Historical Review of DGA Research
Dr. Andres Drobny
Andres brings a strong understanding of macroeconomics, market fundamentals, and tactical trading to his research, which he approaches as a living discourse on global markets. He thrives on providing running commentaries of events as they unfold, aiming to catch key inflexion points in markets. He approaches his analysis from a trader’s point of view and grounds all research and analysis in hard trade ideas. Debate without hard trade ideas, Andres likes to say, should take place in the bar, not the office.
Andres is first and foremost a currency expert (ITHOM – Pages 119-121), having gained notoriety in December 1991 when he appeared on the front page of a prominent European newspaper predicting a breakdown of the exchange rate mechanism in Europe (International Herald Tribune article). The ERM crashed nine months later and the European currencies entered into a two-year process of massive adjustment and volatility.
He soon moved on to Credit Suisse and took part in building a currency business during the 1990’s. He helped the CSFX team navigate and profit from the dislocation in Europe that took place in 1992-1993 and was instrumental in building the CSFX client base, especially with hedge funds. His daily notes and commentary became part of the regular diet for top macro hedge funds and traders. His constant dialogue with top traders led to the term ‘smart guy or gal’ (SG) entering his pieces, which features today in DGA research. Capturing the dialogue with SG’s proved popular. This is also when the concept of a ‘favorite trade’ developed (ITHOM – Page 121).
In 1999, after taking a few years off, Andres founded Drobny Global Advisors and began writing the Drobny Global Monitor, a regular markets piece distributed to an elite group of hedge fund managers and proprietary traders. “Where most research tends to be factual, Andres Drobny’s research is a daily thinking piece. He’s good at finding inflection points in markets, and identifying risk/reward tradeoffs that make sense,” says Jim Leitner, a client and hedge fund manager. Andres soon coined the phrase “The Great Experiment” to describe the reflationary response to the threat of private sector debt deflation, which threatened to engulf the western world (Research – 09/06/01). His biggest trade at that time was to sell the USD, and he presented the idea to buy the euro at the inaugural DGA Conference in April 2002 (Conference Review – Santa Monica 2002). At the following conference, he promoted the idea of buying the Brazilian real versus the USD (Conference Review – Santa Monica 2003). The timing on both trades was spot on.
The concept of The Great Experiment allowed Andres to propose selling Treasury bonds in May 2003, when the second tranche of the Bush tax cuts were passed (Research – 05/23/03). Bearish economic sentiment permeated markets at this time, marking the bottom of the interest rate cycle. Although he had the right call on bonds, Andres readily admits that his constant fear of debt deflation made him bearish equities for far too long, especially emerging market equities (Guest Research – Invisible Hands Chapter 2). However, when the next phase of the deflationary process began to unfold, in 2008, he suggested selling copper as a good deflation bet. It was still trading near all-time highs in April 2008, even after equities had started to tumble (Research – 04/14/08). That was also the topic of his presentation at the Drobny Global Conference in Santa Monica later that month (Conference Review – Santa Monica 2008).
Andres has since used the concept of The Great Experiment to understand the nature of the policy reaction when the second more severe bout of deflation emerged in 2008. And, it allowed him to react to the monetary and fiscal stimulus that soon emerged in response. Although he has been agnostic about whether the stimulus would succeed, he argued that it certainly improved the odds (Guest Research – Invisible Hands Chapter 2), leading him to buy emerging market equities in late 2008 (Research – 12/08/08), which proved timely. And, at the 2009 Drobny Global Conference in London, Andres presented a reason to buy the USD as the Obama stimulus measures were about to boost growth at a time of general pessimism about growth prospects and the USD (Conference Review – London 2009). He followed through with that recommendation in a research piece entitled “Sea Change” on December 4th, 2009, which caught a turn and subsequent 20% rally in the USD over the next 6 months (Research – 12/04/09).
This analysis also helped him understand a flaw in the global stimulus operations. “The Great Macro Experiment,” he argued, “is both an attempt to avoid a 1931-32-style downturn and an effort to prompt an FDR-type vigorous recovery. It is not an easy task to do both” (Guest Research – Invisible Hands Chapter 2). He also foresaw a looming political problem for Obama: no one gets credit for saving jobs. It is possible he did not let things get bad enough early on, limiting the potential for a strong rebound. The danger is a loss of credibility and a possible rebellion against additional stimulus (Guest Research – Invisible Hands Chapter 2). In the summer of 2011, as the latest storm emerged, Andres recommended selling the DAX in July (Research – 07/19/11), and copper in September (Research – 09/12/11). In between – while on vacation (!) in August – Andres spotted some moves by the Swiss National Bank, stepping off the beach to send out a quick note recommending the sale of the Swiss Franc (Research – 08/11/11). It fell by 15-20% in the following two weeks.
2012 is when the big turn in the Yen began. Andres turned negative in early 2012, at time when the Yen trade weighted index was at a peak and well before Abenomics came into focus. He argued that the effects on the Yen of a trend deterioration in the underlying Japanese trade account had been masked by capital repatriation into Japan from the Eurozone (Research – 01/31/12). The Yen trade weighted index collapsed some 15% that year. In 2013 Andres again was involved in the short Yen trade, but into Q2 he advocated several short US interest rate trades on the argument that the US economy had been surprisingly resilient to fiscal tightening enacted at the start of the year.
Of course, Andres gets a lot of things wrong. And, that was with equities in 2012, when he got bearish near the lows in June 2012, as he overestimated the probability of a Eurozone breakup. But like all good traders, he tries to get big trades right and smaller trades wrong. The loss on the equity puts he advocated at the Geneva 2012 Conference in October 2012 was the upfront premium paid. As Andres consistently advocates, if you are a good risk manager, even being right half of the time means you should be very profitable. This approach, combined with making things interesting, fun and interactive, is what keeps people constantly coming back to read, discuss, debate and dispute what Andres is thinking about and proposing.