Monthly Archives: May 2013

The Foreign Exchange Market

The financial world has so many terms for these complex instruments, like the CDO, CDS, BCMH, MBS, LBO and of course FX.
Foreign exchange or as it is commonly known, “forex” or “FX” is where you buy one currency while simultaneously selling another – that is, very simple, you’re exchanging the sold currency for the one you’re buying. The foreign exchange market is an over-the-counter market. (OTC)
Currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar / Japanese Yen (USD/JPY). Unlike stocks or futures, there’s no centralised exchange for forex. All transactions happen via phone or electronic network. The electronic network like BT Radianz.
Daily turnover in the world’s currencies comes from two sources: The statistics are a real eye opener:-

Foreign trade (5%).

Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency. Or travelers changing cash or tourists spending overseas on credit or debit cards.

Speculation for profit (95%).

Traders trying to make a profit. Yes, professional gamblers account for 95% of the market. Naked Speculation. Most traders focus on the biggest, most liquid currency pairs. “The Majors” include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. In fact, more than 85% of daily forex trading happens in the major currency pairs. The world’s most traded market, trading 24 hours a day, with average daily turnover of US$3.2 trillion, forex is the most traded market in the world.

Yes, Trillon. A large number. Let’s try and quantify the Trillion figure…..

US$3.2 Trillion = UK£2.0 Trillion. The UK GDP, the UK ANNUAL output is £1.4 Trillion, so forex turnover a DAY is larger that the UK GDP.
A true 24-hour market from Sunday 12 Noon UK / 5 PM US Eastern Time to Friday 12 Noon UK / 5 PM US Eastern Time, forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York. Unlike other financial markets, investors can respond immediately to currency fluctuations, whenever they occur – day or night. Banks located in the United Kingdom accounted for 37% of all foreign exchange market turnover, followed by the United States with 18% market share.

Cost of University Education in the USA

University fees in the USA have increased at a rate 6% higher than the general rate of inflation in the US for the past 25 years, making it four times as expensive relative to other goods and services as it was in 1985.

[1985 was the year when Duran Duran released the James Bond title song, A View To A Kill, and Madonna was Crazy For You….]

The logical explanation is that University finance departments have a talent for increasing top line fees via tuition. However the number of science and engineering graduates are falling in a lot of Universities. This is a trend in the mature economies in The West. We have focused on arts instead of more practical subjects such as mathematics, science and engineering.
The shocking statistics, are that the average US college graduate now leaves University with $24,000 of debt and total student loans now exceed the US credit card debt of $1 Trillion, (yes, I did say Trillion) and counting (7% of the US national debt). Yes, I said 7%, do the numbers, the US total national debt is about $14.2 Trillion. The US Economy is has an output (GDP) of $14.2 Trillion. Yes, you are reading my numbers correctly, the US National Debt is now approaching 100% of GDP.

Don’t be surprised, this is becoming the accepted state of affairs in Western Economies. Greece is worse of course, it is about 142% of Debt to GDP, and the UK is 76% of GDP with the UK total national debt outstanding is about £1105.8 billion, plus or minus a few billion, which I am sure you will forgive me for. Back to the US Universities. They are run for the benefit of the adult establishment, both politically and financially, not students. To radically change the system and to question the sanctity of a University education would be to jeopardise trillions of misdirected investment dollars and financial obligations.

The numbers are huge when it comes to our economies, debt, student tuition fees, healthcare, pensions etc etc. Also when it comes to government debt, of course the debt is issued in the form of debentures (the posh word), commonly known as bonds. Pension funds buy these bonds to pay pensioners. We can’t default on our debts, a lot of people rely on these bonds.

Technology Investment

The death of Steve Jobs was a tragic loss to the world, but also to the technology sector. Much has been written about this brilliant man, a clever business man with vision, passion and drive, partnering with a smart engineer like Steve Wozniak to create brilliant technology that was user friendly, but also sophisticated.


What is just incredible is the share price growth of Apple. Between 1997 and 2011, the stock as grown by 9000%. In that same period, the share price of the rival Hewlett Packard has shrunk by 48%. Thus technology investment has risks and rewards.
Thus investing £100 in 1997 in Hewlett Packard would have been pretty tough to swallow, with that £100 being worth £52 today. Hmmmmm, a grim investment return. Thus diversification into a technology funds is a good way to get exposure into the technology sector, some great funds with great holdings are easily accessible to retail investors.

( Legal & General Technology Index Fund, 13% of this £20m fund is in Apple !!!

Polar Capital Technology Investment Trust, 10.2% of this £413m fund in Apple and 4.2% in Google.

RCM Technology Trust 4% of this £80m fund is in Apple.

[]The Henderson Global Technology fund, 9.8% of this £340m fund is in Apple.

