Stop reading the news thoughtlessly and develop a macro framework.

When I joined the industry, fresh analysts like myself would flit through the morning newspaper like a drowning man who clutches one spar after another for support. Our attempts to stay abreast were as haphazard as that man's attempts to stay afloat. On page 1, we would read an article concerning Greece's tussle with Germany but forget it by the time we reached page 8.

It took me some time (two years) to develop a coherent macro framework on which every news article now fits to compound my existing knowledge. It took me an immense amount of conscious effort (reading) to become familiar with historical context of individual economies but the rewards have been so fruitful that I would encourage every young analyst/associate (or potential analyst/associate) to do the same. This is because unless you know the historical context, the time you spend reading news/raw information will be much less productive and when the need for that information arises, you will most likely find your memory wanting.

A very useful way to start is by examining global balance of payments. The beauty of analysing balance of payments is that the world is a closed system so actions in one part of the world (for instance QE in the US) will necessarily create an equal and opposite impact on other parts (Japan or Eurozone or China). Balance of Payments data is available on the IMF website for free and you will easily find free articles on the Internet analysing historical trends in major economies. A very good example at the moment is the Eurozone's surplus (driven by Germany's surplus and deficit reduction through unemployment in peripheral economies, especially Greece), which combines with China's surplus and efforts by the US to reduce its deficit to create a potent threat of rising global unemployment and recession - i.e. the world is experiencing a savings glut.

Another useful approach is examining business cycles. Ray Dalio's 'How the economic machine works' is a very good video on understanding business/credit cycles and I'd recommend his other essays as well. Latin American economies are going through a bad patch right now, Eastern Europe was battered last year by the Ukraine/Russia conflict; the Eurozone had its last crisis in 2011/12, the US in 2008 and Asia in 1998. As a result, most regions are experiencing very different phases of the standard business cycle but it is helpful to remember that the world is much more coordinated than we think and regional influences (which may seem very important) often give way to an overwhelming global bull or bear market.

A third approach is examining domestic fiscal and monetary policies through the lens of a simple IS/LM model (or Mundell-Fleming model). Paul Krugman does this brilliantly in his blog. For those of you who need to refresh their IS/LM concepts, Khan academy videos are a good source. For those without any background in macroeconomics, Gregory Mankiw's 'Introduction to Macroeconomics' is the gold standard for Macroeconomics 101.

For most developed market economies, there is enough good content online to understand the historical context by individual economies. For emerging market economies, I find rating agency reports to be a fairly good source. If you do not have access to rating agency reports, I'd recommend IMF articles (which are free), in particular the Article IV reports, as another good source.

Once you have developed a historical context, you'd find that the time you spend reading macro news can be cut down to no more than 30 minutes a day and you'd still be well informed on the important global macro trends.

I would love to hear about approaches that have worked for others (such as the balance of payments approach, business cycle approach for global macro) and would also love to hear any thoughts on how to understand a larger breadth of industries. I definitely think that industries are under-analysed and stocks over-analysed. I have met very few people who understand industry dynamics across a wide breadth and can suggest relative value opportunities across industries the way a competent analyst can highlight such opportunities across stocks in his/her coverage universe. So appreciate thoughts from equity strategists/investors etc.

Mod Note (Andy): #TBT Throwback Thursday - this was originally posted on 4/19/14. To see all of our top content from the past, click here.

Comments (53)

Apr 11, 2015
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Apr 12, 2015
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Observe. Learn. Share.

Apr 12, 2015
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Cause who wants to be in the 99%?

Apr 12, 2015
Apr 12, 2015
Apr 12, 2015
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"My dear, descended from the apes! Let us hope it is not true, but if it is, let us pray that it will not become generally known."

Apr 12, 2015
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Jordan Liang

Apr 18, 2015
Apr 19, 2015
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kqrckfls

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