The Clear and Present Regulatory Danger Facing ETFs

Martin Graham, chairman of London's Oracle Capital Group, knows a thing or two about millionaires.

For the past few decades, hedge funds have been the sexiest way to make money on Wall Street — you can go long or short, fill them with "exotic" products, and lever up as you wish. But it looks like they're losing their edginess to (are you ready?) mutual funds. Just stay with us here.

Yves here. This post helps fill readers in on an important, but under the radar topic: how various international organizations push hard to make emerging markets fertile ground for America’s financiers. I became aware of this practice by happenstance. A McKinsey colleague left to join the World Bank in the 1980s. Her job was to set up capital markets in emerging economies. Later on, she set up private equity funds in emerging economies. She left the World Bank recently to help found an emerging markets PE fund of her own. Mind you, it’s not as if she needed the money.

Hedge funds and other speculators are pushing up energy prices and hurting consumers, a top U.S. commodity regulator said, as oil and gasoline prices have surged to recent highs. Bart Chilton, a commissioner at the Commodity Futures Trading Commission (CFTC), said that the markets watchdog would push on to impose maximum limits on speculative positions that investors can hold.

Remember how big-box stores with all their wide-open spaces and gleaming aisles of brand-name merchandise stacked to the ceiling wiped out the little guys in the past 15 years? How these predatory “category killers” and their triple whammy of competing on price, selection and service decided who died, survived or thrived in Canada’s retail industry? Well, it appears consumers are rethinking their love affair with these giant outlets. In fact, the business of retail in Canada is in such a state of upheaval that scale and price matching no longer guarantee success.

Last week, investors staged a historic shift into equities. Global equity inflows were $22.2 billion, marking the second-largest week in history. Long-only equity mutual funds, a common instrument for retail investors, had their biggest week since March 2000, and emerging market equity funds recorded their biggest inflows ever. Interestingly, though, while the pros are buying up stocks, they're not buying stocks in the United States.

One suggestion that has gained popularity in the post-crisis regulatory debate is a tax on financial transactions. Proponents suggest that the tax would raise revenues for governments (at a time when such revenues are badly needed) and curb the excessive speculation that contributed to the global financial crisis.

The fundamental truth right now is that the overall economy in Europe, the USA and Japan is weak and has some serious long term problems. But the connection between that and company weakness is not incredibly strong. Many companies have huge cash hoards, built up through the large profits they continue to make. Yes, the economy entering a serious downturn will hurt many companies. A railroad is going to lose some sales if retail sales decline (and so they don’t have to be shipped). Airlines (historically problematic companies to begin will) will struggle.