Top Down Macroeconomic Framework

Yes, I strongly recommend that as well - it's helped me tremendously. Keep in mind it is only one view of how the economy works. There may be times when unique things happen that don't fit into historic frameworks, like negative interest rates, for example.

http://www.bwater.com/Uploads/FileManager/research/how-the-economic-mac…

After that, Alchemy of Finance is also great.

Would you be able to recommend any books and/or resources that I could use in order to bridge my knowledge gap in terms of the things you mentioned above?

I would also add understand how interest rates work.

Burke:

I would start with Bridgewater's template, which identifies the following 3 cycles as the principal drivers of economic activity (growth and inflation):

1) Secular economic growth (productivity);
2) Long-term debt cycle (50+ year leveraging cycles);
3) Short-term debt cycles (business cycle).

For the first cycle, I'd recommend reading about demographics; and the importance of institutions, geography and culture to economic development. Few macro people take the time to study this - and they pay for it when there are structural economic shifts, underpinned by these secular drivers (e.g. China in recent years; read The Volatility Machine).

Ditto for the second economic cycle. To understand this, read the economic history literature on deleveragings (e.g. This Time Is Different).

As you get a better grasp on leveraging cycles, you'll start thinking about how money/credit are created and grow/contract. Which will help you understand what drives business cycles (hint: it's not just commodity prices and central banks).

With a better understanding of these 3 cycles, you'll have a template for thinking about various economies; or the global economy. And you'll be much better at drawing linkages between data points reported in the financial news and broader economic trends. Keep in mind - this'll take a long time to do. You will need to read and think - independently, deeply - a lot. And, as setarcos says, it'll only get you to an entry-level understanding of macroeconomics. And there are other, important, things that drive markets - e.g. market microstructure (flows), sentiment, technical analysis, etc. But you didn't ask about those. And what I've outlined above will take a long time already. Hopefully this list can help you on that journey: https://docs.google.com/spreadsheets/d/1VATJoEDTPp...

Amazing advice, like always! Printed your post to assist me in my development. Thanks a lot!

Do you have an opinion on Niall Ferguson's books on the economy (The Ascent of Money, Cash Nexus, I hear his series on the Rothschild's is a good primer on the debt markets)? He's a harvard historian but launched a macro research firm a few years ago.

Agreed.

Op, after you're done with Esuric's recommendations, check out "Applied Value Investing" by Joseph Calandro Jr.

Edited to add: The book is great for Security Analysis with economic cycles in mind.

I've been using the Economist Intelligence Unit service for about forever. Their stuff is great. I don't know if Roubini does full macro data sets. But you can get downloadable data for statistical analysis from OCED (UN) site, some from the World Bank and always poke through the mass of stuff the EU (Europa) has on line. God bless the Europeans. They love to throw up literally everything they know and can collect on the internet.

I second SophieinBK, the Economist is one of the best.

OP, is the RGE Monitor stuff even that good? Always wondered.

I had an opportunity to subscribe to it and its pretty much above average....I have not seen similar research pieces from elsewhere so cant comment on how good or bad it is but I have found it to be okay to start with.

If anyone is interested in seeing the Roubini work for free, please email me for complimentary trial access. Thank you.. rich.rossi@roubini . com

You could look at smth like this: http://markets.ft.com/research/markets/overview

Thanks!

Not sure what else the US could have done to keep China from being cheap. Export economies gonna export, slave labor gonna slave.

But I'm definitely interested in the article. Please PM if you manage to find it.

Have a free bump.

I'm thinking you mean this guy: http://www.tnr.com/print/article/economy/91905/economy-wall-street-defi… (From this thread: http://www.wallstreetoasis.com/blog/superb-article-on-the-big-picture)

One of the most interesting sources is marctomarket.com.

This might not be the most scientific or factual response, but off the top of my head I associate with group #3 the most. I don't agree with the ZH mindset (G1) that someday soon financial Armageddon will commence and ZH and the doomsday preppers will be the ones will all the gold and canned beans while civilization has no $ or food. I also don't agree with the people that literally don't look at the numbers, trends, or history and say this is not right. The debt the US is continually raising & it is scary. The volume of printing the US currency is scary. The trends in real estate is also concerning, considering the history, it's amazing people are adopting similar lifestyles they had in '05.

