Regulating Payday Lending

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payday-loans2The federal government in the US is developing pioneering rules focused on the short-term, small-sum credit called as payday lending.

Though it appears to be an excellent idea, the plan proposed by the Consumer Financial Protection Bureau is not the method to do it.

Payday lenders provide service to individuals with poor credit who require cash quickly. Lenders normally deliver two-week loans. They are usually a few hundred dollars for a 15% fee and almost 400% annualized.

The terms may appear to be very outrageous, but they would definitely make sense for individuals who need money for minor tasks and do not have any other option to secure money.

However, there are certain conditions associated with these loans. The loans have to be repaid quickly. Since they are not repaid quickly most often, lenders exploit the situation.

Repaying the loan slowly is not encouraged. Normally, borrowers are asked to either repay completely on the due date or extend the total amount of added cost.

Several borrowers extend the repayment and they pay much more in interest and fees than they had borrowed initially. This could result in severe financial distress for the borrowers. This type of dealings accounts for a huge portion of payday lender’s revenues.

The challenge before regulators is to restrict this greedy lending without completely ending a useful service.

Certain states such as Colorado have implemented a rule providing borrowers a minimum of six months to repay the loan’s principal and covering total charges. Since then, interest rates have reduced, payments have become very inexpensive, and the service has remained broadly available.

The CFPB does not have the power to cap finance charges just like Colorado did, but it could implement something similar such as establishing a ceiling of gross income, for e.g., 5 percent, below which it would believe loan payments to be reasonable.

This would be a simple method since payday lenders naturally need a pay stub or other proof of income. This could attract normal banks into the small sum lending business, assisting to reduce annualized interest rates even further.

However, the CFPB has planned a very complicated method (lenders would have to conduct multiple checks in the borrower’s capability to repay), which would definitely slow down the process and increase the cost. Traditional banks would not want to enter the sector. Lenders would be in a position to accumulate more fees throughout the life of a short-term loan.

Hence, it would be prudent on the part of the CFPB to implement the model that has been tested in Colorado. Borrowers must find out the terms before agreeing to any payday loan.

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Quant Funds Can Assist in Diversifying the Portfolio

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quant-tradingTechnology has become central to the human society. It is also impacting the investment pattern. Quant funds use algorithmic, or algo-trading (systems make buy/sell decisions based on a predetermined formula after wide-ranging data analysis).

The process consists of using advanced statistical models on the basis of several specifications – price change, capacity, revenues, and financial ratios.

Quant funds usually follow a data-driven method. Usually, a specific model automatically identifies stocks on the basis of different data inputs that could or could not include fundamental data.

Similar to equity funds, quant funds have variations like large-cap and mid-cap. They are popular among portfolio managers.

Quant funds provide exceptional results if there is a very large liquid market, especially for long-only quantitative investing.

Some analysts believe a system cannot replace human capability, while quant fund managers feel that the model does consist of human intelligence and the use of algorithms simply removes human error in the investment process.

Quant funds screen all firms which are in line with their standards and identify the sectors & stocks that are performing well. This removes the fund manager’s authority to select a stock. The system would choose the stock only if it is in line with the standards that are incorporated into the fund’s model.

Quant funds may not recognize the impact of unknown changes since they are based on several assumptions. Hence, if a stock does not adhere to any historical pattern, there are possibilities that the model would not be able to forecast its movement.

Again, a quant fund would not buy even a good stock if trading volumes are insufficient. Returns from quant funds differ broadly. Hence, investors should analyze a funds’ previous record.

Globally, quant funds have a history of providing downside safeguard, but failing to match the returns from regular funds. These funds are appropriate for conservative investors.

A well-managed quant fund would have lesser volatility. Investors must look at volatility and then select. In conclusion, quant funds are a method to diversify the portfolio and not a replacement for regular funds.

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Gold Surges Post Brexit

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gold-etf_190Gold rose as much as 8% (the highest in over two years) on June 24th, 2016 after the UK provided a shock vote to exit the EU.

The investors were found rushing for protection in bullion and other assets perceived as lower risk. They were purchasing gold as an insurance asset, a hedge against tail risks and increases in volatility.

The anxiety in the market is expected to remain in place this week until the market comprehends the next political moves.

In sterling standings, gold delivered double-digit percentage increases to top 1,000 pounds an ounce for the first time in over three years.

