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As a change of pace, I thought I’d use this post to do a little bit of market analysis looking at the market from a different perspective than the ones most often used. This type of analysis focuses more on time spent (or volume transacted) at certain levels rather than looking at simple progression of where it’s been over time as we generally see in bar and candlestick charts.

The chart below shows how EUR/USD has traded since February. Each of the clusters you see represents the distribution of trading over one month’s time. I won’t go too far into the details, but suffice it to say that the fatter a month’s distribution at a given price level, the more days the market traded at that prices, and the thinner the distribution the fewer days the market traded at that level. Think of it this way. If the market spends a lot of time at a price level it indicates agreed upon value in which both buyers and sellers are willing to transaction. Where the market doesn’t not spend much time it indicates rejection by one side or the other – value not agreed upon.

What we can see above is a trio of short, fat distributions for February, March, and April that indicate pretty narrow range trading. Then, in May, we have a long, thin distribution indicating a trend move lower. June was again mainly a consolidative month, but July started off with a trending action, then transitioned into more of a ranging set-up.

The July distribution indicates that things changed in EUR/USD near the beginning of the month and previously accepted value between about 1.2400 and 1.2700 suddenly became rejected. The market then move down to where valued was agreed upon below 1.2400.

Let’s put this in some common parlance. Think of the thin distribution of prices between 1.2350 and 1.2500 or so as a key resistance zone for EUR/USD. Selling interest far exceeded buying interest the last time the market moved through that zone. If the market can work back up there and hold the move it would tells us things have shifted and that buyers are starting to be more interested.

The concern I have, though, is that we don’t have as clear a rejection area to the downside to indicate a price level the sellers clearly found too low and/or where the buyers became much more aggressive. We have to go back to June 2010 to find the last time the market was down this low. Back then there was a final rejection near 1.1900. I think the risk, therefore, is that EUR/USD makes another move down to test those prior rejection lows.

The struggle, though, will be breaking away from the 1.2300 area. As the chart above shows, the market spent a lot of time around there in May/June of 2010. That makes it a significant attraction zone, which we’ve been seeing play out this month. If the market can start to develop more value below 1.2200, though, the odds for a run at 1.19 will increase.

There’s a bit more nuance to this type of market analysis, of course. If you find it interesting, you can learn more about it here.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Legions of investors have been schooled to believe that Treasury bond prices and the major stock market indices should move in the same direction.  In other words, changes in the valuations that investors attach to both high-quality sovereign debt and equity markets are presumed to be positively correlated.  In this context, it is not surprising that each time bond yields drop to fresh generational lows, the uber-bulls spring forth to declare that stocks have rarely looked so cheap relative to their fixed-income cousins.

The optimistic hypothesis however, is nothing more than a stale remnant of the dangerously flawed bull market thinking that dominated investment strategy during the heady days of the late-1990s.  Not surprisingly, the use of models that are without theoretical foundation ultimately proved disastrous for bottom-line investment performance.

The supposed positive relationship between bond and equity yields has not been observed in financial market fluctuations for more than a decade, as ever higher bond valuations have been greeted with lower cycle-adjusted price/earnings multiples.  Nevertheless, the tired argument continues to feature heavily in investment commentary, and few practitioners even bother to search for reasons as to why the presumed relationship may not be valid in the current climate.

It is important to appreciate that the secular trend in debt and equity valuations is regime-dependant, and what worked well in one period may not hold true in another.  The primary determinant of bond and stock market valuations is the volatility of inflation – the uncertainty regarding future inflation.  High levels of inflation uncertainty make it increasingly difficult to isolate the signal from the noise emanating from fluctuations in the general price level, and as a result, elevated inflation volatility is accompanied by relatively poor growth outcomes.

The historical record demonstrates that inflation volatility has been at its lowest when the inflation rate has been sustained in a range of two to four per cent.  This can be defined as the ‘sweet spot’ of effective price stability, and has historically been characterised by fewer and milder recessions, and higher long-term economic growth.  Once the inflation rate strays outside of the two to four per cent range, either above or below on a sustained basis during inflationary and deflationary regimes respectively, inflation volatility trends higher and negatively impacts long-run growth.

