Tuesday, 25 June 2013


The most important data this week will come from the release of the Case Schiller Housing Index. Economists are forecasting a bit over 2% for April which would mean over 11% yoy. 

20 City Index v. US National

20 City Year on Year change
The momentum in the US economy is clear and obviously this is the reason why Ben Bernanke has signalled that it's time to move on from QE. Thats why bond markets have been so volatile in the last week. The most scary thing though was the huge gap late last week in Shanghai interbank offered rate (SHIBOR). 

SHIBOR: The June 20 problems . . .
The conspiracy theories abound, but there is no way that the Chinese leadership wants a disorderly market and therefore I'm left with a feeling that much of what we're seeing in China and the rest of the world is large financial institutions defending their credit lines by cutting back exposures to the least credit worthy ahead of the Fed exiting from a policy of direct market support. Think about it this way; up until now you could swap out various obligations through the central banks, but in the next year that will become more difficult. The Lehman's collapse and the subsequent global banking crisis taught financiers one clear lesson . . . don't be the last one out of the boat. 

I've mentioned before that high yield debt was likely to be the first casualty of the Fed stepping back from the market. The Bloomberg Global High Yield Corporate Bond Index (BHYC) is now down nearly 4% for the month, but is still up 10% for the last 12 months. The index is yielding around 7%, which sounds good at the moment, but probably won't be so good in 12 months compared to government bonds. Additionally amongst these high yield names will be companies that won't make it . . . In other words it sounds great to gear up at the moment, but if your business doesn't work you have no chance of paying off that extra leverage.

In Asia there's been a boom in this type of debt. During 2013 so far $22bn has been raised – well in excess of last year’s total of $16bn, but not a single high yield bond deal has printed in more than a month. If I were sitting on a high yield debt desk I'd be worried and as an investor I'd be getting out while I still can. 

The one part of the bond market likely to see more action now is the CB's.  Convertible bonds have a distinct advantage in turning markets:

1. You give up yield but get upside from the equity participation in a stronger economy
2. Issuers will not get as good terms as straight bond issuers in terms of yield to maturity, but will get a better option premium due to rising volatility (i.e. the embedded option will be more expensive)
3. Bond funds can hold CB's and will happily ditch their "junk" to get something that at least has some chances of paying off in a rising rating environment 

It's been raining in Sydney for the best part of 4 days now. I managed to get out on the Cannondale to test things after a short ride on Friday left my bike covered in road slime. Interestingly I had lost the easiest gears during Friday's ride because of road debris getting stuck in the cassette. Usually my bike wash is pretty straight forward and takes me about 90 minutes including lube due to my bikes never being that dirty. Even in Geneva I only had one serious storm to navigate that caused me to take more than 2 hours cleaning the Pinarello. When I wash my bikes I use the "soft" shower nozzle on the garden hose. The pro's can get away with the power washes, but they have the advantage of being able to remove and re-grease the bottom bracket in case of water getting into bearings. I think due to the amount of dirt I picked up I spent too long using the hose and managed to get some water into the down tube and that caused a horrible squeaking from the bottom bracket probably due to the grease being disturbed. Normally it would have been a trip straight to the local bike shop, but I decided to take out the seat post and allow the bike to dry out upside down. It worked because there was no noise yesterday and I learnt to be very careful in future while washing my bikes. 

I've decided given the weather lately that winter is here and have therefore removed the Campagnolo Bora carbon wheels from the Pinarello and replaced them with the Mavic Cosmic Carbones. I know a lot of cycling stylists will call this sacrilegious, but here's some photos:

It's not that bad, is it?


Tuesday, 18 June 2013

For better or worse . . . Bonds, France and how I try to sleep at night . . .

The bond market bubble seems to be under attack from many different sources. I'd completely forgot about US Municipal Bonds because to be frank in Australia and much of the rest of the world the market for these obligations is generally the domain of funds and pros. In the US it's different because many private investors hold city and regional bonds in their portfolios. So the latest problem to come investor's way is the likely default by the City of Detroit. This has been talked about for a while and though it shouldn't come as a surprise in itself it will set somewhat of a tone for the market as a whole. The city recently missed a $39.7 million payment on pension obligation bond, so is technically already in default. The first point to be aware is that these pensioners who hold these bonds are insured and therefore the losses will pass down to insurance companies. I've talked about this effect before when I first started this blog in respect of the mortgage insurance market in Australia. Secondly there will no be a widening of the credit spreads on most of this type of bond, no matter how well financed a particular locale is. Expect there to be a witch hunt of sorts (which has already started) that methodically goes through every available municipal issuer. For investors bonds are now in the danger category and if you have to hold non-soveriegn debt you need to be actively monitoring the news.

