Monday, 11 March 2013

The moral hazard revisited . . . never promise what you can't deliver

We've heard a lot over the last couple of years about the "moral hazard"connected with the world post the 2008 crisis, but even now we're seeing the ramifications of central bank activity in the financial markets. One of the central pillars of liquidity, the short term repo market has again been shrinking. The FT reports that the market dropped 11.9 per cent in the year to December 2012 according to the latest bi-annual survey by the European Repo Council of the International Capital Market Association. Why does this matter? Well the trouble now is that the banks are reliant on central bank facilities to cover short term liabilities. The result is that money supply and the correct assessment of risk in the system has been shifted to faceless men. If we consider the recent statements emanating from the Feds Open Market Committee (FOMC) we know the key central bankers are worried about the current course but seem somehow reticent to reveal their plans for weening institutions off central bank funding facilities for fear of impacting confidence (as evidenced by market reaction to the said recent minutes) and causing a run on weaker institutions. The moral hazard was not letting some institutions go bankrupt, the hazard to normalisation is keeping the same banks going concerns in the hope that they somehow de-leverage and can be cut adrift in a more regulated market. My own view is that markets are now reaching a point where either they are strong enough to stand on their own, in which case legislators need to step in and take back control of their economies or we continue to see general debasement of risk, in which case there are more new highs in equity markets to come.

The ECB has been somewhat quiet recently. If we look back at the frantic pace of announcements since Mario Draghi assumed the hot seat at the ECB what are we to conclude? Clearly the European economy is still under pressure. It could have course meant that the ECB is saving a rate cut for a time when we have another political crisis. I had suspected that the inconclusive Italian elections may have flushed the ECB out of it's bunker, but it didn't and I now can only think that the ECB will work behind the scenes to get Italy sorted out. The markets would fly if Mario Monti could head a coalition of any colour and it's likely that the ECB would not act. Of course in the case of another election with an inconclusive outcome the ECB would act to loosen monetary policy.

Sterling continues to look under pressure. It will be interesting to see what newly appointed Governor of the BoE (Canadian Mark Carney) decides to do. What if the government goes to a Plan B and starts spending again? Would the BoE go easier on QE? Carney didn't have the same pressures on him in Canada as he does now. He did lead G7 central banks in backing the calls for liquidity stimulus when markets looked likely to fail in 2008. The question is does he believe UK inflation is dead and therefore the economy could take a dose of QE + government spending. I've been tempted in the past to buy some sterling and that's one of the dangers of history. I lived in the UK when the GBPAUD was 3 to 1 - it's now 1.46, so to me it looks like a bargain. It may or may not be, but times have changed and when Gordon Brown broke his "golden rule" in 2005 (i.e. over the cycle the current budget must balance or be brought into surplus) it allowed £22bn of borrowings to go straight into the economy fuelling the final stage of the liquidity bubble that burst in 2007-08. For me now to expect the GBPAUD to get back to the old highs commodity prices would have to plummet and I don't believe that's likely without some major defaults in the global economy.

As I have said before I'm enjoying being back riding my Pinarello Dogma 60.1. Lately I've had a chain drop problem and I had to make some adjustments to the front derailleur this morning. The problem was that I was losing the chain in the shift from the big ring to the small ring when I had the back ring in the low third (easier) section of my rear cassette. The first thing I did was change the limiter so the gap between cage and chain was close to the recommended 0.5mm when on the lowest gear (small ring front, big cog back). Obviously this proves the old addage that you need to change gears before you get to a hill and go through the progression in a smoother fashion. While I was at it I also tightend the shifter cable for the front derailleur as the shift from small back to big ring was not as "snappy" as it once was. The result on today's ride was now dropped chains.

Lovely day here though I wish I'd been in Nice on Sunday to watch Richie Porte win the Paris Nice. Sky looked so well prepared compared to the other teams that the time trial to end proceedings hardly seemed worth the problem. I forget which commentator it was but there was a nice bit of insider knowledge about Sky's understanding of power meter readings. The riders just sit on a level shy of their max output and patiently keep the tempo there and peel off at pretty much at pre-dertermined points. This of course would have frustrated the hell out of Mark Cavendish last year as tempo is less important than positioning for the sprinter stages. That's why Cav went it alone so often at the TdF last year. All this makes me want to go out and get a power meter for my bike, not because I really need it, but rather because the science interests me.

 And finally an update on my damaged bike. After finding out that my new braze-on tab didn't get fitted to my Cannondale Evo SuperSix last week due to a ridiculous piece of bureaucratic logic by the local Australian supplier CSG I was pretty mad. Honestly it's amazing the thinking that says I might not want to repair a $4,000 bike frame because the supplier won't cover a $50 part under warranty. Here's the thing - don't think please, just send the part to the shop and call me and tell me it's a 50 buck fee on top of the labour costs. The angst this type of customer service causes is just another example of how companies get things wrong. I tried not to get upset with the local bike shop guy as it wasn't his fault. It all made me start looking at new bike frames onto which I'll attached the stripped components from the Cannondale. I'm thinking Colnago or Wilier . . .  a C59 or Zero7 . . .  Thoughts?
Wlier Zero7

Notice the pop rivets they use towards the end of the video to fit the braze-on tab . . . ?


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