It is important to note that high inflation volatility is universally bad for equity valuations.  Investors demand a higher risk premium over and above the real risk-free rate to compensate for the greater variability in cash flows, and mark down equity valuations even further to reflect lower expected future real growth.

In other words, the high inflation volatility observed in both deflationary and inflationary regimes precipitates a secular bear market in stocks, as valuations are struck by the double-whammy of a higher real discount rate and a lower expected future real growth rate.  This is exactly the phenomenon that was observed in the deflationary 1930s, the inflationary 1970s, and once again in recent times, as inflation volatility jumped to the highest level in thirty years.

Although high inflation volatility is negative for equity valuations in both deflationary and inflationary regimes, the same is not true for Treasury bond yields.  An inflationary regime is accompanied by a secular bear market in bonds, as investors incorporate not only higher expected future inflation into yields, but also a higher inflation risk premium to compensate for the greater inflation uncertainty.

However, a deflationary regime is accompanied by a secular bull market in bonds, as investors become increasingly willing to pay a premium for financial assets that will provide insurance during poor economic states.  This effect has been particularly pronounced in recent times, as investors learned to their cost that few asset classes provided any protection whatsoever during the global financial crisis, and has been exacerbated by the relative shortage of safe assets arising from multiple sovereign rating downgrades and unconventional monetary policies.

An examination of the historical evidence reveals that the conventional Wall Street wisdom that presumes a positive relationship between changes in debt and equity yields is decidedly misplaced.  The truth of the matter is that bond and stock prices trend in the same direction only in disinflationary and inflationary regimes or roughly half the time.  In a deflationary regime, the financial assets part company, as the lower risk premium attached to safe bonds is accompanied by a higher risk premium attached to stocks.

Investment practitioners continue to insist that lower Treasury yields should result in higher equity valuations, even though debt and equity yields have moved in the opposite direction for more than a decade.  Elevated inflation volatility and the increased deflation risk calls for structurally lower equity valuations, and not higher as the uber-bulls seem to believe.  The astute will be aware that flawed thinking is bad practice.

www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

The forex market continues to make some folks nervous. While there are certainly reasons to be cautious when playing exchange rates, a considerable amount of the nervousness of the average person on the street comes from misinformation. Most notably, they all too often think of the forex market as being highly volatile. I addressed this issue before in Looking at Volatility Across Markets, but I think it’s worth revisiting.

I’ve collected 5 years of weekly values for a number of markets to look at just how volatile they are. Let me first look at the US Dollar Index. Between July 2007 and July 2012 the average weekly range for the USD Index was just 2%. I derived that by taking the distance between each week’s high and low and dividing it by the midpoint for that week [( High – Low)/( (High+Low)/2) ]. At the same time, the standard deviation of weekly closing prices (which gives us an idea of how choppy the market is) was only 4.9% (relative to the average close for the study period).

As you will see, that’s not a lot of volatility.

Let’s start by comparing the USD Index values to those from the major US stock indices.

DJIA: 4.0% average weekly range, 15.0% standard deviation
S&P 500: 4.4% average weekly range, 16.0% standard deviation
NASDAQ 100: 4.7% average weekly range, 20.2% standard deviation
Russell 2000: 5.6% average weekly range, 17.3% standard deviation

As you can see, the major stock indices show considerably more volatility than does the USD Index.

How about individual stocks?

JPM: 9.4% average weekly range, 15.0% standard deviation
IBM: 4.8% average weekly range, 24.6% standard deviation
GE: 7.4% average weekly range, 39.9% standard deviation
XOM: 5.1% average weekly range, 12.0% standard deviation
KO: 4.0% average weekly range, 15.3% standard deviation
AAPL: 7.2% average weekly range, 53.5% standard deviation
KO: 6.2% average weekly range, 18.0% standard deviation

No real surprise to see that individual stocks are pretty volatile by comparison.

