Debate this! . . .

I spent yesterday considering the fact that Romney had clearly defeated Obama in the first Presidential Debate. I watched a big chunk of it on the A-Pac channel on cable, which excluded all the fluff you get on the commercial channels.

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I was very surprised by the result as Obama deffinately let the proceedings slide a little out of control. The moderator basically interferred as little as possible, which was also a surprise and should have been picked up on by Obama, but wasn't. I still can't conceive a Romney victory, but it's at least going to be a fight now. If Romney was to win I'd predict a few things:

1. A big uptick in equities
2. A resurgent USD
3. The end end of Bernanke or at least a Fed Board of Governors that are likely to see plenty of turnover

 There's probably a lot of bankers who would be happy to see the back of Obama, Bernanke, Geitner & Co. Clearly my fellow countryman James Gorman of Morgan Stanley would be one of those people. You have to hand it to Gorman who has had a "Pauline" conversion on the subject of bankers pay. As this blog has pointed out on many occassions the sorry returns now available to investment banks are changing the industry. The days of 20%+ RoE's have long gone and Mr Gorman only has to visit his Head of Research in Tokyo to get a picture of what he should expect in the years to come. I do have some sympathy for some of his observations (as quoted by the FT):  

“Comp [compensation] comes down because the amount of people in the business comes down,” said Mr Gorman. “What the Street has historically done is when revenues went up, they kept the comp-to-revenue ratio flat. They rank comp by ratio. When revenues went down, they increased the comp-to-revenue ratio because they said, ‘We might lose all our people. We have to increase it’. ”

He's 100% right, but as shareholder can we trust a board still thick with people who built the model he now rejects. At least as a shareholder I can understand Goldman Sachs, but MS? Perhaps Gorman will turn out to be a great leader, but I believe an outsider is what's needed if his view is correct. Watch this space and be prepared to accept less than 10% RoE. I'm not going to debate the merits of various bank bail-out schemes in respect of the Spanish situation. There can be no debate. Spain needs to clean up zombie assets fast. The trouble is that many of these assets are held down at the state level where politics and prejudice plays a huge roll. Madrid has held Spain together since Franco by allowing the regions a lot of autonomy, reversing that trend in order to solve the solvency crisis will not be easy. They need to follow the Swedes before they get stuffed with everything at the wrong price.

 Finally earllier this year I was warning about the potential losses likely to come to light in the annual student loan default statistics, which are published as the new academic year begins (i.e. when cheques are due). The Department of Education published a very concerning note regarding the situation:  

"The U.S. Department of Education today released official FY 2010 two-year and official FY 2009 three-year federal student loan cohort default rates. This is the first time the Department has issued an official three-year rate, which was 13.4 percent nationally for the FY 2009 cohort, a slight decrease from the trial three-year rate of 13.8 percent for the FY 2008 cohort. For-profit institutions had the highest average three-year default rates at 22.7 percent, with public institutions following at 11 percent and private non-profit institutions at 7.5 percent. The Department is in the process of switching from a two-year cohort default rate to a three-year measurement as required by the Higher Education Opportunity Act of 2008. The national two-year rate rose to 9.1 percent for the FY 2010 cohort, from 8.8 percent in FY 2009."

I wonder what 2011's default rate was? Leaving that aside, lets just say things haven't gotten any better, so now we have over 100bn of defaulting loans??? At what stage does this become a huge deal? Unless you have jobs for these graduates the US economy is just layering more zombie assets that will need to be reserved against by a banking system that just doesn't need its solvency tested further.

There is a major debate within the cycling community in Sydney regarding helmets. There's a strong hardcore who want to fight the compulsory helmet laws. I was on a well known website recently and when I expressed the view that fighting helmet laws was a worthless battle in a bigger war I was absolutely slayed by strange angry faction of riders. I don't get it? I mean why can't they see that wearing a helmet is a small price to pay for the moral high ground over the driving community? None of these people has read Sun Tzu's Art of War:  

"If your enemy is superior, evade him. If angry, irritate him. If equally matched, fight, and if not split and reevaluate. "

Maybe if they did they could appreciate the following video . . .


Ciao!

Memo to self . . . if output is slowing . . . then get on your bike and ride . . .

Here's a chart I got from Zerohedge. It's a nice follow-up to yesterdays's blog as it shows the disconnect between the Global Manufacturing PMI's and equity markets. If you remember I pointed out the contractionary numbers printed by Australia and China on Monday which were very much at the core of the RBA's thinking when they cut rates yesterday.

I know very few people want to be reminded about this stuff, but what it speaks to is the gap between QE and the real world. Unless you are producing stuff that is consumed a monetary policy predicated on ink and paper only is doomed to fail. 

I'm lunching with an old friend on Friday who know is going to ask for some investment advice. You know I want to just tell him to sit on cash at the moment, but that's probably not going to cut it. I know a good rule of thumb used to be that once you're over 40 you start buying bonds at percentage proportional to your age. How do I suggest that given where bonds currently trade?  The BIS released a report on Monday pointing out that sovereign bonds were being overvalued in terms of "riskiness". If banks are buying up questionable soveriegn debt and ranking them as "riskless" then I have a feeling that you don't want to be in them, because when the clean out comes you're going to be in trouble.

Of course part of me is excited about the fact that report said the implementation of Basel III was behind schedule etc. As I've said on this blog before we are in the middle of a solvency crisis which Basel III is not helping to alleviate. So good news for banks, bad news for middle age investors?

As a sometime professional expat I know the trouble you can get yourself in when the good times are flowing. Well it's often good to break away from your immediate peers and try and meet some "real" people. With this in mind I can certainly recommend the following which I received from a good friend in HK today:

THE ROYAL GEOGRAPHICAL SOCIETY - HONG KONG

presents

"Biking the World"

by
Emily Chappell

on
Thursday, 11 October 2012

The British Consulate General
1 Supreme Court Road, Pacific Place, Admiralty
by kind permission of Her Majesty's Consul-General

Drinks 6.30 pm; Lecture 7.30 pm

Pre-booking; please reply to events@rgshk.org.hk also www.rgshk.org.hk

I can only marvel at peoples durability in being able to accomplish feats such as this. I know from my own reading that anyone attempting such a challenge needs to plan the setup of their bike very carefully. I'd suggest going to the lecture and checking out a book entitled "It's All About the Bike" by Robert Penn. Mr Penn goes about building his perfect bike in the book and importantly shares some secrets for those going long distance touring including the fact that steel frames are better than carbon or aluminium because if you're in northern India it's likely you can find a welding shop, but unlikely that you'll find a specialist in carbon lay-up technology.

Ciao!