Just as the title says...would very much like to do a better job of this and would love to hear from those of you that have to do this for your work every day. What books do you recommend reading, and what news do you specifically try to seek out? In addition, what are the thought processes that you try to use when looking at current events? Thanks.
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Interest rates are big.
Interest rates do play a part but I think those are a tool used after the fact or a symptom of something bigger that's happening. I try to find long term trends that are setting up and are all but certain but have been ignored b/c frankly it's an area that is boring to retail investors and there's currently something else that's flying high to institutional investors have their money elsewhere currently.
Would tend to agree with these...of course you definitely have to keep track of where rates are going...but they seem to be "symptoms" if you will, not the underlying issue as you say. They change because certain things are happening or not happening that forces the hand of the central banks. Of course, this drives FI and currencies, so it has a massive effect. But I guess it just feels almost too simplistic to look at rates...you almost have to anticipate the rate changes because it's pretty helpful if you can get out ahead of the other guy.
Fundamentals are about rate of change and sustainability of the current fundamental situation. Take housing during the crash for instance...if the home values have been decreasing at a rate of 20% per year(or whatever figure you choose) and home values have already declined 50% from their peak; how much farther are you willing to bet home prices will continue to drop and for how long. Just as the rate of change when home values were increasing was unsustainable...there will always be a reversion to the mean.
A more recent fundamental situation would be negative rates out of the ECB -- peak credit? Another, what is the implication of prolonged ZIRP on the insurance industry? Or determining the sustainability of the Fed's balance sheet by comparing it with the BOJ which lost effectiveness once their balance sheet hit roughly 30% of GDP.
Notwithstanding the fact that it's the marginal rate of information that's important to the market: Split it into different time-frames i.e.;
Short = event-risk stuff such as Ukraine/Iraq/freak incidents of the market - these can move into the other two horizons if they persist. The whole idea is to quickly sort through if this is 'an issue' or if it's hyped up. You've got the most noise here.
Medium = regular expected information releases, such as PMI's, employment/inflation/interest rate data, monthly closes of markets to determine trends etc.
Long-term = Big picture stuff, like end of a secular bull/bear market in an asset class, technological and demographic trends (such as HFT affecting market microstructure, and aging population changing demand for financial assets/real goods).
Tie it all together and you'll have an operating picture of the world. If you want to make it more sophisticated, add quantitative, statistical elements to it.
Great points, that sort of brings in to view something that goes along with the original question...what's the best way to filter out the noise? The longer the time frame, perhaps the less "noise" you will get. However, it seems you must certainly be better at picking what's relevant and what's not the longer you look out.
Like you say, some apply quant/stat methods to do just that...I guess in this case there is an overlap of quantitative analysis and fundamental analysis. It seems you can't ever really divorce the two, especially as you shorten your time frames. In other words, the shorter the time frame, the more important it is to statistically analyze the data you're working with and filter the noise. At least that's what it seems.
If I am allowed to paraphrase Harry Callahan, I'd say that macro views are like arseholes, everybody has one. IMHO, the very first thing that you need to learn as far as macro views are concerned is the ability to say "I have no view". Based on my experience, this is much harder to do than one would expect.
Just my Z$2c...
I like that. I think many see having no view as being incompetent to make an argument one way or another. This is what we've been trained to do in college, to take a viewpoint and argue it. At the hedge fund Bridgewater, it's part of their interview process, to be given a topic you may know nothing about but to form an opinion and argue your position. I wonder what the response would be to having no opinion or no view based on current information. Would they value you not having a view at the moment if you believe any view taken with the limited information you have could be materially incorrect?
Interesting to think about.
Funny, right when you started writing I was thinking about Bridgewater. I'd heard before that this is part of their interview process, although not sure how quite how it speaks to relevant qualities of an analyst. For example, I just can't imagine seriously defending a position that I have no information on. In my mind, if you're trying to hold a global macro mindset, you necessarily have to look for as much information and data as possible to support your views...otherwise you're just guessing and that's mostly useless.
