Tuesday, October 03, 2017

Efficiently Inefficient #12 : Global Macro Investing, the Rojak of Investing.

I find Global Macro Investing super confusing because you can't really distinguish the good investors from the bad ones.

The Warren Buffett-level guru for Global Macro is none other than George Soros himself. I attempted to understand his theory reflexivity a third time and have no idea how it can be used for trading my portfolio. It still appears to me that George Soros trades on his own gut-feel but had the time and luxury to create a philosophical framework around it so it seems more intellectual. Global Macro investors strike me as being very intuitive in their approach to money management which is fine so long as it make s money.

Some Global Macro investors make money by carry trades.

This is when you go long on any asset with high interest rates and short any asset with low interest rates. In the 1990s, a lot of boomers used the Australian fixed deposit as a means of getting 6% yields every year. Imagine borrowing Singapore dollars at 3% to invest in Australian dollars at 6% - that's a basic carry trade for you. Global macro investors are not limited to currency carry trades and they can find the equivalent carry trades in equities, bonds or even commodities.

Other Global Macro investors can spend their careers just monitoring and predicting the behaviour of Central Banks so that they can make directional bets on the markets.

What is possibly more useful for readers of this blog are Global Macro investors who trade on economic developments who have a simpler framework to assess what works best when investing in a particular country.

You need to know whether the GDP growth and inflation of a country is strong or weak relative to its historical record before you can apply this framework :

a) Strong Growth + High Inflation = Overheated Economy

In an overheated economy, the central bank may be compelled to raise interest rates so Global Macro investors will sell bonds. Stocks tend to do well at this stage. The US economy right now seems to be overheating.

b) Strong Growth + Low Inflation = Goldilocks economy.

In a goldilocks economy, both stocks and bonds do well but volatility drops which would lower the price of options. I think Singapore is currently in a Goldilocks situation.

c) Slow growth + High Inflation = Stagflation economy

This is a nightmare scenario because stocks do badly because of slow growth and bonds flounder because the central bank may need to raise interest rates to fight inflation. In this kind of economy, Gold and commodities do well. I would venture to guess that Bitcoins would also thrive in situations like this as well.

d) Slow growth + Low Inflation = Lost Decade economy

Japan might still be trying to get out of this rut and if Singapore does not leave a door open for some foreign labour, we will enter this phase and stay there for many years. Only bonds do well in this economy.

If you can chart which stage a country is in you can theoretically invest in a basket of ETFs containing stocks of overheated and Goldilocks, for example.

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