Developing a Macro Perspective
So this question is ideally directed to any professionals in the Global Macro world.
What are the fundamental building blocks of economics/history/politics required to be able to construct and develop macro trading idea's?
Or, in other words, if you were to construct a curriculum of concepts that you would expect any young trader on a Global Macro desk to know and understand, what would they be?
To put this in context, I'm a student very keen to get into the Global Macro trading industry after graduation who is trying to build up a knowledge base that could come across as impressive to a potential employer.
Thanks in advance for any responses; I've really come to value the quality and intelligence of some of the advice given on this site.
A good candidate for a Global Macro HF is typically someone who can do data analysis by programming (R or Python are sufficient) and be resourceful about Googling how to program. Everything else can be learned on the job. The trader/PM will have the ideas, but may not necessarily have enough time to test the ideas. That's where the junior analyst comes in. Majoring in finance/economics is less useful than majoring in CS/math/engineering for an entry-level FO position out of undergrad. The best course of action is to have both programming and economics expertise. A standard econ major is more than sufficient.
Interesting, I didn't know that the process would have such a quantitative base; although it suits just fine as I'm from one of those backgrounds.
Is that a feature specific of your fund or do all Global Macro HF's check their idea's with computational analysis?
I expect a young trader on a global macro desk to know and understand nothing. Most importantly, I expect such a trader to know that they know and understand nothing. Humility is a massively underrated asset that any young 'un should aspire to possess.
Haha, good point.
So out of the pool of talent that are hungry for a seat what separates the wheat from the chaff and persuades you to hire one monkey over another?
I think I might have actually written about this in an earlier post, although I can't really find it. Basically, the main thing that you need to realize is that, as a junior, your value is not defined by your knowledge and understanding of macro. Instead, your raison d'etre, so to speak, is to enhance productivity and improve efficiency. That's what you need to focus on and where you need to come up with a compelling, ideally unique value proposition that makes you the best possible "bang for the buck" bargain among all the candidates. It's a challenging task, but that's what separates the boys from the men, so to speak.
Interesting, I never really considered that, thanks allot. Just to clarify, could you add a little more colour to what you mean by 'enhancing productivity and efficiency'; I can appreciate that being a useful addition to a desk but it's pretty hard for someone on the outside to be able to tell what would make a PM's day to day job easier.
Yeah, that's, indeed, the challenge. Basically, you need to think about what particular skills of yours can be most helpful and highlight them in a convincing fashion. Like the other poster mentioned, an example of this could be Excel/VBA skills etc.
An example would be if an Excel model breaks, or a script that processes data breaks, can you dig through it and fix it with relatively little guidance?
This skill is pretty hard to gauge in a candidate, however it is relatively cheap to test out for 2-3 months in an internship. I can tell you at my macro HF, I haven't met anyone who got hired full-time out of undergrad for a front-office role without first doing an internship.
Thanks for the advice.
Looks like I need to learn to do something that's actually useful, which is a pretty scary goal for anyone who's been living the student life for two years.
What if we ignore op's context? What would you guys recommend doing to build a macro perspective? What elements? FX, Interest rate, job growth, historical bubbles, what else?
@LeadBalloon:
I have been on the macro side of the industry for slightly less than three years so I may not be as experienced as some of the other members.
Nevertheless, here are some suggestions:
1) There are some good videos you can watch for free: a) Ray Dalio's 'How the Economy Works'. You can also read some of the other essays he has written. b) 'Commanding Heights' video series - I found it pretty engaging and informative
2) Newsletters and blogs: I would recommend John Maudlin's free newsletter, FT Alphaville, Mish's Global Economic Trend Analysis, The Big Picture etc. You can follow finviz.com which is free and is a good aggregator of news and blogs. Krugman's blog and Project Syndicate are pretty good as well.
3) Books - I'd suggest pick one topic and read a book on it. For instance, you can pick the 'Bretton Woods Agreement' and read a book on it. Or you can pick 'Japan's rise and fall' and read on that - this is fairly time consuming so you need to be really interested in the topic. One way to develop interest is by reading autobiographies. I read Greenspan's autobiography and it got me interested in many historical events that he mentioned. Similarly I read a book called 'The Partnership' (history of goldman) and it got me interested in many events that were mentioned.
4) Free research by the IMF, World Bank, ADB (you can get it from their website - the IMF articles are very good)
5) Free academic articles that discuss historical issues (there are many fantastic academic papers on pretty much any topic that you can think of)
SB to you sir!!
Thanks allot, I have seen Ray Dalio documentry but I'll check out the Commanding Heights series sometime. And I'll start slowly working my through a couple of books that interest me.
The post from @stalagmite's blog is also a great thread about this same topic that's going on concurrently.
The more you continue to analyze from a conceptual basis and mix that with real world quantitative examples/live deals, the greater you'll be. Being honest, it'll take some time but you'll see. You'll learn, then you'll work and perform, but one day after some time you'll go in and SNAP, it'll all open up like an epiphany. Then what you don't know you'll know where to find it.
I started off from the bottom analyzing small commercial banking deals and then large corporates so I know companies work and finance themselves. Now I'm more macro and financial institutions focused. This has helped to understand how this all works together.
I'm not an economist, but it looks like this.
The government Sets policies and direction for the country. In doing this, they aggregate (or have firms aggregate for them) a lot of data and conduct a lot of analysis which winds up driving future investments and identification of strategic sectors. Things like manufacturing data, unemployment, exports/imports, etc....It also spends money itself, offering up large government contracts for the private sector to perform while pushing money back into the economy (fiscal policy). Other than revenues from taxes it also borrows large sums of money which influences the capital markets. Obviously there's different "political" forces on tactics and ideals on accomplishing these objectives. Actually, when the differences are so polarized it can render the government ineffective which can also weigh on its creditworthiness.