I'd take that point and say - if you'e running money, you're going to 'need' to have a view, even if you don't have any information, i.e. every action you take exposes you to a different type of risk, and whether you're aware or not is irrelevant. E.g. If you're holding cash, you're hedged against deflation, you could have 'optionality' as per Taleb, you could see the market overvalued (and you have a mandate allowing you to be in cash), you could be anticipating rising rates and hence be insanely short-duration, or you could simply be in FX.
amen brother.
another good quote, by Galbraith: "the only function of economic forecasting is to make astrology look respectable." I personally think it's silly to have forecasts of economic data and the like, because you can't control any of that. there are only a handful of economies to invest in (Eastern, Western, developed, emerging, frontier), whereas there are tens of thousands of publicly traded companies. I can control what risks I allow into the portfolio from a company perspective, but since I've chosen to own mainly US equities, I cannot control the macro risks, they just exist. I'm not as stubborn as Warren Buffett by saying macro doesn't matter, I'd say I have the view that Howard Marks does: values always exist, and there will always be good and great companies, but valuation is so important that if you buy with blinders on (ignorant of the macro backdrop), you could very well have a great company in your portfolio that turns out to be a terrible investment (I know I've cited this before, but MSFT & CSCO at Y2K, great cos, terrible stocks).
more of a serious answer: understand how economies work, and have an opinion on capitalism/socialism/communism. that will drive what economic indicators you look at (unemployment, GDP, interest rates, monetary/fiscal policy, etc., they're all important) and consequently how that plays into an overall view.
also @"Martinghoul" a way I've learned to dodge this question at cocktail parties is to cite a few recent events on both the bull/bear camp and then ask the other person a question. something like "well, what's going on in Iraq & Ukraine is certainly a drag, but on the other hand we've had some impressive increases in jobs here at home, so I think the jury's still out. what do you do for a living?" give it a whirl, most people just want to bait you into an argument when they ask, but if they are given the chance to talk about themselves, they'll take it and the pressure's off you.
I don't feel any pressure, sire... I have absolutely no issue telling people that I have no view on something and am happy that they have one. Furthermore, I have to confess that cocktail parties where people discuss their macro views aren't my cup of tea, so to speak. Maybe I am just not mingling with the right people, but there you 'ave it.
Ok this is just absurd- 5 types of economies to invest in? eastern vs. western? Are you kidding me??? That being said this is categorically false that there are such a limited number of options for macro investments…by my last count there are almost 60 investable countries in the world with a decent amount of money following them. Next you’re going to say that 60 are fewer than the amount of companies out there? Not really a far comparison…it would be better to compare it to the # of industries for companies. When you consider fx, rates, sovereign credit, and equity indices and multiply that by the number countries (yes I know not all countries have the aforementioned and they’re not all liquid but neither are microcap stocks), count every security/issue/contract within sov credit fx or rates, and then throw in the associated derivates etc…that’s a pretty big pool to play them. Yes, in certain scenarios some assets can move in tandem but that’s what relative value and hedging are for. I get that equity and company ownership is more tangible but the whole “I’ll wait until value is realized” really only works if you don’t have to mark to market. People fear macro because they don’t understand it and it is a harder thing to be good at. Too many people don’t look at it from the perspective “hey if it’s really hard to be good at and people are scared of it….what is the value of being great at it?” Riddle me this- what value/insight do you bring to the table over the 100’s of other investment professionals looking at a given large cap stock? I think there is a place for fundamental equity investing but to hold it above as far superior to macro is misguided.
Well, at my shop, we ask our desk of quant strategists. Apparently analysts/traders take that to be the case and then make small sensitivity adjustments (aka eyeballing it to their gut levels).
In general, I think macro forecasts are pretty bad. I dont know if you guys saw any econometric macro forecasts from 2005- 2010 but shit definitely was like another 2 standard deviations from what everyone thought. Hedge your trades, market neutral up, and capture those spreads. Don't bother with the whole macro outlook AT ALL. There is a reason great value investor don't give a fuck about general macro and focus only on bottom up company level analysis.
I am not going to go into the process i use to come up with ideas but i will say that there is much more fundamental analysis going on in macro then this board generally understands. the whole thing starts with having pretty sophisticated views on growth, inflation, and monetary policy in the countries you cover (the whole world) and then seeing where those views diverge from market pricing...that is the foundation and it is a pretty daunting task when done right/well. this isnt just "this iraq thing is bad, buy oil" or some crash analog you see on zero hedge. And while general macro forecasts did poorly in 2005-2010 as jcpenny mentions above, this was a great stretch of time for macro hedge fund returns especially 07-10. I think there is a bit of a misconception here that macro trading is about wildly trading from 'your gut" and hoping for the best while equity investors carefully do complex analysis that we macro dinosaurs wouldnt understand.