I don't think we are on the doorstep of doom, but I don't think all is well. I feel that the US needs to carefully manage the debt, budget, and economy. With regards to financial matters I feel politics is seriously damaging the economy.

The way you are formulating it is very biased towards group 3 imho

I'm not sure how mutually exclusive #2 and #3 are. I think the US economy is starting to show signs of life and inflation is in check, but at the same time we have to be careful of raising interest rates if/when inflation/stagflation starts to show up. I think the key question is what will nominal growth be over the coming years, and what will be the corresponding inflation, and how will all this differ for US vs Other DM vs EM countries. I don't have a good answer.

Group #3.5: We are fine, but assets are more than a little frothy. The risks of anything approaching hyperinflation are vanishingly small, as most of the growth in the money supply has been accompanies by a decrease in the velocity of money. Nonetheless, the Fed has to be careful to withdraw stimulus in a timely manner to reduce such risks and return markets to normal functioning

Over the next few years the U.S. economy will face tailwinds from decreasing energy, rising consumer incomes, and the end of the consumer de-leveraging cycle. Debt/GDP will fall as economic growth is driven more by consumers/ firms than by govt spending.

Asset price correlations will fall, and security selection will become more important than asset allocation.

Bernanke's a rigorous researcher of the 1929 crash, so up until now he's managed the deleveraging in a good manner. I came across this great piece the other day regarding the whole system employed by central bankers post-1971.

Food for thought:

http://www.visualcapitalist.com/wp-content/uploads/2013/11/global-gold-…

99 times out of a hundred, middle of the road is the answer.

Awesome that you mentioned ZeroHedge

This depends on how much money you have now. If you have no money you will be fine, if you have some money you will be fucked, if you have lots of money you will be ok.

Group 2, but for different reasons than described. I don't think QE and Ben Bernanke are helping the current expansion--in fact, I think it's holding back growth.

That being said, the hyperfocus on the Fed has led to strong fundamentals being underappreciated, and sentiment is nowhere near the optimism typical of a mature bull market. So I think we're basically at the halfway point of a growth period and even better times are ahead, even though pockets of protectionism and weakness will still exist.

Strong Form Group 1. Although I don't think the high inflation/hyper-inflation is likely to show up in the government reported figures, given this would be extremely costly for the U.S. govt in the form of dramatically higher interest payments. Instead we'll just see fast food workers making $15/hr. Can we all just call QE what it actually is: "debt monetization". The Fed itself has said there is no need to unwind the bond buying, but instead they can "hold to maturity"-- that's exactly, precisely, what monetizing the debt is. They've just created a complicated enough Enron-like structure between the Fed, Treasury, GSEs and banking complex, so that most of the paint sniffing U.S. doesn't see how the actual mechanics work. And then they nod their heads when they see CPI print at

A good write-up on hyper-inflation from GMO from earlier this year --- it brings some of the fear back in line with reality:

http://goo.gl/evuyel

On another note, a basket of currencies to make up the world reserve currency (SDR or something like it), in order to largely replace the dollar is interesting. It would likely lead to a decrease in our (US) standard of living. I don't see this as an apocalypse though, just more of a gradual effect of globalization.

There is going to be a larger and larger divide between capital (the "rich") and labor (everyone else). Technological unemployment is eventually going to lead to a guaranteed minimum income (like negative income tax) or there will be massive unrest and stagnation --- this a bit longer term though.

Robert Prechter, who is pretty legit, is predicting a pretty significant decline to come shortly.

http://video.foxbusiness.com/v/2929896324001/in-the-midst-of-a-major-st… http://video.foxbusiness.com/v/2929896325001/stocks-headed-for-2-3-year…

His argument is basically that we're in a bubble that is sustained by ridiculous leverage multiples.

I don't believe we are doomed but some major corrections will happen in the future as markets fight central planning in interest rates, this opens new opportunities.

