Draghi Sounds Tight

At his press conference yesterday, Mario Draghi left everyone with a sense that he was turning his attention to the risk of inflation. He said that the environment had improved enormously in recent months and that there were many signs that confidence in the euro was returning, and talked about the “upside risks” to inflation. Naturally this has to be seen in the context of Jens Weidmann’s recent (leaked) letter, in which he worried about the measures the ECB has already taken, but I think it is too simplistic to see Mario Draghi as the dictator of the ECB, having to keep the Bundesbank interest group happy in order to maintain his rule. I prefer to think in terms of the ECB’s objective, which is to maintain inflation below, but close to, 2% in the medium term. The ECB committee tends to act in line with its mandate, raising interest rates even when, for example, inflation is being driven by temporary factors. This is partly about the asymmetry of the target (inflation a little below 2% is fine; inflation about 2% is not), but also about an attitude of mind of which the Bundesbank is the leading representative but which European policymakers in general seem to share. This attitude is that rule-guided systems are better than ad-hoc systems; that the cost-benefit ratio for the single-minded application of a particular set of precepts is better than the cost-benefit ratio for flexible policy-making. With regard to inflation, European policymakers really believe that if they can keep inflation under control, at all costs, other benefits will eventually follow. I think that this approach is a mistake — that precepts introduced to fight one battle may be completely the wrong ones for fighting the next one. But they believe in it, and that means that it should not be surprising that they should start worring about inflation when oil prices start to rise. The ECB is fundamentally an inflation-fighting machine; it is not, like the Fed, fundamentally an institution that sees its role as the promotion of the welfare of its people (or, if you like, conceives its ability to promote welfare in terms other than inflation-fighting).

At the start of this year, many commentators were predicting further interest-rate cuts and a fall in EUR. I closed out my short EUR position at the end of last year, and I am pleased that I did. I was never sure that further cuts were coming, and by the start of 2012 I thought that the European situation was stabilising. More recently, however, I have been rather slow. I should have seen this more hawkish performance from Mr. Draghi coming, and anticipated its tightening aspect. As it is, I have seen it now, and I think that another important support for risk sentiment has been weakened.

In consequence of this, and of the uncertainties I discussed on Tuesday, I no longer have a view on the direction of risk assets.

On Lifestyle

One reason for the slowness that I talk about above is that I have not been feeling great. A couple of weeks ago I had a stomach bug, and I took a while to get over it; in addition, I have not been sleeping well, especially at the weekends. I don’t mention this just to whine about it — I think it pertains to an important point about my trading style. If you are going to be a macro trader, you have to be on the ball, following the latest developments in the news and reading plenty of analysis. You also have to be creative and imaginative, in order to think out the implications of the stream of events that rushes past you. Occasional tiredness and other forms of disruptions can be useful, because they break one’s normal routine and can spark periods of creativity, but persistent tiredness knocks one off the ball and saps creativity. This is why, for example, I tend not to go out on weeknights — if one does not have a rule of never going out, one finds that things arise at least once a week and one’s focus is regularly blurred.

At an interview last year, someone asked me the question: “why should I hire you, rather than someone else”. I didn’t have a very good answer. One real answer, which I didn’t like to give because one shouldn’t sound to arrogant in a job interview, is that I am completely committed to working out the truth, and most people are not. There are three aspects to this.

First, I am committed to working out the truth.

Second, I am committed to working out the truth.

Third, and this is what I really want to talk about here, I am committed to working out the truth. I am prepared to rearrange my whole life in order to be better at it. Not going out on weeknights is part of this; so is devoting large amounts of my own time to reading (the only activity that reliably makes you cleverer); and so on.

