China within the global crisis

China's Vice Premier Mr Wang issued a bearish forecast, saying he is "certain, among all uncertainties" that a long term global recession is going to happen, that it will be "chronic" and China, which relies highly on external demands, must see the situation clearly and focus on domestic problems (Reuters)

China will have to move on its own and not be dependent on global growth to drive their domestic growth.
This is a strong comment from China. It suggests that domestic growth will be a priority since there is a strong likelihood of global recession. Will this mean a more isolationist economic policy? We will have to see, but the three pillars of economic growth, the US, the EU, and China all look weaker than six months ago.

Greece failure - happy holidays?

There is in my opinion a very high probability that within weeks, or months at most, Greece will be forced to freeze bank deposits as a prelude to leaving the euro.  Mexico in 1994 and Argentina in 2001 chose the Christmas/New Year holiday season to announce their devaluations.  Will Greece follow suit?  


“If history repeats itself,” footballer Andrew Demetriou once pointed out, “I should think we can expect the same thing again.” 

from Michael Pettis Will Greece unravel by Christmas?

It seems likely there will have to be more action taken and the holidays would be a perfect period to get the action and word out without a major market malfunction. A break-up is a possible and it is the logistics which may be the hold-up.

FAO - there is confusion in commodity markets

The impact of uncertainty in commodity markets is strong. If there is greater price volatility, it will be harder to plan for next year's production. The cost of production will also fluctuate with the price of energy. The cost of buying seeds will also be less certain. Even if prices have fallen from their highs, there is uncertainty with what should be the right crop mix by farmers which creates an impact on food security as reported in the latest FAO study. The impact on certain regions such as Africa are significant. The impact of food price variability is much stronger on the poor because they spend a significant greater portion of their income on food.

Confusion and uncertainty is never good for both consumer and producers of food. 

Sugar and corn connection

"Corn and sugar are becoming increasingly linked in the global markets, something that has implications for the prices of both commodities." from Agrimoney

Sugar is used as a sweetener and bioethanol simialr to corn. Hence, there is a substitution between these two crops that did not exist in years past. 

It may not show-up in short-term correlation but the relationship between corn, sugar, and oil is going higher. The cost of production in corn is more driven by oil. The output is oil driven. The same is true of sugar. 

The role of corn as a sweetener is also increasing. Corn syrup has been a cheap substitute for sugar. This relative cost will create a further link. 

Solvency not liquidity

"Four years into the crisis it is surely time to accept that the underlying problem is one of solvency not liquidity – solvency of banks and solvency of countries. Of course, the provision of additional liquidity support to countries and institutions in trouble can buy valuable time. But that time will prove valuable only if it is used to tackle the underlying problem.......But the underlying problems of excessive debt have not gone away. As a result, markets are now posing new questions about the solvency of banks and indeed governments themselves." Mervyn King, Governor of the Bank of England, 18th October 2011.


The balance sheet recession needs liquidity to provide for the fluid transfer of assets, but it cannot solve the recession. The problem is still solvency and that requires time and effort by both government, consumers, and businesses. The cost is lower spending in order to pay-down debt. The can be write-offs which will be helpful only to the extent that the borrowers have a higher propensity to consume and will not make the same mistakes again. Lenders will be hurt which has a direct wealth effect. Governments have to cut services. Businesses will have to delay investments. 


Governor King has it right. Liquidity buys time but does not fix balance sheets.

Information and attention

Herbert A. Simon's 1971 thoughts on the economics of attention: "What information consumes is rather obvious: It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention, and a need to allocate that attention efficiently among the overabundance of information sources that might consume it."

This has been one of the more interesting quotes that I have read in the last few months. It was picked from a thoughtful article in the Journal of Finance called "In Search of Attention". This is a very innovative research piece which tries to measure the attention that is given a specific stock based on the number of hits on google. The authors find that the stocks that are given more attention will rise and that there will be a subsequent reversal. The important point is that the world of investing is overloaded with information and that investors have to learn or allocate time to any piece of information. If there is more information available, there will be less time that can be spend on any given piece of information.

"A wealth of information will create a poverty of attention." Search is one of the key activities in economics. Search is associated with attention. Attention is a scarce resource because there are limits to the amount of cognitive resources we can use at any one time.

