Not everyone likes to talk about (let alone read about) macro.
I’ll go out on a limb here: to the extent investors exhibit an aversion to macro analysis, their revulsion stems from an unwillingness to think too hard. Yes, predicting macro outcomes with any degree of accuracy is largely impossible. But that doesn’t make macro pointless.
Indeed it’s through the study of macro that we derive hypotheses about tail events and black swans. Needless to say, hedging tail risk is critical when it comes to avoiding large drawdowns (especially in a world where cross-asset correlations are rising). Further, our hedges can result in big paydays when outlier events finally come calling. Here’s a succinct answer to the “why macro?” question from former SocGen analyst Dylan Grice:
Most people would see the macro strategist’s role as timing macro events … switching between defensives and cyclicals, adjusting duration, risk-on/risk-off trades, and so on … the only problem is that most of us are rubbish at seeing macro events coming, let alone timing them, as our evolutionary programming blinds us to events which are forecastable (and many are not even that). Perhaps we should embrace our limitations by accepting that ‘outlier events’ are actually quite regular, and use macro research to aid in the search for appropriate insurance strategies.
This is why I’ve argued that it’s important for investors to understand a few critical themes and trends that are likely to move markets in the new year.
One of those themes is political risk stemming from elections in the Netherlands, Germany, and France.
One important trend is the apparent shift from a negative to a positive correlation between stock and bond returns.
In the interest of helping to simplify what can be a complex task (the task of wrapping one’s head around the proverbial “big picture”) I bring you PIMCO’s attempt to succinctly describe the three most important “transitions” that look set to shape how we think about markets going forward.
- The transition from monetary to fiscal policy, which has gained speed with the European Central Bank (ECB) tapering the monthly run-rate of its asset purchases to €60 billion, the Bank of Japan (BOJ) abandoning its money supply target in favor of a yield target, and the next U.S. administration likely to embark on a more expansionary fiscal policy.
- The transition from globalization to de-globalization, which has been underway for some time but now looks set to accelerate as governments in the U.S. and elsewhere are likely to become more inward-looking.
- China’s currency regime transition from what was a U.S. dollar peg until August 2015 to the current quasi basket peg to what may become a managed or even free float of the yuan.