As you can see, Apple features very high in technology funds, as today when one thinks of a technology pioneer and the bell weather of the sector, Apple is that company.

The Cost of Local Authority Pensions

I was reading an article about final salary pensions for council workers, and the research has brought to light some incredible costs. Investment fees in the Local Government Pension Scheme average around 0.2 per cent of assets which compares favourably with the OECD average of 0.5 per cent.

In all £347million was paid out by the council pension funds to investment managers last year, up nearly 9 per cent on the £319million paid out in 2011. The overall cost of the fees would be the equivalent of adding £15 to every council tax bill in England and Wales. The increase is more than double the increase in the value of the council pension funds, which went up by nearly 4 per cent to £158.6 billion, raising fundamental questions about whether the taxpayer is getting value for money.

The figures were obtained by analysis by The Daily Telegraph of the annual reports and accounts of 89 local pension funds in England and Wales. It shows big disparities between different council funds, with some cutting fees and others seeing big increases.

For example fees paid by Lewisham jumped by 85 per cent to £3million and by 41 per cent to £8.7million in Durham. Pension fund charges fell in other parts of the country, 39 per cent in Cambridgeshire to £2.8million and down 37 per cent in Richmond-upon-Thames to £675,000. There was also a big disparity between funds, with Kent paying out nearly £4million in fees to fund managers more than Lancashire, despite having a smaller fund.

A breakdown shows taxpayers in some of the country’s poorest boroughs supporting payments to some of the City’s biggest fund managers.

Camden paid out £2.8million fund managers including £1.1million to Aberdeen Asset Management and £667,000 to Fidelity while Barking and Dagenham paid £2.2million to fund managers including Aberdeen Asset Management, Goldman Sachs, Prudential and Schroders. Somerset paid £2million to a group of fund managers including Jupiter Asset Management, Aviva Investors and JP Morgan.

Internationalisation of the Chinese currency.

The Chinese Yuan (Renminbi) is becoming like a reserve currency.

[UK £10 = 103 Chinese RMB/Yuan = US$16 = Euro €11 = Singapore$19 = Hong Kong$124 = Australia$15 = Japanese Yen 1297]

The Central Bank of Sri Lanka has given approval for the Renminbi to be used in cross-border banking transactions, in a move that underscores the growing internationalisation of the Chinese currency as well as the close ties between the two countries. The central bank said its monetary board had agreed to allow the use of the Renminbi in international banking deals because it would significantly facilitate the growing volume of trade and investments between Sri Lanka and China.

China is today as the world’s second-largest economy, while also being a leading player in international trade, investments and foreign reserves. It also enjoys extensive economic connections with many countries; as a result the Renminbi has been gradually evolving as a globally accepted currency. The Renminbi is allowed in international transactions by several countries, including the US and the UK. However, Sri Lanka’s decision to allow the currency highlights its strengthening relationship with China.

Beijing has forged closer political ties with Sri Lanka and has been the biggest source of foreign funding to the country in recent years. China is also playing a big part in helping Sri Lanka with reconstruction following the end of the country’s 25-year civil war two years ago.

Beijing has been encouraging the use of the Renminbi as an international alternative to the US dollar. Over the past two years renminbi cross-border trades deals have surged.

Much of the activity around the currency has focused on Hong Kong, initially chosen by the Beijing to act as a launch pad for the currency’s expansion beyond mainland China.

Emerging Markets

The New Silk Road of Emerging Markets.

Stephen King is a very well respected Economist at HSBC. He wrote a paper called the Silk Road that is stating the emerging nations will increasingly be trading with each other in the future, thereby leaving the western economies more and more isolated. This is why BT is investing so heavily in Asia with Project Prosperity. Stephen King wrote in The Independent re-iterating this view.

The issue is as the UK, Germany, France and the USA all emerge from recession, investors are wondering where the growth is going to come from. Take Marcopolo. Brazil’s biggest bus maker. It’s having a fantastic year, with revenue up 47 percent so far. However, we don’t see Marcopolo buses on the streets of Europe or North America though. They’re cruising the roads, highways and city streets of Argentina, Colombia, Mexico, Egypt, India, China, and South Africa. Maybe the Brazilians have a better relationship with these customers than the traditional big multinationals. Interesting point, Marcopolo sold 460 buses to South Africa for the World Cup last year. Stephen King, chief economist of HSBC, has dubbed “the new Silk Road”—a 21st-century version of the trade routes that criss-crossed Asia almost 2,000 years ago, linking merchants in China to their counterparts in India, Arabia, and the Roman Empire. The new Silk Road spans the globe, connecting companies and consumers in Latin America, the Mideast, Asia, and Africa, and generating some $2.8 trillion in trade, according to the World Trade Organisation.

