In my most recent process document, I say that a macro investor should expect his work to be cyclical. His views diverge from those of the the market; he makes a trade; and then he waits to be proven wrong or for the market to catch up. At present, I am in the last phase: I have a divergent view, I think I know what is going on, and there is not a lot of difficult thinking to do.
The ECB will announce today how much of their LTRO borrowing Eurozone banks intend to repay at the first opportunity at the end of this month. They borrowed EUR 489bn in the first LTRO, and analysts expect EUR 84bn of that to be repaid this month, and EUR 150bn to be repaid early in total. I do not know what effect this will have, although I have read various speculations. There might be an increase in EONIA as the amount of extra cash sloshing around in the European financial system is reduced.
The last 24 hours have seen another negative print for Japanese CPI, an expectation-beating increase in the German Ifo index (following a strong ZEW earlier in the week), the US flash PMI, which beat expectations at 56.1, and initial claims, which made the second post-crisis low in two weeks. The preliminary estimate of UK Q4 growth has just been released, and disappointed expectations at -0.3% QOQ vs. -0.1% e. Good heavens, its almost as if fiscal contraction is contractionary. I wonder what happened to George Osborne’s boost to “confidence”. Oh, yes, it was stupid, model-free, politically-motivated drivel.
How can you find out the funding costs of banks in different countries of the Eurozone? I did not know the answer to this at the end of 2011, when it was most interesting, but I think I do now: you can look at general collateral repo rates in the different countries (“general collateral” means that you are lending for the sake of lending, not lending for the sake of getting a specific security as collateral because you want to short it, for example). There is a clear and large increase in the spread between Spanish and Italian repo rates and “EUREPO” — that is, the European benchmark repo rate — in late 2011.
One of the problems with having a position in the market is that it exposes you to hope, or longing. It is natural to hope that the position will go in your favour, and not only that, but that it will do so today. I do not spend a lot of my life hoping for things. I enjoy life as it is, and plan to make it better. Hope is both sapping of energy and cheerfulness — it is emotionally trying when the hoped-for thing does not happen — and sapping of confidence, because it entails a degree of submission to fate. I am not a great one for submission to fate.
How to deal with this chink in the armour? One must accept that one cannot control one’s P&L on any given trade. There is randomness in investing. It is entirely wrong to conceive of one’s project as being about the realisation of a profit on any one trade. Rather, one should conceive it as being about the identification of profit opportunities in which the ratio of risk to reward is in one’s favour, some of which will pay off, and some of which will not. One should not see it as being either good or bad if one loses money on a particular trade: one should see it as completely mundane, normal and acceptable. It is the sum of profits over time that is important. That is not to say that one should not take a loss as being the market’s way of telling you that you are wrong, or that one should not try to avoid losses and analyse them in great detail when they occur. It is to say that one should accept wrongness as the inevitable counterpart of rightness — because both are consequences of action.
This requires some more thought.