Monday, 22 April 2013

How to run a deficit and lose 10,000 calories without even trying . . .

Readers will know that this blog believes the US is the best bet in terms of global growth for a number of reasons. One reason I didn't factor on was a change in the statistical analysis of GDP. The US economy will officially become 3% bigger in July as part of a change that will see government statistics take into account 21st century components such as film royalties and spending on research and development. That of course doesn't mean an instant employment boom, what it does do though is explain the two speed economy that we've all encountered but have had trouble explaining. The whole way we consume has changed in the last ten years. So much went online and in fact the sales of things such as movies and music has been growing even though we've all seen our local record stores closing. Stats can help explain, but they don't change things alone. Some economists will argue that the negative perception of growth in economies acts like a brake on spending. I think that this is correct to a minor degree and probably effects the bottom end of the economy more than the top end. Look at the boom in luxury goods as an example of this phenomenon. The upper reaches of the economy are hardly effected by slowing growth and are in fact the biggest beneficiaries of cheap credit generated by QE as practiced by institutions such as the Fed. If you want to read more about the changes to the statistical analysis of the world's economy go to: UN Stats

In days gone by the Aussie dollar would take a hit whenever the terms of trade started to go against the country. That's why so many hedge funds have been bearish on the currency for the last two years. Most expected a cooling China to be the catalyst for a move down towards 85c, but that didn't happen. Why? The main reason has been the endless increase in the money supply be the G7. Latterly of course Japan has embarked on the total debasement of the Yen, which of course has pushed the carry traders into higher yielding AAA currencies such as the AUD. The consequences of this is starting to become apparent. According to the Grattan Institute the Australian budget has taken a $7.5 billion hit since the midyear update last October because of the dollar strength impacting on previous forecasts. That means that the combined state and federal budget deficits should reach 4% of GDP by 2023, or about $60 billion in today's dollars and would be about $100 billion in 10 years' time.

Australia can hope the Chinese return to a 10% growth rate or start to budget accordingly now. There's only one thing for certain and that is that Glenn Stevens the Governor of the RBA seems pretty deaf to the AUD and other central banks and unfortunately he's been reappointed by a government 99% likely to get kicked out of office in September. What a mess!

A couple of blogs ago I was suggesting that if you're a European investor then you should have some cash in German real estate as a hedge against eurozone inflation and as a defensive measure in the case of more peripheral shocks. 

An interesting problem has developed for investors looking for a broader, more diverse version of this strategy. The German regulator that deals with investment products "BaFin" has proposed that German Reits should be regulated as investment funds under the EU’s Alternative Investment Fund Managers Directive, due to come into effect in July. That basically in my mind treats Reits like a hedge fund and requires a whole new layer of regulation. It probably doesn't matter a lot to people already invested in the very small Reits market in Germany, but it will inhibit the growth of the sector and make it harder to launch new products. If the German real estate market remains a vehicle only for large insurance companies then price discovery and therefore return remain somewhat opaque. More importantl is where the Germans go so to does the rest of Europe. Consider what might happen to Reits in France that make up a much larger investible asset class? The costs are going to get passed on through the dividend pay-out and to what end? I'll be looking out for the final paper from BaFin and posting it when I have it. 

Bike riding in Sydney has been a bit of a problem of late due to the changeable weather. I can't remember Geneva being like this even in the dead of winter. Sure it was cold, but you could prepare for that. The rain here falls heavily when we have it, not like Singapore mind you but hard enough to have you heading for the safety of your favourite cafe. I shouldn't complain as I'm well aware of the conditions that much of Europe has had this year. On Sunday the Liege-Bastogne-Liege, or La Doyenne was raced with in-form Irishman Dan Martin taking the last of the major spring classics. If you'd like to know what it takes to compete on a day like Sunday you can check out the Strava track for Blanco team rider Laurens ten Dam:

Liege Bastogne Liege with a pro
Amazing stuff and hard for we local road warriors to contemplate. I miss the fact that in Europe's smaller cities and towns you could be off in the countryside in a matter of 30minutes or so, but still have the infrastructure to support you in case of anything going wrong. I've been stranded up a mountain in France, but a steady set of hands on the brakes and a bit of patience from drivers and I always made it home.

I dropped off the Evo for a bottom bracket service today at my local Cannondale dealer. I really would have preferred to give the job to my regular guys, but the cranks on the ultra lightweight "Spider Rings" require a special tool that I'm fairly certain very few people in Australia currently have. I spoke to one of the mechanics on Friday and he concurred that it was a matter of a clean, lube and tighten to get the last of the ticking creaking sound out of the bike. Additionally I noted down a few things and told them to have a look at my headset and cabling. Obviously I'll report on the service and results as I get them in. 

As the Cannondale is out of action I'll be doing some more miles on the Pinarello. It's nearly time to change the tires on my Campy Boras as I've noticed some flat spots developing on the rear wheel. The last time this happened I left it a little too long and the result was that I was lucky to get home without having to resort to the support crew. 

I won't be letting that happen again.


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