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.


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