Day 3

Well we have had everything today. Left France in the wet arrived in Switzerland in the dry and then at Interlaken we hit the mother of thunderstorms. Gotterdammerung in spades!! Sheltered in a bikers café for an hour then went 6000 feet up a pass to the hotel with temperatures near freezing! Beer still going down well at the end of the day. If it’s dry tomorrow we are going down and up the Stelvio Pass. Eat your hearts out you petrol heads and Clarkson look a likes! Then into Austria for the next stop. More tomorrow.

Day 2

‘ello ‘ello mes petits rosbifs! Ici nous sommes dans la belle Frog somewhere near Strasbourg at the end of day two. Wifi reception has been hopeless so this will be at least 2 days out of date. 300 miles today – no problem – but the beers are going down very well! Switzerland tomorrow and up the top of the Eiger for lunch. Two days in Swiss then one in Austria and then a 400 mile day to Prague where will get a “rest” day – I wonder what we will do….!

You will have to wait for the next update to find out but some of you will probably be ahead of the curve!

Yours the Mad Biker

One more thing before I go…

Once upon a time our parliamentary system was the model for all others. Now we have reverted to the days of “rotten boroughs” or should it be “rotten politicians”. At least it has taken the heat off the investment bankers who were also guilty of milking the system.

Much talk of reform in both spheres – it seems they just won’t leave laissez faire alone. With every crisis the legislators determine to change the rules so it “wont happen again”; but it always does…There is arguably too much legislation not a lack of it but where would the legal profession be without it? There are just too many vested interests to prevent true parliamentary democracy from working.

Enough of politicians! Markets have done pretty well since March but before we get too excited we are only back to where we were at the end of December and I don’t remember too much bullishness around back then. The truth is that a lot of people have missed this rally and the latecomers are keeping it going, but there is a distinct lack of momentum lately, which is a less positive sign.

Bond yields are moving up as is gold so for the moment the inflationists have the upper hand aided by the glut of government paper coming onto the markets, but with parts of North Korea “glowing in the dark” the next move may be another chapter in the flight to safety.

So what will the next four months hold while I am away on my motorbike? If I knew I wouldn’t tell you! Here are three totally off the wall guesses. Gordon Brown calls an election after claiming mortgage payments on 10 Downing Street – he’s mortgaged the rest of the country so why not! North Korea won’t be the only place to experience some “fall out”; who will stop the Taliban getting hold of Pakistan’s nuclear arsenal? The US, Iran or Israel? If option two gets going then option three must be to buy more gold.

We’ll have a post mortem when I get back. The tour starts from the Ace Café in London on June 4th and we should be in New York having taken in Siberia along the way by the end of September. It’s still not too late to contribute to the charity I am sponsoring via the link below. A big thank you to those who already have and to those who I am sure will be doing so soon!

Debtor’s prison

The budget has pretty much killed off any chance of Labour getting another 5 years; not that the odds were very good anyway; or that the Tories would have done much better. Politicians are in denial as are many investors who think it’s all over. Well as much as I would like to believe that, the tea leaves (charts to those of you who think you can do without them) tell me we are still in a long term downtrend and that wont change until the Dow gets above 10,000 and the FTSE 100 above 5,000. A very profitable rally but experience suggests that most people will climb on board as we reach those targets rather than the 6,600 and 3,500 lows, when Armageddon seemed the only option

The big issue is still debt; government, corporate, personal; there is too much of it and its getting bigger. On Tuesday the Fed spent $10 billion buying 7-10 year Treasuries yet prices still fell on the day and both the US and the UK have huge funding programs to come; the UK will be issuing £175bn of gilts this year alone. Their only salvation is that deflation is still centre stage in the short term. In the 90’s Japanese bond yields fell from 8% to sub 1% (at the same time JGB issuance went through the roof and found willing buyers) and whilst 10 year bonds in government debt are circa 3% on both sides of the Atlantic they are still the safe haven for many. The Chinese have been adding to their holdings despite the world and its dog proclaiming how expensive they are. Compared with deposit rates, 3% from a triple AAA lender is really rather attractive isn’t it?

If the top US banks mark their derivative/loan positions to market 16 out of 19 would be insolvent. The optimists say that mark to market is irrational as in a “few years” liquidity will return and market values will re-establish themselves. If you will excuse the vulgarity “you can’t polish a turd”. Yes – much of this debt smells to high heaven. Western economics was founded on the Darwinian principle of survival of the fittest. If the business model is bust so is your business but bankruptcies and dole queues don’t buy votes.