Looking at commodities:

CRB Index: 3.9% average weekly range, 18.2% standard deviation
Gold: 4.6% average weekly range, 28.1% standard deviation
Crude Oil: 8.4% average weekly range, 24.2% standard deviation

Here again we see markets with a great deal more volatility than the USD Index. The one place where there is something of a contest is the bond market. The long-date Treasury note/bond ETF is TLT. Looking at its weekly figures I come up with a 3.2% average range and 10.6% standard deviation. That’s considerably less volatility than the other markets and securities shown above, but still not at low as what we have seen the last five years in the USD Index. We would likely have to move down to short-term Treasury securities (like 2yr Notes and T-Bills) to find lower values.

The point of all this is that anyone avoiding the currency market because of the perception that it’s super volatile is operating on a false belief. The figures just don’t back that up.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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The prospect of having an investment industry genius strategically (and often aggressively) managing your asset allocations in an attempt to kill risk and crank out returns can be alluring. Add to that the current upsets throughout the global economy, and despite their stigmatic volatility, hedge funds are looking pretty tempting.

Unfortunately for many retail investors, the restrictions that determine who can access a hedge fund don’t leave much in terms of acceptance. In order to invest in these managed funds, one must either be an accredited investor with $1 million plus in liquid assets and a $200,000+/year paycheck, or a qualified purchaser, who owns at least $5 million in investments already. This clearly narrows the investor diversity scope down a bit.

But, the shell of the hedge fund industry looks like it’s finally starting to crack. Recent findings of financial research firm Cerfulli Associates published in an InvestmentNews article last week demonstrated that money managers expect their allocations into alternative investments to increase by at least 50% over the next three years. Investors and financial advisors also have a growing desire to increase alternative investments to negate market downturns and create a divergence from the stock and bond market.

But what does this have to do with making the elusive world of hedge funds more mainstream? It seems the ripples caused by an overall increase in demand for alternative investments have reached the mutual fund industry in the form of something known as ‘alternative mutual funds’.

Funds of this sort fall into alternative sectors such as long-short equity (one of the more popular), currencies, precious metals, and commodities. Taking it to the next level, alternative mutual funds twisted and evolved a bit further into something very similar, known as hedge-like mutual funds (the two names are often even interchanged.) These funds have the potential to hedge risk and generate stronger returns using some of the same strategies and tools that hedge fund managers use.

The most attractive characteristic of investing in a hedge-like mutual fund is that now, average-income investors can access the advantages of hedge fund investing previously available only to those qualified to invest in a hedge fund. Because the SEC regulates them, hedge-like mutual funds preserve some amount of the conservatism and transparency that is demonstrated within traditional mutual funds. Unfortunately, this can also impact these funds negatively in that it restricts their flexibility and requires a greater level of liquidity.

Though these crossbreed mutual funds aren’t anything new and earth shattering, Cerulli predicts that within the next five years, their presence will increase to the point of comprising 10 percent of mutual fund assets – a 245+ percent surge. The fueling of their growth really comes down to one thing: education. Money managers who strive to educate financial advisers on their investment products are the ones seeing positive results. This is due simply to the fact that many advisers are not yet familiar with all of their options in alternatives available to them. And we all know how easy it is to fear the unknown.

The theme of taking an investment that was once unavailable to traditional investors and making it available to them is common across the alternative investing landscape. Hedge-like mutual funds have successfully done what Currensee is striving to accomplish by carrying out this theme. Just the way hedge fund management, tools, and strategies were only available to high net-worth investors at one time, not long ago the world currency market experienced the same inaccessibility. However, with the emergence of various types of trade replication software and autotrading, even those with no prior knowledge of currency trading can allocate a portion of their investments to this type of alternative.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

The financial markets are in disagreement.  The yields available on high-quality corporate bonds have dropped to generational lows, as fixed income investors embrace the idea that the US economy is caught in a deflationary trap.  Meanwhile, stock markets are priced for perfection, as equity investors remain optimistic that the life-support operations provided by the Federal Reserve will ultimately reflate the economy and restore price stability.

Investors need to determine which view will ultimately win out and allocate their assets accordingly.  All else equal, the deflationary argument calls for a highly-defensive asset allocation with minimal exposure to risk assets, while the reflationary case prescribes an aggressive allocation with little investment in high-quality bonds.  A reasoned analysis on which way the dice will ultimately fall requires a comprehensive understanding of secular investment cycles through time.