Option 2:

Hyperinflation is not possible through QE as bond purchases are 'sterilized' in their ability to affect any standard measure of money supply - there also simply isn't enough demand for it either. The majority of assets are not in bubbles. There are a lot of idiots running around with their heads chopped off because they think any sustained rise in stocks is unnatural because the memory of 2009 is still baked in everyone's minds. The fact is, sustained increases are more normal than choppy or corrective markets. Not only that, you can't predict a bear market with one isolated statistic and typical financial panics have more of a psychological aspect to them than pure numbers.

Growth is slowly returning to normal. Europe has pulled back from the brink, China is creating reforms to encourage consumption led growth which will likely have a greater effect on world GDP than most people realize (over the long-term, albeit). Congress seems to have learned that debt-limit showdowns are retarded and the polarization in the house is waning (just look at the lack of disagreement over the latest budget bill).

Oh yeah, and if you're referring to Zero Hedge for any economic/financial information, don't forget to put your tinfoil hat on before leaving your computer.

I'm surprised this hasn't made an appearance in this thread.

//www.youtube.com/embed/PHe0bXAIuk0

I'm far from being an expert on macro economics, but just take a look at the chart at 16:37 before commenting. Can't find a way to embed that chart separately.

I think we're fine, group 2. Although i'm hoping the middle class will be able to get stronger in the next decade and not weaker.

1. ZeroHedge is actually a really good resource. Certainly much better/more complete than what you'll read in the Journal or bloomberg.
2. Gold has a higher Sharpe ratio than equities.
3. Gold has a higher Sharpe ratio than bonds.

Seriously, what more do you want? Haters gonna hate. Others will make $$$ buying super cheap mining stocks and gold bullion.

There are only two schools of thought in the discussion: Austrian Economics and Keynesian policies. What we're experiencing right now is a Keynesian model. I do not think we will see the end of the world by the next decade, but the fed's actions certainly are not what's best for the markets. QE is not real money, plain and simple. There is no way around it. No way to argue in favor of it. Eventually the payments will have to come from somewhere real, you cannot borrow forever. Payments will come from someone's pockets(taxes), some future growth opportunity(taxes), some future investment(taxes), and that will, of course, restrict growth and production. Right now it has not created a negative effect because we are just front running our debt by borrowing MORE debt, so no adverse actions have occurred. But we cannot do this forever. Not because it is unethical, or because it would "look bad" to have $10 trillion on the Fed's book, but literally because it is an unsustainable model. The more the fed borrows, the more it has to pay(interest). Eventually it will come to a tipping point.

So, if the fed reduced its borrowing now(tapered) I think we would be okay. But at the current rate, there is nothing to indicate this, or a spending decrease in general, to take place. Eventually, we would HAVE to default on our loans. That is a fact, plain and simple. We cannot continue to borrow forever.

In response to the market itself, the reason people are calling for a bubble or speaking of frothy prices is not because they are doomsdayers(some are) but because nothing fundamental has actually pushed up prices; it has only been QE and the cheap liquidity(almost free money) caused by the low rates. Company profits are because of stock buybacks and employee cuts. There has been no actual recovery. Look at a 30 year chart of GDP, no growth is taking place. It's the equivalent of giving a poor person a credit card and calling them rich because they are able to buy a bunch of stuff. Yes, they will be spending like they are rich, and possibly give off the appearance of wealth, but of course, they are not actually rich, and will have to account for their borrowing at some point in time.

QE is going directly to Investment banks(45Billion of qe purchases are Treasuries and 40billion are MBSs). Banks, both foreign and domestic, are the primary receipt holders of those securities. That money has to go somewhere. With rates being near zero, it is not going into fixed income or bonds. So, it goes into the equity market. QE is the only reason the market has gone up so much since 09(some recovery would have taken place naturally, but the incredible returns, especially in 2013, are solely due to QE).

