Who is the real Market Maker
On Thursday the US stock markets suffered one their most dramatic one day falls
in history when the Dow plunged a thousand points and recovered much of it shortly
afterwards. Of course the speculators and investigators are out looking for
a reason why.
Some reports say a trading floor broker pressed the b on his keyboard instead of an m while selling Proctor and Gamble shares. Others say it was the computerised trading programs that are becoming so popular reacting to preprogrammed volatility thresholds. This trader has his own two cents to add to the debate.
If you are a market maker, in other words you hold billions of dollars worth of shares in key companies why wouldn't you want to offload large amounts unexpectedly and then buy them back after the rest of the market panicked and followed your lead. You could make millions at any time. This is based on the practice of shorting the market, of selling first and buying later at a lower price. But what I'm referring to differs in that the investor has bought first and intends to relinquish ownership of the shares for a short period to gain some extra profits.
There are some safe guards in the markets to protect against this. Firstly insiders like company directors and also major shareholders have to declare their transactions to the exchange. Small guys like you and I can track these transactions on various sites such as Yahoo! Finance. Insiders using their position and influence to profit from activities such as "Insider Trading" can incur huge penalties.
Now I want to move on and discuss the relatively unregulated Forex markets. Unlike stock exchanges forex exchanges aren't under the jurisdiction of any one country or legislating board. The market makers here aren't just companies, banks and hedge funds, but whole countries, some of whom rigidly control their own currency for their own benefit while actively trading others that have been floated. Such a country can, if it chooses, wage economic war on its competitors (other countries) by overvaluing or undervaluing their currency relative to their trade partners.
If country A needs to buy products from country B it can sell its reserves of country B's currency or buy back large quantities of its own currency to increase its currency's value relative to country B's currency. At the same time country B may also be selling its currency and buying country A's to help make its exports more affordable and desirable.
But what if say country C is trading with country A and sees country B as a competitor. If it has the buying power it can buy large amounts of country B's currency pushing up its value and reducing country B's ability to compete. Country C can further gain advantage by having its own currency fixed relative to its chief trading partner country A.
Hu JingTao's government is the world's largest corporation and the world's biggest employer, manufacturer and producer owning vast numbers of factories, farms and mining companies within China. Its interests are like any other companies: generating huge profits and lowering operating costs. And it has the advantage of having the law on its side because it is the government. The Hu government keeps its Yuan at fixed levels against the American dollar while its competitor Japan has suffered further in the global financial crisis by having its Yen trading at historic highs.
Not only does the world's largest corporation benefit from fixing its terms of trade but it can also liquidate the competition within its borders. Rio Tinto, an Australian company and the world's third largest miner had several of its Chinese based employees arrested and sentenced for corruption charges such as bribery after a deal by Chinalco to purchase a major holding in Rio fell through. Funnily enough several businessmen representing independent steel mills in China were also convicted at the same time on similar charges.
The Hu JingTao corporation likes to get its way as much as any other business likes to. The real danger for the global markets is this market maker really can move the markets long term in its favour with impunity.
Perhaps to even up the battle field American and Japanese
investors and investment banks have been buying up Australian currency and buying
Australian mining stocks to push up the value of exports to China. While the
US markets are up nearly 60% on their February 2009 lows, the Australia markets
up around the same amount would actually net each $US dollar invested in February
about 130% return on investment at the time of this writing due to the rapid
rise of the AUD. If there is a lesson here for the small investor it is to use
your US dollars to buy Australian shares during recessions and sell them for
US dollars (or Japanese Yen) during the peak boom periods.
Rudd's Emissions Trade Scheming
Before the panic of the Greek bailout took hold earlier in the trading week starting 3 May, the Australian stock market traded down as investors dumped their mining stocks. The reason for this was the newly announced tax the Labor government proposed on the weekend to help fund superannuation for millions of Australians at 12% of each workers' salary. To help pay for extra retirement handouts and buffer the tax cuts to small businesses the Rudd government said it would levy the mining companies with a 40% tax on profits.
Of course mining magnates and opposition politicians were fuming. But middle Australians were probably somewhat indifferent to the handout they wouldn't see until they retired. Small businesses realised that much of the money from their lower taxes would also end up going into their employees’ super funds.
Why would the prime minister and his treasurer want to penalise the largest income earning industry in his country? Rudd said it was because all Australians had a right to benefit from the sale of Australia's geology and not just the foreign owners and investors in the big mining companies.
However this major tax reform initiative came barely a week after Kevin Rudd put his Emissions Trading Scheme (ETS) on hold until 2013, a move that helped his former arch rival Malcolm Turnbull change his mind on retirement. So one has to ask the question and—if you're like me—come to the conclusion that the two policy decisions are somehow linked.
Coal is undoubtedly Australia's biggest product accounting for around 20% of its exports on average. Australia has also long been the world's biggest exporter of coal. But coal is a major cause of CO2 pollution which in a way makes Australia is one of the world's biggest polluters by proxy. That wouldn't sit well with a Prime Minister who touted his climate change credentials, and having made an election promise to do something to arrest the rate of global climate change, eventually saw his bill quashed in parliament by an opposition back flip.
So not able to introduce a tax on emissions Kevin Rudd and
treasurer Wayne Swann have introduced a superannuation tax, something that will
make any politician who opposes it look bad for doing so even in the eyes of
many climate change skeptics. The result will be the same. Australian power
companies aren't going to start importing cheaper foreign coal. They will just
take the higher prices offered by local mining companies and pass them on to
consumers. It's an ETS by stealth. In the end it will be Australian workers
and small business owners who will be topping up their retirement funds out
of their own pockets while power companies and mining companies will all get
their cuts along the way.
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