Yesterday I wrote about the problems of illiquid investments. Consider then that the bond market by it's nature represents a bigger version of the wine market; it looks more liquid and behaves in a more public way and instruments are easier to mark "correctly", but it still is in fact an amalgam of thousands upon thousands of small not very liquid issues. The problem, as was the case with the wine markets I discussed yesterday is that a lot of money now invests in bonds via funds. Many of the largest of these funds are ETF's, so they're meant to replicate stocks even though the composition of the underlying is a portfolio of bonds. If the bond market goes into liquidation mode their will be a mismatch between the liquidity of the ETF's and the underlying portfolios and with that many ETF's will tend towards a significant discount to NAV anticipating the liquidity trap. The professional investor will look to take on this differential, but only when said discount is significant enough to provide a big enough cushion. Investors would be well placed if they followed this aspect of the ETF market and treat it with the respect it deserves. 

So the US and EU have started talks for the biggest trade tie-up in history. That's good. As usual the French have me in stitches with their cultural paranoia. Apparently they want to include audio-visual items within the agreement . . .  or is that exclude; I'm not sure, but either way they're doing their best to sink this deal before it gets up and running. Clearly they have trouble with the fact that most of the world doesn't speak French, doesn't watch French TV or listen to French euro-pop. 

Are you sure those fingers are facing the right way?
When even the slightly comical figure of José Manuel Barroso (the EU President) can talk about French recalcitrance in public you know that Paris is being obstructionist in the extreme:

“Some say they belong to the left, but in fact they are culturally extremely reactionary . . . ”

Moi, réactionnaire? . . . heaven forbid. The fact that France is willing to send these talks under because they want "L’exception culturelle" as usual shows them as grasping for a Napoleonic past. Hollande continues to shrink in the opinion polls as he lurches from one policy mistake to another. All he needs to do now is propose the reintroduction of the 35hr week for the cycle to be complete. France is a place for a vacation, but for foreign investors stick to jurisdictions more welcoming of your capital.

For the last few days I've felt my cycling legs weren't all there. Maybe I'm too concerned about the markets as my rides have shortened in duration and my blogging has increased. At least today I managed a solid 50k effort with a reasonable speed. Part of what made me feel better was the arrival of my Rapha winter kit: Long sleeve jersey and winter tights.

Moroccan Blue . . . 

Firstly on the jersey. This is essentially the classic jersey with sleeves. The cut is a bit loser than some of the Italian jerseys I have so you can feel comfortable ordering your usual size. I'm nearly 6' and weigh 90kgs so the XL is about right . . . I could fit into an L at a push, but why subject the public to that. I was surprised by how comfortable the sleeves felt in the wind, and although not completely as wind resistant as my Castelli Motirolo Due it was certainly good enough when temperatures are around 10 - 15ºC. 

Just plain old black . . .
I was a bit surprised when I first opened the packet containing the tights as these come without a chamois pad. I had not noticed that they are meant to fit over your favourite bib shorts. I put on a pair of Rapha's Pro team bib shorts with them and was surprised that I really didn't notice the two layer effect. In fact on a day like today in Sydney in mild conditions with a bit of wind I felt extremely comfortable. These tights are quite high at the front, but not to worry because there's a short zipper that allows you some room to move when nature calls. It's not a perfect solution, but then again tights are not the answer if you need a comfort break in the urban wilderness. All in though I was fairly impressed and reckon these are worth persevering with.


Monday, 17 June 2013

There's a reason I don't own yellow trucks, wine funds and time trialbikes . . . .

It's hard for me to get excited about even my favourite companies at the moment. For a long time I've liked everything about the heavy machinery king Caterpillar. Clearly I'm not alone as evidenced by stock tipster Seeking Alpha which has been filling my mail box with reasons to buy the big CAT of late. Today though was special as they summarised the reason why I'm not interested yet:

Caterpillar (CAT) recently increased its quarterly dividend from $.52 to $.60. The 5-yr dividend growth rate is 8.9%. At the current price of $83.87, the 12 months trailing P/E is 11.3. The current yield is 2.9%. Thus the Tweed Factor ((yield + 5yr dividend growth rate)-P/E)= +.5. 