The Central Bank Kinda bank of the banks. Ultimately tries to control the money supply, M1 and M2 figures, etc. The level of the money supply determines capital for spending and investment. That availability plays out in inflation rates, interest rates, and the strength of the country's currency. They do this by driving monetary policies which wind up driving deposit and lending rates that influence saving, investing and lending, in general the availability of said capital. Now, it's supposed to be separate from the government, but sometimes succumbs to the political pressures. Also provides guidance for the banking sector.
The Commercial Banks This is where the rubber meets the road, IMO. This is where Main Street meets Wall Street. Banks facilitate the payments between entities and the flow of capital between savers and borrowers. These parties can include all, e.g. businesses, consumers, and the government. Credit is very detrimental because if we only relied on the capital in hand, the size of all economies and speed at which it moves would be smaller and slower. Banks also have a front row seat to local and regional economies in which the serve. They're also usually the first entry point to higher level financial services for investments and risk management as well for more sophisticated needs, such as the capital market services and insurance.
The Businesses Self explanatory. Commercial ventures that supply goods and services. They create value by commanding the factors of production, human resources, natural resources, and most importantly by turning intangible ideas into realities. Even more important, they pay wages to people like me. LOL
The People No discussion needed. Other than to point out that the level of employment of the people determines the production capacity of the country. Also higher the wages and wealth of the people, the greater their ability to spend money on goods and services which in turn supports economic activity. Think GDP per capita of $40k in an advanced economy versus the $6k in an emerging market. The people and their financial decisions along with the businesses, in my opinion, is the real economy. Everything else is in service to these entities.
To me, this is a simple explanation and understanding of how things work from a macro view. May not be what you were looking for but I think really understanding this will drive making sense of all the data and jargon.
Unemployment decreases production and lowers satisfaction of the people, if they get so unsatisfied, political instability, corruption and crime will ensue. Political stances around property and ownership can influence innovation and motivation of the people.
Higher interest rates slows credit growth, but encourages higher savings and investments. The more available savings and investments are, the more capital is available, and thus financial institutions may be willing to support higher risk ventures with lower percentages of capital at risk, albeit at greater returns required. Quantitative easing pushes more capital into the economy. Central banks buy security issuances and give governments and other agencies more capital to spend when they feel the economy needs a jolt, until consumer and investor confidence is strong enough to "keep the party going" so to speak. The balances of payments looks at flows into and out from the country. Inflows are things like cash flows from exports and incoming capital and portfolio investments from other countries. Outflows are things like spending on imports and interest payments on foreign borrowings. Understanding this shines light on the country's strengths, proficiencies, and major industries. Also points out deficiencies, lack of capital, or dependencies on key imports like energy, food, or natural resources. FX concerns and exchange rates can be driven by the assessments of each country in question on the above, such as, the direction of their economies and the respective interest rates in each. Also, there's the overall risk/reward trade off in choosing amongst other countries as well as the willingness to hold investments in the subject currency. Assessments of things like corruption and the rule of law can help determine what a legal fight may entail, how well contracts are honored, and the effectiveness of various agencies in implementing policies.
As mentioned already, the IMF, the World Bank, the rating agencies, as well as many central banks, the Economist's Economic Intelligence Unit, and even the CIA's website are great sources of information, data, and assessments.
Any investment with a component of foreign country risk should include at least some sovereign analysis too.
Hope this helped in some kind of way.
What an absolute gold mine of information. It's going to take me awhile to work and research through all these nuggets but this is all great. Thanks man, +SB.
A couple books on macro policy history I would suggest are Globalising Capital and Hall of Mirrors by Barry Eichengreen: http://www.amazon.com/Globalizing-Capital-History-International-Monetar… http://www.amazon.com/Hall-Mirrors-Depression-Uses--Misuses-/dp/0199392…
Eichengreen's ability to go beyond your typical theoretical frameworks and embrace economic history's complexity are the kind of attitude you need to have when looking at current events and assessing how strong your take on things actually is.
I would also recommend Ambrose Evans-Pritchard's column at The Telegraph: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/
The dude is on the conservative side by UK standards and it often shows through his euroscepticism, but you'd be hard-pressed to have read a better column on what has been going on in Europe over the past 5 years. Very sharp guy, he's like ZeroHedge minus the conspiracy theory angle.
LeadBalloon Notwithstanding GoodBread 's awesome reply and skepticism regarding theoretical frameworks, I'd encourage you to try and develop some (Michael Pettis' global Balance of Payments approach has been highly useful to me for instance). Your query inspired me to write a blog post on this issue which you can look at in case you are interested:
http://www.wallstreetoasis.com/blog/stop-reading-the-news-thoughtlessly…
I'm not saying theoretical frameworks aren't useful, but any framework that is broad it accounts for every possible scenario is probably too vague to lead to actionable insights. By all means use them, but remember that they're only tools (there is a strong tendency for wannabe macro traders to try to apply stuff like Austrian economics/"anything Friedman said" to their trading which is usually a recipe for disaster --> the market can stay irrational longer than you can stay solvent).
Going by a credit cycle/business cycle model is very helpful when trying to understand the potential severity of a crisis (see 2008-2009) but ultimately can only do so much in knowing how to position yourself for an eventual rebound (and what if the regulatory pendulum (see Soros' Alchemy of Finance) fails to swing the way it did back in the last financial crisis? Does that shorten the distance to the next financial crisis?).
great insight, thanks guys keep it coming :)
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