Loan Market

Gone are the days of chalkies, jobbers and blue buttons pacing around a trading floor to get quotes.

Financial markets today are more automated, computerised and run on ever increasingly sophisticated application software using high level encryption and firewalls to ensure that trading platforms and networks are secure from hackers. Additionally, the back end settlement side of trading has eliminated paper and is digitised. So it would seem completely surreal to imagine a one trillion-dollar financial market operating today on merely a phone and a piece of antiquated 80s technology, the faxmachine.

Believe it or not this market does actually exist , it is known as the unregulated market for leveraged corporate loans. The issuing and trading of loans is being conducted in relatively archaic conditions and that seems odd for a market with such a massive annual turnover.

Trading on the unregulated market for leveraged corporate loans has ballooned from a turnover of a 35 billion USD in 1997 to a massive one trillion-dollar (1,000 billion) USD in just 17 years.

So let's delve into the unregulated market for leveraged corporate loans. Despite this market's spectacular growth and massive turnover, the mainstream doesn't really talk much about it and many investors are to some extent being kept in the dark about it’s workings.

The unregulated corporate loan market has been slow to adopt to new technologies and continues to operate on labour-intensive methods, manual processes and human inefficiencies with lengthy settlement times. This is partly due to the relative complexity of the asset class, according to analysts. “There are two things that make this such a unique asset class,” said Scott Kostyra, managing director and head of loan settlement at Markit. “One is the syndicated model, so the fact that you have got one bank managing all these loans across the syndicated lenders for one borrower has created a complex communication cycle. The other is that the loans are unique in a technical sense—they are floating, don’t have a fixed payment schedule and have a variable nature for repaying interest. That complexity makes it a burden to track or manage the assets from an accounting and communications standpoint.”

Trading on the loan market is laborious, time consuming and long winded. The unregulated loans market mainly involves private deals and that makes securing details challenging. Legal counsel from both sides have to sign off the trade terms. Additionally, standards are non-enforceable so each deal requires its own conditions to be thrashed-out and it needs to be agreed by each side of the legal counsel. There are unscheduled events, unscheduled pay-downs, and payments on the principal of the loan.

Since there is no clearing platform, transactions rely on the exchange of detailed documentation. While par loan documents are now largely standardised, distressed loan documents are customised and jam-packed with legalities. The outcome can be a chain of documentation issues. This means that a party eager to settle may have to wait for three others down the line.

“We are all aware of the inherent inefficiencies which exist in the loan market, especially in terms of trade settlement and the length of time it takes to settle the loans in the market,” says Alan Kennedy, head of operations for Mitsubishi UFJ Fund Services in the US.

What about moving to the manual processing system as a short term fix to the problem. Many industry experts don't believe that this would fix the problem, even if parties and counterparties agree and sign quickly, a position is not going to move on the register until the documents have all been sent to an agent and countersigned. Agent notifications mostly come in via fax and are non-

standardised, meaning a human being must trawl through the data, understandeach notification or request, and then add it to the system.

Despite the antiquated structure of the loan market, funds continue to keep pouring in from mainstream investors. Particularly, from Kansas and New York pension plans. In an era of near-zero interest rates even conservative investors are being attracted to riskier asset classes with the aim of getting decent returns on their funds. Moreover, high yield seeking investors are heavily tied up in the corporate loan market. Perhaps this explains why the trillion dollar corporate loan market has grown exponentially in less than two decades.

Last year Markit conducted a survey based on automating the loan market. Participants were asked to grade the operational efficiency around the loan trade settlements.

Votes for Excellent scored 0 percent, 9 percent for Satisfactory, 21 percent voted Needs Improving, 37 percent voted Dis-satisfactory and 33 percent believed that the system needs improving. In other words, the vast majority of traders (91 percent) are unhappy with the way business is conducted on the corporate loan market.

But what would happen to the corporate loan market in, for example, a fast market, in a rapid downturn, when everyone is rushing for the exit door at the same time, would investors (including the pension funds) get their money back at the click of a button?

“It’s a critical issue,” said Beth MacLean, a money manager at Newport Beach, California-based Pacific Investment Management Co., which oversees 1.97 trillion USD, including the world’s biggest bond mutual fund. “Any single retail fund not being able to meet their redemptions would have a ripple effect on the whole market.”

Perhaps that is no surprise, markets are so globally interconnected today, they are like one giant machine. When one critical part fails, for whatever reason, the machine just grinds to a halt.

To date, no regulators have taken responsibility for fixing the deficiency.

RBS

Hot on the heels of the Alibaba floatation, the largest International Public Offering (IPO) in history, the British Bank (RBS) Royal Bank of Scotland has priced the sale of a stake in US banking arm Citizens Financial Group. But unlike Alibaba's floatation the RBS's IPO price is on the lower end of its initial expected range. This has raised eyebrows amongst some analysts who are now wandering when the Banking group will eventually breakaway from British government ownership.

While RBS's public offering was expected to be priced between a price range of 23 USD and 25 USD per share. However, a set IPO price of 21 USD per share was instead chosen ,which is expected to raise 3.5 billion USD for the British bank. At the 21 USD mark, the value of RBS's total holdings would be around over 12 billion USD.

(2.1 billion pounds sterling ). 140 million shares, 25% of the US firm's common stock will be made available to the public. The underwriters could boost this amount by 21 million in a 30-day over-allotment option.

But why has RBS's floatation price been scaled down by almost 20 percent from its top range price?

Bearing in mind that the equity market is hovering arround record highs, the flurry of IPOs that have come on the market in the past year were mainly priced at the upper end of the companies expectations. So companies were able to raise better than expected levels of funds becuase the bullish stockmarket ensured good investor demand for IPOs.

A 21 USD floatation price with a 140 million share offering means that RBS is going to raise 560 million dollars less, a little over half a billion dollars, compare to its top range price of 25 USD.

Interactive Investor's head of investment, Rebecca O'Keeffe, believes that the lower IPO price of 21 USD is due to fears about the offer being overpriced relative to potential earnings. In other words, the future business prospects of US banking arm Citizens Financial Group may look less jammy than anticipated.

"This is disappointing for RBS and its investors and calls into question the timing of when, or even if, RBS will ever be able to untether itself from government ownership," she said.

However, not all analysts took a negative view. For example, Investec was "pleasantly surprised" with the initial pricing range, but added that market timing and reported investor resistance had led to a downward drag on the sale price.

Building RBS's bank balance, following the 2008 financial crisis, is no longer seen as the main priority of the bank. Banking analysts are more concerned now about the weaker than expected outlook and the impact this might have on the bank's earnings.