The reason inflation has not hit is because 80% of the funds from qe are being held by the reserve. The fed is literally paying banks to hold money that they gave them. it would be like me giving you $5 to let me keep $20 that i just gave you in my pocket. The minute the fed cannot afford to hold all of these funds in their reserve that money goes elsewhere, and boom, you have inflation. that is why the fed is trapped. They are paying the reserve rate/fee with QE. They are borrowing from the future(tax payers) to pay for their current debts. They cannot stop QE right now in fear of inflation.

yes, QE has worked for the moment, but it is by no means a good solution and will end very badly if not corrected. There is still plenty of time to right the ship, but if continued, it fundamentally cannot work. There is no argument about that. It's simple math. I would love to hear an argument in defense of QE.

Nice - glad you ran the #s. It's been awhile since I've done the calc, and obviously starting and end points matter. But I think starting in 87 is way too late. Gold was $35/ounce in 1970. Your data starts at $450! It had already done more than a 10-bagger by that point.

Here's what I'm getting: I use monthly data over two periods i) since 1970 and ii) since 2000. The long period the S&P has actually caught up. Sharpe for the S&P is 0.53 vs. 0.50 for gold. Still pretty good considering the horrible yr gold has had.

Since 2000 (e.g. easy money policies), gold has handily beaten. The Sharpe for the S&P since '00 is 0.20, vs. 0.67 for gold.

https://docs.google.com/spreadsheet/ccc?key=0AndCUjb9VV86dENWb0ZENTYyN3…

Overall, I think this just goes to show that those who preach the "diversification" mantra are full of shit. You can do just as well holding 'real money'/hard assets as you can being diversified across the top 500 stocks.

OK - you got me. I didn't include dividends, and you're right, that PIMCO series seemed strange to me. My B-unit is acting up and I'm too lazy to pull the total returns data the ghetto way.

But the one defense I'll make is if we include dividends we should also consider tax consequences. The tax you'd pay on capital gains and dividends for the S&P would likely outweigh the value of the dividends (e.g. 15% x total return). Conversely gold bullion gains accrue tax-free, at least if you know what you're doing. I'll take the 3500% tax free from holding gold over the 2000% + dividends minus taxes from the S&P.

All three of these camps place far too much emphasis on "us" as a sovereign economy entity for my tastes. Who cares about how the U.S. fares? Economic units come and go, but the underlying progress of humanity doesn't take cues from the decisions of aristocrats.

Human productivity is at an all-time high; technological innovation is occurring at break-neck pace; we have nearly doubled expected lifespans in 150 years; global population is at record levels, yet food, goods and services per capita are greater than at any point in history; in the Western world, "impoverished" people have TVs, cars, refrigerators, microwaves, air conditioning, etc.; I could go on.

Despite 100 consecutive years of apocalyptic predictions, we are at the peak of human civilization. What would give you any indication that this trend is suddenly tipping in the opposite direction? Virtually any projection from decades past that anticipated a world "worse off" in any way, shape or form was so hilariously incorrect as to make the entire idea of "macroeconomic forecasts" absurd.

In a globalized planet, human progress doesn't yield to prognostications or political engineering. Economic growth moves to those countries which most support business and entrepreneurship. Geography or sovereignty makes no difference.

That's my perspective. Consider me an optimist re: human ingenuity and a pessimist re: political efficacy. For the first time in contemporary society, countries and governments answer to the will of people, not the other way around.

3

Thanks for the responses, job.resume.

Here's my rebuttal: let me be specific about my statement that a government cannot borrow forever- of course they can, and will, borrow forever. What I am saying is that they cannot continue to increase their borrowing YoY. I hope we can agree on this. If they continue to pay for their debt by front loading it with future borrowing they will eventually get to the point where investors will not trust their ability to pay it back. This would cause interest rates to rise becasue there would be less demand for Treasuries, and that would expedite the government's insolvency. I hope you are not saying the government has an unlimited bank account. Eventually shit would hit the fan.

