End of the Yuan peg?

In one of the least mentioned news stories of the day, the CME will start trading yuan futures in August. From Bloomberg:

Trading of the futures, which will be listed on the CME exchange, is due to begin Aug.

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If you trade commodities, ETF’s, futures, or anything: Read This!

This might be the most important article on the structure of trading in physical, options, futures markets that I’ve ever read. For those involved in these markets, it’s a must read. I can’t excerpt it – because IT IS ALL IMPORTANT! It is pretty technical, but it highlights the pitfalls of trading, issues with financial vs. physical exposure, etc.

To go to the article, click here.

Position limits – have we learned nothing?

I can’t put my finger on it, but I know it’s all related. Writing about it definitely helps clarify, but then again, it makes me more flabergasted. I’m speak of the direction our policy – on multiple fronts - is headed.

From healthcare to contract law to trading, policy makers seem to believe that government and bureaucracies are the best allocators of resources, best sources of price discovery, and most efficient providers of services, while at the same time believing that increased regulation can encourage wage growth, competitiveness, and productivity. For fun, here’s an article, sent by a friend on the impact of some of these policies: http://victorhanson.com/articles/hanson071809.html.

Today, I won’t go into healthcare (although for those interested, there’s an interesting interview with Daniel Palestrant, CEO of Sermo, an online physician’s community, about the fact that the AMA is not accurately representing the doctors of this country: http://www.cnbc.com/id/15840232?video=1196233131&play=1. I spoke to Daniel and the interview doesn’t do their research justice, and his attack on Howard Dean only scratched the surface of the hypocracy of the current leadership.) Instead, I’ll mention that the current debates on The Hill about speculative limits in commodities scare me. In the 1970′s, with inflation running rampant, the Nixon administration, in its misdirected brilliance, decided to place price controls on everything from meat to lumber. Well, the small time players got hurt and the guys who were smarter went around the price controls and played in the futures markets. Now, we have a new administration thinking they need to control prices and better yet, control volatility. Well, someone should point out that speculators play on both sides; they provide better liquidity, more price discovery, and smaller spreads. Without speculators, hedgers wouldn’t be able to trade and everyone from small time farmers to large conglomerates like General Mills would face increased costs of business. In and of itself, more players do not lead to increased volatility – quite the contrary.

http://www.marketwatch.com/story//spotlight-on-goldman-as-commodities-hearings-begin-2009-07-28

So GS is on the hotseat again, this time for being too large a player in the hedging space. But that’s what they do. They provide an investment opportunity to pension plans and institutional players and then hedge. Should you place speculative limits? Fine, but let’s define speculation and hedging differently. Not all natural hedgers are pure hedgers. For example, many oil companies and airlines and producers take speculative risk beyond the positions their hedging. Same is true for “speculators”, some of whom are actually hedging different risks in their portfolios. The definitions, in my opinion, actually become so nuanced and convoluted as to be virtually irrelevant. I wish someone from GS would get up and say that and more importantly that someone in DC would listen.

Where’s the Gold?

I am far from a gold bug. Gold always seems to me to be a relative play in the sphere of other currencies and subject to the same greed, fear, and everything in between that every other asset class is subject to. That being said, there is no doubt that interest in the shiny stuff has been increasing for about 10 years now. More recently, I read ongoing reports of more and more money managers and financial advisors piling in, mostly through paper gold (e.g. GLD or futures). In light of that, the following article is incredibly interesting and scary. The main contention is that there is some weird stuff going on with the actual, physical gold that is difficult to explain and might have vast implications for the markets, both physical and paper versions.

http://www.huffingtonpost.com/nathan-lewis/wheres-the-gold_b_216896.html