"We reiterate our view that capital repair should no longer be seen as a material challenge for RBS. Our primary concerns relate to a weak outlook for earnings and returns; we continue to forecast a modest loss in both the second half of 2014 and full-year 2015," said analyst Ian Gordon.

For the full year, Gordon believes that RBS will bring in pre-tax profit of 2.9 billion pounds sterling. At that pre tax estimated profit forecast it would give RBS earnings per share of 11.6p. Investec has a “hold” recommendation on the stock with a price target of 355p.

Other schools of thought on RBS are slightly more bearish believing that the current market prices for the stock is overvalued. This assumption is based on the fundamental analysis that the stock price is trading over and above the company's tangible Net Asset Value.

Tangible Net Asset Value t(NAV) is a measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, patents and intellectual property. Tangible net worth is calculated by taking a firm's total assets and subtracting the value of all liabilities and intangible assets.

RBS is currently trading on 1.0 times its tangible net asset value, which indicates that it may be overpriced. Investec don't think that RBS will deliver a Return on Tangible Equity RotE greater than the Cost of equity CoE before 2018/19. So for this reason they don't think it is cheap. “We see considerably better value in Barclays (BARC), Standard Chartered (STAN), Lloyds (LLOY), TSB (TSB) and HSBC (HSBA),” said banking analyst Ian Gordon.

The Return on Tangible Equity measures the rate of return on the tangible common equity. It is calculated by dividing net earnings tangible common shareholders’ equity. Tangible common shareholders’ equity equals total shareholders’ equity less , preferred stock, good will and identifiable intangible assets.

The Cost of equity is the return that stockholders’ require for a company. The traditional formula for cost of equity (COE) is the dividend capitalization model. Dividends per share (next year) divided by the Current Market Value of the Stock plus Growth Rate of Dividends. 

A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.

RBS will remain the main shareholder in the 13th largest retail bank in the US, holding 75 percent of its common stock excluding the extra share option. RBS will be prohibited from trading this stake in any part for 180 days.

Bond Bubble

“It is the beginning of the end of the bond market rally. We are done,” said David Tepper the founder of 20 billion USD hedge fund Appaloosa Management. The multi billion dollar hedge fund manager made these comments following the European Central Banks (ECB) most recent interest rate cut. Yields on US bonds kicked off the year in 2014 at around 3 percent, eight months later yields on the ten-year fell to less than 2.4 percent and they are currently trading slightly above that today at 2.45 percent. 

Moreover, in the eurozone bonds have also been rallying this summer, with the yield on 10-year German bonds falling below a measly 1 percent. Just knowing where to invest funds and get a decent return without shouldering excessive risks is getting trickier.

If the US bond market tops out this year it will mark the end of a thirty-year secular bull market that investors have enjoyed since the U.S. 10-year topped out above 15% in the early 1980s. Jeff Gundlach of DoubleLine Funds was one of the few people on Wall Street who predicted this year's rally in bonds and he expects the 10-year yield to remain between 2.2 percent and 2.8 percent, with a downside risk that yields could fall below 2.2 percent. 

At the most influential investor summit in New York, some of the world’s most successful investors debated the state of the global economy. While there were varying views concerning the sustainability of the gloabal economic recovery, there was a unanimous consensus that the bond market has gotten out of control. Moreover, perhaps investors have even become complacent about risks in the bond market.

“Bonds are at ridiculous levels,” said Tiger Management founder Julian Robertson at the Bloomberg summit. “It’s a worldwide phenomenon that governments are buying bonds to keep their countries moving along economically.” There may be two factors in the equation that have caused an unprecedented bond bubble. The extended period of low interest rates coordinated by central banks around the world through quantitative easing,which involved the purchasing of bonds, has been a major factor in fuelling the bond rally and suppressing bond yields.

Additionally, the historic long period of low interest rates may have aided and abetted higher risk taking behaviour by investors. In a period of low interest rates even conservative investors might have been forced out of the safety of low interest rate deposit accounts and tempted to invest in bonds. So there’s been bond buying from governments and central banks around the world with the aim of pumping liquidity into the system following the financial crisis of 2008. Investors were also moving into bonds, as they were perceived to be a less risky asset class than equities. Consequently, the jumped up demand in bonds fuelled a bond price bubble and sent yields crashing down.

But a safe haven asset might not be that safe, particularly for those investors jumping on the bandwagon at the later stage of a rally. Last year the worst performing assets were the so called safe-havens, such as gold, silver and bonds, the latter of which, considered to be a safe-haven asset, fell in value by 13 percent. Gold was also down in 2013 by around 30 percent. The central bank induced rally, spurred on by loose monetary policy, caused a flight of capital from safe-haven assets into equities. Indeed cyclical stocks, which tend to perform well when investors perceive an upturn in the business cycle, were the best performing assets last year.

But a year for traders, or short term investors is a long time. The economic recovery is looking shaky, the eurozone “recovery” is done. China's growth is slowing and Japan is back in negative growth. The UK recovery is weak and unbalanced. The US economy remains a bright spot, but how long can it keep revving with its trading partners remaining in an economic quagmire? Additionally, old risks remain in the market and new ones have emerged. The geopolitical situation has deteriorated, with the Ukraine crisis and tit of tat Russian sanctions. The era of cheap money, which may have just delayed the inevitable, has created new asset bubbles, in equities, bonds, real estate, antiques and maybe even classic cars.

There is no elegant way to burst a bubble. So what is going to happen when the next big debt bubble bursts? A growing number of insiders believe that the current bond bubble is going to end badly with the implications being anything from bad to catastrophic. That translates to mean that national governments can't run their economies in the long term on debt. It may keep the system ticking over for a lengthy period and everything may appear fine but eventually it could collapse in a matter of hours.

Omega Advisors founder Leon Cooperman, thinks the stock market is fully valued but not overheating, called bonds “very overvalued” and Oaktree Capital Group chairman Howard Marks warned investors to “clip the top of the cycle” so that they don’t get caught in the next correction.

Sustainable Energies

Climate change and fossil fuels have been a hot button topic this week and it might be making some investors in oil and gas companies hot under the collar. First it was the news that a foundation tied to the Rockefeller family, heirs to the Standard Oil Co. fortune would be joining other groups in exiting coal and tar sands investments. Then came the United Nations (UN) climate summit in New York, with its usual theme that the world needs to stem the use of green house gas emitting energies and move towards sustainable energies.

But should investors in the conventional oil and gas companies be worried?

These environmental summits, with all their benign intentions, haven't really yielded anything tangible in the past. In fact the UN has been trying to broker a deal on climate change for the last 21 years with apparently no beneficial results.

So why should this latest summit in New York be anything different in reaching an effective deal to cut down on greenhouse gasses?

The last time so many high-level delegates met about climate change was back in 2009 in Copenhagen and they failed to reach a plan on cutting greenhouse emission gasses.