[an interesting side comment, US$2.8 Trillion = GBP £1.72 Trillion, in Oct 2008 at the height of the global financial crisis was the size of the Royal Bank of Scotland balance sheet was over £1.7 Trillion, yes RBS had assets of GBP £2.2 Trillon, remember the UK GDP is about GBP £1.4 Trillion….]

King is quoted to have said that emerging markets will grow about three times faster than rich nations this year and next. There are now massive trade connections within the emerging markets. It means in one sense the emerging world is protected from the worst ravages of the developed world. The WTO estimates intra-emerging-market trade rose, on average, by 18 percent per year from 2000 to 2008, faster than commerce grew between emerging and advanced nations.
The developed world will increasingly compete with these fast-rising countries for resources like oil and iron ore. The established multinationals will also encounter new pressure from emerging-market rivals, many of them state-supported. Yet for Western and Japanese companies that are the best in their industries, the opportunities are great. One example: Caterpillar, the world’s largest maker of construction equipment, raised its full-year earnings forecast last month on higher demand in developing countries for mining, energy, and rail equipment. Note that demand was not from mature markets. While the USA, Europe (not Greece….) and other developed countries hope to find their place on the Silk Road, the central player is China. Chinese exports to the emerging world accounted for about 9.5 percent of its gross domestic product in 2008, compared with 2 percent in 1985. Last month the Saudi Railways Organization awarded a contract to China South Locomotive & Rolling Stock to supply 10 locomotives. The Mecca-Medina rail contract went to Beijing-based China Railway Group. Shenzhen-based Huawei Technologies, China’s top maker of phone equipment, is investing $500 million in its research centre in Bangalore. China Mobile, the world’s biggest phone carrier, may soon invest in Africa. India and Brazil are stepping up their efforts, too. India’s Tata Group was one of the largest investors in sub-Saharan Africa in the six years through 2009, according to the Organisation for Economic Cooperation & Development. Many Silk Road companies are becoming aggressive acquirers. We are seeing the same phenomenon with European and American companies as they went global over the past 100 years, eg Vodafone, BP, HSBC, Nestle, Ericsson, Unilever, Cisco, Shell, Coca-Cola, UPS, Toyota, Oracle, Boeing, Pfizer, Ford, Siemens, Proctor and Gamble, ExxonMobil, McDonalds blah, blah, blah….
Today, Brazilian mining company Vale has invested in three copper projects in Zambia and the Democratic Republic of the Congo. In April the company agreed to pay $2.5 billion for iron ore deposits in Guinea, and another example is Australia’s mining giant, BHP-Biliton who bought Chesapeake Energy Corp for $4.75bn, note that the balance sheet of BHPBiliton shows they have assets of $98.2bn.
Such trade used to be conducted in Dollars, Pounds, and Euros, even when the deals did not involve U.S. or European companies. Today companies in emerging markets are more willing to take Reals, Rupees, and, above all, Yuan as the Silk Road economies prosper. If emerging-market fundamentals continue to be superior there is the potential for serious currency appreciation against old-guard currencies, (the mature markets).
With trade comes competition. About a third of the order book of Brazilian plane maker Empresa Brasileira de Aeronáutica, or Embraer, comes from emerging-market customers, up from 1 percent in 2005. Yet Embraer doesn’t have the field to itself. The Brazilians are bracing for a fight from Russia’s Sukhoi and Commercial Aircraft Corporation of China, which are both developing airliners.
Traffic on the Silk Road is getting pretty heavy. Names like ZTE, Petrobas, Huawei, Tata, China Life, America Movil,  ICBC, Levono, Bank of China, Ping Insurance, BHPBiliton, Bank of Baroda, SingTel, China Telecom, Haier, Reliance, Hutchison Whampoa, Shanghai Automotive, Astra International, China Mobile, Dr.Reddy, Mahindra & Mahindra, AirAsia, RioTinto, PT Indosat, Vale, Sinopec, Infosys, Cemex, Bumi Resources, State Bank of India, Petronas, ICICI Bank, Wipro, Mittal Steel, Bajaj, Godrej….blah, blah, blah will be household names in the very near future.

Finally, trading ties among developing nations are intensifying fast and may eclipse emerging-market ties with the West.

Investment in Natural Resources

In the FT recently, there was an article on how rare earth metals have doubled in just three weeks amid heavy stockpiling in China.

A trend in the market place has been the movement of investment funds out of traditional financial instruments such as shares and bonds, into other asset classes such as commodities like metals and natural resources. Today Legal and General the UK’s largest institutional investor owning about 5% of the UK Stock Market


They have launched a new fund, that is focussed on Environmental Enterprises:


Another fund is the JP Morgan Natural Resources Fund:

Also M&G (the Fund Management company of Prudential) have a fund called Global Basics:[]

Perhaps when interest rates are near zero, then investors are looking at more sophisticated assets to find a better return, such as natural resources to diversify the asset base, or if you are pension fund manager, that has monthly obligations, getting an income from having investments in natural resources, or getting the generous dividend from BHP Biliton are really vital.