The Austrian economist Schumpeter put forward the theory of “creative destruction”. A painful but effective course of action that has been shanghaied by the vote grabbers. An industry selling expensive and largely inefficient products that no one wants unless you give them away and which is run by the government is what my father would have labelled communism. In the US they call it General Motors…and “buy American” is the catch phrase.

We tried that (Buy British) back in the 70’s when we still made “things”, but not very well. It didn’t work then and it wont now. In June I am off around the world on a motor bike (more anon) and the only thing on the bike that’s British is me! And please don’t tell anyone I might know that I am actually one-eighth French!!

Stay very nimble…

There seems to be a quiet regaining of confidence in the markets from the January lows; not surprising given the very oversold conditions back then. The huge sums earmarked for government inspired bailouts are slowly improving liquidity and reducing interest rates; the emphasis being on “slowly”.

The G20 meeting ended in some sort of consensus and the amendment to the mark to market rules in the US (albeit minor tinkering at the edges) have both helped confidence. The “failure” of the last UK gilt auction was not exactly a big surprise but 10 year yields are still below 3.5 per cent which perhaps is to some. The gold buffs are also facing the prospect of IMF sales and the “recycling” of scrap which has turned India from a net importer to an exporter.

On the other hand hedge funds are getting some traction again as figures show improving performance for the long/short brigade with lower volatility as an added bonus for the doubters. Risk adjusted returns have long been the mantra for the shrewd asset allocators and no more so than right now. Short term equity returns have been mouth watering in some markets but high volatility remains a concern. “Betting it all on black” is tempting but avoiding getting whipsawed will be only for the very nimble and how many of those do you know?

The latest US initiative to deal with “toxic debt” looks like foundering. The original TARP bail out required all the major US banks to take money from the government regardless whether they needed it or not. The “big issue” then raised its head as it was discovered that this “free” money was, in some cases, being used to pay exorbitant bonuses to executives in “failed” companies. Congress then started making noises about banning any form of bonus structure where bail out money had been supplied. Those that didn’t need the TARP weren’t allowed to pay the money back with the result that some “high fliers” have left to set up their own businesses so they can pay themselves the “going rate” without a dozen angry politicians on their backs.

The latest wheeze is to allow the FDIC (Federal Deposit Insurance Corporation) to gear up six times to buy toxic debt off other banks that are also allowed to buy debt off each other, (does this sound like the merry go round is still in full swing?), but with the taxpayer footing 90 per cent of any downside. The take up has thus far been very small as the banks fear further retribution if (when) someone finds a fault in this scheme and the banks are seen to be making money at the taxpayers’ expense!

So the question is will the fragile confidence last as we climb the wall of worry or is there another big pot hole down the road apiece? And how deep could that pot hole be? Well try the near $700 trillion in outstanding derivatives. Some very big positions in interest rate futures are purported to have gone “very wrong”, so Q1 results from the beleaguered banking sector may make interesting reading. The fat lady is not yet on the horizon so to quote Art Cashin at UBS “stay very, very nimble” … if you can…

The Great Experiment

The Great Experiment continues with “our” money being spent on any business model claiming to be too big to fail. I have to say, in my “humble” opinion, that Fred Goodwin’s pension is irrelevant given the trillions being thrown into the lame ducks’ pond. There will be a time for retribution but that is in the hands of a power far higher than those of our regulators and politicians, who have yet to come to terms with their part in this debacle and, in all probability, never will. When was the last time you heard the words “mea culpa” from that unhappy band?

The Bank of England has embarked on quantitative easing, which is the same as printing money, despite what you may read in the papers. (You don’t still believe them do you?!) Buying gilts increases the money supply. They don’t have to physically print money as so many transactions are made “electronically”. Think about the number of purchases you make by credit/debit card or bank transfer. It’s cash by another name. Even my tab at the local goes on a card.

They have said they don’t want to “pay up” for their gilt purchases but that rather defeats the object. If they can flatten the yield curve, ie the yield on longs gets closer to shorts, that will lower the cost of borrowing, (much of which is linked to the longer end of the curve) which is as much a hurdle to new borrowing as the apparent lack of liquidity. This week the yield on 10-year gilts dropped below 3% and on 30-years below 4% despite all the talk about gilts being expensive. Sub 2% and sub 3% yields on 10 and 30 year gilts could be coming your way sooner than you think.

There is no doubt that equity markets look cheaper on a relative basis but we have yet to see any real follow through after some impressive gains on Wall Street this week. Bullish news sees the shorts covering but the action is often in financials and the chances of that sector leading the charge into a new bull market are remote. Unemployment continues to rise and the Chinese are finding out that, like Gordon Brown, the title “saviour of the world” is hard one to sustain.

