Just minding my own business . . .

I finally made it back to Australia on Friday after a brief stop in Zurich. Things seemed to be going pretty well for the inhabitants of private banking central. The recent up-surge in market volatility outwardly was having little impact on my favourite small city of Europe. I wonder what it might take to change the mood?

Before I got to Zurich I had been thinking about commodities and and more specifically Oil. One of the bankers I met handed me a 2014 outlook booklet and I coincidentally flicked it open to the commodities page and found that I was not the only one thinking about oil. I'm a great believer in the petro-dollar, but I also understand that there's a reasonable amount of hot air in the price because of Iran, Syria and Egypt . . not to mention the lesser instability in places such as Iraq. The flip side has been the shale gas boom in the US and the subsequent change from energy importer to newly minted exporter. My ex-partner was a firm believer in the metrics that Oil would remain fundementally in a tight market as the BRICs economies continued to take up slack that the US economy was now generating in the energy markets. While in the long term I think he is right, I'm a short term (12 months or so) bear. This blog's position is that the US dollar will strengthen further in 2014 and therefore concludes that there will be some downward pressure on the oil price in USD's. This one is not for the faint hearted and therefore it would be best to develop a cautious short overall, best manifested from cheap out-of-the-money type options of various strikes and maturities.

Given the above I suggest equity investors remain underweight various contractors in the sector as any downward price spiral will inevitably lead to the closure or delay in slated projects, as has been the case in other commodities such as coal and various metals.

I was asked about the final stop of my skiing expedition in Cervinia . . . Not sure what I think of this resort. The snow never stopped falling during my 6 days there and as such getting a clear view of the terrain was somewhat difficult. By the time we left the slopes were recording about 4 metres of powder, mostly dry and very skiable. As is my usual practice when arriving at new ski resorts I always hire a guide/instructor for day one so as to limit the amount of time you would normally spend squinting at one of those huge piste maps located on the sides of most lift stations. Anyway with the snow falling I spent 3 hrs or so being shuffled around he Italian side of the mountain. The idea of being in Cervinia is that you get to ski over to Zermatt, thus creating a huge high altitude mega resort. Cervinia itself is already at 2000m and the top stations are closer to 3600, so when the weather is bad the mountain closes off access to Switzerland to avoid people being stuck. You can't just grab a taxi back from Zermatt as you have to go the long way around, about CHF500.

Cervinia doesn't advertise itself as a restaurant paradise, so our expectations were quite low. In reality there's a number of good restaurants both on and off the mountain, but few make it into the conventional guidebooks. We managed to spark up a conversation with an English girl working the lunchtime shift in a hidden gem of a bar. She gave us a list of suggestions which proved to be all good. Readers can contact me directly for the list.

During one lunch there I met a young Canadian guy and his wife. He was working for a multi-family wealth management office that had 1.5bn to play with. The usual complaints flowed pretty quickly regarding the ability to execute deals with any urgency. This is familiar territory to me. If you're fresh out of university or a graduate position at an investment bank it no doubt seems very attractive to be given the keys to the "financial Ferrari" and told to go out and look for opportunities. Unfortunately unlike in a large institution the ability to act is much more limited as these offices firstly seek to protect family wealth and secondly enhance it. It's therefore very unlikely that (say) a family who built their wealth in packaging is going to let a 28 year old lead them down the path into coal mining assets in Mongolia. Having said that, so long as you're willing to play the long game and build up a portfolio of actionable ideas you just may after a lot of due diligence get the chance to get out on the "deal highways" and see what that V12 can do. Patience is your friend.

My Canadian friend and I didn't get to talking ideas, which was a pity because I'd like to have heard what he thought about the current situation. A lot of the Gen Y's I meet were still at business school during the crisis and have come to see the current central bank activism as being quite the normal thing within the financial system. That may or may not be a good thing and I somehow think that the Fed taper may leave more than a few MBAs splattered like financial road kill by the side of the road. The problem is the only example of this type of thing we have is the Japanese and their flirting with ultra-lose monetary policy ever since the collapse of the real estate boom in the late 80's through early 90's. I know a couple of readers of this blog would tell me that the US version has had far more conviction behind it and therefore will ultimately prove successful. I'm not as a confident if stage one of the taper and the markets reaction to it is anything to go by. The overall correlation between markets has been so high for so long that it's hard to believe that the carry trade gang can extricate themselves from the developing world without some unforeseen systemic risk. Investors will just have to put up with the volatility. 

Finally I managed to get back on my bike yesterday and thanks to jet lag made it out early on to Sydney's roads. I can report that all systems were in working order. My legs were a bit heavy and I've definitely put on a pound or two thanks to a constant diet of rich european food. As is my custom I try not to ride on Mondays because of the early week "aggro" most drivers in Sydney show, therefore today I'm restricting myself to clothes washing, blog writing and bill paying.

Ciao!

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.

Ciao!