Investment Funds

An investment fund = Unit Trust = Mutual Fund = Open End Investment Company (OEIC) = Individual Company with Variable Capital (ICVC)

Think of a fund as a collection of stocks or bonds (securities) with something in common.

By investing in a fund, you’re essentially pooling your money with other investors to access a broader range of stocks or bonds than most people could own by themselves.

Every fund reflects a particular investment objective and style, such as growth or value, which affects the stocks, bonds, and/or other securities that it buys. Knowing this can help you to determine whether a fund would be a good fit for your overall portfolio.

Funds have some advantages over individual stocks or bonds, including:

Diversification. For a minimum investment, you gain exposure across broad market segments at a fraction of the cost of owning representative individual securities on your own.

Professional management. You don’t have to keep track of the individual securities that make up the fund. An expert fund manager (like Asad Karim) takes care of that by buying and selling as needed to help the fund meet its objectives.

Convenience/liquidity. You can buy and sell funds daily during market hours by phone or online, so you can always access your money.

When you invest in a fund, you purchase shares along with many other investors. The cost of a fund share is called the net asset value (NAV). For example, if you invest £1,000 in a fund with an NAV of £50, you will own 20 shares.

Active and Index

There are two main types of funds: actively managed and index. With an actively managed fund, a fund manager attempts to exceed the average returns of the market. There is the risk that the fund manager’s selection may underperform, but there is also a chance to beat the market.

Index funds try to track the return of a benchmark index such as the FTSE-100 Index by owning shares (securities) that make up the index or a representative sample. They won’t beat the market, but they shouldn’t substantially underperform it either. They usually have lower costs than actively managed funds. Active and index funds can complement each other in a well-diversified portfolio.

Index Tracking Funds

Index-tracking funds closely follow the performance of a particular stock market or sector – tracking the index. They’re also known as passively managed funds. There are various ways the fund providers do this. Index-tracking doesn’t involve the extensive research used in an actively managed fund to select particular companies. Also, an index-tracking fund will only buy and sell shares to match the index: typically, these transactions are less frequent than those made by an actively managed fund. Index-tracking funds will typically have a lower management charge than an actively managed fund, as one is not paying for a fund manager, the index fund is just a computer trading buying and selling as the index moves.

Trading: Fibonacci Numbers and the Golden Ratio

The Fibonacci sequence first appeared as the solution to a problem in the Liber Abaci, a book written by Leonardo Fibonacci in 1202 to introduce the Hindu-Arabic numerals used today to a Europe still using Roman numerals. That in itself is one of the greatest innovations the world has ever seen.

Fibonacci was an Italian mathematician and he’s finest remembered by his globe popular Fibonacci sequence, the definition of this sequence is always that it is formed by a series of numbers in which each amount may be the sum from the two preceding numbers; 1, 1, two, 3, 5, 8, 13….

What is incredible that mathematics from 800 years ago, today is used in Financial Markets. [and no, Asad Karim does not use an abacus to calculate his ‘low net worth’ !!!]

The case of foreign exchange dealing, Fibonacci mathematics is essential for that foreign exchange market, as the Fibonacci ratios derived from this sequence of numbers, that i. e.. 236,. 50,. 382,. 618, etc etc, are related to the direction of foreign currency exchange market movements. The Fibonacci retracements is a method of technical analysis for determining support and resistance levels in foreign exchange markets. Fibonacci retracement is based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction. Hedge funds and foreign exchange trading use Leonardo Fibonacci’s genius.

The original problem in the Liber Abaci posed the question: How many pairs of cute fluffy rabbits can be generated from a single pair, if each month each mature pair brings forth a new pair, which, from the second month, becomes productive. [when I was 17 I had a grey pet rabbit called Norman who sadly died the night before I left home for The University of Liverpool to read Applied Mathematics & Theoretical Physics.]

These ratios are mathematical proportions prevalent in several areas and structures in nature, as properly as in several man made creations like financial markets.

After the first few numbers in the Fibonacci sequence, the ratio of any number to the next higher number is approximately .618, and the lower number is 1.618. These two figures are the golden mean or the golden ratio. Its proportions are pleasing to the human senses and it appears throughout biology, art, music, and architecture. A few examples of natural shapes based on the Golden Ratio include DNA molecules, sunflowers, snail shells, pineapples, galaxies, and hurricanes.

Repo Interest Rate

In the back pages of The FT you will see lots of different interest rate terms. Always confused me what all these terms and rates actually meant.

