Political risk map 2016

Aon plc (NYSE:AON), a leading global provider of risk management, insurance and reinsurance brokerage, powered by Roubini Global Economics produced its 2016 Political Risk Map with the additional ability to predict the future financial strength of global economies, which reflect a country’s ability to repay its sovereign debts.

The report is now freely accessible through AON's new, dedicated online portal, enabling those interested in the topic to examine past, current and future trends in global political risk.

The map examines political risk in 162 emerging economies, considering risks through nine risk icons (six in the print version), namely: exchange transfer, sovereign non-payment, political interference, supply chain disruption, legal & regulatory risk, political violence, risk of doing business, banking sector vulnerability and inability of government to provide stimulus.

The online portal allows users to drill into specific risks, territories and time periods, providing a comprehensive tool for those interested in understanding the impact of political risks on the global economy.

This year the map has the additional ability to predict the future financial strength of global economies using Roubini's Shadow Credit Rating scores, which reflect a country's ability to repay its sovereign debts.

An Improving Outlook

For the first time in three years, improvements in the political risk landscape far outweighed deteriorations. In fact, in 2016 the Political Risk Map counted eight upgrades, against half that many downgrades.

A slowing China and weaker commodity prices are responsible for increased political risk in both Sub-Saharan Africa and Latin America, although there is cause for cautious optimism in Argentina and Cuba.

In the Middle East and North Africa the oil drag deepens and continues to threaten domestic stability, heightening risk in the region. While in Asia Pacific, anti-corruption campaigns have helped to strengthen economic resilience and reduce political risk.

Why Popular Investments Are Usually Wrong

Why popular investments are usually wrong

(Wealth Management) Oscar Wilde, the 19th century poet and playwright, once said: "Everything popular is wrong."  The Irish wordsmith wasn't referring to the financial markets, but he may as well have been. That's because investors should be very wary of the popular stocks, sectors, and exchange-traded funds (ETFs) du jour.

While it's true that momentum can persist, more often than not, popularity is the kiss of death.

In finance, the degree of popularity is typically referred to as sentiment.  Fundamentals matter in the long term, but sentiment is what really drives short- and intermediate-term moves in the financial markets.  Caution is, therefore, essential when sentiment reaches a bullish extreme.

The Texas Hedge

It was a no-brainer, can't-lose trade.  Pundits on CNBC and Bloomberg TV were supremely confident in the outcome.  Fund flows poured in to take advantage of its inevitability.  This was a "layup" - a sure thing.  The Bank of Japan (BOJ) was going to depress the value of the Japanese yen, and Japanese equities would rise due to exporters benefiting from a cheap currency.

Naturally, everyone wanted to be long Japanese stocks, but short the yen, and the WisdomTree Japan Hedged Equity ETF (NYSEARCA:DXJ) provided an easy way to do just that.

Except now investors are realizing that they aren't hedged at all.  Ironically, the yen has gone through the roof ever since the BOJ implemented a quasi-negative interest rate scheme.  The U.S. dollar/Japanese yen exchange rate (USD/JPY) recently hit its lowest level since October 2014 (a decline in USD/JPY represents dollar weakness, yen strength).

Thus, anyone betting on a decline in the yen is getting bludgeoned in the market.  Not only that, Japanese equities are, unsurprisingly, falling in tandem with USD/JPY.  This is a lose/lose situation for DXJ holders.

Since April 2015, when I warned that investors in currency "hedged" ETFs were essentially speculating on currency movements, DXJ has lost 26% of its value (including distributions).  Going back even further to early 2014, DXJ has produced a total return ofnegative 6%.

Alas, it was so popular!  Over the same time frame, the S&P 500 has returned a positive 16%.

Shifting Sentiment

To be sure, DXJ now offers a far better risk-reward proposition than it did a year ago.  Basically, the fund may excel because the trade is not nearly as popular.  We're even seeing currency futures speculators, in aggregate, bet on yenappreciation.

