New CME margin for silver and gold futures - fixed percentage of noitional

The CME has set new margin rules for gold and silver. The CME says this is a procedural change with no significant impact on the margin market, but we think it is a much bigger issue and will eventually affect all markets. Traditionally, margins are set as a dollar value tied to the contract's notional value and volatility. It should cover more than the expected most significant one-day move. The link between VaR and margin in this setting is unclear; there is no direct link, and it is determined by a committee. There is a process, but it is not mechanical, and the underlying assumption is that margins will remain relatively stable over time unless market behavior changes significantly.

The new procedure that went into effect for the gold and silver markets is now based on a percentage of notional value. Hence, if the value of the gold or silver contract increases, there will be a corresponding increase in margin. In a rising market, the longs will have to post more margin on their gains instead of being able to take their notional gains out of the market. In practice, most traders will not take excess cash from their margin account until there is a gain in cash balances. In the case of shorts, when there is a gain in the market, there will be a need to post more money. The average cost of shorting will be higher.

Now, at the end of the month, the CME increased the margin percentage for gold and silver, so the margin required for those contracts needed to be posted again. 

Gold margins rose to 8% of the value of the underlying contract from the current 6% for a non-heightened risk profile, and the heightened risk profile margins increased to 8.8% from the current 6.6%.

Silver margins climbed to 15% from the current 11% for a non-heightened risk profile, while the heightened risk profile margins moved to 16.5% from the current 12.1%. Platinum and palladium futures' margins were also boosted.

Are we creating the wrong macroeconmic statistics?

 

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The book The Mismeasurement of America: How Outdated Government Statistics Mask the Economic Struggle of Everyday Americans, by Gene Ludwig, the former Comptroller of the Currency and the Ludwig Institute for Shared Economic Prosperity, is a thoughtful, concise analysis of a critical issue. Do we measure unemployment, median wages, and inflation effectively? The answer is no. Before you say this is only a policy issue, consider the current discussion of a K-shaped economy.

The simple question is: why do American workers feel so stressed when employment, wage, and inflation numbers are either positive or tame? The answer is that our statistics on these key issues are problematic. 

They tell a story, but reality may be different. For example, inflation appears to be under control, although it exceeds the 2% target; however, if we focus on a basket of everyday necessities, inflation is much higher. Unemployment is low, but if you adjust for part-time and low-wage work, the functional unemployment rate is higher. If we consider an alternative wage scale based on actual time worked, we would see wage earners falling behind.

We need better, more informative data. We can address the fallout from politics, but we first need better facts.

The crowds, momentum, and risk in markets

 "These heroes of finance are like beads on a string - when one slips off, all the rest follow." - Henrik Ibsen during the early phase of the Great Depression 

An insightful comment from someone not in finance. Ibsen was mainly a playwright; however, he was aware of the goings-on in Europe and the world. We have heroes of finance, but they are not the contrarians. They are the ones leading the crowd or banging the drum to move the crowd. Everyone likes the person who reflects their thinking. I follow Bob because Bob's thinking is consistent with my view of the world. Show me the person who is thinking differently. They are the people who will move me to think better. 

Global Capitalism - we may never go back the the early 20th century world

 

Jeffry Friedman is one of the leading economists on the history of the international global order. His book, Global Capitalism: Its Fall and Rise in the Twentieth Century, is now 20 years old, but it is a good read if you would like to know where we have been before the current globalization upheaval. Global capitalism is not natural. It was fought for by a few visionary bankers. These bankers made money, but they also saw a more connected world. Unfortunately, the Great War destroyed the high point in global trade and reset the world financial order. The depression forced new isolation. The Second World War again led to a new, more controlled international order under U.S. dollar hegemony. This system broke down, but we saw a new emergence of global capitalism following the fall of communism, cheap transportation, and a world willing to cooperate. The story ends before the Great Financial Crisis, which again led to a shift in global capitalism toward autarky, neo-mercantilism, and non-cooperation. We are observing a decline in trade volumes. We may never see coordinated global capitalism, but we do see bastardized forms of public-private coordination imposed on economies.