Investors need to appreciate that the economy rotates around price stability or the rate of inflation that maximises the non-inflationary rate of economic growth, and at any given point in time, the economy is either moving closer to or further away from this Holy Grail.  Meanwhile, secular trends in both bond and stock valuations are determined by the stage of the cycle in which the economy currently lies.

The stages of the secular investment cycle can be classified under four general headings – disinflation, deflation, reflation, and inflation.  A disinflationary regime is characterised by falling inflation and robust growth, a deflationary regime is characterised by low and falling inflation alongside poor growth, a reflationary regime is characterised by rising inflation and strong growth, and finally, an inflationary regime is characterised by high and rising inflation alongside disappointing growth.

The historical evidence reveals that recessions are fewer and less severe in both disinflationary and reflationary regimes, while real economic growth is stronger.  During the reflationary period between 1949 and 1968 for example, the economy spent just one month in eight in recession, while the annual rate of economic growth was 4.3 per cent.  Meanwhile, during the inflationary period between 1968 and 1982, the economy spent almost 30 per cent of the time in recession, while real growth was just 2.5 per cent.

It is important to appreciate that the secular investment cycle should be employed as an important input to asset allocation, given its influence on asset prices and valuations.  Both bonds and stocks perform well in a disinflationary environment as valuations rise with the latter outpacing the former over the period.  Bonds excel in a deflationary environment as yields decline, while stocks perform miserably as valuations contract.  Stocks exhibit robust performance in a reflationary regime as valuation multiples expand, while bonds do poorly as yields rise, and finally, both fare badly in an inflationary period as valuations fall, with stocks outpacing bonds.

As an input to asset allocation decisions, it is important to identify transition points in the secular cycle.  In this regard, it is instructive to note that high-quality corporate bonds have led stocks, as the cycle transitioned from deflation to reflation, and once again, when the underlying regime switched from inflation to disinflation.

The historical record of the past one hundred years provides clear evidence of the corporate bond market’s ability to signal an impending regime shift ahead of time in 1920, 1947, and 1981.  The yield on high-quality corporate bonds peaked in June 1920 at 6.4 per cent, and registered a lower high six months later, which signalled the end of the two-decade long bear market.  The stock market’s inflationary bear market drew to a conclusion eight months later.

The yield on high-quality corporate bonds bottomed in April 1946 at 2.5 per cent, and registered a higher low thirteen months later, which signalled the end of a secular bull market that spanned almost three decades.  The stock market’s twenty-year deflationary bear market came to an end two years later, and even though the ‘buy’ signal seems quite premature, the high dividend yield available on stocks alongside the modest decline in the major market averages in the intervening period, meant that equity investors who acted upon the call earned a positive real return.

The yield on high-quality corporate bonds peaked in September 1981 at 15.5 per cent, and registered a lower high the following February, six months before the stock market’s inflationary bear market hit bottom.  Equity investors subsequently went on to enjoy the strongest secular bull market in stock market history.

The financial markets are currently enduring a tug-of-war between the deflationary fixed income view, and the stock market’s reflationary optimism.  Unfortunately for equity investors, the weight of historical evidence indicates that the bond market leads the stock market at important turning points in the secular investment cycle.

The fresh generational lows in the yields available on high-quality corporate bonds suggest the stock market’s more than decade long deflationary bear is not over.

www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Monday, July 23, Currensee will be returning for our second consecutive year participating in the private wealth series event known as the Family Office & Private Wealth Management Forum. Opal Financial Group, an investment education association that coordinates investment conferences, will be organizing the event and what they have in the works should make for a very exciting three days. Attendees will be a mixture of Family offices, Private investors, money managers, and private wealth service providers.

After months of preparation, Currensee couldn’t be more excited to be in Newport for this series. Not only will we be working alongside some very successful heavy hitters in the investment industry, but we will also be interacting directly with those who benefit most from using our product; retail investors themselves. Having the opportunity to connect face-to-face with these individuals is a very exciting prospect. Being able to offer our investment solution to those seeking diversification with alternatives is of equal significance and something that will be very energizing for our company as a whole.