The last time this group had a net long position in the yen was 2012, right before the yen plummeted as "Abenomics" was introduced. In other words, the sentiment of this crowd is a contrarian indicator.  Sentiment notwithstanding, the fundamentals for Japan, in general, remain poor.  Japan has a shortage of the most precious natural resource on the planet: children.

Do the central planners really think that burning their currency at the stake is going to solve anything? Well, they certainly shouldn't.  Nonetheless, the short-term swings will continue, as prices are determined - at the margin - by human behavior and emotions.

This is why serially buying the most popular investments is a great way to destroy wealth.

Meanwhile, the fundamentals for U.S. Treasuries remain strong. The real trick, however, will be knowing when they, too, have become overly popular.

Originally published by Alan Gula on WealthManagement.com.

Russia is Shooting Itself in the Foot Keller

Russia is shooting itself in the foot: Keller

(Bloomberg) -- Christian Keller, Head of EM Research at Barclays Capital, discusses the crisis in Ukraine, and his outlook for both Russia and China. He speaks on Bloomberg Television’s “The Pulse.”

Source: Bloomberg

Markit Alaric Blockchain - alaric trader securities broker stock trader

Blockchain: disruption or distraction?

(Markit) Jeffrey Billingham - a vice president in Markit’s Processing division and a leader of the Chain Gang discusses blockchain technology, Bitcoin protocol and the new market potential for the truly forward thinkers .

The financial industry began 2016 with a host of blockchain promises. While many of these promises show encouraging momentum, a clear implementation strategy remains elusive. If every bank, exchange, infrastructure provider and clearing house put their internal working groups in one room, all would agree to one point: blockchain technology is not a silver bullet for financial markets. However, beyond defining what the technology is not, few seem to agree on what the technology actually is.

The financial industry has invested over $1 billion in the last 14 months to support blockchain consortia, pilot programs, companies and other efforts to create consensus about implementing blockchain. This activity indicates a high level of excitement, but is atypical of how innovative technology enters a market. We would expect the industry to eschew consensus and exhibit bolder, unilateral moves in pursuit of competitive advantage. Moreover, if incumbent institutions were slow to move, we would expect blockchain startups to build new banks.

For now, neither is happening in earnest. A cynic would say the focus on partnerships only shows that players are hedging their bets. The eternal optimist would say that players need to partner to be successful.

Nevertheless, there is merit to the collaborative approach. A blockchain isn’t simply software to install, but rather the foundation of a robust peer-to-peer network. We at Markit certainly appreciate the time and efforts necessary to build a successful network. And, to be fair, at least one startup has obtained a banking license.

However, the question persists: why a blockchain? How did we go from a conversation about a digital currency to talk of a revolution in the creation and transfer of financial products and agreements?

Though unfashionable to admit, it started with some key perceptions about the Bitcoin protocol. Specifically:

1) Bitcoin transactions settle within minutes - minimal settlement latency.

2) Payers and receivers of bitcoin use a distributed ledger - no central data store.

While the financial industry struggled to come to terms with the post-crisis financial framework and its associated systemic costs, the Bitcoin protocol provided tantalizing solutions. Settlements, reconciliations, and the security apparatus around these processes, all of which can theoretically move to a blockchain, are massive drivers of cost for a financial enterprise.

At the same time, digital currency and distributed ledger startups had to reinvent themselves after the price of bitcoin slid throughout 2014. Realizing that budding interest from capital markets offered a lifeline, these companies moved away from digital currencies and towards concepts like enterprise blockchains, colored coins, metacoins, side chains, smart contracts, etc.

This union of convenience between cost-conscious financial firms and revenue-hungry technology firms propagated visions of a new operating paradigm in finance, but has yet to produce a long term framework that gets us there.

Instead, the industry distracted itself with a spate of false choices: it is “Bitcoin” or “The Blockchain?” Should a blockchain be “public” or “private?” Is this technology “the end of banking” or “just a database?” These questions prevent us from exploring the real elegance of blockchain technology.

If blockchains are to play a revolutionary role in financial services, 2016 must be the year that firms agree to disagree about the role of blockchain, forge their own paths, and dare others to follow.