The rate for spot gold peaked at $1,358.20 per ounce. The US gold futures for August delivery moved up by $59.30 to settle at $1,322.40. Shares of gold mining firms also moved higher.

Brexit is extremely beneficial to gold since, in an overall risk-off mode, it’s a logical safe haven for all investors.

Post-Brexit, market experts believe that there is a greater probability that the $1,350-1,360 per ounce level could be breached.

Gold dealers in the UK reported rising demand for coins and bars among retail investors, while stocks were rangebound.

Global stocks headed for one the substantial crashes on record as the vote triggered 8 percent falls for Europe’s biggest exchanges and the greatest drop for sterling.

The sterling was under pressure because of worries among the investors that the Brexit vote would result in similar movements in other European nations.

The Fed was expected to reduce interest rates to help protect the economy from any global fallout. Gold would be supported by the change in the stance to easier monetary policy.

Gold has become very attractive post-Brexit because the interest rates globally have been pushed lower.

At present, deflation is a bigger threat than inflation. Investors would not want to invest in a government bond with a negative interest rate.

The demand for gold always moves up when there are negative interest rates. Again from a political perspective, Brexit could trigger other nations to leave the EU. These uncertainties would contribute to the rise in demand for gold in the future.

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Five Charts to Analyse After Brexit

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logo_brexit_new_size2The historic decision taken by the UK to leave the European Union has triggered a sharp response in the markets.

The pound dropped to its lowest level in over three decades. The impact of the UK’s exit is being felt throughout the global markets.

The below mentioned five charts would provide an indication of the movement of the markets.

Money Markets

A measure of where bank borrowing costs would be in the coming months, known as the FRA/OIS spread, reached the maximum level since 2012.

The Bank of Japan has initiated measures to deliver enough liquidity, including the use of cross-currency swap arrangements. This is to ensure stability in the market.

Increasing Volatility

The Chicago Board Options Exchange’s Volatility Index, which is also known as the VIX measures volatility in the markets. The VIX index and its derivatives are expected to increase following the vote for Brexit.

Foreign Exchange Market

The consequence of Brexit is affecting the foreign exchange markets. Several safe haven currencies are gaining.

The Japanese yen has been the best performer among the major currencies, while the euro has come under severe pressure.

Analysts believe that the franc and the pound are also an excellent measure of the risk of a Brexit.

The Renminbi

The Renminbi is the official currency of China. It has declined to its lowest level in comparison to the US dollar since 2011.

The devaluation of the Renminbi had resulted in a market crash in August 2015. Hence, the markets fear that the weakening of the Renminbi could result in another market turmoil.

An assessment of the volatility of this pair (for a month) indicated by options prices has also increased after the referendum outcomes.

 The Futures and Eurodollars

The real S&P 500 futures contract is dropping after the Brexit vote. The market prospects regarding the direction of the Federal Reserve’s policy rate are measured on the basis of the December 2016 Eurodollar futures contract.

The December 2016 Eurodollar futures contract is progressing, indicating that traders forecast less tightening from the Fed in the US by the end of the year.

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Europe Needs Investments Instead of Budget Rules

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blog-budget-693x425After hesitating for some time, over the failure of Spain and Portugal to conform with Europe’s budget rules, the European Commission arrived at a decision to assess the countries’ excessive borrowing in July.

Experts believe that’s the problem with fiscal rules that are difficult to enforce. Europe requires a comprehensive reform of its unsuccessful fiscal structure, but it does not have the required political resolve and widespread support. Until this changes, it would be difficult to encourage investment.

According to the European rules, budget deficits should not be over 3 percent of national income. At present, Spain has a budget deficit of 5.1%, while Portugal has a budget deficit of 4.4%. Again, nations are required to maintain public debt at no more than 60% of income.

Among the 28 EU members, just three have constantly complied with both rules. At present, nine nations are subject to the provisions of the excessive deficit procedure.

This would result in fines of nearly 0.2 percent of the gross domestic product. Completely revamping the fiscal system needs a change in the thought process. The policy makers must concentrate on the basics of the economy.

They must also establish a restricted form of fiscal union for nations that are members of the euro zone.

The EU must focus on two less fundamental methods. In the first place, boost public investment. It is evident that the net public investment in several EU nations has been low for a long time and particularly since the financial crisis.