But four years on from the previous summit, greenhouse gas emissions have become more of a pressing issue. Indeed, emissions of carbon monoxide being released by the world's power plants factories and auto-mobiles since 2009 has increased by an alarming rate of 50 percent.

At this rate by just 2019 there will be more than double the amount of carbon monoxide in the earth's atmosphere compare with the global emissions in 2009.

So the big oil companies are keenly listening in on the latest climate change summit in New York.

Some of them have even sent their own executives to the New York summit, including China's Sinopec.

However, there is something paradoxical about these climate change summits. On the one hand, we have western leaders banging on about the need to wean ourselves off fossil-fuel energy and cut down on carbon monoxide, meanwhile fossil-fuel companies remain the largest recipient of government subsidies. Between 1994 and 2009 the United States oil and gas industries received a cumulative 446.96 billion USD in subsidies, compared to just 5.93 USD billion given to renewable energies in those years. Incidentally, the nuclear industry received 185 billion USD in federal subsidies between 1947 and 1999. So it seems rather odd that we have the United States trying to spearhead a deal on curtailing carbon emissions, meanwhile it continues to heavily subsidises the energy industries that are responsible for producing most of the carbon emissions.

Let's cut down the rhetoric speeches about the need to cut carbon emissions and the numerous high-level climate summits that have yielded nothing tangible. If there was a genuine drive to cut carbon emissions then we would see taxpayers' money flowing the other way. But it is the contrary, the oil companies are big net recipients of the energy subsidising policies.

Typically, public subsidies are used to help nourish emerging industry. But when subsidies continue year after year with no projected end in sight, then public money stops being a catalyst, and starts becoming a crutch. Are we not seeing this happening already with the oil companies, who have become so powerful that they just influence governments to perpetuate their own support.

Moreover, subsidising the oil industries keeps prices artificially low for consumers and fattens oil sectors profits. Another way of looking at it is that tax payers are subsidising the profits of the oil companies.

Perhaps that is an extreme view, bearing in mind the huge cost of exploration and the development of fossil-fuels. Moreover, energy is a strategic business and energy security is so vital to an economy that it even influences a nation's foreign policy. So the strategic reason is probably another factor why the oil companies are heavily subsidised. After all, fossil-fuels are a reliable source of energy that keeps the lights on and the wheels of industry spinning, irrespective of whether the sun shines or the wind blows.

Nevertheless, what about the Rockefeller Brothers Fund and the other180 institutions and local governments and 654 individuals who have so far pledged to cut investments in 200 coal, oil and gas producers from their asset holdings. Total divested funds are 50 billion USD and commitments to sell have doubled so far this year. Could this be “like a snowball, that is going to get more and more mass as it rolls forward,” according to Stephen Heintz, president of the fund.

While this might be a signal to the investment community it doesn't necessary mean that jumping on board would workout to be profitable.

The reality about sustainable energy companies is that when the subsidies are pulled from under their feet they can't compete with their hugely funded and mega powerful rival, big oil.

That's not to say that investors can't make money dabbling in sustainable energy stock. Take for example SolarCity in the US, its initial IPO price in 2012 was 8 USD and at one point it was trading at 82 USD. But the secret to that success is that its billionaire founder, Elon Musk who also started PayPal built SolarCity almost entirely on government handouts, which is about to end soon.

So investing in sustainable energy is a high risk bet, investors could make a lot of money, or lose it all. What is likely to determine the outcome is whether government subsidies will continue or end, therefore a reason to invest might be more political, rather than business based.

With respect to the fossil-fuel companies, it's probably still going to be business as usual as they are just too big and too powerful to touch. Investors in these companies can sleep easy.

Plan B

In the last liquidity crisis of 2008 the US Federal Reserve bailed out practically the whole world, printing out tens of trillions of US dollars in swap guarantees, thereby guaranteeing every bank deposit in the US and propping up the system for the elites, those high up the food chain. Other Central banks around the world followed suit carrying out their own massive bond buying with the aim of keeping interest rates low and stimulating investment. Some of the liquidity pumped into the system found its way onto the stock, property, and bond markets which spurred a rally in emerging currencies brought on by carry trade investments. It is most likely that this lengthy period of low interest rates may have been directly responsible for artificially inflating asset prices and creating yet another asset bubble. The extent to which this has occurred remains to be seen. Furthermore, the era of cheap money may have been the culprit for encouraging reckless investing and distorting investors' perception of risk. When Greek bonds return to the market and investors where applauding yields of around six percent, this underscores the above point. The Greek economy is a basket case, where the risk of credit default is high and investors are unlikely to recover their money. Just recently, in June, Greece had become the first developed country to be downgraded to emerging market status by the index provider MSCI. Nevertheless, in a climate of low interest rates where getting a good return of capital is challenging, some investors were drawn to the prospects of investing in Greek bonds. In Wall St speak, investors are “picking up nickels in front of a steamroller.” In other words, investors are taking on board excessive risks for small gains. The extent of excessive risk taking by investors, which has been aided and abetted by cheap money also remains to be seen.

But let's take the bearish view and imagine that we are on the verge of a big asset bubble that is about to burst in equities, bonds and real estate. Furthermore,the excessive risk taking fuelled by cheap money has lured investors into risky sovereign debt. What would then happen if the high risk sovereign debt market in the peripheral states of the euro bloc imploded, leaving many investors burnt? Well, it would probably make the sub-prime credit crisis of 2008 look like a picnic.

What would the central bankers do then? We know that the central banks can print more money. In fact they don't even need to print it on paper, with a few taps on a keyboard they can draft up credit SWAP guarantees and buy up billions, or trillions, of risky debt, freeing up the banks to lend thereby pumping the system with liquidity. That’s the theory of quantitative easing, but in reality the banks aren't playing ball. So where has all that liquidity gone?

"It all got bottled up in the banks, and essentially none of it ... got lent out," according to an independent analyst, Blinder.

"You can think of these as the deposits that banks hold at the Federal Reserve, which is a bank for them," added Blinder. But when the banks don't lend those deposits, or invest them, they don't get into the economy. So the funds don't then enter the money supply and Wboost to the economy, or contribute to inflation. This may in part explain why monetary policy isn't working.

Bearing that in mind, it is unlikely the central banks would follow the same path again in the next crisis. The rationale being that they would lose the most important thing that backs any fiat currency, trust and credibility. Fiat currency has value because investors trust it as a store of value. The moment trust is eroded the whole system comes crashing down like a pack of cards.