A term that is oftern reported in the press and media is the Repo Rate. When a bank or financial institution is short on funds they are able to borrow money from the central bank, eg The Bank of England. The repo rate is the rate at which banks or financial institutions borrow short term money. The repo rate is also referred to as the repurchase rate. A repo rate can be described as an interest rate on loans from the central bank. If the Bank of England desires to make it more costly for high street banks to borrow money then it will increase the repo rate, if they want to make it cheaper for money to be borrowed then the central bank reduces the repo rate.

Repo stands for “repurchase”.  A good explanation is below, that I took from Wiki.

” A Repurchase agreement, also known as a Repo, or Sale and Repurchase Agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price will be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party who originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest. ”

To put it simply, the security that is the subject of the agreement to sell now and buy back later remains the asset of the bank. The bank, on the other hand, gets money which can be added to its cash reserve. The “fixed rate of interest” being charged in this transaction is the Repo Rate.

To summarise this, the bank enters into an agreement with the central bank, based on which it gets a security on loan from the central bank. It then promptly sells that security in the open market, raises cash and adds that to its cash reserves.Thus we see that Repo Rate are the means by which the central bank lends cash reserves to banks. When the central bank lends cash to a bank by accepting a government security as collateral (Repo), it is essentially augmenting the bank’s cash reserves.

In September of 2008, when the financial crisis was at its peak, after Lehman Brothers failed,  European banks we running out of US Dollar$, infact that was a major problem at RBS, it was running out of US Dollar$ fortunately, UK HM Government came to the rescue, we saw a co-ordinated approach for the global central banks and use of the Repo Rate, when the US Federal Reserve lent US$ Dollars to the Bank of England, than then in turn lent those dollar$ to the UK banks, all via the Repo process

Accuracy: Our Calendar

Sometimes it feels as if we are slaves to Outloook & Calendar, meetings, appointments, BT Meet Me audio conferences, webinars, livemeetings, knowledge calls, Telepresence requests, 1-2-1’s, sales deadlines, blah, blah, blah.
I was thinking about the fact of how important the calendar is when it comes to our daily routine but also other key days like the annual performance review, the payment of annual subscriptions, closer to retirement age, etc etc, and I started to think about the mechanics of the annual calendar.

It is incredible to think, it was nearly 1000 years ago, that Persia’s greatest mathematician, astronomer and poet, Omar Khayyam [1048-1131] worked out the solar year. In 1074 AD Omar Khayyam built an observatory in Persia at a location called Ray, as he was asked to develop an accurate solar calendar to be used for tax collection and various local administrative matters. This calendar was way ahead of its time, it is today accurate to within one day in 3770 years. Specifically, Omar Khayyam measured the length of the year as 365.24219858156 days. It shows that he recognised the importance of accuracy by giving his result to eleven decimal places. In telecoms, the accuracy of data is essential. We take it for granted, our network time (Network Synchronisation) is essential for basically the integrity of all telecommunications.
Omar Khayyam’s work, was done effectively in a time of very limited mathematical knowledge, to put things into context, Sir Issac Newtons “Principia” was published in 1671, the corner stone to modern mathematics, and yet Omar Khayyam was laying the foundations to our calendar 597 years BEFORE our Newton. Next time you are sending out a calendar appointment remember it is based on mathematics from 937 years ago. (approx….)


Complex financial instruments have been an innovation in the market efficiency in capital markets. They can help reduce risk, limit exposure to changing prices, but also can be highly lethal, when it comes to bringing down financial empires. eg. CDO’s from the USA, were traded, and they turned into toxic assets.
Warren Buffet the legendary investor, the Sage of Omaha, the CEO of Berkshire Hathaway, and one of the world’s richest men, is quoted to refer to derivatives as financial weapons of mass destruction.

So what are derivatives ?

To put is simply, they come from agriculture, when farmers hundreds of years ago want to secure the price of their harvest crop (rice, corn, wheat etc etc) in the future, to protect them against market changes, such as over production or perhaps another unforeseen problem like a drought. In the financial world, they are exactly the same, derivatives are contracts whose value is “derived” from the price of something else, typically a share (stock), and a share is an equity instrument, so an equity derivative, for example, might give you the right to buy BT Shares (BT plc) at a stated price up to a given date. And in these circumstances the value of that right will be directly related to the price of the “underlying” BT Share: if the share price of BT moves up (which can only be a good thing…especially if you are in sharesave…..) then the right to buy BT shares at a fixed price becomes more valuable; if it BT shares then moves down (which upsets me and fellow shareholders), the right to buy BT shares at a fixed price becomes less valuable.

A good example from the FT, as explaining them which a physical asset, shoes !! Here is the example.