Any additional infrastructure investment would generate demand in the short period and increase growth in the long-term.

The EU should also quicken efforts to establish a unified market for capital and equities. This would be the most optimal method to enable the EU to negate economic shocks. This is more effective than the operating fiscal union.

It needs a committed attack on regulatory restrictions to capital flows within the EU, integrated insolvency laws, and other measures.

The EU should focus on investment. The correct public investment would make the EU very popular.

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Bitcoin The New Safe Haven

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bitcoin-perfecthueBitcoin is turning out to be as safe a haven as gold. The value of the cryptocurrency has been quickly increasing in the recent past. It traded over $730 per bitcoin on June 17th, 2016, levels not witnessed since February 2014.

According to Chris Burniske, a blockchain analyst and products lead at investment manager ARK Invest, “the cryptocurrency could be referred to as digital gold, as it shares many of the characteristics that make the precious metal a great store of value.”

Bitcoin and gold have an extremely restricted supply. Gold is utilized in electronic circuits, while bitcoin is utilized as payment.

At present, gold is performing well, increasing 20 percent year to date. However, investors must also consider diversifying into bitcoin.

The global markets have been impacted by lots of fear, uncertainty and doubts. Investors are anxious about the equity markets and rushing into bonds. Though gold has performed well in 2016, over the last five years, it has not performed well.

Hence, investors are seeking safe havens to store their assets. Experts are recommending to diversify and make allocations to bitcoin. Some analysts don’t agree that bitcoin is a safe-haven asset. It is still projected to be volatile.

According to Vijay Michalik, research analyst at consultancy Frost & Sullivan, “Bitcoin is still such a new innovation that the economics of its value aren’t fully understood, and the price looks likely to remain moderately volatile in the medium term.”

Volatility and the long-term unidentified aspects pertaining to bitcoin’s development prevent it from being treated as a safe-haven asset such as gold. However, since bitcoin is not connected to any particular national currency or macroeconomic feature, it could be an excellent choice for portfolio diversification.

The recent increase in the value of the digital currency is primarily due to a forthcoming transformation which would see bitcoin miners earn less money for every block that they extract.

This is expected to tighten the supply of bitcoins. The bitcoin developers are expected to implement a protocol called “Segregated Witness” to scale up bitcoin. It would decrease the size of every bitcoin transaction, thereby increasing the number of transactions.

Since bitcoin is not correlated with other financial investments, it would be advisable for investors to allocate a minor portfolio to the cryptocurrency. Even modest implementation of bitcoin for cross-border transactions would significantly increase its value because of restricted supply. Every time a nation establishes capital controls, the transaction volumes for bitcoin rises.

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Uncertainty Is the Only Thing That Is Certain for The World’s Central Bankers

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bis-tower-2From the immediate prospect of the UK leaving the European Union to the longer-term ramifications of aging populations, the major central banks across the globe are not able to decide on the next move.

Decision makers from various developed nations, including the UK, the US, Switzerland, and Japan all decided to keep monetary policy unchanged in June 2016 as they await the Brexit vote on June 23rd, 2016 and try to comprehend the comprehensive forces transforming the global economy.

Experts are not sure about the rates in the longer term. An aging society and lagging productivity development denoted that borrowing costs could be below historical normal levels.

The inaction by four of the most outstanding central banks raised concerns among investors that monetary policy makers are undecided in the face of a struggling international economy and distorted global financial markets.

That perception, combined with uncertainties about the fallout should the U.K. exit the EU, sent global stock prices slipping lower in the 3rd week of June 2016 and drove bond yields down, in certain cases into an unheard negative territory.

At present, investors are not willing to take any risk. Markets do not like the uncertainty.

Japan and Switzerland could possibly see an economically harmful increase in their currencies if the U.K. decides not to remain in the EU. The UK is also expected to face a currency crisis if it exits the EU. The central bank in the UK would be forced to raise interest rates to reinstate confidence in the pound.

Brexit is not the only uncertainty central bankers are worried about. The Fed in the US is trying to determine the best monetary policy strategy for an economy that is nearing full employment and where inflation is expected to come back to its 2% target.

The central bank in Japan has not made much progress in lifting the nation’s very low inflation rate.

All the uncertainties could have consequences for economic and financial scenarios in global financial markets. It would take an integrated effort by the prominent central banks to sustain economic growth.

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