In the worst case scenario the monetary authorities have a plan B, which is available on the International Monetary Fund (IMF) website for all to see. The plan was first published on the IMF website in 2011. In short it is a 10 year plan to make the SDRs (Special Drawing Rights) the global reserve currency. There is nothing new about the idea of a global reserve currency. The idea was conceived back in 1969 and has been issued already on several occasions. Just like we saw back in 2009 the Federal Reserve has a printing press and can print dollars, likewise the European Central Bank is in the same position with regards to Euros. Additionally, the IMF too can print SDR, which are not backed by anything, but if they did so it would be highly inflationary.

In the last liquidity crisis the Fed bailed out the whole world, printing tens of trillions of dollars in SWAP guarantees, guaranteeing every bank deposit in America and propping up the system. The problem now is that the FED has already fired its rounds in the last crisis, they are tapped out. Some analysts reckon that the next crisis coming is going to be bigger than the FED. In other words, the FED will not be able to go to 8 trillion on their balance sheet because it might this time destroy confidence. So where is the liquidity going to come from?

It is going to come from IMF in the form of SDRs, reckons James Rickards an industry insider turned whistle-blower.

But that could mean hyperinflation.

Puts and Hard Assets

We may be witnessing the greatest gamble in the history of finance.

The Federal Reserve has had 15 different policies since 2009. There has been forward guidance first for 2012, then 2013 and now 2015. We’ve had QE1, QE2, QE3 of which there was part (a) and part (b), operation twist and then currency wars. “When you have fifteen policies in five years you don't know what you are doing,” said James Rickards an industry insider turned whistle-blower. Rickards has an impressive Curriculum Vitae. He worked on Wall Street for 35 years, was a principal negotiator of the1998 bailout of the Long Term Capital Management (LTCM) by the Fed, he previously used his financial expertise to aid the US national security community and is now the senior managing director for market intelligence at Omnis Inc, a consulting firm.

Rickards latest book entitled, “The Death of Money,” which predicts an imminent collapse of the International Monetary System is raising hairs on the back of the necks of the monetary authorities.

But the book's title isn't provocative, since within the last 100 years the monetary system has already collapsed three times. The first collapse occurred in 1914 and then again in 1929. The last collapse of the Monetary system was in 1971. So perhaps there is a 30 or 40 year pattern emerging here. If so, the next collapse of the monetary system maybe three of four years overdue. “That doesn't mean it’s going to happen tomorrow but no one should be surprised when it does,” said Rickards.

The central bankers have been entrusted with godlike tasks of saving us from a financial collapse and an economic meltdown. In many instances finance ministers have washed their hands of the situation and delegated monetary authority to the central bankers. Central bankers, with limited tools at their disposal, are being told by their finance ministers that they are now our only hope and not to mess it up. Publicly, the central bankers are putting on a brave face, they have to; the rational being that despite the common belief that the fiat currencies arn't backed by anything, that is not entirely true. While gold is not backing fiat currencies it does have something very important backing it, which is trust. When confidence evaporates in a fiat currency it then collapses like a pack of cards.

“Privately the central bankers will tell you that they don't know what they are doing, they are making it up as they go along, if it works fine, they will do a bit more, if it doesn't they'll pull back,” said Rickards. Perhaps this explains why there have been 15 different polices in the last five years. But having a captain improvising at the helm in stormy waters doesn't inspire investor confidence.

So what is the bottom line then?

“The bottom line is that a crash is coming,” said Rickards. It would look like a collapse in confidence in the US dollar, added Rickards. People will keep using the US dollar, while they believe it is a good store of value, but the moment they stop doing so, then the currency could collapse like a house of cards. Confidence, or trust in a fiat currency shouldn't be taken for granted, but the Fed is doing just that, added Rickards.

What should investors do and how can they protect themselves from a crash?

Watch what the top players are doing. With respect to Warren Buffet and the other billionaires it is always more prudent to analyse their actions, rather than their words. So let's examine some recent investments made by Buffet . A few years ago Buffet bought Burlington Northern Railroad , these are hard fixed assets consisting of rails, right of way rolling stock, switches, signals etc. Buffet didn't buy a few shares, he bought the whole shebang. The rail road makes money by moving hard assets, freight, such as coal, wheat, steel. It is the ultimate hard asset and it makes money by moving hard assets. Buffets next big purchase was oil and gas natural resources. So now he can move his own oil on his own rail-road. “Buffet is dumping dollars as fast as he can and investing into hard assets,” said Rickards. So in essence it doesn't matter what happens to the dollar or other currencies because he still owns a rail-road oil and natural gas,these are things that people need.

So Buffet is getting out of paper assets and moving into hard assets.

These moves have been seen before. For example, Rickards likens the period we are in to that of the Weimar republic back in the 1922/23 with hyper inflation we all know who the losers were, the middle class with savings in the bank, annuities and pensions. But there were a lot of winners too, such as industrialists, people who had factories, people who had gold in Switzerland etc, they were not wiped out. They then were in position to buy up all the losers and consolidated their industrial holdings.

The recent stock market rally is being driven on at high octane with a combination of heavy leveraging and low volumes. The billionaire investors are buying put options, betting that the market is going down. The “Soros Put,” has risen to a record high and other billionaire investors are following suit.

These money masterminds can't just pull the plug on their billion dollar stock portfolio investments. If they start exiting the market they could be the snow flake that creates the avalanche/they don't want that to happen. After all, they have made tidy profits in this rally. How do they play then? They enter another market, the derivatives markets and buy put options. So even if the market were to crash these investors high up the food chain will make money on the fall on their puts, which offsets the losses on their stock portfolio. In other words, these guys have hedged their portfolios and they are in essence protected from a crash.

Currency Wars

The currencies market is on the boil over mounting news that China and Russia are plotting to end US dollar hegemony. Moreover, the economic sanctions imposed on Russia may be inadvertently acting as a gravitational force, pulling economic activity away from western europe to the East. If the trend continues this is likely to result in the BRICS (Brazil, Russia, India, China and South Africa) nations increasing in strength at the cost of a weaker US dollar.

During a session at the St. Petersburg International Economic Forum on May 22, Anton Siluanov, Russia's finance minister revealed that Russia has been considering diversifying its debt portfolio away from countries that have imposed sanctions on it. So that implies a likely Russian exit from Western Debt Securities. Russia will instead invest in sovereign debt, “papers” in its partner BRICS nations. The new economic sanctions imposed by the European Union, United Kingdom, United States, Japan and Australia against Russia over its annexation of the Crimea and for supporting anti government forces in eastern Ukraine, might also have an impact on the sovereign debt market. If the geopolitical situation in the Ukraine deteriorates over the coming months we may see a trend in Russian investments in sovereign debt flowing out of the West and into the East. Although, Russian investment in Western debt is relatively small and unlikely to have much of an impact on the market if Russia were to exit the debt.