Our attention will be focused on the "chunky news", news that will come with multiple headlines. A specific news topic like the EU crisis will have chunky news. Limited attention will lead to category-learning. (See the research "Investor Attention, Overconfidence, and Category Learning".) Investors will often allocate more time to market and sector-level information instead of firm specific information. Investors who focus on category information will often be overconfident. The overconfidence problem is more severe in diffuse tasks that require difficult judgments and do not provide good feedback. The feedback is noisy and delayed. This can represent macro information when trying to project onto firm-specific behavior. When we have more category information, we will also focus on more firm-specific information. When macro data is easy to obtain, we will then go for more specific information.

One of the reasons why I focus on models is that it can reduce the attention problem because the model will force the focus of attention to key economic variables. While this can cause problems, there will always be a specific amount of time spent on looking at key linkages.

Sherlock Holmes and investment judgment

"It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts." Sherlock Holmes


Holmes would have been a great investor and provides useful information for any decision-maker.

Low yields and the end of money funds?

The low yields on money funds are forcing more investors to move out on the yield curve to longer-term bond funds, but these funds do not provide risk-free rates of return. This is changing the risk profile of investor's portfolios and killing an industry. Investors will be taking on interest rate risk that they never expected with their money.

Money market funds cannot compete under this environment and the result will be money flowing back to banks and way from what has been called the shadow banking system. This could be what regulators and government wants, but it will change the forms of financing and will reduce the potential supply of loanable funds. The cost of business will go up for those borrowing money and the rate of return for investors will go down. 

Fed as thermostat?

"The Fed thinks they are playing with a thermostat - the house is too cool so we dial it up a little bit, now it's too warm, so we dial it down," Rickards said. "In reality, they are playing with a nuclear reactor. If you get it wrong, you're going to have a meltdown." - James Rickards author of Currency Wars  in NYTimes interview

Rickards, the author of Currency Wars, may be extreme but the idea that monetary policy is a thermostat has been applied to central banks for decades. The idea that the Fed could control interest rates was applied as optimal policy during the early 1970's. The result of research shows that lags, feedback and expectations make trying to control monetary policy difficult. The result was a movement first to monetarism through long-term control of the money supply and then to inflation targetting. We have now moved back to the idea that central banks should control the thermostat and this places a new, but actually old, burden on the central banks. Precise control of monetary policy is dangerous. Asset markets can actually see more volatility given this desire for control. 

Gas shortages in the Middle East?

According to David Barringer, Oil & Gas Leader, Ernst & Young MENA, "While the energy strategies adopted by some countries in the Middle East may help improve their energy independence in the longer-term, in the short-term the region's requirements will also have to be met by imported gas."

There is growing talk that there are natural gas shortages in the Middle East as demand for power has increased. What if there is a natural gas shortage? Or what if there is less gas available for export to other parts of the world? The oil politics will change and the idea that we are ready for a new age of natural gas will only be a good news story.

Gas is supposed to grow at over 6 percent while oil usage may only grow at 2%.  41% of the world's proven reserves are in the region, but 73% are located in two countries Qatar and Iran. Qatar has a current moratorium new filed developments until 2014. There is not an even mix of supply across the Middle East. There are now problems with power and industry usage have to fight for access to natural gas. This is occurring in Kuwait with industrial demand actually falling over the last few years.

The gas bubble in the US is not shared with the rest of the world.

Is there a risk-free rate of return?

It has always been the case that there is an explicit risk free rate of return for benchmarking performance. It has usually been Treasury bills for the US and short-term rates for domestic G10 countries, but it is becoming clear that in the 21st century there will not be a risk-free rate. There is no meaning to the concept.

The idea is a risk free rate of return is even odder for the EU where there is now a differential between the pay-off of bondholders with a provision of the latest sovereign debt bail-out. The private investors will not get 100 cents on the dollar. They have to take a haircut, but government lenders will receive all of their principal.

A decade ago there was talk that there would be no risk free bonds available to investors. Now there is no risk free asset. There is no greater change in financial markets.

Private equity real estate or farmland?

Dr. Keith Black of the CAIA Association says for many investors, farmland falls somewhere between real estate and commodities.

"It’s basically private equity real estate,” he explains. “You have a farmland manager who acquires and manages the property for investors in a private partnership for maybe 10 years, owning and operating the farmland. But farmland responds differently to inflation than an office building does. Unlike the fixed leases and maintenance and depreciation costs on an office building that make it more like a 10-year bond for investors, with a value that declines with inflation, farmland is leased in one year cycles with income closely correlated to crop values. And you don’t have the depreciation and maintenance you see with real estate.”

