Living in a Macro World
We are increasingly living in a macro world. What I mean by that is that the world is becoming a smaller and smaller place due to technological change and the increasingly interconnectedness of globalization. The result is that the macro occurrences in other parts of the world influence the domestic economy like never before. And the investment world is being forced to adapt to this massive shift in the landscape. So what we’re seeing is less micro and more macro. We’re seeing the myth of stock picking lose momentum and we’re seeing investors veer increasingly towards investment products that are more broadly diversified in an attempt to reduce systematic risk and eliminate unsystematic risk. This is in large part why the ETF world is surging in growth and mutual funds and stock picking are becoming a thing of the past. I think this trend is likely to gather more and more momentum over the years and that the myth of Warren Buffett (the value buy and hold stock approach) will die out.
I think this chart from Goldman Sachs via Bondsquawk is quite telling with regards to macro trends going forward. It’s recent in nature, but will only become more pronounced in future decades:
“According to Goldman Sachs US Economics Analyst, equity markets have become increasingly responsive to macroeconomic news releases ever since the financial crisis took place in 2008. The bond markets on the other hand have always had a close eyes on the US macroeconomic news.”
It’s a macro world and you’re living in it. The funny thing is, I had a reader ask me today whether I could recommend a macro investment book…I looked at my bookshelf and rattled my small brain around in my head and came up with nothing. Someone better get on that….There’s gold in them thar hills.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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11 Comments
Could it be that as more investors veer toward broadly diversified products like ETFs there may be an opportunity for concentrated investment strategies? It seems that everyone is jumping on the index train. Perhaps good active and concentrated management can add value over the next several years. I say this as a devout indexer.
This is the assumption I am working under as I plan my career trajectory. While I spend a lot of time on macro issues, I am in the fundamentals world. A lot of divergences appear to occur due to macro trading, which end up as opportunities if you accept them for what they are.
Could it be that as more investors veer toward broadly diversified products like ETFs there may be an opportunity for concentrated investment strategies? It seems that everyone is jumping on the index train. Perhaps good active and concentrated management can add value over the next several years. I say this as a devout indexer.
and one day when we walk into a book store and see a full shelf dedicated to macro trading books we know the theme is over. untill then there is still some money to be made…
2017- “Daddy what’s a book store”:)
Brilliant………..
You may well be right that it becomes more popular,but that does not in itself mean it will also be more successful in generating returns that are higher than those made by more classical means.
Actually, there are several books describing macro investing, but they are not as detailed/quantitative (e.g. Klarman’s book on value investing), or can be easily synthesized in a magic formula … Probably because macro investing really means everything and there are just an infinite set of asset classes. In the same way there is no book on equity investing that captures every aspect of the capital structure, hedging and strategy.
Also, I wonder if the transition to a macro investing world is bad news for mankind. Does it mean that we are in a zero-sum world rather than one dominated by human brain power? Are we on the precipice of 1930, letting the zero-sum thinking poison us, without realizing that the 2020 equivalent of jet aircraft, nuclear power, capitalist libertarianism etc. is right around the corner?
I started trading in October 08. I can unequivocally say the stock markets move mainly on macro events/news. I am born of this new paradigm. I diligently look at charts, do my technical analysis and belong to a subscription trading room. if there’s a trend we get on it, but the ride is ultimately wild, influenced by….. macro/news.
Important post. Thanks.
I guess that macro means different things to different people. I remember in the 90′s investing in different countries with the idea if one country was down other countries could be up. So, its no longer a matter of selecting a spread of countries but industries, companies, governments, consortium’s that might do better than others because of their positioning within the world economy.
I think the only problem with the ETF shift is the presumption that minds in the ivory towers of Wall Street are better suited to taking intelligent positions. I think that as the current system continues toevolve, more arbitrage opportunities will be out there for investors willing to look.