One of the biggest reasons we are so excited to be involved in this series is that we were able to secure our CEO, Dave Lemont, a spot as a panelist in two separate discussions. Drawing from his deep breadth of knowledge in alternatives, Dave will be contributing to engaging dialogue surrounding the topics of asset allocation for diversification, followed by utilizing alternatives for the best possible future returns.

The first talk Dave will partake in is “Asset Allocation: Constructing a Family Office Portfolio.” In it, he will contribute to topics covering new advancements in allocation methodologies, advantages of risk budgeting, balancing traditional and alternative investments, and risk management to combat market turbulence.

The next afternoon, Dave will pick it back up by participating in a panel discussion called “Investing in Alternatives.” Here, he will join three other speakers to discuss thematic material regarding the best performing alternative asset classes, why now is one of the better times to get your feet wet in alternatives, and where to find the best future returns in this particular investment landscape.

Being able to offer our knowledge and services to the well-versed attendees of an event of this caliber is really a milestone for us as a company. As one of the world’s most paramount symposiums geared towards high net worth individuals and family offices, this conference will be huge for us. The combination of interacting directly with investors interested in alternatives, having a product we are truly excited to share with them, and having the chance to hear our CEO contribute his insight along side such well revered investment industry professionals is a very big step for Currensee.

Newport, Rhode Island. – Coastalliving.com

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

There is a massive amount of attention being given to LIBOR these days. The London Interbank Offer Rate is something the majority of folks probably never heard of, but now it’s front page news. Really, the financial industry didn’t need this latest indication of greed and corruption added to the laundry list of the last few years, even if many folks in the business where under no illusions that LIBOR was cleanly derived each day. There may have been no actually damage done (one blogger I read ran some number suggesting that any given back could only influence LIBOR by something like a tenth of a basis point – meaning 1/1000th of a percentage point), but the banks are rightly being slapped with fines for their funny business.

LIBOR isn’t the only rate that gets played with, though. And I’m not just talking about overnight interest rates for other currencies (EURIBOR, etc). There are fixings multiple times per day in the forex and gold markets (and probably others I’m not aware of). The main ones for exchange rates are at 8:55am in Tokyo and 4pm in London. These fixings are to set the exchange rate for commercial transactions.

Now, the forex market fixings are different than the survey type approach of LIBOR, but that doesn’t mean they cannot be subject to shannanigans. The London afternoon fix tends to be the more important as it comes in the US morning and near the end of the European trading day. That makes it a major focal point for activity from the two biggest trading regions. As a result, it is not unusual at all to see some dramatic moves in the forex market heading up to 4pm London/11am NYC, move that can reverse rapidly after the fix time passes. It’s not hard to imagine market players buying or selling to move the rate toward where they want it at the fix, then unwinding those trades immediately after. It’s rather like the process of running stops.

There are also key times related to options and futures expirations. The 10:00am NYC currency options daily expiration is the most noteworthy of them (Click here for more info). This is not as big a deal on a day-to-day basis as the London fix, but on days when there is a particularly large volume of options expiring in a certain currency pair there can be some interesting price activity. This is seen to be driven by those either trying to defend a strike price (keep the market from going there) or get the market to hit that strike.

As I said, these market manipulations aren’t the same as those related to LIBOR. They will never be prosecuted, because the parties trying to move prices around are actually taking some risk in doing so (what if the market moves against them?). That said, it very much behoves the forex market participant, especially one operating in shorter time frames, to be aware of these key times of day and what can happen around them.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

This past Thursday, we had the exciting opportunity to host a webinar with Currensee Trade Leader JCB FX Trading. Javier Colon, principal trader of JCB FX, conducted the presentation entirely in Spanish, his native language. The main incentive of his talk was to educate investors on the advantages of diversifying in alternative investments as a means of combating market volatility. Colon operates as a professional Forex trader out of Madrid, Spain; the epicenter of what could easily be considered the eye of the economic storm.