World Agriculture Investment Conference October 4-5, 2011

There are significant differences between commercial real estate and farmland. It is simplest to start with supply and demand. Commercial real estate is sensitive to new construction. The supply will grow with construction and fall with depreciation and usage. There may a limited number of good properties but new supply can be be introduced to the market. That is not the case for farmland. There is limited number of acres of farmland and the supply is decreasing with urban sprawl. Farmland is also depreciating because of erosion and soil usage. The supply for new farmland will not get larger. Marginal land could be added but the size is limited. Switching of crops is also possible but again swithcing is limited.

Cash flows will have differences. Farmland will also be more sensitive to commodity prices because lease rates are reset every year. Farmland will also be affected by farm margins, so input costs are more important. This would be the equivalence of maintenance on a building. Farmland has higher risks in the short-run because weather will have a significant effect on the ability to pay leases. Prices can rise but if the quantity is reduced on your specific farmland, the value for income production is lower.

Real estate and farmland should be viewed as separate assets. Farmland is a commodity income and long-term price play and would be different than a commodity or commercial real estate venture. 

The changing complexion of farmland

In 1982, 94 percent of the state's farmland was owned by people who lived in Iowa, according to data compiled by Iowa State University.

But that resolve has waned. When the U.S.'s rural economy eroded in the wake of the 1980s farm collapse, many families encouraged their progeny to leave the land and find their economic fortune in America's cities.

The kids left. Many of them they stayed away. As the years passed, that familial loyalty to the land faded.

Today, about 20 percent of Iowa farm land is owned by people who don't live in the state, according to Iowa State University data. The average Iowa farmland owner is a single woman - often a widow - who is over the age of 70.

from reuters story

The family farm is going away and the land ownership is moving to larger wealthier farmers or land corporations. Will this lead to better farmers? Unclear. It will lead to more opportunities to own land as piece of the production process.

We are running out of soil

“Taking the long view, we are running out of dirt.” —David R. Montgomery, geologist

"The estimate is that we are now losing about 1 percent of our topsoil every year to erosion, most of this caused by agriculture," said David Montgomery, a geologist at the University of Washington and the author of the book "Dirt."

Jeremy Grantham, the curmudgeonly head of the money manager GMO, wrote about soil depletion in his last quarterly letter. “Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite.”

“Globally, it’s clear we are eroding soils at a rate much faster than they can form,” notes John Reganold, a soils scientist at Washington State University.

There are many reasosn to be worried about the future of agriculture and soil as well as water are near the top of the list. The National Academy of Scinces states that we are losing soil 10 times faster than replacement. The UN would argue that the lose rate to replacement is even higher.  It takes 2 bushels of soil to produce one bushel of wheat. The top soil is only about three feet deep around the world so erosion can have a significant impact. The replacement is only about 1- 2 inches per 100 years.

This is not an issue that will effect prices in the short-run, but it will have long-trerm effect and suggests that holding agricultural assets will be a good long-term play.

Central-bank bail-out through buying government bonds

Let's make this EU crisis hand-wringing easier. Just bail-out the governments by having the central bank buy government bonds. This is the historical tried and true method. Of course, if it gets excessive their will be strong inflation, but this is what governments want anyway.

The interesting comparison is between Britain and Spain. Britain looks like it has a worse gross debt problem and has a similar problem with the budget balance. There is, however, a significant difference between the interest rates that they pay. The British rates are around three hundred bps lower because liquidity can be provided by the central bank through the purchase of bonds. There is less of a risk premium with funding because liquidity can be provided. Given there is a output gap, there is little  reason to worry about inflation today so liqudity is still the key consideration.

The latest speech by ECB president Draghi suggests that he is, like other central bankers, are looking for ways to avoid using liquidity in the short-run to solve fiscal problems. There is a clear bias to have the fiscal ministers provide a solution and holdback liquidty as a last resort.

Berkeley Earth confirms warming

The Berkeley Earth Surface Temperature Group has done an outstanding job at providing a stronger statistical foundation for measuring the historical global warming. One of the largest problems has been the diverse data used to make judgments on global temperature changes. The data has multiple start and end dates. Multiple sites and measurement techniques. The data are from various research sources with different time lengths and reporting stations. They have been able to blend 1.6 billion records from 15 different data sources.

