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International Finance markets

Page history last edited by Brian D Butler 13 years, 7 months ago

 

 

 

 

 

 

 

International Financial markets

 

Financial assets = promises from someone else that you will get paid at some time in the future.   The thing about promises is that they might be broken, or might not be worth as much as we originally thought they were (think about the massive write downs from sub-prime in the US as an example of promises not worth as much as we thought they were!).

 

Financial transactions are a series of promises....but trust can be broken shockingly fast (think about the Bernie Madoff scandal that made investors $50 billion poorer)

 

Through insurance and saving, financial services are supposed to offer shelter ...Financial services are supposed to bring together borrowers and savers. But as lending markets have retreated, borrowers have been stranded without credit and savers have seen their pensions and investments melt away.

 

Finance links at GloboTrends

 

 

Table of Contents:

 


 

 

Size of the Financial sector:

  * data from McKinsey report 2005, "Mapping the global capital market"  and http://www.federalreserve.gov/releases/

 

What is amazing is that the financial sector ballooned to the size that it has...with a worldwide total of $140 trillion in promises outstanding in 2005 (surely more in 2008/9).  Of that total, the US was the prime holder of promises (assets).  The US household sector held about $39 trillion (28% of world total), and with the US as a whole holding nearly $52 trillion (37% of all world financial assets, or promises).

 

USA:

  • household & non profit: 
    • total assets = $64.4 trillion assets owned  (5x USA GDP)
    • total debts =  $11.9 trillion
    • total balance:  $52.5 trillion
      • of this $52.5 trillion...the breakdown was as follows:
        • $25.6 trillion = tangible, mostly property
        • $38.7 trillion = financial assets
          • $6.1 trillion in deposits
          • $3.1 trillion in credit market instruments
          • $5.7 trillion in direct corporate equity
          • $8.9 trillion in indirect corporate equity, of which...
            • $1.1 trillion in life insurance
            • $3.0 trillion claims on pension funds
            • $1.9 trillion claims on gov't retirement funds
            • $2.9 trillion mutual funds

 

So, total US financial assets in 2005 was as follows...

  • Household & non profit sector (data from above):
    • financial assets:  $38.7 trillion
  • Business sector -  Non-farm, non-financial corporate sector
    • financial assets:  $10.9 trillion
  • Business sector -  Non-farm, non-corporate sector
    • financial assets:  $2.3 trillion
  • TOTAL US private sector Financial Assets:
    • $52 trillion USD (approx. in 2005)....obviously it grew more till 2008 (especially housing bubble), before falling...

 

Financial assets globally...

Compare this with world (in 2005):  source : McKinsey report 2005, "Mapping the global capital market"

  • USA (private sector only):  $52 trillion  =  37%  (rounded)
  • Eurozone (all):  $30 trillion                  =  21%
  • Japan  (all):  $19.5 trillion                    =  14%
  • UK (all):  $8 trillion                             =   5.7%
  • Top 4 total $109.5 trillion / 140           =  almost 80% world total !!

 

  • World total (all, including private + govt + business):  $140 trillion....owned of financial assets

 

How this $140 trillion breaks down...

  • $44 trillion was equities      =  31.4%
  • $35 trillion was private debt securities   =  25%
  • $23 trillion was government debt securities   =  16.4%
  • $38 trillion was bank deposits                        =  27.2%.......down from 42% in 1980 (shift away from simple deposits to more indirect banking)
  • $140 total

 

 

 

How has it grown? As a % of GDP...

