Global Macro: Very Difficult (if not Impossible), Very (Most) Important, and… Critical in Coming Years

Claim: I believe global macro-related considerations are the most important when it comes to the art of investing/speculating. Macro matters, and everything falls short of macro.

I also believe global macro will become more obviously important in coming years. This recent (and relatively mild) Ukraine/Russia situation is an opportunity for everyone to prepare for what is to come.

Rather than rigorously support my belief, I include a series of thoughts that have led me to the above beliefs. I welcome (and invite) variant views:

  • Macro considerations (for example, interest rates, tax policies, currency, cross border capital regulations, financial institution regulations, corporate regulations, war, retirement/savings regulations, demographics, etc) can render company-specific fundamental analysis  irrelevant.
  • No investment/trading strategy is more scale-able than global macro – if you want to build a $1, $10, $100, $1,000, $10,000 million position in a security… which markets might allow you to do so without moving said markets?
  • The rules of investing/trading have, can, do, and will change.
  • Understanding the movement of capital (inter and intra country) is inextricably tied to understanding the market mechanism. The market is always and everywhere a voting machine. Valuations (i.e. opinions) are not realized in a vacuum, but via the weighted average vote of market participants (although in some cases, i.e. acquisitions, a single ‘voter’ can set a valuation. But that still is a vote)

There is a time for peace… there is a time for war. There is a time for plenty. There is a time for famine.  There is a time for calm… and there is a time for turbulence.

I believe that understanding the true causes of the relative strength of US capital markets vs. EM capital markets in recent history is key to understanding what will likely happen in coming years. Be prepared.

Important Consideration for the next 2 years:

2 forces that fuel upside risk in US equities next 1-2 years:

  • Domestically, Capital fleeing Fixed Income (equity deemed more attractive). Both current and marginal capital flows.
  • International Capital fleeing EM to US.

US equity markets have been due for a correction, but nevertheless face upside pressure from those two forces. I believe we see much higher and much lower within the next 2-3 years.

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