Until the “Great Experiment” has some more miles under its belt it is difficult to see where we are headed and the best guess is that we will see some impressive rallies followed by further sell offs; rather like the ‘60s and ‘70s in the US. Buy and hold hasn’t worked for the last ten years and another ten years of “famine” wouldn’t be a surprise. Of course Mrs Moneypenny always knew that you could rely on a “Bond”.

It’s all in the mind…

The fatal assumption made by many economists, who have now persuaded politicians to believe it too, is that we all act rationally when faced with the same set of circumstances. Rational for whom? Take the myriad bail out programmes being touted by governments and central banks all over the world. They all come with promises to “increase liquidity in credit markets”, “facilitate banks to amend existing mortgages and grant new ones” with the end goal of increased non –governmental spending which “will pull the economy out of recession”. That’s all on top of earlier “loans” just to prevent banks, insurance companies and the “Fannies” of the world from going bust, which would have resulted in “complete financial meltdown”.

It may still happen of course. The “Great Experiment” continues apace with the passing of HR1 into law in the US. HR1? The mnemonic for the $787,000,000,000 Obama “Make Work Pay” plan. “Make Work Pay”? That’s really going to confuse a lot of people who already thought it did! For all the money being pumped around it is still very hard for businesses to borrow and potential homeowners to get mortgages. The banks are being encouraged by their new owners – aka the Government – to lend, often to the same people who couldn’t afford the repayments the last time around, which is what started the mess in the first place. In the US banks are obliged (forced) to restructure payments to “affordable levels” which will become “unaffordable” again as the economy slows and unemployment continues to rise.

So with ultra low rates and the banks allegedly awash with liquidity the economists posit that rational human beings should soon start borrowing and spending again. Well firstly the banks are still reluctant to lend – one look at their balance sheets will tell you why – and Joe Public is beginning to feel the pinch and has reigned in expenditure from levels that were not and are not sustainable. A perfectly rational response it would seem unless you are an economist. The paradox of thrift then kicks in and the economy slows even further as a result of the lack of spending and the propensity to borrow takes another downward leg. “It’s not rational”, they cry, but it happens all the same!

Now there are some fortunate souls with huge mortgages taken out in the “good times” who are feeling much happier with life especially those with base rate linked accounts. Some building societies were offering base minus 1% so payments are now effectively zero. But even they are feeling less secure as the value of their houses has come back with a bang and they find themselves with negative equity.

Eventually, by throwing enough money at the problem, it will go away but then inflation is likely to become a serious issue and can the central banks be trusted to use the brake early enough?

Meanwhile the focus of attention is moving to Europe. The problem for the ECB is what to do with Eastern Europe most of which doesn’t come directly under its remit. However European banks that do have been lending huge sums to their eastern neighbours who are unable to service those loans as their economies have gone off a cliff too. And then there are the PIGS; Portugal, Ireland, Greece and Spain who are showing signs of suffering from Iceland syndrome; the cure for which is as painful as the disease.

Another part of the rational jigsaw is that protectionism won’t help solve anything at all but on a daily basis it is becoming obvious that this is just what governments around the world are engaging in. Brazil and Argentina have started a spate of trade tariffs and blamed it on the Chinese. The revised US bail out package was supposed to remove the “buy America” clause but it didn’t and this hasn’t escaped the attention of the French. La Sarkozy has suggested that if the Americans are going to protect their industry and agriculture then “perhaps we should try to do same”; as if that was something new for the French!

In most commercial transactions the law of supply and demand works as economists expect but in the financial sector it is all about fear and greed and always has been. After all this is not the first financial bubble to unwind and it wont be the last, despite threats of ever more regulation to prevent it happening again, but it is shaping up to be the most unpleasant, unless of course your mind thinks otherwise. Psychiatry should become a growth business don’t you reckon?

Send in the clowns…

I don’t watch much television these days, but the drama series I have been viewing recently has been enthralling. On Tuesday the great and not so good of the banking industry were taken to task by the Treasury Select Committee and what a “sorry” bunch they were. At least they managed to utter the “S” word which is more than the politicians and regulators, who are pretty much equally culpable in this “sorry” mess, would ever dream of doing. Has it ever occurred to them that not one of us is perfect and that a little bit of humility goes a long way? Prime Ministers question time has descended into farce and is quite frankly a waste of everyone’s time, especially that of the two main protagonists.

