Thursday, 13 September 2012

When investors and riders lose faith . . .

I had lunch today with a few smart players from about town. The conversation was positive, but the sense of opportunity in the secondary markets was negative. Australia, like the US and the UK is an equity culture for a particular reason and that is that the pool of wealth over the years has focused on building itself through taking risks. The old world (i.e. Europe) was a bond culture where wealth defended itself by achieving risk adjusted returns through a high dose of bonds and a small dash of primary investment. Thus in Germany we have the dominance of the non-public companies of the mittelstadt and the same is functionally true in Italy and France, though the latter two gravitate away from public listings on stock exchanges to protect themselves from tax systems unfavorable to "entrepreneurship". The anglo-world is fast regressing as the 2007-08 crisis undermined much of the trust investors had in the system to at least shield them from the most outrageous excesses of the global ponzi scheme. Now of course bonds are in vogue and I sense many of the stockbrokers have learned how to discount cash flows on a spreadsheet.

The FT reports that on Monday some $29bn of corporate bonds hit the market; most were snapped up immediately as investors searched for yield. Nestle issued seven year Euro paper yielding 1.5%. I mean you really have to believe in never ending QE to buy that. Mind you in the case of Nestle there is something of a Swiss "too big to fail" quality that surely has people treating these as the equivalent of Swiss government issued debt - the Swiss 10yr yield is negative. I wouldn't be surprised if the SNB used some of the Euro's they now owned to prop up the issue in their own bizarre version of "Operation Twist". Whatever the example (and there are plenty), it is obvious that company's are being attracted by low rates and investors with an insatiable appetite for paper promises over risky equities.

As I've been spending time in Australia I'm starting to see some of the confidence shaken locally in respect of the never ending Chinese growth story. Right now I believe we're starting to see the end of the infrastructure driven growth that peaked with the massive investment in the Three Gorges Damn and manifested itself in such projects as the MagLev trains and mega cities of the interior. Simply put the calculus of the situation should have told us that economies do not grow at 10%+ for ever and if you try to make this a national policy you will eventually create a situation of overheatinng that can end with only one result. I am constantly surprised by how many people in the Australia/China axis forget the '97 Asia crisis, much as I am surprised with the endless lines of economists from the US who think that LatAm is a car from Ford. No, China's new leaders will have to cool the presses very carefully and with that disappoint trading partners like Australia. Sorry.

I managed to get out this morning to help my ex-trader friend have his first ride on a racing bike. As I said to several people it's easy to coach someone to ski or cycle if they're fit, it's sometimes harder for them to understand that it will take time to perfect the art.  All was good, though getting out of cleats was somewhat more difficult than getting in. Having said that there were no falls, so the BMC and the rider were delivered safely home. I of course being less coordinated fell numerous times in my first week riding, so I hope some of my bad experiences helped with the technicalities.

The other notable thing about this morning was that it was my first time on the Evo Super Six. I don't want to get too effusive about the bike, but the power transfer is amazing. I was riding on big rings  (53/39) today as Cannondale have yet to send me the compacts (50/34). Holy cow! The big ring had me hitting 40kph on the flat without too much effort. Of course up the hills were a little more of a test, but as I was using a 12-27 cassette and I coped pretty well thanks to the bike being at least a kilo lighter than the Pinarello. I expected the stiffness of the frame to be more of a challenge, but it's not . . . in fact the bike is as smooth as anything I've sat on and my only regret is not taking my Campagnolo Bora tubulars with me to compare v. the Mavic Cosmic Carbone SLR clinchers that came with the Evo.  I bet the experience of losing 400gms from the wheels would be pretty sexy. It was a great morning and I hope to get out early tomorrow to trim off todays lunch.


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