Thanks a lot, was hoping you'd weigh in here.
Reason I ask is because when I spoke to both an MD and VP in FI S&T recently they stressed how important it was to have a macro viewpoint in order to actually provide the clients with any useful information/make decent trades depending on which side you fall on. This is something that I have a lot of interest in doing, with maybe the hope that one day I'd get to jump to the buy side at a GM fund.
We all know what fundamental analysis looks like for an individual company, but what are the things you look at when trying to generate ideas in regards to the FICC side of things? I can't quite remember what products you specifically focus on but just general basics would be great. I think maybe a lot of people get the "shoot from the hip" notion after reading books like More Money Than God that seem to somewhat paint this picture by accident...even though that's not at all the case.
Economists generally are poor traders. I really wouldn't delve too much into that, and those who are have AUM so large that the strategies aren't even scalable.
You're generally correct and I was being sloppy not differentiating between traders/PMs/strats/economists. Wasn't trying to imply people traded just off economic forecasts but in the EM world there are plenty of good PMs that come from an economics background (or were even economists) and have informed views on it. They do usually have someone good on the excution side though Plenty of ways to skin an apple.
I know what you mean and meant above, your points are well articulated. I didn't mean to single you out, it was a general comment for the thread.
Some of these threads and posts are mind boggling to me, take the Russell 2k for example, from a valuation standpoint (much higher time frame than I normally use) and at current prices, it is set to deliver negative returns over a 10 year horizon. Which doesn't mean the market will drop tomorrow, but it likely means any further gains from this point will be erased and anyone investing at these levels will certainly see a lot of volatility in their returns.
Yet, on virtually every post where a comment is made the advice is to buy into the market at current levels. I would have thought overall market outlook would be subject to more scrutiny from a predominately finance community. I blame compliance :)
Great discussions so far, thanks to everyone who's contributing.
This is by far one of the best threads I've dove into. So punctual, no argument and clutter. I'm an undergrad student right now and (surprise, surprise) want to make it into global macro hedge funds. This is exactly the kind of stuff I love to read. Thank you guys. Any good books anyone could recommend on learning more about how GMs differ in investing strategies? When looking at companies, I mainly look into what's going on in X economy, see what the government and politics are, try to break down the different ways things could turn, strongest/weakest industries, global positionings; then I look into Y industries and why they're strong/weak (and everything in between), why it would be worth investing, what outside factors Y industries depend on (different economies/countries, industry relationships between said economies/countries, what could happen between them and how everything interlinks); then I look for Z company(s) that are new, old, established, overvalued, undervalued, and why. I'm still learning how to get into the financials of Z company(s) and being able to find key points on why they're performing certain ways. I love all of it though. Sorry, feel like I'm thread-jacking, and I promise I'm not. Just trying to add SOME sort of value (for what it's worth).
look at the major risk assets, news and trends - US rates, treasuries, major currency pairs, S&P, gold - good starting point. An appreciation of the credit cycle also important. Major macro trends are relatively clear to spot and last several years.
Start with major markets and then slot the periphery and emerging into the picture.
Develop a view that is flexible and able to appreciate geopolitics and news shocks.
you have to appreciate that different macro traders form views in different ways. Some guys are top down, others will start bottom up. top down guys do the above then position, bottom up guys start in companies/ sectors they like then can build macro position accordingly. Depends largely on the exact macro strategy, size of fund and securities they are most active in.
If you can appreciate the interplay of different markets and the weaknesses which are present in the global economy at any time you formulate a solid worldview to trade off. some of the best macro traders out there find their best trade ideas in little more than The Economist and economic data, you don't need super models or be on the ground to trade macro, its just a trickier form of trend following where you can put greater size to work - don't get bogged down in the intricacies.
enjoy.
I have yet to meet a viable macro trader, let alone a good one, whose trades are based on the Economist and just economic data. People like that don't survive very long, in my experience.