Blockchain technology presents a new model for the architecture of the global financial system. That’s why consensus building, however well-intentioned, often results in a focus on the least common denominator, dimming our understanding of the bigger picture.

Speaking at the South by Southwest conference, Mark Thompson, CEO of The New York Times Company, explained how he thinks about new technology, specifically applying virtual reality tools to news reporting: “You can’t wait for someone to jump off the cliff, you have to jump first…We want to be braver than our rivals and be out there and be smart about it. Don’t make crazy bets when you’re not sure. But we cannot be complacent. We know what complacency leads to and we have to be brave.”

The financial industry must adopt the same mindset with blockchain. We can start with cost saving initiatives that digitize assets and agreements, but need to also understand that blockhain’s potential to transform management of collateral and securitize a range of financial products represents new market opportunities that will captured by truly forward thinkers in the industry.

by Jeffrey Billingham - a vice president in Markit’s Processing division and a leader of the Chain Gang, Markit’s group implementing distributed ledger technology.

Article originally published on Markit.

Still Time to Buy Gold Miners?

Still time to buy gold miners?

Finally, after months—nay, years—of dismal performance, gold mining stocks look good. Producers, I mean, not juniors.

Proxied by the Market Vectors Gold Miners ETF (NYSE Arca: GDX), these stocks are up better than 56 percent since the top of the year. That’s certainly good absolute performance, but it’s also good on a relative basis—relative to gold, that is.

The attractiveness of gold mining stocks traditionally boils down to leverage. Miners are bellwethers of sorts, traditionally rising earlier and faster than metal in bull cycles and swooning sooner and quicker in downturns. Leverage has been negative for GDX since 2010. You can see from the chart below that the mining ETF’s relative strength turned down months ahead of the 2011 price peak in the SPDR Gold Shares (NYSE Arca: GLD).



Bottoming action in late 2015 then presaged the 17 percent rise in GLD this year.

There’s another more compelling chart illustrating the resurgence in the miners. If you plot the price ratio of GLD to GDX, you get a graphic representation of investors’ favor. As the ratio rises, bullion becomes the preferred exposure for gold punters; when the ratio falls, mining stocks are fancied.

Just last week, the ratio broke through a key support level after cascading below the 200-day moving average, the first such occurrence in years.

Clearly, investors like gold now, but they love gold mining shares. And why not? Several of the big names in the GDX portfolio have washed themselves clean of the dirt that once sullied their balance sheets. That allows more of gold’s price buoyancy to percolate to the bottom line. A 10 percent rise in bullion could translate to a 50 percent hike in company cash flows. Now, that’s leverage.

And how does that translate to GDX’s price? GDX is dancing at the $22 level now. Long-term charts show a triple-top breakout pointing to a $36 objective. Patient investors are likely to use April price pullbacks to bargain shop, then ride the fund’s typical bullish seasonality and lighten up on their positions in August.

Originally posted by at The Market's Measure.

The New Minimum Requirements of the Advisor-Broker/Dealer Relationship

New requirements of the advisor-broker/dealer relationship

Not that long ago it was enough for an independent broker/dealer (IBD) to provide their advisors with basic clearing and custody and mandatory regulatory oversight. But today, with so many broker/dealers to choose from, advisors have come to expect much more. Higher levels of operational and practice management support, accelerated growth, cutting-edge technology and a strong platform are among the requirements FAs seek when considering a firm.

Yet with so many options out there, what should an IBD advisor do to make sure they are with the right broker/dealer? Is your current b/d still the one that can best serve your clients and allow you to meet your own business goals?

Checking in With Yourself

Before starting any due diligence, it’s important to have a strategy that begins with “checking in” with yourself to gain a true understanding of your requirements.

That means asking yourself:

“What do I wish my b/d would do to better support me and help me reach my goals?”
“Do I see myself with my current b/d five or 10 years from now?”
“If I had to start over, would I still choose my current b/d, given the options across the landscape and how my b/d has changed?”