I don't know or want to know what the "Tweed Factor" is, but I can surmise that it's some type of historical momentum indicator based on earnings etc. The trouble is that if a) interest rates start to go up the dividend on which this recommendation is based will be less relevant; b) the earnings growth in the crucial mining space is slowing; c) US housing construction is yet to gain a decent foothold as we're still clearing much of the existing stock. The P/E doesn't put me off as a good friend of mine who helps manage a hedge fund in NY always told me the time to buy cyclical is when the P/E is high, not low because it's confirming a growth profile consistent with the cycle. The trick of course is not to buy them at the end of the cycle when the less than street smart money sees no end to the good times. CAT at current P/E's sits in line with many of it's cyclical cousins and is therefore a luxury in an active portfolio. Keep it of you own it, watch it if you don't.

If being wary of CAT is too much then perhaps the savy investor can glean something from the recent problems in the wine investing sector. In a past guise I was quite a wine geek as many of my friends know. This week I'll be withdrawing a couple of prized bottles from my cellar to enjoy with friends at a BYO restaurant here in Sydney. Making money from wine investing has never been my goal, though I have been able to make a lot of my drinking pay for itself. To say I've been skeptical of the funds that setup to accumulate positions in wine, art and even vintage cars is an understatement. These have always had a ponzi-ish quality about them, especially the world of high end cars. But back to wine . . .
Vintage Wine fund, a Cayman-based investment vehicle once boasted as much as €110m in assets (peak 2008) now says (according to the FT) that:

“The wine market is dead. It could take years for this market to recover, I think you have to ask whether open-ended structures are suitable for these sorts of illiquid investments. There’s also a danger that wine funds can get too big. When you allow investors to come in and exit on a regular basis, you get huge outflows when things go bad.”

That's what I mean by "Ponzi-ish" . . . "wine funds can get too big . . . " This is what happens when people invest in a class of assets that feeds on itself. The market is just not liquid enough (pardon the pun) to allow a broad range of investors to pool capital into a fund with the sole goal of rolling the stock periodically to produce profits. Here's the problem . . .  Say I'm running a fund and I have to produce a monthly NAV of the holdings, but the auctions for wine at the high end don't occur on a regular basis in the way that the stock market opens every day. I'm therefore left with a holding in '61 Latour that may not be valued in the public market more than say 3 - 4 times a year. Add on to that that said auctions might only see a case or two trade. What happen's if I have to redeem 5 cases quickly? Well maybe the private market is going to pay more or less than the published auction prices, but who knows and therefore what is the correct NAV. Some wines are not even covered at all . . . '28 Latour is a magnificent trophy wine, but what's it worth? The same goes for art. If I own a Monet I can get a reasonable idea maybe once a year, but if the Monet is from a different period from what goes under the hammer how do I value it? Think about someone like Vermeer. The rarity value might mean that you see a trade once a decade if you're lucky . . . If you had one in a fund and only market the NAV to the last traded prices new investors in the fund might be getting a bargain or a pig. That's why open ended funds don't work for illiquid assets and investors should avoid them or directly purchase holdings themselves. Obviously the key is not to drink the assets too early.

It was fascinating watching the final stage of this years Tour de Suisse last night. Time trials are not my thing, but if they were all like this one then I might just become a fan.

This TT was designed by committee headed by an evil scientist and probably included a comedian and a Formula 1 pit boss. The course was just under 27km's in length and flat for the first 17km's, so you needed the time trial bike and super-aero positioning. The fight for the yellow jersey though really began at the 17km mark when the riders hit the base of a 10km 9.5% climb and had to decide whether to switch bikes or try and lug a heavy time trial bike up a hill it was never meant to climb. Most chose to switch which led to some interesting techniques in the makeshift pits. You see it's my belief that the UCI doesn't allow you to have a spare bike waiting out on the course and therefore the bike can only be carried by the following support vehicle. That vehicle can't drive past it's rider and wait up the course because in doing so it may give the rider an unfair advantage by allowing him to slipstream the car. Therefore the rider has to stop, wait for the car, then for the bike to be taken off the roof and finally attempt the switch. This is funny because seeing a small man in a skin tight suit wearing a large comical TT helmet try and climb on to a new bike and set off up a hill is amusing. Rui Costa did it with about as much class as could be expected and won, though given the heat of the day wearing a non-ventilated TT helmet on that climb must have been terrible and some riders clearly suffered. My own view is that it we should have more of this, even if it's slightly cruel on the riders. Sorry.

