I was amused by Senator Bernie Sanders disclosing confidential information about market participants of the 2008 energy market. Even though this information was confidential and restricted by criminal law from being disclosed by anyone at the U.S. Commodity Futures Trading Commission, there were no rules against Congressional disclosure. Right or wrong, Senator Sanders found a legal loophole and used it. If you underestimated your political risk, that is your fault.
We are in a time of increased political risk. In this newsletter, we have long focused on non-price oriented risks. That includes political risk. Headline grabbing political risk is the dominant paradigm impacting the world economy, our markets and even our participation in them. Whether it is long only long term investors in commodities as an asset class or short term oriented high frequency traders, market participants are under political attack.
Taking a cue from this paradigm, I am going to start address more of these political risks in my commentaries.
The CME is threatening to leave the City of Chicago and move its corporate headquarters to another state. The corporate taxes in Illinois are too high and thus unfair, they say. I don’t expect them to move, but my guess is they will be making more and more noise about moving. If they move, it will not destroy Chicago’s financial markets sector, but it will be a significant blow. CME Group was created to champion Chicago as the risk management capital of the world. Now, because of a political risk, the Chicago area stakeholders in the CME Group are at risk.
No one I have talked to believes the CME Group will move out of the City of Chicago. The CME Group is going to have to REALLY sell they are serious about moving to get the concessions they desire. Look for this rhetoric to heat up.
If NYSE Euronext and Deutsche Boerse’s merger does not go through, it will be because of political factors.
The US needs to get out of the ethanol subsidy business. There was maybe an economic argument with corn at $2.00 or below, but not now. And these higher prices for corn lead directly to malnutrition in smaller, less wealthy countries, which leads to people dying. There is a moral reason that should outweigh any Iowa-centric political reason for us to stop this tragic policy. The US needs to change its ethanol policy.
Gold is not a currency or a store of wealth. I believe it is the ultimate credit default swap. Gold is the credit default swap without any lien on it from a counter-party or country, assuming you have physical possession and adequate possession management infrastructure. If you are trading gold as an ETF or futures, you have credit risk versus the custodian or brokerage or clearinghouse. You can not eliminate risk, but you can try your best to manage it.
Europe is struggling with what to do about the debt situation in some countries in its economic union. After being in Switzerland at the Swiss Futures & Options Association conference in Interlaken, I did not come home with the answer for what is going to happen in Europe. From American history, I can tell them that if your economic and political union is not strong enough, you need to make it stronger. In the US, the governing laws after the founding of our nation were the Articles of Confederation. This union among the 13 states was not strong enough and caused the creation of a Constitutional Convention to come up with a new governing structure. Thus was born the US Constitution.
While I can make the case of a stronger central government for Europe, perhaps creating a United State of Europe, none of my European friends in Switzerland gave it any chance of happening. In the US though, we had a very similar situation after the War of Independence, with many states having significant war debts, while Virginia had paid off half its debt. Somehow, Secretary of the Treasury Alexander Hamilton struck a political deal for the new federal government to assume the debts of the states in return for moving the nation’s capitol from New York to a site on the Potomac River. By the way, Hamilton was appointed the first US Treasury Secretary on September 11, 1789.
We need some European leaders to emerge, not national ones. This is very difficult. We need some of the leaders of important institutions, including the media, to speak out about a new, stronger political union for Europe. The future with a weaker connection between European countries will not work.
I don’t believe the US has dealt with the causes of the financial crisis of 2007-2008 in an intellectually honest manner. The Financial Crisis Inquiry Commission should have been the tool, but it was politicized and we are left without the neutral inquiry into the causes of the crisis. Thus, we are left without the data, analysis and consensus plan to help us avert the next crisis.
Dodd-Frank is a work in process. It is a huge political risk because of the agenda of uncertainty it mapped out. But you know what, the US has seen bigger structural challenges before and met them. We need to keep moving forward.
There will always be a next crisis, no matter what. Our only hope it to learn from our experiences and not repeat the stupidity of the last one.