Say you believe the price of Gucci shoes is going to rise in 30 days’ time. You want exposure to that price rise. To speculate, you buy those Gucci shoes on Ebay at today’s price for delivery in 30 days. No matter what happens to the price of Gucci shoes in the interim, you are scheduled to receive your shoes in 30 days’ time for the price you paid today. If the price of the shoes shoots up in the interim, there is nothing stopping you from selling them on to someone else for a higher price. On delivery date, you would simply sign over the right to the delivery to the person you sold the shoes to.
In some cases, the seller of the Gucci shoes (if she believes the price is going to fall) might even be inclined to sell the right to those shoes in 30 days’ time, before actually obtaining them first herself. That is because she believes they may become cheaper closer to delivery time. No matter how many times the contract exchanges hands, in 30 days one pair of Gucci shoes has to be delivered by the seller to the ultimate recipient. Not a pair of Clarks loafers. Not a pair of Nike trainers. Only a pair of Gucci shoes of a certain specification will do. On delivery day, then, the price of the futures contract has to converge with the underlying supply and demand fundamentals of Gucci shoes.

To put it very crudely, it is like a piece of insurance, to protect against price movement.

Our Love Affair with Crude Oil

Our ‘Crude Oil Addiction’ is best described by our shear volume of consumption of this black gold. A co$tly addiction, l£t m£ £xplain…..

Using BP’s Statistical Review of World Energy, the world uses 80m barrels a day. Production approximately meets this demand.
[1 barrel of crude oil costs about $110]

The numbers are staggering:

80,000,000 barrels at $110 = $8,800,000,000 = $8.8 bn [£5.5 bn]

So the world each day spends £5.5bn or $8.8bn Per Day on Crude Oil.
A little side fact, the US is the largest consumer at about 19m barrels a day = $2,090,000,000 = $2.09 bn per day.

(about 20% of world production is used by the USA)

China use 4m barrels a day, which equates to $440,000,000 = $440m a day spent by the Chinese on Crude Oil. The largest producer is Saudi Arabia with 8m barrels a day produced = $880,000,000 a day ($880m) in revenue to Saudi Arabia.
The numbers just show our desire for crude oil.

Ethical Investment Policy

Ethical Investment funds are designed to only invest in companies, that avoid questionable activities, such tobacco production, arms and weapons manufacturing or processes that pollute the environment.They are tailored for investors who have principals or questions on how there money in tied up and invested. In the UK the Co-Operative Bank have for a long time, refused business customers who pollute the environment.


The idea originated in the US, where church investment groups who controlled billions of dollars and often did not want the money used to prop up repressive regimes in the developing world. It became very popular in the 1970s when the Vietnam War led to some investors questioning what their money was funding. Friends Provident the life insurance firm founded by Quakers – set up the first so-called ‘ethical fund’, called The Stewardship Unit Trust, back in 1983.
A good site that recommends other ethical investment funds is :- []
Here is a good example of a fund that has an ethical investment policy.


The Legal and General Ethical Trust.
Interesting to see the names that this fund holds:- BT Group PLC, Vodafone PLC, Prudential PLC,
The FTSE has an index known as the FTSE 4 Good Index which of course BT is a member of:- []
In general, an ethical fund manager will run checks on the company to find out if it has interests in a number of positive and negative criteria.

Positive criteria includes:

  • Specific environmental protection practices.
    Extensive involvement in conservation and recycling measures.
    Pollution control.
    Ethical employment practices, such as recognising trade unions and treating workers fairly and an emphasis on health and safety

Negative criteria includes:

  • Involvement in weapons manufacture.
    Animal exploitation and testing.
    Poor employer relations like a non-union workforce
    Involvement in supporting oppressive regimes.
    Alcohol and tobacco promotion.
    Environmentally damaging product practices.

However, this is not a complete list, and it is hard to determine, on what is ethical or not ethical, it is am imprecise science, but also who determines what is ethical or moral?

The Bond Market vs The Stock Market

Th€ $hear size of the global capital markets is incredible, and when hears the size of the US National debt ($14 Trillion), getting ones head around the size of an economy can prove hard.
The power and control of the Bond Mark£t is what I find more thought provoking. Governments can be brought down by the bond market.

However a good way to understand numbers, is to compare, so I thought I would undertake some research (Asad Karim style) into the size of the Stock Market (equity market) and then Bond Market (debt market).

The world’s Stock and Bond markets in total have a market value in U.S. dollar terms of more than $125 Trillion, [£77 Trillion] or approximately two times the value of the world’s total economic output (GDP), estimated at approximately $61 Trillion. [£38 Trillion]

Total value of the Stock(equity) & Bond markets (debt)
$126,449 Billion or $126.449 Trillion. [£77.601 Trillion]
That is made up of  $44,223 Billion in Stock (Shares) [£27,139 Billion or £27.139 Trillion]
So you would need to have £27,139 Billion to buy all the shares in all the companies listed around the world.