A line or two from “Send in the Clowns” would not be inappropriate. “One who keeps tearing around (Brown); One who can’t move (Cameron); Send in the Clowns…” Not much difference in the US. Tim Geithner, who was heralded as the saviour of Wall Street, (as opposed to “the World” which of course is Gordon’s territory) has announced the latest $2 trillion bank bail out “plan”, which is very light on detail. It would be fascinating to watch the “Great Experiment” unfold, as a detached observer, if it weren’t for the sheer number of zeros that accompany each change of direction. The “Great” Gideon Gono, the chairman of the Central Bank of Zimbabwe, has developed a neat trick to solve this problem. Having issued the first trillion Zimbabwe dollar note he proceeded to lop off all 12 zeros to make it a one Zim affair. Marvellous! If only it were that easy…

Mervyn King is also flirting with inflation although not yet at the 231 million per cent level that Giddy Gono has unleashed; but give him time! The UK bail outs are, by American standards, more modest affairs. The latest bond bail out is a mere £50 billion and is to be funded by issuing Treasury bills, which will not add to the monetary base. However he also said that the MPC is looking at a gilt buy back programme which would be funded by “quantitative easing”; the new buzz word for printing money; aka monetising debt, which will. Inflation is anathema to the bond markets so why would he buy gilts using freshly printed money, which has to stoke inflation at some stage; a fact that he readily admitted to. The answer is that he has no choice as the amount of gilt paper the government will be obliged to issue to fund this stimulus package, and the one before that and no doubt a few more to come, will swamp the market unless Merv is there as the backstop.

As with the American plan the details of the bond bail out have yet to be finalised but apparently it will be up and running by Friday. The intention seems to be to buy corporate bonds that have some realistic chance of avoiding default; something that a lot people looking for yield (decimated by the Bank’s “zero interest rate policy”) are already doing. I am not sure how this helps liquidity in the sub investment grade/CDS end of the market but, rather like Ben Bernanke at the Fed, Merv is confident that if he throws enough “money” at the problem it will eventually go away. Perhaps it’s time he gave Gideon a call…

Another day – another scandal

This is how politics works in Thailand. Whether it is a general accused of taking bribes for re-equipping the air force with Saab Gripens (although compared with the Al-Yamamah contract – loose change in a bucket) or a lowly official who bought air conditioning units that didn’t work there is always something for the Thai’s to chew on. The opposition party is the PAD (the pro-Thaksin red shirts) – Peoples Alliance for Democracy – but not democracy as we know it. In Thailand the military and the royal family have ruled the country up until about 25 years ago when the first “democratic” elections were held. So trying to compare Thailand or in fact any “new” democracy (pretty much most of the world!) with our ideas of democracy in Western society isn’t going to work! Churchill would have understood – “democracy is the worst form of government apart from all the others” as he was wont to say.

Bribery, corruption and democracy are synonymous in much of the region. In Korea 67% of people polled were happy for politicians to take bribes as long as it didn’t affect them! Maybe there isn’t a phrase for “vested interests” in Korean? Unfortunately for Thaksin he was convicted, in absentia, by a military court for “abusing power”, sentenced to two years in prison and banned from all political activity for five years. The PAD have stepped up their campaign to have the sentence revoked which culminated in a series of demonstrations which shut the two main international airports in Bangkok; Suvarnabhumi and Don Muang.

The repercussions on Thailand’s tourist industry had not been thought through by the PAD and a second series of demonstrations barricaded the Parliament buildings and left the airports alone. The Government are now considering whether to charge the leaders of the PAD with international terrorism for their earlier actions. Always something controversial going on in Thai politics!

As for the economy, the shutting of the airports was a big blow to the tourist industry coming just as the high season was underway. I arrived in early January on a full Thai Airways 747. Most people book their holidays well in advance so the tour company holidays were not affected but it was noticeable that the four and five star hotels where the discretionary spend is more volatile, were much harder hit. A group of boutique hotels were actively promoting rooms at 50% off the rack rent which was galling for your correspondent who had paid a currency surcharge on top of the published tour price!

Even at 50 baht to the pound (it was 70 baht only months earlier) Thailand is not an expensive country – petrol is 40p a litre and you can eat out handsomely for the price of the tip you would pay in London. Driving from Phuket in the south to Chiang Mai in the north (where some of the best motor biking roads in the world are to be found – the road from Mae Hong Song to Chiang Mai on route 1095 has 1864 bends and I have the t-shirt and sore bum to prove it!) it is quite apparent that agriculture is still a big part of the economy. Rubber and palm oil are the two major products both of which have more than halved in dollar terms over the last six months so another blow for the Thai economy.