The cause of my recent tiredness is that I have been sleeping in a traditional bed at weekends and on a hard futon during the week. I am unused to a traditional bed, which I find too soft and too hot, but when I get back to my futon I have to readjust to that as well. Now, many people would just go along with this, and perhaps wish that they were not so tired (in the same way that people can be kept awake for years by a partner’s snoring or fidgeting but do nothing that actually solves the problem). For me, it is completely unacceptable: I cannot be tired. So I have been experimenting. This week I am sleeping on the floor — after all, different floors have a fairly consistent level of insulation (none) and hardness (maximal). People seem to think this is “weird”, but when I hear this, I think: that is why I will have an edge, and you will not. When you have a problem, you either ignore it, or you try to solve it within the constraints of social convention. I do not ignore problems, and if they are hindering my attempts to work out the truth, I will solve them in any way possible.

Incidentally, I think that a reason why people seem to be ignoring problems is that they are actually trying to solve them, but have the wrong model of human beings. A model that says that human beings are spritual beings (a hangover from religion) or basically rational creatures (a development of the former idea that arose in the Enlightenment) would see the mind as fundamentally separate from the body and in command of it, and might therefore prescribe “trying harder” or “not letting the body rule the mind” as a cure for tiredness. While science has moved away from this kind of model, I think that it is just the kind of model that many people apply to themselves. I prefer to apply scientific models. The mind and the body are aspects of the same thing; if you want one to work better, you have to look after the other. This brings out a further aspect of what I think my edge should be, if I have one: I have been committed to working out the truth in a wide range of fields, including the true “macro” fields of metaphysics and epistemology. I am not a scholar of these things (i.e. I find no delight in knowing about someone else’s erroneous ideas): my interest is always practical, and the point of my studies is always to come to a view. Thus, when my macro trading is disrupted by some external factor, I am often at least moderately prepared to deal with it.


Bloomberg reports that Representative Brad Sherman has introduced a bill to impose sanctions on foreign insurers who do or enable business with Iran. Iran appears to be having genuine difficulty exporting this oil, and a major factor in this has been that European insurers have pulled back from insuring ships that carry Iranian oil because of the EU’s own sanctions. Rep. Sherman’s bill might have the same effect on Asian and Russian insurers. Mr. Sherman, together with Sen. Kirk, is also attempting to impose sanctions on the remaining Iranian banks that are not covered by the existing regime, and on foreign financial institutions that do business with Iran, including foreign central banks. As I have said before, some people in the US are getting really serious about this sanctions thing.

Southern Oscillation

With reports that La Nina is continuing to cause trouble in Australia, I have had a look at the Southern Oscillation Index. The index has dropped in the last couple of months, and I wonder whether, contra fears about the South American drought, a fading of the extreme weather that La Nina has caused together with (expected) record planting might lead to a fall in crop prices. With corn and soybean prices still fairly high, it might be worth a bet — but using options rather than the futures, because there could be a lot of volatility in the meantime. The index has been in La Nina territory for quite a long time now; it has to mean-revert some time.


  • Swiss CPI 0.3% b.e. Feb. The first positive month in five.
  • German IP 1.6% b.e. Jan.
  • Initial claims 362k d.e. but downward trend is intact.
  • Australia trade balance turns negative, d.e. in a big way, Jan. Still, this could be disruption from the Chinese New Year (as China grows, this complicating factor in the data is going to become ever more annoying).
  • China CPI 3.2% YOY d.e. Feb. Inflation continues to moderate.
  • China PPI 0% YOY a.e. Feb.
  • China fixed asset investment 21.5% ytd/Y b.e. Feb. A big drop in the YOY rate. New Year effect again?
  • China IP 11.4% YOY d.e.
  • China retail sales 14.7% YOY d.e. Feb.
  • China’s data have been generally weak this time, compared to recent history. Giving the central bank the benefit of the doubt, one might say that it has successfully reduced inflation while keeping growth above target.
  • China new loans 711bn d.e. Feb. Still at quite elevated levels.
  • Italian IP -2.5% MOM d.e. It’s almost as if austerity doesn’t work.

Coming Up

  • Non-farm payrolls
  • Trade balance
  • China trade balance
  • US and Canada clocks change Sunday