On the day of Colon’s webinar about the growing significance of alternative investments, an influential financial survey just so happened to be released simultaneously. The results shown were in perfect confluence with Colon’s insight. In a Business Wire press release, findings generated in the Elite Access Alternative Investment Survey conducted by Jackson National Life Insurance Company showed information gathered from the responses of over 2,000 financial advisers.

In an attempt to determine adviser’s current use of alternative asset classes and their needs from financial product providers, the survey uncovered a huge increase in their expected use of alternatives. The driving factors behind their interest in tapping this resource were to help negate potential market volatility and try to improve upon client portfolio diversification.

The survey found that within the next year, nine out of 10 advisers plan to increase allocations into alternative investments – with over half looking to do so by 15% or more, and a third aiming for 20+ percent.

The rest of the release details insight from Jackson executive vice president, Clifford Jack, who explains how over the last decade markets have seen record volatility. This has spawned an evolution in investment breakdown, which renders traditional 60/40 portfolio composites somewhat obsolete. A portfolio broken into thirds, with the inclusion of alternatives, is now becoming the norm.

One of the most prevalent themes the survey demonstrated was an obvious need amongst advisers for guided strategies in devising the alternative portion of client portfolios. Up towards 80 percent of advisors expressed they would be more likely to use alternatives if they were able to be to have some guidance in strategizing.

Being in the alternative sector of the investment industry, I sometimes take for granted the seeming “simplicity” of alternative investments and their related financial products. This survey demonstrated that despite their rapidly growing popularity, investments of these kinds are still emerging and thus require far more transparency. It is, however, very exciting to be right in the middle of the “traditional” investment portfolio makeup evolution. From the old 60/40, equities/fixed income breakdown, to the now evolving versions that include alternatives as an increasingly permanent fixture.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

For a long time there’s been an argument in the retail foreign exchange trading community about whether it is better to trade futures or spot. It’s something which comes up so often that I included “Is it better to trade spot forex or currency futures?” as one of the questions addressed by contributors to my Trading FAQs book. One of the key elements long seen as being in favor of futures is the regulation, transparency, and security of the futures market.

Then we had MF Global go under.

In one shocking moment the accounts of thousands of futures traders were at best frozen and at worst completely gone. This was a stunning development. After all, customer funds with brokers are supposed to be sacrosanct. Even if a broker goes belly-up it’s not supposed to impact customer accounts. The MF Global fiasco shook that confidence in the system very hard.

Now we get PFG Best.

No doubt it will take a while to get things all cleared up, but early indications are that a lot of customer money has vanished. This is another blow to the previously nearly unassailable integrity and stability of the futures markets and brokerage industry.

I am personally on record as having favored spot trading over futures for some time now,  primarily on the basis of flexibility and lower capital requirements. Those on my side of the debate may very well use the MF Global and PFG collapses as arguments in favor of the spot market, especially since none of the big brokers in the retail forex space have suffered anything like this kind of failure (though they have had issues of their own). This, to my mind, is a dangerous case to make.

What the implosion of these two futures brokers does is highlight the need to manage risk not just on the level of your trades and/or portfolio, but also in the security of your accounts. We may feel comfortable working with highly capitalized firms, but as MF and PFG have shown, there are flaws in the regulatory and oversight structure.

And on top of all that, whenever things aren’t going well in society there is an increased effort to find someone to blame (notice how few market scandals there are during bull markets?) and to look for lawbreaking behavior. The banks and other financial institutions are facing that now from many different angles, as the current LIBOR scandal demonstrates. What impact would there be on your broker or bank if a regulator or court slapped it with a huge fine or judgement?

The point is that diversification of assets isn’t the only thing you want to be doing. You should be diversifying your exposure to financial institutions as well.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

India has been viewed as a tiger economy – rather than a lumbering elephant – ever since it embraced outward-looking, market-friendly policies in 1991.  Income-per-capita has increased from just $300 three decades ago to $1,700 today, and the economy has not experienced a single year of contraction since the Iranian oil shock and a bad monsoon struck in 1979.

