You can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.” (Steve Jobs, Stanford Commencement Speech, 2005)
I remember as a child learning how to draw pictures and color in shapes. I have to confess I was anything but a gifted artist. When it came to drawing, I was hopeless except when I was drawing a dot-to-dot picture. A dot-to-dot picture was one where you draw starting at number one and connect the dots in ascending numerical order. At the end of doing these drawings, a picture would emerge. At the outset, even though all the numbers are on the page, you cannot see the picture until you have connected all the dots. Our trading and financial markets are undergoing fundamental and structural change, and 21st century markets will be networked, decentralized and on a peer-to-peer basis. Is it the case that global markets of tomorrow are in fact a lot closer than we think and need little more today to bring them about than to connect the dots?
In executing world trade currently, we are heavily reliant on the current banking system, or more appropriately the banks. The instrument of choice for settling trade is the Letter of Credit, or LC as it is known. The English name “letter of credit” derives from the French word “accreditation,” a power to do something, which in turn derives from the Latin “accreditivus,” meaning trust. A letter of credit is actually nothing more than a messaging system. It is a bank-to-bank system which allows for the transfer of title of commodities like oil, gas, gold, rice or any commodity against a transfer of title for money, usually U.S. dollars or the euro between the buyer and the seller with the bank in the middle. The LC market however, as with much of the current financial system, is seizing up. Banks need trust not least between each other for the LC market to work and for trade to settle, and as we know the one thing banks are short on at the moment is trust. It goes without saying that global trade is suffering not least because the current messaging system, Bank-to-Bank LCs, is becoming obsolete.
The dots are definitely out there at the moment for a new decentralized 21st century market and our ability to connect them is becoming clearer. The current sanctions on Iran are highlighting, or illuminating if you will, the dots of the new system. The sanctions seek to limit Iran’s ability to be part of the bank-to-bank LC system, which relies on U.S. dollars and the euro to settle. However, Iran’s trading partners such as India, China, South Korea and Russia to name a few, are actively seeking new ways to settle their bilateral trade with Iran, while not damaging their trade with the United States and Europe.
A new system of trade settlement will require a pool of assets other than the U.S. dollar and euro. This pool of assets might include national currencies such as the rupee, the ruble, the yuan, or it may include other assets such as gold, silver, oil, gas, or even soft commodities like wheat, rice or other grains. These new pools of assets will need to have title registries, in order to register ownership and title transfers. These title registries would be linked to custodians or warehouses around the world, monitoring the stock of commodities in and out, and linking to the title registries. The new stocks of commodities registered with custodians or in warehouses would in fact form securities depositories. This new stock of securities could then be traded on stock exchanges.
If we keep looking for the dots, we will find that if we unitize energy (http://en.rian.ru/columnists/20111108/168505785.html) or indeed other commodities and make them redeemable in units of the underlying, then the newly formed securities depositories will not offer the holder of the security the right to redeem U.S. dollars or euros, but rather a barrel of oil, or a unit of gas, or a tone of wheat, or a kilogram of gold. This creates the very basis of value for networked markets.
The ongoing global banking crisis is clouding our view of the dots in the market and limiting our ability to connect them to create new markets. We assume wrongly that banks must be in the middle of world trade and that we can only trust banks using U.S. dollars or euros to facilitate and settle trade. This is plainly not the case; we are quickly building a picture of how trade will work without traditional LCs.
The new picture is 21st century global trade consisting of a pool of assets accounted for through a registry of title, stored in a warehouse or kept safe with a custodian, whose value is denominated by varying national currencies or directly in the underlying asset, where the stock of security is traded on a network of stock exchanges. As Steve Jobs said, you just have to trust that your dots will somehow connect in your future.
The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
Current markets are anything but global or integrated. What if we had a paradigm shift in the way we think and transact when doing business with each other? Balanced global trade can only occur if we have transparent, accessible and efficient markets. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company. Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.
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