Broker/Dealer Assessment: The Nine Minimum Requirements

At a minimum, all quality b/ds should offer the following:

  1. A robust platform with access to financial and estate planning, trust, insurance, lending and alternatives, etc. The platform should allow you to capture clients of all sizes including niche business.
  2. Best-in-class technology with the financial strength and commitment to an ongoing investment.
  3. The sophistication and expertise to anticipate, understand and prepare for regulatory changes. The firm should respond by creating policies and practices that are appropriate for high-quality, top advisors and not merely designed to manage to the lowest common denominator.
  4. Support for business growth—both inorganic and organic. The firm will act as a strategic partner by providing help with inorganic growth such as recruiting, identifying acquisition possibilities and providing access to capital and expertise. The firm should also have organic strategies for growth, including marketing support for new client development and the tools to support the business you want to develop.
  5. Practice management support, including operational support to maximize your team’s efficiency and the profitability of the business.
  6. Succession planning assistance by helping to develop next-generation talent through training, recruiting and human resource development.
  7. Best practices for wealth management and investment management represented by the ability to associate and share thought leadership with like-minded individuals.
  8. Fair and transparent economics so you are able to readily understand the payout and the true costs of associating with a b/d, and they should be well aligned with how you do your business.
  9. An accessible, responsive and knowledgeable support team that makes themselves available to you with answers that are meaningful and help, not hinder, your business processes.

Based on these nine criteria, you may find that your current b/d is lacking. With the many options out there for independents, why is it that some dissatisfied advisors opt to stay where they are? They typically fall into one or more of the following categories:

  1. They assume that all b/ds are essentially the same and nothing better exists.
  2. They are simply “comfortable enough.” While they have some frustrations, they are able to make it work. The challenges don’t yet impact their ability to accomplish what they need to, and they are still able to insulate clients from whatever imperfections exist.
  3. They find the array of choices overwhelming and confusing. It’s easier to stay than to take on the additional burden of exploration and moving a business.

While a move an advisor made a decade or more ago may have been right then, it doesn’t mean that the firm is still right. It would behoove you to re-evaluate periodically, even if you feel perfectly content, to confirm you are still in the best place to serve your clients.

Originally published by at WealthManagement Magazine.

Robo Advisers Set to Capitalize Under New U.S. Retirement Plan Rule

Roboadvisers set to capitalize under new U.S. retirement plan rule

A new U.S. rule protecting retirement funds from commission-paid brokers could be good for roboadvisers, a fast-growing sector that manages money with algorithms who may collect new clients fired by other firms because their accounts are too small.

While it is not clear how much money is at risk of leaving bigger firms because of the new rule, industry trade groups say the costs of compliance will be high.

Individuals with meager retirement savings or small businesses who offer 401(k) plans could get the boot from big brokerage firms because the revenue they generate is not worth the expense.

The fiduciary rule, aimed at ensuring that brokers put clients' best interests ahead of their own profits when advising on retirement funds, was released last week and requires all retirement plan advisors to be completely compliant by the end of 2017.

Roboadvisers like Wealthfront, Betterment and Aspiration said they are in a position to scoop up business that has been tossed aside by larger brokerage firms.

"To the extent that this rule starts undermining the business models for incumbents, it absolutely opens the door for innovators," said Andrei Cherny, chief executive of Aspiration.

At Betterment there is no minimum balance required, while Aspiration clients determine their own fees based on what they think is fair. Wealthfront's minimum balance is $500.

Roboadvisers have lower costs and offer smaller fees than traditional firms partly because they do not have to pay an army of brokers to sell their products.

The Labor Department predicts the broader wealth management industry will face up to $31.5 billion in additional compliance costs due to the fiduciary rule over the next decade.

A Department of Labor official said roboadvisers must comply with the rule just as human advisers do. But these firms already adhere to a fiduciary standard set by the U.S. Securities and Exchange Commission, which means costs and fees may not go up in the same way.

Arjun Saxena, a consultant who deals with wealth and asset management firms at PricewaterhouseCoopers, called the fiduciary rule "a big win for digital and online advice."

"Many of the larger firms do have a great deal of smaller clients," said Saxena.

Some traditional firms may end up partnering with roboadvisers to offer low-cost services instead of pushing clients out the door, he added.