There is the potential for significant error in the data so that false conclusions or counterarguments can be used to draw different conclusions. The Berkeley group uses new methods to fill in the gaps and smooth the rough parts of the data. They are able to draw similar conclusions as other scientist but with greater strength from the data. Global temperatures have increased about 1 degree C since the 1950's. Even though some areas (about 1/3) have showed cooling, 2/3rd of the sample station showed warming and the overall result is consistent with the finding of other researchers.

The implications are strong. We can expect more warming and more weather volatility which will translate into greater commodity risk.

Sargent and Sims win Nobel prize in economics

Thomas Sargent at podium and Chirs Sims standing to the left.

Thomas Sargent and Chris Sims have truly had a strong impact on macroeconomics over the last four decades. Sargent drove the rational expectations revolution while Sims provided the econometric firepower to get us to understand the implications of shocks to an economy. There is not a macro economist alive today that has used or discussed their approaches to economics. You may not agree with the rational expectations revolution, but you have had to understand it and debate to be considered a serious economist. There have been excesses within rational expectations which are still being dealt with. Shocks will have real effects but the expectations change the behavior of economic agents. Building large econometric models to explain the behavior of an economy will never be done like efforts in the pre-RE environment.

Chris Sims will have as strong an impact as Sargent because techniques can be applied by all schools of thought. Sims, through vector autoregressive models, VAR, focuses on the impact of shocks to the economy. We can now measure shocks through time and see how they will play through the economy. Every econometric course focused on macroeconomics will have to learn the techniques of Sims.

We congratulate both for having a profound change on economics.

The deflation fear bias

Central banks seems to have a significant almost primal fear against deflation. Central banks believe they can control inflation but they do not have good strategies for dealing with deflation. With deflation, there is a strong decline in financial assets and bank stocks. There are further declines in housing values and overall wealth.

There is no money illusion when there are price declines. Tangible assets clearly will be worth less and all borrowers will be negatively affected. Borrowing or leverage becomes more dangerous. Perhaps more clearly, there is a fear of asset price deflation by central banks which is much greater than any fear of general price increases. Is because central banks are part of the creditor class? Hard to say. It is also unclear that central banks are able to control inflation. Look at the periods of hyperinflation. What is clear is that deflation cannot be easily solved and will have a strong wealth effect and central banks want to avoid this problem at all costs.

La Nina is expected to be back - look out commodities

Weather is still one of the single greatest impacts on commodity supply. La Nina, the little girl, will again create cooler than normal temperatures in the Pacific Ocean. This will lead to above normal rainfall in south-east Asia and eastern Australia. There is also a higher risk of tropical cyclones in the Pacific. The northern US will be wetter while drought will continue in the south. The southern hemisphere growing regions of Latin America will also be drier than normal.

The impact will be strong on grains and cotton in the US and a greater chance of spring floods. There will be heavy rains for coffee in central America, but dry conditions for the soybeans and corn of Brazil and Argentina. 

The weather is not supposed to be as severe as the La Nina of 2010-2011 but we can expect that there is again potential for extremes. This will place added stress on those markets which have low inventory to usage. 

Who really controls oil markets? - not speculators

When we look at global oil companies and interesting dichotomy exists. The largest oil firms are not private but state companies. In fact, the top ten oil companies are owned by governments. Exxon Mobil comes in at number 11 and Lukoil is at 15 in size. The next two private firms are at 19 and 20, respectively Royal Dutch Shell and BP.

So how can speculators control the price of oil markets when the largest firms are all in the hands of governments which may not have the same objectives as private firms own by shareholders and required to maximize profits?

State control of oil is the greatest danger to the oil markets.  

Financial repression and asset allocation

Carmen Reinhart and M Belen Sbrancia have provided a strong argument that finanical repression will be a solution to the government debt problem. They define three characteristics to financial repression:

1. explicit or indirect caps or ceilings on interest rates;
2. cresation of a captive domestic audeince for government bonds;
3. direct ownership of banks or management of financial institutions.

The objective is to get real rates low, so the cost of debt is low. Financial repression is an alternative to pushing economic growth or engaging in surprise inflation. Of course, growth should be preferred solution but governments have a hard time figuring out how to support private growth.