Speaking at the annual investment forum in the Black Sea town of Sochi. Russia's finance minister said that Russia wants to diversify its investment basket, looking for higher yields without too much risk. Furthermore, he reiterated that the ministry will consider buying papers issued by BRICS. Perhaps hinting that Russia isn't planning to hit the exit door on Western debt, unless geopolitical tensions over the Ukraine deteriorate further, said Mr. Siluanov.

"We would like to walk away from investing in papers of the countries that impose sanctions against us,". He added that the reshuffle would be carried out gradually. However, Russia's finance minister, Mr. Siluanov, didn't elaborate on when the first purchases of Brics debt may take place.

Playing down the move, Mr. Siluanov said that action wouldn't be aimed at punishing the West because Russia's share in their papers is so small they wouldn't feel the effect.

But imagine what could happen to the sovereign debt market if that trend were mirrored by China. Would that not in itself cause a sovereign debt crisis in Western debt?

China is keeping no secrets about its economic ambitions and its eagerness to lighten up its investment portfolio on low yielding western sovereign debt. But, with the world in chaos what asset class is likely to be the recipient of this reshuffle. Could it be gold?

The big story making waves with bullion traders is about China looking to dominate the gold market with the International Shanghai Gold Exchange. This is likely to change the way the gold market is priced and perceived. Bearing in mind the recent well publicised scandals, even in the mainstream, about the London “gold fix” involving a cosy club of big players i.e. banks who were accused of manipulating gold prices. Incidentally, that is not the only scandal to rock the markets. Before that was the LIBOR (lending rates) scandal, when, as little as two years ago, it was revealed that the big international banks had long been manipulating the LIBOR rate. So, while the rest of us are left speculating and guessing the elite cosy club literally sit around a table and make it up as they go along.

So the BRICS are trying to take on the kingpins of the financial world by launching their own currency, central bank and now even their own gold exchange. China's International Shanghai Gold Exchange will give foreign investors direct access to their gold market. The big gold consuming nations, like India and China want to have more of an influence over the gold prices. Moreover, when the BRICS nations are investing/trading on China's new gold exchange they are doing something else, ditching the US dollar and boosting the yuan's global use.

The Shanghai Gold Exchange will start trading contracts in the city’s free-trade zone. It will be linked to its domestic spot market and made available to approximately 40 international members including Goldman Sachs Group Inc. and UBS AG. Previously, access was limited to Chinese institutions. Gold prices in China this year have fluctuated between a range of being as much as 31 USD an ounce more and 42 USD less than the London spot price, according to data compiled by Bloomberg.

Meanwhile, the drive for the BRICS nations to launch their own currency to challenge US hegemony continues to gain momentum. Western sanctions imposed on Russia is giving further impetus for Russia to spearhead a BRICS currency to challenge US dollar as the world's reserve currency. Prime Minister Dmitry Medvedev announced at the investment conference in Sochi that Russia, along with all other nations, should be trading in their own national currencies and outside the scope of a US dollar controlled reserve currency.

So the sanctions might be backfiring and could be a catalyst for accelerating a global shift away from the dollar as the reserve currency. Furthermore, restricting the Russian government and business interests from access to the SWIFT system (International payment system) might be spurring on the Russians to collaborate with the BRICS nations to create their own bank and alternative currency swap mechanism. The highlight of the 6th BRICS summit in Fortaleza, Brazil, on July 15 was the creation of a 100 billion USD reserve bank and a currency pool. It's aim-to cut US dollar dominance. So it looks like the US dollar has got a new kid on the block.

G20

The Financial Minsiters and Central Bank Governors of the world's 20 largest economies must feel somewhat chuffed with themselves. After all, six years on from the worst financial crisis in living memory and the financial Armageddon followed by an economic meltdown hasn't materialised as some of the more bearish pundits predicted. The Euro has survived the crisis, the stock markets have not spun into a perpetual nose dive. On the contrary, stock markets keep breaking record highs, week after week. Moreover, there has been a flurry of International Public Offerings (IPOs), underscoring a buoyant stock market. Property prices in the world's largest cities keep heading north too and the luxury goods market, ranging from classic Ferraris, to designer handbags and top of the range jewellery, are booming. In fact everything seems just fine and dandy in the goldilocks economy.

So when the financial architects, the Financial Ministers and Central Bankers of the world's largest economies, descended on Cairns for a meeting this weekend, September 20-21 2014, they were probably expecting praise and a pat on the back from the International Monetary Fund (IMF), but that just didn't happen. Indeed, the latests IMF report was thin on praise and highlighted an unbalanced economic recovery, rising downside risks with old ones remaining and new risks emerging. The IMF report flagged up excessive risk-taking, which is leading to overinflated asset prices egged on by a prolonged period of low interest rates. The latest IMF report is in reality a warning to the financial community.

Nevertheless, the IMF report acknowledged that global economic activity has continued its momentum despite a weak start during the first quarter of 2014. The main drivers of growth have come from China and the the United States, albeit weaker than it was projected back in April by the World Economic Outlook (WEO). Global recovery sustained by loose monetary policy and moderating fiscal discipline is expected to continue along its trajectory of recovery, according to the IMF report. But the recovery is expected to moderate at a deccelerated pace and the economic imbalances are also likely to remain or even worsen in the months ahead, according to the report. New heightened geopolitical concerns,particularly the Ukrainian crisis and ongoing problems in Iraq were cited as likely to drag down the global recovery.

In some advanced economies the growth has been weaker than expected, particularly in the euro zone and Japan. In the second quarter of 2014 growth has rebounded in the United States, although weaker than expected. China has also been another growth story, for the same period, supported by accommodating fiscal and monetary policies. This has had a positive knock on effect in the Asian emerging economies. Meanwhile, in South America weaker than anticipated domestic demand is beginning to dampen many economies in the region. The IMF report also notes export growth regained momentum in both advanced and emerging markets in the second quarter of 2014, compared to the previous quarter.

Prospects are shifting in advanced economies, according to the report. For example, a surprising fall in US Gross Domestic Product (GDP) during the first quarter, has since been revised and growth appears to have rebounded sharply upwards in the second quarter of 2014. Improving United States GDP has been put down to an increase in fixed investments (physical assets such as machinery, land, buildings, installations, vehicles, or technology), improved private consumption and a growth in local and Federal Government spending, which has in turn created jobs. Although United States net exports and the sluggish housing market continues to provide some headwinds for the economy.

The IMF report cites that Euro economic activity has stalled in the second quarte. Weaker growth was recorded in the main economies, notably in Germany and Italy, where economic activity contracted, while in France activity remains stagnant.

