The recent congressional examination of OTC derivatives could play out much like a scene in the film ‘Gangs of New York’; once threatened by the police, organised bare knuckle boxing fights move to a floating rig in the river, away from the jurisdiction of mainland Manhattan, keeping all invovled happy whilst leaving the authorities hapless in their attempts to thwart the activity. New York has to be mindful of a repeat of the late 1950s when legislation resulted in much of the nascent eurodollar market moving to London, and staying there.
Under the umbrella of derivatives scrutiny comes the CFTC’s hearings into last year’s oil price spikes, many are concerned that any interfering in markets will result in higher volatility and higher transaction costs. Passive index investors may well have lifted prices above a natural equilibrium with their blunt buy and hold strategies over the past few years, but it seems unlikely they will have the same impact again. They suffered enormously as prices plunged and negative roll yields (the impact of selling a near dated future and buying the next one out along the curve, a costly experience with a market in steep contango) ate away their returns. Today’s investment flows into the complex are more sophisiticated, often going short as well as long whilst choosing more favourable parts of the curve that are less crowded. Investors should come to realise that commodities are not really an asset class as such – they offer no yield – but are instead a speculative vehicle where one bets on trending markets or attempts to identify fundamental imbalances not yet reflected in the price.
Continuing on the theme of a new alternative financial services (or bubble) index, spawned in a past entry from the editor himself, I would recommend watching sales of some classic velben items to those under the age of 30, having noted the behaviour amongst several aquaintances. Lavish purchases of 2 seater sports cars (even if second hand) highlight the extent to which conspicuous consumption appears to be creeping back into the high-lifestyles of professionals with just a few years experience. Have they not learnt to adopt a slither of restraint, prudence or caution from the recent crisis?! Gordon Brown would be proud. But given Jon Hunt, the man who timed Britain’s property market to perfection when he sold Foxtons in 2007 (mentioned in an earlier entry) has blessed the seeming stabilisation in property prices, perhaps a little exuberance is warranted.