If this is the case, any portfolio based on holding fixed income as a safe asset will be a true danger. The real rates will eventually move higher and if there is ainflation or a loosing of the repression, there will be further  reasons for not holding bonds. Real assets will make sense in this type of environment so there is a reason to hold commodities which may not be encombered like fixed income assets. Equities will be mixed. There would be limited reasons for holding financial assets, so banks and other financial itnermediaries will not do well.

Farmland - the next bubble?

Farmland - "the dark-horse bubble candidate for the next decade " Robert Shiller.

This is an interesting analysis from a leading bubble and housing expert. Still the economics are very different. There will not be any great increases in farmland at any time in the future. Housing can be built. This is not the case for farmland. 

The best land is already being used. Any new lands are marginal and have highe risks. Any uncultivated farmland outside the US is also declining. The best land in Latin America is also in production. The best land in New Zealand and Australia which has limited political risk also has been put to use. The only new land that could be employed is in Africa and the "stans".  The long-term play is very strong; however, the short-run could be more diffcult.

With price highs in grain hit earlier this year, there is a greater chance of margin compression in the farm industry. Debt levels and interest rates are lower than the last timewe had a US farm land crash, but the price of farm land is still tied to the prices of commodities. Unfortunately, the talk of a bubble is based on the the delinking between land and prices.  The growth in land prices has moved ahead of commodity prices and does not reflect the volatility in commodity prices. This is the basis for the bubble story and the reason for short-term caution.

The change in oil geopolitics

The reserves in Canada are growing as higher prices make tar sands more viable. Deep water off-shore in Brazil should be huge albeit expensive and hard to reach in the short-run. Mexico may see greater drilling to offset the poor US regulatory environment. The US nautral gas business is exploding with new reserves. The rest of Latin America will see more reserve growth.

If all of this comes to reality, there will be a change in the geography of  oil. The center of the energy industry will start to move away from the Middle East. The long-term implications are significant. The Middle East will become less important to the US. The political risk of oil will decline. The chance of disruptive policy shocks will decline. 

Euro resilience - what will it take to fall?

With all of the problmes in the EU, it is surprising to not see the euro fall further. It has moved from highs of around 1.50 to 1.35 against the dollar. We saw the euro fall to the 80's in the initial post common currency period. The euro may fall apart yet the delcine is trvial relative to bond prices and equity markets. What gives? 

Rates are higher than in the US, but this seems to be silly reason to hold euros. We expect the ECB to be looser and we also expect fiscal policy to be looser to meet the fiscal shortfalls across the EU. The US is having problems, but we should expect a stronger desire for dollars, or almost any G10 currency.

Liquidity like water - necessary for financial growth

Liquidity is the core issue with the EU crisis. It is like water, a necessary condition for growth in agriculture. The funding cosst are getting tighter. There is a water/liquidity shortage. 

The only marginal provider is the ECB and we are unlikely to see then act until it is almost too late. Bid-ask spreads are increasing for all government bonds. Fewer institutions want to make markets or hold inventory for trading. Banks want to get soereign debt off their balance sheets. The Fed has had to provide dollar swap lines to help out EU banks. The lending facilities by the ECB are starting to expand again like earlier in the debt crisis.

The EU needs liquidity in the short-run not restructuring of debt. The restructuring pushes the problem forward but may not solve the liquidity issue. 

The Italian job in finance

The Italian job was a great caper movie about stealing gold in beautiful Italy. I was fun but in the final failure. We will see the same thing happen as the Italians try and steal liquidity from the rest of Europe. At about 125% debt to GDP and rates now at 7% for 2-year bonds, there is little room for a successful solutions. The movie had the stars balancing on an edge of a cliff trying to make off with the gold. The situation is a simialr cliffhanger and PM Berlusconi is unlikley to be as lucky as Michael Caine. 

Cannot make money trading currencies if there is no return difference

This has been a frustrating year for trading G10 currencies because there is little differntial between the strongest and weakest currencies in this group.  DB has measured the difference between the strongest and weakest at 8% instead of a normal 23%. The current issue with currency trading is just getting the dollar direction right, nothing else.

Rate differentials are low and intervention has been used to stabilze rates, so it is not clear whether this current tight differential environment will change. We do not like this environment because it places execess emphasis on the flight to quality - risk/on risk/off trade.

Can the US export economy be sustained?

