Things haven’t changed much since Old Hickory‘s time, have they? The bankers were in sore need of strict regulation then, and they still do. Reflect on this… Wafflin’ Willy wants to let the bankers run free and play MORE games with your money. That’s a recipe for a disaster that’ll make the present mess seem a holiday…
This is important as reckless and unregulated derivative trading, along with two hellishly-expensive wars of aggression and a government choked of funds due to imprudent tax cuts to the affluent effluent, led directly to the Great Meltdown of ’07. Thus, the American failure to win control of this market was a godsend. As HH said, “The modern economy’s a fraud. Who’s going to pay for it all? Why, the ordinary worker shall”. Now, that’s TRUTH.
At a time when Greece and Europe are hanging onto the edge of a cliff with their fingernails, and Iran and the 5 nations +1 are trying to stop another war in the Middle East, a turf war between the financial economy, the banks, and the real economy, the consumers and producers was fought and won. The winner was the real economy, and the battle was over the trading of the global metals market. The London Metal Exchange, known as the LME, is a 135-year-old member-owned exchange. It’s been the subject of a bitter bidding war between the US-based Intercontinental Exchange (ICE) and the Hong Kong Exchange and Clearing (HKEx). While ICE essentially represents Wall Street banks, and their derivative Ponzi trading schemes, the LME and HKEx represent real consumers and producers. The core difference is that under an ICE model, the interests of the intermediaries, the banks, come first, where transactions occur for the sake of profit to the intermediary. While under the HKEx model, the exchange is much more of a peer to peer system where HKEx acts in the interest of the end user, and facilitates real transactions, which represent real value.
With the centre of gravity for exchanges clearly moving east with the LME-HKEx deal, risk and risk management is a key consideration moving forward. The synergies between LME and HKEx have the clearing of trades at the core. HKEx already clears all their trades through the London Clearing House (LCH) as does the LME. In terms of spreading market risk, this is important, as there’ll be a much bigger pool of capital to support the clearing of market trades through LCH on behalf of real consumers, where of course the real capital is. Other bidders for HKEx wouldn’t make assurances that they wouldn’t move the clearing to a new clearing mechanism. Of course, the risk was that a clearing system would be set up by the banks, for the banks, using bank capital (credits) not real capital (“end user”… producer and consumer capital) with the result being market risk increasing as less capital is clearing more trades. Then, the market would be vulnerable to any large price movements, with the risk being banks running out of capital, a familiar story now to most of us. The key difference is that with the LCH, end consumers would be more supportive of the market risk; whilst under an alternative bid, intermediaries would be expected to support the market risk.
While all the other bidders for the LME, Intercontinental Exchange, CME Group and NYSE Euronext are US-based, the HKEx was the only non-US-based bid. Since the HKEx has pretty much gone from “zero to hero” in one swoop with the purchase of the LME, the LME also gets newfound market reach. As part of their bid, the HKEx promised to increase the participation of Chinese companies and traders on the LME. Of course, this would be no small addition, as China’s thirst for base metals is unrivalled in the world. However, it isn’t just consumers that HKEx is likely to attract. The Australian metals market is also likely to gravitate towards HKEx, as China is a key buyer of Australian metals so HKEx will also bring producers.
However, the benefits for the LME to scale its business don’t stop with just the increase of Chinese and Australian companies. The Hong Kong Mercantile Exchange (HK Merc) is also a new player on the block, trading gold and silver futures contracts, and they use the LCH to clear their trades. On top of this, the president of the HK Merc also sits on the board of the world’s largest Nickel producer, Norilsk Nickel, which happens to be Russian. Russia and Hong Kong have been going to great lengths to raise the profile of Russian companies in Hong Kong, including listing Norilsk Nickel for trading. It isn’t impossible to think that the HKEx and the HK Merc work in tandem in regards to products, or even merge the two groups.
HKEx pledged to tackle the problem of metals storage and delivery. Recently, storage of metals has become a big game, with banks and trading houses buying up all the available storage facilities and encouraging producers to send metal straight to storage. Of course, the banks and trading houses get huge storage fees, but they’ve also put a stranglehold on the delivery cycle of metals, with consumers bitterly complaining about the time taken for delivery, or being held ransom by the banks and the traders for spot delivery. This storage also hinders the real price of metals since the true state of supply and demand is kept hidden. Finally, and worst of all, this metal is funded by “Muppet” investors who have been sold “inflation hedging” funds by investment banks, who thereby cause the very inflation they wish to avoid. You couldn’t make it up. Nevertheless, unfortunately, the banks did.
The significance of the merger of the LME with HKEx shouldn’t be underestimated. In the development of 21st century resilient and networked markets, it’s a big step in the right direction and may mark the beginning of the end of the “Dark Side” of markets. This merger has created a link between real consumers and producers that will increase the participation of Russia, China, and Australia to the LME network, whilst reducing the role of the banks. This can only be positive for the markets going forward.
19 June 2012
The largest role in the ’07 Meltdown was that played by vulture capitalists such as Willard Romney, who played games with financial paper that represented no real world economic activity (to think that he actually believes that such self-serving buccaneering fits him to be US President). HH has said that we need an economy where shares represent real-world assets and resources. I heartily agree. The action described in the article by Mr Barden above is a step in that direction. It’s time to dismantle the bubble capital edifice before it blows up and destroys the world economy. Oh, yes… the affluent effluent is going to take a bath… BOO HOO.