Thursday, 13 June 2013

This is important . . . to some . . .

I've written before about the statistical collation of the Australian employment numbers and the relative disconnect from the anecdotal  news we're seeing here. It's hard to believe that economists once again failed to come close to the real figures when they predicted a loss of 10,000 jobs and were greeted today with the news that the  total number or people with jobs rose 1,100 to 11.663 million in the month, meaning the unemployment rate fell 0.1 per cent to 5.5 per cent in May. The April figure was upwardly revised to 5.6 per cent from 5.5 per cent. I'm not sure how to take these numbers given most other numbers we're seeing suggest a distinct weakening with many forecasting for a significant jump in unemployment in the next 12 months. Also it's not as though the participation rate has changed much, which leaves me scratching my head somewhat. Is it possible that not one of the major economists surveyed is capable of tracking these numbers within a reasonable margin of error?

In my previous life as a convertible bond trader I was constantly dealing with the vagaries of the repo market. Unlike in equities the individual bond issues by corporates can be comparatively small, thus making it difficult to short specific issues. At one stage it was common to have considerable amounts of failing trades against which you'd put up collateral such as US treasuries or JGBs. During the 97 Asia crisis the confusion relating to these trades was quite extraordinary. Often particular institutions or funds were unwilling or unable to deal with failed bond trades and would buy you in, causing very nasty short squeezes. Funnily enough you can imagine the situation where a AAA credit bank fails on a trade  of say a junk rated bond (e.g. Hyundai Telephone), but the institution on the other side doesn't care because implicitly the likelihood of you being able to make good on coupons on principal of the bond in question was greater than the issuer of the bond itself. The problem of course was when the chain of buyers and sellers was corrupted by a comparatively "junky" trading house that no one wanted to have open obligations with. This is the risk of having masses of failing bond trades and if you think about where we are now you'll understand that banks that used to be AAAA are not so anymore. That's why the Fed, the BoE and the ECB are becoming more interested in the fail rate in the government bond markets. The FT reports that number of failed trades in a key short-term financing market has jumped since central banks indicated they might wind down monetary easing policies. Fails on repo trades that involve US Treasuries as collateral jumped from $14.5bn to $58.5bn in the week to May 29, according to Fed data, and that number is believed to have increased since. The central banks are wondering what happens if someone gets bought-in . . . can they settle. It may be that a short squeeze could be followed by a collapse of an institution unable to meet its' obligations. Systemic risk is therefore still a worry and investors need to pay attention.

While the regulators are investigating the bond market's failed trades they (specifically the UK FSA) is also probing the FX markets. I'm less concerned about this, though like Libor there has always been the potential to manipulator the various fixes. The difference between Libor and FX has always been the thought that the FX market is by comparison almost infinitely liquid. I think this one is all about protecting investors and to a lesser degree having a better idea of the various cash-flows in the market. Lets just say this one is for trading "wonks" like me.

I finally managed to struggle out into the blue of a Sydney day on my bike. The winter so far has been very mild so it was shorts and arm warmers today. I'm still getting adjusted to winter riding here as my clothing is either too heavy or too light. I've found that the best jersey I own for Sydney is the Rapha Classic.
In Australia you have to wear a hemet. Hipsters not welcome!
This one's a little heavier than most Italian short sleeve jerseys and I've found good arm warmers and a base layer was enough on all but the coldest Sydney mornings. You can almost disregard full length tights, though if you have some lighter weight ones they are fairly useful. The 3/4 length tights are my preferred leg apparel as I hate leg and knee warmers with a passion. Putting on leg warmers makes me understand why women prefer pantyhose to stockings . . . but that's a discussion for another day.

Wednesday, 12 June 2013

Substance and style . . . not always a pair

A week ago a friend of mine sent me a video of Wall St Journal doyenne Dorothy Rabinowitz railing against the new Citi-bike scheme in NYC. Well I had to chuckle when I saw the reply by Jon Stewart.