But better to be living in Thailand than Myanmar. We had a brief excursion across the border from Mae Sot into the “People’s Democracy” – you will be becoming aware by now that one man’s democracy is another’s dictatorship… We had the obligatory lecture by the customs official welcoming us to his country and that we could have our passports back when we returned to the checkpoint so “nothing to worry about” all said with a huge grin on his face; something the local populace tend not to sport in the same way as in Thailand. Myanmar was noticeably poorer, dirtier and considerably more threatening and as the sun rose into the midday sky we were all very keen to retrieve our passports and walk back over the bridge to smiling Thailand.

As a holiday destination it has everything – and tourism is getting to be everything for the Thais. I suggest you get out their soon before the pound sinks any further…

Poll of polls

The voting is over, the result is in and by an overwhelming majority no one has the foggiest idea about what actually comes next, which is a small vote for sanity as those who profess to “know” are due a good “shipwrecking on the laughter of the gods”.

 There have however been some excellent ruminations. In the red corner the supporters of the end of the world include Robert Prechter of Elliott Wave fame ( whose targets I wont trouble you with for fear of apoplexy (at best!). He is also one of the founders of the study of Socionomics of which more anon. For the rabidly bearish I can also recommend the Daily Reckoning ( writ large by Bill Bonner who is both plausible and terrifying at the same time.

 In the blue corner the doyen of value investors and sometime Yorkshire man Jeremy Grantham at GMO ( is a steady buyer of equities, but admits that the curse of the value manager is to be too early. My good friend David Fuller ( is also siding with the bulls but would be a lot happier if a touch of confidence returned to the market; after all, as he points out to the battered and bruised investors of the class of 2008, “bear markets don’t last forever”.

 The mega bears, of course, see little hope, other than a rally in an ongoing downward spiral, whilst the bulls admit to the possibility of more downside before the next bull market takes hold. Not surprising, I suppose, given the diametrically opposed views and the extreme volatility that we have been getting used to, but does any of this help us mere mortals to invest our money with any confidence?

 The only spark comes from the universally held opinion (ex the mega bears who have eyes only for gold) that investment grade corporate bonds are a steal; certainly relative to government issues where yields are at decade lows. Historically corporates tend to lead equity markets on average by about six months but in today’s volatile market place six days might do it! In fact US corporate bond yields peaked at the very end of October and the S&P 500 bottomed in mid November so we may have had the signal already!

 As ever there is a caveat…or two. All bond yields have done is to retrace the spike bought on by the October downdraught when it was “sell everything and buy T-bills”. So in effect the gun has been reloaded awaiting the next panic attack. In the meantime in thin holiday markets the indices are trying to rally and the bulls will be hoping for the momentum to carry over into 2009.

 The second caveat is the worsening state of world “diplomacy” if it can be called that. The basis of Socionomics as preached by Prechter is that social mood precedes social and economic events. Simply put we don’t feel bad because we are in a bear market it’s the other way around! We experience a bear market because we are in a bad mood. Same with wars and conflict. Social mood turns ugly and the ammunition starts flying around. Now you can take this theory or leave it as far as I am concerned because I know how painful it is giving up sacred cows but there is no doubt that, increasingly, the world is becoming a very unfriendly place.

 Gaza is on the brink of catastrophe. Neither side is prepared to give an inch and never has. The 1948 boundary demarcations were anathema to Israelis and Palestinians alike and no amount of diplomacy will get them to see it differently. It’s been a problem for 60 years and isn’t going away. India and Pakistan are posturing towards conflict and South America is reverting to true bandit territory. In parts of Mexico over 90% of the police force is in the pay of the drug cartels. A senior ranking officer in the President’s security council was recently arrested for taking bribes (allegedly $100,000 per month) to keep the cartels posted on Calderon’s movements; supposedly so they could keep out of his way and not attract police attention to their illegal activities.

 Ecuador has reneged on its foreign debt and is broke; the government is raiding the social security fund (“social security” there’s a euphemism…) but the writing is on the wall. The rapid decline in the oil price has been the significant factor and this is causing pain and angst to many bigger fish including Venezuela and Russia, not to mention the Middle East “families”. With no sign of any uptick in the oil price (and many of the oil exporters need the price to double from here to make their budgets balance) social upheaval will inevitably follow.

 So before you reach for the razor blades, the rational response to the markets’ capitulation in 2008 is to accumulate things that look cheap, which covers pretty much everything if you have a reasonable time horizon! I just wish I could tell you how long that period of time needs to be! Happy New Year!