateral was also exposed to this downturn - a pack of very wet cards.
If Mr Obama has his way, a number of these smaller funds will fail, there will be a mass dumping of these assets, potentially causing catastrophic losses.
If you would like to see what exposure your investments have to this call Peter for investment advice on 0845 230 9876, e-mail info@wwfp.net Source.
1. barchart.com.
2. Guardian.
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