I feel sorry for people unable to embrace the change occurring in the worlds major cities. The thinking that everyone in a city of 5m or more can drive 20minutes into the centre of town and park their cars for little cost is wrong. Governments will come around at various velocities, but they will come around. New York is a great case for restricting the car as are the great cities of Europe with their constricted medieval hearts. People in my current home town have eschewed public transport and local bicycle travel because the responsible governments have failed dismally to invest in the appropriate infrastructure. The frustration of drivers is palpable most days because they have organised their lives around the car, rather than arranging a car to fit in with their lives. 

As part of my own coping mechanism with the city I've up-sized the lights on my bike. It spooked me that a woman was killed here over the weekend on a street that I occasionally use for training on a clear sunny non-work day. Therefore I biked down yesterday to one of my local bike shops, Cheeky Monkey near the cycling hub of Centennial Park and checked out what the latest in lights was. I selected the Moon X Power 500.

I've only had 70 lumen front lamps up until now because I usually don't cycle in absolute darkness. My first impressions are that 500 lumens is a truck load of light (pardon the pun). The flashing function is unbelievable, so much so that I'm very concerned about blinding on coming drivers. I can't even contemplate what sort of light you get from the 1500 lumen version. The only problem I have is with the mounting bracket as it's quite bulky on the Cannondale and will not work at all with the type of handlebars I have on the Pinarello. The problem is that the bar routed brake and shifter cables get in the way from mounting the base easily. I'll play around with it and see if I can get a better solution. For dedicated commuters the light comes with a helmet mount which might be a better solution in pure night riding. My conclusion so far is that the substance is good, but the design or style are somewhat lacking. 

Bond markets now in retreat and there will be more than one or two large investors licking their wounds after confidently investing in the largest of the mega bond deals, Apple's $17bn 6-part offering of April 30 because of what they thought was substance and style. The main tranche is down 9% since issuance, but I'm sure if you asked a bond fund they'd say something like: " . . . yes we bought it, but only so we could swap out some of the junk grade stuff we killed it on since early 2012". Well that may be the case, because as we all know investing is a game of relative value. Apple stock is up since April 30, though it had been trading some 4 - 5% higher during the marketing period of the bond, meaning the idea of switching stock into bonds as a protection against a slowdown at Apple has failed on a dollar for dollar basis. It's a salutary lesson that a stock can be expensive, but so too can a bond and is worth tracking as a total return pair of the rest of the year.

Perhaps the ETF world got the bond market about right as Pimco's Total Return Exchange-Traded Fund (ticker symbol: BOND) suffered its' first outflows since listing during the month of May. If Apple trading has lessons, so too does the trading of instruments such as this ETF. I'm sure the algorithmic and CTA momentum players are among those who exited the fund, but as returns for May performance are coming through it's noticeable that the increased volatility has not been kind to this style of investing. This is why turning inflexion points are so difficult to trade. 

Bond investors don't want to believe what they're seeing because they've in general made good returns fro the strategy. Most want to believe that the Fed is going to exit more slowly than currently being implied by the market. For example the FT quotes Michael Pond, interest rate strategist at Barclays as saying: 

“The bond market seems to be missing the point that the Fed’s policy of tapering depends on the tone of economic data. The market has moved from pricing in less bond buying to a full-on tightening cycle and we believe that is a different story than what the Fed is trying to communicate.”

In a way he's right. The Fed certainly wants to believe that the message they've sent is consistent with the trend and not the raw numbers. The problem is that waiting for the Fed to action the trend will probably be too late for all but the most precise and savvy of investors. 


Tuesday, 11 June 2013

Banks, currencies and chutzpah . . .

It would be too easy to start today's blog by writing about the "timely" upward revision to Japanese GDP that saw the N225 up nearly 5% in a day. Instead I was doing some reading in the FT about the coming crackdown on "virtual" currency tax fraud. Bitcoin of course is only one of a number of such currencies currently being championed by the "geeky" wing of the libertarian movement and day traders who find the current volatility in the N225 not enough to sustain their attention. In what must be considered a master stroke for criminal organisations everywhere it would seem that said currencies are actually being used to launder vast amounts of black money. I for one had never thought about the possibilities for this, though I have always had an interest in the way the art market bubble has for some served a similar purpose. Clearly governments are worried about the extent to which individuals can transfer wealth between jurisdictions without touching traditional banking institutions. Last month the IRS's criminal investigation division broke up an operation based in Costa Rica that essentially allowed it's one million "clients" to transfer "monies" with basically zero background information. For the investor the warnings are twofold: firstly the use of these services is risky as they are likely to attract a criminal element which if investigated may lead to your assets being frozen or worse. Secondly trading the "currencies" used to facilitate this commerce as though it were based on something other than pure fantasy is dangerous. In other words . . . if you think Bitcoin and it's siblings is a blow for freedom, think again.