In regards to the market: yes, the market is not exorbitantly overvalued- PE is not high in historical comparison. The problem I have with the current market is that until recently(last 10 days) it has solely been driven by QE. Good economic news was bad investor news because anythinig that resembled a recovery threatened the continuation of QE, and the market responded adversely to this news. Every time. So when you say that earnings are justifying prices, I would counter by saying that earnings, or EPS, are not due to production and actual growth, but a result of cheap money- a result of rates being so insanely low due to QE. EPS are being pushed up by stock buybacks more so than actual growth and production. I think this chart helps demonstrate how dependent the market has been on QE. And then, of course, the fact that all of that QE money has to go somewhere, and it is not going to lending(lending is still significantly down) and it is not going to fixed incomes, since rates are so low. So you, again, have government money pushing prices up. QE won't last forever, so when QE stops, there will be an adverse effect in the market.

http://www.forexlive.com/wp-content/uploads/2012/09/SPX-QE3.png

Just look at how the market has reacted with every FOMC announcement this year. I think that's why sentiment is shaky, and that's why I would say we're not in bubble territory, but in an area where one should tread carefully. Again, because current prices aren't wholly justified by their growth and production, but because of stock buybacks due to cheap money and restructuring. I got it, the market generally only cares about value, so it does not matter where that value is cominig from- actual growth or buybacks and a restructuring workforce- but long term, those are not healthy practices for businesses and the economy. I would argue that is the reason for apprehension.

The goal of QE is not to create hyperinflation, and that is the risk that comes with qe. So, my fault for not being specific. But to clarify, QE was initially employed to prevent deflation, and more importantly, increase consumer confidence and spending by lowering rates, which you need a rise in inflation to do. But at this point, they are no longer afraid of deflation, there is far too much money in circulation to worry about that. And I didn't get it backwards; yes, the fed is buying assets from banks, which gives the banks cash, BUT, the fed in-turn offers banks a competitive rate, called the IOER to hold thier funds with the fed(they are currently holding $2.5trillion, or 80% of QE) you can conjecture why they are holding all of these funds, but I would argue that it is because the fed knows the minute they stop offering a competitive rate(something higher than the risk free rate) banks will take that money elsewhere. And what will happen when 2.5 trillion floods the market? Hopefully we can agree you will have problems with inflation, and not the intentional inflation desired by QE.

http://en.wikipedia.org/wiki/File:EXCRESNS.png

And maybe I am missing something here, but how is the fed receiving funds from the assets they are buying??? They are buying MBSs and Treasuries. MBSs have absolutely no value; the fed is just buyin them to help clean up banks balance sheets. Treasuries are issued by the treasury, soooo how would they be making money from themselves? yes, they can buy a bond they initially issued and pay themselves the interest that bond accrues from their own pockets, but how is that making money?? Again, maybe I am missing a big piece of this, but that doesn't add up to me. Yes, bond prices move inversely to interest rates, but that would still be a zero sum game for the fed.

To reiterate, I am not a doomsdayer saying QE will cause the end of the world, I'm just arguing that I don't think it is the most effective means of allowing our economy to heal.

sorry for the long post, just tryiing to be thorough.

Group 4: Hedge and hedge against your hedge. Trade around a core on your hedges. Who cares where we'll be in the next 10 years? Your a Capitalist. You don't pick sides you pick opportunities.

Group 5: someday all countries will end up like japan. no room for new growth and if it wasn't for disasters an endless population explosion. All fiats will eventually be equal. 1:1 trade. Look how the peso has moved closer to the value of the dollar in less than 50 years.

Group 1... I think the US is in a bubble. Growth since 08-09 fueled by debt and MS. US debt is increasing by the minute and we are at a market top, having topped SPX highs a few months back. I seriously don't think this is complicated, and people are over-complicating this too much. Just take a look at the sp500 daily/monthly scale and zoom out until you have the 2000-2014 period on your chart. Up, down..., Up, down... Up, guess whats coming next?

Good thread. Agreed on Tesla - not sure where I saw this but a recent poll in the U.S. said 27% of respondents had even heard of Tesla. I know people in several states, from different backgrounds, that are itching to buy a Model S.

In the same vein, I'm bullish on SolarCity and looking to short California utilities, such as PG&E. Technology is moving too quickly for these mutual funds (which are propping up stocks) to adjust, and there has been a strong push for PV in residential. Decreasing energy demand + Fixed costs = Death spiral.

I'm long SCTY at this very moment as well; I have some faith in Elon Musk