Mike Sha, chief executive officer and co-founder of roboadviser SigFig Wealth Management LLC, said roboadvisers are keen on those kind of partnerships as well.

"One way to drive up scale is to partner with traditional financial institutions that already have a trusted name and brand," he said.

Fiduciary Shift

When the Labor Department first started crafting its fiduciary rule in 2010, roboadvisers were barely a gleam in the industry's eye. Although the idea has been around for more than a decade, it has only gained traction the past few years.

The industry now oversees $100 billion in assets, or about 3 percent of the wealth management industry, according to Deloitte Consulting. By 2025, Deloitte predicts the industry will manage between $5 trillion and $7 trillion, representing 10 to 15 percent of U.S. retail assets under management.

Betterment and Wealthfront are the most prominent roboadvisers, and came on the scene in 2010 and 2011, respectively. Since then, competitors like Aspiration and Vanguard's Personal Advisor Service platform have also sprung up. Firms including Charles Schwab, Bank of America Corp, BlackRock Inc, and Goldman Sachs Group have either acquired stakes in or developed their own in-house robocompetitors as well.

The wealth management industry has broadly gravitated toward a fiduciary standard in recent years, driven by client preferences and fee pressure as much as expectations that rules would get stiffer.

The biggest wealth management firms inside Morgan Stanley , Bank of America, Wells Fargo & Co and UBS AG have been shifting client assets from "transactional" brokerage accounts, which generate fees by trading frequently, to fiduciary accounts that charge a flat fee regardless of how often they trade.

Firms hit hardest by the Labor Department rule are smaller ones that still have a healthy number of transactional accounts, like LPL Financial Holdings Inc, analysts said. Insurers may also face pressure when it comes to selling certain annuities that face restrictions.

A spokesman for LPL Financial said the firm will not be one of the hardest hit and about 40 percent of overall assets are fee-based, and roughly two-thirds of new assets are fee-based.

(Additional reporting by Elizabeth Dilts in New York, and Lisa Lambert in Washington D.C.; Editing by Lauren Tara LaCapra and Chris Reese).

Originally published by Tariro Mzezewa on Wealth Management.com. Image credits: Images Bazaar, Getty Images.

India just stunned the gold market

India just stunned the gold market

(Business Insider) Dave Forest from OilPrice.com discusses latest Indian government taxes that affect the global gold market.

wrote a few weeks ago about record slowdowns in gold sales across India. With buyers in the world’s number-one consuming nation holding off on purchases ahead of an expected cut in import taxes from the federal government.

And yesterday we got the decision from India’s officials on the gold tax. Although it wasn’t at all what the market had hoped for.

Finance Minister Arun Jaitley presented the government’s gold plan as part of the annual federal budget. Saying that gold import taxes will remain unchanged this year – dashing hopes for a cut.

In fact, Jaitley actually announced an increase in taxes on gold sales. Saying that the government will add a sales tax of 1 percent to all gold jewelry sold in India.

Such a sales tax had been scrapped by the government four years ago. But is now being revived by officials with the stated aim of reducing gold consumption.

And that wasn’t the end of increased taxation on bullion. With Minister Jaitley also saying he will raise taxes on imports of dore gold bars – to 8.75 percent, from a former 8 percent.

Dore purchases had recently become a preferred way for India’s gold buyers to get a break on the 10 percent import tax for refined gold. But the new tax significantly narrows the arbitrage here.

All of which suggests that the government is very serious about reducing gold demand – in order to keep down the country’s current account deficit.

The increased taxes could also be aimed at driving buying away from physical gold. And toward paper instruments such as the gold-backed bonds recently introduced by the government.

Whatever the case, these measures are very likely to have a dampening effect on gold purchases in this key market. Watch for statistics on gold purchases to see how great the damage will be.

Article republished from Business Insider by Dave Forest. Image credit to Reuters

Puerto Rico bonds crash after "moratorium" raises default risk

Just a day after Governor Alejandro Garcia Padilla signed a law that enables him to temporary halt debt payments, dramatically raising the risk of widespread defaults, Puerto Rico securities had the biggest one-day drop in more than eight months.