Exports as a contributor to the current business cyle is better than at any time in the post WWII period. The idea of having a weak dollar to foster export growth has been working even with the flight to quality to the dollar over of the EU crisis. 

Exports for the US are diversified and not EU dependent. Our key trading partners are still Latin America and Asia, but we are still dependent on overall global growth. If the rest of the world slows, a weaker dollar may not be enough. 

Inflation is not going away

The core Fed view toward inflation is that it can be controlled around their core policy rate of 2% and that headline inflation shocks are temporary. The data may suggest otherwise. Headline inflation does have shocks that are mean-reverting but the data is more complex. Deutsche bank has shown that we have not seen a decline in food and energy prices since 1986 when we measure the numbers as a five year rolling average. This may represent a complete business cyle. Prices will rise and fall with the business cycle, but the general direction is higher. 

More important to inflation is that fact that renter costs which represent about 30% of the inflation index are increasing. with vacancies falling the cost of shelter is going up. This information suggests that it will be harder to keep inflation at 2% if we have any economic growth near trend.

Cleaning up bank balance sheets will make matters worse in EU

Banks have to clean-up their balance sheets. Regulators are requiring it and shareholders need to have it done.

This clean-up means that banks have to markdown sovereign debt. Greek bonds have declined by 42 percent since July. Banks have to stop buying poor credits, but if this is done the only buyers of last resort will be other sovereigns and the central banks. There is no escaping the economics of bad debt and the sooner governments realize this the better. The cleaning of banks will mkae the system's ability to handle new risky debt weaker. The options get tighter not broader over time. 

Government policies matter - the case of livestock

Argentina is a laboratory of what will happen if you do not get the right policies for Agriculture. Over the last five years we have seen, export bans and regulatory restrictions on livestock production. The results are simple. Argentina has moved from 4th to 7th with respect to beef exports. Per capita beef consumption within the country has moved from 72 kilos in 2009 to 53.2 kilos in 2011. Argentina no longer has the highest per capita beef consumption. 8,000 cattle ranchers have moved to soybean production. 

The cost of beef has skyrocketed. Some of this rise and adjustment is associated with drought, but the methods of allowing for markets to work are also critical.

Refining driving dip in oil inventory

When oil is cheap relative to end distillate products, refining margins will increase. If you can get cheap oil, you will run flat out and try and make as much money as possible. This is what has happened in the Midwest. The result is a fall in Cushing, OK inventory. NYMEX crude has moved from contango to backwardation and the spread between NYMEX and Brent has collapsed. 

Refiners who use North Sea oil or OPEC oil are not running at high cap utilization rates and have lower margins. The refining economics are simple, but will not last as inventories get tighter and prices increase.

Keystone XL pipeline - the future of oil dependency

The Keystone XL pipeline decision has been placed on hold until the end of next year. The will limit the amount of oil that can come from the vast Canadian tar sands reserves. We will continue to be dependent on distant oil. Of course, there are environmental issues which have to be addressed but an energy policy has to be base don multiple sources of oil. 

Canadian tar sands are expensive oil with the break-even costs at about $60 per barrel. Those will go up once the easy sands near the surface are used, but at current prices this is a viable and useful source of energy. Not building the pipeline will place stress on the global oil infrastructure. Canada now has the second largest reserves next to Saudi Arabia. It is a natural and a likely better source relative to deep off-shore oil

What happens when wheat prices rise?

Markets respond to incentives. Higher prices mean rationing on the demand side. Higher prices will cause more supply to be produced. What happens next? prices fall form the over supply. Look at the wheat market. Prices are the lowest in years and have declined form over $10 / bu in March to current prices of $6.36 /bu.

Stocks are rising after what seemed like a crisis last year. Production is outstripping consumption so the price of wheat has come down to a new equilibrium level.

See International Grains Council

Draghi takes action

Mario Draghi, the new ECB president, has decided to take action almost immediately with a 25 bops cut in the in the ECB benchmark rate to 1.25 percent. He also decided not to ramp up the bond buying program of the ECB. He said the program was supposed to be temporary.

Draghi has now shown that he can be a man of action although 25 bps in a crisis is not overwhelming. He is also a traditionalists by lowering rates instead of buying bonds. He also sounds like a president who will be interested n growth as well as inflation. He will unlikely be a large departure from now former ECB president Trichet. He seems to be a pragmatist who will not be pulled into the fiscal problems of the EU unless absolutely necessary.