Slow Down, Interest Rates and Goodbye London
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Slow Down, Interest Rates and Goodbye London

Slow Down, Interest Rates and Goodbye London


Trading Features / Strategies from Simon Denham of Capital Spreads.

After the minor falls on Tuesday the commodities markets went into overdrive on Wednesday with Crude Oil, Gold, Corn, Silver etc etc all recording record highs. In all the happiness for the producing parties involved please shed a tear for the poor old pig and cattle farmers. Live Cattle and Lean Hogs (traded in Chicago) have now fallen some 10 and 25% respectively since last summer which, with the increased cost for feed, energy, general inflation etc must mean that many meat farmers will be selling their produce below the rearing costs.

Difficult as it is to feel sympathy for the agricultural industry (no other business across the globe receives so much tax payer subsidy) it must be galling when the bottom has fallen out of your world to see your crop growing neighbour swimming in riches.

This dislocation in price variables is symptomatic of the strange events across the financial landscape as we survey the various economies across our planet. If it wasn't for the drawn out disaster being played out in the US housing markets the growth, prospects for most G7 nations would be of, mainly, academic interest. Yes, we might be fearing a small slowdown in the UK, a bit of weakness as 10 years of asset/public sector based growth ground to a halt or some worries over a blip in the inflation curve. But, in the main, the tone of the apocalyptic articles that we see almost every day would be considered to be just scare mongering.

Even though we have just had the bank reporting season, showing the big four riding high once more, fears of a major collapse in the financial system are at all time highs.


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Most comments on derivatives markets seem to be ill informed speculation and written by people who would not recognise a Hull White/Black-Scholes equation or Monte Carlo risk model if it bit them on the bum. However, with the reality that the vast majority of such instruments are designed to spread risk rather than to take it, the worry remains of a massive unwinding of the market.

For all of the weird and wonderful models created the fact remains that a derivative instrument is still just that, a derivative of an actual underlying asset. If the value of the underlying asset gets called into question the mountain of financial engineering perched on top of it (much of it off-balance sheet risk) multiplies the risks ten fold.

Spreads between genuine 'AAA' risk and virtually anything else are reaching almost decades wide levels. As this mountain of debt comes up for renewal, companies that were once paying US Treasury yields plus maybe 2% will now be asked for anything up to UST plus 7%. These are business destroying levels. Whilst many companies work on very wide margins the vast majority are in the low teens or sub ten percent area. In the midst of a slowdown in sales being asked to suddenly pay a huge premium for borrowing may well drive many to the wall. Many of the more accommodating banks of the past have had their capital bases shot to pieces and just do not have the leverage available to renew loans on anything other than penal interest rates.

And now we have the regulators coming in with a steam roller of ignorance and overkill to add yet another layer of useless 'reporting' and 'procedure' mandates onto the UK banks just when flexibility is desperately needed. We saw the knee jerk US political reaction to the Enron collapse seriously damage their financial industry by its implementation of the Sarbannes Oxley requirements and it is beginning to look as though the UK authorities are going to make the same mistake. What's the betting on a badly thought out "wonderful new 'Darling-Brown' Straight-jacket" sending business flooding to Dubai and Singapore? Not the oft mentioned Geneva. The next centre for financial management will be in the Middle or Far East where all the money is. As political stability and tax favourable regimes begin to work in their favour more and more of the most liquid asset on earth (cash) will gravitate to their shores.


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The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'Slow Down, Interest Rates and Goodbye London' edited by SD, updated 09-Mar-08



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