On another note, this is a pretty useful write up that sorta talks about some broad macro themes: http://www.bwater.com/Uploads/FileManager/research/how-the-economic-mac…
Obviously that was a broad oversimplification. Jim Leitner has explicitly said that The economist is little more than he would need.
He said that in 2006...
Reflexivity
i agree that just the economist and following the data doesnt seem to be a viable process but i also dont discount top-down thinking so long as it genuinely produces unique ideas. I have never picked up the economist, read an article, and done a trade on it, but i have read articles that have spurred interesting thoughts that have eventually led to great trades. I often find primary sources of information like newspapers, magazines, and non-finance websites create more of these opportunities then reading street research which tends to represent consensus, herd-like thinking. Something as simple as reading local papers (or english language news websites) in other countries is often overlooked by traders...you'd be amazed how many seeds for divergent trade ideas come from this kind of stuff as opposed to slogging through "The JT Marlin Interest Rate Weekly" to learn that 7yrs are cheap on the 5/7/10s fly.
i recall you suggested reading local papers in the bondarb guide to trading. i've found doing so particularly beneficial for EMs and have used it to source some trades, all of which required google translator...
When speaking with a VP a couple weeks ago I noticed that one thing he really stressed was that they look for someone that has a good handle on what's happening in a macro sense, although I'm sure they're not expecting you to come in and be the next Soros. However, when I go back and look at some of the bigger macro trade ideas that have become famous, specifically Soros's big FX trade, it seems like at some point it's not rocket science and if you have the ability to "see" things 3 or 4 steps out you have a huge advantage.
More or less saying that when I read and try to stay on top of what's happening, I can of course parse all the information and connect the dots, but I don't necessarily have any big trade ideas that spring to mind as a result of looking at all this information. I can certainly do some research, describe the situation, and make some speculations, but I have no idea how useful they'd be.
All of my amateur investing experience has been on the equities/equity-options side so far, and I'm certainly no genius but I've made plenty of good calls, and had good reasons for all of them. However, as some have said, Macro is very different...it's much more complex and multi-faceted. Also, there seems to be no real career going forward (at least for the time being) for just pure equities. FICC seems to be where all the action (albeit much reduced due to regulation) is going to be for the time being.
Lots of rambling, but basically asking - those of you who either have a lot of experience in FICC S&T or in a Macro fund - how do you know you're heading in the right direction? What is helpful for you to read? When does it click for you? I'm sure experience is the primary factor here, as you just can't teach this stuff at some point. But you have to (seemingly) be at a certain level to get your foot in the door, which is something I am still struggling to do. Just trying to figure out how good I need to be.
Does anyone ever truly know that they're heading in the "right" direction? What does "right" direction even mean?
My personal preference is NOT to read the Economist and all that stuff, but rather read some quality blogs, e.g. Calculated Risk or Macro Man. But that's just 'cause of my preference for bottom-up, rather than top-down methods.
the only right direction is the one that makes money for you and the only wrong direction is the one that loses money...other then that there is no "right" or "wrong" path to developing trade ideas and there are many different styles and methods.
The closest I've come to seeing a 'macro' trade work is producer break-even prices + seasonality for commodities and cash flow + yield for equities. Forex is murky for long term trades.
I have never heard of anyone making money based on unemployment trends, trade balances etc.
uve never heard of people making money based on views of how the economic data will play out? cmon thats not true...how about the entire 2008 recession?
Isn't Einhorn the poster child for calling out all of that negative econ data during 2008 and shorting the hell out of it, and still lost 25%?
Plenty of money was made throughout 2008 and I never saw someone come out with, well I predict that because housing sales have dropped YoY and unemployment continues to drop at X rate therefore I am going to short this stock. Never. There is plenty of fundamental data to use as backdrop for a trade, economic reports, being all but useless.
What platform do you use / how do you guys invest in multiple markets? For example, I'm from Australia.. Other than Cfds (which has limited products), I can't think of any platform I can use as a retail investor to say.. Go long the s&p 500, long coffee, short Indian stock market... These are just random btw- what do people use to trade multiple markets?
Learning a lot here, thanks guys.
Is the general consensus that bottom-up is the more reliable way to go about this than top-down? I'm sure there's examples of both generating successful returns but it seems that bottom-up is still more highly favored at least so far in the discussion I'm seeing in this thread.
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