  • $140 trillion was = 3.16 x total world GDP in 2005....up from 2.18 times in 1995,  and from 1.09x in 1980
  • Regional trends from 1995 to 2005
    • UK: rose from 2.78x to 3.59x GDP
    • USA  from 3.03x to 4.05x GDP
    • Eurozone: from 1.80x to 3.03x GDP 

 

 

 

Derivatives:   Market Size:

 

HUGE:  see data here:  http://www.bis.org/statistics/otcder/dt1920a.pdf

 

Notional amounts outstanding:  June'08 = $683,725 billion

Gross market values:                             =   $20,353 billion   (approx $21 Trillion USD!!)....out of est $140 trillion total

 

read more from GloboTrends on derivatives  and shadow banking market

 

 

 

Money Market Funds

Stock markets:

 

In comparison,

 

 

My colleagues at the Council’s Center for Geoeconomic Studies calculated that it was enough to buy most of the common equity of the US financial system – at least on January 21.  That isn’t the best use of the TARP’s funds, but it does illustrate just how little common equity is now left to help support the financial sector’s large aggregate balance sheet.  Update: The book value of bank equity is of course higher. And the banks have other sources of regulatory capital.

 

 

 

Financial liberalization = series of crises?

 

Finance is increasingly fragile. Barry Eichengreen of the University of California at Berkeley and Michael Bordo of Rutgers University identify 139 financial crises between 1973 and 1997 (of which 44 took place in high-income countries), compared with a total of only 38 between 1945 and 1971. Crises are twice as common as they were before 1914, the authors conclude.

 

see GloboTrends links:

 

  1. Asian Crisis 1997
  2. Commercial Banking
  3. Company defaults to rise
  4. Crisis watch
  5. Financial Services Industry
  6. Financial markets
  7. International Finance markets
  8. Investing strategies for 2009
  9. Possible recession in 2008
  10. Predictions-for-2009
  11. Real estate
  12. bad-bank
  13. contagion of financial crisis
  14. credit crisis of 2007
  15. deleverage
  16. economic indicator
  17. financial leverage
  18. financial system regulation
  19. fiscal stimulus and crisis recovery 2009
  20. global imbalances (finance)
  21. history of economic crisis and currency devaluations
  22. leverage
  23. liquidity
  24. margin call
  25. quantitative easing
  26. savings glut
  27. securitization of mortgages
  28. subprime lending

 

 

 

 

 

Global Imbalances:

 

 

 

Global Stock Exchanges

 

 

International Finance Issues:

 

 

Sophistication = different than before:

 

Powerful new computers also created a platform for a new sort of mathematical finance. In the hands of “quants”—the mathematicians and physicists expert in the arcana of quantitative analysis—this proved immensely versatile

 

maybe financial regulation has not kept up...partly leading to the credit crisis of 2007

 

 

"fixing global finance":

 

"Reform is certainly needed, yet, for all the excesses and instability of finance, a complete clampdown would be a mistake. For one thing, remember the remarkable prosperity of the past 25 years. Finance deserves some of the credit for that. Note, too, that finance has always been plagued by crises, whether the system is open or closed, simple or sophisticated. Attempts to regulate finance to make it safe often lead to dangerous distortions as clever financiers work around the rules. If there were a simple way to prevent crises altogether, it would already be the foundation stone of financial regulation."

 

source:

 

 

 

 

 

 

Links for further reading:

 

 

Other Links:

 

 

Bank-dominated vs. Market-dominated financial system

 

By Mark Carney

 

Brief summary: "Our response to the financial crisis will be as important as the event itself. We can never eliminate financial crises, but we can reduce their likelihood and severity.

 

This crisis marks the reversal of a decades-long transition from a bank-dominated to a market-dominated financial system. The market-based model has the potential to price risk and to allocate capital more efficiently. In some cases, however, the development of markets ran well ahead of the supporting infrastructure. A system that appeared resilient (and enormously profitable) in times of low volatility has proven brittle in the face of shocks.

 

...there is a sudden re-emphasis on bank-based intermediation that has led to an urgent need for banks to raise very large amounts of capital. This threatens to intensify the global economic slowdown if not managed properly.

 

...The second strategy recognises that the transition towards a market-based financial system has increased the importance of core money markets. In economies with weak banks and large non-bank sectors, massive central bank liquidity is not yet cascading through the system. Non-bank participants – such as money market funds, pension funds and hedge funds – fear that liquidity may not be continuously available. Their fears will not fade without structural changes to markets."

