The thing I really like about Credit Default Swaps is that the market for Inter-Bank lending is very good at making a judgement on how likely it is for the lender to get its money back at the end of the loan term. I know – I should really get out more!

By way of an example, a bank choosing to lend to Banco Bilbao would need to insure against default at a rate 71.31% higher than LIBOR. At the other end of the scale, if you wanted to lend to JPMorgan Chase, you would need to insure against default at a rate 28.57% higher than LIBOR.

The market clearly thinks you are most likely to get your money back if you lend to JPMorgan, but the downside to this will be that the “spread” will be much lower and so will your return.

Similarly, global markets such as the FTSE100, Dow Jones and Nikkei 225 all tend to factor in value and likely returns based upon data released at regular intervals by the various institutions represented.

I got to a stage last year when I became utterly fed up with the continuous positive market/economy lines being spouted by various industry pundits. I’ve been researching IMA Sectors every month for over 10 years and what worries me most at the moment is the very narrow range in which we seem to be trading. This makes me wonder whether markets are just happy to bump along continually without much fuss, or if there is an as yet, unexplained underlying issue which has resulted in this sideways movement.

The problem I have with the FTSE100 breaking through 7,000 points and beyond is this: The FTSE100 is a true representation of the market capital of the top 100 companies in the UK. If the UK continues to trade with an annually huge deficit (much more being imported than exported), then where is this extra capital going to come from exactly, which is supposedly going to see the markets ride off into the sunset? I’m not buying it.

I asked a fund manager last year exactly the same question and he told me that the FTSE100 should be trading at 10,000! I think he was more interested in enticing me to ply his fund with my clients’ money. Luckily, I could quickly identify that he didn’t have an answer, so until I get a satisfactory response, I will be exercising caution until further notice. The FTSE100 is currently quite close to its historical high point, so I am inclined to believe that the next significant move will be down.

One other interesting piece of news this week came from the Financial Conduct Authority, who have tabled a suggestion that the banks should in future, be able to certify their staff as “Fit and Proper” instead of the regulators. As you can imagine, this went down a storm with the IFA community. In my opinion, we have yet to recover from a bank-led financial meltdown, yet the very bodies who are in place to protect us from this awful scenario ever reoccurring, seem to have accorded both forgiveness and trust prematurely to the far from rehabilitated culprits.