This brings me back to the Yen and the Japanese governments pledge to double the money supply by the end of the year. It takes a certain chutzpah to believe by politicians and a newly politicised BoJ to sell such a policy and tell us that they can control the situation. The problem is that how can you believe the outcome will be a nicely contained 2% inflation rate and 2.5 - 3.5% GDP growth when the government is not putting in any other structural reforms simultaneously?  PM Abe is saying such a plan will be coming our way during the summer, but in the meantime I'm guess the talking up of stimulus and down the Yen will continue. Given this it is going to be hard making money on the short side of Japanese equities.

The problem with currency devaluation is that it can hurt the very people you're trying to help. During the 97 Asia crisis the cost of energy and food soared in many of the regions countries. In India, for example a weakening rupee put undue stress on governments finances because of the large subsidies the government places on petroleum products. You wouldn't think about this for Japan but consider that the according to Bloomberg the Japanese crude basket is up 35% this year. Lets leave aside that this is bad for the refiners and focus on the fact that in the post Fukushima world Japan has substituted fossil fuels for nuclear and in doing so is building-in a bigger problem. Many would argue that the stronger USD will eventually start to erode the price for products such as crude oil, but I'm not so sure the current consumption patterns suggest that is inevitable. For those with a green tinge to their thinking it might mean that alternative energies get a boost in the long term, though going long the suppliers of wind turbines, solar cells and tidal generators is somewhat risky nowadays when government subsidies are being scaled back. Anyone interested in a slightly used solar farm in Spain should feel free to contact me.

The bond curves have been shifting upwards again and the crucial mortgage driving US 30year has retraced much of the territory it covered since the Fed stepped things up in the first half of last year.

The concern now is that equities and bonds are becoming disjointed, suggesting that at some stage the tears are going to flow again. I heard one theory that what we're seeing is a carefully managed deflating of the bond bubble by the powers to be, but seriously how can that be? It's hard to imagine that Bernanke is willing to keep spending 85bn a month for nothing but higher mortgage rates? How does that help unemployment etc? I think instead that this is the smart money getting out while it can. The USD remains my best bet for the coming months, more so as rates increase. Who knows . . . you might actually start to get paid something for your bank account deposits?

Sydney was quiet over the last few days because of the traditional June long weekend. Normally I'd say it was a pleasure riding the deserted streets, but unfortunately there was a bike rider killed close to one of my usual routes. I can't think of a worse time to go. I know since my own recent run in with a car bonnet that I've been riding extra defensively, but even I let my guard down over the last few days wrongly lulled into a sense of security by the absence of some of the more aggressive school run and tradesmen type drivers. The lesson is clear . . . trust no one. Not even central bankers.


Tuesday, 4 June 2013

Staying the course . . . but which one?

Markets remain in change mode and once again the old adage of sell in May and go away looks to be correct. In the US the time is fast approaching for a change in the leadership of the Fed. The US bond markets and the USD both understand this, but some hold out for a continuation of the current status quo.

Ben Bernanke might just be in personal exit mode himself judging from the noise in the upper reaches of the economics establishment. An application was received on the weekend from none other than  Lawrence Summers (aka "Larry") via an opinion piece in the FT: "It is no time for faster cuts to the US budget deficit" . . .

"Premature fiscal tightening has taken a toll on UK economic growth. Things are looking up. Led by rising house prices, the US recovery is likely to accelerate this year. Budget deficit projections have declined, too. And although the European economy is stagnant, there is some evidence that stimulative policies are gaining traction in Japan. So this is an opportune moment to reconsider the principles that should guide fiscal policy."

