Friday, 17 January 2014

License plates and mosaics . . .

It seemed to me that half of Poland was driving to Italy on Saturday. Now my father, like many fathers of the second half of the twentieth century had to invent ways to keep the kids entertained on long road trips in the family car during a time before iPads and in-car video screens. His solution was that classic of the genre "license plates". In Australia  the game was easy. You got zero points for your home state (NSW), and a point each for Queensland and Victoria. All other states were worth two points ... Anything non-Australian was worth ten points ( you did actually see the odd UK or US car on their way to the local motor registry to get their Aussie plates). Anyway I started to consider the numbers and types of the Polish vehicles. The fact that I kept seeing Mercedes, Audis, BMW's and VW's and the odd Korean Kia (which made me laugh for some reason) seemed to me to indicate a change from 5 years ago when most Polish license plates were attached to long haul trucks and old rust buckets. So what changed?

Poland's economy was one of the few in Europe not to go into recession due to the global crisis. Growth hit a low in 2013 of just under 2% and looks likely to rebound according to the forecasts to about 2.5% this year. So why did Poland escape the misery?  Firstly Poland did not enter the Eurozone, they kept the Zloty. This meant that Polish household debt was low coming into the crisis as the ultra low Euro rates were absent and not used to super-charge things as countries such as Ireland did. Secondly the Poles were one of the cheapest and flexible economies to do business with , allowing them to become a huge logistical centre for servicing eastern Europe and bridging into the Russian commodity block. Finally it must be acknowledged that the Poles are net beneficiaries of EU largese to the tune of about 3% of its GDP. No wonder then that Poles are able to get in their new 4wd's and head to the ski fields of the South Tyrol and the Dolomites. Good for them. 

Meanwhile during my contemplative time in the car the talking heads of the money TV world were ramping up the rhetoric after the shock of a general 2% drop in equities. As this blog has said for some time, the taper by the Fed would increase volatility and see a switch out of the carry trade markets of the emerging world and commodity exporters and back to the credit markets of the core G8. How can investors not have seen this coming? Listening to CNBC etc. asking the weekend guests about whether the Fed needed to intervene after a mere 3.5% drop in the week seemed incredulous. The Fed is still pouring in 70bn a month and anyone panicking now surely needs to calm down and reassess their portfolio with special consideration to bond market exposure and geographic equity weightings. This blog remains committed to:

1. USD assets, with an emphasis on US domestic businesses geared for GDP growth there.
2. The UK as bridge to "safe" Europe. The GBP should be a better bet than the USD this year, though both will be good performers.
3. Mediterranean Europe - specifically hard assets likely to benefit from a bounce in GDP. 
4. Short high yield, Asia (ex-Japan) and emerging market bonds. Most of these markets are like high beta plays on US GDP . . . If you believe in the US recovery and in the Fed tightening monetary policy, then you can't believe in the risk v. Yield equation that put you into EM and alike. 

As I was reminded by a reader of this blog over a glass of red in Lech last week, this blog mentioned the value inherent in the VIX volatility index v. the coming taper back in December. That index was then under 12 and now is over 17. That's a nice return on a protective hedge and I'd remind readers that although in extreme conditions 17 isn't very high, it is towards the upper end of normal. 17 indicates the market moving just over 1% per day. I see volatility moving a little higher, but not abnormally so given the Fed's current level of market participation. Investors could take profits on this hedge and facilitate their move into assets mentioned above.

I'm in Ravenna Italy today. Why? Well your intrepid blogger has always had an interest in the transition that occurred in the fourth, fifth and sixth centuries. Perhaps this interest in the last few years has been heightened by the likes of SocGen dynamic bear duo Albert Edwards and Dylan Grice (who departed the team in 2012) who always seemed to have a slide in their presentations dealing with the continual devaluation of coinage during the Roman empire. Few men in the street know that at the end of "Rome" it was Ravenna that was the capital. It was during the fifth century that the Byzantine Emperor Justinain camped out in Ravenna and poured into it enough cash to produce some truly amazing works of art. There are eight UNESCO sites in the city, each containing vividly coloured examples of Greco-roman style mosaics emphasising the new emperors piety and power. This blog is therefore recomending Ravenna as a strong buy for any tourist-investor. And finally consider this . . . I bought two espresso macchiatos for about USD 3 and a filet steak at a good restorante for 25. My hotel is cheap too . . . 

I'm not seeing many road bikes on my trip so far. I've spotted only one Lycra clad friend since leaving Australia and he was on a mountain bike here in Ravenna. I have seen a couple of Bike shops both here and in Bolzano, though none were open and and they all seemed to specialise in commuter cycles. Bike riding in winter Italy is dominated by the old and the school aged. In Ravenna it's great to see so many pension aged riders on heavy three speed bikes. Obviously it would please me more to see a couple of these ladies and gentlemen mounted up on a Pinarello or a Colnago, but it's understandable given the likelihood of theft while you're buying your groceries.


