Monday, 8 October 2012

Cracks are starting to show . . .

I was riding my Cannondale Evo here on Sunday and was jolted heavily when I failed to spot a pot hole. I guess it was just too beautiful of a morning to be paying extra close attention to the road. Anyhow the end result is that my FSA K-Force Stem in Cannondale green suffered a couple of micro cracks that widened throughout the ride. In one way I was lucky as the stem costs about 250 bucks, whereas a broken Mavic Cosmic Carbone SLR front wheel would have been closer to 1000. As such I've sent mails to Cannondale, FSA and my bike shop in Italy to see how I go about claiming for a part that has a very comprehensive warranty. I'm guessing as the stem was a special edition I'll get the usual excuses about it being irreplaceable and I'll have to settle for the standard red and white model. Who knows? While I was mailing Cannondale I also took the opportunity of reminding them that the compact rings for my Spider cranks hadn't arrived yet. Let's see what they make of that?

In the meantime the AUD has cracked down below crucial support at 1.02 and as I write this is trading at 1.0158 after the RBA said "the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected," . . .  and the board remains poised to push the cash rate lower because they suspect a harder landing in the Chinese economy. As such I remain surprised that stocks such as Rio Tinto remain about 10% above their mid-September lows when the Iron Ore price crashed through the 100 dollar mark. The local borse seems to be benefiting from yield and financial stock buying. In my mind the fact that more than 50% of the Australian market is held offshore could be the biggest headwind to the Index and I remain skeptical of the usual bulls.

So if my bike stem and the AUD are cracking what else is under pressure? This week’s annual meetings of the IMF and World Bank in Tokyo I suspect will show the economic debate starting to show equally fractious signs.

A number of interesting pieces regarding US government exit from QE-ternity are starting to appear in the press and if we are to believe that the US has turned the corner on the employment front as many were suggesting last week with the fall in the headline below 8% to 7.8%, then it's time to start looking ahead. You see as the Fed heads towards a 4 trillion dollar balance sheet we have to consider what happens as we return to "normal" conditions. The Fed has moved it's duration of debt out past 10 years by buying up vast quantities of mortgage backed bonds and alike. Of course to reverse this will require people and institutions with similar views on the long term viability of such debt. If the Fed manages to get things growing at 2-5% (and that's a big if) it would be dangerous for the market to have excess liquidity in the system. The Fed surely must understand that at the first sign that they are a seller a market (the MBS market wich they are currently destroying with their actions) will not be there to buy back the debt the Fed wants to sell. As Philly Fed Governor Charles Plosser said in September:

"While these risks are very hard to quantify, it is clear that the larger the Fed’s portfolio becomes, the higher the risk and the potential costs when it comes time to exit. And based on my economic outlook, that time may come well before mid-2015. In my view, to keep the funds rate at zero that long would risk destabilizing inflation expectations and lead to an unwanted increase in inflation."

The risk is that the bond market "cracks" long before the first Fed move and with it so does many of the huge bets currently in play in government corporate and junk debt. 

Now where is that bike of mine?


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