 

Continue reading “Towards a more resilient financial system”

 

 

 

 

ETF's - Exchange Traded Funds 

 

see our discussion on ETF

 

Investing Internationally

FDI - direct investment in factories, infrastructure (more permanent type of investment).

 

Finance rates affect strategy (discussed in facilitator session). Hurdle rate ROI should be higher than cost of capital. In Japan, hurdle rate for investments is lower because of low cost of capital. Borrow at 1-3%, so ROI might be as low as 5%. In USA, cant do projects at that price (might need 10%). So, US companies need a faster return, and a higher NPV. For the time being, the JPN capital is more patient and can go after lower returns.

 

 

 

International portfolio investment:

 

Consider this scenario:

 

You live in Houston. You work for Enron. You invest in nothing but Enron stock. When Enron went bankrupt, you were not only out of a job, but also your savings were wiped out, and there wasn't anyone around who wanted to buy your house.

 

Or what about this one:

 

You live in New Orleans. You work in New Orleans. You invest in nothing but New Orleans-related companies such as Whitney Holding (Nasdaq: WTNY), Entergy, or Harrah's Entertainment. Thankfully, the region and many of its businesses are bouncing back, but in the wake of Hurricane Katrina, you could have found yourself out of a house and a job and seen your investment accounts significantly down.

 

Enron, New Orleans ... the United States?

Simply put, when every part of your financial well-being is tied to one place, you increase the risk of disaster. So if you own a home in the United States and earn your living from an American corporation, take that into account when deciding how much foreign exposure you need in your portfolio.

 

You might even find yourself approaching Siegel's magic number of 40%.

 

three questions...Of the five top makers of steel, electronics and consumer appliances, how many are based in the United States? Since 1993, how many years was the U.S. stock market the world's top performer? Last year, how many of the top 15 best-performing stock funds were U.S. funds? Would it surprise you to hear that the answer in all three cases is "NONE." Well it shouldn't.

 

Risks

 

Exchange rates can move against us, governments can destabilize or grow less favorable, economies occasionally falter and reporting requirements rarely live up to rigorous U.S. standards.

 

And that's on top of the ordinary company risk associated with stock investing. Anybody who tells you these investment risks can be eliminated outright is either lying or delusional. Either way, they are not to be trusted.

 

That's why you need to be even more diligent when buying international stocks (and one of the reasons they can be so profitable). And that's all the more reason you don't want to go it alone when building out your international allocation. see http://www.fool.com/ (global gains newsletter for more info)

 

Culture

 

 

When interacting across cultures, it is important to keep an open mind to other possibilities so that your mind doesn't become set in only one way of seeing things. With the diversity found in the world workplace, there are often opportunities to view a project, idea or proposal from a different point of view.

 

 

 

 

 

 

 

 

 

 

 

 

STRUCTURED TRADE FINANCE

 

For exporters who requires short- or medium-term financing to support export sales

Issues to consider: of foreign credit exposure and export financing,

 

Financing Programs for Your Company

Export Working Capital Guarantee Program

International Receivables Secured Funding Program

Export Receivables Purchase Program

Financing Programs for Your Overseas Buyer

Buyer Financing for Capital Goods and Services

Buyer Financing for Agricultural Products

 

Risk Management tools

 

currency hedging

Receivables reconcilliation

guarantees from EXIM bank

Credit Insurance

 

 

Programs:

 

Overseas Private Investment Corporation (OPIC)

Credit Commodity Corporation (CCC)

The Private Export Funding Corporation (PEFCO)

The World Bank

Agency for International Development (AID)

International Development Bank (IDB)

Export Insurance Corporation (EIC)

American International Group (AIG)

Click here for easy access to U.S. government and international financial agencies

 

Exim Bank†

U.S. Small Business Administration†

PEFCO†

OPIC†

CCC†

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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