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.


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