With respect to Japan, growth experienced in the first quarter of 2014 spurred on by a pending rise in consumption tax(having the effect of raising consumption just prior the tax hike), had a temporary impact on economic activity in that same period. Growth in the Japanese second quarter was disappointing. However, there are positive signs of investment gaining momentum in the final quarter of 2014.

In emerging markets the recovery has been unbalanced. China's supportive economic policies. which stimulated infrastructure investment and private consumption resulted in faster economic growth in the first quarter. Additionally, Chinese exports during the same period also rebounded from the previous period. The IMF anticipates growth to continue in the final half of 2014.

In emerging Asia external demand has recovered, spurred on by a growth rebound in the United States and China. Domestic demand is expected to pick-up in Indonesia and Asia.

Growth in South America remains disappointing, particularly where activity contracted in the second quarter on falling investment and cooling consumption. Nevertheless, one bright spot in the region is Mexico with economic growth remaining in line with the United States rebound in economic activity.

Looking forward the IMF forecasts the economic recovery to regain some strength in the remainder of 2014 to 2015, but it is likely to be weaker than envisaged in early spring of 2014.

The key driving factors supporting the recovery remain in place in advanced economies, namely; loose monetary policy, fiscal consolidation (reduction in the underling deficit) and strengthening balance sheets. But despite this, global output is weaker than forecasted in April by the WEO, due to investment weakness. Furthermore, there are general concerns that the sluggish recovery in the euro zone might be stalling.

The IMF recommends macro-prudence policy to address the potential financial stability threats associated with too low for too long rates. Moreover, emerging markets should continue to prepare for the likelihood of tighter financial condition.

With respect to advanced economies in the eurozone, the IMF recommends those countries which have completed financial consolidation, such as Germany, to invest in infrastructure projects. On the other hand, in the weaker economies which are experiencing negative growth, the IMF advocates putting the brakes on austerity.

Alibaba

He may have failed his university entrance exams, been turned-down for a job at his local Kentucky Fried Chicken branch and have the kind of face that only a mother could love. Jack Ma founder of Alibaba is now the richest man in China and has defied all the odds, including the stereotype Chinese business personality. It's a remarkable story of endurance and inspiration.

Ma's grandfather a local official under the Nationalist Party that Mao defeated, was persecuted as an enemy of the Communist revolution. Ma and his relatives all suffered at that time. Jack Ma, who's Chinese name is Ma Yun was born in 1964 and at just five feet tall one wanders whether young Ma may have even been undernourished during his growing years.

Nevertheless, despite the odds stacked against Jack Ma he set-up a company called, Alibaba, from a dinky apartment and has since grown the online business to stellar heights to give him a net worth of 21.9 billion USD,according to the Bloomberg Billionaires Index.

At school Ma was no great academic achiever, however, what he did have was a sharp ear for sounds, as a boy he was able to distinguish the sound of one cricket insect from another. He also had a passion to learn English. At age 12, Ma would get up in the early hours of the morning, say 5 a.m. to walk or bike it to Hangzhou's main hotel so he could practice his English with foreign tourists. He continued this routine for nine years, where he offered his services as a free tour guide, befriended many tourist and later visited a family in Australia.

Following this were various jobs, first as an English teacher, earning $15 a month, then as a translator. He recalls one disastrous time when he was providing a translation service for a Chinese company that was attempting to recover a debt in America. “The American who owed money pulled a gun on me,” said Ma.

Not knowing what to do next a friend showed Ma the internet and an idea began brewing.

With the help of more than a dozen friends who pooled their resources — just 60,000 USD — he founded Alibaba, a business-to-business online platform. The company now makes more profit than rivals Amazon.com and e-Bay combined.

Alibaba is entering the next chapter in its history, it is planning an IPO. Alibaba floatation price has been determined at 68 USD a share, the Chinese online company is on track to raise at least 21.8 billion USD. This price is comfortably above the company's expected range which was increased from an initial $60 to $66. So Wall St is valuing Alibaba more than the company's advisers. The IPO price of 68 USD would give Alibaba a valuation of 168 billion USD. That would make it amongst the worlds 40 biggest public companies, according to S&P Capital IQ. That is a staggering value for a company, which was started in a flat with 60,000 USD just 15 years ago. It would make Alibaba the largest e-commerce company in the world. Amazon has a market capitalisation of 150 billion USD.

Alibaba will start trading this Friday in New York on Wall St, under the ticker symbol BABA. It is guaranteed to be a world-wide spectacle for investors.

Analysts are mixed as to whether at the upper end floated price of 68 USD would leave anymore room for an upward movement. But that would probably depend on how volatile the markets are on the floatation day. Whether the positive outcome from the recent Scottish referendum might calm some political uncertainties and spur euphoria in the markets, time will tell.

Another element in the equation for investors to keep in mind is that some early investors are not tied into a so called “lock-up” clause, which typically prevents them from selling their investments as soon as the company floats. The amount of Alibaba stock not tied to lock-up clauses has been valued at around eight billion USD, according to media reports. So if we get these hefty investors deciding to hit the exit door on floatation, unless there's equal demand to soak up the surplus stock, Alibaba share price might disappoint investors on its first day of trading. Put another way, the stock price could tumble in the first day of trading and these early investors could then double their fortune by shorting the stock on the way down. That's a cynical view, but it does seem odd that the floatation has been valued on the upper end of 68 USD.

An army of banks hired by the e-commerce company are trying to convince fund managers that its shares are cheep given the company's potential growth and profits. The big question is whether US investors will buy shares in a Chinese company. While there has been a lot of optimism about the fate of Alibaba’s business model and its potential performance as a publicly-traded stock, that optimism didn’t translate into plans to buy into the company. According to a report in the Wall Street Journal, less than half, 43% of those surveyed said that they would buy shares in the company. This is surprising since 64% believe Alibaba to be a good long-term investment. Moreover, 88% of those surveyed believe that the stock will appreciate in the first month of trading.

Fund managers who have not yet invested in Chinese stocks appear to be the least likely to buy Alibaba. Only 38% of those fund managers said they would buy Alibaba’s stock compared to 60% of fund managers who have already purchased shares of Chinese companies.

What smells fishy is the 8 billion USD of early investors not tied in a lock-up clause. This is not the unusual arrangement and it is unlikely to inspire the market with confidence.

Gold Vs Silver

It has been dubbed the “Italian job style gold bar”. Remember the film staring Michael Caine, a cockney gangster who masterminds a plan to rob a hefty amount of gold bars in Italy. Well the super-rich are looking to protect their wealth like never before by snapping up record number of gold bars, according to bullion experts. Gold has always been the ultimate rat hole to crawl into when things look like they are about to go pear shaped. Put in a more delicate way, gold is like an insurance policy against the unexpected.

