Someone is starting to get it at the IMF meetings . . . Pinarello tune up ride . . .

IMF warns eurozone on capital flight. Well just maybe someone at the IMF is starting to get the fact that what we have here is a solvency problem. The IMF estimates that European banks will try and offload 2.3trn in assets by the end of 2013. Some private estimates say this number gets closer to 4trn by the end of 2014. In sum as this blog has said on many occasions the governments and central banks need to step in and remove this drag by asset purchases rather than by the indirect method of QE. In fact I would advocate abandoning Basel III in an effort to increase asset solvency. This in turn would allow a more normal central bank monetary policy in the meantime. Perhaps the trade off would be some hybrid return to Glass Steagall?

Meanwhile the IMF meetings were disrupted by the politics being played out by their Japanese hosts and the Chinese. Xie Xuren, China’s finance minister, and Zhou Xiaochuan, governor of the People’s Bank of China, decided not to attend because of the over a group of islands in the East China Sea. Yawn . . . .zzzzz.....

At least we have the start of the earnings season in the US to give us real numbers. As suspected things in corporate earnings land have slowed and the traditional leader of the season Alcoa reported a net loss of $143m which apparently was slightly better than expected. My favorite quote though comes from the CEO who said: ". . . he was “pretty confident” that the stimulus measures announced in China meant “demand will be picking up speed”. However, he said it was “probably going to take until the end of the fourth quarter” to show results." Doesn't sound too positive to me and I think the key here is that Alcoa’s revenue, at $5.83bn in the third quarter, was down 9%. Back in 2011 when I was more bullish we were getting flat to small positive revenue growth combined with massive attacks on business costs and this was justifying the rally in stocks. With said costs mostly squeezed out of businesses a fall at the revenue line cannot be sufficiently offset any longer therefore putting pressure on the bottom-line from which dividends are paid and debt is repaid. Watch the top line coming from these reports.

Just because some of my mates think I'm too bearish I want to mention the post Chinese Golden week bounce in Iron Ore prices. This is good news for Australia and its currency and clearly resulted in the bounce back over 1.02. The government here looks hard pressed to meet it's balanced budget target this year so an uptick in commodity prices will be greeted with a sigh of relief in Canberra.

As readers know, I have always been an Xstrata bull and a Glencore admirer. So I was interested to read the comments by Tim Lane, deputy Governor of the Bank of Canada, who posed the question in a recent speech as to whether some commodity trading companies had become too big to fail? It's a great question and in theory they shouldn't be, but with the growth of leveraged structures based on their core sectors it is entirely possible. Personally I have never thought of Glencore or Vitol and alike in such a light, but it's certainly worth considering as an adjunct to the worries surrounding the securitization of certain important metals such as gold by the major ETF "structurers" in recent years. I suspect Mr Lane is laying the groundwork aimed at preventing further vertical integration in the commodities world and will for many of my friends in risk arbitrage hedge funds add yet another risk factor in their calculation of likely returns in the strategy.

One commodity that had me thinking today was rubber, or more specifically bike tires. As I wrote recently my Cannondale is out of action with a cracked stem.

Now Cannondale have been very proactive about the problem and I'll be taking the bike into one of their dealers tomorrow. In the meantime I took the Pinarello out today for a quick 30k's and I have to make a few observations:

• Tubular tires have rolling feel that is completely different to clinchers. It's as though you just glide above the road
• The Pinarello frame feels far less aggressive than the Cannondale, but really isn't much slower
• Acceleration wise the Cannondale feels like it transfers the power more directly to the ground
• Riding compact (50/34) rings after riding the big rings (53/39) is really strange . . . the power profile is obviously much steeper on the latter, but the slightly higher cadence you track at when riding on the former seems more relaxing

Anyhow it was good to have the Pinarello out and it was nice to have a couple of guys say what a beautiful bike it is. If only I was just as stylish . . . sigh.

Ciao!

Cracks are starting to show . . .

I was riding my Cannondale Evo here on Sunday and was jolted heavily when I failed to spot a pot hole. I guess it was just too beautiful of a morning to be paying extra close attention to the road. Anyhow the end result is that my FSA K-Force Stem in Cannondale green suffered a couple of micro cracks that widened throughout the ride. In one way I was lucky as the stem costs about 250 bucks, whereas a broken Mavic Cosmic Carbone SLR front wheel would have been closer to 1000. As such I've sent mails to Cannondale, FSA and my bike shop in Italy to see how I go about claiming for a part that has a very comprehensive warranty. I'm guessing as the stem was a special edition I'll get the usual excuses about it being irreplaceable and I'll have to settle for the standard red and white model. Who knows? While I was mailing Cannondale I also took the opportunity of reminding them that the compact rings for my Spider cranks hadn't arrived yet. Let's see what they make of that?

In the meantime the AUD has cracked down below crucial support at 1.02 and as I write this is trading at 1.0158 after the RBA said "the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected," . . .  and the board remains poised to push the cash rate lower because they suspect a harder landing in the Chinese economy. As such I remain surprised that stocks such as Rio Tinto remain about 10% above their mid-September lows when the Iron Ore price crashed through the 100 dollar mark. The local borse seems to be benefiting from yield and financial stock buying. In my mind the fact that more than 50% of the Australian market is held offshore could be the biggest headwind to the Index and I remain skeptical of the usual bulls.

So if my bike stem and the AUD are cracking what else is under pressure? This week’s annual meetings of the IMF and World Bank in Tokyo I suspect will show the economic debate starting to show equally fractious signs.

A number of interesting pieces regarding US government exit from QE-ternity are starting to appear in the press and if we are to believe that the US has turned the corner on the employment front as many were suggesting last week with the fall in the headline below 8% to 7.8%, then it's time to start looking ahead. You see as the Fed heads towards a 4 trillion dollar balance sheet we have to consider what happens as we return to "normal" conditions. The Fed has moved it's duration of debt out past 10 years by buying up vast quantities of mortgage backed bonds and alike. Of course to reverse this will require people and institutions with similar views on the long term viability of such debt. If the Fed manages to get things growing at 2-5% (and that's a big if) it would be dangerous for the market to have excess liquidity in the system. The Fed surely must understand that at the first sign that they are a seller a market (the MBS market wich they are currently destroying with their actions) will not be there to buy back the debt the Fed wants to sell. As Philly Fed Governor Charles Plosser said in September:

"While these risks are very hard to quantify, it is clear that the larger the Fed’s portfolio becomes, the higher the risk and the potential costs when it comes time to exit. And based on my economic outlook, that time may come well before mid-2015. In my view, to keep the funds rate at zero that long would risk destabilizing inflation expectations and lead to an unwanted increase in inflation."

The risk is that the bond market "cracks" long before the first Fed move and with it so does many of the huge bets currently in play in government corporate and junk debt. 

Now where is that bike of mine?

Ciao!