Thursday, 16 January 2014

Zurich . . . And the road

Its funny what people say on mobile phones at airports. I was once warned that you should never assume the person sitting next to you at an airport didnt have an interest in your conversation. Just before i got on the flight to Zurich I heard an incredibly indiscreet 30 something discussing a job offer with a friend. I may as well have been his headhunter because i got to hear how disappointed he was with his bonus last year and thats why he left XYZ etc. I instantly thought he'd be the last person I'd want to hire . . . I mean imagine he was closing on a deal and you're a competitor sitting near this guy? What a clown.

Don't Blackberrys seem strange nowadays? I'm always fascinated by people who still use them. Research in Motion's architecture must be worth something, surely? You ask anyone who uses a Blackberry and I'm positive they'll spin it as being a security thing, though it's probably more likely to be a result of a backward IT department, institutional cost cutting, or worst of all . . . they let you keep it when they made you redundant . . . ouch!

Just before this trip I pensioned off my iPhone 3GS, which must be 4 years old. The unit had stopped charging and I couldn't risk it not functioning while I was on the road so I got on to my telco and upgraded to an iPhone5S. I initially had every intention of trying something new, but didn't really appreciate the extent to which the apps lock you in to an ecosystem until I ran some numbers of some crucial apps and peripherals. It makes me appreciate more the notion of what exactly an iPhone killer would look like. Try it . . . Make a list of all your apps that you genuinely use. Then add in cradles, cables and various bits and pieces. Add to this handset cost and time for changeover and you have an economic cost, therefore it becomes your task to put value to that new "something" and do a simple proof that states if A-B is positive you should switch. If its negative you stay put. Now the other element you have to add in is what if your current tech ecosystem is only 6months behind in catching up . . . Switch sill? 

The same thinking works in finance. I never appreciated the "stickiness" of banking relationships until I worked in hedge funds. The first COO I worked with used to say to me constantly "are you sure that our current prime brokers can't offer the same thing?" I never understood that until I had to do the paperwork myself. 

Zurich is the best airport in Europe. It's just big enough to offer great connections to Asia, Europe and North America, but not so big as to exhaust you with its sheer size. Geneva was ok, but lacked the connections. Heathrow has improved leaps and bounds in the last 10 years, but the place seems to always be only a couple of steps ahead of anarchy. Mega airports work best in Asia where they're eeecomparatively new and always well connected to the city . . . . Aside from Narita (Tokyo), but that's another story.

For this trip I started reading Max Hastings new book on 1914 "Catastrophe". I don't think I fully appreciated some of the economics behind WW1's opening year previously, especially the rapid growth in various economies between 1890 and 1910. I always thought that all the growth at the time was centred on the US and it's "gilded age", but clearly countries such as Russia were going through a BRICs like moment as well. The German economy had surpassed the British and France as usual was somewhat stagnet. That's the thing with France, you'd think that the enlightenment embodied in such things as the Napoleonic inheritance laws and the notion of church state separateness would have given them a fantastic base from which to be a super power, but in fact they were somewhat always limited whether by culture, design or lack of planning the role of could have been. 

Why are ski resorts like Greek temples? I always buy something on day one as a sacrifice to the resort gods. On the way to Austria I picked up a hire car at Zurich Flughafen  . . . Renault Cleo 1.5ltr diesel. Not bad, but a few bits of trim let it down. Anyway I've already banged a finger in the dodgy magnetic style ski racks Avis provided. Ouch ... Still weeping blood a couple of hours later.

The drive over to Austria was fairly trouble free. All I could think about was what the B-route might be like to cycle. The Arlberg Pass must be magic to ride on a June day. Wish I had the Evo with me.

Snow falling at a steady rate here. It cleared at 1630hrs letting in a beautiful light, filling the entire valley. Magic stuff for those of us use to the harsh clear Australian summers. The hotel offers the usual cale news channels and I'm already bored with the banality of the English language channels. Tried the French channels in the hope that Hollande has been snapped in dodgy / creepy outfit after big night with the latest mistress. Good for him . . . Bad for France and I think Fench feminism?


Back for 2014 ... views from an airport lounge

Belatedly I have finally got the time to sit down and start considering the year ahead. Right now I'm on my way back to Europe and therefore have decided that this particular issue of the blog will be in the form of general thoughts as I travel to Europe for the next 3 weeks. I'm hoping that a bit of time off the bike might help stimulate some new ideas for investing during 2014.


Siting in the Singapore airlines lounge at Changing Airport I notice a pretty dark haired European woman in a t-shirt that says:  "I'm bored. I need some inspiration" ... I'm taking this as an omen. Of course as a new age man I feel slightly guilty that it took such a t-shirt to jog me back to the blog, but such is life. 

I think I've listened to about 4 hours of podcasts since I landed here. I used some air miles to facilitate this trip and unfortunately that meant I was subject to some vagaries in my schedule. All-in I'll spend 12 hours in Changing Airport waiting for my connection to Zurich.