Apparently, the economic uncertainties have created a stampede amongst the well heeled for “Italian job style gold bars.” These aren't the wafer thin type of bars that could slip through your fingers. They are the heavy chunky type, each bar weighs 12.5 kg and is pure gold, worth approximately 300,000 pounds sterling each at today's prices of 1,226.80 USD (£760) an ounce. The number of 12.5kg gold bars being bought by wealthy customers has increased by a staggering 243 percent so far this year, when compared to the same period last year, said Rob Halliday-Stein founder of BullionByPost. All that wealth being stored in an insurance policy, bars of chunky gold. I guess these high rollers aren't buying the economic recovery story and are worried about what is going to happen next. "These gold bars are usually stored in the vaults of central banks and are the same ones you see in the film 'The Italian Job'," added David Cousins, bullion executive from London based ATS Bullion.

Just in the last three months to the end of August ATS Bullion has seen their volume of sales for 1 kg of gold, worth approximately 25,000 pounds sterling each double, compared to the same period last year, according to their sales figures.

Investors who buy the large bars often require secure storage in secret vaults operated by Brinks. While, only a few customers have actually taken physical delivery of the 12.5 kg bars, said the bullion executive. The small coins can also be sent in the post.

Political uncertainties over the Scottish referendum for independences from the United Kingdom has been the catalyst for a surge of investment in physical gold, up a massive 42 percent in the past two weeks on top of a seasonal rise in gold demand at this time of the year. That's according to Bullionvault.com, a peer to peer gold-and-silver-bullion exchange formed in 2005, based in London, United Kingdom and is the world's biggest online platform for private investors who want to trade physical gold and silver.

So Scotland-based investors have turned to gold as a means of insuring against the uncertainties posed by a Yes vote in Thursday's referendum.

But there are other good reasons why investors should hold gold. 

As an asset class gold holds it value in an inflationary environment, this is known as an inflationary hedge. Goldman Sachs has shown that there is a strong relationship between gold prices and inflation. There has been a 91 percent correlation between the CPI (measure of inflation) and gold prices over the past decade. Annual returns of about 16 percent can be achieved with gold when inflation goes above 5 percent, which is more than what the stock-market offers in high inflation scenario.

As a stock-market crash protection gold is a good play. In the previous stock-market crash shares lost 30 percent of their value in one year, by comparison gold only lost one third of that amount. Moreover, gold bounced back quicker than shares in the first year.

In a low interest rate environment gold tend to perform well as an asset class.

So far this year gold prices have remain relatively stable, the price hasn't crashed as many analysts predicted as it had done in 2013. The World Gold Council reported a sharp fall in gold buying in 2013 from China and India in the second quarter of this year. Nevertheless, there has been strong buying from investors piling into gold ETFs and that has kept prices relatively stable.

With respect to the outlook for gold prices, there has been a slowdown in world commodity prices this year and last year. Goldman Sachs is putting a long term forecast on the gold price at 1200 USD per ounce. Gold is currently trading at 1,226.80 USD per ounce.

But what about that other forgotten precious metal, silver which is down 4.9 percent in 2014, touching a 14-month low of 18.2 USD an ounce and heading for the first two-year slump in more than two decades. Bloomberg reported, September 18, that “silver buyers are defying hedge fund exit amid price slump.” ETP holdings are up 1.5 percent since mid-July to 19,898.8 metric tons, nearing a record reached in October. Silver is more of a volatile asset class than gold. One possible reason for this is that the silver market is smaller than gold, therefore the likelihood of silver price “fixing,” is greater.

Nevertheless, retail investors have been piling into silver this year on a long term play basis. They are anticipating economic growth in the medium to long run to spur demand for silver. Silver is not only in demand by jewellery makers, the precious metal is also an excellent conductor of electricity. So it has a wide spread application from electronics to solar panels. At the moment, silver is currently the worse performing asset class, due to the strong dollar and the equity rally, which is eroding demand for safe haven assets. But the worse of the slump might be over for silver and analysts believe that it is likely to tread water average around 20 USD per ounce in the fourth quarter and 20.4 USD in 2015.

A deterioration in the geopolitical situation and the economy would most likely see a flurry of investors into silver and gold, but for the latter asset class at 1,226.80 USD that may have already been overplayed.

Time Machine

Imagine that we are now entering a Time Machine and being transported back in time to 1937, the mellow tunes of Once in a While by Tommy Dorsey fills the dance-halls as the youth are waltzing cheek to cheek on the dance floor. Already eight years have lapsed since the Stock Market crash and the Great Depression that then ensued. Despite massive fiscal stimulus, despair and long-term disappointment amongst the populace remains unabated. Consumer spending is also considerably lower compared to the previous decade of the roaring 20s. There's wide spread discontent in Europe, people are worried about their livelihoods, their security and the rise of political extremism. In this climate of great uncertainty consumption and investment have been put on hold.

The discontented populace have punished the mainstream political parties of the day and in protest, to their own detriment, the electorate has propelled charismatic despots to power. In Italy, leader of the National Fascist Party, Benito Mussolini governs. The German people, hit hardest by the Great Depression and where discontent runs extremely high, are misled by another demagogue who they wrongly believe will be their saviour. Consequently, the German electorate put the despot fascist leader Adolf Hitler in power.

We know how this all ends. The reality is that economic recovery came only during a period of unprecedented fiscal and monetary stimulus brought on during and immediately following the end of world war two. But it also came at an unprecedented human cost; 60 million lives were lost in the world's last conflict and much of Europe and Asia lay in ruins.

Robert J Shiller, professor of economics at Yale University and winner of the 2013 Nobel laureate in economics, believes that the current situation is not nearly so dire, however, he believes that there are some parallels, particularly to 1937. “Now, as then, people have been disappointed for a long time, and many are despairing”, according to Shiller, “They are becoming more fearful for their long-term economic future”.

Perhaps this may be the reason why loose monetary policy, is failing dismally to get the economies out of the quagmire. Fear and insecurity are the enemies of consumption and investment, irrespective of whether money is cheap. In a climate of job insecurity and uncertainties, those that have the capacity to spend tend to do the reverse and hoard cash. Economists say that the velocity of money, the rate at which money flows from one transaction to another is low. So when we have low velocity of money, aggregate demand is also likely to be feeble. This in turn results in excess inventory overhangs. Consequently, businesses scale down their operations, which results in a fall in investment, thereby putting more people out of work and we end up with a self-perpetuating cycle.

Shiller believes that long term economic insecurity not only puts the brakes on consumption and investment but it can also lead to something even more dire, war. “For example, the impact of the 2008 financial crisis on the Ukrainian and Russian economies might ultimately be behind the recent war there,” claims Shiller.