It's worth reading if you want to see inside the current debate in the US between the various economic schools. What it says to me is that the Keynesians are trying to frighten the political establishment into continuing their line of ascendancy. It also says that we are clearly now at the point where someone's got to give a little and start the like road back to normalcy. The problem is that any half intelligent observer of financial markets understands the overshoot that happens 99% of the time in just these situations. If Larry Summers was to get his hands on the Fed presidency then I'd suggest he'd do just that; overshoot and leave us with a potential problem in the form of inflation. Either way the bond market is right to retreat from bubble mode.

Meanwhile the currency wars continue to hot up. I probably didn't fully appreciate the mood in Asia post the Japanese stimulus package(s). The South Koreans have warned the G8 that they need to do more to tackle the “unintended consequences” of Japan’s monetary easing when they gather for a summit later this month. Hyun Oh-seok, the South Korean finance minister and deputy prime minister, said that international co-ordinated action was needed to mitigate the impact of so-called "Abenomics" on currency markets. The Koreans have, as I have pointed out recently been one of the major beneficiaries of the recently ended bull market in the Japanese Yen. Now with things back to a level that puts them on a similar playing ground in world export markets the Koreans are not going to have things their own way anymore in sectors like heavy machinery and car making. Mind you the Koreans are not the only ones in this camp as evidenced here in Australia by Ford saying they will quit the country because of costs associated with manufacturing here. Read that Ford move as being about the high dollar. The RBA failed to grasp the importance of the high AUD until it was too late . . . part of me thinks that Governor Stevens was enjoying the purchasing power of the Aussie on his visits to various central bankking conferences. Ok, that's a bit unfair, but so to was worrying about the Perth property market instead of the industrial basins surrounding Melbourne and Sydney, at the very least the RBA should have been talking things down more aggressively. This brings me to the comments over the weekend by former government adviser Ross Garnaut, a key policy man in the 80's regarding the floating of the AUD. Garnault says that the Aussie was between 20 and 40% over valued at it's peak. The AUD is down about 8% since then, so the logical conclusion is that 85c is the first serious stopping point.

The Japanese super stimulus will be of little long term benefit unless the government makes associated structural changes. In the early 2000's there was a similar inflection point in Japan and it was marked by a rise in investor activism. At that time groups such as Steel Partners and Perry Capital tried to bully "old" Japan into getting their balance sheets into shape. Obviously the "raiders" wanted to be the main beneficiaries of any such move, but there was a bigger point. Essentially Japanese companies have long carried too many under-performing assets on their balance sheets. I include in this cash reserves as cash returns in Yen have been pitiful for decades. At the time the idea was that assets would be sold and gearing raised, while excess would be returned to shareholders. This still remains the case and the most recent example being highlighted has been Japan Tobacco where the board has reluctantly chosen to do buy backs and increase the dividend. JT of course is enormous, but their only way of growing is to push into emerging markets where governments are still to legislate against the industry, though it must be said that this won't last long and therefore JT needs to realise it's a cash machine only and therefore needs to get comfortable with that role. They might also help the rest of corporate Japan wake up to the brave new world investor relations . . . the consequences of not doing so is to leave the country addicted to money printing as a way out of its' long malaise.

It's not M&A, but it's big. Carlyle Group has agreed to sell a New York office tower for $1.3bn, the largest deal for a US building since 2010. If the deal goes through, it will the biggest sale of a single building in the US since Google bought the 2.9m square feet 111 Eighth Avenue in December 2010 for $1.8bn. They originally paid about $600m at the height of the GFC. It's a good sign and consistent with  the numbers we've seen in the property sector in the US and the continuing desire for yield on investments. The US dollars recent rise should remain a salutary lesson to investors. The prime property markets in the UK and parts of Europe offer similar returns, not just because of an eventual end to the morbid growth of the past 5 years, but also because of the relative value of the underlying currencies. 

Meanwhile back in my old home of Geneva my friends were treated to the first stages of the Criterium du Dauphine. As a guide  to whats possible here's a Strava track of a friend who rode out to see stage one of the event:

This is a great ride, though you could cut out the climbs that my friend added because he's one of the strongest non-pro riders in Geneva. He didn't go to day 2 as he had to work in the family bike shop, so instead here's the course with associated stats from Blanco rider Laurens ten Dam:

A great variation for anyone riding in the Geneva area would be to head out into the rolling countryside to Bon en Chablis before follow the route the riders took through Annemasse to La Maraz and the east side of Mt Saleve before heading up and over and back into Geneva. With blue sky and the right bike you might even forget about your government bond portfolio.