The BBC interviews a bond fund manager about Greece. The recovery juggernaut roles on. Greek bonds continue to make gains and the manager (I failed to catch his name) argues that Greece now is more credit worthy than France. This to me was a laugh out loud moment and coincides with the latest revelations that President Hollande has been caught with his pants down in the midst of an affair with an attractive actress, leaving his current first lady somewhat melodramatically hospitalised for shock. Hollande looks to me like a high school deputy principal of sorts. It's a mystery to me what the three most recent occupants of his bed see in the man that sneered at former President Sarkozy's lifestyle and proclaimed that if elected . . . "I will ensure that at every moment my behaviour will be exemplary". Just hilarious. 

Back to Greece for a moment and a reminder that this blog has recently been advocating a cautious move into Southern European assets. Investors need to be aware that much of the recovery phase is already in place and the bond markets have probably seen their best  moves.

On the same podcast there's an interview with the Director of the Detroit Institute of Art regarding a proposal by creditors to sell off the gallery's works. Christies valued 2500 works bought under the auspicious of the City of Detroit directly over the last 100 years. the valuation is not revealed in the interview seemingly to my ears because it might just be too good for the city to resist actioning. Of course this blog would never advocate such a liquidation and I hope the bankruptcy courts validate the legal argument that the works are held as part of a public trust and not as an asset on the City of Detroit's balance sheet. Hopefully the people of the city will agree . . . As painful as it is for them to face the current proceedings.

Changi Airport remains my favourite transit point to Europe even though Hong Kong is newer because the Singaporeans are constantly renewing the asset. One thing they haven't had to change is the transit motel which offers 6 hour blocks to travellers such as myself when connections times at extended and a trip into the City might prove a little taxing on the liver . . .  If you get my meaning. SGD 92 gets you a good sized bedroom and access to the rooftop swimming pool without having to go through immigration. 

The TV in my room had only local channels and so as an ex-resident of this city state I was braced for the usual semi-propaganda nature of the news broadcasts. During one round table on "what makes an Eco-city" I wanted to yell out loud when the moderator asked the usual apparatchiks . . .  "what then do Singaporeans have to give up to achieve Eco-city status?" . . . My response would have been "democracy" . . .  But that would have been too cruel. 

In the meanwhile I noted the ticker at the bottom of the screen . . . The Australian Dollar seemed to have weakened to new lows while I was in the air. Looks like some stronger numbers out of the US and the UK. Sterling looks good with the BoE 2% inflation target finally being hit and therefore the realisation that the days of ultra cheap rates in the UK are coming to an end. The quid pro quo now must be when the austerity policies in certain EU countries (or should that be jurisdictions?) are loosened by the politicians and the central banks stop QE and raise rates. 

Fun fact of the day comes from my old friend Albert Edwards of SocGen. Edwards is the über bear of über bears. Edwards is pointing out that relative gains by investors who poured money into the BRICs countries at the height of the crisis in 2008 has now been wiped out after peaking at 180%. I don't have the piece in front of me so the relative part remains a bit of guess at this stage. Hopefully a reader will send it o me.

It's snowing in Europe and unlike many of the worlds decision makers I haven't been invited to the world economic crisis in Davos. I have to say though if you want to ski on pristine slopes almost free of the usual euro hordes then Davos and the adjoining resort of Klosters are fantastic at this time of year. The secret is getting a room; you see the rationale is quite simple . . . The whole area is occupied by politicians, bankers, NGO'ers and the usual celebrity types all focused on pushing various a genders and positively not skiing. That means that trails are relatively (there's that word again) free. You don't have to go heli-skiing in Alaska to be far from he maddening crowds. 

I wonder if the Davos bankers are like me a bit cynical when it comes to shadow currencies and the Bitcoin fad. Why if the world is recovering hasn't this particular thing none the way of Rubics cubes, hoola hoops and Madoff? I must ask Albert Edwards whathe thinks of the craze. I'm sure Jamie Dimond has a few Bitcoins in a vault at JP Morgan. I was never a big fan of what came to be the current mega-bank that Mr Dimond runs and therefore wasn't surprised that the whole Madoff thing finally aught up with JPM. The financial services industry has contracted sharply since 2008 in part because of the complexity of meeting regulatory requirements, the fact that JPM acted to protect itself first Madoff and failed to report suspicions to regulators as required in a timely fashion still makes me worry about the "Sandy Weill" integrated services model. Take for example UBS who denied this week that they were contemplating a sale of their investment bank (Warburgs 2.0?). I'm sure they'd love to sell the bank, but how do you get a price for capital hungry asset when the full ramifications of new regulations have yet to be worked through. I can only imagine the positive effect on RoE that many of the asset manger type banks (CS, UBS etc) might achieve absent the risk management reserves a sale of the operations in question might see.

The next leg of my journey will hopefully pass without problems. I'll be meeting up with a CFO of a large industrial company for a spot of skiing. I wish over the years I'd spent more time with business people and less with bankers . . . I wonder if they (the business types) think the same thing?