Today's plunge is the biggest decline since July 28, 2015, a day after PR indicated that it was set to skip interest and principal payments on some securities for the first time.

As The NY Times reports, Gov. Alejandro García Padilla of Puerto Rico on Wednesday signed a bill that would allow him to declare a state of emergency and give him authority to halt payments on the island's crushing $72 billion debt.

The measures capped two days and nights of marathon debate in Puerto Rico's legislature, where lawmakers from the main opposition party called any unilateral debt moratorium dangerous and members of the governor's party insisted that doing nothing would be even worse.

"This legislation provides us with the tools to address the highest priority of needs -- providing essential services to our people -- without fear of retribution," the governor said in a statement on Wednesday. He accused Puerto Rico's creditors of hampering federal assistance by "misinforming the public and dissuading Congress from doing what is right for our 3.5 million American citizens."

The Puerto Rican Senate approved the measure at about 3 a.m. Tuesday. The House, after becoming embroiled in a dispute over whether certain types of bonds should be excluded, approved it around 1 a.m. Wednesday.

The bill did not specify a starting date for a moratorium, leaving that decision to the governor. But a big debt payment, $422 million, is due on May 1, and there have been many signs that Puerto Rico is not able or willing to pay it.

That payment is due on bonds issued by the Government Development Bank, an institution that plays a critical role in the island's financial affairs, including holding deposits of municipalities and other government entities. As recently as last week, holders of the bank's debt were in talks about an agreement that would give the bank some breathing room if it failed to make the payment.

But those efforts broke off in the face of a flurry of revelations that the bank was insolvent, that it might be placed in receivership, and that it was swiftly moving deposits to other financial institutions, apparently to keep them from being frozen or drained away by frightened depositors.

The bill says the bank has just $562 million in cash. A moratorium would be intended, among other things, to help preserve that cash, so the bank can use it to finance the activities of other parts of the government.

The law also establishes a new framework for putting the development bank into receivership, and creating a "bridge bank" that would take over some of its deposits and obligations during the moratorium.

The situation was not helped by Puerto Rico Treasury Secretary Juan Zaragoza who said there was "absolutely" no way the Treasury will have the funds make the more than $700M payment due July 1.

  There are $300M in checks made out to suppliers that are being held because the Treasury doesn’t have the funds, Zaragoza said

Estimates that between other central government debts and public corporations, the amount owed to suppliers of government goods and services is about $2B, Zaragoza said

'Conversations' with creditors continue but the pendulum appears to be swinging towards Puerto Rico's restructuring,

Stephen Spencer, who represents some investors who have already agreed to restructure their bonds, said, "We intend to carefully review the legislation, but at this stage we believe that it may lead to violations of the terms of the agreement."

He said that the administration last fall had hailed that restructuring as a model for others to follow, adding that the bondholders he represents should have been excluded from any coming moratorium, "rather than being cast into a state of uncertainty."

And/or a US taxpayer funded bailout...

In Washington, House Republicans seeking to rescue Puerto Rico prepared to release a revised plan that includes a federal oversight panel. The proposal has been contentious on the island, where the governor and his top advisers are increasingly at odds with investors over how to restructure the debt, most of it in the form of municipal bonds.

As we detailed yesterday, what was more troubling is that in a move similar to what we have seen in Greece, only this time a voluntary one on behalf of the island and not its vassal owners (as happened with Greece), the newly signed Puerto Rico Emergency Moratorium & Financial Rehabilitation Act also empowers the governor to order the financially battered Government Development Bank (GDB) to restrict the outflow of cash in a bid to stabilize its dwindling liquidity levels, which stood at roughly $560 million as of April 1, according to the bill.

In other words, capital controls.  

This, incidentally, confirms what we said yesterday, when we concluded that "the situation is getting messier by the day with a compromise deal now seemingly impossible - absent a US government bailout - and meanwhile Puerto Rico's money is running out, which will ultimately be the decisive catalyst that leads to the next step in the crisis."

That moment may have just arrived.

Originally published by Tyler Durden on Zero Hedge.