Certainly, economic data supports the view that both Russia and its bordering former colony, the Ukraine, enjoyed buoyant economies during the period from 2002 to 2007. During this five year period Shiller cites that real per capita Gross Domestic Product (GDP), which takes into account the average GDP per person in the economy, in Russia expanding by 46 percent and 52 percent in the Ukraine. “That is history now: real per capita GDP growth was only 0.2% last year in Ukraine, and only 1.3% in Russia,” said Shiller.

When you get spectacular economic growth followed by a sharp downturn, that generates widespread disappointment, which can then manifest itself into discontent, civil protest, anger, riots and civil wars. With respect to the Ukrainian crisis, Shiller believes that it was the deteriorating economies of Russia and the Ukraine that led to the discontent and protests, which descended into a civil war and Russia annexing the Crimea and supporting the separatists.

However, the despair that has been driving the discontent is not exclusive to Russia and the Ukraine since the financial 2008 crisis. This kind of despair that was prevalent in 1937 is also visible in many economies today. Bill Gross, a founder of bond giant PIMCO has coined this despair today as, “the new norm,” which is synonymous with economies in stagnation. Think of a swamp, stagnant water, it is a breeding ground for virulent dangers, warns Shiller. Indeed, just like in 1937 we have a discontented populace and the rise of political extremism, be it separatism, nationalism or anti-Semitism and the ultra right

But just like in 1937, are we truly years away from a major war? Might a ruthless leader, to save his skin, exteriorise mass anger onto a manufactured foreign enemy? Surely today the likelihood of that occurring is fairly remote due to the advent of trading blocs like the European Union (EU). The EU has triumphed trade, cooperation and peace amongst its member states over war. Moreover, international bodies and watchdogs have been incorporated to foster global trade, security and economic stability. Nevertheless, rather than applauding integration and cross border trade as a means of fostering peace there is a political movement away from it. Anti EU sentiment is rising, separatism movements are proliferating and even trade with Russia is being dismantled over the Ukrainian crisis. Perhaps we should be mindful of the lessons of history.

The Eve of Scotland's Decision

If you are physically situated near the English Scottish border and you've notice an unusual spike in the number of money trucks moving from across Scotland into say Cumbria, England, then that figures. Apparently, British banks have been discretely moving millions of banknotes north of the border to cope with any surge in demand by Scots to withdraw cash in the event of a “yes” vote in today’s independence referendum, it has emerged.

According to a source at The Independent, a British national morning newspaper, this move has been quietly taken place over the past week or so in order to make sure ATMs do not run out of cash on Friday in the event of a panic reaction to a “yes” vote. The financial authorities are anticipating a flurry of Scottish account holders moving their money to English banks in the event of an independence vote.

Bankers are stressing that there has been no signs of a bank run, massive withdrawals from deposit accounts or ATMs. Indeed, the banking community is insisting to deposit holders that there is absolutely no need for deposit holders to panic. The rationale being that the Bank of England has pledged to guarantee all accounts for at least 18 months in the event of a “yes” vote.

Nevertheless, this has not calmed bank deposit holders' concerns on how safe their cash is likely to be in the event that Scotland votes for independence. Indeed, should the Scots vote a “yes” for independence it raises a sticky question of who would be the guarantor of bank deposit accounts in Scotland, for example in an unfortunate situation where the bank is in need of a financial bailout. Its unlikely that the Bank of England would be willing to fulfill the role of guaranteeing Scottish bank accounts indefinitely should Scotland vote for independence.

The Bank of England as the lender of last resort was the main motive behind the RBS and then Lloyds last week moving their registration addresses south of the border. This move was apparently made by both banks to reassure their deposit holders of the continuing protection available to them irrespective of whether Scotland voted for Independence.

A further part of the banks contingency plans has been to move physical cash to secure locations in Scotland in readiness that their branches can keep up with the potential increase in physical demand.

Scottish branches have been instructed to reassure customers that there was no reason to panic, according to an anonymous source at a major bank. “We have seen a big rise in customers coming in and asking us what would happen, but there is no sign of any significant flow of deposits from north to south.”

UK banknotes are created at a Bank of England printer in Debden, Essex. The notes are then held in secure depots managed by a group of major banks situated around the country. Secure vans are deployed to physically move the physical notes and coins around the country. The little-known arrangement is called “Notes Circulation Scheme,” which keeps banks informed if more notes need to be printed.

A source at one bank said: “This forms part of our contingency planning. We are, of course, monitoring the situation very closely from hour to hour.”

The Bank of England latest figures indicates that the amount of notes in circulation has been creeping up steadily over the last year. This month there are 62.3 billion notes in the country, compared with 59.8 billion a year ago.

Considering what is at stake the markets appear to be reacting remarkably calm. Sterling remains comfortably above its support of 1.60 USD at 163. The market obviously doesn't believe that the Scots will vote to go it alone. Market consensus is that 82 percent believe that the “no” vote will win with Scotland remaining in the union. However, if we compare the latest UKGov polls on Scottish Independence 52 percent are likely to vote for “no” to Scottish Independence and 48 percent “yes,” with a margin of error of three percent. Therefore, according to the polls it is too close to call. Bearing in mind that the market has factored in a win for the “no” vote to Scottish independence, if the “yes” vote were to win we might see considerable downside movements for sterling. But this is an unlikely event according to the markets.

The big guns have all jumped on the political ban wagon campaigning for Scotland to remain in the United Kingdom. British Prime Minister David Cameron made an impassioned plea to the people of Scotland to reject independence. UK was not just “any old country” and that millions of people would be “utterly heartbroken” if it was broken up, said Cameron.

Meanwhile, a series of major figures in US politics and economics warned Scots against a Yes vote. Alan Greenspan, former US Federal Reserve chairman, said the economic consequences would be “surprisingly negative for Scotland, more so than the Nationalist party is in any way communicating”.

He said their forecasts were “so implausible they really should be dismissed out of hand.” Greenspam then added that “there was no way the Bank of England would agree to remain the lender of last resort to an independent Scotland.”

Even the German , Deutsche Bank, is throwing a bucket of cold water on the idea of Scottish independence. “Yes vote would herald a 1930s-style depression,” according to an analyst at the bank.

But that was considered to be over done, according to rival bank Commerzbank, “some of the worst-case scenarios painted in recent days appear exaggerated”, providing evidence that Scottish shares have actually outperformed those of the UK as a whole this year, rather than registered any major collapse.

So on the eve of Scotlands decision we wait. It's always difficult to speculate which way sterling will go with certainty, however, a “yes” vote would shock the markets and could send sterling tumbling. Would the Bank of England then be forced to raise rates sooner rather than latter, to support the pound, if this scenario occurred?

On the other hand if the “no” vote wins, a pound rally might then ensue and that would make raising base rates difficult. Already UK exporters are moaning about the strong pound.