History repeats. However between eras in history, things look smooth, steady. And that’s when another storm strikes. And we realize that we rarely learn from history. 

Yen did appreciate from 300 or even less level to 80 or so against dollar, take a little more or less on both sides, during 1980s or so. However many of 1970s generations don’t recall having seen yen varying by closed to 1% or even more against dollar intraday basis regularly or going up or down by 5-10% within a week.  

Probably it happened during those days as well. And it happens again, and with every passing day; there is more of it. Now Jim Rogers said Chinese currency may quadruple in next decade, against dollar. What about the rest of the leading currencies? What about Chinese exports if Yuan: Dollar gets closed to 2:1 by 2017? China’s economy no doubt becomes the largest economy, probably twice as large as US by then when one considers both currency appreciation and the double digit growth rate of China that’s running like a loco with no brakes. 

Questions arise that it may be, true may be one remote scenario – purely on economic front. Even if that happens, would the US allow that economic force to take place without any military intervention? One needs to get into many more scenario generations. We leave those aside and focus on present when currencies trade with the volatility known for stocks.  

Leveraging in currencies is usually much more than it’s in stocks. Daily turnover of currency markets are mind-boggling. And closed to $ 300 trillion or more derivatives are linked with currency markets (and interest rate swaps); accounting for nearly 80% of all open positions globally. 

So currency markets are not shallow channels like many of the emerging financial markets. They should have the highest depth. And where depth is highest, little inflows or outflows should not cause tsunami waves. 

Therefore historically, daily return of closed to 1% in stocks or even by 5-10% in a week is always considered to be very attractive. Currencies usually moved by having the first digit as zero post the decimal. Probably exchanges have now stopped the first zero due to inflationary effects or for better approximations!  

However it still does not make sense. Try figuring out Yen-Dollar rate if you have not been following it daily or even at higher frequencies. 120, 123, 110, 115…any of these may be possible within days. 

So when currencies move by 5-10% in a week and stocks by 10-30% again in a week, potential returns or losses in an average business week in global financial world can be 40%. That’s without leveraging. If one adds five times leveraging in stocks and twenty times leveraging in currencies, with the remote possibility of having one right trading call, one can multiply one’s asset ten times in a week. 

But be aware of the equally attractive downside. Some weird animals in India having their belief in Marxism, where this author resides, often compares stock markets (thankfully they are yet to cover forex markets!) with casinos. Without having any belief in any ‘isms’ as such; many, including me, wondered how can they do that? That was just years ago. I was young, naïve, believed in fundamentals and slowly started taking un-hedged positions driven by greed. 

 

Greed and human beings are probably inseparable. For mortals like us at least!

 

Until I burned my finger (should I say even the whole body!) pretty badly in one such week back in the summer of 2006, which thankfully gave me the opportunity to watch all the fun in the Roman Circus without being inside the ring, casino and stock markets were different to me, if not in opposite poles. Legendary investors like Warren Buffet would also feel hurt with such allegations of Indian Communist Party leaders; but having ten times return or ten times losses in significant number of business weeks in a year as seen in 2007 often would beat the records of any casino as well. 

So at least on physical evidence, people who believe markets are becoming casinos (or worse than casinos) are not wrong. 

No research is done to gauge how much money in markets flow with the mindset of Buffet-like investors; and how much with casino-like mindset. Since long, Buffet-lot has been a minority and now with increased Federal backing of ‘Helicopter-Ben’ mentality lot who is ready to throw the lifeline to the losers in this casino due to their individual willful actions; more and more money in financial markets would be moving with the same mindset as it does in casinos. And Buffet-like investors would soon be endangered investor species – a result of global warming in financial markets. 

Global warming is caused by too much development, too much consumerism, too much emission of Green House Gases (GHGs). Global warming in financial markets, resulting in severe surges of volatility, is caused by too much liquidity and ‘fiat’ money. Both are not sustainable; but policy-makers die hard to make both sustainable. And the effects of warming and its consequent impacts rise. Common people suffer… 

That’s how we have seen more volatility in leading global currencies lately than we were accustomed of gauging volatility even in leading global stocks. GHGs in the form of easy manipulative fiat policies have brought in this change in global financial markets that increasingly beat the best casinos of the world, without any fundamentals.

Ranjit Goswami is a research scholar with the Indian Institute of Technology (IIT), Kharagpur, India; and is the author of the book “Wondering Man, Money & Go(l)d”. 

Be Sociable, Share!