[Apple has a very large market capitalisation of £352 Billion, (352/44223 x 100) equates to 0.79% of the Global Stock Market]

[BT has a market capitalisation of £13.759 Billion which equates to 0.05% of the Global Stock Market]

[HSBC has a market capitalisation of £99.558 Billion which equates to 0.36% of the Global Stock Market]
$82,226 Billion is Bonds. [£50,461 Billion]
So today there is £50,461 Billion (£50.461 Trillion) in debt that is outstanding. A note to remember is that this debt is gathering interest too. It is the fact that the global bond market nearly exceeds the world stock market in size by a factor of nearly 2 to 1 really puts things into perspective for me.
Yes, the debt market is nearly twice as large as the stock market. So that is why when you see such a major financial crisis in banking, the credit markets and governments in danger of not paying there obligations, you see this massive turmoil.
When one looks at the mechanics of banking, apart from raising cash from deposits, banks raise cash from the bond market, by bond issuance, and then use the cash to fund themselves like creating mortgages or loans from the cash raised from the bonds issued.
Governments are the same, raising funds from the international money markets, and pension funds. So when these bonds are at risk of not being paid, that is when you have such horrific market turmoil and lack of confidence. Remember if you borrow, you have to pay back, thus the term bond. My word is my bond, or in global terms a £50.461 Trillion Pound Bond or $82,226 Billion Dollar Bond !!
(and it is paper after all… Paul Krugman has said)

The serious issue is these bonds must be honoured, as who buys them ? Pension funds. Pensioners deserve good pensions.
……but then as Pink Floyd said in ‘Money’ from Dark Side of the Moon from the wonderful year 1973 (a critical year for Asad Karim….), in the 3rd verse “Money, It’s a crime, Share it fairly, But don’t take a slice of my pie, Money, So they say, Is the root of all evil today”…..

Infrastructure Investment.

In this highly volatile times, how can you secure your capital and where is it safe to invest our hard earned money ?
Infrastructure is something that professional funds like pension funds are moving their money into, and I am showing some specific funds that invest in essential infrastructure and public-private finance deals to provide an income too.
The return (yield) can be between 4 and 6% easily beat returns on most deposit accounts. The rent, tolls or usage fees for the infrastructure asset are often linked to inflation, which boost income
With governments unable to pay for new roads, hospitals, bridges, tunnels, schools, public sector facilities etc etc, the governing authorities are looking for private partners to help pay to replace ageing infrastructure.
Thus infrastructure funds could “bridge” that public sector funding gap.
These funds give predictable cash flows, often in highly regulated markets, and this provides a good, inflation-linked income stream. While infrastructure investment funds are a new source of income they are also investing in hard assets rather than paper financial assets.
Have a look at 3i Infrastructure, HICL Infrastructure, John Laing Infrastructure, Macquarie Infrastructure and First State Infrastructure.

They all offer a healthy dividend in these low interest rate times, and hold their investments in hard assets like bridges, roads, hospitals etc.  An asset class that is physical.
An interesting little snippet, when one looks at 3i Infrastructure:
Question: Guess who is one of the largest shareholders, with 3.48% of all the shares?
Answer: The BT Pension Fund (Hermes Invesment Management)

The Mechanics of the Banking System

The Mechanics of the Banking System

Today marks a turning point in UK banking, with the long awaited report from Independent Commission on Banking, chaired by Sir John Vickers.

Effectively this is recommending that the retail banking business is ring fenced from the risking investment banking arm, to avoid a banking collapse, and protect the UK taxpayer from a bailout.
The banking system on the high street works on a process called The Fractional Reserve Banking. This refers to a banking system which requires the high street banks to keep only portion (a fraction) of the money deposited with them as reserves. The bank pays interest on all deposits made by its customers and uses the deposited money to make new loans. In order to understand how fractional reserve banking works, in this blog let’s look at the following example.
[I read a book on finance by Liaquat Ahamed that gives a worked example]
Somebody (not Asad Karim, he’s not that flush…) deposits £10,000 with HSBC. HSBC is obligated by law to keep 10% of the deposited money as a reserve, that’s why the bank keeps £1000 and lends out £9000. Somewhere down the road the £9000 loan is deposited in another bank account (RBS for example, or it could be with the same bank HSBC but let’s keep things simple). Now RBS (our second bank 83% owned by us, the UK Taxpayer…) also wants to make money by giving out loans, that’s why it keeps the required £900 and lends £8100. Fast forward to a deposit with a LloydsTSB (fourth bank, 41% owned by us, the UK Taxpayer…) and you’ll get the following:
Bank             Deposit           Reserve           Loan
HSBC             £10000            £1000                £9000
RBS                £9000             £900                  £8100
Barclays         £8100             £810                  £7290
LloydsTSB     £7290              £7290                £0
Total              £34390            £10000              £24390
As you can see from the table above, the banks created £24,390 in loans based on the first £10,000 deposited. Yes, you guessed it a licence to print money. This is sometimes known as the ‘Money Multiplier’ where money gets re-lent out, some commentators call the banking system a hugh Ponzi Scheme. The fractional reserve banking works for now, because the total amount of withdrawals is offset by deposits made at the same time. While the depositors are confident at the fractional-reserve banking system, a very small part of all deposits is withdrawn at the same time allowing the banks to handle the withdrawals through their minuscule reserves. However when people’s confidence in the banks is shaken, bank runs are possible, (2007 UK Northern Rock) and the entire banking and financial system can collapse.
However, what I don’t understand from the Sir John Vickers report, is that even if the report is put into law, and retail deposits are secured, that would not saved HBOS, Northern Rock, Bradford and Bingley, London Scottish Bank, all of which, were Retail banks, with NO risking investment arms, and were brought to their knees, by simply lending too much (from retail deposits) to the property (real estate sector) !!
In otherwords, poor credit management was to blame.

