In its daily note to clients, Goldman Sachs says, “good riddance to 2011,” because of the “adverse shocks” that hit markets during the year. I don’t feel that way at all, and whatever happens in the future I will always remember 2011 fondly as having contained my first really successful period of trading. Goldman’s attitude highlights the fact that the majority of market participants are in some way at the mercy of the markets, hoping that risk assets will rise and suffering when they fall. That I was determined not to be among their number was one of the reasons I decided to learn to trade the markets. There are two ways to escape from the tyranny of being basically long: either predict short-term market moves and ride them (like Soros), or stop worrying about them and focus on the long term (like Buffett). The reason I opted for the former was simply that it is a better business proposition: learn to trade like Soros and you are likely to get a job or build a business; learn to invest like Buffett and you will still have the problem of finding backers who have as strong a stomach for mark-to-market volatility as you do. I have a strong stomach, and it has got stronger this year, but I know that most people do not.

I still have not got my head fully around the latest developments in Europe. I still think that the ECB’s loosening of its collateral standards has played an important role in the calming of markets over the past month. In this connection, the Money View blog makes an interesting point: the present shortage of collateral can be seen as a shortage of unsecured borrowers — i.e. borrowers of sufficient standing that lenders do not require collateral. The IMF is one such borrower, and its lending is in turn unsecured. By channeling their lending to peripheral banks via the IMF and peripheral sovereigns, as is part of the current plan in Europe, core central banks will free up peripheral commercial banks’ collateral. With up to EUR 150bn of lending potentially happening in this way, the effect could be significant. Of course, there is no short-term effect — there will be no change until the IMF actually makes further loans to the Eurozone periphery.

It seems that the DPJ has agreed (within itself) to double the sales tax in Japan by 2015 (despite having promised not to raise the sales tax during the current parliament, albeit under a previous leader; the promise has not technically been broken because the first increase will be in 2014). The measure still has to be agreed by a government panel and then negotiated with various other parties (because the DPJ lacks a majority in the upper house). This measure is an attempt to stave off a ratings downgrade by improving Japan’s long-term fiscal position. I cannot claim that I understand it well enough to take a position on the subject, because I do not have a clear view about what Japan should do to end its decades of stagnation, and judgements about specific policies should be made in that context. From a trading point of view, an increase in sales tax is contractionary, but since it will not happen for some years (if ever), its short-term effect, if it is passed, should be to increase risk appetite at the margin by a) signalling that any fiscal contraction is not imminent, b) staving off news stories about a downgrade (of relevance to the equity market — the bond market is sanguine as ever) and c) keeping the Prime Minister in his job. On the last point, I am reminded of the limits of my understanding of Japanese politics by the fact that I do not understand why Japanese PM’s have to make everything a resignation issue. I suppose they would never get anything done in Japan’s corrupt political system if they did not.

Gold has rebounded nicely today, taking my long position into profit and the market a good distance further from my stop. Incidentally, while I am happy to be out of my short oil position given the tension over Iran and the cost of rolling the trade, I note that the price has not gone up in the past week and still appears to be in a volatile downtrend. The tone of media reports in the past few days suggest that oil has risen over the Iranian situation, but that is not true.


Japan manufacturing PMI rose to 50.2.
HSBC China PMI fell to 48.7.
UK Nationwide house price index -0.2%, disappointing expectations for an increase.

Over the Weekend:

China official PMI.