A poor growth mix in recent years however, has undermined the sub-continent’s status as emerging-market darling.  Persistently large fiscal deficits, a deteriorating external position, and stubbornly high inflation have led to a change in concerns over India’s ability to sustain its high-growth performance to whether it can simply maintain overall stability.  Corrective measures are required urgently if the country wishes to avoid a return to the status of lumbering elephant.

The Indian economy endured centuries of sub-par performance until recently.  Indeed, income per capita stagnated for almost 350 years following the arrival of the British at Madras in 1602.  The economy fared little better in the decades that immediately followed independence in 1947, as the subcontinent withdrew into autarky and socialism.

Economic growth averaged 3.5 per cent a year – the so-called ‘Hindu’ rate of growth – from the late-1940s through the 1970s, or roughly half the rate achieved by Asian tigers with outward-looking, market-friendly policies.  The economy’s performance was particularly disappointing over this period, given that the population grew at 2.2 per cent a year.  Indeed, the modest annual increase in income-per-capita meant that India made little headway in reducing mass poverty.

The first efforts to dismantle socialism and reform the domestic economy were introduced following the election of the Janata Party in 1977, and further economic liberalisation took place in the 1980s under Prime Ministers Indira Gandhi and Rajiv Gandhi.  The reforms alongside profligate public spending helped to accelerate the rate of GDP growth to 5.5 per cent in the 1980s, but the expansion was based on unsustainable borrowing, and a crisis erupted in 1991 when the country ran out of foreign exchange.

The foreign exchange crisis induced India to abandon its inward-looking policies and embrace the economic reforms recommended by the International Monetary Fund (IMF).  The new direction was not without its critics, and opposition parties argued that the new policies would result in a ‘lost decade’ of economic growth, as had been seen in other lesser-developed countries that supposedly adopted the IMF-model in the 1980s.  The critics vowed that they would reverse the reforms when they came to power.

The pessimism proved misplaced, as the country’s finances were restored within two years of the reforms, and the annual rate of GDP increase accelerated to a new record of 7.5 per cent from 1994 to 1997.  The outward-looking, market-friendly policies proved too successful to be reversed, and reform continued even when other political combinations came to power.

The Indian economy has continued to move forward at a robust pace, and weathered numerous tests of its resilience relatively well.  Economic growth slipped to 5.5 per cent a year from 1997 to 2002, a favourable outcome given that the Asian financial crisis, two severe droughts, and a global recession all struck over this period.

The economy’s performance improved sharply after 2003, and annual growth accelerated sharply to an average of almost 9.5 per cent in the three years that preceded the global financial crisis.  The ‘Great Recession’ took its toll on the economy, but growth was still almost seven per cent in 2008, and rapidly recovered to an average of more than eight per cent a year in 2009 and 2010.

The recent growth performance however, was propped up by unsustainable aggregate demand policies.  The overall fiscal deficit has averaged close to ten per cent of GDP over the past three years, and the budget released in February does not display any serious ambition to restrain public spending.  The government’s profligacy has been driven primarily by populist spending policies, and with national elections due by 2014, next year’s budget is unlikely to be much better.

The public debt-to-GDP ratio is already close to 70 per cent or 30 percentage points higher than similarly-rated sovereigns, and further increases in the ratio are virtually certain to lead to rating downgrades.  Further, current fiscal policy has contributed to a widening current account deficit and rising net external indebtedness.

The level of net external debt to GDP is already above ten per cent or three times greater than similarly-rated peers, and the more than ten per cent drop in foreign exchange reserves since last autumn limits its ability to absorb sustained capital outflows.

The profligate public spending policies helped push the rate of headline inflation up to the eight-to-ten per cent range over the past two years, and though the inflation rate has since decelerated to seven per cent, it remains above the central bank’s comfort zone.  The stubbornly high rate combined with a sharp drop in the Rupee, limits the central bank’s ability to stimulate the economy, which has seen its quarterly growth rate plunge to the lowest level in seven years.

India is rapidly losing its lure as emerging market darling.  Persistently large fiscal deficits, a deteriorating external position, and stubbornly high inflation have seen foreign investors look elsewhere for growth opportunities.  The lumbering elephant stands at a crossroads.

www.charliefell.com

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