Banking and Moral Hazard

A few weeks ago, I watched the TV drama ‘Too Big Too Fail’ on Sky Atlantic, based on Andrew Ross Sorkin’s book called Too Big To Fail.


Andrew Ross Sorkin is the business editor of The New York Times. The drama was about the 2008 Wall Street Crisis, and throughout the drama, the term Moral Hazard is mentioned.
Economics and finance are complex subjects as they are governed by forces such human behaviour. The banking crisis that begun in 2007 in the UK with the run on the bank, Northern Rock, again the term coined in the media (Robert Peston & Co) was again Moral Hazard.
In this blog, I will explain what it means in the context of global banking and financial markets. The phrase “moral hazard” originally comes from the world of insurance. It refers to the future situation that insurance will distort peoples behaviour. For example when a holder of fire insurance take less precaution with respect to avoiding fire.
In the banking context, what this means, is that ‘bad beaviour’ or ‘reckless actions’ will be rewarded with a bailout. So let explain in more human terms. If a child (not Asad Karim) is being naughty, and chocolate (candy) is given to the child, then the chances of the child being naughty again are high, as they know they could be rewarded with more chocolate.

Central bank chiefs, economists and government officials have warning about moral hazard, especially with regard to the sub-prime crisis from 2007. In the context that if a high street retail bank lends in a reckless fashion to the property sector that ultimately leads of insolvency, (Northern Rock as an example) then the Bank of England will step in and  provide emergency loans (£30 billion) to Northern Rock, then perhaps in the future, the high street retail bank will continue to be careless and irresponsible with its lending decisions, as ultimately it knows it will be rescued by the state / central bank.
One argument about allowing Lehman Brothers to fail, was a government decision, to send a a clear message out to the market, that bad behaviour has its very serious consequences, and reckless actions will NOT be rewarded, and a rescue will not come from government / tax payers.
Final comment, perhaps today when commentators talk about banks unwilling to lend, it could be the simple fact that perhaps their will not be a government organised rescue, or perhaps it could be the honest fact, that government has no more money, and a rescue is not possible, so to to avoid any risk, banks are not lending as they can’t take the chance of a loan going bad as their is no lender or investor of last resort.
Moral Hazard at work.

Quantitative Easing Explained

The UK Bank of England injected into the UK Economy a sum of £375 Billion. This process of injecting money is called Quantitative Easing. The Japanese did this in the 1990’s to rescue their banking sector, and the UK Federal Reserve has done the same, to help the US economy after the financial crisis. Only last week the Bank of England are talking about more Quantitative Easing, and also the US decided to do more by buying short term US Government Bonds to lower long term interest rates, by more Quantitative Easing.

But what really is Quantitative Easing ?

To put it simply the Central Bank (eg The Bank of England) creates money and uses it to buy assets such as government bnods and high quality debt from private companies, (like BT)


BT’s bonds.

This created money feeds into the wider economy as high street banks that hold government bonds and corporate debt (high quality debt from private companies) sell the gilts and corporate bonds to The Bank of England, and get the newly created cash. The Bank of England for example, in March 2009, they decided to buy two types of asset – UK government bonds (known as gilts) and high-quality corporate bonds. Making the majority of purchases in gilts allows the Bank to increase the quantity of money in the economy rapidly. Targeted purchases of private sector assets has make it easier and cheaper for companies to raise finance by improving conditions in corporate credit markets.
The above link from a speech in 2004 that makes interesting reading on monetary policy from the US Federal Reserve, and now quantitative easing.  So really it is not printing money as the media often say, but really it creating new credit